Public Storage. (PSA) — Q1 2019 Earnings Call Transcript

Thank you, Laurie. Good day, everyone. Thank you for joining us for the first quarter of 2019 earnings call. I'm here with Joe Russell and Tom Boyle. Before we begin, we want to remind you that all statements, other than statements of historical fact included on this call, are forward-looking statements that are subject to a number of risks and uncertainties that could cause actual results to differ materially from those projected by the statement. These risks and other factors could adversely affect our business and future results that are described in yesterday's earnings release and in our reports filed with the SEC. All forward-looking statements speak only as of today, May 2, 2019, 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 provide on this call is included in our earnings release. You can find our press release, SEC reports and an audio webcast replay of this conference call on our website, publicstorage.com. With that, I'll turn the call over to Joe.

Great. Thanks, Ryan. And thank you all for joining us. We had a good quarter, and I'd like to open the call for questions.

Hey, good afternoon, guys. Thanks for taking the question. So my first question is in regards to revenue growth. Over the last few quarters, you've ranged between $1.2 million to $1.5 million of revenue growth, and your period end data would suggest that revenues stay in that range for 2Q. So it seems like things have been fairly steady in the midst of all this new supply. And given the resilience of demand, how do you feel revenue is going to play out in '19? And any thoughts on when revenues could drop?

Great. Thanks, Shirley. I can comment on that. I think you gave a pretty good summary of what our historical revenue growth has been over previous quarters, and you do point to the period-end occupancy and contract rent growth, which do suggest we ended the quarter in a place where contract rents would be growing at the start of April at a similar level. So I think -- we've been encouraged by customer trends like we spoke about on our last call, really a combination of a tougher move environment, balanced by continued good performance by the existing tenant base. In our existing tenants, we see move-outs down and length of stay modestly increasing, and they are all being supported by a strong labor market out there in the broader macro economy. So we've seen good operating trends consistent with what we discussed on our last call, reasonably steady contract rent growth and occupancy through the quarter.

Got it.

In terms of where we go from here, we're obviously at the end of the first quarter. We're about to enter into our seasonally busy move-in time as we get into May and June and that'll be a big determinant of overall 2019 revenue trends. We'll certainly update you on those trends on our next quarterly call.

Shirley, I'd just add the other thing that we've been seeing and we're pleased to see is, we're maneuvering through and navigating through what continues to be a commanding arena of new supply in certain markets. Some of that has been shifting out of markets that have been more heavily burdened, say over the last two or three years. We still have other markets ahead of us that are likely to see a somewhat similar impact going into '19 and 2020. But again, to Tom's point, we're feeling better and we like what we're seeing relative to the traction and the capabilities that we're putting into many parts of the business to maneuver through this environment.

Okay. So moving to street rates. How did 1Q trend and even into 2Q, and also you're moving rates as well?

Great. So, as you know, we've spoken on in previous calls, we don't tend to watch street rates too closely. Street rates were actually up a little over 1% in the quarter, but we focused on move-in rates, as they're actually the rates that customers will be paying us. Move-in rates, as we disclosed in our 10-Q last night, were down for the quarter, down 1%. That's the best move-in rate performance we've seen in some time. And we did see moving volume down modestly in the quarter, but again offset by move-out volumes being down as well. In terms of rent roll down, this is seasonally one of the bigger rent roll down quarters given the slower move-in season and the fact that folks have moved in and higher rates through the summer. So we did continue to see rent roll down in the quarter which deteriorated modestly, but again, one of the better performances in rent roll down deceleration.

Got it. So would you say move-in rates have persisted, not negative 1% into April as well?

Yes, we've seen consistent trends in April. And that's really a balance of all the markets in which we have operations. So if you look at certain markets like LA on the West Coast to some of our stronger East Coast markets, which have good positive move-in rent performance. And then as Joe highlighted, the markets we're being impacted by new supply. We do see negative move-in rates continuing into 2019. So markets like Houston, which were lapping hurricane benefit in the prior year, I would lump into that group as well.

Got it. Thanks for the color, guys.

You bet. Thank you.

Hey, guys. Joe, you touched on navigating supply just a minute ago, but can you just give your broader views on supply here as we look into 2019 and any early read on 2020? And whether those views have changed or how they've changed at all as we've moved a little further into the year?

Yes, sure, Jeremy. I would say there's really no change on what, again, our outlook is from even 60 days ago from our last call. So everything we're tracking points 2019 to be yet again another pretty commanding year of deliveries, plus or minus from that $5 billion range, say 400 to 500 properties, plus or minus 30 million square feet. The one thing, as I noted a few minutes ago, it is shifting somewhat. So if it's encouraging at all, which we like to see fewer deliveries were taking place in Denver, Charlotte, Houston, Austin and Tampa, for instance. So there has been a pullback there, that's good news. But some developers are starting to get more active in Portland, Boston, Seattle, Miami and New York. So we're keeping a close eye on any residual impact that the supply is likely to have this year and going into next year. The same drivers are out there that have fueled this level of supply over the last two or three years in particular, which is a lot of new entrants are still coming into the sector. You've got developers that like the potential yields are likely to derive from new development and fundings out there. So we're keeping a close eye on it. We're looking at 2020 as potentially a year that things could start shifting down, but again, we've got to track it and see what's at hand. I'll tell you, and maybe even the shift a little bit into how that's affecting the acquisition environment. There are a number of conversations that are becoming more pronounced which are laced around the theme of I want out. Now again, not out because it's a stressful situation or it's one that necessarily is commanding that decision at a level that I've got to get out, but it's a realization that maybe returns aren't going to be met. They may have some lender pressure, maybe expectations from a revenue performance standpoint aren't there. So that is a residual effect and potentially a good thing that we're going to continue to see. If you even look at -- as you saw through the first quarter and what we've reported relative to what we have under contract, we've now even through the early part of this year, exceeded the acquisition volume we did in all 2018, and there are some interesting things as part of that collection of acquisitions. One for instance is, for the first time in several years, we have a property that we're acquiring out of bankruptcy. So I've talked about that a little bit over the last few quarters, meaning that we think some of that kind of acquisition opportunity could surface, and we've got one again under contract. We bought a portfolio in the first quarter, nine properties, great assets, long-term ownership and the deal came to us on an off-market basis. But again, the owners decided it was for them the right time to exit the sector entirely. And it was a good negotiation, meaning it was a deal, it was fairly priced. It wasn't one that they looked at was one that had to meet or get a top-level evaluation, but it was a deal they wanted to do on a very efficient and clean basis; and we were an ideal candidate to do that. So there's more of that in the mix as we speak, and we're encouraged by that. We'll see how the rest of the year plays out.

And is something that driving just maybe the price per pound here we're seeing just in terms of some of the pipeline, I mean, just looking at the market mix, it wouldn't appear those are high-cost markets like say in New York, but it looks like some of the stuff you have on your contract would equate to around the $100, call it $60 or $70 a foot. I mean, I know replacement cost is core to your buying philosophy. So is any of that factoring into that?

Well, a little of the mix in -- what on average is driving that a little higher than maybe what you've seen us do in a few prior quarters is, some of our acquisitions in the pipeline right now are in more urban markets and higher finished assets, newer that we think not only are very well located but very hard to duplicate. Again, with the same theme, that owners are coming to us and saying, OK, we may not meet or exceed the type of returns we expected two or three years ago when we put these properties into development. They're not by any means failed assets, but again actual expectations are not being met. So we've got a few of those in our pipeline right now under contract that are extremely well located, great assets. A handful of them might be a little bit higher on average than you've seen us do in some of the other markets that we bought assets, but we still feel great replacement cost deals; we're going to get various good returns. Again, we hope to see more of that kind of activity throughout this year.

Definitely appreciate that. Last one from me, I was just wondering if you could give a quick update on your third-party management initiative and on that front, are you actually seeing anyone out there jumping platforms between the bigger operators who do third-party? I know historically I really haven't heard much of that happening, but have you seen any of that at least on the margin?

So in the quarter, we signed 11 properties into the platform. Our backlog continues to grow. It's heavily weighted by development deals that will take a number of quarters to actually come to completion and be pulled directly into the program itself. We're seeing and learning a lot of interesting things through the platform. Yes, I would tell you some of that includes, which I don't think at the end of day is maybe new to the business, but there are certain owners that do change flags. So whether they're coming to us through either private or another public third-party platform. We are seeing some of that, but I wouldn't tell you that the dominant part of the activity in our backlog; it's still highly correlated to deals that are in various forms of development. But we like what we see relative to the type of assets that are coming to us. We've actually at the end of the day, passed on as many properties as we've decided to pull in to the platform for a moment for a number of reasons. So I think we've got the ability to continue to be particularly cautious about what markets that some of these assets come to us and whether or not we choose to go into those or other factors. But again, we feel like over time; we'll be able to grow the scale of the business and keep good momentum around it itself. So that's where we stand as we speak.

Great. Thanks for the time.

You bet.

Hi, thanks. I just wanted to ask you just a little bit about marketing expenses in the quarter. There was a pretty big increase year-over-year. Do you expect that pace to continue through the balance of the year? And I guess along with that, it sounds like you are seeing some stabilization throughout your system a little bit. And I mean, do you attribute it to maybe changes in the way that you're marketing on the Internet versus other ways? Or maybe just some color around that?

Sure. So let me take that in some different components. The marketing spend that we saw in the quarter was a pretty consistent rate of increase from the fourth quarter. As we discussed last time, we did that in the fourth quarter really throughout 2018 and increased our spend as we saw good demand response online and a great reaction to our brand and in online paid search that's combined with a more competitive environment. In many markets impacted by new supply, the cost of acquiring customers is increasing as that supply is getting absorbed, so there is some market cost per click increases in there as well. Ultimately, our decision-making around that is very dynamic based on keywords and local market dynamics and traffic. So I'm not going to call a rate of increase for the rest of the year, but it's a tool that we are seeing good returns on today and we're continuing as we get into the second quarter to use that tool. The second part of your question was, is that benefiting the overall level of move-in activity? And certainly, the answer to that is yes, we do like the demand response we're seeing from that channel. We're using a combination of advertising rates which again, our rates were down about 1% for move-ins for the quarter and promotions to drive traffic to our stores. In terms of the third component of your question, which was around, is it contributing to the stabilization of the portfolio in aggregate? I guess, I would say we're seeing good trends in advertising helping move-ins, but move-ins remain challenging in many markets. And so that's where our increased spend is concentrated and in other markets where move-in trends are quite good and healthy. In terms of the stabilization point, we have seen some good trends in some of the early markets that were hit by new supply. You'll see markets like Washington, D.C., or Chicago improving. DC is up 180 basis points in occupancy for us year-over-year, Chicago is up 160 basis points. So we are seeing some improved trends there.

Okay, thanks a lot. I appreciate it.

Hi, thanks. I just wanted to circle back to development. It looks like your development and expansion pipeline decreased specifically, and I know you delivered a few stores in the quarter. But how is the activity looking to backfill that pipeline? Is Public's pipeline slowing down here? Or is it just more timing related?

Yes, Todd, first of all, we had an active Q1. So a lot of the pipeline delivered in the quarter, we had about $137 million deliveries for new builds. But what really drove the volume was a number of redevelopments heavily tied to the remaining scrape and rebuilds we did in Houston specifically. So we had an elevated level of first quarter volume. So to a degree, some of that impacted the pipeline. The pipeline did shift down close to $100 million or so, but that can ebb and flow. I wouldn't take that as an indication that overall we've intentionally tapered that down just one or two quarter basis; we're seeing a lot of good continued potential activity out there. It has shifted intentionally more to our redevelopment activity, where we're taking existing properties and putting a lot of the attributes from what we call our Gen 5 new product into properties that are extremely well located; where we can expand and increase not only performance but scale in certain markets where otherwise you'd never be able to get to those great land sites. So we see continued, very active activity on that front. Today about 60 plus percent of our development pipeline is tied to that; and the teams are out looking for land sites in a variety of different markets. In some markets, land is becoming more expensive, so we're keeping a close eye on the impact to that. The other thing that is happening is the time to entitlement seems to be, and certainly a number of markets, getting more commanding. Now the reverse of that, which kind of ties to some of the impact with some of the either developers or entrants that have come into the market over the last two or three years. We are getting reverse inquiries more than we've seen recently for close to our fully entitled land sites. Again, we've got a healthy collection of different opportunities there, and the team's every bit as focused on driving that kind of opportunity, and we continue to see very good returns from our investments in the development pipeline.

Okay. And then -- and Tom, you mentioned the cost to acquire a customer continues to rise. Can you share with us what that cost is today and maybe discuss how that's trended?

Sure. The cost has modestly increased. Certainly, the advertising spend is a component of another component. You can track in our disclosures and 10-Q is the promotional discounts that really come in the form of the $1 for the first month rent for Public Storage, which is a great way to drive traffic to our stores. Those are the two large components of customer acquisition costs. So you can take a look at those that are in our filings.

Okay, that's fine. And then just lastly, can you just talk about your plans to run, I think what previously was -- the Memorial Day sale this month in May; whether you're planning to and how discounting and promotions are sort of shaping up for the busy season in general?

Sure. So we typically do run some sales as we go through the summer months, and we've seen good returns on that in the past. It's something that we'll dynamically assess as we go through the quarter and we'll update you as to where we go. In terms of promotional trends, you could see promotional dollars were down in the quarter. That's really driven by volume and rate decreases, not a strategy change there. So we continue to use that dollar special to drive traffic into our stores. I would expect consistent strategies this year as last year, but obviously if anything changes, we'll let you know.

Okay, thank you.

Hey, if I go back to the marketing spend, just curious, obviously it's pretty local. But is there any kind of high-level discernible themes in terms of where the dollars are going? So said another way, is it more West Coast markets versus East Coast maybe more supply challenge or is sort of increased spend all across the board and hard to pick out?

Sure. In terms of where it's located geographically, the increase in spend is across the board. I think there are certain markets, as I highlighted that spend is increased more than others, and that's really driven by the competitive dynamic as customers are competed for on Google and other online platforms. So the overall spend costs are higher across the board, but it is concentrated in markets where the competitive dynamics are more intense.

Great. The other question was, just, I think I believe there was a website refresh for the Company set to be [indiscernible] this quarter. I think the idea was hopefully it would kind of tie in to your ability to market online. Maybe can you give us an update on that and how that's been received and what you're seeing there?

Sure, Ronald. I'll start and Tom can add to this too. So, yes, we delivered what I would label our generation, our fifth generation website in the first quarter. So it's a project that has gone through a variety of different testing, et cetera, as we rolled it out through the entire platform. So we're pleased thus far by what we're seeing. It's going to give us additional capabilities that we've been able to add, not from a need standpoint, but from an opportunity standpoint. All indications are the tool that's going to provide us are going to be quite commanding in a number of ways. So we're anxious to continue to roll those out as we go through the rest of this year and Tom if you can give additional color on it.

Yes, I think we've covered well Joe. I think it's built to be mobile centric as customers continue to move to transact with us on their phones, as we continue to see that trend play out. It's something that has played out over the last decade and so you'll see that as you pull up the new public storage.com, but we're pleased with it and team worked hard on it and we're happy to have it delivered in the first quarter.

Yes, my last question was that -- I think you made some interesting comments about sort of the -- the environment and opportunities out there. Just curious on -- just thinking about lease-up and lease-up times. Obviously, you're in the market looking at properties and you've got a few that's delivered, how does that -- how are you guys thinking about that, how has that trended over the last year or so? When you're running the pro forma are you assuming no longer lease-up times? And just, what can you quantify that for us? Thank you.

Yes, I wouldn't say there's been any shifts at all. I mean, again, you go back to the fundamental way that a lease-up typically happens on a property and, frankly, it can range from anywhere from two to three years on an average basis, so not really seeing any different timeframes tied to that. In certain markets where supply may be more pronounced, you may have elongated lease-up or some impact from that then alternatively, some markets that do have a fair amount of supply are still doing quite well because there's an inherent need in the market itself maybe underserved, and that frankly is the reason why we chose to develop a specific asset there in the first place. Another part of the mix that we have out there is that we've got other assets that are clearly well ahead of our expectations and we're seeing very good traction in a number of properties that are, again ahead from that standpoint as well. The thing that is a natural part of our business as a whole is it not only is it a factor of lease-up, but then it's the maturity of the lease. It's the lease property -- property itself. What I mean by that is the inventory leases that are at hand take a fair amount of time to mature and stabilize because you're going to see good growth, and you're going to see good factors tied to that, but that time needs to mature. So that again, you've got a highly stabilized asset, and you're able to evaluate its ultimate success.

This is Tom, you can see that in our 2013 to 2015 development vintages that -- as Joe highlighted, they leased-up well, and they continue to stabilize. You can see that the growth in the quarter, up 10% or 11% for that group as it continues to season. We certainly provide that disclosure so you can evaluate the performance of those stores as well as the other developments and expansions vintages that we've been active in delivering.

Helpful. That's all from me. Thank you so much.

Thanks, Ronald.

Thanks, good morning out there. I guess number my operating questions have been asked, but I just wanted to touch on the balance sheet quickly. Tom, I mean, obviously you guys recently did a longer-term bond issuance and historically you've used preferreds to kind of fund the Company. And I'm just trying to get an update on sort of your thought process there. You do have a couple of preferred issuances that are callable later this year. And I'm just kind of wondering what your thought processes longer-term about using more debt?

Sure. Thanks, Steve. So we have issued both preferred and bonds throughout the year. We continue to remain committed to both markets as good financing tools. As we've talked about in the past, the preferred market is a great long-term permanent source of capital with lots of great features including the call feature and the permanent life. With our balance sheet, we also have the ability to add incremental long-term debt to finance our external growth pipelines, both the acquisition activity as well as the development pipeline. So we'll look to use both sources of capital going forward. You highlighted that we do have some callable preferreds outstanding. We also have some new callable preferred later in the year that we'll evaluate. In the month of March, we did execute a preferred financing as well as a redemption that lowered our aggregate preferred cost to 5.3%, which is a continued improvement. It's a long-winded way of saying we like both markets and the balance sheet is in great shape here today with -- if you deduct the $120 million-ish of acquisitions under contract from the $220 million of cash we had at year-end and a pro forma for the $500 million bond issuance, we're sitting on about $600 million in cash today, which gives us good liquidity to fund external growth as we get through the rest of the year.

Okay. And then I guess just second question about real estate taxes. I know in the MD&A section here, the 10-Q you sort of talked about real estate taxes staying relatively consistent up kind of about 5%. But are you just seeing any relief in any markets? And as you kind of look forward, when might that start to tail off a bit?

Relief is not what I would consider what we're seeing in real estate taxes today. So we do expect property taxes to grow around 5% this year. If you look back over prior years, that's reasonably consistent with what we've seen. I do think that there is an element of catch-up to cash flow earlier in the cycle associated with real estate values that we're seeing. So in certain markets, could we see a benefit going forward as incomes have maybe come down in some of our more supply impacted markets. It's certainly possible, but we're not seeing that in any real quantity at this point.

Okay. Thanks.

Hi, guys. Just another question on the marketing expense. This is the third quarter that you started ramping up your marketing spend, are you seeing your competitors respond at all by increasing their marketing spend maybe driving up the cost for the same impressions at all?

Yes. So I touched on this a little bit. There is no question that the overall Internet paid search environment continues to get more competitive. So we're certainly part of that as we increase our spending and like what we've seen, and others are doing something similar. So the competitive environment is driving cost per click up year-over-year. But like I said earlier, we're seeing good demand response for our brand term online and we've continued to push there and like what we're seeing.

Hi, thanks. This is Ryan Lumb. So just circling back sort of on the fifth generation reinvestment program, are you able to quantify for us the total capital investment we can anticipate in '19, and maybe the number of stores that are involved in that program alone?

So again, it's a rollout that we've now been testing, say for the last year and a half to two years. Through 2018, we began to test in a number of different markets what we call our property tomorrow platform, which is taking a number of key elements from our fifth generation product and overlaying it into existing assets. Some of it's somewhat straightforward, meaning it's enhanced signage, updated painting schemes. We're also optimizing things like water usage through landscaping improvements, utilities around LEDs, changing the office environment because in today's world environment with our new Web Champ 2 platform, we've gone completely paperless. We don't need filing cabinets anymore. We've got more space to create a better customer environment. So all those things have played through quite well in the properties that we've tested thus far which total say less than 75 or so assets that we tested in a number of different markets through 2018. So this year, we're maintaining the rollout with all the feedback and the reaction we've got in from customers, employees, etc. and it's starting here on the West Coast. We're likely to touch anywhere from say 100 or 150 properties in the next two to three quarters here in California specifically, and then we'll be rolling it into a number of different markets literally for the next few years as we touch the entire portfolio. In 2019, the cost tied to this is plus or minus about $100 million. It wouldn't be surprising over the next few years if we spend a $0.5 billion or more as we roll this entire plan out and we like what we're seeing so far. The properties that have been retooled to this new standard are seeing some residual benefit in a number of ways. It's still early in that regard, but we like what we're seeing and we think it's really another way to amplify and enhance not only the curb appeal but the brand itself that resonates incredibly well to consumers, but it matches all the things that we're doing on an online basis as well. So again, it's a program we've got a lot of focus on and we're likely to see a fair amount of capital in subsequent years that's going to be dedicated to this effort.

That's helpful color. Can you maybe translate what have you -- in your test markets spent on a per square foot basis? Or what do you anticipate spending on a per square foot basis?

Yes, it's to -- I wouldn't point to that direction yet because it can vary. In some properties, it can be what I would call a lighter rebranding because it may not need as many components, and then other properties that could be more thorough or we're touching a number of different components of the asset itself. I wouldn't point you to a specific number on a per asset basis yet.

And then, I mean obviously, you had some very new assets that you recently developed and you're not going to be reinvesting in those. What is the total percentage of your portfolio that you would like to touch, roughly speaking?

Well, ultimately in its purest form, we would maintain or lift the entire portfolio to elements of, again, that new standard that we're rolling out as we speak. That's why I mentioned this could take several years. We do have what we would characterize as five generations of product. So 2,400 locations, some of which have been in our hands for 30, 40 plus years. Those may need, in some cases, heavier levels of again elements of the program that I talked to and some may not. It’s going to be on a case-by-case basis, the amount of enhancements that we're going to do property-to-property. Again, what we'll continue to do is moderate and choose assets that make sense to you in the early phases of the program and then we'll roll it out over time. Ultimately at a certain point, we will get most of the portfolio touched.

Okay, thanks.

Sure.

Hey, guys, this is Ian on with Ki Bin. I just want to go back to Shirley's line of questioning. The last couple of quarters, you've seen gains in our occupancy. And I'm just curious if that's going to be a meaningful driver the next few quarters? Or you kind of expect that more be on the rate side?

Sure. Sure. As we've talked about consistently, we managed by revenue and revenue and revenue per available foot. So we're not focused on either occupancy or rate. I will tell you at the end of April, we were sitting with occupancy up about 25 basis points. So we've continued to hold the occupancy gains that we saw starting with the end of the fourth quarter through April, but we're about to get into the busier summer leasing season and we'll update you on our next call as to where we go from here.

Okay. And then on the expense side, on-site payroll has been down the last, call it, three quarters. Are you feeling any pressure in any of your markets on payroll? Or should we see an uptick in payroll going forward? Kind of what's your thoughts around that?

Yes, again part of the benefit of our rollout of Web Champ 2 at the property level has included a number of property efficiencies and optimization strategies we've been able to deploy as we've rolled Web Champ 2 throughout the system in 2017 and 2018. I would say going forward -- and we highlighted this to a degree in the queue. We're likely to see more normalized pressure. What I mean by that is some level of increase along the lines of inflationary cost increases tied to property payroll. There's no question we're in the most commanding employment arena that we've seen over the last decade. So we're assessing that on a market-by-market basis. We've got a number of very vibrant strategies around that. We're looking for not only cost efficiencies but ways to make our full team as productive as possible. So we've seen a lot of good traction around that, particularly in the way that we're using a number of technology opportunities. I would say -- I would look to something more along the lines of inflationary pressure as we go forward.

Okay, that's all from me. Thank you.

Sure.

Hey, thanks for taking my call. It seems like industry-wide revenue growth is stabilizing there, and I don't think this is just Public Storage. Even without a lot of pricing power on the front end, it looks like the makeup has been because the in-place increase are either larger or they are coming faster or there's a combination of the two. Am I right with that premise?

Well, I think we've seen good trends with existing tenants overall and I think some of that is tactics that we and others in the industry are using to attract good customers that will stay with us. I think part of that probably relates to the mix of customers that we've seen. If you look at things like housing sales in many of our markets across the country, a deceleration in housing transaction activity which has meant fewer movers as a percentage of our customer base on the margin; all those types of things. The reason I highlight that is, movers tend to be shorter length of stay customers. All of those things have resulted in more tenants staying longer and lower move-out volumes that we've been reporting. That is certainly helpful to our existing tenant rate increased program as they stay longer. They are eligible for rate increases. I do think the other thing that's happening in some markets, as you're seeing the real resilience in demand for the sector. I highlighted earlier on the call, markets like Washington, D.C. or Chicago, which were hit by new facilities earlier in the development cycle, we're seeing real occupancy gains there, which is certainly supporting revenue growth as we get through 2019. So a mix of factors. But you're right that the existing tenant piece has been helpful, both in terms of move-outs as well as rate increases.

But it doesn't sound like you've either increased the rate increases or reduced the term at which you start to increase rates like rather than doing a one-year anniversary, you're now doing six months.

I would say we've used consistent tactics year-over-year and how we're managing our rate. I would say we are sending more volume this year versus last year, which is driven by that some of the factors I highlighted earlier.

Got it. I just -- my only concern for really the entire industry is if it gets too dependent upon rate increases, does the now it, right? And when does that impact the industry, or if you have somebody whose in-place rents go up really, really fast relative to where they got in and what it could do to the reputation of Storage? But that doesn't sound like that's, it sounds like your mix that's changing.

Yes, we haven't seen anything concerning from a trend standpoint. As I've said the behavior of that tenant base has been very solid year-to-date and really solid throughout 2018.

Great. Thanks, guys.

You bet.

Hey, good afternoon. Just one from me. Going back to Ryan's question on the property of tomorrow initiative. Joe, you mentioned signage and paint and what sound like standard maintenance items as part of that program. My question is how much of that $500 million spend over the next five years on that program is deferred CapEx, if any? I mean, this year's CapEx budget is there tripled to 2015 spend but square footage is only, say, 10%, since I know a lot of that's new construction. So I'm just trying to determine if that initiative is essentially making up for under investment over the past few years.

Yes, it's not. The run rate and the amount of traditional CapEx that we've been putting into the portfolio has been in that $0.50 to $0.75 cents per square foot range, and that's going to continue. What I'm talking about is again in the elements that go into the property tomorrow's again beyond just the simple paint. Those kinds of simple upgrades, also include additional enhancements that we're making to LED, landscaping, mechanical systems and other things that are again longer-term good drivers relative to efficiency and utilization from our water or electrical standpoint. Those kinds of things, so it's more bent toward that. Our ongoing CapEx is a program that will consistently keep in place and this is in any way some kind of a catch-up for that; it's really the noted benefit matching what we have, which is a very commanding brand that we can amplify through some of the, again, the successes that we've seen through our Gen 5 products as well as the testing that I mentioned that we've done over the last couple of years.

Okay, fair enough. Thanks for the time.

You bet.

Thanks. Just to go back to the balance sheet discussion you guys addressed some of the longer-term financing. But when we see some of the other larger REITs using commercial paper for the first time, I just wanted to get your impression of maybe some alternative sources of short-term debt that'll be, I guess, part one. And then part two, can you touch on your free cash flow expectations for the full year? You're likely more of a self-funder than some of the other REITs. Just your thoughts there. Thanks.

Sure. The question around commercial paper. We've started to add long-term debt to our balance sheet; we have no immediate plans to add short-term debt. We really like the long-term nature of preferred as part of our balance sheet. We've got about $4 billion of that on our balance sheet, and we've added five and 10-year debt in the public markets more recently, so we're sitting on cash, right now with no plans for short-term borrowing needs. In terms of your question around free cash flow, we disclosed in our 10-Q last night, we continue to expect something like $200 million to $250 million of retained cash flow for 2019. And that's been a reasonably stable number over the past several years.

Okay, thank you.

Thank you, Laurie and thanks to all of you for joining us today. We look forward to seeing many of you next month at the NERI conference. Take care.