Good day, ladies and gentlemen. And welcome to the Fourth Quarter 2018 Extra Space Storage Inc. Earnings Conference Call. At this time, all participants will be in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Jeff Norman. You may begin.

Thank you, Michelle. Welcome to Extra Space Storage's fourth quarter and year-end 2018 earnings call. In addition to our press release, we have furnished unaudited supplemental financial information on our website. Please remember that management's prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act. Actual results could differ materially from those stated or implied by our forward-looking statement due to risks and uncertainties associated with the company's business. These forward-looking statements are qualified by the cautionary statements combined in the company's latest filings with the SEC which we encourage our listeners to review. Forward-looking statements represent management's estimates as of today, Thursday, February 21, 2019. The company assumes no obligation to revise or update any forward-looking statements, because of changing market conditions or other circumstances after the date of this conference call. I would now like to turn the call over to Joe Margolis, Chief Executive Officer.

Thank you, Jeff and hello everyone. Thank you for joining us for our fourth quarter and year end call. It was great to have so many of you here last month for our Investor Day and we appreciate your interest in, and support of Extra Space Storage. 2018 was another solid year, same-store revenue was in line with expectations. Our diversified portfolio and best-in-class platform are maintaining very high occupancies while producing positive rate growth despite a challenging environment with new supply in many markets. Expenses were also generally in line with expectations with the exception of a couple of uncontrollable expenses which hit in the first half of the year. Our team stepped up and did a great job with controllable expenses, especially in the last two quarters and found ways to offset some of the expense growth through savings and efficiencies. Our same-store NOI grew 4% for the year despite a challenging operating environment. Same-store NOI was enhanced by our strong external growth from third-party management and off-market acquisitions resulting in core FFO growth of 6.6% which was above the high-end of our annual guidance. Looking forward to 2019 many of the themes are similar to 2018. We continue to see new supply delivered in many markets. The rate of deliveries has started to slow, and while we still believe new openings in 2019 will be lower than in 2018, we expect the impact of new supply to be greater due to the cumulative impact of several years of elevated development. These concerns are the same concerns we discussed on our call a year ago. However, there are also some encouraging themes from last year that will continue into 2019. First, the economy continues to be healthy. Second, we are in a need based industry with steady demand…

Thanks, Joe, and hello everyone. Our core FFO for the quarter was $1.22 per share and our core FFO for the year was $4.67 per share ahead of our guidance. The peak was primarily due to property performance and G&A savings. Core FFO includes a $0.02 adjustment for the write-off of deferred financing cost related to the prepayment of notes payable to trust. We continue to evolve our balance sheet which has never been stronger. During the quarter we amended our credit facility, accessed our ATM, and increased our unencumbered pool which now stands at $5.6 billion. These efforts are part of our goal to further diversify our capital structure, latter [ph] our maturities, and minimize our average interest rate while extending the average term. This will ensure that we continue to have capacity to fund future growth through multiple sources of capital. Last night we provided guidance and annual assumptions for 2019; our new same-store pool increased by 38 stores to a total of 821. Same-store revenue is expected to increase 2% to 3% in 2019. As Joe mentioned, we believe the impact from new supply will be greater in 2019 than it was in 2018. The level of this impact will depend on the timing of deliveries and the speed of absorption in impacted markets, specifically the major Florida and Texas markets. Our guidance also assumes some revenue growth moderation in markets, not heavily impacted by new supply. This is due to multiple years of outsized growth resulting in tough comps. Same-store expense growth is expected to increase 3.75% to 4.75%. The increase in expenses is primarily driven by outsized growth in property taxes and marketing spend. Our revenue and expense guidance results in NOI growth of 1.25% to 2.75%. Our full year core FFO is estimated to be $4.73 to $4.83 per share. In 2019 we anticipate total dilution of $0.23 from value-add and C of O acquisitions, up $0.03 from 2018. We recognize that short-term headwinds, this causes to our core FFO growth rate but believe the investment in these lease-up stores continues to improve the quality of the portfolio and generates long-term value for our shareholders. With that, let's turn it over to Jeff to start our Q & A.

Thanks, Scott. In order to ensure we have adequate time to address everyone's question. I would ask that everyone keep your initial questions brief. If time allows, we'll address follow-on questions once everyone has had the opportunity to ask their initial questions. With that, let's turn over to Michelle to start our Q&A.

[Operator Instructions] Our first question comes from Jeff Specter [ph] of Bank of America.

Good morning, guys, this is Shirley Wu [ph] with Jeff Specter. So thanks for the actual call our supply. I think of previous earnings calls you've mentioned that the percentage of a portfolio being affected by the new supply would be around 60% and 90%. Has that changed and what do you think 2020 is going to look like?

So our view of 2019 has not changed. The only thing that's changed on the ground is a certain number of developments that we expect to be delivered in 2018. We're in fact delayed and now will be delivered in 2019. But we expect the same thing to happen in 2019 in some of the properties that are scheduled to be delivered late in 2019 will, in fact, be delayed and not delivered until 2020. So our view continues to be that deliveries will be higher in 2018 than in 2019, although peak impact is in 2019 because of accumulative affect. As to 2020 and our views frankly, it's all subject to the trend continuing of decreasing new developments if in fact, people start putting more shovels in the ground then we could be wrong and you know we just have to wait and see what happens.

All right so could you talk about chief street rates 4Q and maybe how that's going to look in 1Q of 2019 as well?

Yes, Shirley, our street rate in the fourth quarter were -- this is our achieved street rate, we achieve street rates that we're in the low single digits. And that it was about 2% in January.

Our next question comes from Jeremy Metz of BMO Capital Markets

Did you mention the drag from discounting it all. I know last quarter's about an 80 basis points drag or supposed to update a little bit here and fourth quarter. What was it?

So in the fourth quarter there was really no drag or no benefit from discounts it was flat and our guidance for 2019 is since the same; no benefit or direct.

So if we combine that you know with the 2% effective rate you have just mentioned here, it obviously takes a while to roll through same store but as we think where you're at today and where you're Guidance is, that 2.5% midpoint for revenue assuming you are actually going negative on that effective runs and it sounds like January is holding but are you seeing any sort of signs already maybe in February of some slowing that's making you more cautious?

February is not significantly different than January and I think guidance all depends on where you are in that range.

Okay and then just one last one Joe, at the investor day you touched on the new bridge financing program you started. Can you just give an update on where that stands today? What sort of activity you're seeing out there and how much capital allocation are you putting in the budget here for 2019?

Sure, Jeremy, I'd be happy to. For those of you who weren't at investor day, we started -- initiated a new bridge lending program. The goals which is to expand our management platform to form additional relationships across the industry because we found through management parts and other activities we do that those relationships frequently turned out to produce acquisitions or other benefits and to fill what we perceive as a capital void in the market and make some money by lending to non-stabilized stores. We will not be leading to development stores. We don't want to have to take over a half-finished development but we believe there is an opportunity to land on stores that are not yet stabilized. We're just starting this program, we've made a couple loans, we have a few in the hopper, we're getting very good reception in the marketplace. But we are just beginning. We're going to walk before we run. We're going to see how the market reacts to this and I would not expect it to be a significant capital allocation in 2019.

Our next question comes from Ronald [ph] of Morgan Stanley.

Just following up on same-store expenses. I think you mentioned outside property taxes and marketing spend. Just curious if you can find more details? How does that -- how does the growth rate compare for those versus 2018 and if there's any markets or any kind of a one-time thing that's really driving this outside nature of these expenses?

Yes, our property tax budgets for 2019 assume about 4.5% increase year-over-year. We continue to see pressure across multiple markets, so it's actually down slightly from 2018 but continues to be higher than inflation. 2019 marketing spend is about 11% in -- is what we budgeted which is up from our annual run rate of 2018 and that comes from a couple of things. One is just overall inflation from you know more people bidding on using you know the search engines and that's driving the cost of the bids up as well as you know we're going to supply cycle and wanting to make sure that we stay top of mind in people's buying decisions.

Right. And then just a quick one on development. Maybe could you just comment versus 3, 6, 9 months ago, have you seen any incremental sign from developers whether a deal compression, whether it's projects taking longer to lease up. Any incremental color on slowing that supply pipeline?

I think we are seeing the factors you described. Yield compression, increased costs and just an awareness that many markets are over-built or fully built and some more caution. So we are seeing a hold back in new supply in some areas, new developments in some areas but there still are people who have either more optimistic views or lower yield requirements that are still trying to go forward.

Great. And the last one for me is; just I noticed in the release that Miami was added to markets lagging in Philly was dying as the market that are performing. Can you just -- maybe a little bit more color on what's going on there? Is there anything to know there?

I think that's directly related to new supply. Miami has had a very large influx of new development that is acting performance and we haven't seen the same thing in Philadelphia.

Our next question comes from Smedes Rose from Citi.

Hi, thank you. I wanted to ask you, did sequential decline in curated occupancy from 3Q to 4Q will split steeper than what we've seen in several years now? Did that surprise you at all can you maybe provide a little more color on the -- I guess the case over the course of the quarter?

First of all, I would tell you I think sometimes people focus too much on rentals and vacates you know I think if you look at our year end occupancy, it was quite strong. maybe slightly stronger at the end of the third quarter but again the goal here obviously is to maximize revenue you'll see it plus, you know plus or minus 10, 15, 20, 30 basis points depending on the month, depending on the quarter. But I don't think the fourth quarter played out significantly different than what we were expecting and we felt like we had a -- you know strong ending to the quarter of the year.

Okay, you were looking for that level of kind of sequential decline and that wasn't a surprise at all.

Not necessarily decline but on an annual basis we were expecting no benefit from occupancy and that's largely where we ended up.

Our next question comes from Eric Frankel of Green Street Advisors.

I just want to go back to the same-store calculations. The news confirms or you said that it's a 15 basis points; can you just confirm the number of stores that can be added in the same-store pool?

We're adding, so our current pool is 783 and the new pool goes to 821, so an add of 38.

And the average occupancy for the -- roughly, I guess 440 or so stores, is that significantly lower or same as what you currently have?

It's pretty much the same, very close to being right on top of each other.

And then, I know you -- question is regarding your cap allocation guidance here and the investments you have under contract in what you're hoping to close. But it seems like you're 70% of the way there essentially in terms of what you have under the contract are closed and what you're guided to; that seems somewhat conservative. Maybe you could provide a little more color on how you're thinking? I guess you have roughly $160 million of deal that you have in -- gone under contract or closed now but it's kind of based on your guidance. Any reason why that shouldn't be higher just kind of given all the trends that you're referring to?

The only thing I could say is, it's very difficult for us to predict when we're going to have opportunities to transact on an off-market basis. And as I said earlier, that's really where we are able to be successful. So, we could talk to the brokers, and we can understand the pipeline and what we think is coming forward but we know we're not going to be very successful there. So is it possible that we exceed our guidance and buy more, absolutely, but creative opportunities are available and good deals, we have a balance sheet and capital flexibility to execute on those transitions. So I hope we do exceed our guidance in 2019 like we did in 2018 but we're not banking them.

[Operator Instructions] Our next question comes from Wes Golladay of RBC Capital Markets.

When rent growth slows, is it driven more by changing distribution channels or lower street [ph] rates?

The street rates are really what's going to drive your rent growth. I mean our current -- your current street rates, your current achieved rate at some point flows through and becomes your rental rate growth, and so street rates are going to probably be more influential than anything.

And then going back to that 3-year rolling supply, when do you see that peaking and do you expect a gradual decline or a sharp decline, or how should we look at that going forward?

So we believe that 2018 was the peak delivery year and we expect to gradual decline and that's fully caveated by -- we don't know what people are going to do in terms of picking up development; we're looking at current trends and assuming that they continue. But if -- for whatever reason, a bunch of people go capital into development and start putting shovels in the ground where they shouldn't, then we could be wrong.

And then, maybe going back to Keithman's [ph] question about the developers not hitting the returns; are there certain markets where you see maybe in the next year or two you can have an opportunistic fund and take advantage of some of this?

I think that is likely, I think there are going to be opportunities to purchase projects that are not hitting pro forma or not doing as well as a lender would like or an equity partner would like. And our acquisition guys are fully focused on that.

Our next question comes from Todd Stender of Wells Fargo.

Just to go back to the $0.23 dilution expected from C of O and value add; have you guys separated those two on how much do you scribe to those two buckets, each if you have?

It's about $0.16 from C of O's and about $0.07 from lease-up properties.

It could be a pretty good source of upside to earnings, you've got 12 of the 17 projected openings I guess; opening in the first half of the year but I also want to see potential offsetting that. Have you tapped the ATM already in January/February just because you've acquired so much -- just seeing where your capital is coming from?

Well, we used the ATM in the fourth quarter and in the current quarter we've not. Yes, correct, third and fourth quarter of last year we used the ATM.

And then just finally, excluding the 12 assets you've described in California that you've already gotten, where are the other locations? I know you've had a couple of C of O deals that are wholly-owned, that you've acquired already in the first quarter, where are those in markets?

[Indiscernible], Louisville, Kentucky and many on Pennsylvania. Should we just call [ph] -- posted one in Brooklyn too last week; was that last week again?

Yes, we had several little close. We have three little close in -- well, two in Brooklyn, one in Queens. And then also Massachusetts, Merrill Lynch, so they are kind of throughout the country.

Our next question comes from Tayo Okusanya of Jefferies.

A couple of questions. The first one is the 2% increase in street rates that you guys have discussed, is that net of concessions or is that without concessions?

It is not net of concessions, that is just we have achieved great as the average, some of this pain [ph], no matter which channel they come from. This can say discounts year-over-year, there is no change.

Okay, so that's the first thing. Then I'm going back to a question I was asked earlier on not getting a lot of push back from in place tenants on rent increases. But I was just curious, the guidance contemplates a slower rate of rent increases going forward because of supply or no?

No. We really don't believe supply impacts are our ability to increase rents to tenants when appropriate.

Okay, that's helpful. And then could you help us understand what the mark-to-market is in the portfolio? Like today, if a tenant moves out average rents are X versus if a tenant moves into probably moving on average at this particular rent?

Yes, if you look at our employees rents and compare those to our cheap rents so what people rented at when they come in the door on average for the year, it is mid-single digit so call it 5% that is considerably higher in the offseason so right now it's you know call it double digits and then it goes to zero in the summer months so depending on the time of the year we typically you know our rates are typically higher in the summer when more people are moving in and lower in the offseason with fewer people are moving so that rolled down is higher in the colder months and I would tell you to be careful to assume that's the role down on everybody because you have many people that moved in a move right back out and so they are at very close to what the street rate is.

There are no further questions I will turn the call back over to Joe Margolis CEO for any closing remarks.

Thank you, everyone, for your joining us today. We expect another great year in 2019 despite the challenges we're all aware of and we've all discussed. We operate the resilience sector; our demand is needs based. We're able to achieve high occupancies in positive rate growth and we have significant external growth opportunities. We continue to invest heavily in technology. Our digital marketing in revenue management systems continue to evolve and improve. But none of this would be possible without our people. We have an incredible deep team of dedicated, motivated, engaged employees who live our values every day and are driving our performance and I want to recognize their contributions to our efforts and our success. Thank you all for your interest and now we'll talk to you soon.

Ladies and gentlemen thank you for participating in today's conference.