Jeff Norman - Vice President, Investor Relations Joe Margolis - Chief Executive Officer Scott Stubbs - Chief Financial Officer.

Gaurav Mehta - Cantor Fitzgerald Gwen Clark - Evercore ISI Todd Thomas - KeyBanc Capital Markets Juan Sanabria - Bank of America George Hoglund - Jefferies Neil Malkin - RBC Capital Markets Vikram Malhotra - Morgan Stanley Ki Bin Kim - SunTrust Todd Stender - Wells Fargo.

Good morning, ladies and gentlemen and welcome to the Third Quarter 2017 Extra Space Storage Inc. Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Jeff Norman, Vice President, Investor Relations..

Thank you, Andrew. Welcome to Extra Space Storage’s third quarter 2017 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 statements due to risks and uncertainties associated with the company’s business.

These forward-looking statements are qualified by the cautionary statements contained 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, November 2, 2017.

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. Good morning, everyone. Before I begin my remarks, I just want to say how impressed and humbled I am by the sacrifices our teammates made in Florida and Houston and Puerto Rico. They went the extra effort to take care of our customers, to take care of our stores and most importantly, maybe to take care of each other as family.

I am very proud to be associated with a company that has teammates like this. I want to say that all of our employees are safe and we didn’t have any injuries in any of our stores, and I am very grateful for that. So thank you for giving me the opportunity to say that. And I will start my remarks.

Throughout the third quarter, we had strong execution and posted another solid result. Same-store revenue growth was 4.8%, NOI growth was 5.5% and FFO as adjusted growth was 10.8%.

If we exclude our properties in Houston and Florida from same-store totals, revenue growth for the 640 stores not impacted by hurricanes actually improved 20 basis points to 5.0%, and NOI increased 40 basis points to 5.9%.

So, our outperformance this quarter was driven by strong operating results produced by our diversified portfolio, not by one-time events. Houston did grow occupancy and is well-positioned for growth going forward, but there was no benefit to revenue and NOI in the third quarter.

Florida received some benefit to occupancy and revenue growth in the quarter, but we don’t expect the long-term benefit to be significant. We have provided additional details related to the performance of these markets in our supplemental financial information posted on the website.

On our last call, we announced that Strategic Storage Trust, formerly known as SmartStop, decided to internalize management, and as planned, its 94 stores left Extra Space’s system effective October 1.

As of today, we have added 121 properties to our managed platform this year and we expect to add approximately 30 more between now and year end for a projected 2017 total of 151 stores. From a store count perspective, this offsets the loss of the Strategic Storage Trust properties.

Further, our 2018 pipeline is the largest we have had in our history, with over 100 stores approved to be added to the platform already. Third-party management will continue to be a growth driver for Extra Space. Finally, I would like to provide an update on the 36 store portfolio that we have marketed for a joint venture recapitalization.

The transaction is now under contract, debt financing has been arranged, and we plan to close by December 1, 2017. Proceeds will be reinvested in other properties through 10/31 exchanges, which we have under contract. We will be prepared to discuss additional details after this transaction closes. I would now like to turn the time over to Scott..

Thank you, Joe. Last night, we reported FFO as adjusted of $1.13 per share, exceeding the high-end of our guidance by $0.02. The beat was primarily due to stronger than expected property and tenant insurance results. We recorded a net loss of $2.1 million related to property damage and cleanup from the hurricanes.

We recorded an additional $2.3 million for tenant insurance claims for a total of $4.4 million related to the hurricane. These losses have been added back to FFO as adjusted to more accurately reflect our run rate. Occupancy for the same-store pool ended the quarter at 93.9%, a 140 basis point increase.

The growth in occupancy wasn’t just the result of the hurricanes. Same-store occupancy growth in non-hurricane markets was up 130 basis points. Throughout the quarter, we were able to increase rates to new customers in the low single-digits and we continue our existing customer rate increase program without changes.

During the third quarter and subsequent to the end of the quarter, a number of our acquisitions closed or went under contract. As of today, we have closed $140 million in wholly-owned acquisitions and invested another $50 million in stores held in joint ventures.

We also bought out our joint venture partners’ interest in several other properties, adding another $20 million in investment for a year-to-date total investment of approximately $175 million. We have another $240 million under contract and scheduled to close by year end.

We remain focused on only acquiring properties that create long-term value for our shareholders. We funded our acquisitions and loan maturities with draws on our credit facility and the closing of our 10-year $300 million private placement that we announced last quarter.

The funding is part – the funding of this private placement is part of our strategy to lengthen our average debt term, increase our fixed rate debt ratio and expand the size of our unsecured pool. Based on performance year-to-date, we raised the bottom end of our same-store revenue guidance by 25 basis points to a range of 4.5% to 5%.

Year-to-date, expenses have been below budget and we have lowered our annual expense guidance to 1.25% to 1.75%, increasing our annual NOI guidance to 5.75% to 6.5%. As a result of the Q3 beat, we are increasing our full year FFO as adjusted guidance to $4.32 to $4.35 per share.

Our guidance also includes $0.07 of dilution from our C of O stores and additional $0.08 from value-add acquisitions for a total of $0.15. We are accepting some short-term dilution in exchange for outsized long-term value creation. I will now turn the call back to Joe..

Thank you, Scott. With most of the year behind us, 2017 has shaped up well and we are pleased that our sector leading performance has allowed us to increase guidance each quarter. The fundamentals in storage are healthy. Demand has been steady resulting in growth in occupancy and rental rates.

As expected, the rate of our revenue growth is moderated since the beginning of the year, but the rate of the moderation is flattening. We are confident that our systems are well equipped to maximize revenue in the current environment and our team has demonstrated a track record of consistent execution.

We also have some headwinds, which are unchanged from the previous two quarters. High seller expectations continue in this competitive acquisitions environment and several submarkets have felt the impact of new development. However, these challenges present opportunities.

The competitive acquisition market allowed us to put our 36 property portfolio under contract at attractive pricing and the new development has led to the acquisition of purpose-built assets that will create significant long-term value for our shareholders while enhancing the overall quality of our portfolio.

New supply has also resulted in significant growth in our managed portfolio, which generates an income stream for us today, increases our footprint and provides a meaningful acquisition pipeline for the future. Our three-pronged ownership structure positions us to continue to grow efficiently in the current or any other economic climate.

This external growth platform, together with our sector leading same-store performance and our efficient balance sheet, all contribute to meaningful and consistent FFO growth and to our ultimate goal of maximizing the long-term return on our investors’ capital. Let’s now turn the time over to Jeff to start the Q&A session..

Thank you, Joe. In order to ensure we have adequate time to address everyone’s questions, I would ask that everyone keep your initial questions brief. If time allows we will address follow-on questions, once everyone has had an opportunity to ask their initial questions. And with that, we will turn it over to Andrew to start the Q&A session..

[Operator Instructions] Our first question comes from the line of Gaurav Mehta with Cantor Fitzgerald. Your line is open..

Thanks. Good morning. A couple of questions, I guess. You mentioned 3Q was ahead of your expectations and you raised your same-store revenue guidance for ‘17.

I was wondering in terms of markets, which market outperformed your expectation in the quarter?.

Yes. The West Coast markets in general continued to perform very, very well for us. Orlando and Las Vegas and the West Palm have also been the strong markets for us..

And I guess, on the expense side, what’s driving the expense guidance growth for ‘17?.

So the fourth quarter looks like its elevated expenses, but it really relates more to a tough comp. Last year in the fourth quarter, we had negative expense growth, right around negative 2%. So year-over-year is really the difference..

Okay, thank you. That’s all for me..

Thanks, Gaurav..

Thank you..

Our next question comes from the line of Gwen Clark with Evercore ISI. Your line is open..

Can you talk about where street rent trends – sorry, can you hear me?.

We can hear you now, Gwen..

Hey, sorry, about that. My phone just came off the headset.

Can you guys talk about where street rent trends are today and then where move-in rates are? And I guess what you guys call your effective rate?.

Yes. So throughout the third quarter, our street rates were about 5%, ahead of where they were the prior year and our achieved rate was about 3% and moving into October, those continue strong..

Okay. And then I guess on that piece, I know promotions as a percentage of revenue seems to have been trending up as of early September.

Can you talk about where that is today and how that fares relative to your expectations?.

Yes. So discounts as a percentage of revenue were just under 4% and we continue to discount rentals about 55% of our rentals receive some type of discount in the third quarter. Most of those, the most popular discount continues to be first month free and we continue to use discounting as a way to move occupancy.

You can move rate, you can move discounting or you can move your marketing spend and right now, we are probably a little more focused on the discounting side..

Okay, that’s helpful. And sorry again about the headset/.

Thanks, Gwen..

Our next question comes from the line of Todd Thomas with KeyBanc Capital Markets. Your line is open..

Yes, hi, thanks.

First, can you provide an October occupancy for us and where that is year-over-year?.

So, our occupancy year-over-year at the end of the quarter was 140 basis points. We have actually seen it come down a little bit, closer to the 1% delta at the end of October. That’s primarily a result of some of the move outs we have seen in Florida as the elevated occupancy around the hurricanes has kind of gone away..

Okay.

And then the increase in rental activity in the quarter, rentals were up 7 – a little over 7%, is that more inbound hits or is it driven by a higher conversion rate? What’s the mix like there?.

It’s a little of everything. And as Scott pointed out earlier, we are constantly playing with the various tools we have to maximize revenue and we are able to increase occupancy by using those tools this quarter..

You also saw more activity with the hurricanes, Todd..

Okay.

How do you measure your conversion rate or how would you quantify that? Is there something that you can share with us around what your conversion rate looks like?.

We don’t share that information, Todd, sorry..

Alright, thank you..

Thanks, Todd..

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

Hi, thanks for the time. Just on the same-store revenue as you commented that you thought that the pace of growth was decelerating, but the fourth quarter implies kind of at the midpoint of your guidance, 3, 4.

Is that where you see things, I know you have kind of had a history of beating and raising or is that – is there some conservatism built in there? That will be my first question..

Yes. Juan, so the fourth quarter does imply some decelerations.

The number you give is kind of your number, I would tell you just kind of depending on where you pick in the range, but I think if you look sequentially from the second to the third, the average 4.8% after starting – ending the second quarter at 5.2%, somewhere in that quarter, you were below 4.8%.

So, I think you see some deceleration in the fourth quarter, but it has moderated significantly..

And when both – and can you just talk a little bit about SmartStop and where the occupancy is there versus the rest of the portfolio, because I think it still contributed to a fair amount of the relative performance this past quarter when you thought that, that be kind of flat in the second half of the year?.

Yes. So, it’s within 50 basis points in terms of occupancy compared to the rest of the portfolio. So, it’s really right on top of the rest of the portfolio. We started the year thinking that it would add on average for the year about 50 basis points of benefit, the change in same-store pool. Now, we are probably closer to 75 basis points on average.

Our thinking was it would start the year at 100 basis points and be zero by the end and it’s probably on the higher end of the 50 to 75 basis point range..

And so sorry, just to clarify the occupancy is 50 basis points below the rest of the portfolio? Is there anything....

It’s actually – so it’s very close and it’s going to be market-by-market. What I am saying is, it’s within 50 basis points, but it’s a combination of rates as well as occupancy that have provided the benefit from the change in pool..

Okay, thank you..

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

Hey, good morning guys.

Just one question on the acquisition environment, just what are you guys seeing out there in terms of portfolios in the market? And then also, are you seeing any change in the competitive landscape for acquisitions in terms of how is the appetite from a private equity? Has there been any noticeable change there?.

Sure. So, transaction volumes are down significantly. The last statistics I saw was 63% between 2016 and today through the end of the third quarter. So, the volume overall is down significantly that we believe the quality of most of what we see on the market in terms of product quality or markets is lesser than what we would like to chase.

So, it’s just a very difficult environment. And as you suggest, there is significant interest in private equity in self-storage.

I think that even with our reduced numbers from prior years, we still look a lot better than other real estate asset classes and people are looking to get exposure to self-storage and we are seeing new private equity money compete in this space..

Okay.

And then just following up on that, as given the amount of private equity money looking to get into the space and given where some of the stocks have gone over the past 12 to 24 months, where do you think is a likelihood of large scale M&A in the sector?.

Yes, I am not sure I could really predict large-scale M&A..

Okay, thanks..

Thanks, George..

Our next question comes from the line of Neil Malkin with RBC Capital Markets. Your line is open..

Hey, guys. Good morning. In some of the other sectors, we are seeing just the lending environment tightening give way to the ability for the REITs who have better access to capital to provide that mezz part of the capital stack.

Have you seen more people come to you looking for mezz financing and are you considering that just given sort of kind of the outdated supply and the less dilutive impact of that versus C of O lease-up?.

It’s a really good question and we thought there was going to be an opportunity in mezz and frankly, we thought there would be a void in the capital markets there would be a way we could attractively place capital given the current acquisition environment. For us, we would be unwilling to do it on a development property.

I don’t want to be in a position where I have to take over some broken development property. But we thought maybe for people who had under-leveraged assets with long-term debt on it, there might be an opportunity. We made some inquiries in the market, and we’re wrong.

We just – we haven’t found that to be an opportunity, but we will continue to try to be creative and find ways to invest investor’s capital at good risk-adjusted returns..

Okay. And last one for me, just given the sentiment and nature of the environment for stabilized assets and pricing.

Are you kind of alluding to you, you are getting more comfortable with your C of O pipeline? Do you see that increasing? And if so, what size relative to the enterprise are you comfortable with this part of the cycle?.

Two good questions. So first of all, we have an internal governor on the amount of dilution. Our C of O pipeline and value-add stores, they were willing to accept. And we monitor that every quarter and we do our best to stay within it.

One way, if we see attractive deals that we can continue to participate but stay within that dilution governor is to execute deals in joint ventures. And I think if you look at our C of O pipeline, there is a good number of the deals, are executed in joint ventures.

We still believe there are opportunities in C of O in development, although they are fewer and far between. We approved in 2016, 38 C of O transactions and we have approved so far this year 15, 7 of which are in joint ventures.

So we are about half of the pace that we were a year prior, but we have never out of the market, and to the extent someone has a submarket of location that makes sense – costs that makes sense, we will continue to participate..

Thank you..

Thanks, Neil..

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

Thanks, guys. Thanks for taking the question. Just wanted to dig into sort of the West Coast markets a bit more, maybe if you could compare and contrast LA and San Francisco a bit, LA did seem to decelerate quite a bit where San Francisco sort of was more stable.

Just wondering what are your expectations over the next, call it, 6 to 12 months for those West Coast markets and if you could just compare the two?.

So de-acceleration is relative and we are still growing rents in Los Angeles at over 8%. So, that’s a pretty good clip and it’s real hard to think you can sustain over a long period of time higher rent growths. I think those markets are going to continue to be very strong, because we just don’t see very much new development.

It’s very difficult to get things built in those markets. There is some exceptions, Irvine and San Jose, but overall, we expect those to continue to be very strong markets..

Okay. And then just on supply sort of now coming towards the end of ‘17 into ‘18, any updated thoughts on sort of the pipeline and deliveries.

It seems to be there is a couple of different figures out there now, I am just wondering what your thoughts are and when you expect to see the peak impact from this in the markets where you are seeing supply?.

So, earlier this year, we are asked that question on overall number, we said 600 to 800. If we have to give an update now, we would say we are probably towards the lower end of that range.

But I want to caution as think I have in the past, overall number and the focus on markets, I think you’d be misplaced because the most important thing is where these stores are being built. So for example, Dallas is kind of the poster child of a lot of development, possibly overdevelopment.

But Dallas’ several markets, our stores in South Dallas are growing revenue at 10%, where North and East Dallas are slightly negative. So it’s real hard to say how many stores are being delivered in the country, what’s the overall number or even how many stores are being delivered in a market, because it depends where those stores are being built..

Okay, good. Thanks, guys..

Thanks, Vikram..

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

This is Ki Bin. I am sure you figured that out. So, it seems like the results are just trending a little bit better than guidance, obviously.

If you had to look at all the variables that you are always managing to drive occupancy, drive revenue, what is the surprising factor that came in better than expected?.

I would tell you, occupancy has been better than expected as well as we have been able to have a little bit more pricing power than I think we expected early on in the year..

So when you say occupancy, if you can dig in a little bit deeper, is that because different ways of advertising is the private market getting a similar uplift in your MSAs or are you taking share just wondering if you could provide more color on that?.

It’s hard for us to get really good statistics on the private market, but I will tell you we believe in our platform. We believe in our systems that we can stick the most people into the funnel and convert the most people out of there. And we are never happy with where we are.

We are always going to try to improve it, but right now, the system is working pretty well..

And when you say the system, how much of it is truly your algorithms and your pricing systems outputting something and you guys do it versus something more subjective that you might do during the quarter?.

So our machines, our algorithms work in conjunction with our people. We don’t turn the machine on and just let it run. There are situations that a machine doesn’t know the road in front closed or whatever, and so it’s a combination of our people on the ground and in our data science and revenue management teams and our algorithms..

Okay, thank you..

Thanks, Ki Bin..

Our next question comes from the line of Todd Stender with Wells Fargo. Your line is open..

Hi, thanks guys.

Can we hear details on the properties you acquired in the quarter, specifically locations and maybe stabilization occupancies, that kind of stuff?.

Combination of a few things we did, Certificate of Occupancy in Georgia, we bought one in Virginia, we bought one in North Carolina, one in Florida and then one joint venture in Massachusetts. Majority of those are lease up or Certificate of Occupancy deals..

And Scott, can you go through your underwriting assumptions, I guess if you are willing to take one on balance versus one in a joint venture, if you go through maybe the growth – annual growth rates and maybe going in yields?.

So, we underwrite all stores the same regardless of whether we are going to offer it to a joint venture partner or not and their question to us would be sometimes it’s the size of the store, sometimes the wholly-owned return is unacceptable to us, but the joint venture return, which is enhanced, is acceptable to us, exposure to a market, different factors such as that..

And then sometimes just managing the dilution, quite frankly..

And you guys have an updated dilutive number or dilution number, maybe an annualized number?.

Yes. So, in terms of Certificate of Occupancy, we have got $0.07 in our current number and then $0.08 related to stores that will stabilize at a number higher than our current earnings. So, $0.15 total of additional earnings from those C of O or from those lease-up properties..

The other factor frankly to give a complete answer is sometimes, developers bring us stores that they will only do on a joint venture basis where we don’t have the access to the transaction unless we are willing to do a joint venture..

Got it. Thanks for the color..

Sure. Thanks, Todd..

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

So, just a quick one, when you guys had the C of O deals that you are doing this year, is probably half the pace, are other players picking up that slack or is it just less getting done?.

I would say there is less getting done..

Okay. That was it for me. Thank you..

There are no further questions at this time. I would now like to turn the call back over to Joe Margolis..

Thank you everyone for your interest today in Extra Space and look forward to seeing you shortly. Have a good day..

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