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Life Storage, Inc.  (NYSE:LSI)
Q3 2018 Earnings Conference Call
Nov. 01, 2018, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Life Storage third quarter 2018 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded. I'd now like to turn the call over to your host, David Dodman, Vice President of Investor Relations and Strategic Planning. Please proceed.

David Dodman -- Vice President, Investor Relations and Strategic Planning

Good morning and welcome to our third quarter 2018 conference call. Leading today's discussion will be David Rogers, Chief Executive Officer of Life Storage along with Andy Gregoire, 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 limit yourself to two questions to allow time for everyone who wishes to participate. Please requeue with any follow-up questions thereafter. At this time, I'll turn the call over to Dave.

David Rogers -- Chief Executive Officer and Director

Thanks, David and welcome everyone to our call. Last night we reported adjusted FFO of $1.45 per share for the third quarter, driven by strong same-store top line growth and well-controlled operating expenses, especially Internet advertising. While we mainly benefited from a somewhat easy comp over last year's 3Q, we are seeing some headwinds in Houston as we pass the anniversary of Hurricane Harvey. All in all, though we're pleased with our results.

Touching on a few macro industry topics, additional supplies continue to dominate the discussion. Life storage markets that are most impacted with new deliveries are San Antonio, Dallas, Charlotte, Miami, Raleigh, Phoenix and Austin. Markets with less of a new construction issue but still managing through a substantial absorption process are the Chicago and Houston markets. In evaluating the dynamics of Chicago and Houston, the supply impact was maybe not so severe as we anticipated given the quantity of space that has come online since 2015. We believe this to be a function of the strength of our brand, the quality of our stores and great customer service.

For the most part, demand remains pretty solid across most markets. And while attracting new customers is a competitive game, really competitive in some markets, existing customers continue to absorb rate increases. We've been able to keep our operating expenses well under control so far this year, but we expect advertising and property maintenance costs to exert pressure on margins in 2019.

Property taxes, of course, continue their relentless march on. Construction costs of all types; concrete, steel, labor have risen considerably in the past 18 months. And while not overly impactful to us, these do crimp the ROI on our expansions and enhancements program. I'll list just a few of our company's highlights this quarter aside from the strong property operating results.

We announced the roll-out of our Rent Now initiative in early August. It's in place at almost 300 stores as of today and we've just had our 1000th customer take advantage of the program. Rent Now is expected to be in place in all 750 of our stores by mid-2019. We announced major enhancements to our Warehouse Anywhere stores, an inventory management solution, by expanding our product suite and offering added optionality for our B2B and B2C customers.

We acquired two stores during the quarter and another in early October for a total of $27 million. As of today, we're on contract to purchase five more properties at a further cost of about $50 million. All eight of these are in our key core markets; Atlanta, Boston Metro, the greater New York metro area, Orlando and Sacramento. We're still in the due diligence process on some of these and can't guarantee we'll be able to finalize them all, but these are the type of properties we like to put the Life Storage flag on. They're larger, they're newer and they're higher growth markets. We also brought on three properties via joint venture investments; one each in Phoenix, Miami and Brooklyn, again adding class A third generation stores to markets we like.

On third-party management front, we've experienced strong momentum and we're realizing some significant wins. This morning we're putting Life Storage signs on 42 high quality stabilized stores in the southeast, primarily in Louisiana as we take over management for a significant new client. We're very excited about this transaction and it puts our TPM count at over 200 properties, a 110% increase since just year end 2016. Andy will speak more on this.

But yesterday we entered into an agreement with our commercial bank group to extend the duration and improve the terms of our corporate line of credit facility. Our asset recycling program is under way with the sale of some of our non-core properties expected by year end to do a joint venture in which we expect to own a majority interest and then manage the property going forward. We have a second group of assets that will be put on the market soon.

Pertaining ever higher levels of operating scale, customer satisfaction and the application of data and technology are key drivers to profitable growth an NAV accretion. These occupy much of our focus and the targets we're hitting this year bear this out. We don't plan on letting up.

Andy, you may please go ahead.

Andrew Gregoire -- Chief Financial Officer

Thanks, Dave. As Dave mentioned, last night we reported adjusted quarterly funds from operations of $1.45 per share, a 4.3% increase compared to adjusted FFO of $1.39 per share for the same period in 2017. These results were above the high end of our forecast, driven by better than expected same-store performance as well as better than expected growth at our lease-up facility. As a result of the strong performance, we have again increased our annual guidance, which I will reveal shortly.

Our same-store performance as highlighted by our NOI growth of 4.2%, achieved by both improved revenue growth and controlled expenses. Specifically, same-store revenue rose 3.6% over the same period last year, driven by improvement in rental rates. Same-store realized rates per square foot increased 3.9% over the third quarter of 2017.

Third quarter same-store expenses outside of property taxes were well controlled, increasing only four tenths of 1%. The strengthening of the Life Storage brand on the web over the last year allowed us to again reduce quarterly Internet marketing spend, which decreased 9.6% versus the third quarter of 2017. In addition, our store and construction teams are doing a great job improving efficiencies at the stores and this is showing up on the expense side.

As we anticipated, the only significant expense pressure we're seeing is from property taxes, which increased 6.2% in the third quarter. In addition to the improved performance of our same-store portfolio, we continue to see consistent growth trends at the properties that we purchased as certificate of occupancy are very early in the lease-up stage. With quarterly occupancy of 85.7%, these lease-up stores still have significant room to grow. Our overall third quarter revenue increase also reflected a 10.6% increase in other operating income, driven by an increase in Warehouse Anywhere sales.

Our balance sheet remains 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 $13.3 million and $371 million available on our line of credit. Earlier this week we closed down a refinancing of our bank credit facility, which included extending the maturity on the revolver to March of 2023 and reducing the credit spread by 15 basis points at our current investment grade rating.

Subsequent to this opportunistic refinancing, we have no debt maturities until June of 2020. Our debt service coverage ratio was a healthy 4.9 times. Net debt to recurring EBITDA ratio improved to 5.2 times.

Regarding guidance, we are encouraged by the better than expected results in Q3 and have raised the guidance on annual same-store revenue ranges as well as our annual FFO guidance. Specifically, we significantly increased the midpoint of both our 2018 same-store revenue and NOI growth guidance and the midpoint of our 2018 FFO per share by $0.04.

As we discussed last quarter, we had a tougher comp in Q4 as a result of new supply and the return to normal trends in Houston and certain Florida markets that benefited from hurricane-driven demand in late 2017. In addition, our Q4 2017 Internet marketing spend was reduced substantially as the Life Storage brand relevancy improved, eliminating much of the comparative benefit we've seen year-to-date. Same-store revenue growth for Q4 is expected to be in the 2.5% to 3% range and for the year revenue growth is now expected at 3% to 3.5%. Our expense guidance was also reduced slightly.

As a result of these changes to our same-store guidance, we're forecasting adjusted funds from operations for the full year 2018 to be between $5.46 and $5.52 per share and between $1.35 and $1.39 per share for the fourth quarter of 2018. With that, operator, we can open the call for questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Juan Sanabria with Bank of America Merrill Lynch. Please proceed with your question.

Juan Sanabria -- Bank of America Merrill Lynch -- Analyst

Hi, good morning. I was just hoping you guys could give us a little bit of color on same-store revenues on a go-forward basis and how we should think about occupancy particularly with the comps from the hurricanes which you mentioned, maybe if you could give us how results are trending to date on a year-over-year basis as well as the benefit of expansion, it seems like it's been 40 basis points at or about the last couple of quarters if that should continue into the foreseeable future.

Andrew Gregoire -- Chief Financial Officer

Hi Juan, it's Andy. Yes, revenue -- I think if you look at our guidance we're looking at tougher comp Q4 with the Houston and Florida markets in 2017 Q4 were very strong from the hurricane-driven demand and this year obviously that's a tough comp. So we would expect some deceleration. That really showed up in the occupancy at the end of the quarter, we were down 110 basis points. 70 basis points of that was just related to the hurricane affected store. So, other stores were down 40 basis points. We expect that to continue.

The easier comp from an occupancy point of view should come late in Q1 when those people moved out. But occupancy wise I would expect more than 1% -- more than 110% in the fourth quarter just because of tough comp revenue, as we shown -- have shown 2.5% to 3% in Q4. We're not given any guidance for next year, but I would expect Q1 to be a tough comp just from the hurricane zone.

Juan Sanabria -- Bank of America Merrill Lynch -- Analyst

And then the benefit that you're getting from the renovations and expansion should that continue that roughly 40 basis points or how sustainable is that or when does that comp become an issue, if at all?

Andrew Gregoire -- Chief Financial Officer

Yes, it's not a perfect calculation, but 30 basis points to 40 basis points is probably a reasonable estimate of how it's affecting the revenue. I wouldn't expect any changes. We have a great team down there working on those expansions, they're keeping the flow of them pretty consistent. So until the point where we stop doing those, I would think the effect would be very similar because as we take stores -- take buildings out of services we knock those down, we lose the revenue on them and then it's usually six months to a year later before we replace that revenue with something new.

So the net effect by taking some out of service put some on been about 30 basis points to 40 basis points and that would -- I would expect it to continue.

Juan Sanabria -- Bank of America Merrill Lynch -- Analyst

Great. And just one more for me on the supply side. Can you give us any sense on a three year rolling basis how the store exposure, percentage of total stores changes as you go from 2018 into 2019, if there's any increase/decrease if it stays the same and by what amount?

David Rogers -- Chief Executive Officer and Director

I think this is Dave, Juan. I think for the most part and balance across the portfolio, it doesn't change very much. As we mentioned in the prepared remarks, we're shifting Chicago and Houston and are absorbing now. They don't seem at least as far as we can tell they have a lot of new supply coming out of the base. Dallas and some of the other markets we mentioned are still getting deliveries. But by the end of 2019, they'll be pretty much having in the absorption phase. We probably expect some to go to other markets for more secondary or suburban side. I think on balance, it's pretty consistent 2018, 2019 into 2020. It's just market specific rolls as far as what's coming, what's being absorbed with past.

Operator

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

Jeremy Metz -- BMO Capital Markets -- Analyst

Hey, good morning. Andy, I just want to go back, you talked about Houston and Florida impacts on the Q4 revenue. You mentioned that they will carry into the first quarter next year. But just as we look past that should we almost think about that as sort of a trough here for revenue?

Andrew Gregoire -- Chief Financial Officer

Yes, it's tough to say it right now, but definitely, in those markets, I would think that would be the trough.

Jeremy Metz -- BMO Capital Markets -- Analyst

Okay. And then switching gears, you mentioned the joint venture sale progress, it sounds like that first slug will be done by year end. Just wondering if you can give a little color on them in terms of the number of assets that -- in that first pocket there, what sort of proceeds do you guys were talking about? Are you going use those for acquisitions and then any sort of goal post on the yield would be helpful.

Andrew Gregoire -- Chief Financial Officer

Yes. I think we're -- it's in the plus or minus range around $100 million expected by year-end. The proceeds are already spoken for by properties we have under contract. I think in terms of accretive dilution, I think we're in a good spot. I think the assets we're selling, we're hoping we were expecting to keep as third-party managed and in the joint venture. So our part of that joint venture and the fee income should basically take away the dilution you would ordinarily expect by selling stabilized properties and core source versus the growth-type properties we're getting.

So, I think just in terms of what you're asking, $100 million we expect by year-end to be slightly accretive on that pool. There is a fairly large second pool that we'll be taking to the market very soon. We hope to have the same end result to get them into a joint venture or at least third-party management basis, take the proceeds into core plus stores in markets that we already have a presence or maybe even enter a new one. So I think for 2019 we would expect, again, that much or more with the same accretive effect.

Jeremy Metz -- BMO Capital Markets -- Analyst

Thanks.

Operator

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

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Hi, good morning. I just wanted to follow up on the comments around occupancy. You mentioned that it's down on a seasonal basis also year-over-year given the hurricane comps, and I suppose some new capacity entering the system, some new supply growth. Any indication where you might see occupancy portfoliowide sort of bottom out during the off peak season? And when does occupancy typically trough in your portfolio?

David Rogers -- Chief Executive Officer and Director

Yes, the trough in occupancy, Todd, is normally at the end of January to mid-February is the low point. So we don't see any changes in that. That's what we would expect. The new supply obviously is a piece of that drop in occupancy, but majority of it right now is occurring because of the hurricane-driven demand from the prior year.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Okay. Any thoughts around where you might see that bottom out in late January?

David Rogers -- Chief Executive Officer and Director

I would hope it wouldn't be -- we're 40 bps down now. I would hope that would not increase much. We're -- this time of the year we sort of fight for occupancy. So the pressure on street rates comes back a little bit. The incentives go up a little bit. So I think at this level, we are willing to fight for occupancy and we will. So I would not expect much of a dip through the -- from the prior year through the upcoming slower season.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Okay. And then switching over to existing customer rent increases and sort of the program there. You mentioned previously that the company wasn't really increasing rents to in place customers above street rates in the portfolio. And I think now you've changed that policy and strategy. It seems like there would be some upside there, just based on sort of the stickiness of the customer. And I was just curious given the churn and the seasoning of the portfolio, if you have a sense of how much upside that could present, and if you can sort of quantify and help us understand what that opportunity looks like over the next year or two?

David Rogers -- Chief Executive Officer and Director

Todd, we do believe there is more upside. So this year, we did go above street rate. We did have a limit on how much above street rate we would go. So we have the ability to push more above street rate and maybe a little bit higher above that. We're also -- this year we did a lot of testing of wearing the curve meaning how late after they move in do we given that first increase. We like some of the results we see. So we have more potential there next year.

Impact on revenue, it's difficult to point to that. It's anywhere from 1% to 2% right now. I would expect probably very similar next year.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

So when you say 1% to 2%, what would is -- what exactly does that mean? So the current yield on an average asset you think that there is 100 basis points or 200 basis points upside as you sort of reach it -- change the strategy and the rent mix for some of these customers?

David Rogers -- Chief Executive Officer and Director

To clarify, the 1 to 2 is what I mean the impact we think, and it's not a perfect science remember because there is move-outs on how you replace those customers and what free rents offer. There is no exact way to calculate the impact of rent increases. But of our rental growth, we believe 1% to 2% this year came from that, and we think we can get a similar number from that next year.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Got it. Alright, thank you.

Operator

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

Smedes Rose -- Citi -- Analyst

Hi, thanks. I wanted to ask you first of all just as you look at acquisition opportunities, if you are seeing any change in pricing or cap rates. If you'd expect to see -- it seems like with an upward bias in the interest rates now maybe that should be playing out in the private market and just kind of how you're thinking about external growth now?

David Rogers -- Chief Executive Officer and Director

Yes, we wish we meet that that quick, but overall in the cycle the rises and rates have really eventually trickled through, but it takes several quarters. There is also -- so we haven't seen any change at all in asking prices and what owners expect sort of exacerbating that is the fact that there is a lot of private capital winding in the space that they just did it's remarkable the pressure on prices.

So -- from last quarter to the quarter before to last summer, there has been almost no perceptible change in cap rates for property, especially stabilized. That's probably the best parameter because a lot of the variables have taken on the equation when you are valuing them. But we have seen as is evidenced by some of the purchases we made this quarter by the pipeline that we have, we -- Joe Saffire, pretty much realigned our team and house here over the past year. So we've got sort of a coordinated effort with our third-party management solicitation team and our acquisitions team finding properties.

We had good relationships with a lot of people over 25-plus years. We were able to bring them one of our third-party managed source. We have another one under contract that we're bringing in. So they're there, but the pencil has to be sharp. It has to fit. I think that's really where it makes sense. We did some synergies by buying properties in markets where we already have a presence. We are doing a lot of one-off now, which our history has shown pretty much when we take a property that hasn't been exposed to the platforms, we can get the return up there. But it's not and no there has been -- short answer is no perceptible move. We don't really expect one for the next few quarters even if interest rates were to grow by 30 basis points to 60 basis points, 70 basis points, I don't think you're going to see that much of a change in pricing in the near future.

Smedes Rose -- Citi -- Analyst

And I guess just wanted to ask you, could you maybe just talk about what you saw in the third quarter on street rates versus in-place rates and maybe what you are seeing thus far in the fourth quarter?

Andrew Gregoire -- Chief Financial Officer

Sure Smedes. Street rates in 3Q are up by 1.6% increase over the prior year. Street rent was up as well, so it was up from 2.8% of revenue in 2017 Q3 to 2.9% in this quarter, down from last quarter's 3%, but 2.9% this quarter. So the net effect is we're about 50 basis points, about 0.5% up effective rent, very similar so far in the fourth quarter.

Smedes Rose -- Citi -- Analyst

Thank you.

Operator

Our next question comes from the line of Ki Bin Kim with SunTrust Robinson Humphrey. Please proceed with your question.

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

Thank you, good morning everyone. Can we go back to the existing customer rate increase program? It seems like to me that change in the philosophy of that program to increase number of tenants getting it and the level of increase as well contributing 100 basis points to 200 basis points of same-store revenue growth is pretty important. My question is basically can you recap how many more customers are getting this increase? What their level of increase is versus what it has been? And when does that benefit, actually, starts to wind down. I know it can take awhile because of the seasoned customers enter that program, but when should we expect that to tail off?

Andrew Gregoire -- Chief Financial Officer

Sure, Ki Bin. The number of customers year-to-date have increased, we put out were 149,000 versus last year's 63,000. So, obviously we've done a lot more. We've moved in the curve where we do them, pushing customers above street rates has changed how many we do. So that has changed. The actual percentage increase we're receiving has not changed much. Last Q3, it was 9.8%. This Q3, 9.6%. So still pretty significant increase is going to those parent customers, move-out rates been relatively consistent other the ones we do earlier in the curve, which we would expect it to be higher because how -- most of our customers are, I should say, half of our customers gone by 6.5 months.

So when we put them in earlier in the curve you're hitting customers that were moved out anyway. So the move-out rate did tick up year-over-year, but we attribute that to where we did those in curve.

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

So when should this benefit tail off?

Andrew Gregoire -- Chief Financial Officer

No, I think, we have got some more strategic items we can do on that side of the ledger next year. So we're comfortable that we've got some good tailwinds pushing us into next year.

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

Okay. And just the last question. How much money are you making in absolute dollar terms roughly in the Warehouse Anywhere program in third quarter. Just want to get a sense of where that is and where it can grow to? 

Andrew Gregoire -- Chief Financial Officer

Sure. I have the annualized numbers in front of me. So when you look at Warehouse Anywhere, there is two pieces right it's the rental of the space, and it's about $4 million a year, rental of the space that those customers are in. And then on top of that, the fees we receive from our customers, whether they'd be in the retail side or on the equipment side, those that service the ATM, those fees that we get are about $8.5 million on an annualized basis. So I'm sorry, $7.5 million on annualized basis. So about $11.5 million total revenue coming from all assets of that program including the rent part.

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

And how do you balance that versus taking some inventory out from just the regular retail customer?

David Rogers -- Chief Executive Officer and Director

Well I think what it does keep it add pressure to the system in terms of we've got more occupancy, we've got good customers that we know we can raise rates. So we like commercial customers first and the less things we have, the more we can charge for those who want to get in. So it's not a justification of taking it away from retailers basically filling our spaces and making the incremental rates or no spaces more valuable.

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

Okay, thanks.

Operator

(Operator Instructions) Our next question comes from the line of Jonathan Hughes with Raymond James. Please proceed with your question.

Jonathan Hughes -- Raymond James -- Analyst

Hey, good morning. Thanks for the time. So growth in the third-party management platform has been very strong. Can you just talk about why the owner of the 42 property platform left one of your competitors whether strictly pricing related, maybe performance-related, just trying to understand the switch, which is great for you and vote of confidence in your platform?

David Rogers -- Chief Executive Officer and Director

Yes, it's we've known the owner -- we've -- for a long time, our acquisition guys have kept in touch with them. So we know the markets, we've been down there since probably 1996. So I think, we have -- when we put it up for bid, we were happy to go down, Joe, took a team down there and we sort of matched culturally in a very good way. So I think, this is one way that we were very happy to get a pool of 42 established and stabilized stores.

And because we know the market, because we like the properties, because we got on the same page with the owner knowing what his objectives are, I think, it was a good fit. He's a quality operator. He's got good stores, he's going to be demanding -- all of our third party clients are demanding and we'll stick around the same page and we've got a good cultural fit.

I think you're going to see, Jonathan, more of this. And these assets are big dollar value. They're a big part of most of our clients network. Basically -- given the fact that now there are options for them to go to, they are going to say dude, I have had it here for four or five years and not so much on this type but a lot of times on the development deals you see a fair amount of impatience. And when these things were penciled out and put to paper and then put into the ground, these owners have very high expectations. We tried and I've heard the other guys in their call say the same thing. We tried to temper the expectation, a lot of low-hanging fruits been taken. But yes, these guys are anxious to see their stores do very well, and it's like a football culture or a hockey culture.

Now, you do so much for so long, and they say you know what it's not going to wait like the way I thought, times change. I got to say I don't know that we're all that different. But nonetheless, the owners are wanting to see responsiveness. They want to see results, and they want to see a culture fit. And so we were able to go in with some of the things that we've done Rent Now, our B2B, those kind of things. I think that's how we won this particular deal and our experience in the market. But it's a competitive game, and it's going to be that way, I think going forward more and more.

Jonathan Hughes -- Raymond James -- Analyst

Okay, that's great. And are you scheduled to operate the eight properties that are under construction that you're going to open up for the next year and half or so?

Andrew Gregoire -- Chief Financial Officer

Yes, that's part of the -- I think, the overall plan would be -- crazy not to, but yes.

Jonathan Hughes -- Raymond James -- Analyst

Yes, OK. And then just one more. But looking at the 22 stores that are in lease-up and outside of the same-store bucket, I know your threshold for adding is the second year after reaching 80% occupancy and when I look at that three that are not there. So fair to assume that 19 of those 22 are going to be added to the pool next year?

Andrew Gregoire -- Chief Financial Officer

No. I don't think you'd see that many. You probably see half. We have not only do they have to be at stable occupancy above 80%, but they got to be at stable rates, Jonathan. So, we haven't made the decision yet, -- we're going to make -- we'll look back at the data and see what was stable, but we'll be clear with you on which ones we're going to add come February when we give our guidance for next year.

Jonathan Hughes -- Raymond James -- Analyst

Okay, got it. And then one more. Can you just talk about the sequential revenue growth acceleration in Atlanta. That's a market that's seen a lot of new supply. Just curious if there's strength there, maybe that new supply is not in your submarkets, but the acceleration from last quarter just caught my eye. Thanks.

Andrew Gregoire -- Chief Financial Officer

Yes. You're welcome. Atlanta was a -- it's a strong market for us. It had a tough comp last quarter, and it had an unusual benefit of some cell tower income. So there was an unusual item in the cell cover income in 2017. So Q2 2018 was -- it's actually was negative in Atlanta, but Atlanta has been strong for us. We've got good stores in Atlanta. Yes, there is a lot of competition, but our stores are not as effective as others in that market. So, I think, we are over 4% revenue growth there, strong market, and we like that market.

Jonathan Hughes -- Raymond James -- Analyst

Okay. that's it for me. Thanks and congrats Dave on your time.

David Rogers -- Chief Executive Officer and Director

Thanks Jonathan.

Operator

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

Eric Frankel -- Green Street Advisers -- Analyst

Thank you. Just one quick question. In your guidance, can you just explain why your fourth quarter NOI growth range is a little bit tighter than your annual NOI growth range?

Andrew Gregoire -- Chief Financial Officer

I think --

Eric Frankel -- Green Street Advisers -- Analyst

A a little bit wider rather?

Andrew Gregoire -- Chief Financial Officer

I think the wideness happens because of the property taxes. In one quarter when you can have this swing in property taxes a lot of our Florida and Texas markets solidify in the fourth quarter, and we adjust those estimates, that's what swings -- could swing the NOI lot. So it's really -- you can really easily go from high end to low end of that property tax range.

Eric Frankel -- Green Street Advisers -- Analyst

Right. I'm sorry, I was just -- I got my terminology mixed up. I mean, your annual guidance is wider than your fourth quarter guidance I would think would be the opposite?

Andrew Gregoire -- Chief Financial Officer

No. I think it's the same explanation. It's the way of property taxes can come in and we tried to put a range out there to give people an idea where the midpoint would be. it's tough always to keep that guidance tight. We want to give yourself some flexibility.

Eric Frankel -- Green Street Advisers -- Analyst

Right, but it's three quarters -- your full year guidance is already baked in I'm not sure why -- why that numbers a little bit more predictable?

Andrew Gregoire -- Chief Financial Officer

Yes, I think, it's just, again, looking at the midpoint and putting a range around there. I think that will size to it.

Eric Frankel -- Green Street Advisers -- Analyst

Okay. Thank you very much. Good luck Dave on your retirement. Thank you.

David Rogers -- Chief Executive Officer and Director

Thanks.

Operator

Our next question comes from the line of with Samir Khanal, Evercore. Please proceed with your question.

Samir Khanal -- Evercore -- Analyst

I'm sorry if I missed this. But on the noncore properties that you're putting into the JV with the two pools, did you say anything about sort of pricing or maybe where pricing is coming in versus maybe your expectations?

Andrew Gregoire -- Chief Financial Officer

It came in -- it's good or better than what we expected. We had some pretty good data points with the couple of the big deals that came out of we actually I think our buyer consider, perhaps, lesser quality than we even put out. So we got a little bit of a portfolio premium. We had -- so they are definitely market priced and core properties, but they're market priced. So they came in where we had hoped.

Samir Khanal -- Evercore -- Analyst

Okay. That's it for me. Thank you.

Operator

Our next question comes from the line of Omotayo Okusanya with Jeffries. Please proceed with your question.

Omotayo Okusanya -- Jefferies Group LLC -- Analyst

Hi, good morning Dave, congrats on your retirement as well. I just had a quick question around the CO (ph) deal. Just given all the concern about rising supply, construction delays things of that sort, are you underwriting CO deal differently now versus, say, six or twelve months ago?

David Rogers -- Chief Executive Officer and Director

Well, we're hardly underwriting any and that we are -- we've been up and running a bit. So we kind of got out of CO game a couple of years ago, just because the spreads were unattractive to us. It seemed like they came in and they pay we were getting the value we are able to create was less than valuation put on the lease-up part of the equation, just on tenable about.

So some of the stuff we're buying though that we have under contract is in the 30% to 60% lease-up stage, one of those is one that we're managing. But I do think it's tougher. You are seeing construction costs go up, you are seeing lease-up times go up, you're seeing rents being more competitive. So there is squeeze, (inaudible) deal out there obviously, but we've not been too enticed by any of them. We -- we'll take them out as management, of course, but as far as buying them, given the risk-reward ratio and the amount developers really want to keep to themselves, it's gotten away from us a bit.

Omotayo Okusanya -- Jefferies Group LLC -- Analyst

Fair enough. Thank you.

Operator

(Operator Instructions) This is our final question. And ladies and gentlemen, we have reached the end. And I would like to turn the call back over to Mr. David Rogers for closing remarks.

David Rogers -- Chief Executive Officer and Director

All right. Well, thank you, everyone for your call. We look forward to seeing you in San Francisco next week. I honestly don't think we're going to have much different story to tell, but we will look forward to seeing you next week and safe travel, see you there. Thank you.

Operator

This does conclude today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.

Duration: 38 minutes

Call participants:

David Dodman -- Vice President, Investor Relations and Strategic Planning

David Rogers -- Chief Executive Officer and Director

Andrew Gregoire -- Chief Financial Officer

Juan Sanabria -- Bank of America Merrill Lynch -- Analyst

Jeremy Metz -- BMO Capital Markets -- Analyst

Todd Thomas -- KeyBanc Capital Markets -- Analyst

David Rogers -- Chief Executive Officer and Director

Smedes Rose -- Citi -- Analyst

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

Jonathan Hughes -- Raymond James -- Analyst

Eric Frankel -- Green Street Advisers -- Analyst

Samir Khanal -- Evercore -- Analyst

Omotayo Okusanya -- Jefferies Group LLC -- Analyst

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