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Extra Space Storage, Inc. (NYSE:EXR)

Q1 2014 Results Earnings Conference Call

April 29, 2014 12:00 PM ET

Executives

Clint Halverson - VP, Investor Relations

Spencer Kirk - Chief Executive Officer

Scott Stubbs - EVP and Chief Financial Officer

Analysts

Todd Thomas - KeyBanc Capital Markets

Christy McElroy - Citigroup

David Toti - Cantor Fitzgerald

Andrew Rosivach - Goldman Sachs

Brandon Cheatham - SunTrust

Vikram Malhotra - Morgan Stanley

Ross Nussbaum - UBS

Todd Stender - Wells Fargo

Paul Adornato - BMO Capital Markets

Paula Poskon - Robert W. Baird

Michael Salinsky - RBC Capital Markets

Dave Bragg - Green Street Advisors

Tayo Okusanya - Jefferies

Ki Bin Kim - SunTrust

Jordan Sadler - KeyBanc Capital Markets

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2014 Extra Space Storage Incorporated Earnings Conference Call. My name is Glenn and I'll be your operator for today. At this time all participants are in listen-only mode. Later in the call, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Mr. Clint Halverson, Vice President, Investor Relations. Please proceed.

Clint Halverson

Thank you, Glenn. Welcome everyone to Extra Space Storage's first quarter 2014 conference call. In addition to our press release, we've furnished unaudited supplemental financial information that you can access 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, Tuesday, April 29, 2014.

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.

With that, I would now like to turn the call over to Spencer Kirk, Chief Executive Officer.

Spencer Kirk

Good afternoon. During last quarter's conference call, I commented that we were coming off two years of superior results and we're heading into what would be a great year. We are seeing signals that this is materializing. Core performance was ahead of expectations. We held rates flat in the off season to drive occupancy and we ended the quarter up 200 basis points at 90.4%.

Same-store revenue was up 7.9% with expenses growing at 4.7%. NOI growth was 9.4%. Our same-store properties experienced high snow removal and utility costs due to the severe winter weather. However, this was offset by lower than expected payroll and property tax expenses.

As we move into our rental season, we are seeing pricing power in higher street rates and lower discounts. Now I would like to turn the time over to Scott.

Scott Stubbs

Thanks Spence. Last night we reported FFO of $0.55 per share for the first quarter, adjusting for non-cash interest expense and acquisition related costs, FFO was $0.57 per share. We outperformed our guidance due to better than expected property performance, tenant insurance results and lower G&A and interest expense.

Since going public nearly 10 years ago, our definition of our same-store pool is not changed. In 2014, we added 99 properties to our same-store pool, bringing the total to 443. 90 of these properties were from our previous acquisitions and 9 came from our development pipeline. This change in our same store pool added about 80 basis points to our revenue growth. We had another strong quarter for acquisitions. We purchased 21 assets for $250 million. 17 of these properties came from a single portfolio in Virginia.

Subsequent to the end of the quarter, we closed 5 additional properties for $61 million. We currently have 4 properties under contract for $39 million which should close by the end of the second quarter. Therefore, as of today, we have closed or have under contract $350 million. We’ve revised our full year 2014 FFO guidance to be from $2.41 to $2.49 per share these estimates include non-cash interest expense and acquisition-related costs. Adjusting for these items, FFO is estimated to be from $2.45 to $2.53 for the full year.

I will now turn the time back to Spencer.

Spencer Kirk

Thanks Scott. After all this said and done, our job as a management team is to grow FFO and increase shareholder value. The first quarter has added to a two year run of excellent results. The FFO per share grew by 24%, which marks 14 consecutive quarters of double-digit FFO growth. To this point we don’t see anything that would preclude us from delivering another strong year.

Let’s now turn the time over to Clint to start the Q&A session.

Clint Halverson

Thanks Spence. As in the past, in order to ensure we have adequate time to address everyone’s questions, I’d like to ask that everyone keep your initial questions brief and if possible limited to two. If time allows, we’ll address follow on questions once everyone has had an opportunity to ask their initial questions.

With that we’ll now turn it over to Gwen to start our Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Todd Thomas with KeyBanc Capital Markets. Please proceed.

Todd Thomas - KeyBanc Capital Markets

Hi thanks. Jordan Sadler is online with me as well. Just first question, in terms of the rank growth and the pricing power I was just curious if you could tell us where street rates are today versus scheduled inline rents for the portfolio? And maybe you could just elaborate a little bit more on the pricing power that you commented on. Is it lower concessions and discounting primarily or are you seeing more traction in the ability to raise place rents or street rates?

Spencer Kirk

Yes. Let’s back up just a little bit. As we entered the off season Todd, we said, we are going to hold rates and drive occupancy which actually worked out very well. At the end of March our street rates were up about 3% and as we walk into the busy season, we expect to be pushing rates obviously how the year turns out depends on how far we can push those street rates. In terms of in place rates, we’re right on top of where we’ve been. There has been no material change in that.

Todd Thomas - KeyBanc Capital Markets

Okay. Have you seen renters respond differently to rent increases that you have pushed through whether by not moving out at the same rate as you had in the past or just less push back overall?

Spencer Kirk

No. Actually Todd, it’s a combination of pushing the street rate or reducing the discount. And we are not trying just one single strategy, as we look at our revenue management system, we’re employing a variety of strategies to maximize the revenue. It depends on the customer, the channel, when they came to us and what we know about that customer. And I think it’s fair to say that we’re not seeing any material change in consumer behavior as we’ve applied our pricing strategy.

Todd Thomas - KeyBanc Capital Markets

Okay. And then just one question and then I’ll hop off, really to the interest expense assumptions, I saw that it came down $5 million for the year and I was just curious last quarter when you provided guidance, you had most of the acquisitions either completed or under contract that you announced with the earnings last quarter. And so I think this quarter, there was roughly an incremental $50 million that we learned about. And I was just wondering what drove that interest expense assumption down so much, why was that not I guess baked in more last quarter when you provided initial guidance?

Scott Stubbs

Yes Todd, this is Scott. Our guidance really moves about $5 million like you mentioned and about half of that is really a non-cash item. So, what it is, is you are taking a gain basically from some out of market debt due to some acquisitions and that was kind of a last minute thing that we recorded as part of the acquisition of the one of our joint ventures.

And so effectively what’s happening is reducing your interest expense by $2.5 million and then you can see in the last part of our guidance, it shows that you are basically taking that benefit back out. So, for FFO adjusted, there is no really effect from that.

So, the other $2.5 million comes from really three components, one is we’ve elected to have three different loans, we had partially swapped and we were originally going to swap the entire amount, we’ve elected to have a portion of that remain variable and that benefits us to the tune of about $700,000. In addition, LIBOR, the LIBOR curve is changed to the point where it’s about a $0.5 benefit through the year. So that’s $1.2 million in total between LIBOR and allowing these loans to float instead of fixing them. And then the rest comes from adjusting our amortization of loan fees. And we basically just trued that up from a run rate from prior years, where in prior years we had a little bit of [decisions] or additional write-off relating to that. So, half non-cash, half cash largely relating to variable rate loans and LIBOR.

Todd Thomas - KeyBanc Capital Markets

Okay, great. That’s helpful. Thank you.

Scott Stubbs

Thanks Todd.

Operator

Our next question comes from the line of Christy McElroy with Citigroup. Please proceed.

Christy McElroy - Citigroup

Hey guys good morning.

Spencer Kirk

Hey Christy.

Christy McElroy - Citigroup

I just wanted to quickly follow-up on Todd’s rent question. I heard you say that street rents were flat year-over-year in Q1 as you were able to drive occupancy. Did I hear you say that what was the big year-over-year change in street rents form April, so just trying to get a sense for how that’s changing heading into the spring leasing season?

Spencer Kirk

Okay Christy, it’s Spencer. Good morning. I’m not really happy to comment about what’s going on in April, let me clarify. Last fall, we held street rates in the off season to gain occupancy for the first quarter on average it was 2% and as we exited the quarter it was about 3%. So it’s trending up and we like the direction.

Christy McElroy - Citigroup

Got you. And then on existing customer rents, you said that you are increasing rents on existing customers at about the same pace, I assume that’s about 8% to 10%. I know that it fluctuates based on the length of stay but do you expect any change in 2014 in the percentage of your portfolio on which you are spending out rental rate increases?

Spencer Kirk

No, that 8% to 10% range Christy is an average, it depends on the customer, it depends on how highly occupied a unit might be, it depends on seasonality, it depends how long the customer had been in that unit. So it could be less than that or it could be more but I would say for 2014, modeling purposes 8% to 10%.

Christy McElroy - Citigroup

But I guess the question is 8% to 10% on what percentage of your portfolio, so will it be the same number [outstanding] that you are giving on a rental rate increase there?

Spencer Kirk

Yes, no change.

Christy McElroy - Citigroup

Okay. And then just lastly, if I could sort of think about the 6% to 7% same-store rental growth projection for the year, you were at almost 8% in Q1 how do you expect that growth rate to trend through the year? And I know that you manage for revenue growth and you don’t really disclose what the inputs are, but if I, you have your own internal forecast for what occupancy would be and growth in realized rents I am wondering if you could share those with us? So in the first quarter if you add about a 200 basis point occupancy delta and almost 5% realized rent growth what should those metrics look like for the full year?

Spencer Kirk

For the full year on occupancy we are expecting that to trend towards 1% by the end of the year, so on average between 1% and 2%. We expected street rates, we just experienced it obviously 2% average for the first quarter so 2% to 3% by the end of the first quarter pushing them during the busy season during our summer month. And then we’ll see how they hold in the fall. Obviously there is some risk if we don’t find that we have as many rentals and if we have a drop off in occupancy but we are expecting to push rates in the summer.

In addition to that the other thing that is actually causing our rental growth to slow towards the end of the year is the fact that our discounts have been down 10 plus percent since last June. So we are coming up against some tough comps starting in June. So we are expecting our rental growth to slow as a result of the decrease in discount slowing.

Christy McElroy - Citigroup

So when you say rental growth I understand sort of the slowing occupancy delta but as I am thinking about sort of the realized rent growth are you talking about that slowing as well?

Spencer Kirk

What happened is last year our discounts started decreasing to the tune of double-digit and that benefited our rental revenue growth by just around 1%. We expect that to be a smaller component of our rental growth this year and that diminishing throughout the year. So the start of the year was still in the 1% range by the end of the year, it’s tough to continue to decrease your discounts 10 plus percent year-over-year.

Christy McElroy - Citigroup

So is that 4.5% to sort of 5% growth in realized rents per square foot is that sustainable going through year even as you have discounts decreasing.

Spencer Kirk

If you take an average, let’s say street rates on average are going to be 4%, your discounts are going to be half percent and your occupancy is going to be 1% to 2%, that’s how you get that 6% to 7% because we are expecting street rates on average for the year to be maybe 4% if we are lucky 5%, it’s going to depend the little bit on how much pricing power we have during the busy season. So it’s really kind of 2% discounts called 4% street rates and then the rest coming from discounts.

Christy McElroy - Citigroup

Thank you.

Spencer Kirk

Thanks Christy.

Operator

Our next question comes from the line of David Toti with Cantor Fitzgerald. Please proceed.

David Toti - Cantor Fitzgerald

Thank you, guys good morning.

Spencer Kirk

Hi, David.

Scott Stubbs

Hey, David.

David Toti - Cantor Fitzgerald

I won’t make the (inaudible) again on this call, but I want to talk a little bit about transactions. And you are obviously running pretty close to your full year guidance. So I can assume the volumes are expected to slowdown in the second half?

Spencer Kirk

Where we are today David, we closed about $200 million right at the start of the year in the first 15 days. That transaction had been under contract from end of last year. Right now we are estimating at about $350 million done by the end of June and right now we really only have the four properties under contract for just under $40 million. So what we are saying is if we do a $150 million of one off transactions for the last six months of this year, we think that that’s attainable and we think that that’s actually good for our shareholders, if we come across a portfolio or something, obviously that's going to benefit us and we could do more.

David Toti - Cantor Fitzgerald

Are you able to disclose aggregate cap rates on acquisitions completed so far?

Spencer Kirk

Yes, I can talk a little bit to that. Our cap rates have been as low as zero and I know that sounds odd and what I mean by that is we've done two certificate of occupancy deals in the first quarter of the year. And then on our stabilized our operating properties there between 6 and 7.

David Toti - Cantor Fitzgerald

Okay. And then if I can just hack one more question on. The smaller industry contacts have been commenting recently that they are seeing notable compression in secondary, tertiary markets, but relative stability and sort of the institutional quality re-product, would you say that's true based on what you're seeing so far year-to-date in terms of deals that have been coming across your desk?

Spencer Kirk

David, it's Spencer. I would say notable compression might be a little strong. I think there is always the seller expectation of benchmarking or tagging their property to the core market transactional rate. But as we've been showing through disciplined acquisitions that you can still transact in that range 6% to 7% and I think that a lot of sellers hope to get a better rate, but are not necessarily achieving what they want.

I just, I think notable is probably a little stronger than I would have characterize it, there is a little bit, but it's not substantive is how I would say.

David Toti - Cantor Fitzgerald

Okay. Thanks for the detail Spence.

Spencer Kirk

Thanks Dave.

Operator

Our next question comes from Andrew Rosivach with Goldman Sachs. Please proceed.

Andrew Rosivach - Goldman Sachs

Hi guys. I’ll tell you my goal of this question, and ask it. As China figure out how an EXR same-store may be a little bit different from a same-store portfolio that hasn’t been making a lot of acquisitions and you had the big jump in the first quarter for the tenant reinsurance running through your same-store.

And I’m curious how much of that is like a truly stabilized asset getting a better rate and a better penetration versus some of it say assets that you bought in 2011 or 2012 that it entered the same store pool but really had not had the full tenant insurance penetration rate yet?

Scott Stubbs

Our growth in tenant insurance is really coming from two or three components. One is obviously as we increase the penetration, it’s going to help us. Let’s say you go from 67% to 70% that’s going to grow it by 3%. The properties we acquire obviously help it a little, but the majority of our growth this year has come from increasing the dollars per policy. So we have tried to make sure that our tenants are adequately ensured and that is increasing the dollars per policy.

Andrew Rosivach - Goldman Sachs

Got it. Now that helps Scott. Thanks.

Spencer Kirk

Thanks Andrew.

Operator

Our next question comes from Brandon Cheatham with SunTrust. Please proceed.

Brandon Cheatham - SunTrust

Thanks for taking my question. Just real quick on the snow removal for same-store NOI, if you normalized that what would same-store NOI have been? And then kind of the same vein, were there lower move outs in the first quarter year-over-year?

Spencer Kirk

Yes, our NOI if you would have just normalized the snow and utilities would have been 10.4%. The one thing I would caution you on that is we did have the benefit of lower payroll and lower property taxes in the quarter that kind of offset that. So, if you get a normalized one you might want to normalize both so just to get to a normal run rate.

Brandon Cheatham - Suntrust

(Inaudible) that is one time?

Scott Stubbs

Yes. To answer your question of move-out, obviously with the severe weather move-ins might have been a little bit muted. Well, if you can’t move-in, you probably can’t move-out either.

Brandon Cheatham - Suntrust

So, I guess you would say that they may have offset one another?

Scott Stubbs

Yes. So, move-ins and move-outs we would say offset each other as far as the benefit or the detriment to same-store NOI obviously it affected that. But again, we did have the benefit of some up property tax appeals going in our favor in the quarter also.

Brandon Cheatham - Suntrust

Okay. That’s it from me. Thank you.

Spencer Kirk

Thank you.

Operator

Our next question comes from the line of Vikram Malhotra with Morgan Stanley. Please proceed.

Vikram Malhotra - Morgan Stanley

Hi guys. I just had a kind of over the last maybe say 12 or 18 months you guys have, all the acquisitions you have done and where you’ve had the opportunity to kind of overlay your own revenue management system. Can you maybe just talk about kind of what, how rent growth was maybe say 12 months ago for those property and maybe what you’ve seen as you’ve kind of implemented or utilized more of your own system, overlay on those properties?

Scott Stubbs

I would tell you that it really runs kind of a pretty wide range. We’ve seen as much as 15%, 20% growth on some of those properties we saw that on some Cincinnati assets a year and half two years ago. We’ve also seen as little as kind of similar to our same-store growth 5% to 7%. And what I mean by that is, there is a pretty big range of operators out there; some of the properties we’re buying are very well run, others maybe are little bit [unquoted] in some of their methods. We’ve bought some properties where they don’t take credit cards, some that don’t take cash. So, it really runs a range of anywhere probably between 5% to 7% and 15% to 20%.

Vikram Malhotra - Morgan Stanley

Okay. Thanks guys.

Spencer Kirk

Thanks Vikram.

Operator

Our next question comes from the line of Ross Nussbaum with UBS. Please proceed.

Ross Nussbaum - UBS

Hey, guys. Good morning.

Spencer Kirk

Good morning, Ross.

Ross Nussbaum - UBS

First off, I do appreciate the added color on what the impact to the same-store pool was from shifting it, but I guess maybe a question or comment on that. Do you think it might make sense to revisit the definition of the same-store pool in so far as a property that hits 80% occupancy, maybe that would stabilized in the old storage era, but these days it seems to be a little light and it seems like those properties are coming into pool a little early and positively influencing the number?

Scott Stubbs

I would tell you something that I think we’ll consider going forward. But I think if you ask anyone if 90% was going to be the new norm as far as stabilized occupancy, I don’t think anyone of us would see that. You also obviously have the risk of new development coming in at say self storage yields remain where they are; I think you are going to see some new construction. Right now there is really no new construction; I think we’ve run into that risk is out there.

Spencer Kirk

Ross, it’s Spencer. If I could just add another comment, the definition has served us really well for the past decade through the best of an economy and through the worst of an economy. And the idea of change unit is obviously something we need to evaluate, but there is still a lot of uncertainty and we don’t know what the future holds into work to effectuate change on something that has worked so well. We just need to study that before we act.

Ross Nussbaum - UBS

Sure. I’m just throwing it out there because obviously trying to get a quarter compared to last quarter is virtually impossible, right?

Spencer Kirk

Yes, I understood.

Ross Nussbaum - UBS

Okay. So, my question though is, I just want to clarify a comment made earlier and then push on it a little bit. Spencer, when you talked about street rates being up, I think you said 2% and then trending to 3%. That comment was sequentially relative to where the street rates were towards the end of last year?

Spencer Kirk

That year-over-year is what it is Ross. And the other thing that I think we’ve got to be careful on anytime we’re talking about rate growth is not to get too hung up on where we are just on street rates. I think we also need to consider where we are with discounts and that type of things also.

Ross Nussbaum - UBS

Totally with you, sort of a net rate count.

Spencer Kirk

Correct.

Ross Nussbaum - UBS

So, you think that sort of 2% trending to 3% in March, your sense is that that number goes 4% hopefully and maybe even to touch above it as we get into the summer?

Spencer Kirk

We hope it goes 4% to 8%. We’ll see how what kind of strength we have in the summer. It's too early to tell.

Ross Nussbaum - UBS

I mean is there anything that you are seeing today, I mean it's already April, I know that’s what’s touched on. The biggest question I get towards the sub-storage industry is just a complete and total lack of visibility as to what pricing power is going to be two months from now. So, what can you sort of tell this audience as to what you are feeling today versus perhaps what you were feeling last in April 29th of 2013 with respect to pricing power at this coming summer?

Spencer Kirk

Right. So, without commenting about April, I can tell you year-over-year sentiment and year-over-year opinion. I am equally optimistic, I’m buoyant. There are two factors and I didn’t want to bring him up, but I’m going to bring him up. There is still virtually no new supply. And number two, because of the power and the potency of our internet platform we’re taking market share from the smaller guy. And that has not changed in 12 months and I don't see a changing in the next 12 months.

Ross Nussbaum - UBS

Thank you.

Spencer Kirk

Thanks Ross.

Scott Stubbs

Thanks Ross.

Operator

Our next question comes from the line of Todd Stender with Wells Fargo. Please proceed.

Todd Stender - Wells Fargo

Hi, thanks guys. Scott, you’ve grown the size of the portfolio pretty quickly over the last couple of years. Just haven’t really tap the street on secured debt market, I just wanted to see if I can get an update on how you are looking at to how you are going to structure the balance sheet and maybe your aspirations to tap the bond market and potentially achieve an investment grade rating?

Scott Stubbs

It’s something that we continue to look at. We're still struggling a little bit with covenants. We want to try to be as covenant light as possible. And if you go standard investment grade, standard bond offering, there are certain standard covenants that come with that. And so it’s something that we're considering. I think our company is at a different state than we were five years ago.

I think really our leverage is in line and we're not looking at certainly to do a transformational transaction that makes us a rated entity tomorrow, but it’s something obviously we’re moving towards.

Todd Stender - Wells Fargo

Okay. Thanks and just to follow-up with that, your cash balances according to the new guidance are expected to double. I just wanted to see what was behind that and is it really fair to assume you are using more internally generated cash flow when you are making your acquisitions and maybe lees a need for equity?

Scott Stubbs

It’s a combination of a few things; one is, more internal generated cash flow, two is the timing. Some of the acquisitions are bumped back and the loan has not necessarily bumped back. So, it’s a combination of those three things.

Todd Stender - Wells Fargo

Okay. Thank you.

Scott Stubbs

Thanks Todd.

Operator

Our next question comes from Paul Adornato with BMO Capital Markets. Please proceed.

Paul Adornato - BMO Capital Markets

Thanks. My question relates to industry consolidation, just trying to get a sense of where we stand today thinking about the universe of investment grade or properties that you and the other public peers might be willing to own. And so given that you guys that there has been very little construction over five years and you guys have continued to acquire and grow your managed pools, I was wondering if you could compare industry consolidation then to now?

Spencer Kirk

Okay. I don’t have all the exact numbers, Paul. What I can tell you is that the public companies own or operate about the same percentage that they did 15 years ago. I think as we look forward to the next five years, it’s probably a fair assumption to say with muted supply and with recognition that the world has changed and it’s not about yellow pages and drive up but it’s about the internet and drive up, I think it’s likely that you will see some continued operational consolidation as well as financial consolidation. The advantageous cap rates that are out there today I think are causing lot of people to say, if I don’t sell now, when we would I sell. And we continue to see opportunities out there. And our transactional history over the last 8 or 12 quarters shows that the market is out there and you can transact.

If you use the number of 54,000 self storage facilities in the U.S. and you say that half of those are not institutional grade, it takes you down to 27,000; if you take the top several dozen operators owning or controlling about 7,000 to my way of thinking, there might be about 20,000 facilities out there that would fit the profile of saying yes this would be a nice inclusion into an institutional portfolio. So, a lot of stuff out there, we are never going to get to but I still think that the market is wide opened for a lot of consolidation either operationally or financially.

Paul Adornato - BMO Capital Markets

Okay, thanks. I just didn’t catch maybe the beginning part of your comments, when you said that compared to five years ago that the public operators own or manage about the same percentage, given that there was a lot of growth in your guys’ portfolios and very little new construction?

Spencer Kirk

Okay. My comment was for 15 years ago, I don’t know where we were five years ago, Paul.

Paul Adornato - BMO Capital Markets

Okay.

Spencer Kirk

But I can tell you from 2003 to 2007, there were about 13,000 self storage facilities built in the United States which put us over the 50,000 mark. So we could go back and reconstruct that. I am just speaking anecdotally from some loose data points but generally that the public companies have owned or operated about same percentage historically, it hasn’t changed a lot.

Paul Adornato - BMO Capital Markets

Okay, great. Thank you.

Spencer Kirk

Thanks, Paul.

Operator

Our next question comes from Paula Poskon with Robert W. Baird. Please proceed.

Paula Poskon - Robert W. Baird

Thanks. Good morning everyone.

Spencer Kirk

Good morning, Paula.

Paula Poskon - Robert W. Baird

I want to follow up on the transaction commentary and Spencer your comments that historically low cap rates are attracting what were perhaps previously reluctant sellers. Are you hearing that from your JV partners as well? Clearly those -- some of those relationships have been in place a long time. What’s their propensity for recycling their capital?

Spencer Kirk

It depends on the partner, it depends on the fund whether it’s open or closed and the investment objectives. I can tell you that many of our partners have reported year after year after year, self storage has been their best performing asset class. And if they got out of storage, they don’t know where they would redeploy the capital to get the same kind of return. the same mentality exits with many of our third-party managed owners. Some of them are first generation are thinking about retiring or passing along wealth to their posterity and others are saying why would I want to sell, I don't know where to redeploy my cash, where I get the same kind of returns that I'm getting out of storage. So, it all depends on the individual, it depends on the fund, it depends on the portfolio manager. And that is a very broad swap, because about 500 of our assets that say Extra Space fall under that partially owned or non-owned category.

Paula Poskon - Robert W. Baird

And the acquisitions that you closed on in the first quarter and have under contract, were any of those from your JV or third-party relationships or were those off-marketed deals that relationships came to you in other ways or were those marketed deals?

Spencer Kirk

Two of those properties came from joint ventures, or once that were related managed entities. The rest were all outside third-party.

Paula Poskon - Robert W. Baird

Okay, thanks. That's helpful. That's all I have.

Spencer Kirk

Thanks Paula.

Scott Stubbs

Thanks Paula.

Operator

Our next question comes from Michael Salinsky with RBC Capital Markets. Please proceed.

Michael Salinsky - RBC Capital Markets

Good morning guys. Just to go back to the portfolio of question, can you talk about just looking at market deals, what's the quality on the market, your peers have mentioned that quality is down a little bit. And then just go back to the street rate question. Since you guys pushed occupancy more or so in the first quarter than dry run rate, what was -- where you think street rates were up for the industry in the first quarter?

Scott Stubbs

This is Scott, I can comment a little bit on street rate. So on street rates, it's little bit difficult to comment on what we see as an industry, we compare our properties to kind of their closest competitors. And we don't necessarily move resulting on what they do, but we've seen them zero to 5%, it really depends on the property and the competitor?

Spencer Kirk

And then on the transactional stuff, Mike, many of our competitors/peers as I have even said, yet there are some lower quality portfolios coming to market, may be as a percentage the lower quality stuff is ticked up. It does not mean that there aren’t decent portfolios that are out there to be had. And there is plenty of maneuvering room on acquisitions as you think that there might be 20,000 self storage facilities that are still out there that don’t have one of the brand names of the four rates flying to flag over that asset.

So for us yes, there has been downtick in quality but it doesn’t mean that there aren’t good opportunities, solid opportunities, and decent assets to be added. You just have to maybe work little harder, be a little more selective and be a little more disciplined.

Michael Salinsky - RBC Capital Markets

Okay. And this is my follow-up question. You talked about not seeing any new supply right now nationwide, are there any markets that you are starting to see and those will creep up in the last call it 60 to 90 days in terms of new construction? And then also just as you have many joint venture partners, you are looking at various things, have you seen any relaxation in terms of lending on new construction among the small regional banks?

Spencer Kirk

So as far as new supply in the last 60 to 90 days, I can’t tell you a market that has seen significant new supply or tick up there. As far as the bank’s lending, I think it’s still fairly difficult, we have not seen them lacks I think with the regulation. I think the banks are still more than willing to lend to people to have money. So if someone is well capitalized, I think it’s pretty easier to get money. That doesn’t mean development loans are not there. I think people can get development loans, it is usually through relationships or local banks.

Michael Salinsky - RBC Capital Markets

Okay, thanks you much.

Spencer Kirk

Thanks, Mike.

Operator

Our next question comes from the line of Dave Bragg with Green Street Advisors. Please proceed.

Dave Bragg - Green Street Advisors

Thank you, good morning. Spencer last quarter you commented on the potential for a disconnect between buyer and seller expectations and you attributed impart to your higher cost of capital and earlier in this call you seem to suggest the same type of relationship. So would love to hear you elaborate on that particularly in light of your much improved cost of capital?

Spencer Kirk

My statement I think I could summarize it this way Dave. When I talk about a disconnect. If I could be very specific many folks think that a 5 cap or a sub 5 cap is the going rate for the best assets in the best markets, think Manhattan brand new property. The smaller operator perhaps with the property that’s a little bit older in a secondary or tertiary market uses that 5 benchmark and says well maybe my asst could be where 5.5 or a 6 cap. And once again it all comes back to how Extra Space scores the quality of an asset. And this works for us. I am not suggest it for anybody else that’s the storage operator, but for Extra Space our philosophy is very simple it is; we look at the quality of the market; we look at the quality of the physical asset; and we look at the quality of the location of that physical asset within the market. And we make a determination as to what we think that that asset will be worked.

And many times there is a disconnect between our view of the world and what the seller might expect and that’s where I think it’s fair for me to say Extra Space is interested in transacting, but not at any cost and not for any price point, but for a price point that simply is accretive for our shareholders. And we are working harder to find the acquisitions that fit our operational footprint and fit that quality scoring and with that what we will see what happens.

Our cost of capital moves up and down today, Dave, it depends on lot of factors, but the bottom line for us is we want to be disciplined and do accretive acquisitions.

Dave Bragg - Green Street Advisors

That’s helpful, thanks for that. And directionally as your cost of capital has improved, is there potential for that disconnect to narrow?

Spencer Kirk

I think that what we saw was when the cost of capital got more expensive, the pricing didn’t change a lot and now that is back down. I am not sure it will change that much either. It is possible just a point in time, you saw interest rates pick up for a period of time, they are now relatively -- they are not necessarily down but maybe the growth has slowed, but I think everybody would agree that interest rates are going up.

We don’t want to go whips out, Dave with the changes and the fluctuations that take place over a short period. We are taking long view on our weighted average cost of capital. And we are looking at what the market is going to do, and there are lot of operational elements that pop-in and out of the equation. And we don’t want to react or overreact any of those we want to be consistent and sustainable in our actions.

Dave Bragg - Green Street Advisors

Thank you. One final question related to acquisitions. And as it relates to underwriting what we understand that every deal or portfolio deal is very different, but from a broad perspective over the last couple of years. How have you adjusted your NOI growth underwriting for say years two through five of the deal as the cycle has matured and you get slightly closer to the rival of new supply?

Scott Stubbs

No, our underwriting, we typically base it on how our properties in the area are doing and we have not necessarily made an adjustment or an assumption that new supply has or will come to effect that property.

Dave Bragg - Green Street Advisors

Okay. So no change?

Scott Stubbs

No Change.

Dave Bragg - Green Street Advisors

Thank you.

Spencer Kirk

Thanks, Dave.

Scott Stubbs

Thank you.

Operator

(Operator Instructions). Our next question comes from the line of Tayo Okusanya with Jefferies. Please proceed.

Tayo Okusanya - Jefferies

Yes, good afternoon. Great results for the quarter. Most of my questions are on acquisitions, the deals that you guys announced this quarter, just wanted to clarify that, the stabilized asset were brought at 6% to 7% cap rate and there are still some assets that are technically a zero cap rate?

Spencer Kirk

That is correct. And we say 6% to 7% that's a year one forward-looking cap rate and some are absolutely CLO.

Tayo Okusanya - Jefferies

And is 6% to 7% for the entire portfolio or just for the stuff excluding the CLO stuff.

Spencer Kirk

Just for the stuff excluding the CLO stuff.

Tayo Okusanya - Jefferies

And what kind of NOI growth that are you assuming for that first 12 months that gets into a 6% to 7% cap?

Spencer Kirk

It is anywhere between 5% and 9% on year one, well actually probably 5% and 8%

Tayo Okusanya - Jefferies

On year one. Okay, that's helpful. Then the second thing, again you now have about $250 million of acquisitions locked in and your guidance is $500 million. Just kind of curious if you guys see a good chance of you guys exceeding guidance just given how well you’ve done year-to-date and what your acquisition pipeline looks like?

Scott Stubbs

So Tayo, what I would say is, let’s go back and put a little perspective in this just right after the year began we closed down the Virginia portfolio of $200 million in assets. That really was an activity that largely took place in 2013. And where we draw this artificial line at December 31st and January 1st and put something in one year or following year.

I won’t get too hung up on that, I would say, a lot of what happens in our acquisitions guidance is predicated on knowing what we think we can do versus what potentially might happen. And all it takes is a joint venture partner to come to us and say, hey we're thinking about liquidating these assets, would you be interested in buying them, or it just takes someone to say, you know what, it’s time for me as an owner to sell my portfolio and that’s really hard to script.

So, we look at what we know. We know what the historical velocity has been and we give you our best prognostication. We certainly could do considerably better, but I don’t have any bases and we don’t have any bases for making that statement because we haven’t had any substantive dialogue with any owner either off market or open market to substantiate that’s how we’d given our best guidance or our best guess.

Tayo Okusanya - Jefferies

Right. Okay, that’s helpful. And then just one more, with occupancy now kind of breaking things, occupancy now kind of breaking 90%, I mean when we kind of start thinking about an upper limit for that number where you just kind of have structural vacancy you can’t of get rid of it. You kind of guide us something about how we should be thinking about that just how much more that occupancy rate can go up?

Spencer Kirk

Let me tell you the way I view the world. We think that just with about 6% to 7% of your properties are either vacating, 6% to 7% of the total units or renting 6% to 7% of the total units each and every month. You kind of say somewhere around 94% is a good place to start to think. And if you are at 94% occupancy, I can tell you if that’s an average, you have a lot of site quotes that are sold out, which is something we don’t like to do. We think you are leaving money on the table at that point, because if you are sold out in some of the more popular site quotes some of the less desirable units are not at that 94% they are in the mid 80s or high 80s.

So for us, we could wrapped up a bit during the absolute peak of the season, but to expect to get much above 94%, 95% I don’t think is reality and I don’t think that that’s somewhere where we think we are going to be operating. Certainly our revenue management system with the predictive inputs that it has to drive the algorithm is going to not let us get to those levels. Now as we learn and see what the market shapes up to-date, things could change. But today I would say, low to mid 90s is the limit for Extra Space.

Tayo Okusanya - Jefferies

Got it. And then lastly just one more, from a development perspective when you just kind of take a look at market pricing right now at what point does development start to makes sense again, while we’re still a year away, two years away from that?

Spencer Kirk

Well Tayo, I’d like to give you my seven part thesis on why I don’t see development coming this time in the near future, but I will give you a truncated version. Number one, banks are reluctant to win. Number two, there is off a lot of interest in the prime parcels from every asset class which is driving up land prices. So, banks are willing to win or the lending terms are less favorable thus this bring to the profitability, if you’re paying more for the land that’s being the profitability and then you are the mom and pop operator or the local developer and you can’t compete on the internet.

You are going to have to sign up and have someone who can provide the flow of customers to your property and you are going to paying the management fee, you’re going to be sharing some it not all tenant insurance and you are going to be getting hit with some downstream cost for a call center and other marketing expenses, so that’s your third day on the profitability.

And I just think that the return versus the risk equation has shifted and people are little bit more reluctant. There is ample interest in doing development, but when you really see the number of properties that are coming out of the ground, it is still muted and I don’t see those fundamental elements either on having to sign up a management company and paying a fee or property prices being pressured upward or banks willing to land to the smaller perhaps capitalized individual.

I think those are things that will remain in place for the foreseeable future. There will be some buildings, but I don’t see anything that’s going to put a lot of new supply into the market in the near-term at all.

Tayo Okusanya - Jefferies

Thank you very much, good color.

Spencer Kirk

Thank you.

Operator

We do have a follow-up question from the line of Todd Thomas with KeyBanc Capital Markets. Please proceed.

Todd Thomas - KeyBanc Capital Markets

Yes. Hi thanks, a couple of quick follow-ups. First for Scott, you mentioned in response to an earlier question on the tenant insurance that you’ve increased the dollar amount per policy or that's where some of the growth is coming from. Can you just provide more detail on what you are doing with regard to insurance program?

Scott Stubbs

Our tenants are insured based on the dollar amount of the goods that they have stored. And what we found is we want to make sure that our tenants have adequate coverage. So, as we are offering tenant insurance, we are making sure that they are truly valuing their goods at the correct amount. And we are basically executing better at the point of -- point the rental was made and having them take the correct amount insurance, which is effectively pushing it up. So, for instance instead of them insuring $200,000 worth of goods, they are now insuring $300,000 worth of goods.

Todd Thomas - KeyBanc Capital Markets

Okay. And can you quantify what the monthly dollar amount per renter is in terms of the insurance collections that you are receiving?

Scott Stubbs

I don't have it in front of me per renter.

Todd Thomas - KeyBanc Capital Markets

Okay. What about the overall penetration rate within the EXR portfolio today?

Scott Stubbs

Overall, it's around 70% depending, if you're looking mature or overall portfolio.

Todd Thomas - KeyBanc Capital Markets

Okay. And then a question on page 21 in the supplement where you break out the joint ventures, you have been in the promote for two other JVs now for some time. I was just wondering, if you could talk about, whether you're getting close to any of those other promote hurdles that are in the high single-digits for some of the larger joint ventures at all?

Scott Stubbs

No, on the larger ones we are not. Those promotes, actually had slight escalations that took effect at the timeframe, when we are actually going through a recession. So we have some catch up to do on those and we are not near the promote on any of these storages that legacy JVs the big ones there.

Todd Thomas - KeyBanc Capital Markets

Okay. All right, great. Thank you.

Spencer Kirk

Great. Thanks, Todd.

Operator

We have another follow-up question from the line Brandon Cheatham with SunTrust. Please proceed.

Ki Bin Kim - SunTrust

This is actually Ki Bin. Just one follow-up. What happens to a property when there is a new development next door? I’m sure you’ve a lot of historical data, is it -- could you talk a little bit about kind of financial impact on whether it be occupancy or rents that typically happens when there is new supply moving in next door?

Spencer Kirk

Okay. There are a lot of variables on that Ki Bin. I would say the biggest impact is, what is the population density and how many other self storage facilities are already in the market. So, if you are in southern California in Venice and you’ve got 500,000 people in a three mile radius, there are already 20 self storage facilities serving that population, if you add one property, it’s a 5% increase in supply. And it’s not going to really have material effect. If you’re in Wichita, Kansas and there are two games in town in a three mile ring, it can have a pretty detrimental effect, which is why most of the REITs want to be in the better more densely populated markets. It’s your protection against the downside.

Ki Bin Kim - SunTrust

Okay. A related question, have you -- how much redevelopment potential do you have in your existing properties in terms of expansion entitlements that have not been used yet? Just trying to get a sense of, if you guys did pursue incremental more development or redevelopment, what the existing potential could be adjusting your properties as well today?

Spencer Kirk

Okay. Ki Bin, we are redeveloping our assets. We’ve been looking at how to keep them relevant in the marketplace by bringing them up to the current standards. In terms of a bunch of properties that have a lot of expansion capability and a lot of vacant parcels next to it, it’s not a lot. What we want to do is just make sure the assets that we have appeal to the customer and regardless of when new development arise into this market, we have an asset that is competitive, it’s well located, it’s well cared for, it’s clean and it meets the customer’s needs and that means you might be adding some climate control to the property, you might be knocking down the office and reconstructing a more retail oriented higher visibility office. So this redevelopment effort is something that we have fully engaged in. And it’s all towards keeping the properties relevant. But in terms of adding lots of square footage because we are sitting on a bunch of vacant land, not so much.

Ki Bin Kim - SunTrust

Okay, thank you.

Spencer Kirk

Thank you.

Operator

We have another follow-up question from the line of Todd Thomas with KeyBanc Capital Markets.

Jordan Sadler - KeyBanc Capital Markets

Hey, it’s Jordan Sadler. Sorry, I wanted to quickly touch on the tax expense. Obviously, the tender reinsurance business is a good and growing business for you guys and as is that tax liability, so you are obviously making money. Is there another way to shelter some of that liability at this point, given the scale of that [TRS] at this point?

Scott Stubbs

It’s something we are looking at all the time; there is some risk with these. We want to make sure we about it properly. I think probably there is an opportunity to argue that tenant insurance is standard and customary to the point where you could move it into the REIT but that’s a long process with the IRS but it’s something we are always looking at.

Jordan Sadler - KeyBanc Capital Markets

Okay. So potentially it is clean income, like your rental income stream and sort of an ancillary fee associated with owning the facility?

Scott Stubbs

We would need to prove that it is customary standard and the business.

Jordan Sadler - KeyBanc Capital Markets

Make sense to me. And then separately on the commercial segment of the business, not a lot of discussion. Are you seeing anything different in the commercial segment of the business relative to your individual renters, are you seeing more traction, less traction, anything, any commentary will be helpful?

Spencer Kirk

Okay, Jordan, it’s Spencer. Here is what I will tell you. I am just coming up on 16 years in self storage. When I started about 20% of the customers were commercial accounts, today it’s about 20%. It hasn’t changed a lot and I don’t expect it to materially shift over the next foreseeable period. So for us, it’s out there; it’s a part of our business; we like it; they tend to be on auto pay; they tend to be less sensitive to rate increases; but in terms of wholesale shift and driving our commercial accounts to 30% or 40% or 50%, market demand just isn’t there and it’s been remarkably consistent for the 16 years that I have been in storage.

Jordan Sadler - KeyBanc Capital Markets

Okay, thank you.

Spencer Kirk

Thank you. With that I would like to thank everybody for their interest in Extra Space. We’ll look forward to next quarters call. Have a good day.

Operator

Ladies and gentlemen, thank you for your participation in today’s call. This concludes the presentation. You may now disconnect. Have a wonderful day.

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