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Extra Space Storage, Inc. (NYSE:EXR)

Q2 2014 Earnings Conference Call

July 31, 2014 3:00 PM ET

Executives

Clint Halverson – VP, IR

Spencer Kirk – CEO

Scott Stubbs – EVP and CFO

Analysts

Christy McElroy – Citigroup

Todd Thomas – Keybanc Capital Markets

Vikram Malhotra – Morgan Stanley

Ki Bin Kim – SunTrust Robinson Humphrey

David Toti – Cantor Fitzgerald

Michael Salinsky – RBC Capital

Todd Stender – Wells Fargo

Tayo Okusanya – Jefferies & Company

Dave Bragg – Green Street Advisors

Ki Bin Kim – SunTrust Robinson

Todd Thomas – KeyBanc Capital Markets

Operator

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

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

Clint Halverson

Thank you, Denise. Welcome everyone to Extra Space Storage’s second quarter 2014 conference call. In addition to our press release, we’ve 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, July 31, 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’d now like to turn the call over to Spencer Kirk, Chief Executive Officer.

Spencer Kirk

Good afternoon, everyone. We started the year with record high occupancies. And the question was asked, how hard can Extra Space push street rates? Well, street rates were up nearly 5% on average for the quarter. On top of this strong rate increases, discounts decreased by an average of 18% and aided by limited new supply occupancies still climb to 160 basis points to 92.4%.

These factors contributed to NOI growth of 9.9% for the quarter and FFO year-over-year growth of 26%. In addition, we raised the dividends 17.5%. It was another solid result for Extra Space. Now, I’d like to turn the time over to Scott.

Scott Stubbs

Thanks, Spencer. Last night, we reported FFO of $0.63 per share for the second quarter. Adjusting for non-cash interest and acquisition related cost, FFO was $0.64 per share. We outperformed our guidance due to better than expected property performance and tenant insurance results.

At the start of this year, we added 99 properties to our same store pool bringing the total to 443 properties. Ninety of these properties were acquisitions and nine came from our legacy development pipeline. This change in our same store pool added 75 basis points to our revenue growth for the quarter.

The acquisition environment has becoming increasingly more competitive. We’re committed to remaining disciplined in our approach to build a long-term value for our shareholders and during the quarter, we acquired eight properties for $91.2 million.

We currently have five properties under contract for $41.4 million which should close by the end of the third quarter. As of today, we have closed or have under contract $382.3 million. Included in our year-to-date totals are two ground up development properties that we acquired upon completion in Q1. In addition, we have three more development properties under contract that we will acquire upon their completion in 2015 and 2016.

We revised our full year 2014 FFO guidance to be from $2.42 to $2.50 per share. These estimates include non-cash interest and acquisition related cost. When adjusting for these items, FFO is estimated to be from $2.46 to $2.54 for the full year.

I’ll now turn the time back to Spencer.

Spencer Kirk

Thanks, Scott. August 12th will mark 10 years for Extra Space as public company. That has been an excellent run. We went public with 136 locations and today we have nearly 1,100. I want to take a moment to thank our investors, our management team and most importantly our employees. It’s a great time to be in storage. With the distinct on the Internet when it comes to customer acquisition and with muted supply, we see continued opportunity for double-digit FFO growth.

Our job as the management team is to increase FFO and enhance shareholder value. This quarter’s 26% FFO growth marks 15 consecutive quarters of double-digit gains. Now, let’s turn the call over to Clint to start the Q&A session.

Question-and-Answer Session

Clint Halverson

Thank you, Spencer. As in the past, in order to ensure we have adequate time to address everyone’s questions, I’d ask that everyone keep your initial questions brief and if possible limit it 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 will turn it over to Denise to start our Q&A session.

Operator

(Operator instruction) Our first question comes from the Christy McElroy with Citigroup. Please proceed.

Christy McElroy – Citigroup

Hi, good afternoon everyone. Spencer, I just want to follow up on your comment on street rents. Can you discuss some of the customer behavior that you’re seeing when you change the rate and what your pushing rents sort of at the street level? And are you pushing those rents with the idea that you’d sort of still like to push occupancy further to your holding back a little bit? Or are you kind of happy with this level of occupancy such that you’re pushing rents as much as you can just to maintain occupancy?

Spencer Kirk

Christy, great question. Philosophically, what we’re trying to do is maximize revenue. We obviously like where the occupancy is. I don’t know how much higher you could go in a peak season.

We feel this quarter we have pushed rates as much as reasonable and rational. We are coming into the shoulder season. And we need to recognize that holding on to our occupancy gains is going to be a primary focal point for us.

To maybe to put a little color into it, I can tell you with at the end of June, the rates were up just about 7%. So as we started at the beginning of the year, we were holding the rates down to build occupancy. As we came into a busy season, we pushed rates hard and we also got 160 basis points of occupancy gain and this will come full cycle as we come into the latter half of this year where we’re going to maybe moderate some of the push for rate to maintain the occupancy.

Christy McElroy – Citigroup

You are 5% on average for the quarter and 7% at the end of June?

Spencer Kirk

Correct.

Christy McElroy – Citigroup

Okay, got you. And then Spencer, I wonder if you could provide your thoughts on the potential threat of the aggregators especially given – as a company, you’ve been somewhat vocal on the topic. Do you see Google entering the game anytime soon? And what could be the potential implication to a pricing power?

Spencer Kirk

It’s an excellent question. First of all, if you look at the aggregators in the space they play a roll. For Extra Space, I can tell you that our cost per acquisition, the CPA using an aggregator is considerably higher than our own internal cost per acquisition. So we do not use other aggregators to drive our business.

Google has entered other business sectors. They very well could enter the storage sector. Obviously, that would change many of the rules. But if Google becomes the source, what we would do is tell Google, the profile of the customer we want them to go after. Hence, my statement many, many times the single most valuable asset this company owns is now its data.

And with that data I think working with a company like Google, we would still probably be in a preferential position because we would have the knowledge to direct Google specifically to the higher value customers that would fit best with what we’re doing.

Christy McElroy – Citigroup

That’s helpful. Thank you.

Spencer Kirk

Thank you, Christy.

Operator

Our next question comes from Todd Thomas with Keybanc Capital Markets. Please proceed.

Todd Thomas – Keybanc Capital Markets

Hi, thanks, good afternoon. Just a question on acquisitions. I know $500 million of deal is still a big number for the year, but I think it’s been a little while since we’ve gone two quarters now without there being some upper pressure on deal volumes and around your guidance.

So I’m just curious whether something has changed with regard to your underwriting criteria, the quality or pricing of the deals in the market maybe sell our expectation. So it just appears that the investment environment has slowed somewhat.

Scott Stubbs

Todd, this is Scott. We have seen the environment and get very competitive. I mean it’s not just before REITs, you’re seeing a lot of other money chasing the deals that are out there. So pricing has gotten very competitive as we’ve gone through. And then our guidance, we’re still comfortable with the $500 million.

One thing that did change is it’s pushed more toward the end of the year. And the cap rates have moderated somewhat. We would tell you the cap rates have come down, some even since we gave our initial guidance to begin the year.

Todd Thomas – Keybanc Capital Markets

How much of car rates come down versus your initial guidance?

Scott Stubbs

Probably 25 basis points.

Todd Thomas – Keybanc Capital Markets

Okay. And then looking ahead for EXR, do you see acquisition activity continuing to move away from stabilized property to more of the use of C of O type deals. I mean is that something that we should expect to continue to see grow in size within the pipeline as you’re sort of thinking about it?

Scott Stubbs

We continue to look at these deals. I mean we bought one last year. We bought two in the first quarter of this year. We have a few more under contract that are slated more for 2015 and 2016.

We’ll continue to look at those. We’re trying to balance the growth in those properties with also the dilution that comes with those. I mean one of the things we would consider if it gets too big to look to a JV partner, something of the sort.

Spencer Kirk

Yes, Todd, this is Spencer. The only additional color I might give you is I think you’ll still see Extra Space participating in the open market acquisition environment as well as what I call the off market where we’ve got the JV and the managed assets that have provided meaningful growth for our company over the last several years.

You’re going to also see more opportunities for these C of O deals pop up. To expect that there will be no new supply forever in this space is not reasonable. And I think what we’re seeing is that there is some supply coming. It’s muted, greatly muted at this point. But I think that most of those that would be developed – would be developers are acknowledging that the landscape for leasing up and operating that property that they helped to build has changed and they need to align themselves with a larger, more sophisticated organization.

And so I think you’ll see continued acquisition opportunities augmented with some of these C of O deals coming to provide another growth channel. So I’m actually quite optimistic that this gives us some new brand spank in new properties into our system that will complement the existing assets that are fully stabilized that we hope to use to grow the platform.

Todd Thomas – Keybanc Capital Markets

Okay, great. And that’s C of O, yes, the plan is that Extra Space takes over 100% of the ownership?

Scott Stubbs

That is the plan right now. The ones we’ve done to date have been 100% – again, we would potentially look to a JV as the volume increases. Where we buy the developer out with a JV partner, not necessarily JV-ing with the developer.

Todd Thomas – Keybanc Capital Markets

Okay, thank you.

Spencer Kirk

Thanks, Todd.

Scott Stubbs

Thanks, Todd.

Operator

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

Vikram Malhotra – Morgan Stanley

Thank you. Could you give us a breakout of the price increase that you saw, the 5% price increase between street rate and existing customers?

Scott Stubbs

I’m not sure I’m following the question. You’re talking the 5% – so when we say 5%, our street rates were up on average 5%.

Vikram Malhotra – Morgan Stanley

Sorry, I didn’t mean – I meant the overall price increase. Could you just break that down into the different components?

Scott Stubbs

Yes. Our revenue growth has grown from several different components. One is the occupancy. Year-to-date, it’s roughly 2% of our growth has come from that occupancy increase. About 4% has come from pricing. About 0.5% to 1% has come from discounts and then another 0.5% has come from existing customer rate increases.

Vikram Malhotra – Morgan Stanley

Okay. And then just on the web based – for the Internet based pricing, was there anything that changed this quarter in terms of the overall strategy, meaning – I know you’ve talked in the past about targeting customers even more. But was there anything changed on the web in terms of just pricing more granularly which may have [ph] pricing a bit but also could that help in sustaining a relatively higher level of pricing in the off season?

Scott Stubbs

We have not had any significant changes in this quarter to our web strategy.

Vikram Malhotra – Morgan Stanley

Okay. Thanks, guys.

Scott Stubbs

Thank you.

Operator

Our next question comes from Ki Bin Kim with SunTrust Robinson. Please proceed.

Ki Bin Kim – SunTrust Robinson Humphrey

Thanks. So similar to the kind of breakdown you gave just a second ago on same-store revenue growth, could you do a similar exercise for maybe what you expect in the second half of the year? And part of that reason why I ask this question is because mathematically, it seems like your same-store NOI guidance is on the surface coming down for the second half and possibly why your stock is right the way [ph] it is today?

Scott Stubbs

Yes, absolutely. So the two components that would change from what I gave just a minute ago, we view pricing as staying pretty similar. Our rate increases to our existing customers is very similar. The occupancy delta will go down. Right now, it has been – for the first half of the year closer to 2%. Right now it’s closer to 1.5% and we see that dropping.

And second of all, our discount, while it’s been closer to 1%, we see that going closer to 0.5% as far as the total add.

Ki Bin Kim – SunTrust Robinson Humphrey

Okay. And so I guess at the end of the year your occupancy benefit should be maybe closer to 1%?

Scott Stubbs

Correct. So we see it for the – correct. You’re absolutely right. It started at just over 2%, dropping to 1% at the end of the year.

Ki Bin Kim – SunTrust Robinson Humphrey

Okay.

Scott Stubbs

Oh, 1.5% average for the year.

Ki Bin Kim – SunTrust Robinson Humphrey

Okay. All right, that’s it for me. Thank you.

Scott Stubbs

Thank you.

Operator

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

David Toti – Cantor Fitzgerald

Hey, guys.

Spencer Kirk

Hey, David.

Scott Stubbs

Hi, David.

David Toti – Cantor Fitzgerald

I want to go back to the development topic a little bit because of this has been an interesting evolution for the company. Hard core developer to no development to acquiring C of O sort of off balance sheet mitigating risk, how are you underwriting these yields [ph] today that would be differently than saying how you were underwriting in 2006? And I guess secondly, can we expect an evolution further closer to your historical franchise?

Scott Stubbs

Yes. I would tell you not to look for us to get into full scale development. I don’t see that changing. I think we’ve said it throughout the whole downturn and into today. We’ve been pretty consistent in saying we don’t want to do development.

The beauty of this is it enables us to add new properties to our pipeline. Many of our properties – as time goes by, properties age. So this enables us to bring new product in. As far as underwriting them, we feel like any time you do a development property, you have entitlement, construction risk and lease-up risk. By doing it the way we’re doing it, you eliminate two of those three risks. The only risk we really have is lease-up risk.

So as we underwrite them, I would say your typical yield is going to be 1.5 – 150 to 250 basis points. Your cap rate is going to be 150, 200 basis points higher.

David Toti – Cantor Fitzgerald

So I guess more specifically, what kind of stabilized yields are you looking for and what type of lease-up timeline are you looking at in those specific deals today?

Scott Stubbs

So lease-up yield, when we’ve –

David Toti – Cantor Fitzgerald

Just to get [indiscernible].

Scott Stubbs

Yes. When we’ve underwritten these, we’ve tried to go with our historical average lease-up. So they’re usually three to five years, kind of depending on where they are, the density and the size of the property.

So we’re not necessarily projecting today’s lease-up because if you’ll open something today, I think it’s going to lease up very quickly. But many of these aren’t going to be open for a year or two, so we’ve tried to be pretty middle of the road on our estimates for lease-up.

Then as far as stabilized yield, I think it’s – we are eventually going to get to the cap rates where they are today. So if something’s trading at a 6.5 cap today, we’re saying it’s a 6.5 cap deal at 150 to 250 basis points to that.

David Toti – Cantor Fitzgerald

Okay, that’s helpful. And then I have a kind of a weird question which I never thought I’d ask on a call. Are there any assets or markets where you’re seeing such high occupancy levels that you’re actually pushing rates so aggressively as to induce move-out and more turn?

Spencer Kirk

It’s a great question. I would say on the margin, David, if I could use an example, I think Seattle might be a reasonable place to say we’ve had some really strong success up there.

We don’t like to push out customers. What we don’t want to do is push so hard that the customer that has been with you for several years who has had multiple existing customer rate increases walks out the door. So it’s not so much trading vacancy at the frontend. It’s with your existing customers where you’d be pushing the rate to create the vacancy.

I don’t know if that helps.

David Toti – Cantor Fitzgerald

Yes. I guess maybe said another way, is there – do you see a point where there’s going to be served markets where the street rate is going to be so much higher than a lot of your in place that you won’t be afraid to potentially dislodge that longer term customer?

Spencer Kirk

I can’t foresee that. Anything’s possible. But I think we’re on a revenue management system working pretty well in a coordinated fashion to make sure that the street rate and the existing customer rates are where they need to be to optimize revenue not only at a snapshot in time but over a protracted period.

Scott Stubbs

And today, we really haven’t seen a site where street rates grew so fast that they outpaced existing customer rate increases.

David Toti – Cantor Fitzgerald

Okay, great. Thanks for the detail.

Spencer Kirk

Thanks, David.

Operator

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

Michael Salinsky – RBC Capital

That’s an interest one. Hey, guys.

Spencer Kirk

Hi, Michael.

Michael Salinsky – RBC Capital

First question. You gave some color on acquisitions. You said cap rates are down about 25 basis points on a year-to-date. Are you seeing the underlying IRRs change? Meaning, is gross keeping pace to support that cap rate compression or are people just being more aggressive in terms of bidding?

Scott Stubbs

We are seeing people being more aggressive in bidding. And again, it goes to their assumptions on their growth rates. And we don’t know what those are. We haven’t necessarily changed ours.

Michael Salinsky – RBC Capital

Okay. Second of all, as you think about C of O buyouts, they’re obviously being 15, 16, we have a couple coming on [ph], what level of dilution are you comfortable taking on in a short-term for that long-term? I mean how are you thinking about managing that process?

Scott Stubbs

I think overall, Michael, if you looked at it in terms of we’re willing to take 2% or 3% dilution to potentially have bigger growth in the future and to refresh the portfolio.

Spencer Kirk

Yes. So when Scott talks about dilution, you look at the total FFO that we might produce in a year and we say, what percent would we tolerate. And it’s kind of in that 2% to 3%.

What we don’t want to do is go back to the days which is why we are not going back into full-blown development. I’ll take any ambiguity out of that. Because as a public company, we never got credit for the developmental pipeline and the drag of the development had on our earnings. And we think we can bring a lot of new product to market using a different methodology.

And that’s with the C of O deal where we’ve pushed off a lot of the risk – two of the three risk elements that Scott addressed. And even perhaps with the joint venture partner have much of this, for all intents and purposes, be off balance sheet. So for us, we think this is a way to refresh our portfolio, participate in some of the new product that will come to market.

What we offer is a win-win. The developer with local expertise can do things that we never were able to do. They have contacts and relationships in their local markets that we cannot replicate. On the other hand, we have a platform that once that property is built, that developer can never replicate. It’s beyond their ability.

And it creates a symbiotic relationship where we both win. And we march forward with a mutually beneficial transaction.

Scott Stubbs

Yes. We would say it’s going to be tough to really get a huge volume of these, Mike. Just in terms of pricing and in terms of actual new product coming online, I mean its’ a competitive market out there. So to even get 2% or 3% I think is going to be difficult.

Michael Salinsky – RBC Capital

One of the [ph] two questions there and go back in the queue. Thank you.

Scott Stubbs

Okay. Thanks, Michael.

Operator

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

Todd Stender – Wells Fargo

Hi. Thanks, guys, and thanks for the color on how you underwrite the C of O deals. I think it’s very helpful. Just to stay on that theme, just one question. Can you tell us what markets the C of O deals you have teed up for ‘15 and ‘16? Just thinking, do they need to be located within your existing footprint just to kind of mitigate some of the risk as you build out some level of scale?

Scott Stubbs

The three we’re talking about, two are in Boston, one is Phoenix. The two that we bought to date, one is in Texas and the other one is in Connecticut.

Spencer Kirk

Existing footprint, Todd, is very important to us as we look at these opportunities. We don’t want to go to indoor market where we have no operational scale and where we don’t have the infrastructure to support it.

Todd Stender – Wells Fargo

And are you experiencing an inbound flow of questions or you guys are seeking these out from developers you have relationships with?

Spencer Kirk

It’s almost 100% inbound.

Todd Stender – Wells Fargo

Great, thank you.

Spencer Kirk

Thanks, Todd.

Scott Stubbs

Thanks, Todd.

Operator

(Operator instructions) Our next question comes from Tayo Okusanya with Jefferies. Please proceed.

Tayo Okusanya – Jefferies & Company

Yes, good afternoon. I just had a quick question in regards to mark-to-market on the portfolio. Again, this idea of how much you’re getting when you get a new tenant moving in versus how much you’re losing when an existing tenant moves out, what that spread differential looks like and whether that’s still a big drag on the portfolio when it happens.

Scott Stubbs

So in the past, we’ve always answered this with our street rates are on top of our existing customers which is still the case. But street rate isn’t necessarily what you get. You’re usually giving some type of discount or you’re coming in at an Internet rate or something of the sort. So our typical rollback is call it 6%. It’s mid single digits.

Tayo Okusanya – Jefferies & Company

Okay, as a rollback, okay. That’s helpful. And then from the press release where you kind of talked about markets performing below the company’s average, you do highlight Washington, D.C. and Baltimore. Just kind of curious that market in particular because I mean a lot of office properties having issues there and as well as also a lot of multi-family, whether this just a general economy in Washington DC, Baltimore that’s creating the underperformance, and if you guys are seeing something very specific to sell storage?

Spencer Kirk

Okay, Tayo, this is a really important thematic piece. Storage is a great business, and we can take one of our worst performing markets today, DC and the NOI is still a very respectable 5.0% for that order. So if you were talking any other asset class, you’d say, great job guys. And that’s one of the worst we have.

So the themes of merit supply and dominance on the Internet still play out. And we’re very comfortable that this is going to be a solid year in 2014 for Extra Space and for the other larger more sophisticated operators. Nothing has change. And I think there has been some concern about a pullback and of course there’s going to be some seasonality to our business. But in terms of the fundamentals of the business, it’s strong, it’s healthy and DC is just a nice point of illustration to say a poor performing asset is still 5% NOI.

Tayo Okusanya – Jefferies & Company

Great. That’s helpful. Thank you.

Spencer Kirk

Thank you, Tayo.

Operator

Our next question come from Dave Bragg with Green Street Advisors. Please proceed.

Dave Bragg – Green Street Advisors

Thank you. Good afternoon. Returning to the topic of development, when we think about Extra Space and your Web platform, your data, your operating platform, we’re interested in hearing how you think these advantages of yours could help you better select sites and hasten the lease up process?

Scott Stubbs

We obviously hope to outperform our lease up estimates. And I think that what you’re seeing today is very good in terms of lease up. But as far as projecting that and actually underwriting that, it’s not necessarily what we’re doing. We’d rather be surprised on the upside.

We think we do have the ability to drive rentals. And it is particularly strong in markets where we already exist. So for instance the properties in Boston should do very well because we have a very strong Web presence there.

So as we focus or look at any development, certificate of occupancy type deal, it’s going to be important for us to have a presence there. And for this property, we have a very good location.

Spencer Kirk

So one other comment on that Dave, I talked about data being a valuable asset for this company. So when a CFO deal gets flopped into the middle of one of our core markets, we obviously have a lot of data as to what to expect on rate and transactional velocity. And we can and will use that to optimize the performance of that lease up asset, so that we end up with a better result than had we not applied the data to the assumptions and to the operations. So I think it goes hand in hand.

Dave Bragg – Green Street Advisors

And along those line Spencer, do you think that your – the lease up [ph] pace that you experience will exceed that of your prior ventures into development?

Spencer Kirk

It depends completely on the product as Scott said, the size, the market, the square foot per capita and a host of issues that would cost let me say, Dave [ph], I’m not even going to speculate. I’m going to tell you that we’re going to underwrite it to the best of our ability to prognosticate and we’ll see what the result is.

Dave Bragg – Green Street Advisors

Okay. But all of those things equal is your process better? Is your data better? I’m looking to understand if this will provide you an advantage as compared to others looking at similar deals.

Spencer Kirk

We think it’s better. I think the major difference for us is there’s less new supply today than when we were developing. I mean, there’s a significant difference in the amount of properties coming online today. Obviously we’re more sophisticated than we were then. So I think on the margins, we should do better.

Dave Bragg – Green Street Advisors

Thank you.

Spencer Kirk

Thanks, Dave.

Scott Stubbs

Thanks, Dave.

Operator

At this time, we have a follow up question from Ki Bin Kim with SunTrust Robinson. Please proceed.

Ki Bin Kim – SunTrust Robinson

Thanks. Just a couple quick follow ups, in your guidance, have you guys fully baked in the fact that when you have higher street rates [ph] the negative market to market or negative roll [ph] I should say from a tenant that has been getting many increase letters, then when they move out and lurk as mark too [ph], that benefits as well. And that’s the benefit of street ways improving [ph], that comes better.

And also you’re listening [ph] customer rate increases makes some more meaningful impact as your street rates [ph] go up. Have you guys – is your guidance fully baking into those couple other positive elements of higher rates?

Scott Stubbs

Yes. I think that we have baked all of that in. Obviously street rates go up, it enables us to raise existing customers more. And we have included that as we given our guidance. The one point of note here in our guidance, clearly our properties have done better than we originally estimated. But our acquisitions have done probably – they been slower later in the year than we estimate it. So part of that benefit of the properties doing better has been offset by slower acquisitions or acquisitions that took place later in the year.

Ki Bin Kim – SunTrust Robinson

Okay. And last question for me. What is the – if I look at – if I think about full source [ph], the one part that hasn’t gotten a lot of attention is maybe the downtime it takes when you have a customer and the days that takes for you to leave that back up [ph], even if there is demand, there’s always seems – there’s always going to be a structural delay. What does that look like for I guess maybe your 10 by 10 category which is the hottest segment, how many days as it stay in the inventory before you can leave without, even if there is demand? And have you look at ways to cutting that down further?

Spencer Kirk

It all depends on the size of the facility, the square footage per capita, the number of competitors with comparable product to offer. There are a whole host of issues Ki Bin. And we have not measured it. All I can tell you is usually the unit is swap out, the light bulb is changed and it’s put back into the system ready to rent.

And so, it’s just a function of what’s the seasonality? What was the customer is searching for on an Internet search? What solution did we serve up? What price point and promotion? So this is one where we think that being ready to rent the unit as quickly as possible has been an operational focus. We don’t want it offline, but when you figure that 6% or 7% of the total inventory of a storage facility turns over every month.

So if you have 600 units in a facility of say, 70 square feet, and 6% or 7% of that turns over in a month, that’s somewhere between 36 and 42 rentals, divided into 42 – into 20 or 21 business days. So you might end up with 1.75 or 2.0 rentals per day. And then with 5 by 5, 5 by 10, 10 by 10, 10 by 15, 10 by 20, 10 by 30, indoor outdoor, upstairs, down source climate control, non-climate control, that’s a really tough question to answer Ki Bin. [Indiscernible] one.

Ki Bin Kim – SunTrust Robinson

[Indiscernible].

Scott Stubbs

How’s that?

Ki Bin Kim – SunTrust Robinson

All right, okay, that’s all for me.

Spencer Kirk

Transcribing.

Operator

Our next follow up question come from Michael with RBC Capital. Please proceed.

Michael Salinsky – RBC Capital Markets

Thanks guys. Just chiming back on, lot talk about [ph] street rates, any change you’re now seeing in duration or is there any change to lease structure maybe where you’re trying to link in these duration a bit?

Scott Stubbs

So we’re not changing our lease at all, but there is an – the average length to stay is slightly longer than it was five years ago, but no significant change.

Michael Salinsky – RBC Capital Markets

Okay. And then the second question, I know you touched about no supply on a broad based across the US. But are you seeing any markets where you’re seeing supply ramp up in particular?

Spencer Kirk

Yes. New York City.

Scott Stubbs

New York City, Texas is another one we’re seeing a lot of – Chicago.

Michael Salinsky – RBC Capital Markets

Any thoughts to potentially recycling maybe a bit ahead of that?

Scott Stubbs

We’re always kind of looking at our portfolio. And we’re not necessarily looking to sell a significant number, but we would selectively look at selling a few properties. So it’s always on the table.

Michael Salinsky – RBC Capital Markets

Okay. Thank you.

Scott Stubbs

Thanks, Michael.

Operator

Our next follow up come from Todd with KeyBanc Capital Markets. You may proceed.

Todd Thomas – KeyBanc Capital Markets

Yes. Hi, thanks. You talked about new supply being muted in part because developers realize they cannot lease up the facility once they’re developed. You also talked about cap rate compression you’re seeing in the competitive environment on the acquisition side for operating property.

So on the acquisition side how deep is the buyer pool of investors that have the necessary sophisticated systems and the operating expertise? And then appropriate cost of capital, I mean, who are the buyers that are entering the mix here.

Spencer Kirk

[Indiscernible] Todd, it’s Spencer, buyers are coming from every walk of life. And one of the things that has amazed me recently is buyers with a less sophisticated platform thinking they can extricate the same performance. And just because somebody has money, doesn’t necessarily mean that they’re going to achieve the same result out of a less sophisticated platform. It’s possible, but there’s a big question mark in my mind.

So I would tell you, there are a lot of buyers, trade buyers, non-trade buyers and everything in between. And for us, we just need to make sure that when we buy an asset at Extra Space, it’s accretive, it fits our footprint and operationally, it puts us in the best possible position for keeping our product relevant in a market. Hence, some of our efforts to refresh and renew our assets whether they be 10, 20 or 30 years of age, we want to make sure that we’ve got something that as new developments come on or as others come into the space, what we have is compelling for the customer to look at extra space as the first solution.

Scott Stubbs

And Todd, the other thing I would add is you’re seeing obviously the REITS [ph] looking to buy things. You’re looking at funds, looking to buy things. Some of those funds are having their assets managed by us or by other REITS [ph]. You’re also seeing private REIT [ph] money chasing us. So it’s pretty diverse crowd.

Todd Thomas – KeyBanc Capital Markets

Well, that’s a good transition. I guess my next question was I saw the third party management, you’re up about a dozen contract. I mean, are you seeing – are you getting more inbound calls from these investors? Do you think that we’ll see growth accelerate in that line of business for you?

Spencer Kirk

Yes. There are a lot of inbound calls. What’s interesting is we’ve looked at this Todd, it seems to go in wave splash. We had 91 that we added into the system. We’re not running quite at that pace. But all it takes is just one institutional buyer, somebody out there saying, look, I’m a financial buyer, I don’t want to operate these. And you could be back at last year’s pace.

So for us there’s still a lot of interest in the third party management. It continues to be a major strategic trust for us, because strategically, we ultimately want to end up owning high percentage of those that we manage, not necessarily everyone but a high percentage. And we’re going to continue to promote and sell the benefits of being part of a larger platform.

It will appeal to some folks, it won’t appeal to others. But now, it’s still very healthy and growing. And the pipeline – folks that we have been talking to is quite robust right now.

Todd Thomas – KeyBanc Capital Markets

Okay. Thank you.

Spencer Kirk

Thanks, Todd.

Operator

We have no further questions. I would now turn the call back over to management for closing remarks. Please proceed.

Spencer Kirk

It’s Spencer. Thank you very much everyone for your interest in Extra Space today. We look forward to the Q3 earnings call in 90 days. Thank you.

Operator

This concludes –

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Source: Extra Space Storage's (EXR) CEO Spencer Kirk on Q2 2014 Results - Earnings Call Transcript
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