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Executives

Clint Halverson - Vice President of Investor Relations

Spencer Kirk - Chief Executive Officer

Karl Haas - VP & COO

Scott Stubbs - Executive VP & CFO

Analysts

Swaroop Yalla - Morgan Stanley

Michael Knott - Green Street Advisors

David Toti - Cantor Fitzgerald

Christine McElroy - USB

Ki Bin Kim - Macquarie

Eric Wolfe - Citi

Smedes Rose - KBW

Todd Thomas - KeyBank Capital Markets

RJ Milligan - Raymond James & Associates

Paula Poskon - Robert W. Baird

Michael Salinsky - RBC Capital Markets

Tayo Okusanya - Jefferies

Mike Bilerman - Citi

Extra Space Storage, Inc. (EXR) Q2 2012 Earnings Call July 31, 2012 1:00 PM ET

Operator

Good day, ladies and gentlemen and welcome to the second quarter Extra Space Storage, Inc earnings conference call. My name is Brie, and I will be your operator for today. At this all, participants are in listen-only mode. Later, we will conduct a question-and-answer. [Operator Instructions]. As a reminder, this conference is being recorded for replay purposes.

I would like to turn the conference over to your host for today, Mr. Clint Halverson, Vice President of Investor Relations. Please proceed.

Clint Halverson

Thank you, Brie. Welcome to Extra Space Storage's second quarter 2012 conference call. In addition to our press release, we have furnished unaudited supplemental financial information on our website.

Please remember that management's prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act. Actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the company's business. These forward-looking statements are qualified by the cautionary statements contained in the company's latest filings with the SEC, which we encourage our listeners to review.

Forward-looking statements represent management’s estimates as of today, Tuesday July 31, 2012. The company assumes no obligation to revise or update any forward-looking statements because of changing market conditions or other circumstances after the date of this conference call.

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

Spencer Kirk

Thanks, Clint. Hello, everyone and thank you for joining us today. With me are Karl Haas, our

Chief Operating Officer, and Scott Stubbs, our Chief Financial Officer.

It was another very good quarter for Extra Space. We achieved year-over-year FFO growth of 41%. Our properties and our systems are performing very well. During the quarter, we increased same-store revenues 6.7%, and reduced expenses which resulted in double-digit NOI growth of 10.2%. I give credit where credit is due. To our people.

I think our 2,400 employees, who have worked hard and dedicated themselves to executing on the fundamentals of our business. Our internal and external growth efforts have been highly effective in acquiring quality well-located assets.

We have acquired 51 properties so far in 2012, 36 of which are from Prudential, and we have an additional nine properties under contract. We are disciplined in our acquisition approach and purchased assets when it makes financial sense for our shareholders.

As the country's largest third-party management company with 519 assets under management, we continue to assert and demonstrate that this is a viable off market acquisition pipeline. Of the 51 assets acquired this year, 76% came from these existing relationships.

Our company is driven by an entrepreneurial culture of innovation and growth and we push for continuous improvement in all areas of our business. This development and implementation of system-wide innovations will continue to improve our performance.

I would now like to turn the call over to Karl to talk about our operational success in more detail.

Karl Haas

Thanks, Spence. As Spencer noted, we saw excellent revenue growth of 6.7% in the second quarter. There are a few primary factors that drove this top line growth.

First, the latest version of our revenue management software is working well. We are gaining a better understanding of the price elasticity of demand for storage at a property level. We are often asked about our rental volume for a given period. Although the rental volume is significant, it is more important to maximize the long-term revenue growth of those rentals with the correct mix of incoming price, discount and rate increases over time.

Second, we continue to gain market share from our smaller competitors by leveraging our size, resources and sophisticated systems, we are driving traffic to our websites and properties. We are capturing more than our fair share of the rentals while lowering our overall cost per acquisition. Lastly, we are not seeing any new supply.

As we mentioned in the last quarter, our same-store pool of 282 properties includes 19 sites that over three years old and are in the final stages of lease up. As a result, during the second quarter, we received almost a 0.8% of top line benefit from these assets. By stripping these 19 properties out of the same-store pool, our top line revenue growth would have been 5.9% versus the 6.7%.

Same-store year-over-year expenses were down slightly, primarily due to lower utility cost as a result of our investment in sustainability initiatives. We are also seeing lower credit card processing fees, thanks to new regulations. While we continue to implement processes and invest in systems that create efficiencies, we don't expect our expense growth rate to continue at the levels it's been at Q1 and Q2.

Expense will return to more normal levels as we move through the year. With occupancy at historically high levels, discounts and promotions are down 11% for the quarter. When combined, all these factors bode well for the remainder of the year.

With that, I would like to turn it over to Scott.

Scott Stubbs

Thanks, Karl. Yesterday, we reported second quarter FFO of $0.38 per share including $0.01 of lease-up dilution. We exceeded the top end of our guidance by $0.03. $0.02 of this was due to better than expected property and tenant insurance results. The other $0.01 was the result of lower than anticipated interest expense as we have been able to obtain loans at rates that are at all time historical lows.

During the quarter, we sold 8 million shares of common stock for net proceeds of about $225 million. These proceeds are primarily being used to fund acquisitions. We have seen good traction in the acquisitions market in 2012.

During the second quarter, we closed on the acquisition of four properties for approximately $21.3 million. These properties are located in Florida and Maryland. Subsequent to the end of the quarter, we closed on the purchase of Prudential's interest in the PRISA III joint venture, adding 36 properties to the REIT.

As of today, the total number of wholly-owned assets is 408, as compared to 304 joint venture properties. This demonstrates our strategy to grow the REIT in a meaningful way. In addition, subsequent to the end of the quarter, we have closed on the acquisition of nine other properties for approximately $71.8 million.

These properties are located in California, Colorado, New Jersey, New York and South Carolina. In addition to these, we have nine additional properties under contract for approximately $83 million, located in Massachusetts, New Jersey, New York, Texas, Utah and Virginia.

We have updated our acquisition assumptions in our guidance to account for the increase in volume and acquisitions. We have revised our full year 2012 FFO guidance to be between $1.47 and $1.53 per share, and expect to earn between $0.39 and $0.41 in the third quarter. Key assumptions relating to these estimates can be found in the press release.

I will now turn the time back to Spencer for some closing comments.

Scott Stubbs

Thanks, Scott. Let me reiterate that Extra Space has one main theme in 2012, focus on fundamentals, which simply put is, maximize every revenue opportunity and appropriately minimize every single expense. We are executing at a high level on both fronts.

We exceeded our expectations in the second quarter and are pleased with the results, but I again caution that they should not be utilized as the basis for our long-term growth trend. If you look back over the last several years, it is evident that we are now running on the high end of the growth spectrum.

As a team, we can't take our eye off the ball, become complacent or become arrogant. We are keenly aware of the considerable competition that exists in the self storage sector. With this attitude and approach, I feel confident that we will consistently find ways to increase shareholder value.

With that, I would now like to turn the time over to Clint to start the Q&A Session.

Clint Halverson

Thank you, Spencer. In order to ensure we have adequate time to address everyone's questions, I would ask that everyone keep your initial question to (Inaudible) possible limited to two. If time allows, we will address follow-on questions once everyone has had an opportunity to ask their initial questions.

With that, we will turn it over to Brie to start our Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from the line of Swaroop Yalla with Morgan Stanley. Please proceed.

Swaroop Yalla - Morgan Stanley

Close enough. Thank you for taking my question. Spencer, can you talk a little bit about the source of the deal flow you are seeing? Who is the incremental seller in this market? Is it mom-and-pop operators, or private guys liquidating their portfolios? Maybe on that note, if you can discuss the cap rates, which these acquisitions are based on?

Spencer Kirk

Let me first of all take the cap rate question. I would say the purchases of the assets we have talked about have ranged from about 6.5 to about 8, and that depends on the quality of the asset. In my mind, a quality score has three components. The physical condition of the asset, the market where that asset is located and the location within the market. So we tried to pay an appropriate cap rate depending on that three-tiered or three-pronged quality assessment.

We are getting buyers from across the board, Swaroop. Obviously, what call I call quasi-proprietary acquisition pipeline is not prettiness in any way, shape or form. 76% of our purchases so far this year have because of those existing carefully nurtured relationships and we will continue to work with our partners and provide a fair transaction if and when they decide it's time to exit a particular property or portfolio.

We do have mom-and-pops coming to us at an increasing rate. Many of the smaller operators are acknowledging that they cannot compete against the national operators. They don't have the platform or the systems, particularly with the internet to really drive traffic like the larger operators do.

Some of the mom-and-pops however still are looking for prices that are not realistic, at least not for Extra Space, and we have remained a disciplined buyer adding properties when it is accretive to this company.

Swaroop Yalla - Morgan Stanley

That's helpful. Second question I wanted to ask on the rental trend. If you can talk about asking rents, how they've trended this quarter? Then do you track your rents versus overall market rent? Can you talk about the delta between yours and the overall market?

Karl Haas

This is Karl. Our rates are holding quite well. We ended the quarter about 3% above the prior year, and combined with the occupancy delta to last year, which held better than I would have expected. That's what really the combination of that is what drove our growth this quarter.

As far as the competitors, it's kind of all over the place. Public storage, cube and sovereign, their rates are up and down, and in other cases follow us, or not necessarily follow us, but we are all kind of moving together.

The local operators, really, there's not much variability in their rates. They stay about the same, so we in this last quarter, I believe, we probably closed the gap a little bit with our competitors and in some cases we are above. Some cases we're below, but the gap closed a little bit because we held our rates probably a little bit more than other and that's not surprising, because our occupancy is at a better level.

Swaroop Yalla - Morgan Stanley

Got it, so the local operators are sort of flat for the year you are saying?

Karl Haas

Yes. They really haven't adjusted their rates much at all.

Operator

Your next question comes from the line of Michael Knott. Please proceed.

Michael Knott

Spencer, just wanted to ask you, is this as good as it gets, and what else can you guys do to keep this going, both on the internal growth side and on the external growth side as we all look into 2013?

Karl Haas

We are certainly not complaining as a management team. Looking at the overall economy and reading the bad news and then looking at what we're able to do in the storage sector. I am not going to say that it's as good as it gets, but it certainly is a very pleasant time to be in this sector and associated with the great team here at Extra Space, it's a very enjoyable time for me personally.

The things that I think will continue to propel our performance, Michael, are, number one is we have a unique structure and we are not reliant upon just one or two things to help drive our growth. In previous conference calls, I have talked about five levers of growth, which are significant and I think it's might be worth repeating that we believe Extra Space has a unique position.

The five drivers of growth that I think continue to propel performance are, number our poor property performance, which has been enhanced by superb execution at the site-level, which has all been enhanced with very strong technology base to give us the tools to produce what I would consider better than peer performance.

I am very pleased that our development pipeline continues to mature and the lease-up assets through 2014 will add value and meaningful cents per share to the FFO. We have got our off market, and open market acquisitions. I think as you have seen nearing $500 million in acquisitions that have been transacted or announced so far this year says that we are doing a decent job of working with our partners and also being competitive in the open marketplace.

Our tenant insurance program continues to provide meaningful FFO growth for this company, because every time we acquire a new property or push the lease-up of an asset or bring a new third-party management asset into the pool, we get meaningful new customers, thousands at a time typically in a quarter. The last area where we have done well is the third-party business continues to grow.

We are focusing certainly on those areas, where we have got an operational overlay on the footprint and we think that that those hopefully will become acquisition opportunities. Those are the five key levers.

Let me add a sixth. There was virtually no new supply coming into the market and that bodes well for the existing operators. The question is, with no new supply who captures a disproportionate share of what's available out there and that's where the power of the internet and the sophistication of our systems and the other national players comes into play.

I said it before that we have 42 dedicated resources internally and externally working on the internet to drive traffic and capture the disproportionate share and the internet which was supposed to be the great equalizer for all sort of operators has become the great divider and I am pleased to report that our internet strategy is not only robust, it's producing the results that we have invested heavily to capture.

So, I gave you the five traditional answers, Michael and reemphasize that no new supply and the power of the internet have made the playing field less in level.

Michael Knott

Thanks for that. I appreciate that. Then my second question would just be your capital structure and financing strategy as it relates to continued external growth. How do you think about your cost of capital with how successful your stock has been trading and how you might use that to continue your acquisition strategy?

Karl Haas

We are going to let Scott answer that question if I may.

Scott Stubbs

Hey Michael, it's Scott. With the stock price trading where it is and looking at acquisitions and growing there, it's obviously a consideration. You have interest rates at all time lows, but at the same time I think it's important not to ignore the long-term cost of capital. So while we have become slightly more aggressive on our cap rates and what we are buying right now it's not significantly more aggressive. We continue to finance things and buy things on largely a leverage-neutral basis.

Michael Knott

How do you guys think about balance sheet longer term? Just remind everyone.

Scott Stubbs

From a balance sheet perspective, we look at things as far as being leveraged in the probably where we are today depending on where your stock trades and what your net asset value is, you are kind of 30% to 45% range.

Michael Knott

Your leverage target is 30% to 45%. Is that what you are saying?

Scott Stubbs

It really varies depending on the markets. Right now, I think that interest rates are very attractive. We are going to do things on a secured basis, and not necessarily lever up, but we are not looking to de-lever right now, so I think it really depends on your net asset value and your net asset value is going to vary somewhat depending on what cap rates are, so that's why our range is as large as it is.

Michael Knott

Okay, just last question. Why not finance more of your growth as you go forward with more equity as opposed to leverage-neutral?

Scott Stubbs

It's something we are always looking at, Michael. We would look at issuing equity; we would look at, if we had somewhere to put that money.

Operator

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

David Toti - Cantor Fitzgerald

Spencer, I think you touched on this a little bit, but can you just maybe walk us through what changed so dramatically in the last couple of months? Number one, to push performance to where it was relative to your original expectations and generally, what has been taking place that's kind of bright your view so much. It is a pretty significant move from the last time we had an update from the team.

Spencer Kirk

I think, David, the answer I would give you is, we are really focused on the fundamentals. So, we talk about enhancing property performance and it begins with making sure that we do everything possible to get the right price with the right discount to the right customer at the right time, and I think we are becoming better at that.

I also acknowledged that we are only at the leading edge of that. We have done a better job on our tenant insurance penetration rates. We have done a better job of controlling our utilities expenses and reaping the benefit of the sewer investment we have made.

It is incrementally, David, in my opinion, an amalgamation of a lot of the efforts and investments that we previously have made where we are starting to see the benefit and I fully acknowledge that we have had a really good strong rebound coming out of the recession. Our performance, quarter-over-quarter and year-over-year have been a very positive and pleasant surprise for us.

But I don’t delude myself nor does this management team delude itself into thinking that all is well. There are considerable significant negative exogenous forces in the world that could cause disruption and we want to provide the very best guidance recognizing that this team is executing exceptionally well but the operating environment of the overall economy to which the overall health of this business is tied remains less than certain.

We want to strike that fine balance between recognizing that we are executing well but also knowing that the economy is hardly on the road to recovery or in a position to provide a boost and with no new supply and the technological investments that we make, we are very pleased with the results. Our job, as a management, is not to think that it is a give me. Each and every quarter we are working as hard as we possibly can, recognizing that there is no free lunch and we need to earn our keep every day.

David Toti - Cantor Fitzgerald

I appreciate that. I appreciate the color. Do you think anything strange on the consumer side? Has there been a loosening of the purse springs? Have you just sort of figured out the psychology a little bit more? Has activity in the housing market perhaps contributed? In other words, has the backdrop of the demand part of the equation improved to map on to your internal efforts?

Spencer Kirk

I think it's all of the above, David. I visit a fair number of sites. I am in the field quite a lot, actually and as I talk to our site managers, I think there has been a loosening of the purse strings. There doesn’t seem to be the gross negative over hang up, two and three ago.

The people are not overly optimistic about the future. The good news in all of this is storage is a need based product and those life changing events continue to happen in a tepid economy and our job as a management team has just been simply to say, what, people will be on the move. They will be in transition.

Life changing events will take place. How can we best maximize the value of each and every customer and how can we target and capture more than our fair share of those people that are going out to the market place.

And I will say it again; the internet was thought to be the great equalizer. It is the great divider and our investment in the internet is paying out a very rich dividend and we will continue to invest in, not only the standard, traditional, paid and organic searches but the social media and some of the other evolutions that are coming upon us in the interactive marketing world are things that we continue to invest in, monitor and will be prepared when the time comes.

So these are the things, I think, will help the performance in the future.

Operator

Your next question comes from the line of Christine McElroy with USB. Please proceed.

Christine McElroy - USB

Just wanted to follow up on Michael's question regarding leverage. Your operating today at some of the lower leverage levels since going public but your target range extends pretty well beyond that. Are you effectively in low cost of capital world, preparing your balance sheet for the potential of an accelerated level of acquisitions or external growth over the next few years?

Spencer Kirk

I don’t know that we are necessarily preparing it for that. I think that we are always prepared to acquire things. We always want to be at a level that serves our shareholders well, if you think about our balance sheet strategy over the past several years, I think it has served us well in good times and bad. We have naturally de-levered a little bit with the dividend. So we do have the ability to acquire some things right now.

So if we have opportunities we will use leverage as necessary.

Christine McElroy - USB

Should we expect that going forward? I know you haven’t given '13 guidance yet but should we expect a similar level of acquisition?

Spencer Kirk

I think that’s hard to expect that. I think we generally put a $100 million as kind of our target number and then hopefully exceed that but I think it's hard to expect that, especially with cap rates decreasing,

Christine McElroy - USB

And then, just with regards to your dividend. How close are you now to your expected cash flow income for this year and given your earnings growth, is it possible that you might have to revisit the payout earlier than the usual Q1?

Spencer Kirk

We are generally very close to the tax flow REIT minimum. So it is something that we will keep our eye on and as FFO grows it is something that obviously may or may not need to be adjusted.

Operator

Your next question comes from the line of Ki Bin Kim from Macquarie. Please proceed.

Ki Bin Kim - Macquarie

If you go back to your comments on breaking out your same store revenue growth, thank you for breaking out the contribution from undeveloped or unstabilized properties, but I was curious to know if all your unstabilized properties in the past, I don’t know how many years, four years, are included in that 0.8% breakout? Or is it only the '07, '08 vintage?

Scott Stubbs

It's really a mix, Ki Bin. This is Scott. We added, I believe, 29 properties this year. It's really, probably about 19 of those properties.

Ki Bin Kim - Macquarie

So how far off an advantage developing your standpoint does that go back because I know you guys develop (inaudible) all through the 2000s? So was curious what bucket that is captured in your same store?

Scott Stubbs

It's really the ones that just got added this last year. Our same store definition is the property has to be open for three years or be 80% occupied for one full year, measured January 1. So the oldest the property could really be is three years and 364 days.

Ki Bin Kim - Macquarie

I don’t want to beleaguer to a point for the 20% of infra revenue coming from unstabilized assets, is that more than one year's worth of development, or is it one time act?

Scott Stubbs

It does have a little bit more than one year's development but it also has some acquisition that was in lease up also. So it's not just straight development.

Ki Bin Kim - Macquarie

The reason I was asking was because there was development from '05, '06, '07 that are priced still reaching for full occupancy that probably helped that number even further than 0.8%. Is that correct?

Scott Stubbs

Even through the downturn, our properties have continued to lease up. They haven’t necessarily struggled from an occupancy perspective. It's more on the rate side where we have rates. A few of those properties, obviously, have struggled some. But for the most part, our developments have all leased up fairly well.

Ki Bin Kim - Macquarie

The second question, going back to your comments about the acquisition cap ratio ranging from 6.5 to 8, at what point, I am guessing the 6.5 is for the best stuff out there, but at what point or what level does that 6.5 cap will have to come down to maybe justify any development and would you ever do it, equal, I mean ever is a bad question, but have you come any close to it?

Spencer Kirk

Ki Bin, Its Spencer. I am not going to give you a threshold as to what that needs to come down. We do think that there needs to be a very 250 to 350 basis points spread to do development. To take on the risk of development versus what we can buy in the open market. We think that there needs to be something substantive to make it worthwhile.

We exited the development world and currently we have no plans to reenter the development market, and ultimately I would just underpin all of that and say we're going to do what is best for the shareholders, but we have been through unprecedented times and I think our current strategy is providing the highest and best return with the lowest risk profile currently for our shareholders and as the environment evolves, perhaps the strategy will evolve, but I think we've been pretty clear on our direction on that.

Operator

Your next question comes from the line of Eric Wolfe with Citi. Please proceed.

Eric Wolfe - Citi

I just wanted to follow-up on David's line of question on sort of what's changed relative to your guidance. If you look at the different components of your revenue growth, occupancy renewals, street rates, et cetera, then what specifically has surprised you relative to your guidance that you gave last quarter, and does that change your strategy at all going forward?

Scott Stubbs

Eric, its Scott Stubbs. The guidance we gave last quarter was at a time when we are looking at April was all right, but it wasn't that strong. If you look at the year, we were right on budget at that time or very close to budget.

During the second quarter, we have exceeded our budgets and therefore adjusted our estimates for the remainder of the year when it comes to our properties. If you think about, we just exceeded by $0.03, we then adjust our remainder of the year slightly. I think it didn't make sense in the current environment not to increase our guidance.

Eric Wolfe - Citi

Right. I know you are very focused on revenue maximization, so you are not so focused on, say, just building occupancy or pushing rate, but if you look at where you sort of ended up this quarter from an occupancy perspective and rate perspective. I mean is there any sort of noticeable difference versus what you had initially conceived or is it pretty much just everything stronger across the board.

Karl Haas

This is Karl. We're pleased with occupancy delta being as high as it is and it was somewhat unexpected, because we have been more aggressive on rates. I think in prior two calls, I have tried to prepare everybody for that occupancy delta to close, and at some point it will, but we're out there with a system doing what it determines is the best store-by-store way to maximize revenue, and it's just played out that while we push rates, we've been able to hold the occupancy as well. From the supplier standpoint the thing that probably helped us the most is that we knew we were pushing rates, but we were very pleased that our occupancy held.

Eric Wolfe - Citi

Right. Okay. That's very helpful, and just last question. Looking at your guidance for the remainder of the year, specifically on the revenue growth side, you seemed to be dropping from call it high-6s, 6.7, second quarter to sort of the low 4s. Is it just sort of a conservative take on occupancy that takes you down there that that gap might not hold quite as much, because I'm just trying to figure out what can take you from that high 6s to the low 4s in such a short period of time.

Karl Haas

I think it's a combination of looking at 2011. I mean, when we do our budgets and we come up with our numbers one of the final things I look at is graph that plots what we are doing this year, compared to what we've done in the prior couple of years. A couple of things come into play.

Last year, we had an odd phenomena and it's graph side, I had went back like four years, five years, we've never had a year where we didn't have the downturn in the fourth quarter. Last year, it did not downturn. I don't expect that that's a permanent trend, so when you look at the gap and you look at the numbers, we are continuing to go against, we just feel like that's a pretty realistic estimate. Going back, when we look at our performance even so far this year, we've actually hit pretty close to our budgeted numbers. We speak on expenses on expense by a lot more than we have on revenue side as far as our actual budgeted numbers.

Eric Wolfe - Citi

Got you. That's very helpful detail. Thank you.

Operator

Your next question comes from the line of Smedes Rose with KBW. Please proceed.

Smedes Rose - KBW

I just want to ask you on properties that you have acquired that were in lease-up or some of your newer properties that are continuing to lease up, are you seeing the demand come in incrementally faster given that occupancies have held up better than what you thought. Are you sort of seeing that across the board or is it in more mature markets or denser markets?

Karl Haas

This is Karl. It's kind of all over the place, and I think two years ago, we were seeing a much smaller than expected rent-up and that's kind what is impacting these 19 properties. They took longer to rent-up. Normally, in the past it's been a three-year rent-up to four-year rent-up, now it's becoming during this recession, a four to five-year rent-up. All in all, we're pleased with the rent-up of the properties that are in that phase right now, but it varies by market and actually even within the market it varies. We've got a good number of properties in Florida that are in that rent-up group and recently they've done very, very well.

Smedes Rose - KBW

Okay. Then I just wanted to ask you on your tenant reinsurance program. It looks like it was running a little better than at least what we had estimated. What sort of customer penetration does that program have at this point?

Karl Haas

We're in the kind of between 65% and 70%, and we're pretty much hitting our target. The speed that we are able to increase the overall penetration has definitely slowed down. We are maturing. What helps is, when we are able to add new properties and especially new third-party managed properties, which come in with very, very low penetration and we can grow those pretty significantly.

Operator

Your next question comes from Todd Thomas with KeyBank Capital Markets. Please proceed.

Todd Thomas - KeyBank Capital Markets

Hi. Good afternoon. Thanks. A follow-up question actually on the acquisitions. Outside of the Peru deal just wondering what the average cap rate and where occupancy is for the properties and the nine under contract.

Scott Stubbs

This is Scott. It's been pretty similar. Your cap rates have ranged from 6.5 to 8 and your occupancy for the most part we are buying stabilized assets, and it's the same for the properties under contract.

Todd Thomas - KeyBank Capital Markets

Then, Karl, I think you noted earlier that asking rents were 3% higher versus last year. I was just wondering where asking rents across the portfolio are relative to in line rents, and also do you have the growth in net rent per occupied square foot for the same-store pool year-over-year.

In the supplement, you give that number, I see it for the different segments, but there's no year-over-year comp and obviously the pools have changed over the course of the year.

Karl Haas

As far as Q2, 2011, 13.52. Q2, 2012 is, 13.97. As far as the asking rates versus the in-place rates, they are relatively even. I actually haven't looked at it really recently, but that's become kind of a non-issue for us.

Todd Thomas - KeyBank Capital Markets

Okay. Then just lastly do you have occupancy as of today last day of the month.

Karl Haas

Yes. We're little over 90.

Operator

Your next question comes from the line of RJ Milligan with Raymond James & Associates. Please proceed.

RJ Milligan - Raymond James & Associates

Good afternoon, guys. The updated acquisition guidance, I guess would imply pretty minimal activity for the rest of the year and I was wondering if that's a function of maybe a smaller, sort of short-term pipeline if that's a issue of expected closing dates or that' just sort of being conservative?

Spencer Kirk

It's based on what we have that we are looking currently and what we have under LOI, so right now we don't have a turn in the pipeline.

Karl Haas

Spencer, just one other comment. Realistically by my math, you've got four months left in the year. If you take out the holiday season and all this other stuff, so if it's not under contract, you are under a substantive discussion right now for likelihood that you are going to transact that's material between now and the end of the year is going to become increasingly more difficult, so I think if you look at our guidance for the rest of the year, I think you are going to find it to be pretty accurate, because we are not in any type of dialogues with people that will provide something to us.

Now that could change, but right now there's nothing in the pipeline that's going to be a surprise between now and the end of the year that we would be able to highlight.

RJ Milligan - Raymond James & Associates

Okay. Thank you. My second question is more for the on the supply side, I'm curious how much do you think rents can go higher before we start to see new supply and is it a purely a mathematical question before we start to see new supplier, or are there other barriers, financing, entitlements, et cetera.

Spencer Kirk

Yes. We would tell you that the main barrier right now not only is the yield, but also financing, which obviously financing is part of the yield. Banks haven't loosened their first string so to speak to the smaller operators. If you think about the development that took place in 2003 to 2007, call it, we were developing more than any of the public companies and we were doing 10 to 15 a year, so we were a very small portion of what was being added, so until the smaller operators were able to get attractive bank loans, we don't see it significantly.

RJ Milligan - Raymond James & Associates

If there was access to the financing, how far do you think you could push rents before you started to see the smaller developers come in and start building?

Spencer Kirk

A way to look at this, RJ would be to say, all right if the banks turned on the lending, say, 12 months for now, we've got to get through the entitlement stuff, because some of those [sales], so that's one to two years. A year to construction and then three or five-year to lease up, so when we talked about no new supply, I think we've got a comfortable cushion, but it all depends I think primarily on one banks starts to lend, because that will signal to the smaller guys that it's time to get back in the game.

Let me give you a data point to just to underscore what Scott said. I did a quick back of the napkin sketch of developments in 2003, 2004, 2005, 2007, 2006, 2007. 13,011 self-storage facilities were built in the United States by one measure. That's 2,600 a year, and Extra Space is the prolific public company developing was producing 12 to 15. Hardly a drop in the bucket against that backdrop of 2,600 a year on average, so a lot of things can and will change, but the lending environment for the small guy hasn't changed a lot. We'll just have to see how things play out.

Operator

Your next question comes from the line of Paula Poskon with Robert Baird. Please proceed.

Paula Poskon - Robert W. Baird

I want to follow-up on the lease-up assets discussion throughout the call and maybe ask this in a different way, so often you all have had a slide in your investor presentations talking about the what the stabilization of those lease-up assets would add to FFO through 2014. Is that still true, or is some of the occupancy gains that we've seen an acceleration of that lease-up stabilization.

Scott Stubbs

It's still about $0.07.

Paula Poskon - Robert W. Baird

Okay. Thank you, Scott. Any thoughts about moving to an unsecured financing strategy?

Scott Stubbs

It's something we'll look at. I mean unsecured obviously an option. We're not looking to go to a completely unsecured financing strategy.

Paula Poskon - Robert W. Baird

That's all I have. Thank you.

Operator

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

Michael Salinsky - RBC Capital Markets

Good afternoon, guys. Scott, first question as we look at the second half of the year, what are you guys expecting in terms of real estate tax appraisals maybe on a year-over-year basis and also looking at financing cost, just curious whether you could you see new secured today? What kind of terms you were hearing from the banks as well as insurance companies and things of that nature.

Scott Stubbs

Our property tax consultants have reduced the number about 4% for year-over-year increase on property taxes. So far it's been running fairly close to that as the assessments come in. As far as new secured financing after the subsequent to the end of the quarter, we did a tranche of seven-year money just under 3.2%.

Michael Salinsky - RBC Capital Markets

What was the LTV on that?

Scott Stubbs

About 70%.

Michael Salinsky - RBC Capital Markets

Okay. That was 10-year, right?

Scott Stubbs

It's seven-year money, so if you compare that to unsecured, it's quite a bit lower interest rate there.

Michael Salinsky - RBC Capital Markets

Okay. Karl, my follow-up question, you talked about renewal and steep rents, what is the delta right now between move-in rents and move-out rents?

Karl Haas

I don’t have it right in front of me. We could get it for you, but it's probably move-out rates are probably little bit more than the move-in rates, but bring people in at aggressive rates and then raise the rates, so it doesn't stay. That gap doesn't remain all that long.

Michael Salinsky - RBC Capital Markets

If you could provide that offline, I'd really appreciate, but how does that compare right now versus call it a year ago, that delta. How would you see that…

Spencer Kirk

It's close because our existing customer rate increases have not changed dramatically, but our rates are starting to climb or street rates are starting to climb, so based on that it has to be close.

Operator

Your next question comes from Tayo Okusanya with Jefferies. Please proceed.

Tayo Okusanya - Jefferies

Congrats on an amazing quarter. Quick question. I mean with your overall strategy working so well, I am just kind of curious what are you seeing in regards to higher competition is basically reacting to what you are doing? Not necessarily the public guys, but a lot of the local guys that are in your market that makes up the bulk of the market?

Karl Haas

They really don't react very much. They haven't adjusted the rates. They are afraid to lose occupancy. They aren't as aggressive with existing customer rate increases, because they are afraid of losing occupancy. We have seen our public competitors follow a lot of things that we are doing and every once in a while we follow what they are doing, but the bulk of the sites out there, they are making money, they are not in trouble and they are not unhappy with the results.

Tayo Okusanya - Jefferies

At what point do your prices become so far away from their prices that customers actually start to notice on and focus on that differential when they are thinking of taking a new unit?

Karl Haas

Well, our prices aren't outlined with their prices. Where we make up for it is, we've been able to gain occupancy and our existing customer rate increases for the customers once they are inside, because people don't move until they don't need it anymore, so our price is competitive.

The other thing that's a little bit different is, that we have an internet price and we did lead the industry in this. We have two-tiers of pricing. We have internet price and we have a street rate, and so when you walk into the site, those people are less sensitive to the prices and so they are quoted a higher price.

If they pushback or they walk out, or if they have checked the internet, they'll get the internet price, which can be as much as 15% lower, so when people are comparing us on the internet, us to our competitors, they see that internet price and that's a very aggressive price and very competitive price.

Operator

Your next question comes from Ki Bin Kim with Macquarie. Please proceed.

Ki Bin Kim -Macquarie

Thanks. Just a couple of quick follow-ups. Going back to just your commentary about the second quarter strength you are seeing and maybe we could use occupancy gains as the measuring stick, and so from 270 basis points gain, if you had to break that up into just overall industry occupancy pickup versus market share gains, how would that look like?

Karl Haas

Ki Bin, this is Karl. I have no idea, but we can get back to you.

Ki Bin Kim -Macquarie

Okay. Just the second question. I know you said development price go far away, especially given financing markets and what not, but if you had to look at the most viable site in your portfolio or where you are located, where would stabilized development yield based on today's market dynamics to be? For the most viable site?

Karl Haas

Manhattan. We don't have any sites in Manhattan, but you could do a site in Manhattan, things would be great.

Spencer Kirk

Yes. It's been a very key just by market just because it depends on what the land is selling for. It depends on what the self-storage densities are like in that market, and then obviously it depends on the yield you are going to get, so it's pretty variable. I mean the only place you'd every really consider obviously is a place with higher barriers to entry.

Karl Haas

Long-term, Northeast is proven to be a very, very good strong long-term market for us, and we know that Chicago has turned out to be pretty good, but probably in a long-term it has been as great as it's been recently.

Ki Bin Kim -Macquarie

Okay. Well, I guess, what I was asking is that are yields just close to where you can buy assets which goes far away or how does that relationship look like?

Spencer Kirk

We haven't looked at it significantly, so it would be difficult to comment on that.

Operator

Your next question comes from the line of Michael Knott with Green Street Advisors. Please proceed.

Michael Knott - Green Street Advisors

I guess this one would be for Karl. I think we've had a few variations of this question. I don't think anyone is asking. I don't think anyone has asked this one just yet, but year-over-year change in street rates for maybe the end of 2Q, compared to I guess the end of 2Q '11, and then maybe how that differs from the same year-over-year comparison at 1Q '12 versus 1Q '11.

Scott Stubbs

That's tough. Well, 3.5% at the end of Q2. I think it was 3% at the end of Q1. I don't remember what it was at the end in 2011, but it was probably less than that. It's gone up and down. I wish I could say that I said it, but the system really it evolves based on our system.

Michael Knott - Green Street Advisors

Then I guess with the proliferation of internet rental I guess when we even asked about street rents on these calls. Are you talking now those numbers that you just gave are those literally the street rents and the stores or is that a blend of your asking rents at the store level and on the internet.

Scott Stubbs

One follows the other, say, if there was a gap, but one follows the other. Our internet price is 15% below our street rate. When we say it's 3.5%, both would be up 3.5%.

Michael Knott - Green Street Advisors

Got you. Then just one real quick one. I think you gave a number of occupancy was a little over 90 at the end of July. How does that compare to the end of the July 2011?

Scott Stubbs

It's still up about more than 2.5%. Actually, about 2.7% on our own pool, and 2.9% on the big pool.

Michael Knott - Green Street Advisors

Does your revised guidance consider that maybe that occupancy gap won't close quickly as you thought?

Scott Stubbs

I mean it's a combination of what we can get with rate, we also are getting a little bit more aggressive with rates, and I expect to see that drive down that. I don't think we've taken seasonality out of our business and we will see a drop in our occupancy and the delta should close, because we are at a very high level of occupancy and probably little higher than we expected to be.

One scenario it could play. I mean, we're going to push rates and if the occupancy holds, that would certainly help us reach the top end of our guidance and that will be a good thing, but I wouldn't want to go and guarantee that.

Operator

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

David Toti - Cantor Fitzgerald

Back when I was in the [past] life. I think you may have been asked this, but just I want to just in case I missed it. When was the last time the portfolio was over 90%. Do you think this is a relatively sustainable level at this point?

Scott Stubbs

Never. Well, remembering that it's seasonal and we are not going to be 90% year around, but this is the highest level we've been. I mean, we're up 6%, 7% from three years ago. It's been a pretty good run.

David Toti - Cantor Fitzgerald

Assuming that world mustn't get a whole lot worst, is it conceivable that that portfolio could stabilize above 90% at this point?

Scott Stubbs

Anything is conceivable.

Operator

(Operator Instructions). Your next question comes from the line of Eric Wolfe with Citi. Please proceed.

Mike Bilerman - Citi

Yes. It's Mike Bilerman. I may have missed this. I jumped on a little bit late. On the operating expenses, which you've been able to control pretty well during the year. When you sort of look at, at least, what was the same-strong guidance of 3% to 4% that you had provided originally when you put out 2012 guidance, and obviously that went to 1% to 2.5% last quarter, and it's now down to 0% to 1.5%. What is sort of driving almost 300 basis points of savings on the expenses and just looking at the total portfolio if you are getting the same sort of savings, it's about $3 million, I'm just curious if you can sort of bucket it a little bit in terms of categories for us.

Karl Haas

Well, this is Karl. If you go back to our Q1 call, a big chunk of it was explained there and that was we had it unbelievably mild winter and we had almost no snow removal and that is a big chuck. It's one quarter. It doesn't obviously carryover into the rest of the quarters, but also utilities. To mild winter, our utilities were dramatically down and those were the by far the biggest drivers and the biggest surprise before the year began guidance to what we're ending up with.

Those don't repeat, and now what we're getting the benefit from is our investment sustainability, which we are seeing ongoing benefit on the utility expense, but nowhere near the level that we were seeing earlier or in the first quarter and we will continue through about October, getting the benefit of the reduced credit card fees, because that started actually last year in the, I believe October-November, so that will equalize and balance out.

Mike Bilerman - Citi

You are seeing that through all the entire portfolio whether it'd be same-store, the core, the unstabilized and also the assets that you manage?

Karl Haas

Yes.

Mike Bilerman - Citi

Is the margin on the tenant reinsurance is obviously higher as you keep on driving that. Is that affecting the same-store numbers at all?

Karl Haas

Hope it is slightly.

Scott Stubbs

But it's in our guidance.

Mike Bilerman - Citi

When looking at the same-store revenue growth, that bumping up from what was 4 in the quarter to 5, 3, 7, 5 to midpoint. A good chunk of that is tenant reinsurance going up $3 million from the original forecast, correct?

Scott Stubbs

Marginally it's helping, but the majority of it's the property themselves performing better. I mean tenant reinsurance adds, 50 basis points.

Karl Haas

Actually I think it's going down. I think it's 0.3.

Spencer Kirk

We've hit the top of the hour. Ladies and gentlemen, great questions, good dialogue today. We appreciate your interest in Extra Space. We'll look forward to next quarter's call. Thank you.

Operator

Ladies and gentlemen, that concludes today's conference. You may now disconnect and have a great day.

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