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Extra Space Storage, Inc. (NYSE:EXR)

Q3 2012 Earnings Call

October 30, 2012 1:00 pm ET

Executives

Clint Halverson – Vice President Investor Relations

Spencer F. Kirk – Chairman of the Board & Chief Executive Officer

Karl T. Haas – Chief Operating Officer & Executive Vice President Operations

Scott Stubbs – Chief Financial Officer & Executive Vice President

Analyst

David Toti – FBR Capital Markets & Co.

[Michael Knott – Green Street Advisors]

Michael Salinksky – RBC Capital Markets

Paula Poskon – Robert W. Baird & Co.

Ross Nussbaum – UBS

Richard Milligan – Raymond James & Associates, Inc.

Michael Bilerman – Citi Investment Research

Todd Thomas – Keybanc Capital Markets

Operator

Welcome to the third quarter 2012 Extra Space Storage, Inc. earnings conference call. 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 will now turn the conference over to your host for today Mr. Clint Halverson, Vice President Investor Relations. Please proceed.

Clint Halverson

Welcome to Extra Space Storages third quarter 2012 conference call. In addition to our press release we’ve furnished unaudited supplemental financial information on our website. Please remember that managements’ 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 managements’ estimates as of today, Tuesday, October 30, 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 F. Kirk

As we start this call I would like to simply say we are keenly aware of the natural disaster that has taken place and is still yet in process. We aware of the destruction and disruption in people’s lives and we want you to know that our thoughts and prayers are with all those that are being impacted, recognizing fully that the aftermath and the challenges going forward are not fully known nor what the course of the storm will yet be. We want to just acknowledge that this is not an optimal time for a call but nonetheless we had to make a decision and we have elected to go forward. But know that we are going to keep good thoughts for all those that have been in harm’s way or will yet be affected.

Extra Space did have an outstanding quarter thanks to the diligent focused efforts of the entire team. The environment and culture here are riveted on innovation, technology and performance. Additionally, our industry leading results speak to the depth and sophistication of our systems, our processes, and our unique financial and ownership structures.

I’ve spoken many times about our ability to deliver double digit FFO growth. This past quarter was no exception with a robust 34% year-over-year increase. Property performance was strong and our results benefited from accretive acquisitions. Speaking of accretive acquisitions, we currently have six properties with an aggregate purchase price of $15 million slated to close by the end of the year on top of the $486 million already closed in 2012.

We continue to execute in a meaningful and substantive way to grow the REIT from open market and off market acquisitions. We are delighted with the success of this quarter and our performance year-to-date. We are keenly aware that the comps for next year will be a very large hurdle. Please remember this statement. I’d now like to turn the time over to Carl to talk about operations.

Karl T. Haas

During the third quarter we experienced very strong same store revenue growth of 6.8% especially in light of the 4.9% revenue growth we had in the third quarter last year. Year-to-date same store revenue is up 6.6%. We continue to see our Internet marketing and revenue management strategies pay big dividends. As we refine our pricing model we will continue to steal market share from our smaller competitors.

Rental demand for storage remained stable in the third quarter and we haven’t seen a meaningful influx of new supply which resulted in record high occupancy levels for our portfolio. We ended the quarter at approximately 90%, up nearly 2% over last year. Stable rentals coupled with the lack of new supply allowed us to increase street rates 5% on average per quarter.

Same store expenses continue to be below budget. The primary drivers for expenses being down by 2.8% were lower repair and maintenance costs, continued benefits from sustainability initiatives and lower credit card processing fees. The benefit of lower credit card processing fees began in October last year and this will dissipate in the fourth quarter.

Discounts were down year-over-year 15% for the quarter and 10% for the year. This is due to higher occupancy and a focused effort to offer the right price and promotion. All those combined to produce third quarter same store operating income of 11.4% on top of 7.3% growth last year. With that I’d like to turn it over to Scott for a little bit more.

Scott Stubbs

Yesterday we reported third quarter FFO of $0.43 per share inclusive of a $2.5 million charge related to our acquisitions. We exceeded the top end of our quarterly guidance by $0.02. This can be attributed primarily to better than expected same store property results and the performance and timing of our 2012 acquisitions.

We’ve had a banner year for acquisitions. During the quarter we closed on 53 properties for approximately $450 million. Of these 53 properties, 36 were from the Prudential transaction. As of today, we have six additional assets under contract for just over $50 million. These six properties are located in Florida, Massachusetts and New Jersey and will be great additions to our portfolio. With the acquisitions closed during the quarter we now have 416 wholly owned assets compared to 304 joint venture properties and 190 third-party sites under management. We continue to focus on growing the REIT in a disciplined and meaningful way.

As of September 30th the company had five separate lines of credit with the total capacity of $340 million with $240 million drawn on these lines. Subsequent to the end of the quarter we paid off the $100 million GE line that recently matured and replaced this line with secured loans. Interest rates continue to be at all time lows. As a point of reference we recently closed a five year loan at 2.8% and a seven year loan at 3.2%, both loans were swapped fixed.

Based on the results for the third quarter, we’ve raised our full year 2012 FFO guidance to be between $1.56 and $1.58 per share. Key assumptions relating to these estimates can be found in our press release. With that I’ll now turn the time back to Spencer for some closing remarks.

Spencer F. Kirk

This year we have had one main theme and that is to focus on fundamentals. Simply put, to maximize every revenue opportunity and appropriately minimize every expense. Our third quarter results show that this focus is paying off. We will continue to drive innovation in our systems, our marketing and our operating platform to capture the right customer, at the right price, at the right time.

It is no surprise but uncertainty seems to be once again a primary theme this earning season. The word is being dropped frequently in many conference calls so far and it echoes much of what we are hearing both on and off the street. However, we remain optimistic about the self storage sector and our ability to produce solid results for our shareholders going forward.

With that, I’d now like to turn the time over to Clint to start the Q&A session.

Clint Halverson

We understand that there are several individuals that are not able to join us on the call today. We would invite those that are on the call to ask all the questions that they have at this time and then we would invite those who are not able to be on the call to meet with us at NAREIT in the next few weeks. With that we’ll turn it over to the operator to start our Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from David Toti – FBR Capital Markets & Co.

David Toti – FBR Capital Markets & Co.

I just have a couple of small questions. I just want to discuss the acquisition strategy a little bit. In terms of the operating platform, do you think there’s a size where you sort of reach maturity because the pace has been pretty aggressive for a couple of years now? Or, is it sort of an infinite proposition in your view?

Spencer F. Kirk

When we started to build Extra Space we had scalability in mind. That’s why we’ve had a significant technology focus and from my perspective operationally this is close to being infinitely scalable. It’s the vision we had and it’s the way we have structured our systems and processes. In terms of the integration of a fairly robust year of acquisition activity, I think we’ve managed it well. We’ve been measured, we’ve been disciplined and the good news as we talked about the 53 acquisitions in Q3 alone, 36 of those were from Prudential. They were already in our system.

The management plus progress we’ve had in growing that third-party management where we’ve prospected and brought some of those properties in our balance sheet. Once again, those were already branded Extra Space, our systems, our people behind the counter and so as you look at the three ways we can grow either the REIT through open market or off market transactions and the growth of the management plus program, I think most of these speak to reasonable pace and minimal risk as we go forward.

David Toti – FBR Capital Markets & Co.

At a certain point does it make sense to start putting some of the weaker assets, I know generally the operators are hesitant to do that because of the scale issue, but when you get to a certain size maybe there’s some sense in dispositions?

Spencer F. Kirk

Dispositions are something that certainly we look at. As I’ve said many times, we’re in the process of building the company and as conduit loans and other things provide some flexibility we’ll take a look at it but I think the primary word for us is growth not dismantling.

David Toti – FBR Capital Markets & Co.

My last question on this topic, as the operating base grows are there other synergies you expect in terms of operating leverage over the existing basket or is it just an expansion of the current synergies? In other words are there expense savings that you expect to obtain as you sort of get into a new size?

Spencer F. Kirk

I think size and scale still matter but I would say we’re starting to talk out on the margins. I don’t think it would be reasonable to model in anything that is on a large scale or substantive base because I just don’t see it.

David Toti – FBR Capital Markets & Co.

My last question, you mentioned in the press release that incentives were down. How do you guys read that? Is it just sort of the period, is it because of your occupancy levels, or is it just the overall environment where pricing power is increasing for you?

Karl T. Haas

Discounts are down because our occupancy is up and as we reach certain occupancy thresholds it’s done by unit type and so the discounts available for our managers to offer go down. The first step is taking it down from full month to half month and then to no months. The good thing is our major competitors are also more occupied and they’re doing the same thing.

Operator

Your next question comes from [Michael Knott – Green Street Advisors].

[Michael Knott – Green Street Advisors]

I hate to ask an insensitive question about the store but I’m just curious if you have any intel on your own portfolio and any damage there may be? Then also, is there any reason to expect that this particular storm wouldn’t be beneficial for the industry like prior big storms have been?

Spencer F. Kirk

It’s not an insensitive question, it’s just a matter of fact that we have to deal with the environment in which we’re doing business and natural challenges and those things. First of all, the storm is far from over. We’ve had a team that has been up all night. What I can tell you today is we’ve got one store that we know has about four feet of water in the office and the property has some serious problems. But the vast majority of our stores are open for business and I think the preliminary report is positive and that we’re in reasonably good shape. But not knowing what the path and the rest of this storm has out there I would hate to prognosticate where I don’t know.

Natural disasters obviously help drive the business. We also know that there will be some expenses associated with this but the indications are right now that the guidance we have given that Scott just talked about is what we still maintain as the likely outcome for the performance of this company in Q4.

[Michael Knott – Green Street Advisors]

Then just as it pertains to your insurance business, that obviously had another good quarter in 3Q with expenses down. Do you expect that the storm will reverse that trend next quarter or maybe even in 1Q? I’m not sure of what the lack is on sort of when those claims might be paid out or how that works?

Scott Stubbs

We would expect them to be up some in the fourth quarter and potentially trailing into the first quarter of next year. But, we had a pretty serious storm go through last year in the same area in New Jersey and while claims did go up slightly it wasn’t like they spiked a significant amount. The other thing that we’re sorting through is which of those claims will be covered whether or not it’s from rising water or from wind damage because certain types of things are excluded in the coverage.

[Michael Knott – Green Street Advisors]

Then just one more question and I’ll hop back in the queue, I guess this one would be for Karl. Karl, I would assume that rent growth this quarter was about 5% or so on average. My question is, is more than 100% of that coming from increases on existing customers? In other words, are move in rates still lower than move out rates or is that starting to dissipate?

Karl T. Haas

No, it’s starting to balance out. It really depends on the length of stay. If you take it on a micro basis, customers that have been with us for a long time can be well above street rates and so there is some negative churn for those but on balance we’re not losing a lot it’s pretty relatively flat Our street and existing customer rates are really close together.

[Michael Knott – Green Street Advisors]

So when tenants move out that’s kind of flat revenue then assuming it’s back filled but then the rent growth is really just coming from existing customer increases?

Karl T. Haas

Yes and street rates being up slightly in comparison to the prior year.

Operator

Your next question comes from Michael Salinksky – RBC Capital Markets.

Michael Salinksky – RBC Capital Markets

First question, you talked about 5% street rate growth in the quarter, I’m assuming that’s year-over-year. Can you talk about how that trended through the quarter? I believe when you talked back in July I think you said 3% so it sounds like there was some nice acceleration. Also, can you give us a sense what you’re seeing in October?

Karl T. Haas

It is up and down continuously. Our system controls it and it’s doing it based on a very micro basis property-by-property unit type by unit type and so it goes up, it goes down. I think it’s better to look at it in a longer period of time rather than trying to get either excited or depressed about it being up and down week-to-week and month-to-month.

Michael Salinksky – RBC Capital Markets

Can you talk a little bit then I guess about the trend, what you’ve seen under that pretense of the last 90 days?

Karl T. Haas

It’s holding pretty well. Our occupancy is actually slightly above where we expected it to be, our delta to prior year. So that’s enabling us to hold the rates a little better. Then it’s a combination of that and the other significant benefit is just at the higher levels of occupancy we’re giving away less discounts so our achieved rate continues to trend very favorably.

Michael Salinksky – RBC Capital Markets

The second question a little bit on asset pricing, have you seen any compression on cap rates I’d say over the last 90 to 120 days? Also, are you seeing any increase in volume, the amount of properties being put on the market by sellers at this point?

Spencer F. Kirk

In terms of cap rate compression the last 90 days I wouldn’t say it’s been substantive I would say as we’ve looked out for deals we still think for us, somewhere between 6.5% and 8% is the sweet spot. It obviously depends on the quality of the asset, the market in which that asset is located and other things because there is a broad range of variability in terms of asset quality. But as we look at transactional volume we see opportunities, we’re bidding on opportunities, there seems to be a fair amount of interest. One of the big questions for us is what happens between November 6th and the end of the year and that’s one of the unknowns. I will say that after November 6th or 7th it becomes a little tougher to transact but we do expect there will be increased activity potentially.

Michael Salinksky – RBC Capital Markets

The final question and kind of bigger picture question, we haven’t seen a whole lot of supply or starts in the storage space over the last 18 months, actually probably longer than that, but given the rent growth that you’re seeing and the occupancy pick up in the storage spaces, when do you expect supply to start ramping up there?

Spencer F. Kirk

It’s anybody’s guess. I think I made a comment previously in another call that the bankers have been a little bit reluctant to loan against new construction. As we’ve demonstrated quite amply, if you’ve got a stabilized asset you can get loans all day long but new construction has been a little problematic. Once you are kind of in that mode, it’s a year or two to get an entitlement, a year to build it and then two to four years to lease it up and having spoken with a number of folks in the industry I reaffirm that I think in major markets there might be several dozen properties being built and maybe in the entire country several hundred.

We’re not back in the hay day of the mid 2000s, 2003, 2004, 2005, 2006, 2007 we’re on average 2,500 or 2,600 properties a year were being built. So it’s anybody’s guess but this is one of those things that is driving the performance of the self storage sector and that is there is relatively no new supply and as I go around for instance I hear of a city like Phoenix might have three, four, or five assets come out of the ground we are not seeing massive amounts of supply. It’s going to just depend on market dynamics and financing and a whole host of issues but right now it’s really good if you’re an existing storage operator.

Operator

Your next question comes from Paula Poskon – Robert W. Baird & Co.

Paula Poskon – Robert W. Baird & Co.

Just to follow up on the question about the acquisition environment, are you seeing more, particularly out of your third-party platform more owners being more willing to sell driven by tax policy concerns?

Scott Stubbs

We have seen an increase over the last 60 days of owners wanting to get a transaction done by the end of the year. They may or may not be able to get that down or we may be able to agree on pricing or not but we have seen more individual sellers versus portfolio deals.

Paula Poskon – Robert W. Baird & Co.

Then out of the joint venture funds is it the normal course of capital recycle through your joint venture partners or is there a strategic change with they’re being apparently more willing to sell those assets?

Scott Stubbs

We would tell you it depends on the fund and their objectives. Each fund is going to have different objectives but for the most part many of them are looking to buy more self storage rather than divest of their self storage investment. All of our partners have been very happy with the performance of self storage.

Paula Poskon – Robert W. Baird & Co.

Spencer, you had mentioned in one of your earlier responses that not only your occupancies are high but many in the sector are high. Even if we do see a more normal seasonality pattern through the trough in February, doesn’t that suggest that portfolio occupancies will be higher than normal heading into the spring leasing cycle which should translate into some pretty healthy pricing power?

Spencer F. Kirk

That is our hope. There’s a lot of distance between now and then Paula but that’s one of the things we have modeled that with virtually no new supply and our occupancies being at the highest level we’ve ever seen. Going into the next prime season we’re optimistic that it’s going to be a good year for us and we’ll capture and deliver some solid results.

Operator

Your next question comes from Ross Nussbaum – UBS.

Ross Nussbaum – UBS

A couple of questions, first where are your street REITs today relative to the peak of the market back in ’07?

Spencer F. Kirk

I’m not sure I have that handy. Probably above it but we’ve gotten back and above where we were but I don’t have it handy with me.

Ross Nussbaum – UBS

On the insurance side I just want to follow up and make sure I understand, there was a suggestion that not all claims fall under the policy, is flooding or water damage not caused by wind not covered under your insurance policies?

Spencer F. Kirk

Generally no, we have two different types of coverage. We have a general insurance policy and then a flood rider also.

Ross Nussbaum – UBS

What percentage of the tenants who generally elect the general go for the flood as well?

Spencer F. Kirk

Well, we just started offering the flood rider in the middle of this year so it’s not a high percentage of our customers who actually have the flood rider.

Karl T. Haas

I view it as a positive if our customers do have coverage and in an instance like this it helps to further enhance our salability of insurance and drives home the point that it’s a good thing to have insurance. So we will probably experience some claims but that’s not a bad thing. It helps our managers feel better about having this program and it will also drive home the point to our customers which is the same thing I think the big insurance companies, they’re going to take a bit hit here but they’re well able to do that and on a go forward basis it’s probably going to help their business. We view it in the long run one, it’s good for our customers and two, it’s going to be good for us.

Ross Nussbaum – UBS

If I go back and look at the positive impact that other web related disasters have had on the storage business particularly let’s take a Florida hurricane for example, is there a way you can help us quantify how much of an uptick in demand let’s say over a 30 to 90 day period you typically see after one of these events?

Spencer F. Kirk

It’s tough to quantify the uptick. What we can tell you is our internal discussions have been look, we’re at 90% occupancy at the end of the quarter we don’t have that much more headroom for the maneuvering. This is very different than five years ago and so I would suggest we’re going to have some gain in revenue, we’ll probably see some nice uptick in occupancy in some of those affected areas. We’re also going to have some claims and I think the revenue and expenses we still reaffirm our guidance, I think it’s still in that range of $1.56 to $1.58 for the full year. We’re not modeling anything dramatically different and that’s based on lots of experience over lots of years.

Ross Nussbaum – UBS

When I look at your supplemental and I look at for the quarter on a year-over-year basis you had about 1,100 fewer rentals and about 554 higher vacates so those numbers how should we think about those heading into next year? Obviously, we’d like the signs in front of those numbers be reversed.

Scott Stubbs

One of the things we caution people on is not to get too hung up on the year-over-year because last year may have been abnormally good or bad so what we generally focus on is how those trends appear on a seven year trend. So we look at our rentals and vacates over a seven year period and we would tell you that those numbers lay right in the middle. In addition to that our occupancy is higher than that so we would expect rentals to be down slightly and vacates to up slightly so there’s obviously fewer units to rent and more people to vacate.

Spencer F. Kirk

There’s also one other thing to consider. We do somewhere between 30,000 and 40,000 rentals a month depending on seasonality. When you pick a data point say you have 1,100 fewer and 500 greater, the order of magnitude we’re talking 1% to 1.5% in context and I think a lot of that is well within the range of normal business cycle variations or normal economic changes that can’t be modeled or forecast. I go back to what Scott said, you need to be careful when you’re taking a look at those numbers.

Karl T. Haas

Plus, we focus on square footage not necessarily just units and our square foot delta is actually exceeding our expectations and we’re pleased with where we are. We expect our square foot delta, the gap to continue to close because we’re – although I’ve been saying this for a while and our system has changed a little bit where it’s not just totally driven by occupancy so it hasn’t closed as quickly as I would have thought but we’re still in a plus two to the same time last year and in October at almost 90% occupancy. We are where we want to be.

Ross Nussbaum – UBS

Then just two quick housekeeping items, when did the bulk of the acquisitions close during the quarter?

Spencer F. Kirk

First of all G&A impact has already been modeled in everything we’ve given you, no change there. [Tim] has come back as Chairman of the Board and Chief Investment Officer and I think he’s doing a good job in helping us to identify opportunities. We are modeling officially the financial impact started July 1, 2012.

Operator

Your next question comes from the line [Michael Knott – Green Street Advisors].

[Michael Knott – Green Street Advisors]

Just going back to your cap rate comment of 6.5% to 8% I’m just curious is that the range you’re willing to buy at or do you feel like that’s representative of some of your best markets versus some of the lower end markets? I would think that many of the better markets would be well below 6% today but I’m just curious if you can clarify those comments?

Spencer F. Kirk

The 6.5% to 8% range is I think, a fair representation of where we think we should transacting to do accretive transactions. I think we’ve amply demonstrated that we are able to produce intelligent results without getting whipped into a frenzy. We’re in this for the long haul and I think it’s important for us to remain disciplined and focused and recognize that we’ve had plenty of activity that we don’t need to pour an accelerant on something that is already going pretty well. I think the results speak for themselves.

[Michael Knott – Green Street Advisors]

If we move that conversation to just sort of market cap rates do you feel like Boston, New York, LA, San Francisco type markets and maybe South Florida are kind of 5.5% today or where would you peg those and where would you sort of peg a very average market within that 6.5% to 8% range?

Spencer F. Kirk

Let me see if I can answer this. I think there will always be buyers that are willing to pay a lot. I still maintain you can pay too much for gold. An A asset in an A market you can get crazy and overpay for something. For us, we’ve said, in building long term value if it’s a good asset in a good market we’re going to be in the sixes and if we start to get into the secondary market it needs to drift into the sevens. I spoke last quarter about asset quality being the physical condition of the asset itself, the quality of the market, and then the location of the asset within the market.

It becomes fairly complex because you have objective and subjective measures by which you value something. For Extra Space we’ve got a seasoned acquisition team, we’ve got a lot of experience and we don’t necessarily subscribe that markets have to be in the fives to produce meaningful results. We’ve demonstrated through 2012 that we can do intelligent acquisitions without being crazy.

[Michael Knott – Green Street Advisors]

A couple more questions for me, one would be have you looked at all or thought about potentially expanding into Europe at some point in the future through acquisitions?

Spencer F. Kirk

This is one where I can be pretty clear, we are not going to Europe. We are a North American self storage company and strategically the board of directors has decided that the greatest opportunities are in our own backyard. A data point, and this is rounding, in North America there are about 54,000 self storage facilities. In all of Europe there might be 3,000. I think the greatest opportunity is right here where we are keenly positioned on the Internet, revenue management systems, operating practices, cultural things, linguistic capabilities of our managers, I think we’ve got the right formula to produce the very best result. I for one, am not interested in looking for a pasture that in my opinion, is not greener on the other side of the fence.

[Michael Knott – Green Street Advisors]

Last question for me, can you update us if you have the numbers off the top of your head but the ’09 to ’12 development pipeline? What kind of stabilized yield are those tracking to? I know you’re out of that business now but are these properties exceeding what you underwrote? How are they trending?

Scott Stubbs

Right now they’re leasing up very well but they’re leasing up at rates lower than we originally underwrote. Generally, once those properties become stabilized we’ll push the rates. So if one were to just look at the rates you would say that those properties are behind the original estimates but they are doing well in our mind because we want to fill them up first and then push the rates.

[Michael Knott – Green Street Advisors]

So you’re going to stabilize at what kind of unlevered yield?

Scott Stubbs

I think you’re talking – and it depends on the property, it depends on the year, you’re probably talking somewhere between 8 and 10 depending on the asset.

Operator

Your next question comes from Richard Milligan – Raymond James & Associates, Inc.

Richard Milligan – Raymond James & Associates, Inc.

Most of my questions have been answered. I’m just curious in terms of marketing for your mobile platform how many of your customers are coming now mobile versus desktop? And what do the conversion rates look like? I’m just wondering if you have an idea as to the smaller mom and pops, how many of those have a mobile platform? What does the competition look like there?

Spencer F. Kirk

Let me take the second question first. I can’t speak to what the smaller operators are doing with their mobile platforms. One of the questions as to why we think the larger operators are taking market share is using Extra Space as a data point, we’ve got 42 people internally and externally working on our traditional Internet, our mobile strategy, and our social media strategy. We are spending tens of thousands of dollars a day on paid search. The mobile penetration to date is just over 30% and the conversion rate is a little bit higher than that.

The mobile strategy is very important to us. It’s accelerating, it’s accelerated very nicely and in fact, we have invested heavily in our mobile strategy and I can’t imagine how a smaller operator can put those kinds of resources for programming and optimization into multiple platforms because you talk traditional Internet which is very different than mobile, which is different than social and you look at all the different devices and the software and it becomes a very large matrix and it’s complex and it’s expensive and I don’t know how the small guy does it.

Operator

Your next question comes from Michael Bilerman – Citi Investment Research.

Michael Bilerman – Citi Investment Research

I apologize I jumped on late because I was on another call, but just in terms of expenses heading into the fourth quarter it would appear though your guidance has got about a 4% lift for fourth quarter expenses and just given the trend that you’ve been seeing it just seems like a large growth rate so I don’t know if there’s anything particular about this fourth quarter, I know we’ve talked a little bit about claim activity, or is there anything in last year’s fourth that we have to be mindful of?

Scott Stubbs

Really, one big item is last year you had very little snow removal so basically our fourth quarter numbers are largely going to our budgets. So we’re showing that snow is going to be the historical norm which is our budget. In addition we’re losing the effect of the credit cards. The benefit from credit cards took place October so year-over-year you’re going to lose that in this fourth quarter so your big changes are really credit card and snow removal. Then property taxes just coming in at 4% to 5%.

Michael Bilerman – Citi Investment Research

How much would snow and credit card have an impact on that 4% growth rate if they were flat with the prior year? What would that imply?

Karl T. Haas

It would probably bring it down to closer around 2%.

Michael Bilerman – Citi Investment Research

Arguably the snow and credit card is across the entire portfolio not just the same store as I would expect all expenses to be up. Is there a certain level of drag on the entirety of the portfolio?

Karl T. Haas

When we give our assumptions just remember those are just the same store assumptions.

Michael Bilerman – Citi Investment Research

Correct, that’s why I’m saying the snow and credit card would obviously have an impact on the entire portfolio?

Karl T. Haas

Yes, that’s correct.

Michael Bilerman – Citi Investment Research

Is there some level, just a dollar number that you can share with us in terms of the negative impact both the aggregate on the same store and the entire portfolio, just what normal was in 4Q in last year and what the estimate is today, and what credit card was last year versus what it is today?

Karl T. Haas

We actually don’t have that in front of us right now.

Michael Bilerman – Citi Investment Research

Spencer, you were pretty clear in terms of your Europe answer, how does Canada factor into the mix?

Spencer F. Kirk

Canada is part of North America and if and when there’s a good opportunity to move northward into Canada we’d love to participate. It’s very simple, we like Canada we just haven’t found the right opportunity.

Operator

Your next question comes from Paula Poskon – Robert W. Baird & Co.

Paula Poskon – Robert W. Baird & Co.

Just a follow up on your comment on real estate taxes, any markets that you’ve seen surprisingly higher or lower real estate taxes?

Scott Stubbs

No market, there’s no theme between markets it’s more property-by-property but no one individual market is significantly higher than it has been.

Operator

Your next question comes from Todd Thomas – Keybanc Capital Markets.

Todd Thomas – Keybanc Capital Markets

I just had a couple of questions on acquisitions. It sounded like part [inaudible] and increase in guidance for the remainder of the year was attributable to the performance of the acquisitions completed year-to-date, they’re running ahead of expectations. I was just wondering what you attribute that to?

Scott Stubbs

Our PRISA III properties are running ahead of what we originally used in our budgets to the tune of about $300,000 in the quarter. In addition to that, we’re talking more about timing of those properties. We originally estimated that six of those properties would close August 1st, they closed July 12th. In addition to that the other four properties in regards to the New Jersey/New York properties we estimated were going to close in late October, they ended up closing in August. Timing was a portion of it as well as the PRISA properties.

Todd Thomas – Keybanc Capital Markets

Then based on what you see today, what’s your general sense of the acquisition environment? If you exclude the PRISA acquisition is the level of acquisitions that you’ve seen something that you feel can be maintained for the time being?

Scott Stubbs

We feel like things are pretty competitive out there. We want to try to be disciplined and we feel like we’ve done that this year and we hope to be able to continue to do that going forward. If cap rates fall we have become a little bit more aggressive but we haven’t necessarily chased them all away. As we model things going forward, if you modeled something $100 million a year we would tell you that’s reasonable, if you did $500 million a year I think that’s going to be aggressive.

Todd Thomas – Keybanc Capital Markets

Then just lastly it sounded like you’re pretty firm about expecting the tough comps to be challenging to overcome in 2013. Is that a function of occupancy at record levels where there really isn’t that much room to improve on the occupancy front or is it because you feel there’s still a lack of pricing power based on what you see today? I know you haven’t provided 2013 guidance but it sounds like street rents are higher by 5% year-over-year, you’re still getting the existing customer rent increases so in terms of revenue growth can you just help me understand where that statement, where the caution that you started the call with, really stems from?

Spencer F. Kirk

The caution comes from this, NOI was up 7.3% a year ago we’re up 11.4% this year, you compound that it’s 19.53% so almost 20% over that time period. That’s pretty good and to expect double digit performance really puts us at the top end of anything that is historically the average. I don’t for one second want to delude myself or any of our investors or shareholders that continuously operating above what has been the historical norm is sustainable. So yes, it’s a great time in storage with no new supply and we’re taking market share from the smaller operators and the assumptions that were in the press release speak to a little more optimistic and buoyant environment in which we can produce results that are on the top end of what the historical patterns have been.

But, I just want to make sure that we do not come to expect double digit NOI growth for year in and year out and have that become something that is attributed to self storage because I don’t know that is something we can produce and I don’t want to set an improper expectation.

Todd Thomas – Keybanc Capital Markets

[Inaudible] the same caution if you think about just top line? If you just think about revenue growth do you feel the same about that or is it more the function of the combination with the lower operating expenses and purely on same store NOI growth where you feel that that’s going to be tough to replicate?

Karl T. Haas

From the top line standpoint we’ve benefitted from three drivers. One is the rate which we’ve gotten some traction on rate and that’s really good. The second is occupancy, we’ve had very good growth in occupancy and we’ve kind of gotten to almost a stabilized point on occupancy. The third is discount so the reduction in discounts and bad debt expense over the last two or three years. Both of those have been squeezed pretty hard, the discounts and bad debt and it’s going to be hard to replicate that kind of growth to have that boost the same store revenue growth. Unless we find something new or different it’s going to be hard. I read this in some of the analyst write ups on apartment complexes and I don’t think we’re that much different, the norm is not 5.5% to 6.5% revenue growth long term in our business. It’s hard to maintain and so I think not just us, we’re going to do as well if not better than our competition, that we’re going to drive, but it’s somewhat unrealistic to think that we’re going to be able to continue with 5.5% to 7% same store revenue growth.

Operator

Your next question comes from [Michael Knott – Green Street Advisors].

[Michael Knott – Green Street Advisors]

Can you just talk maybe a little bit about the stickiness of customers and whether that is increasing or not? Then I don’t know if you happen to know what percentage of your customers have been in place for a year or longer? Then maybe just speak to any seasonality along that number?

Karl T. Haas

Well, anticipating tough questions like this I have those statistics directly in front of me. Greater than 12 months is 58.6%, greater than 24 months is around 37%, and I’m not going to go into any more detail because then you’ll just remember those and want to know it every quarter. But, the good thing is that those numbers are slightly up from prior periods so we’re not seeing any deterioration of our client base.

Operator

Ladies and gentlemen we have no more questions in the queue at this time.

Spencer F. Kirk

Thank you everyone for joining the Extra Space management team today. This concludes our call. A final remark, to all those who have been affected by this super storm Sandy, we sincerely wish you the best for the best possible outcome as you go back to rebuild your personal and professional lives. We know it’s been a great disruption and there’s been significant loss and just know that we’re going to keep good thoughts for you. Thank you.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation you may now disconnect. Have a great day.

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