Apr 29, 2013
Executives
Clint Halverson - Director, Investor Relations Spencer Kirk - Chief Executive Officer Karl Haas - Chief Operating Officer Scott Stubbs - Chief Financial Officer
Analysts
RJ Milligan - Raymond James & Associates Nicholas Joseph - Citi David Toti - Cantor Fitzgerald Todd Thomas - KeyBanc Capital Christy McElroy - UBS Michael Knott - Green Street Advisors Steve Sakwa - ISI Group Michael Salinsky - RBC Capital Markets Tayo Okusanya - Jefferies Paula Poskon - Robert W. Baird Jeremy Metz - Deutsche Bank
Operator
Good day, ladies and gentlemen. And welcome to the First Quarter 2013 Extra Space Storage Inc.
Earnings Conference Call. My name is Chantelle, and I will be your facilitator for today’s call.
At this time, all participants are in listen-only mode. We will be facilitating question-and-answer session towards the end of this conference.
(Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today, Mr.
Clint Halverson, Director of Investor Relations. Please proceed, sir.
Clint Halverson
Thank you, Chantelle. Good afternoon, everyone.
Welcome to Extra Space Storage’s first quarter 2013 conference call. In addition to our press release, we’ve also furnished our unaudited supplemental financial information on our website.
Please remember that management’s 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, Monday, April 29, 2013.
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’d now like to turn the call over to Spencer Kirk, Chief Executive Officer.
Spencer Kirk
Good afternoon, everyone. As a participant on the panel earlier this year in New York, I was asked to describe in a single sentence, how I view the self-storage industry for 2013?
Being a man of many words, I described my expectations for the year simply as solid. The first quarter definitely produced very solid results, as FFO was up 39% and we experienced excellent same-store growth.
Demand for storage remains strong, new supplies diminimis and our occupancies are at record levels. Organic growth remains the primary focus for Extra Space.
During the quarter we reap the benefits of previous accretive acquisitions. In addition, we benefited from greater economies of scale, resulting from our growing third-party management platform.
Our footprint is over 9% larger than one year ago. Now I’d like to turn the time over to Karl, our Chief Operating Officer.
Karl Haas
Thanks Spence. During the first quarter we had great same-store revenue growth of 7.5%.
That’s on top of 6.3% we realized in first quarter last year. We added 62 properties to our same-store pool in 2013, consisting primarily of the 55 stabilize assets that required in 2011.
The addition these 62 assets to our same-store pool contributed roughly about 100 basis points to the same-store revenue growth for the quarter. Rental rates, rental trends remained strong and our square foot occupancy continued at record high levels.
Our same-store occupancy ended the quarter at 88.6%, up 2.9% over last year. We still don’t see significant volume of new development in the industry.
With good demand for the product and lack of new supply, we are able to increase street rates 3% to 4% on average for the quarter. We had strong expense control in the first quarter, increases in payroll and property taxes were partially offset by lower utility and advertising expenses.
Utilities were lower primarily due to solar panels added in 2011 and 2012. Advertising was lower in Q1 as we finished our elimination of the Yellow Pages.
Net operating income for the quarter was 10.8%, this is especially impressive when you consider the net operating income was up 10.8% in the first quarter of last year. This is even more impressive when you contrast the performance with long-term industry averages that are less than half of the recent levels.
Our results continue to be the best I have seen in my 25 years in the business. And now, I’d like to turn it over to Scott Stubbs.
Scott Stubbs
Thanks, Karl. Earlier today we reported first quarter FFO of $0.46 per share, $0.02 above the high-end of our guidance.
This beat can be attributed to better than expected same-store property results, lower G&A and lower interest expense. During the quarter, we added 55 properties to our management program, growing the managed properties count by over 30%.
We also purchased a partner’s interests into flagship assets located in Baltimore and Chicago. As of today, we have five additional assets under contract for $53.6 million, located in Hawaii, Maryland, North Carolina and Texas.
As of the end of the quarter, we had 450 wholly-owned asset, 279 joint venture properties and 236 per sites under management, for total of 965 properties. During the quarter, we actively managed the balance sheet and we reduced our weighted average interest rates by another 10 basis points.
We remain committed to exploring all financing options that have a long-term benefit to our shareholders and that increase the financial flexibility of Extra Space. This morning we updated our full year 2013 FFO guidance to be between the $1.94 and $2.01 per share.
We expect FFO for the second quarter to be between $0.47 and $0.49. I’ll now turn the time back to Spencer for some closing remarks.
Spencer Kirk
Thanks Scott. Our team produced a solid quarter and we look forward to producing solid results for the rest of the year.
Now I’d like to open this up with the Q&A session and we’ll Clint start that for us.
Clint Halverson
Thanks Spence. As in the past in order to ensure we have adequate time to address everyone’s questions, I’d like to ask that everyone keep your initial question brief and if possible limit it two, if time allows, we’ll address follow-on questions once everyone had an opportunity to ask their initial questions.
With that, we’ll turn the time over to Chantelle to start our Q&A session.
Operator
(Operator Instructions) Your first question comes from the line of RJ Milligan of Raymond James & Associates. Please proceed.
RJ Milligan - Raymond James & Associates
Hey. Thanks guys.
Good morning. Good afternoon.
Question on your same-store revenue expectations for the rest of the year, you guys increase your guidance and I’m curious what you think that mix is going to look like in terms of where is that revenue growth coming from, is it an increase in expectations for street rates, lower discounting, increases to existing customers and maybe if you could just talk about that mix?
Karl Haas
Hi. This is Karl.
Yeah. It’s going to be all those things.
We anticipate, rate is, we were seeing good ability to hold street rates up, our occupancy is holding nicely, the delta will continue to slightly decrease, because we don’t expect to get, that, the delta is not going to be above 3% and chances are it will continue to declines, so by the end of the year, probably less than 2%. But we’ll continue to have existing customer rate increases, discounts, we’ll see some decrease, probably the decrease will get less and less, because like with occupancy we have squeezed that pretty hard.
RJ Milligan - Raymond James & Associates
So versus two months ago when you gave 2013 guidance, which one of those levers do you think has more upside versus two months ago?
Karl Haas
Probably the occupancy, but rate also is, we are pleased with the ability to be able to hold our street rates up a little higher than we expected.
RJ Milligan - Raymond James & Associates
Okay. Great.
Thanks guys. I’ll get back in the queue.
Karl Haas
Thank you.
Spencer Kirk
Okay.
Operator
Your next question comes from the line of Nicholas Joseph of Citi. Please proceed.
Nicholas Joseph - Citi
Thanks. Spencer you mentioned that the new supplies diminimis right now, but could you put some numbers around that in compare to what we’ve seen historically?
Spencer Kirk
The expense of repeating statistics that we’ve talked about time from 2003 through 2007, a five year period, 13,011 self-storage facilities were built in the United States. That’s an average of 2,600 a year.
Last numbers that we saw reported by FW Dodge showed 196 total assets either under development or permits being pulled for significant redevelopment. So if you look at 200 versus an average of 2,600 a year its diminimis.
Nicholas Joseph - Citi
And do you expect that pickup in the future or when do you think supply could begin to return?
Spencer Kirk
I do expect it to tick up. I think supply is starting to already show in levels of interest.
We just came back from the self-storage show in Philadelphia and there was quite a bit of talk of development and new supply coming. But this is a property type, it typically takes one to two years to get an entitlement, about nine to 12 months to build and then two to four years to lease up, and even if you open up the spigot fully today, before you had meaningful supply that would be challenging this statement that supply is diminimis today, I think we are one, two, three years out before we see anything that’s pronounced.
Nicholas Joseph - Citi
Great. Thanks.
Spencer Kirk
Thank you, Nicholas.
Operator
Your next question comes from the line of David Toti of Cantor Fitzgerald. Please proceed.
David Toti - Cantor Fitzgerald
Hi. Good morning, guys.
Spencer Kirk
Hi, David.
David Toti - Cantor Fitzgerald
Hey, Karl, question for you the move-in move-out rate or the growth rate seems to have flipped in this quarter versus the fourth quarter. Is that sort of indicative in your mind of increasing strength versus maybe tapering demand or is it just a seasonal pattern from fourth quarter to first quarter?
Karl Haas
I’m not really -- I mean, I haven’t really looked at it that way. But we just continue to focus on the delta to last year.
And the reality is we push rates so that’s going to drive rentals down a little bit. But we’re looking at a combination of rate and occupancy to get to the right balance.
And so I really -- I try not to stay too focused on the rentals, I’m looking at more where is my occupancy and how is that compared to prior year and how is that -- and revenue management is driving the rates to try to get the maximum out of the properties. So it’s a little bit more complicated than simply looking at the rentals for the current quarter.
I mean, you could panic if you’re not careful as far as rentals could go down because we could drive rates up because we feel like we’re at or getting closer to the occupancy that we’re striving for.
David Toti - Cantor Fitzgerald
Okay. That’s helpful.
My second question is also to do with the gap in pricing between the Internet reservations and the Internet quote versus what you’re giving to the walk-ins and to the callers. And I know, historically, that’s been wider.
Has that kept changing at all given the sort of the new strength in the higher occupancy levels? Are you still pricing well above sort of the -- those are the rates?
Scott Stubbs
Our gap is still around 15%. We continue to test it.
There might be some -- we definitely feel that there is some properties to our markets where that gap could even be larger and some where it could be smaller. But in general, our gap is still 15%.
David Toti - Cantor Fitzgerald
Okay. So it’s really asset sort of inventory specific, it sounds like?
Scott Stubbs
Yeah.
David Toti - Cantor Fitzgerald
Okay. Great.
I’ll get back in the queue. Thanks.
Spencer Kirk
Thanks David.
Operator
Your next question comes from the line of Todd Thomas of KeyBanc Capital. Please proceed.
Todd Thomas - KeyBanc Capital
Hi. Thanks.
I am on with Jordan Sadler as well. Just a follow-up question on pricing, I know there are a lot of different ways that you price all of the units.
But, Karl, I think you mentioned that asking rents were up 3% to 4% year-over-year on average but I was just wondering, what’s the spread between the rent for tenants that moved out in the quarter versus tenants moving in, in the quarter? Are you replacing vacates with higher or lower rent paying customers at this point?
Karl Haas
Well, if you’re looking specifically at the tenants that are leaving and the tenants that are coming in, there is always going to be a gap because people that have stayed with us, lot of times especially they’ve been here with us for long time. They would have gotten multiple increases.
And so -- but we don’t focus on that. What we focus on is what our overall in-place rental rates are versus what our Street rates are?
And that gap is -- that was a big problem back in 2008, 2009, that hasn’t been a problem since 2009. And we’re keeping that gap pretty close.
Spencer Kirk
Yeah. This is Spencer.
One additional comment, Todd, as you look at the rates and what we’ve achieved in the first quarter, you also need to factor in that our discounts are down more than 10% in the same period. And it’s the rate plus the discount or the elimination of the discount that provides the juice.
Todd Thomas - KeyBanc Capital
Okay. So, what’s the spread today than between the Street rates and the in-line rent for the portfolio?
Spencer Kirk
They are almost right on top of each other within 0% to 2% kind of dependent on when it’s measured.
Scott Stubbs
Well, you got to keep in mind that we can change that really quickly by just pushing the Street rates. And so if you -- you have to look at it kind of over a longer period of time because I’m looking at it, it’s scheduled right now that has for 2013 and in a couple of months, as a percent of over and -- a couple of months, there was a percent down.
So, it goes up and down because we are constantly adjusting Street rates. But there is no deep issue there like there was three years ago.
Todd Thomas - KeyBanc Capital
Okay. Understood.
And then the second question, I was just wondering if you could give us a little color on the 55 properties added to the third-party management business in the quarter. And I was just wondering, if you could give us a sense for what’s in the pipeline, what you’re seeing for new contracts right now?
Scott Stubbs
The 55 assets, if you look at them -- it’s really primarily made up of three additionals. We did a portfolio of 29 assets that are located throughout the U.S.
and another 10 assets located in Texas and then five assets in the Chicago area. Those assets also fit our footprint very well.
They are all assets that we want in the portfolio for some economies of scale. We also get management fees, tenant insurance on those that are not necessarily all assets that we would buy.
So, I think it fits our footprint. We’re making money on those and we saw some significant growth in the quarter.
As far as the pipeline, it’s more onesie-twosies from here on. We don’t have any significant growth we’re projecting right now.
Todd Thomas - KeyBanc Capital
Okay. Thank you.
Operator
Your next question comes from the line of Christy McElroy of UBS. Please proceed.
Christy McElroy - UBS
Hey good morning guys. Just on page 15, with the same-store realized rent per occupied square foot, up about 0.3% year-over-year in Q1.
Your broader overall stabilized portfolio had a similar occupancy gain but looking at rent growth, it was more flattish year-over-year. Can you talk about that in sort of the context about how you are moving rents throughout your whole portfolio?
And if your same-store properties saw rent growth, does that mean that the rents declined at the rest of your properties. Was it necessary to go a little easier on rents to maintain or grow occupancy at those properties?
Scott Stubbs
Our revenue management system, Christy, doesn’t look at who owns the properties. It’s going to treat every property the same.
So with a sophisticated revenue management system, it’s focusing more on what -- how to maximize the revenue rather than the rate and the occupancy. So it’s a combination of rate and occupancy and it obviously does not look at all of the portfolio.
So I would tell you that that’s -- it’s basically, you’ll get some of that depending on the portfolio and the number of properties within the portfolio. You’d get some discrepancies or differences.
Karl Haas
Chris, this is Karl. I also think we probably have more occupancy opportunity on some of the third-party stuff than on owned.
And as a result, you’re going to see a little bit less rate growth because we’re going to be getting probably a little bit more -- looked at it in depth. But my guess would be that it’s more a result -- revenue management is going to be able to push rates more on more highly occupied -- or will be pushing rates more on more highly occupied properties and the owned properties we probably have more occupancy -- a little bit more occupancy there.
So that’s probably what’s occurring.
Christy McElroy - UBS
Okay. I guess I’m just looking at, if I just look at the same-store pool versus say just split out the 2005 Prudential JVs.
Occupancy is higher on the Pru JVs but the net rents per occupied square foot were down year-over-year. I am just trying to get a sense for what that -- what story is that telling me?
Spencer Kirk
Part of that is a little bit of make-up of the same-store pool. Karl addressed it a little bit in his comments but we had a change in the same-store pool this year where we added 62 assets and 55 of those assets were acquisitions that took place in 2011.
And those assets have really, we would say outperformed kind of the normal historical -- the legacy properties. In addition, there are -- we added eight properties that were coming from our development pipeline.
We’ve never changed our same-store definition but we do have a bit of a benefit from those properties in the current year.
Christy McElroy - UBS
If I look at just those 62 properties, what was the year-over-year occupancy change?
Spencer Kirk
If you look at -- the easier way to look at -- well, I don’t know if it is easier. If you look at the 2012 pool of 282 properties, the occupancy change there went up about 200 basis points in the new pool, the 344 assets your occupancy change went up by about 300 basis points, just under 300 basis points.
And the majority of that obviously is coming from these assets. I don’t have it specifically related to those assets.
Christy McElroy - UBS
Okay.
Karl Haas
We could look at this. And I am sure Clint could probably get back to you with -- or get out with more information related to those kind of in-depth analysis.
Christy McElroy - UBS
Thank you so much.
Spencer Kirk
Thanks Christy.
Operator
Your next question comes from the line of Michael Knott of Green Street Advisors. Please proceed.
Michael Knott - Green Street Advisors
Hey, guys. Spencer, well, you guys should have crushed your prior guidance for the full year just within a couple of short months.
So, I’m just curious how you guys thought about when you set your initial guidance, and then how you thought about where you go from here and obviously you picked -- you upped it quite a bit, but just curious sort of your thoughts looking forward on the 6.5 to 8.25 for the year?
Spencer Kirk
Good morning for you, Michael. Great question.
As we were looking at guidance for 2013 at the latter part of last year, we did not have perfect clarity, obviously. It’s easy to look back now that a third of the year, come on and say morning is behind us.
And with having gone through the low point of the season, the third week of February, Michael, is the slowest time of the year, historically, in self-storage and seasonality. And having gone through that and seeing what we’ve been able to do with the asking rate see -- having seen what we could do with eliminating discounts.
Having taken a look at where we think this business is going to go. Q3 and Q4 in 2013, we were taking a much more conservative approach.
And as we’ve looked at how the year is transpiring and unfolding, we would become more confident that the strong solid trends that we’ve been seeing will continue to play out for rest of the year. And once again, our guidance, it’s our best educated estimate as to what we think we can produce and produce with a high degree of confidence.
And with May just being around the corner and our busy season coming upon us, we have firmed up our guidance and said, yeah, we are confident that we can produce this kind of results. So that’s really a recognition that we’ve gone through the toughest part of the year, and now we have better clarity as to what rest of the year will hold for us.
Michael Knott - Green Street Advisors
Okay. Thanks for that.
And then second question would be just on the acquisition pace and your thoughts about your $150 million target for the year. How you feel about -- what you’re seeing out there, what you’re able to acquire, how pricing looks, how you feel about your cost of capital today?
And how that maybe changes or doesn’t change your appetite for doing acquisitions?
Spencer Kirk
Acquisitions environment are estimated still at $150 million for the year. I think with the two properties that we acquired and the five under contract worth $66.5 million and once again, a third of the year is behind us.
So, I would say, we’re reasonably on track for what is or could be expected. What we don’t know is the numerous conversations we’re having how they are going to play out and we are like every other self-storage operator that is publicly traded, we’ve got a nice cost of capital advantage versus the private guys both with debt and equity.
The challenge for us is to be disciplined and focused on accretive acquisitions as we talked about the results of the 55 assets that were purchased in 2011 and 2012, part of our success Michael is because we were disciplined and we went after acquisitions that intellectually and financially made sense in the short term, mid-term and the long-term. And for us, we want to remain disciplined even though we recognized with an implied cap rate with a five handle on it.
That is not the time to get crazy or become irrational because things can and will change. And furthermore, we recognize that a blend between debt and equity is the strategy that this company tends to employee and going out after acquisitions.
So, I can say there’s an incredible amount of money chasing too few opportunities. Cap rates have a lot of pressure on them, and Extra Space wants to be selective and bring in those that fit our footprint operationally and also to meet the short-term intermediate and long-term objectives.
Michael Knott - Green Street Advisors
Okay. So with that you are not thinking about going into development the way Public Storage has since you had shut that down and that was sort of a permanent decision even though the acquisition environment is pretty aggressive or heated it sounds like?
Spencer Kirk
Yeah, it’s heated. But still there are opportunities out there.
Last year, we did $700 million of acquisitions, Michael and $500 million were off market. And I don’t know what the number will be this year, but I think that there are relationships that we enjoy that say we will participate in the open-market acquisition and we will participate in some off-market acquisition.
But we are not developing to underscore that one more time, if I could.
Michael Knott - Green Street Advisors
Thank you.
Spencer Kirk
Thanks, Michael
Operator
Your next question comes from the line of Steve Sakwa of ISI Group. Please proceed.
Steve Sakwa - ISI Group
Thanks. Good morning.
I guess my first question, maybe it is for Karl. So just talk a little bit about the expense growth or lack thereof.
I mean, how much of -- I know the business has become more and more technology driven and more driven by all the algorithms that you do on the Internet and I am just wondering how sustainable is a kind of 1% to maybe 2% expense growth figure. And kind of what are you saying on the property tax side that maybe hasn’t come through yet like we are seeing in another real estate sectors right now?
Karl Haas
Well, I don’t think we are seeing the 1% to 2% growth. We are saying that the growth will be higher than that.
We continue -- I mean, what we are looking at is year-over-year and so whatever we put in the banks last year as far as that year-over-year and not having the increase, well, then this year we start and we start over again. We are continuing -- there are certain things that we are continuing to get benefit of that’s going away.
Yellow Pages, that’s a big part of the savings that we have this quarter. And as we are almost totally out of it, it’s not going to -- we can’t go to negative growth on it because we are going to have zero growth and zero expenditure.
And we will continue to spend more on the Internet, so that’s going to increase. Our payroll expense as you can see, we are seeing the growth this quarter is a little bit exaggerated because we had a special bonus in there.
But payroll expense is going to run 3.5% to 4% growth. The utility, as we continued to invest in the solar panels, we might be able to hold that down and actually have some -- our actual electricity expense I think was down by 10%.
But actually natural gas was up by 9%. So, luckily, we use less natural gas and electricity.
So that was a bigger savings. We continue to find things on office and expense that gives us the benefit.
But once again, it’s harder and harder. So, I mean, I think our guidance for the rest of the year is more -- not that far from -- we lowered a little bit because we got some benefit in the first quarter.
We are still saying, we’re going to end the year at 2.5% to 3.25% growth and that’s pretty realistic. I mean, there is only so much we can cut.
And so we’ve done a great job in the last three or four years and maybe we’ll find something we haven’t discovered, but I don’t what that’s going to be. And as far as property tax, I’ll let Scott talk about that.
Scott Stubbs
We’ve estimated kind of 3% to 4% is what we’ve estimated. We’ve done that for the past several years and it hasn’t necessarily jumped at that rate.
But we’re expecting the municipalities to reassess our properties on an annual basis.
Steve Sakwa - ISI Group
Okay. And then just I guess a small question.
In terms of like maintenance CapEx across the portfolio, what are you guys budgeting for this year?
Spencer Kirk
I think it’s -- you mean cents per square foot?
Steve Sakwa - ISI Group
Yeah, if you wanted to give it that way, that’s fine.
Spencer Kirk
Yeah. I think it’s in the range of $0.35.
It really varies by property and type and that’s CapEx. Repairs and maintenance runs about the same and it’s been running the same.
Our maintenance, I mean this one thing we haven’t done is we’re trying to be careful to spend the money we need to keep our properties at the level that our customers expect. We increased the rents a lot and we need to give that back to them.
Steve Sakwa - ISI Group
Great. Okay.
Thanks
Steve Sakwa - ISI Group
Thanks, Steve.
Operator
Your next question comes from the line of Michael Salinsky of RBC Capital Markets. Please proceed.
Michael Salinsky - RBC Capital Markets
Good morning, guys. Karl, first question for you.
Can you talk a little bit about street rates, how that progressed throughout the quarter and were you guys ending the quarter up on a year-over-year basis? And also what you would need to see in the industry to give you more confidence in pushing street rates a bit more aggressively, kind of back to the 2006, 2007 levels?
Karl Haas
Yeah, Mike. It’s up and down constantly.
And actually in April, we went up little more. But it’s -- we’re constantly and I guess the short answer is I don’t control rates, our revenue management group does and they are constantly tweaking it.
So, it is going up and down. I think, Scott, probably has something in front of him that he can tell you by month-by-month if that’s what you are looking for.
Scott Stubbs
Yeah, our rates as far as dollar amount per unit have been pretty flat. But if you look year-over-year, as Karl mentioned, they were 3% to 4% on average for the quarter depending on when you look at that what day, what time because those rates are dynamic and they are moving.
They’ve been probably as low as 2% and as high as just over 5%.
Karl Haas
The good thing, Mike is that what we are seeing is we are at a much higher square foot delta than we thought we were going to be and yet being able to hold our rates at the 3% to 4%. It is a good combination and certainly it is reflective of no new supply and I don’t think we’re unique.
I think you are going to see our competitors probably will report things probably similar.
Michael Salinsky - RBC Capital Markets
Is it your expectation that as occupancy gains in the second half of the year moderate that you’re going to be able to push a bit more on street rates?
Scott Stubbs
We hope.
Michael Salinsky - RBC Capital Markets
Okay. And then my second question just -- Scott, just to go back to your comments, sound a little bit more open than you typically have been on just on the secure debt front, does that suggest you guys are opening doing term loans and moving to more of the balanced financing strategy kind of going forward as oppose to…?
Scott Stubbs
We will say Mike that we are -- we would like to have some optionality. We would like to have -- in a perfect world, we’d like to have a tranche of secured.
We’re primarily going to be a secured borrower. But if we had an unsecured tranche or even a preferred tranche, we feel like that will be good for the company.
Obviously, it depends on terms of those types of loans and rates.
Michael Salinsky - RBC Capital Markets
So, you are okay with corporate covenants at this point?
Scott Stubbs
We are not looking to do corporate covenants at this point, but it depends on the covenant some things you might consider.
Michael Salinsky - RBC Capital Markets
Thank you.
Operator
Your next question comes from the line of Tayo Okusanya of Jefferies. Please proceed.
Tayo Okusanya - Jefferies
Yeah. Good afternoon.
Just going back to Steve’s question with regards to acquisitions, could you talk a little bit about cap rates and what’s your opinion on markets right now for Class A and B assets?
Spencer Kirk
Tayo, its Spencer. Class A and Class B, once again we’ve got to be a little more specific on this.
Let me go back to the quality scoring that we use internally, which by the way has a great deal of subjectivity, even internally personality-by-personality here on Extra Space. But there is the quality of the physical asset itself.
There is the quality of the market in which that asset is located, and then there is the quality of the location of that asset within the market. And so if you want to talk a Class A asset in a Class A market with the main and main location, we see cap rates that are in the five range, maybe even some drifting down a little lower.
If you want to talk mid-market and the asset in the secondary market, Tayo, you might be high 6s, low 7s. And for us Extra Space has said that we want to try and do our acquisitions with those assets that are in the six and seven range.
We need to have a spread. We need to be intelligent.
We need to be taking a long view on this because interest rates can and will change, where you are buying today property performance and other things could be affected and to go in there and acquire just to get large is not part of our strategy. We want to be disciplined.
I don’t know if that gives you the color, but we’ve seen stuff starting with a five and going up and above that. But, yeah, that’s the market kind of in the six to seven range.
Tayo Okusanya - Jefferies
Okay. That’s helpful.
And then second of all, it doesn’t seem like you’ve got any of your pushback in the first quarter from pushing rent despite consumers generally are paying higher taxes. Were you kind of surprise at that and what does that kind of suggest to you regards to how much you can continue to raise the rents on existing tenants going forward?
Spencer Kirk
What it suggests, Tayo, is that our existing customer rent increase program, which we test and retest continues to persist exactly the results that we have come to expect. The tax increase at the personal level has not to our understanding or analysis had any material impact whatsoever.
And we’re going to continue to send out rate increases in that 8% to 9% range, running about 50,000 customers a month. We’ve learned and learned it well long ago that once the product is in storage it is very sticky.
There is a great deal of adhesion and people aren’t going to rent a U-Haul truck and take a Saturday morning, and move out for the sake of 8, 9, 10 bucks. It just doesn’t happen.
Good economies, bad economies, higher taxes, lower taxes people don’t move out. It’s too much hassle.
Tayo Okusanya - Jefferies
Well said. Congratulations on crushing it again this quarter.
Spencer Kirk
Okay.
Operator
Your next question comes from the line of Paula Poskon of Robert W. Baird.
Please proceed.
Paula Poskon - Robert W. Baird
Thank you. So speaking of crushing, just looking at the market-by-market numbers on page 18, the Cincinnati Northern Kentucky region has had stellar performance.
And as we reflect back on when you first bought those assets, I remember there was a fair amount of skepticism about going into such markets. So can you just talk a little bit about how your acquired assets over the last, say, two years are performing relative to how you underwrote them?
And then secondarily, do you think it’s these kinds of markets where you’re going to see the most accretive opportunities going forward?
Karl Haas
Paula, it’s Karl. I’ll start and I’ll let Scott finish.
But there are certain acquisitions where going in, we feel like we can have a lot of impact. And Cincinnati was one of those, the prior operator, the things like didn’t take credit cards and had little bit restricted access hours and things like that that we feel going in can have an impact.
And then obviously, our -- both our revenue management and our internet applications have also had a significant impact. We’re a little worried on that portfolio because there’s some rural properties in there that we’re worried that the Internet may not have quite the impact that it does elsewhere.
But it’s turned out well and we’ve had that in a number of other acquisitions where queerly we have an advantage. I mean there is an advantage to being bigger, having better resources and our revenue management group is pretty sophisticated.
And I’ll put them up against anybody in the industry but especially local operator. I’ve been in this business 25 years.
And my guts tell me we couldn’t do some of the things we do but because of the data, the really smart guy, less smarter than me that are making these decisions. They’re doing things that we look at -- I don’t know about that and it holds.
I’ll let Scott maybe add some more color.
Scott Stubbs
As far as the underwriting goes, Paula, we are very consistent in how we underwrite things. So our acquisition groups bring things to our real estate committee.
And I would tell you that we don’t miss badly as far as our underwriting goes. I would tell you if anything, it may be slightly conservative.
I mean in Cincinnati we didn’t pro forma at this kind of growth. And you’d rather be surprised on the upside.
As far as markets go, we continue to look at all markets. I think obviously that you prefer to buy in New York City and Los Angeles and Washington D.C.
but pricing might not make sense. So if there is a market such as Cincinnati that’s still a major metropolitan area and the pricing is very accretive to us, it’s something we’ll look at it if it makes with our footprint.
Paula Poskon - Robert W. Baird & Co., Inc.
Thanks Scott and Karl. And Spencer, sort of, a bigger picture question for you just in terms of valuation.
I know obviously a lot of folks are talking about the implied cap rates for this sector and relative to historical norms. Given the technology component of its driving performance in this sector, do you think this sector is just permanently re-priced at a lower implied cap rate level?
Spencer Kirk
I would hope that it is permanently re-priced because we have proven -- and when I say we, I try to include the other public operators. We have proven that the Internet is not the great equalizer.
It is the great divider and the CASM is not only widened, the rate at which it is widening is accelerating. And I just think that we as the public operators with national footprint in the sophisticated systems that Karl alluded too, can and should get credit because it is a highly fragmented business.
Most of our competitors do not have to wherewithal to begin to do what we do. And I think that when you put up in the case of Extra Space at 39% FFO growth year-over-year, I would hope that we would be treated more as a growth company unless as just a me-too storage operator with a yellow page ad and some local marketing flyers going out to the local apartment complexes.
The world changed and it’s changed permanently.
Paula Poskon - Robert W. Baird & Co., Inc.
Thank you very much. That’s all I have.
Spencer Kirk
Thanks Paula.
Operator
Your next question comes from the line of Jeremy Metz of Deutsche Bank. Please proceed.
Jeremy Metz - Deutsche Bank
Hi. Just going back, you just made a comment about D.C.
as a market, and New York and LA where you prefer to buy. But just looking at the market, it looks like it’s underperformed some of your other major markets a little bit.
Could you just give us a little color on what’s going on in that market?
Karl Haas
Yeah. This is Karl.
I actually happen to be traveling in the D.C. market last week.
It’s still a great market and but we pushed it very hard. It was kind of one of the earlier high growth markets and I think in some cases we might have gotten, our revenue management system is very, very good, but it’s not perfect.
And sometimes I think, we kind of have tendency to maybe push it a little bit too hard and that I think is a case where we pushed it a little bit too hard. And also in general there’s, while the rest of the countries feeling really, really good, there’s a lot of concerns in the D.C.
market about sequestration and I heard a lot of ad hoc comments about governmental agencies that had units that are moving -- that were going to move in, that didn’t move in or moving out. So there’s a little bit of that going on as well.
But if I had to bet on a market long-term we love the D.C. market and it’s -- the great part of that it is, whereas the suburbs of Cincinnati could have a lot of new properties built some day and may -- and we probably will be faced with that.
The D.C. market it takes -- we just opened a property, our third-party owner just opened a property, they’ve been working on for 10 years and -- in the Gwynn, Virginia.
And it’s you go into markets like that and there is not going to be a lot of new competition there, and there are a ton of people with a lot of money and that’s a good formula for us.
Jeremy Metz - Deutsche Bank
Okay. Great.
I appreciated, the color and along that same line. I know you are not looking to sell any assets, but just looking at market like Houston where you know occupancies below 80% and the strong bid for storage assets you mentioned earlier.
Are you changing that thinking or I mean would you look at maybe looking to call some of your assets that are either underperforming or older?
Spencer Kirk
Jeremy, it is Spencer. We are trying to build a company, there might be an asset or two that we call, but realistically to Karl’s point, we are trying to invest in our assets to keep them relevant in the market and we will yet be more aggressive in terms of recognizing that as the portfolio ages, we’ve got to invest additional dollars to make sure that they stand competitive in each of these markets in which we are doing business.
But no, we are not trying to balance portfolio, we are trying to grow one.
Jeremy Metz - Deutsche Bank
Okay. Great.
Thanks, guys. Appreciate it.
Spencer Kirk
Yeah. Thank you.
Operator
Your next question comes from the line of Todd Thomas of KeyBanc Capital. Please proceed.
Todd Thomas - KeyBanc Capital
Yeah. Hi.
Thanks. Just a follow-up on the Cincinnati, Northern Kentucky properties, the performance does look strong, but effective rents stick out at just under $7 a foot.
I was just wondering is that a function of concessions or I mean can those properties get $9 or $10 rents overtime or is that really just a lower priced market? And then secondly, I was wondering, you’ve owned these assets now for a little over 18 months.
I was just curious where the yield on that portfolio of properties is today, maybe you can remind us where the in place yield was at the time you acquired them in mid-2011?
Karl Haas
This is Karl. I’ll answer part of your question.
Scott can talk about the yield. But $6 and $7 is better than $5 and $6, and that’s what we’ve grown it, that’s blended rate, in some of these properties are very rural and $6 is a great rate in some of those rural markets.
Some of them are making, are in the $9 range. So it’s kind of all over the place but I don’t think we are going to get that total portfolio to $9 anytime soon.
What we’ve been able to do though is the result, there was a lot of occupancy opportunity and you can only go. You are not going to be able to drive the rate tremendously above what the market is, but if you buy a group of properties that are 75% occupied, 80% occupied, you can drive them to 90% or 92%, and that’s a lot of what we’ve been able to do on those properties.
Scott?
Scott Stubbs
As far as the yield, we haven’t necessarily broken it out. We can tell you that in the north of an A cap, well, north of that.
Todd Thomas - KeyBanc Capital
That’s what it’s yielding today?
Scott Stubbs
If you look at the cap rate and where we bought it, that is correct.
Todd Thomas - KeyBanc Capital
Okay. And then just one last question on guidance, interest expense, it looks like the first quarter annualized would be a little bit below $70 million.
You are forecasting $72 million to $73 million. I was just wondering what assumptions that you’re making for the balance of the year that would cause interest expense to increase towards the midpoint of that range?
Scott Stubbs
Timing of some of those loans and as we refinance or put loans on for acquisitions your debt will go up slightly, primarily through acquisition.
Todd Thomas - KeyBanc Capital
Okay. Great.
Thank you.
Spencer Kirk
Thanks Todd.
Operator
Your next question comes from the line of Christy McElroy of UBS. Please proceed.
Christy McElroy - UBS
Hi. Thanks.
Just with regard to the 100 basis points added to the revenue growth rate from the 62 properties added to the same-store pool, does that include the impact of tenant insurance revenues on the newly added properties, presumably for the acquisitions that was pretty low when you bought them?
Spencer Kirk
Yeah. But the majority of that increase is actually from rental revenue than from tenant insurance.
Christy McElroy - UBS
Okay. And you talked about discounts and asking rents, how much are you pushing existing customer rents currently?
Spencer Kirk
In the range of 8% to 9%.
Christy McElroy - UBS
8% to 9%, and are all those numbers representative of your overall portfolio or just your same-store properties?
Spencer Kirk
Overall portfolio, we don’t differentiate.
Christy McElroy - UBS
Got you. Okay.
Thank you.
Spencer Kirk
Thanks, Christy.
Operator
(Operator Instructions) Your next question comes from the line of Michael Knott of Green Street Advisors. Please proceed.
Michael Knott - Green Street Advisors
Hey, guys. Just a follow up on, Spencer, your comment earlier about the discounts coming down, I think you said they were 10% less, just wondering if you can put a little more color around that.
How much juices are left to squeeze out of the discount when and compared to say the top of the last cycle? And then also is it possible to think about the your rent gain for the quarter year-over-year in terms of the three different buckets, how much came from discounts receipting, how much came from street rates and how much came from your existing customers?
Spencer Kirk
I’ll let Karl take the second half of the question. The first question, Michael is, so our discounts were down more than 10% for the quarter, which we were pleased about.
And as we push our occupancies and go through this busy season and everything else, I think you will see that percentage shrinking. Just don’t know that it’s sustainable, obviously, we could be pleasantly surprised, but I think realistically, the asking rate will be pushed first and foremost, we’ll couple that with the discount and we’ll see what the effective prices that we get on each of the units, but I see that coming down.
Karl Haas
Michael, as far as where the 7% plus rental rate growth came from this quarter, I think that almost half of it came from occupancy. We had almost 300 basis points from occupancy.
Rates were 3% to 4% on average up for the quarter. So, another half of what’s left came from the rate growth, street rate growth, as well as the decrease discount.
So, your effective rate that you’re charging incoming tenant then the rest came from existing customer rate increases.
Michael Knott - Green Street Advisors
Okay. And then just a question on Los Angeles, it looks like that’s now the biggest component at least of the wholly-owned stabilized group.
It looks like you had sort of above the portfolio average performance this quarter, which I don’t think you had. It was below average in 2012, just curious if you’re seeing a decided turnaround in that region?
Karl Haas
This is Karl. Yeah.
It’s -- it suffered for two or three years and now it’s come around. It’s a great market for us.
We have very good product there and good location, good quality, but the market has been a struggling market. There is a lot of self-storage there and it’s coming back nicely though.
Michael Knott - Green Street Advisors
Okay. Thanks.
Spencer Kirk
Thanks. Michael.
Operator
At this time, there are no additional questions in the queue and I would like to turn the call back over to Clint Halverson for closing remarks. Please proceed.
Spencer Kirk
Actually a name change, Spencer. We appreciate your interest in Extra Space today and we look forward to the Q2 earnings call in 90 days.
Thanks very much. Have a good day.
Operator
Thank you for your participation in today’s conference. This concludes the presentation.
You may now disconnect. Have a wonderful day.