Aug 2, 2013
Executives
Clint Halverson - VP, IR Spencer Kirk - CEO Karl Haas - COO and EVP, Operations Scott Stubbs - CFO and EVP
Analysts
Todd Thomas - KeyBanc Capital Market David Toti - Cantor Fitzgerald Christy McElroy - UBS Michael Knott - Green Street Advisors Kevin Ken - SunTrust Michael Salinsky - RBC Capital Markets Paula Poskon - Robert W. Baird Todd Stender - Wells Fargo RJ Milligan - Raymond James & Associates Michael Bilerman - Citigroup Jordan Sadler - KeyBanc Capital Markets Ross Nussbaum - UBS Michael Knott - Green Street Advisors Tayo Okusanya - Jefferies
Operator
Good day ladies and gentlemen and welcome to the second quarter 2013 Extra Space Storage Earnings Conference Call, my name is Derek and I'll be your operator for today, at this time all participants are in a listen only mode, we shall facilitate a question and answer session at the end of the conference. (Operator Instructions), as a reminder this conference is being recorded for replay purposes.
I will now like to turn the conference over to Mr. Clint Halverson, Vice President, Investor Relations.
Please proceed.
Clint Halverson
Thank you, Derek. Welcome everyone to Extra Space Storage's Second Quarter 2013 conference call, in addition to our press release we've furnished unaudited, supplemental information that you can access on our website, please remember that management's prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act.
Actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the company’s business. These forward-looking statements are qualified by the cautionary statements contained in the company’s latest SEC, which we encourage our listeners to review.
Forward-looking statements represent management’s estimates as of today, Friday, August 2nd, 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.
With that, I’d now like to turn the call over to Spencer Kirk, Chief Executive Officer.
Spencer Kirk
Thanks Clint. Hello everyone.
Q2 was another excellent quarter for extra space, fundamentals remained strong and while there has been an increased interest in new construction we have yet to see any significant new supply in the markets in which we are located. Our technology platform, Advanced Revenue Management System, internet prowess and unique operating structure have again produced outstanding FFO growth, FFO was up 32% over the same quarter last year and we were able to increase our dividend by 60%, our disciplined and creative approach to sourcing and executing on acquisitions that enhance shareholder value has been validated.
During the quarter we placed two portfolios located in core markets under contract for over $300 million, these transactions are a great representation of the value in building and cultivating mutually beneficially relationships. Now I'd like to turn the time over to Karl.
Karl Haas
Thanks Spence. During the first quarter we had same store revenue growth of 7.8%, that was on top of 6.7% we realized in the second quarter last year, rentals and vacates are within historical norms, our square foot occupancy remained with record high levels ending the quarter at 90.8%, that's up a 1.8% over last year.
Street rates were up 3-4% for the quarter, discounts for new customers during the quarter were down 12% and the percentage of new customers receiving a discount was down over 10%, year over year. We saw expenses shift towards the norm, increases were due to growth on payroll, insurance and repairs and maintenance expense.
Net operating income for the quarter was 10.4%; this is notable when you consider that net operating income was up 10.2% in the second quarter last year. Higher rates, lower discounts, stable rental demand and high occupancies continue to support record high performance.
With that I'd like to turn it over to Scott.
Scott Stubbs
Thanks, Karl. Last night we reported FFO of $0.50 per share, this is $0.01 above the high end of our guidance, this can be attributed to better than expected same store property and tenant insurance results.
During the quarter we purchased four assets for approximately 48 million located in Hawaii, Maryland and Texas. Subsequent to the end of the quarter we closed on two additional properties for approximately $9 million, located in Arizona.
Year to date we have closed on just over $70 million in acquisitions. As of today we have an additional 37 assets under contract for just over 300 million.
20 of these assets located throughout Northern and Southern California are from the previously announced OP unit transaction for 206 million, the remaining 17 assets are located in seven states. We anticipate that these acquisitions will close by early in the fourth quarter.
During the quarter we continue to evolve our balance sheet and execute it at $250 million exchangeable bond offering. This unsecured financing fits well with our commitment to increase our financial flexibility.
Based on our acquisition activity our new data estimates and our operational performance we have updated our full year 2013 FFO guidance to be between a $1.96 and $2.01 per share. We expect FFO for the third quarter to be between $0.49 and $0.51.
These estimates include non-cash interest expense and acquisition related costs. When you adjust for these items FFO is estimated to be between $2.01 and $2.06 for the full year and between $0.51 and $0.53 for the third quarter.
With that, I'll now turn the time back to Spencer.
Spencer Kirk
Thanks, Scott. Our results show that we have the platform, the properties and the people to propel our performance.
Same store results were strong but more importantly we had another outstanding quarter in FFO growth because of the multiple components or levers that we used to drive profitability. The operating environment remains positive and we remain focused in our efforts to optimize occupancy, maximize revenue and minimize expenses, we believe we will continue to produce double digit FFO growth for the foreseeable future.
Let's turn the time over to Clint to start our Q&A session.
Clint Halverson
Thank you, Spencer. In order to ensure we have adequate time to address everyone's questions, as in the past I'd remind everyone to keep your initial questions brief and if possible limited to two, if time allows we'll address follow on questions once everyone has had an opportunity to ask their initial questions.
With that, we'll turn it over to Derek to start our Q&A session.
Operator
(Operator Instructions) and our first question is coming from the line of Todd Thomas, KeyBanc Capital Market.
Todd Thomas - KeyBanc Capital Market
I'm on with Jordan Sandler as well. First question, just in terms of acquisitions it looks like acquisition activity overall appears to be ramping up a bit and I was wondering longer time, I know the business is scalable so adding property to the platform makes sense, but I would just be curious to hear your thoughts about the company's appetite to invest today.
Spencer Kirk
Todd and Jordan, this is Spencer. We are seeing a large volume of acquisitions coming to the market, mainly in smaller one off transactions, it's interesting to note that seller expectations are incredibly, might even be characterized in some cases as ridiculous, so for Extra Space we want to participate where it makes sense, we want to remain disciplined and make sure that what we do adds value for our shareholders.
Todd Thomas - KeyBanc Capital Market
Okay, so it's been a few quarters since anything's really surfaced from within the joint venture portfolio, are you having any discussions with your partners there, any indication that there could be some opportunity there in the near term?
Spencer Kirk
What I can say about the JV relationships, you know we've got 279 properties in JV relationships, we do have discussions, we give annual reports to our partners, if not quarterly reports in some cases and of course we're wanting to engage in the dialogue. But we don't want to be too eager, because that's going to drive up the price and be counterproductive.
And so as I have said in the past, what we want to do is be a great partner and when our partner decides that it's time to monetize their assets, already will enable to transact and hopefully will be able to do something that is win-win situation for both parties.
Todd Thomas - KeyBanc Capital Market
If I could just sneak just one in for Scott. I was just curious about the thought process behind the exchangeable notes offering, maybe relative to a more traditional five year off bank financing.
And I was just wondering in terms of the pricing also, I think you got priced a little bit outside of the range that you are initially targeting 1.2% to 2%.or so. So just curious if you received any feedback maybe wondering why price where it did relative to your initial expectations?
Spencer Kirk
I think the initial expectations we went in with were probably more relevant to the market as it had been, maybe two weeks or month prior to that, the market was pretty choppy, the week before, and then month after. So we have been probably a little bit more optimistic than maybe we should have been.
We feel like we priced a deal that was very beneficial to company, its two and three deal with a 30% opt as far as the exchange feature. And we feel like it's going to be a good option for shareholders, I mean the largest benefits for us is unsecured, so it frees up a large group of properties and enables our balance sheet which has become that much stronger because you have fewer properties tied to loan.
Operator
Your next question is from the line of David Toti, Cantor Fitzgerald.
David Toti - Cantor Fitzgerald
Spencer question for you, you talked about sort of positive fundamentals. If we think about the rapidly growing supply demand and balance assuming that the macro backdrops did more or less the same.
What does '14 look like to you relative to industry fundamentals pricing power and could the supply outlook change relatively quickly next year given these kind of conditions?
Spencer Kirk
Lots of question in there David, look 2014 I remain optimistic for a few reasons. First is like the other operator, large operators for publicly traded companies, it appears that we're all kind of in record territory and occupancy that bodes well for perhaps pushing street rates and minimizing discounts.
The new supply question is one that there is a lot of talk, there is a lot of chatter, there is perhaps even some activity, but to get a self-storage properties located in a great location is not a six month deal. It's a multi-year deal to get the entitlements and permits and everything to allow you to build where you are in a retail corridor rather than at the end of some cold (inaudible) in some industrial part.
So with a one year construction timeframe on top of that and a lease up period of two to four years I still maintain to the best of my ability prognosticate that in 2014 there will not be meaningful competition from the news supply chain. It just takes too long to bring properties to market and have a broad impact.
Last and final point if you look at the natural population increase plus immigration the country is growing at about 1% a year about 3 million people. You would need to have on order of 500 to 550 new self-storage properties per year coming into the market to just keep pace with what the population is doing.
And so to our way of thinking 2014 we’ve got strong Internet presence, limited new supply, record occupancies and I see no reason why 2014 won’t be a good year for all of the larger operators.
David Toti - Cantor Fitzgerald
And then my second question just has to do more with technology and retail. If we think about your sort of technology advantage the success you’ve had with the reinsurance product.
What could Extra’s Phase II by way of additional retail delivery, given a relatively massive and captive business to consumer channel? Have you guys explored potentially expanding the sort of secondary kind of high margin retail product delivered?
Spencer Kirk
We have, David, we’ve done that for 15 years. I’m sure other operators have done it for more than 30 years.
And what we’ve learned if I could be really direct customers want five things from the self-storage providers. They don’t want prepaid phone cards, they don’t want cell phones, they don’t want car washes and convenient stores build into the side of a self-storage facility, they want something that is conveniently located to their home.
It’s clean. It’s secure.
You’ve got someone confident curdiest behind the counter and it’s a competitive price. You can’t be out of balance.
You deliver on those five elements and customers are happy. Focus group after focus group has just deliver on these five things and will store with you.
You start missing or getting distracted, we’re going to look somewhere else.
Operator
Your next question is from the line of Christy McElroy, UBS.
Christy McElroy - UBS
Good morning, guys. You’ve been talking for some time about a second half slowdown in revenue growth, and your guidance certainly implies that.
Do you still expect your toughest comp to be occupancy? And just from a strategic standpoint, does public storages report last night of 95% occupancy level, give you some encouragement of potentially achieving those levels as well or do you think that you’ll ever try to manage your portfolio to that higher than occupancy level?
Karl Haas
Christy never is a long time. So, I never thought that we’d see any operator operating at 95%.
Public does a lot of things very well and it seems to be working for them. I don’t anticipate us going to 95% but I would say that as they get to those levels and continue to do well that it makes us think that we might be able to push what we see or what we have previously thought of as our highest level that we might have some more upside.
But, our revenue management system really we put a lot of stuff, lot of different metrics in there, it’s based on whole lot of different metrics, the competitor’s prices, our occupancy, occupancy by type and everything else. And it spits out what our pricing should be, and kind of balances out the occupancy with the rate and the discount get to what we think is the right answer.
So we very well could go higher but right now it’s not… we’re not anticipating getting to 95% anytime soon.
Christy McElroy - UBS
And, Karl, just looking at the acceleration in your realized rent growth from last quarter. Can you talk about the biggest impact to that number going from 3.3% in Q1 to 4.9% in Q2 and maybe quantify the drivers?
I don’t know if I missed those, I think I heard you say the discounts were down 12%. But if you could also say what street rents were year-over-year and where you are pushing in place customers?
Karl Haas
The components, what we call the waterfall is 2% from occupancy growth, 3% from street rate, 1% from the delta in the ECRI or existing customer rates and 1% from the reduction in discounting.
Christy McElroy - UBS
And what were your street rents year over year?
Karl Haas
They were up about 3% to 4%. But keep in mind that’s the actual street rates.
That gets supplement with the reduced discounting that really helps to drive the overall growth.
Christy McElroy - UBS
And did you mention I know you have disclosed this in past quarters the impact on same store revenue growth of the newly added properties for this year?
Spencer Kirk
It's about 80 basis points.
Karl Haas
It has been running like 0.8% to 1%
Operator
Your next question is from the line of Michael Knott, Green Street Advisors
Michael Knott - Green Street Advisors
Karl, just to follow up on that, I am curious if I heard you right the revenue growth impact from street rate increases was 3 to 1 compared to the existing customer increases, is that an atypical relationship? Is that new?
Karl Hass
No. This is pretty consistent with what we have been have seen.
Michael Knott - Green Street Advisors
Okay because I was under the impression that street rents were not really strong enough to drive revenue growth so as customers moved out and new customers moved in, I thought most of the rent growth was coming from existing customers.
Karl Hass
Well, you got to keep in mind that what we are talking about is delta year-over-year and our ECRI we have been aggressive on ECRI all the way for the last six or seven may along that eight years, so while it is a big driver of our revenue growth and it does increase what existing customers are paying the delta in what we are doing as far as increases has not gone up that dramatically, does that clarify?
Michael Knott - Green Street Advisors
Yes that helps thanks. And then Spencer, I am just curious if you can talk about Ken Woolley stepping down as CIO and what impact do you think that may or may not on your company’s ability to continue to grow externally and just what sort of the long term plan for that role in terms of CIO, thanks.
Spencer Kirk
It’s really simple Michael. Ken is a very talented man; he has been Storage for 36 years.
With Ken's intellect he will obviously also has a broad and diverse set of business interest and the change, the transition I believe is going to allow Ken to focus on some of those outside interest while still actively engaged in the growth and strategy of Extra Space. If you think about where Ken can add value, he has got a lot of vision and he is very creative and I think those idea will help propel innovation here at Extra Space but realistically the greatest contribution Ken can offer this company is being in a role where he taps into those long term relationships and utilizes the personal feeling and the personal connection that he can make to drive transactions in the off-market so that Extra Space is able to have meaningful growth without having to overpay for assets and I think if you look at what’s going on right now in one of the two portfolios that we announced, Ken had a very-very strong and pronounced role in bringing that to a successful conclusion and that’s the role that envision Ken as an Executive Chairman someone help in with strategy and help into leverage relationships so that we can continue to grow in a meaningful and accretive way.
Karl Haas
I would like to add to that where Ken brings value on my side of the business is that he is very and he is a guy that stays at 30,000 fee and helps and we don’t need much of it, eight hours a month of him talking to our revenue managers and challenging what they’re doing and he can talk at their level and also bring that practical experience to it and even with me with operations and we don’t a lot of Ken’s time but he is just incredibly valuable and with being able to come in understand things quickly and help kind of tweak the direction and we’ll continue to get that for as long as we wanted and needed.
Spencer Kirk
Yes, I think Michael the answer is he left for Russia 4.5 years ago; he has been back just a little over a year and I think having settled back into his particular stage in life and what the stage that extra spaces in today we have found the right balance for the future it’s working very-very well.
Operator
Your next question is from the line of Kevin Ken, SunTrust.
Kevin Ken - SunTrust
Did you guys quote a cap rate on some of the pending deals that you have to close?
Spencer Kirk
It’s kind of in the six to seven range.
Kevin Ken - SunTrust
Okay is that range going in or stabilized?
Spencer Kirk
It’s forward looking.
Kevin Ken - SunTrust
And could you comment on maybe the couple of other portfolios out there in the market, I know you guys said some forward expectation are seeming crazy, and could you maybe comment on maybe the more in for portfolio what you think that (inaudible) that portfolio is compared to your company's and where you think pricing we comment on that for that property?
Spencer Kirk
First of all I didn’t use the word crazy, Kevin, I used ridiculous. Separately into state fleet with regards to the Morningstar, the only observations I would make threefold, number one we bid, number two we weren’t invited back for round two, and number three we didn’t think it was the best operational overlay for our existing footprint.
We think there might be better portfolios in terms of where we’re conducting business and for us I would simply say I don’t know where it’s going to come in ultimately on pricing but we’re out and we’re comfortable with it.
Kevin Ken - SunTrust
Would you be willing to state maybe where you guys bid that it didn’t get where you didn’t’ get invited back for round two?
Spencer Kirk
I am not going to tell you specifically but I will tell you we’re in the lower quartile.
Kevin Ken - SunTrust
And just last question one you expenses, it seems like property tax are going up for a lot, these offer other real estate factors, your expense haven’t really moved up that much is this something that we can - I guess what should we expect going forward longer term?
Spencer Kirk
We would tell it’s probably similar to inflation 3% to 4% that’s what we continue to budget, we have been able to manage that and we hope that continue to come in 1% to 2% where it’s coming in but our expectation is more in the 3% to 4%.
Operator
Your next question is from the line of Michael Salinsky, RBC Capital Markets.
Michael Salinsky - RBC Capital Markets
Spencer you talked 2014 being problem from supply standpoint but as you look out to 2015 given starts does that appear a challenge?
Spencer Kirk
I don’t know yet Michael my crystal ball doesn’t go out that far we will have to wait and see what is going on there could be significant new supply and per chance maybe the economy starts to heal and get some momentum so how it plays out I would probably be a fool to speculate on 2015. All I can say is for the foreseeable future we are optimistic that the fundamentals are strong demand is strong the larger operators are taking market share from the smaller operators and we are in a good position.
Michael Salinsky - RBC Capital Markets
Second Karl can you talk about the acceleration in street rate growth throughout the quarter and also kind of where you are tracking in July?
Karl Haas
I wish I could tell you that I had some control over it or that it stays consistent but we are up and down every day based on what the model tells us and so there was really no specific trend up. I will say that and I guess we anticipate the question I might as well answer it now, July was a very good month.
We held firm and we are pleased with where July came in.
Michael Salinsky - RBC Capital Markets
Spencer, bigger picture question and using your term ridiculous, how would you define ridiculous maybe in terms of where assets are trading versus replacement cost? How big does that delta have to get before you would look at development as another one of the growth engines just given where market pricing is today?
Spencer Kirk
Ridiculous to me is relative and I am only speaking from the Extra Space perspective. We have a certain business model Michael and we want a certain spread on transaction so that we are doing accretive deals and I am not talking accretive in years four and five.
Everybody’s business model is different and so when I use ridiculous it’s only from the very narrow perspective of Extra Space. Obviously in A markets, with A quality assets you can just fight very low cap rates but s you start to get into secondary and tertiary markets with properties that are maybe 10-15 years of age.
We have a tough time wrapping our arms around the arithmetic that makes sense for Extra Space. So for us I would say looking down the road for development well just one other comment on purchasing we don’t look at replacement cost as the primary thing we look at the cash flow and we are primarily a cap rate buyer.
So as you think about development and where the spread becomes large enough I have made the statement a number of times Extra Space is out of the development business. I don’t see us getting back into the development business.
It doesn’t make sense for this organization now the caveat there might be an occasional property or a joint venture partner that brings considerable other resources to the table where we might enter into a JV program we have nothing to announce today I don’t know of anything that’s contemplated but we can’t preclude that with some other structure we might be willing to enter the game. We shut down a development department and this company has no plans to open one up and re-staff.
Operator
Your next question is from the line of Paula Poskon, Robert W. Baird.
Paula Poskon - Robert W. Baird
Spencer, what are you seeing from the third party inbound calls? Are you continuing to see that at an accelerating pace and are you accepting more of those, turning away more of those?
Just what’s happening in that business?
Spencer Kirk
There has been an acceleration. I think there is a gradual awaken Paula, between the haves and the haves not and the thing internet is the great divider not the great equalizer.
I think our friend Dave Rogers said that, folks aren’t scared yet but I think there is a growing awareness that there are capabilities with scale and size that the smaller folks cannot replicate. So, we are getting inbound calls but I will tell you, way more than 50% of the calls coming in are getting rejected because either the market is not right, the asset is too small or the asset quality is not appropriate for this company.
And so we are selective, we are growing nicely but quite frankly, I don't think we’re growing as quickly as I would like us to but we’re going to lower our standards to meet our actions.
Paula Poskon - Robert W. Baird
And are you seeing any changes in terms of your commercial customers, is that on the uptake as the economy continues to improve?
Spencer Kirk
No. What’s really interesting Paula is I’ve been doing this for over 15 years and the ratio between commercial and residential with very, very, very minor fluctuations has remained the same.
Operator
Your next question is from the line of Todd Stender, Wells Fargo.
Todd Stender - Wells Fargo
How many all of board acquisition, can you share with us some other details of that portfolio was just in terms of the rent per square foot, have that kind of compare to your current portfolio who knows California markets and maybe what you’re strategy is to get the occupancy up which is think is in the mid 70% range?
Spencer Kirk
Without getting into too many details on the rent per square foot we would tell you that 12 of the assets are in Southern California, 8 are in the Northern, very good over lay with our existing assets and we would tell we’re going to manage them very similar to the way we manage our existing ones using the same internet and pricing strategy that we do at our existing.
Karl Haas
I think we also see some opportunities with our strategy of having multi-tiered pricing, more clear cut multi-tiered pricing and combined with the discounting that we see an opportunity. The pricing wasn’t that bad but we think there is some tweaks and some of the things we’ve been doing for a while that makes us feel like many other properties are very close to our properties and our properties are substantially more occupied and there, so we think that we have just through kind of tweaking what they were doing, we should be able to see some really good growth in occupancy.
Todd Stender - Wells Fargo
Just at the margin if could stick with you, just with the expansion opportunities, are they in general smaller facilities or anything that you like about the size or of the possibilities to expand them.
Karl Haas
Well, they are not overly large. They’re decent size.
Most of them are single story in markets that I don’t think we’ll be doing it in the short run but I think in the long run these properties our markets where where you could go up and so we also see in the long run some potential, they are in such great markets that we probably will have the ability sometime in the next three to five to 10 years to take some parts of these properties out and go up.
Todd Stender - Wells Fargo
And that starts to bring in the conversation of climate control and adding to that?
Spencer Kirk
Well in California climate control is not such a big thing, so it's not going to be so much climate control. If we build up, we probably would do climate control.
But you don't get a big premium especially southern California and Northern California for climate control.
Operator
Your next question is from the line is Kate of Goldman Sachs.
Unidentified Analyst
On the topic of large acquisitions being in the market, can you comment on the mix of properties you are seeing, whether there are many portfolios versus one-off properties?
Spencer Kirk
Once again we see a large volume of acquisitions continuing to come to the market, but primarily it's the smaller one-off transactions. The fact that there have been so few larger transactions and the only one that I am aware of is it's kind of hanging out there currently is Morningstar, speaks of the fact that larger portfolios are hard to build.
And with the performance of self-storage, lot of people are happy holding of what they have got, and so I think it's going to be the smaller one-off transactions primarily in the future.
Unidentified Analyst
If you do see portfolio acquisitions, do you look at them differently and have different requirements and hurdle rates when they are that much larger?
Spencer Kirk
A little bit. We think that there is some benefit to picking up 20 or 30 assets out of whack or 40 assets, especially when the operational footprint is a nice overlay.
So there is a premium we'll put on a portfolio, but we as a company want to be careful in not placing too much of a premium on, that the ease and simplicity of getting a bunch of assets in one transaction. This company has an acquisitions team that is geared up and ready to go and do a number of smaller transaction and hitting those singles has worked well plus the occasional double or triple or even homer.
But I think it just boils down to we're ready to conduct business on whatever scale.
Operator
Your next question is from the line of RJ Milligan, Raymond James & Associates.
RJ Milligan - Raymond James & Associates
I was just curious if you could tell us what the occupancy was at the end of July?
Spencer Kirk
Yes we can, it was around 91.5%.
Operator
Your next question is from the line of (inaudible) Citigroup.
Michael Bilerman - Citigroup
Its Michael Bilerman. Spencer as you think about your comment about size and scale on the public landlords, where do you think of the last 12 to 24 months the operational differential has been between sort of public and the entirety of the sector?
Put aside acquisitions, but how much market share do you think is been taken at the occupancy level, at the rate level, public versus private.
Spencer Kirk
You know Michael I don't have the exact numbers on top of my head. I can just say I look at the data supplied by REITS and SSDS and others say, larger more sophisticated operators.
By the way some of those are private. There are some larger regional guys that are doing very well.
As you look at our occupancies versus their occupancies our NOI versus their NOI, it’s pronounced. And I can only anecdotally tell you two stories that I have first-hand knowledge because I ask the question.
But I become really concerned not for me but for them when I am talking to an existing operator and they tell me that their NOI is 10% or more below where it was in 2008. And the storm has long since passed and the larger operators are pinning up record results and record occupancy.
And I think the advantage is not going to abate any time soon.
Michael Bilerman - Citigroup
And so, going back to your ridiculous comment how much do you think sellers are trying to get credit for that differential of being able to sell portfolio of their assets into one of the public landlords that have that size and scale that can drive so much better efficiencies and occupancy? How much is that the tension that’s happening where sellers are effectively trying to be greedy?
Spencer F. Kirk
I won’t say they’re trying to be greedy, I’ll say they are trying to optimize what they have. when they see a notable transaction in the New York Metro area in the five cap rate and perhaps they live in Wichita, Kansas and they think well, I won’t get a five but I can get a 5.5 or 6 because not New York based.
I think they’re just trying to optimize what they hold and maximize their value and I don’t fault them in anyway shape or form. The question is what is reasonable and rationale and what is defensible and every company that’s out there buying properties has to answer that for themselves.
Michael Bilerman - Citigroup
And then just lastly just on the 350 million that closed and under contract in terms of the acquisitions. You had mentioned 6 to 7 cap rate.
Can you just share with us sort of what is the going in cap rate on those assets and when do you reach a 6, when do you reach a 7 it was just a pretty wide range? And I just want to understand the dynamics of these assets coming online day one versus of a forward yield?
Scott Stubbs
I would tell you it’s typically within a year to year and half that we’re at those cap rates. So we’re bringing up the occupancy and stabilizing the rents, to rents similar to what we have.
None of these portfolios have, they are not 50% occupied or anything of the sort. We’re basically optimizing what is out there today.
Michael Bilerman - Citigroup
Right, so where does it start and what’s the going in, in the third quarter and the fourth quarter we’re going to bring in $350 million of assets. Should we bring those in 4 cap, should we bring those at a 5 cap?
How should we think about going in the yield versus getting to a 6 to a 7?
Spencer Kirk
Going in yield might be slightly below 6 and so it’s not a significant discount. And then we underwrite fairly conservative going to potentially 6.5 or 7.
Michael Bilerman - Citigroup
Over 12 months…
Spencer Kirk
12 to 18 months, correct…
Operator
The next question is a follow up from the line of Todd Thomas, KeyBanc Capital Markets.
Jordan Sadler - KeyBanc Capital Markets
It’s Jordan Sadler. Just on acquisitions, you mentioned that the only portfolio where was the Morningstar wanted, does that mean you did not look at the $375 million associated with PSAs expected to close on this quarter?
Spencer Kirk
Jordan, its Spencer, I don’t know what portfolio that is that has been referenced. So…
Jordan Sadler - KeyBanc Capital Markets
21 in Florida, 5 in Mass, 2 in California, 1 in Rhode Island and it could be one-offs in those, I don’t know if it’s a portfolio at all, I just doesn’t sound like Morningstar…
Spencer Kirk
It probably isn’t Morningstar, it could be another portfolio. And we’re aware of some that have been talked about being carved up.
So when you ask me to comment on that, I can tell you we’ve looked at some other stuff but not necessarily in totality.
Jordan Sadler - KeyBanc Capital Markets
And then I think ultimately the word that will define this call will end up being with hindsight it will be ridiculous of course I think in all the years you haven’t been want to be prone for hyperbole so I am interested in sort of following up on your comment there a little bit which is any thoughts on selling assets at ridiculous levels?
Spencer Kirk
Yes, I actually had discussion with someone last week, we were trying to buy their assets and they said that they would be a buyer at a four cap so if anybody want to offer Extra Space a four cap, yes we would be interesting in selling but right now, Jordan we are building a company, we are building value for the long term and dismantling this company is not something that I am interested in.
Jordan Sadler - KeyBanc Capital Markets
Not dismantling but are there properties around the edges worth pruning?
Spencer Kirk
Absolutely, few here and few there but it’s going to be may be a dozen or two dozen and that to me 5% of the portfolio and what we have to look at is what the loan structure, what the ownership structure and it becomes a little complicated and at the end of the day those properties that are fully unencumbered or perhaps we have 100% control on, I can count on one hand or we say we have the ability to maneuver.
Operator
Your next question is from the line of Christy McElroy, UBS.
Ross Nussbaum - UBS
Two follow ups, the first is when Ken Wooley joined the board of American Home 4 Rent which is an entity controlled by public storages chairman, was that something he discussed Spencer with you or the board and how do you guys feel about that?
Spencer Kirk
He discussed it and I was fully aware of it, the board was aware of it and we were fine with it, once again Ken like many other chairmen sits on other boards and I don’t think that that’s problematic in a public company setting.
Ross Nussbaum - UBS
But nobody find it peculiar that it’s a board controlled by the chairman of our largest competitor?
Spencer Kirk
Its peculiar but it's not unpalatable or unreasonable given how small the audience is, the fact is Ken used to work for Wayne and they have had a wonderful friendship for 30 years. they are both brilliant minds and I think Wayne was looking for a way to bring some intellectual horsepower to his new company.
I think Wayne was smart and it has been a good thing for Ken.
Ross Nussbaum - UBS
Second question, fundamentally Michael Knott asked a question earlier in the call and he was I guess expressing some surprise that rent growth from existing customers wasn’t as big a driver as I guess rent growth from street rents and I guess I shared that surprise because I thought you guys were raising rents in existing customers, I call it 8% plus, so I guess may be the question here is what percentage of your existing customers are actually getting that staying around long enough to get that increase and I guess I am not understanding why that’s not a bigger driver?
Spencer Kirk
Okay, so I am going to put this back over to Karl but the issue is, let’s verify what you have said yes we are getting more than 8% and that’s about 45,000 to 50,000 customers month to get the rent increase but we have been in that range for a long-long time Ross, of the 7% to 8%. So you are not going to get tons of a juice out of that in a more stable environment.
Karl Haas
.
Ross Nussbaum - UBS
Second derivative is flat it’s kind of what you’re saying, maybe we almost understood that original comment, okay that makes sense, just finally where your average in place rents relative to your street or maybe on a net basis native concessions, is there rent hold down any kind?
Spencer Kirk
And we’ve been saying, that’s the last year, it’s basically flat, they’re top on each other.
Operator
Your next question is from the line of Michael Knott, Green Street Advisors.
Michael Knott - Green Street Advisors
All the way back into your supplemental on page 25 you show some details on your joint ventures and you a have column that shows whether you’re in the promote or not, there is a couple that are, I’m just curious if there is some hidden value and some promotes that just haven’t been realized that no one's giving you credit for. just curious why maybe we haven’t seen more of these be in the money on the promos just given how strong the operating environment has been, does it require a recapitalization of some sort?
Scott Stubbs
The majority of those they’re not in the promote actually were from the storage USA acquisition, you think about what happen from the time the storage USA acquisition happened till today, you actually had a downturn where those property effectively went backwards and so some SMS were put in place and the agreement was put in place with these assumption that it was going go up from that point obviously and with the downturn, its possible we eventually get into the promote but we’re not near right now and that’s we’re about half of that joint ventures on that page.
Michael Knott - Green Street Advisors
Okay and then if I’ve done the maths right I think you have about 375 million of acquisitions that have either closed this year or under contracts, you’re bumping your guidance really isn’t that much more the one you’re already got accomplished, I’m just curious if that math is right then does that mean that you’re being just very conservative on what you expect to happen the rest of the year or do you not think that there will be more opportunities?
Scott Stubbs
First of all I’ll math is correct and we’re looking at this terms of here we’re the first of August and based on but we have under contract but we’re looking at, it generally takes 60 to 90 days to close on something, so realistically based on what we have that we’re looking what we’ve discussed in our real estate committee we feel like 24 million is a number we can do, we hope to exceed that.
Michael Knott - Green Street Advisors
Okay and then second with acquisitions just curious if there is any evaluation or grading of pipeline of acquisition opportunities through the third-party management is coming along and is that paying off or is more just other benefit of that program that you’re telling right now?
Spencer Kirk
We continue to talk to the owners and this year we’ve bought two joint ventures partners one additional property out of that portfolio, we had one follow out contract due to some other reasons but we continue to farm that pipeline and hope to continue to close on acquisitions through that.
Michael Knott - Green Street Advisors
And then just one more from me if I could and that would be on your tenant insurance just curious what is driving that growth of 16% in the same-store pool on the revenue side just because I would have thought your participation rate was already fairly high. And I don’t sense that there is a lot of pricing power in that business but it’s been just, so just curious here where that growth is coming from?
Karl Haas
This is Karl what really presents a good opportunity is as we bring in new properties where there is almost no penetration and then we are going from zero to 10 to 20% to the 60 some to almost 70% that we get into a maturity and you’ve indicated earlier the reason we are one of the primary drivers for the third-party management is that when you factor in tenant insurance, it is a good business for us, if you didn’t have tenant insurance, it wouldn’t be worth doing it because while we are getting, it is a good pipeline and JV is probably even better in the long run, we are not stealing properties we are buying them, there aren’t too many people that have these properties that are going to sell it to you without talking to other people or checking the market. So while it does gives us the ability to be kind of first in line but we are not the only one in line when it comes to buying these properties and so the only reason we are doing it a big part of it is the fact that we are adding to our platform, having more ability to spread our overhead and tenant insurance and we have had very, very good growth this year.
I think in the first quarter we added 57 properties to our third-party management and most of those come to us with very low insurance penetration.
Michael Knott - Green Street Advisors
Yes I get that the income statement shows big growth in that business because you are adding new properties but just on the same-store basis I would have suspected that all those properties already had the programs in place?
Scott Stubbs
In our same-store pool if you remember we changed the same-store pool this year to include 15 properties in Cincinnati that had very low if any, tenant insurance penetration as well as 1 properties in Southern California as well the final development asset. so we added a fair number of properties that had lower tenant insurance penetration so that obviously has helped increase the tenant insurance.
Operator
Your next question is from the line of Tayo Okusanya from Jefferies.
Tayo Okusanya - Jefferies
Congrats on a solid quarter I wanted to back to the whole idea of acquisitions Spence I know you said that apart from Morningstar you weren’t aware of any other big portfolio out there but I am just kind of curious and if you do take a look at your crystal ball and you kind of project out six to 12 months do you kind of expect for us to kind of see more portfolio deals with Morningstar just kind of being the first of many?
Spencer Kirk
I think that is a reasonable assumption obviously with cap rates drifting down as they have been seller interest is peaking and I think that is a very rational conclusion to can’t you tie out there is going to be more and the question is how does the bidding take place and how does it fit into each company’s respective financial modeling.
Operator
Your next question is from the line of (inaudible) SunTrust.
Unidentified Analyst
Have a couple of quick follow ups if I understand the 100 basis points increase in your chance NOI stems from rate increases of existing customers, that number if I understand it correctly, is 1% is that because as customers you get rent increases, let's say a couple of them and they eventually when they do leave, the replacement customer is coming in at a street rate which is much lower. so that spread dynamic unless street rates are rising dramatically or the level of rate increase you are giving out are higher, that number is difficult for that number to move up over time, is that correct?
Karl Haas
Probably. You said, there is lot of pieces, and I know you, you are a deeper thinking and probably you’re kind of going beyond what I am capable of explaining.
The bottom line is it’s just hard for it, unless we change, and unless we go from 8% on average increase to 9% or 10% and or we have a tremendous increase in the number of people we’re going to give increases to, that delta is not going to increase that much. It’s going to be relatively flat.
So, yes, there is only two levers, it’s the number of people you give the increases to and the percentage increase and the number of people we’re giving it to is relatively consistent and the percentage increase is staying relatively consistent. Unfortunately, we were aggressive, very, very aggressive to start with on it and have been for a couple of years.
So, it’s not like, we were doing 5% and now we’re going to 6% or 7% or 8%. We’ve been at 8%, the range of 7% to 9% for a while.
So, hopefully that answers this, because it is what it is.
Unidentified Analyst
Right. But I guess you kind of answered my second part of the question was, do you expect as things get tighter to change the level or frequency of the rate increases.
Karl Haas
I don’t think we’re going to change the frequency. But if we were at public storage level of 95%, we might be looking at raising more because you could afford.
Yes, there is, we say that overall it doesn’t impact vacates. But at some point it does have some impact and so unless you want to take the risk and increase vacates even more, you don’t want to go past the certain the point.
So, if unless we change unless we get toward totally different occupancy level, I don’t see us being able to change the percentage increase.
Unidentified Analyst
And then just quickly, you say 45,000 customers a month get it, what is that translate into percent of portfolio or percent of total customers?
Karl Haas
About 7%.
Unidentified Analyst
7% a month.
Karl Haas
Somewhere there.
Unidentified Analyst
And your same store revenue on your management assets has gone up pretty significantly better than your core portfolios run rate. It's somewhat of a double edged sword, if you want to buy those assets, you make it more expensive on yourself, but maybe, have you guys thought about increasing the charge, the amount you charge to your partners or maybe adding a promote to those deals?
Spencer Kirk
We’ve looked at it, the thing about it it’s a commodity out there, management services to some degree and you can’t be too far out of what considered market. So, what we feel like we are going to do better job managing these properties, we also need to be somewhat in the market.
Operator
At this time there are no further questions in queue. I would like to turn the conference back over to Mr.
Spencer Kirk for any closer remark.
Spencer Kirk
We appreciate your interest in Extra Space today. We look forward to next quarters call.
Thank you.
Operator
Ladies and gentlemen that conclude today’s conference. We thank you for your participation.
You may now disconnect. Have a great weekend.