Extra Space Storage Inc (EXR) — Q3 2016 Earnings Call Transcript

Good day, ladies and gentlemen, and welcome to the Extra Space Storage Inc. Third Quarter 2016 Earnings Conference Call. As a reminder, today’s program is being recorded. I would now like to introduce your host for today’s program, Jeff Norman, Senior Director of Investor Relations for Extra Space Storage. Thank you, Jonathan. Welcome to Extra Space Storage’s third quarter 2016 earnings call. In addition to our press release, we have furnished unaudited supplemental financial information on our website. Please remember that management’s prepared remarks and the answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act. Actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the company’s business. These forward-looking statements are qualified by the cautionary statements contained in the company’s latest filings with the SEC, which we encourage our listeners to review. Forward-looking statements represent management’s estimates as of today, Thursday, October 27, 2016. The company assumes no obligation to revise or update any forward-looking statements because of changing market conditions or other circumstances after the date of this conference call. I would now like to turn the call over to Spencer Kirk, Chief Executive Officer.

Hello, everyone. As many of you know, last month, I announced that I will be retiring at the end of the year and that I will be succeeded by our Chief Investment Officer, Joe Margolis. I have had the opportunity to work with Joe for more than 18 years. He was instrumental in structuring our first joint venture with Prudential in 1998. He served on our Board of Directors for more than a decade, and he has excelled in his role as our Chief Investment Officer. He has the right balance of real estate expertise and leadership skills to lead Extra Space in its continued growth and success. So at this time, I would like to turn the time over to Joe.

Thank you, Spencer. Good afternoon, everybody. It has been great to meet with many of you face-to-face since we announced Spencer’s retirement, and I look forward to getting to know you better through future interactions. It was another strong quarter for Extra Space. FFO per share as adjusted grew 26% year-over-year. This growth was the result of solid operating performance, fueled by accretive acquisitions, joint ventures, third-party management, and an optimized balance sheet. We are focused on using all of these levers to continue to grow shareholder value. Operationally, we continued to push rates to new and existing customers in the quarter and experienced average street rate growth of approximately 7%, similar to 2015. This growth was partially offset by an increase in bad debt and discounts, which resulted in same-store revenue growth of 6.1%. Discounts, while still very low from our historical measure, are up from an all-time low in 2015. Expenses increased only 1.4%, which led to NOI growth of 7.8%. Quarter end occupancy was strong at 93%. Year-to-date, we have acquired $825 million in wholly-owned stores. With very few exceptions, these acquisitions were not broadly marketed but came from our joint venture, managed, and other relationships. The largest of the off-market transactions closed on September 16 when we purchased Prudential’s majority interest in 23 stores for $238 million. Concurrently, we sold our minority interest to Prudential and the remaining 42 stores in the joint venture for $35 million. We will continue to manage these stores. In addition, we are under agreement with the joint venture partner to purchase its majority interest in 11 stores for approximately $153 million. We plan to close this transaction in the fourth quarter, which will result in wholly-owned acquisitions of $1 billion in 2016. We also expect to close $255 million in Certificate of Occupancy acquisitions in 2016. $90 million of these will be wholly-owned, and the remainder will be in joint ventures with our investment in these ventures totaling $53 million. Our joint venture strategy and our Certificate of Occupancy program are working and are creating value year in and year out. I would now like to turn the time over to Scott.

Thanks, Joe. Last night, we reported FFO as adjusted of $1.02 per share, exceeding the high end of our guidance by $0.02. Including costs associated with acquisitions and non-cash interest expense, FFO was $1 per share for the quarter. The beat was primarily the result of stronger than anticipated performance from our 2015 acquisitions, specifically SmartStop. We also benefited from the collection of $1 million in business interruption insurance proceeds. As Joe mentioned, our same-store revenue growth was driven by higher rates to new and existing customers. This is consistent with our guidance, which assumed no benefit from occupancy and a headwind from discounts in the second half of 2016. We continue to have solid revenue and NOI growth throughout our diversified portfolio. Our top performing markets in the quarter included Las Vegas, Los Angeles, Sacramento, San Diego, and Tampa St. Pete with revenue growth in the high single-digits. The slowest markets were Boston, Chicago, Denver, Houston, and Memphis. With the exception of Denver, which represents about 1% of our revenue, all of our markets showed positive revenue growth year-over-year. Subsequent to the end of the quarter, we completed a $1.15 billion unsecured credit facility. The facility consists of a $500 million revolving line of credit, a 5-year, $430 million term loan, and a 7-year, $220 million term loan. The credit facility has an accordion feature that allows us to increase total capacity to $1.5 billion. At closing, we drew $300 million on the 5-year tranche and paid off and terminated 3 of our 4 bilateral revolving lines of credit. The 5-year and 7-year tranches have delayed draw features. We will access the remaining available term balances as needed to finance future acquisitions and to pay off debt. This unsecured facility further diversifies our capital structure and reduces our average interest rate. Our goal is to have access to multiple types of capital to maintain financial stability. This credit facility helps accomplish all of these goals. Due to the outperformance of our 2015 acquisitions, we are increasing our annual FFO guidance. FFO as adjusted is now estimated to be $3.78 to $3.80 per share. FFO is now estimated to be $3.63 to $3.65 per share. This guidance includes $0.05 of dilution from our 2015 and 2016 Certificate of Occupancy stores. It also includes acquisitions that, as anticipated, will require time to be brought up to our performance standards. As these properties move towards our portfolio average, we expect outsized NOI growth. I will now turn the time back to Spencer.

Thanks, Scott. This is my final earnings call as the CEO of Extra Space. I have enjoyed working with each of you and I am grateful for the relationships and friendships that have developed over the years. Going forward, I will continue to be actively involved as a member of the board and I will remain the company’s largest individual shareholder. My interests are perfectly aligned with those of our shareholders. Thinking back 7.5 years ago when I took over as CEO, it wasn’t about my predecessor Ken Woolley, and today, it isn’t about Spencer Kirk. It’s always been about our constant and capable executive team, which has an average tenure of 14 years. I am 100% comfortable that Joe Margolis is the right person at the right time to lead this very strong team. Our unique structure and our ability to execute a clear business strategy has allowed us to be among the fastest-growing REITs in the nation. None of that changes with this transition. Over the last 5 years, we have profitably acquired over $5 billion of real estate. These acquisitions alone would constitute one of the largest storage companies in the nation. When you combine that kind of external growth with the industry’s best operating platform, which just delivered its 24th consecutive quarter of double-digit FFO growth, Extra Space is well-positioned to continue to deliver outsized growth for years to come. With that, let’s turn it over to Jeff to start the Q&A.

Thank you, Spencer. In order to ensure we have adequate time to address everyone’s questions, I would ask that everyone keep your initial questions brief. If time allows, we will address follow-on questions once everyone has had an opportunity to ask their initial questions. With that, we will turn it over to Jonathan to start our Q&A.

Yes. Good afternoon, guys. First off, congratulations, Spencer. It’s been great working with you. So congratulations on your retirement.

Thank you.

Scott, I had a question in terms of the acquisition and sort of plans for long-term funding, obviously a lot more acquisitions this quarter and for the year more than planned. But given where the stock price is trading, curious what your plans are for funding those acquisitions and if you would be comfortable raising equity at the current price?

Yes. First of all, I would tell you we don’t look at our current stock price anytime we make an acquisition decision. It’s not made with a short-term cost of capital in mind. We always look at the long-term costs. So we have always tried to have many sources of capital. And right now, I would tell you that we still do. Debt is an option. We just closed this facility that gives us a fair amount of capacity. The preferred market is still very good. And our stock price, we don’t like it as much today as we have in the past. But I think that we have always looked to access the cheapest cost of capital, which could also include joint ventures or even proceeds from the sales of properties.

So would you be willing to increase debt levels for the short term until you maybe have a better stock price?

Marginally, yes, we would.

Okay. I will get back in the queue. Thanks guys.

Thank you.

All the best, R.J. Thank you.

Hi, good afternoon guys. I was just hoping you could talk a little bit about the state of demand. If I look at Page 20 of your supplemental, it looks like rentable square feet on a same-store basis declined year-over-year for the three months and for the nine months. And you kind of talked about concessions going up, so just curious about the health of demand and kind of what you are having to offer to get people to sign the leases?

Yes. I am assuming you are looking at the rentals and vacates in our supplementals. First thing I would do is we always tell people to be careful looking at rentals and vacates. It depends a little bit on what happened last year. We focus more on occupancy and revenue growth. I would tell you demand is very solid. We are very near our record high occupancy for this time of year. Last year was our best year ever. So while we are slightly below last year, it’s still very solid. We are still seeing rate growth in our street rates. For the quarter, we grew 6% to 7%. And we continue to push those here into the fourth quarter.

Any color on concessions to get people in and then what – how that’s changed as a percentage of revenue or absolute dollar terms?

Yes. So our discounts are up slightly from where they were. Last year was the kind of bottom, where you – as a percentage of revenues, if you take discounts divided by revenues, you are around 3%. Current year, they have ticked up slightly from there. But they are going to tick up for a couple of things. One is the fact that our rates are up. And then the second thing that affects discounts, obviously, is how many rentals you are doing in that month. With rentals being down slightly, that helps. With rates being up, that hurts. And in addition, we are offering slightly more discounts right now to try to compensate a little bit for our drop in occupancy. We ended a quarter about 40 basis points below where we were last year. We would like to pick up a little bit of that going into the slow season here.

Thank you.

Hi guys. Just two quick ones, in terms of the joint venture acquisitions, can you talk about what prompted these, was this driven by your partners coming to you and saying they wanted to sell and any insight into why now? And then did you ever roll flow on those?

So I will answer the second piece. We have a roll flow in all of our joint ventures, but that was not the triggering factor here. We have done five transactions with four different joint ventures, all managed by Prudential. Each venture is run by a different portfolio manager, has a different strategy, and the catalyst for the transaction in each case was different. In some cases, we had an unsolicited offer for a property that we didn’t want to sell. That started the discussion. In another case, the portfolio manager wanted to change up his geographical diversification and wanted to sell a bunch of properties, primarily in California. From our standpoint though, the similarity in each venture was that we had embedded promote in the venture that we could not get to without a capital transaction. So we restructured – earlier this year, we restructured two of the accounts without a capital transaction and realized over $40 million in promote. And then in the purchases we have done from the two single client accounts, the sales proceeds to the venture would be sufficient to satisfy the accrued preferred return, pay down some capital, and put us in a position going forward where we will be cash flow promoted in the ventures.

I appreciate that color. And then I just had one – second one on supply, just any changes in the supply picture in terms of expected starts out there, any new markets where you are seeing it start to get more heated than maybe you initially thought?

I think the picture looks pretty much the same to us. We see increasing supply from a period where there was very little supply. The markets that we see supply are the markets that have limited barriers to entry, primarily. Many markets in California and others don’t – we don’t see that supply. Maybe a new market we are starting to focus on will be Austin, Texas. But overall, supply – we are in a development cycle. We are seeing increased supply. We are seeing in some instances, it affects our operations. In some instances, it doesn’t, but on a portfolio level, we still perceive it to be at a manageable, moderate level.

Jeremy, I would maybe add one thing to that and that is currently as these properties open, there is demand. If you look in our supplementals and look at the occupancy of our Certificate of Occupancy deals, these properties are leasing up extremely quickly. So obviously, there is some type of pent-up demand.

By the way Jeremy, it’s Spencer. One of the things you need to know is just because a macro market might have a lot of supply, it doesn’t necessarily mean that it’s going to impact certain individual sites. A lot of noise has been made about South Florida and Miami. Well, this past quarter, our revenues were up 6.8% and NOI was up 7.3%. So there can be new supply in Miami, but apparently today it’s not having any impact that’s discernible on our property level performance, because those sites aren’t within a three-mile or four-mile or five-mile radius of our current operations. So it all depends as you look at across the country, the impact of supply.

Thanks.

Thanks Jeremy.

Hi guys. It looks like street rates are still pretty healthy, renewal rates are pretty good, concessions are slightly higher, and occupancy is just a tad lower than you would expect. But we are seeing about 150 basis points sequential decline in revenue growth likely three quarters in a row potentially to get to a low end of the guidance, what is going on? Is it just you guys are above market and you are just resetting back to a more normal level, is that the driver or is that the concessions? What is driving the 150 basis points a quarter?

Yes. So year-to-date, we have had 150 basis points per quarter. So Q1 to Q2, Q2 to Q3, it’s been 150 basis points per quarter, that’s coming off of all-time highs, record NOI growth. I would tell you, the rate of decline has slowed from the second going into the third quarter. So it was fairly steep and then later in the third quarter, it absolutely slowed.

Okay. So would it be potentially you guys are just above market for even though new lease growth or effective rent was growing or street rate was growing call it 5%, you guys might have been above and as your portfolio starts to reset back to where the market is, the pace of decline will start to moderate and maybe start to reaccelerate again, is that how you should look at it?

I would tell you it’s tough by market, because every market is a little bit different. Some markets, it truly is new supply. Other markets, it’s that we have grown 15% for two years in a row. We wouldn’t expect to grow 15% again next year. So, Denver is a combination of supply plus Denver in 2014 grew double-digits, 2015, double-digits, 2016, it’s now – in this quarter went slightly negative. So, it varies by market, but overall, you are coming off of record highs. It’s just the timing of when you are coming off of those.

Okay. And then as I recall you guys do have some governors that you want to be too far above market. It sounds like you guys might have been somewhere where the governors were at and then you had the new supply and that’s where we are seeing such a drastic decline in Denver and that will probably be the most extreme example. Is that a fair assessment?

I think that’s probably fair. The one thing we do have, like you mentioned, is the governors. So what governs that is street rates. So, as street rates are increasing, you do have the ability to increase existing customers also. But if street rates aren’t moving, then your existing customers won’t be getting rate increases at some point also.

Okay. And then lastly just on the – there is a lot of new supply and we already talked about how it will affect your current operations, but would you see as far as the managed business or maybe your Certificate of Occupancy business, I guess, how much share of the new development can you take in your market, either developers wanting to affiliate with Extra Space? I see some developments in Charlotte that will be managed by you. I just wondered how much opportunity it is for you?

Well, thank you very much for asking that question, because we always talk about development as a risk to our business. Well, development also provides an opportunity for us. And if you look at our supplements and see how our Certificate of Occupancy assets are leasing up, you can get an idea of what good investments those are going to be and the value those are going to add to our shareholders. And also on the managed side, as you point out, the vast, vast majority of our incoming – our pipeline of managed stores are new developments. So, we will be able to grow that platform. We are growing it this year even though we had some sales out of the management plus platform and be able to continue to grow that business both as a revenue generator, a source of additional data, and a pipeline for future acquisitions.

Okay, thanks a lot. Congrats Spencer and congrats Joe.

Thank you.

Thanks, Wes.

Hi, how are you? I wanted to just ask if you are seeing any changes in seller expectations despite very healthy fundamentals. Still, the pace obviously has declined. And I was wondering if you have changed your underwriting at all given a little bit of the slowdown of the industry or are you seeing any kind of change in private market cap rates?

Well, sellers always have unrealistic expectations and I think they still have unrealistic expectations. But to the point of your question, we feel that the cap rate compression has stopped and that things are still trading at very healthy prices, but perhaps there are fewer bidders and there is not as much pressure on pricing. I think through this period, we have done a good job of being realistic and disciplined in our underwriting, and because of that, we have not been successful with widely marketed deals. Only about 12% of the deals we have accrued this year in our real estate community were from a broker. Everything else came through some type of relationship or off-market transaction. So, we have not changed our underwriting. We continue to try to be disciplined. And I think we are going to continue to be largely unsuccessful in the bid auction market until there is a significant change.

Okay. And just switching to Certificate of Occupancy deals for a second, have you seen any sort of change in the frequency of folks approaching you with these kinds of deals say versus 6 months ago?

I wouldn’t – I think we have always had a very strong pipeline of Certificate of Occupancy deals, and we see – storage is still a very, very healthy business and folks who have not been in storage before want to get into storage and want to be developers and approach us on a pretty consistent basis. So, I think the pipeline is still strong and we are very selective both in terms of who we want the developers to be and which projects we want to commit to in terms of what else is being developed in that area.

Okay, thanks. That’s helpful. And Spencer, I wanted to add on my best wishes to you as well going forward. Thank you.

Thank you very much, Smedes.

Yes. First off, Spencer, just enjoy your retirement. It’s been a pleasure working with you.

Likewise, George, thank you.

And I guess my two questions have two specific markets. I guess one in New York if you can just comment a bit on the performance on the sequential slowdown in revenue growth? And then also in Denver sort of what drove that large increase in same-store expenses, up 25%?

I will take the Denver one first, and then maybe Joe, you want to take the New York? The Denver one is actually a property tax increase in expenses, and it’s not that the tax of this year went up. It’s a comp from last year where we won an appeal last year, and so you had expenses go down, because we got effectively a lower rate or cash back. So, it’s really more of a year-over-year comparison on the expense side than a big increase in expenses.

The New York is a little bit of a mystery to us. It’s a good market. There is some development coming online. The saturation is extremely low. Perhaps, it’s a market where valet is making a little bit of an inroad, but we have a hard time understanding and predicting the New York market right now.

Okay. Thanks for the color.

Thanks, George.

Thank you.

Yes, hi, good afternoon, Spencer, best of luck in retirement. Good luck. Just first question, Joe or Scott maybe just following up on the discounting, can you just talk a little bit more about the discounting in the quarter, maybe quantify what percent of customers receive discounts in the quarter, how that compared year-over-year?

Yes. So, year-over-year, current year about 58% of our new customers received a discount compared to last year it was 47% of our new customers. Now that can be a little misleading sometimes, because it’s going to depend on which discount they receive. So even though fewer customers last year received a discount, it’s possible you could have given more discounts if you gave a larger discount, but that is – we are still – majority of our customers coming in the door are getting the discount as they come in.

Okay. So, how should we think about that discounting in the context of the 7% higher asking rents that were mentioned year-over-year? I mean, what does that mean for move-in rates in the quarter on a year-over-year basis?

So discounts, assuming all things were equal, 7% increase in asking rates would be a 7% increase in discounts. I would tell you, they are slightly higher than that, because we have increased the percentage of customers getting the discount. And then we have also – depending on the market, depending on occupancy, we will continue to change discounts offered, the specific discount offered. But it’s not significantly higher, but it is higher and it is affecting your net rental income.

Okay. And then just maybe for Joe, just like a bigger picture question here. Just sticking with revenue growth and the deceleration that we are seeing today realizing we are coming off record highs, are there any signs of stabilization today whether it is discounting or something else though that you might be able to point to or do you think that this deceleration on a broader portfolio level could continue over the next several quarters?

Our view is that deceleration is going to moderate and flatten out, and we are going to revert to more normal rates of growth, self-storage normal, which historically has been higher than other property types, so we are already feeling that and that’s what we expect.

Okay, so it seems like your comments suggest then that you think that you would just sort of moderate and stair step down to a level that stabilizes in the coming quarters then?

Correct.

Thanks Todd.

Thanks. And Spencer, it was great working with you and best of luck.

Thank you.

You’re welcome. So maybe we can just start off with maybe you could provide some October stats on street rate growth and promotions?

Yes. Our street rate growth for October is slightly lower than where it was in the third quarter. So you are mid-5s – in street rate growth mid to upper-5s depending on kind of the time. Discounts are pretty similar to what they were in the third quarter, up slightly. But – the reason we are adjusting discounts and pricing is obviously to try to recoup some of the occupancy that we were down.

Right. So if I look at your guidance, adjusted guidance, and what it implies for the fourth quarter, we are roughly looking at a low 5%, same-store revenue growth rate. What’s interesting about that is that probably your rent per occupied square foot growth rate for the first time is going to surpass same-store revenue growth rate, at least just trending that way. So it feels like there may be some levers, whether that’s promotions like we talked about or existing customer rate increases having a lower benefit to those same-store revenue numbers or just decrease in street, but it feels like there are some other levers that are giving way, so I was wondering if you had any thoughts on that?

Yes. I would tell you in terms of the levers, the majority of our growth the end of last year and all of this year has been street rate growth. Existing customer rate increases don’t add a lot, but it is almost entirely rate growth. That has been offset slightly by discounts and bad debt has increased dominantly also.

Okay. And I guess on the same line of questioning, I know we tend to focus a lot on the supply issues, but maybe something on the demand side, because it feels like even your good markets are not just L.A., but overall some of the great markets are becoming just very good and just kind of toning down a notch, is there something that you can point to on the demand side? Are customers shopping price more often or is there just less traffic or are there some things that you are seeing out there that are pointing towards just a little bit weaker demand than what we are used to?

I think what we are seeing is just the cyclicality of markets. If you – we did a study, we looked at almost 90 markets over a 10-year period. And one thing you see is that markets are strong and then markets are less strong. And they are not correlated and they move in all different directions. Our number one market for 10-year NOI growth is Chicago, which is now one of our weaker markets. So we fully expect to see markets like Sacramento be very strong for a few years and then perhaps be not as strong. One of our markets now that we reported is a weaker market is Boston. Boston is not a market that’s been impacted by a lot of supply, but it’s just – it’s kind of in that cyclical pattern that we see. So we are very happy to have designed a portfolio that is highly diversified across many, many markets that will smooth out ups and downs of individual markets.

Okay. Thank you.

Thank you, Ki Bin.

Thank you. Congrats, Spencer, on retirement and congrats, Joe, on the new role. Two quick questions, just on the comments about steady state, can you give us some context, if I look at the last 10 years self-storage same-store NOI is probably in the 4% to 5% same-store NOI range. I’m just going to understand that when you say steady state, given sort of all the changes in technology, etcetera, is that somewhere in between the long-term average and today’s numbers, can you just give us some sense of what steady state means?

I would tell you, we are reverting back to that historical average of 4% to 5%. And I think as a company that’s obviously our belief, you are going to have times that’s above that. They are not going to be way above. And there are times you are going to be below that and they are not going to be way below. It’s the beauty of self-storage that it is a fairly stable property type.

Okay. And then just on supply and talking to some private operators, it seems like in markets where there was this uptick in supply, given their performance – subsequent performance, it seems like some projects are getting either pushed out or delayed and it’s also just taking longer to get new projects started, just given capacity issues in terms of contractors. I’m just wondering if you have seen that in any market?

Yes. We see that across all markets, that a fairly sizable percentage of planned projects do not get built because of local opposition, increasing construction costs, difficulty getting financing, land costs, whatever it is. But that being said, there are projects being added to the funnel and a good portion of them don't make it to the funnel, but there are still more projects getting added to the funnel. So, I think the factors you talked about will slow and moderate the development cycle but not stop it.

Okay, great. Thank you.

Thanks, Vikram.

Yes. Thanks. A couple of quick ones, number one, for your existing customers, have you seen any pushback from your tenants on rent increases and can you comment on percentage of move-outs for rent increases in your portfolio?

So we have not seen any changes, if that’s the question. We still have a very small percentage of customers who will actually go get their boxes and move out when they get a rate increase. We continue to – every time we sent out a rent increase, keep a control group and measure the control groups' move-out rate against the folks who got the rate increase. I think about 1% of the people move out. So there has been no change in that. It’s something we continue to monitor and it proves to us that the rate increase program continues to be valuable.

Okay. And the second, you talked about discounts – higher discounts in the quarter, were there any markets where you had to use more discounts than others?

Any market that’s shown softness in terms of occupancy or rate, we will typically increase the discounts. As we look at the leverage we have to pool, you are going to look first to increase your spend on the web. The last thing that you want to do is decrease your rate. So in terms of magnitude, you will difficulty increase your spend on the web. You will increase your discounts or you will change your rate and you typically want to do them in that order, because of the costs, long-term costs or benefits.

Okay, thank you.

Thanks, Gaurav.

Hi, can you give us an update on how you are thinking about valet storage and the threat to the industry and then also some color on sites like SpareFoot?

Yes. We have done quite a bit in terms of research on the valet storage, and we don’t see it as an imminent threat. We understand it a lot. We have done deliveries with companies. We have done click-throughs to see if they choose them over us. And right now, based on the way it’s priced, we do not see it as a major threat. The only thing we have is the ability to get into that business fairly quickly. We have the real estate. We have the customer list, so not a huge threat at this time.

Okay, that’s helpful. And then on a different note, it looks like Denver was one of the first markets to go negative. Can you give us an update on how to think about what markets could be next and what would be driving that?

It’s tough to predict the future. If you look at a market that has had 15% growth for 2 years in a row and had a lot of new supply, I think that it’s probable that that market is not going to be great next year and you might again see trends like that in other places.

Understood. Thank you.

Thanks, Gwen.

Thank you. Scott, I appreciate the comment in regards to not focusing necessarily on what your share price is today in terms of driving your external growth strategy, but what is that the team looks for that would – or that will eventually tell you that it’s time to slow growth from that perspective?

I would tell you when things are not accretive anymore. So in other words, what you are paying for a property is greater than your cost of capital. So we are very careful in terms of assessing our cost of equity as well as assessing our cost of debt and trying to look at that long-term and having realistic growth assumptions. But I think that’s what can cause you bigger problems, pricing stays extremely low.

Okay. And you have obviously seen great success in producing this double-digit FFO growth over many consecutive quarters now. Do you consider that a hard target internally as you are looking at acquisitions or is that more just an outcome of what the strategy that you have employed, and you are okay with not producing double-digit FFO growth at a certain point in time?

No, we are not okay with not producing – that’s too many negatives, sorry. Our goal – we are very focused on producing double-digit FFO growth, both through acquisitions and all the other levers we have to pull that are to do that whether that’s as we talked about restructuring our ventures, our management plus platform. We will add over 9,000 units this year through expansions or combats where we have turned 10 by 10 to 5 by 5. So we are very focused on that goal.

Okay, thanks. And just wanted to make sure that we sort of round out quantifying the rent growth trends for the quarter. I think what we heard is sort of 6% to 7-ish percent in both street rate growth and move-in rate growth. Are the increases to your existing customers, have they changed at all?

No, they are still high single-digits.

High single. Okay. And then are you able to quantify what the roll-down is for move-out to move-in for the quarter?

Yes. It depends on what we are doing with street rates, but they are typically low to mid single-digits and they can get as bad as high single-digits. Right now, you are more in low to mid with the fact that you have been pushing your street rates.

Okay, got it. Thank you.

Thanks, Ryan.

Thanks guys. I just want to get a sense of how you are evaluating your cost of capital and how you are deploying capital at this point in the cycle. Can you talk about the three buckets that you invested in, the joint venture assets? That sounds like they are pretty mature. I think you acquired three properties outside of that in the quarter and then your Certificate of Occupancy deals, is there a way to quantify your return expectations side by side with those three?

Well, the question is on one tie. I think I would tell you we are very focused on the long-term cost of capital. That’s going to take into consideration debt as well as equity and it’s going to be the mix of debt and equity. In terms of returns, we are typically a cap rate buyer. We also consider your replacement costs. We also look at IRRs and we also look at cash on cash yields, because we are long-term holders. I think cash on cash is probably the most relevant one that we focused on rather than just looking at the cap rate today or stabilized cap rate, what’s the return because that equalizes – if you look at a 7-year cash-on-cash return on a Certificate of Occupancy deal, you now can compare that to how is that cash on cash doing acquisition. So I would tell you we are focused on long-term cost of capital. We are focused on cap rates and cash on cash yield.

Yes. The other thing to add is, if you look at those three types of acquisitions, they all serve a different purpose, right. The assets we buy from a joint venture partner that we have managed, we have already maximized performance. There is less upside in those assets. But there is also less risk. We know the inside and out. We know exactly what the performance is. They are already branded. So those are kind of our safest, lowest returning assets. The Certificate of Occupancy deals, where we are taking full lease-up risk, construction risk, and we have the period of dilution that Scott mentioned, those are higher returning type deals in return for taking that lease-up risk. And then the deals we buy on market, they span the globe. There is deals – our first year cap rate on acquired deals range from 2.7% to 8%. So that just tells you how much juice there is or lease-up or value is out there as in those deals. So, those could be anywhere along the spectrum.

So what are you guys expecting? What’s the cash on cash return for the Prudential assets? Because it sounds like we are going to see some more joint venture assets being pulled into Q4? What’s the kind of return expectations there?

So, the deal we just announced where we dissolved that joint venture and purchased 23 assets, the forward 12 cap rate on that was 5.8. So that gives you a sense of that.

Yes. It’s tough to give you the cash on cash yields, because they vary so much depending on lease-up, Certificate of Occupancy versus bids. I would tell you, JV is more like buying the safe annuity and some of the others are more swinging for the fences, much higher returns.

Great, thank you.

Thanks, Todd.

Hi. Just a follow-up on Todd’s question, just curious what your typical return is for the Certificate of Occupancy deals that you are looking at today that are in the pipeline?

So, we try to target – we target 200 basis points over what we believe a stabilized asset – we would buy stabilized asset for in that market. So, we are looking at stabilized cap rates of the 31 Certificate of Occupancies we have approved this year between 6.5 and 10, and that will give you a 7-year cash on cash between high 5s to 8, all un-levered.

Okay. And then could you give us just a snapshot of it sounded like SmartStop was a big driver of kind of outsized non-same-store growth of where that portfolio stands today?

Yes. So, SmartStop compared to our underwriting assumptions all year has been outperforming in terms of revenue growth. It continued to outperform in revenue growth. Our problem has been on the expense side, where we have been spending higher than our original projections. In the quarter, the expenses continued to be – well, didn’t continue, they actually came in right on budget, and our revenues continued to be – continued higher. We actually were about $1.1 million ahead for the quarter for SmartStop alone in NOI.

What’s the occupancy there?

You are just over 90%.

And just one last question, I think it was Joe, correct me if I’m wrong, may have said that on demand valet could have been a driver of maybe some acceleration in New York. Do you guys have any sense of market share in New York or other large metros for the on-demand or valet?

We really don’t. Talking to some folks who have large exposure in Manhattan in particular, they had a hypothesis that there maybe – that business may be gaining some traction there, but it’s really just a guess at this point.

And any other markets that kind of mimic Manhattan like San Francisco?

We haven’t heard that yet.

Okay, thank you.

Thanks, Juan.

Hey, guys. And Spencer just wanted to say congrats and it was good working with you. I know everyone else has said that, but wanted to get that in myself.

Thank you, Neil. I appreciate it.

Sure. And then my question – two questions. One, how many people in the quarter were eligible in your total renter population to receive a renewal?

In terms of how many people are eligible, it’s tough to… Yes, percentage-wise, we give about – was one-twelfth basically, because we are raising rents every month, but we give about 80,000 rental increases every single month.

Okay. I just wondered because you do the 5 and 9, so do you think if people are there for…

Yes. Some people don’t stay the full year though, so some people get that and get both and other people don’t get that. They just get the first. And some people don’t get it.

Sorry, so it winds up working to about roughly like saying someone gets one per year because of the churn and people leaving, etcetera?

About 10% of our customers actually get them every single month is where it turns out to be. So it’s slightly higher than one-twelfth...

Right, okay. And then my last question is on expenses for next year, obviously I know you guys aren’t giving guidance. But would you expect to see any more pressure on expenses just from real estate, number one, because you have more deliveries coming, so maybe more price discovery from municipalities. And then number two, as you get more competition you will be spending more on marketing and things along those lines that will hit the expense side?

So I would tell you, from a property tax perspective, it will be above inflation. I mean, the last couple of years we have seen 4% to 6%. We expect that again next year. We hope to be able to grow less than inflation in some of the other areas by some of the things we are doing. So hopefully, that will offset some of it. But in terms of marketing, hopefully as we grow, we will certainly experience the size and scale benefits. So we hope to keep that somewhere in the inflationary.

Thank you, guys.

Thanks, Neil.

Hi. Thanks for taking the follow-up. Just back to the migration from a secured balance sheet to the unsecured, does that do anything to your cost of debt? I know you are a nimble borrower on a secured basis, but now on an apples-to-apples basis, do you think that will adjust your cost of debt down? That’s part one. And then part two is do you think that helps your valuation in the stock as you guys kind of move towards a more, I would say, modern era REIT?

I would tell you there are a couple of things for us. One is hopefully it decreases our average cost of debt. And then two hopefully, it extends out the average length of maturity. In terms of whether or not that increases the value, I think that will leave that to the investors and the analysts.

Great. Thank you.

Thank you.

Again, this is very heartfelt. It’s been a pleasure working with each of you. Thank you for making the last 7.5 years so enjoyable. I appreciate your support and interest in Extra Space and we look forward to next quarter’s call.