Welcome to
Salt Lake City and welcome to the 2019 Extra Space Storage Investor Day. We're happy to have you here. This event is also being streamed via webcast. The link to that webcast can be found on our IR site. There's also a press release sent out earlier this week as the link and the login instructions.
We're excited to have you here. We're grateful that you'd make the trek west, make the trip out to Utah to get to know our team better, learn more about Extra Space, and we appreciate the interest and the support. We also recognize that some of you might have come because there's a skiing activity day tomorrow, and that's great. We're happy that, that got you here. We also know that there might be some of our friends like Ki Bin, who came really just for Sundance to test out his new hat.
We're excited to have him as well. Again, whatever got you here, we're excited to have you. In our 2018 annual report, we talked about 4 properties of success of Extra Space Storage. And when we have our earnings calls, when we go out to conferences, meet with investors, we spend most of the time talking about performance, that 4th property. The goal for today is to focus on the other 3.
We hope that after you've met with us, have a deeper understanding of our best in class portfolio. We hope that you have an appreciation for our diversified portfolio and how we maximize the revenue and the value of each and every property. And most importantly, we want you to know our people. You'll see here in the room, we've got a lot of the team here from Extra Space, who might be different folks than you typically see out at NAREIT, for example. These are essential department leaders that really drive the business and can answer many questions in great depth about how we do things here at Extra Space.
So we're happy to have you here in our backyard. We're happy to have you meeting our team. I just want to walk through the agenda quickly for the day, as well as a few housekeeping items. We're going to executive presentation that will be given by Joe Margolis, Scott Stubs, Saundy. After that presentation, we'll have a marketing section, followed by a 15 minute break.
After the break, we'll continue with presentation on revenue management and then IT and Innovation. We'll then break for lunch. Lunch will be out here in the foyer. And after you've had a chance to get your plate, we invite you back into this room again. We'll have a lunch speaker from our people department talking about the culture here at Extra Space Storage, which is an important part of what we do.
After that, we'll have a presentation by our acquisitions team and followed by our 3rd party management and asset management team. After the management presentations, that will conclude the webcast portion of the event, but those here in attendance will be taken to a property tour at a local store here just a couple of miles away, followed by a tour of our call center, you get to meet the leadership team out there, see the process of the call center. After that, between that and dinner, do have some downtime. We'll drop you off back here at the hotel, let you catch up on emails, any other work that you need to do. But we'd also invite anyone who's interested to come tour and visit our corporate headquarters, which is actually just about a mile away, not even a mile, half a mile from where we're standing now.
So to the extent you'd like to see the corporate office, we'd love to have you come over and we'll have some vans available to shuttle people over, if that's of interest. Just one a couple of other housekeeping items. The Wi Fi link to use is under Hyatt meetings and the password is hyatt, all lowercase, for anyone who needs to connect. Also, as I mentioned, since we're streaming this event, typically, as you know, we really like this to be in formal meetings and we want to keep a dialogue going. Since we're streaming this and it's being done through the microphones, we'd actually ask that you hold all questions until the end of the session.
At the end of each presentation, we've earmarked some time for Q and A. So if you hold on to the questions until then, we have a roaming mic that we can pass around. Please just raise your hand or stand up, we'll have someone bring it to you. If you'll state your question into the microphone so our streaming audience can hear it as well, we'd appreciate that. And with that, welcome again.
Thank you for coming. And I'll turn the time over to Joe Margolis, Chief Executive Officer.
Thanks, Jeff. Good morning, everyone. Thank you all for coming out to Utah. I know it's a long trip and everyone's busy, particularly at this time of year. And we reward you by sticking you in a basement conference room and feeding you this fine Hyatt breakfast.
So at least we're not being profligate with shareholder dollars. So we meet a lot. We meet at NAREIT and we meet at other times. And we thought what we do today is try to talk about some different topics or talk about the same topics but in a little more detail to give you a better understanding of our platform and of our people and how we drive performance. So I'm going to talk about 3 things today.
And these are kind of the things that are most foremost on my mind right now. First is, how do we grow in the current market? If that green circle is bigger, I would say, how do we grow accretively in the current market? How do we grow accretively without taking on too much risk in the current market, but limited by the size of the circle? So how do we grow in the current market?
We're going to talk about new supply, but maybe in a little different way than we've talked about it in the past and then talk about sustainability. So let's jump right into it. So this is a chart of our historical FFO growth. And you could see that by any measure, absolute comparative measure, we've done a really good job of growing FFO in the past. And that's great.
But we also realized that no one holds our stock for what we've done in the past. And our challenge is to continue to create outsized FFO growth for our shareholders. But that's getting tougher. It's getting tougher because we've become a bigger company. So our same store pool is bigger.
And therefore, the contributions to FFO of our other businesses, our management business, our insurance business, our CO program, make less a contribution on that bigger base. And secondly, we're in a market environment of moderating revenue growth. So even the growth within our same store pool is lesser than it has been in previous years. So that's the challenge that we think about all the time. How can we continue to grow FFO while staying in our sandbox, right, not getting away from our core business and not taking on too much risk.
So I want to show you this chart. And I know you've seen this chart a 100 times and we always show it. But it is very important to our strategy of growing FFO. So we have these 3 buckets or 3 alternatives of growth. We have our wholly owned sleeve joint ventures and managed properties.
And this does a number of things for us. Firstly, it allows us to approach the market in any market environment and continue to grow. It gives us optionality and flexibility. It also gives us more scale across the market where we can form more relationships and have a broader footprint because we don't have one price fits all. We don't rely on being the high bidder in a marketed deal to continue to grow.
We can address a certain economic climate. We can address a certain owner's situation and circumstances and try to make a deal and continue to grow. So if you look at what we've done in the past and if you take out 2015 where we had the broker deals represented there is almost all the $1,300,000,000 SmartStop acquisition. You can see that very little of our growth in the past comes from being the high bidder in a marketed transaction. That most of the way we're growing is buying from our joint venture partners, buying from our management plus or because we have this broad footprint in the market, we have lots of relationships, We're able to get to deals before they go in the market.
And that's been very helpful for us. And I expect it's going to continue in the future to be the way that we continue to grow and move FFO. So what are our strategies? What are things that we're going to do to try to maintain this superior FFO growth? Well, clearly, we're going to continue doing joint ventures.
As a company, we've been doing joint ventures since 1998 And they've been a great vehicle for us. We can de risk investments through joint ventures. We can enhance our yield because not only do we get our proportionate share of the real estate return, but we get management fees, we get tenant insurance, and we have the opportunity to earn a promoted return. We expand our relationships and we have an acquisition pipeline, as we just showed you. So let me give you a recent example of this.
This is a deal that closed the 1st week of January 2019. So this is 2.5 weeks old. This was an acquisition we made of 12 properties in California from a joint venture partner that owned 95%, almost 95% of the assets. It was a $280,000,000 transaction. And at the property level, it was a sub-five cap, forward sub-five cap after tax reassessments.
But we had within this venture almost $73,000,000 of embedded promote that we could not get to without a capital event. So by buying the assets here, that was a capital event, which we could then realize to promote, apply it to the purchase price. Our 1st year yield on these assets after tax reassessment but giving effect to the embedded promote was a 6.3. 3. So let me show you where these assets are.
10 of them were in Los Angeles and 2 of them were in San Francisco. These are infill assets in barrier to entry markets that are under no supply pressure. So our ability through this joint venture relationship to buy these assets at a 6.3 1st yield before anyone else on the market sees them is a great example of the benefits of joint ventures. So another strategy is preferred equity. So in 2018, for the first time that I'm aware of, we executed 2 preferred equity tranches in our joint ventures, where we were able to take the 53% to 70% slice of the capital stack and provide a 53% to 70% and get an 8% yield is very attractive way to deploy capital.
And we're able to address a prospective partner's need and execute a transaction. We also had a 10% of the common equity, if you would, in this deal and manage the properties. So those 2 transactions were about $47,000,000 So another strategy deployed in 2018. OP units. We've been doing OP units for a number of years now.
And it's a great option for an owner who has a low tax basis and a tax problem, but wants to dispose of his properties. And because we can offer this tax efficient method of transacting, we are a preferred buyer. And we don't necessarily have to pay full market price because we're bringing something else to the table. We're bringing tax deferral. Well, also in the last 18 months, we have executed a number of preferred equity preferred excuse me, preferred OP Unit transactions.
And these transactions were with sellers who were uncomfortable taking the risk of volatility in our stock price, wanted to have a fixed OP unit with a fixed coupon. So we executed a number of these transactions with the coupon, the low of 3% and the high of 4%. So again, for us to be able to use that type of currency, which has a cheaper coupon than our dividend, cheaper than debt that we could get now and be able to get to transactions provides us a great way to stay active. Noah Springer is going to talk about our 3rd party management business later. So I won't say too much about that other than we all know that's been a very large and growing way for us to increase our revenue without making any capital investment.
It also does a lot of other things for us, expanding our relationships, more data, cost efficiencies and an acquisition pipeline. Similarly, our captive insurance company has become a very large profitable business for us. And unlike some of our competitors, we do not share insurance proceeds. We get 100% of insurance proceeds on all our wholly owned properties, all our joint venture properties and all our managed properties. We're very focused on maintaining this as a very profitable business.
In 2018, we started a bridge loan program. So this was a program we started because we perceived a void in the capital markets The people were building self storage facilities, they get a 60% to 65% loan to cost recourse construction loan, build the property and deliver it. Well, now they've added value, the property is under levered, but they don't have a good permanent loan solution. They can't go out and get 10 year CMBS. They can't go get an insurance company loan because the building is empty.
It has no cash flow. So as you know, we have a very active CO program. We've done about 75 COs that we've either bought or have committed to buy and we've underwritten 100 of others. So we are very comfortable valuing an empty self storage building and buying it at 100% of what we perceive the value to be. So therefore, we should also be comfortable lending 75% to 80% of value against that.
And this does a number of things for us. One is, it just gives us another product, another tool to offer people in the market, again, expanding our relationships. We're going to manage all these buildings. So it expands our management platform with the associated fees and tenant insurance. And we're basically spread lending, where we're borrowing off our line and lending to these partners and making a spread.
Now we were concerned we didn't want to move our leverage too much by borrowing off our line to do this. So we've set up a relationship with the debt fund where we can sell the A notes to them, keeping the B notes, thereby minimizing the amount of dollars, but increasing the return to the low teens. So this is a new program for us. We have 2 loans done. We have 1 in the pipeline.
We're going to walk before we run. But again, something that we saw a need for in the market that no one else was doing that we jumped in and did. And what's next? Well, I can't tell you. But I can tell you we are working on new things.
And we will continue to be innovative, to be flexible, to be creative, provided we're staying within our core business and we're keeping our eye on our risk profile. New supply, let me turn to my second topic. So since I became CEO, this has been kind of the number one topic. It's the question everyone asks and rightly so, right? We're in a development cycle.
New development is impacting operations. And it's a very appropriate topic to question and talk about. That being said, we get questions like how many properties were delivered in 2018? And how many properties are going to be delivered in 2019? Is it more or less?
How much is construction costs going up? All these macro questions. So we get asked, how many of your properties are impacted by new supply. And we did some research and we came up with this stat that about 50% of our properties have new supply within a 3 mile radius. And that's these kind of macro questions are kind of interesting.
But to be honest with you, they're not meaningful to us in terms of what does that mean for our properties? What is that going to mean in terms of guidance or budgets? Or what does that mean in terms of how we have to operate in response. We also get questions that are a little less macro on markets. What are the good markets?
What are the bad markets? So here Smith Travel puts out some data that shows that Denver has 23.4% increase in supply in 2018. And you could see all the other markets. And then in 2019, we see New York jump to the top, but we see the number of markets in double digits go from 6% to 2%. Well, that's kind of interesting too.
But that's true macro also. That doesn't really help us. That doesn't tell me that New York is a good or a bad market or that Atlanta is a good or a bad market because this is not that macro of a business. So let's look at one market and I'll try to show you the way we would look at it and maybe that would help you. So let's start with Atlanta.
So this is Atlanta in December 31, 2015. And the green triangles I got to go back to kindergarten if I don't my shapes. The green rectangles are our stores and the gray dots are every other self storage property at the end of the year 2015. So sorry, guys, can you see? So in 2016, the stores represented the blue dots were delivered.
And then in 2017, the stores represented by the red dots were delivered. And in 2018, the stores represented by the yellow dots were delivered. So this is about 12% of the stock was delivered, new stock. So that sounds bad, right? Because Atlanta's population didn't grow by 12%.
So that's a lot of new supply in the market. But you could see there's areas on this map where we have stores where there is no new supply that are not affected. And there's other areas where our stores have a lot of new supply coming near it. So it's not a one market situation. It depends more on the micro market.
So let's look at a couple of examples. Mount Vernon Highway. And the orange ish squares or diamonds are our customers. So we know where all our customers are coming from for that store. And the blue dot is a new development that was delivered in 2016 about 0.6 miles away from our store.
And the 2 yellow dots were delivered in 2018, 1 inside the 3 mile radius, 1 right outside. All of these are public company competitors. The other thing you could see is that if you drew a vertical line right at the 1 mile radius, we have almost no customers from the east of that. Our customers all come from the west. So when we saw the new supply coming in 2018 to the West of us, we were not overly concerned.
We did not adjust our budgets that much in face of these new competitors because we felt given where our customers come from, we outpositioned them. And in fact, this store had 5.5 percent revenue growth in 2018 even in light of these new competitors. So let's look at a different situation. This is very similar, right? We have a new competitor almost across the street delivered in 2018, which is a mom and pop and then a new competitor about maybe 2 miles away, also in 2018.
And we also had 1 in 2016. And coincidentally, we have the same dynamic, where if you drew that vertical line outside the 1 mile radius, all our customers are from the west, virtually all our customers. And because of the location of this new supply, we were more worried about this. We knew this would have greater effect on us. And in fact, it did.
We lost 200 basis points of occupancy here down to 93%. And our projected rent went from 6% to 3.5% in the face of these new competitors. So the point I'm trying to make is, for us, when we try to understand the impact of new supply, we'll look at a store by store level. And we'll look at where the customers are and how much market presence we have in that market and how much digital presence we have in that market and many other factors to try to understand what the impact is on our stores and use all that to produce our guidance going forward. And it's not sufficient for us.
I understand why it's what you have to do. But for us, just to look at macro statistics on number of stores or square footage added to a market. Okay. My last topic is sustainability. So Extra Space has been pursuing sustainability projects or activities for a number of years.
But we haven't communicated it very well. And now ESG is becoming a much more important issue. And we need to do a better job communicating what we're doing in this area. And one thing we've done in that regard is we've put on our website under the IR tab a description of some of our sustainability activities. We also took the GRESB survey in 2018 and will join GRESB in 2019.
And we'll continue to add surveys and do more in that regard. But what are some of the things we're doing? Well, on the environmental front, we've had a very active solar program for many years. We invest about $20,000,000 plus or minus a year in solar projects. And that's great for the environment and we're happy to do it.
But it's also great for our investors. We get a very good return and we choose projects where we do get a good return on our solar investments. And similarly, we've had a very active lighting retrofit program where we bring existing stores or require new stores to be at the highest standard, which again is good for the environment, but also saves us money on the expense side. I'm not going to talk too much about the social side because we have a lunch presentation about our people and our culture. But one thing I will say that I am very proud of is we were ranked 73rd in 2018 by Glassdoor as the best place to work out of over 700,000 companies.
So top 1 tenth of 1%. And frankly, that's because we value our employees. We Clint will talk more about that at lunch. And then lastly, on the governance side, we have and will continue to adopt best practices on the governance side. And we feel we have a good scorecard in this regard and we'll continue to strive to get better.
One thing in 2018, one development is we appointed a new director. Ashley Dreier is our 2nd female director on our Board of Directors, 2 out of 7. You may not be able to tell from this picture, but she is younger than me. So she also provides some age diversity. And she's also an IT expert.
She's the Chief Technology Officer at HealthEquities. And that's a good diverse skill set that we like to have on the Board. So she kind of aided our diversity across 3 categories, if you will. So I hope that was helpful. I hope today I'm pretty sure today is going to be helpful as you get to meet some more of our people, understand in a little more depth our platform and see how we drive performance.
Jeff, are we taking questions? Yes. Okay. Michael.
Thanks, Joe, for having us out here. One of the things you talked about from a challenge perspective was as you've grown in size, all the other businesses are less meaningful to that bigger base and moderating same store becomes a challenge on the growing base. The example you gave in terms of buying out your joint venture partner, good return because you're able to use the promote, but that just enlarges the base further. So how do you think about shrinking the size of enterprise value and leveraging your joint venture capital, institutional capital today to be able to get a higher octane return from all these other interesting things that you're doing? And is that something that's in the cards to sort of reset the size of the enterprise?
So we have thought about that. And we've thought about that from let's drastically reduce the size to let's be more measured in that. And we did in I guess it closed in the beginning of 2018. We did take 36 wholly owned properties and transfer them to a ninetyten venture and use those proceeds to 1031 into higher growth properties. So we took one step in that direction.
We the future, but we don't currently have a plan to massively shrink the size of the company to try to maximize FFO growth. What we're going to try to do is find more things to move the needle. And importantly, we're not looking for the home run, right? I'm not looking for something that is going to one big swing that's going to jack FFO because frankly, if that misses, you're in a bad spot. We're going to find a lot of little things that just move the needle a little bit.
So bridge loans are going to move the needle a little bit. These are the things I talk about. We're all going to move the needle a little bit. And that's our strategy.
You had that what next bucket? Can you give at least some broad strokes of what types of things are in there? Because a lot of the other boxes are capital driven, right? So OP units, preferred, bridge loans, leveraging the existing management platform and insurance platform. What other ideas are you thinking about?
Are they more capital driven or are they more data analytics management driven? Just to give us a sense of what other things are in the kitchen.
Okay. So I can tell you without any
No one is listening. You can shut off the webcast too.
Cut off everyone from Malvern, Pennsylvania. So we are working on another capital light strategy that would involve no investment in capital but produce returns
for us. And if that
closes, we'll be happy to tell you about that. We're working on a ton of things on the technology side. And we have a product development session, I think, right before lunch. And Dana is going to talk about marketing and pricing. And so we'll have a lot of today.
We'll focus on some other things we're doing. And hopefully that will give you a good answer to that question.
Can you just talk a little bit more about the bridge loan program, what your expectations are in 'nineteen or maybe in the next couple of years in terms of how big that opportunity could be for the company?
Yes. The question was how big could the bridge loan opportunity be for the company? And the answer is we don't know, right? We when we first thought of the concept, we kind of went out and tested the market and got tremendous response in a very large pipeline. So then we did work to set it up, right?
We don't have servicing. We had to arrange that. We didn't have the 8 piece bar. We had to arrange that. And then we've approached the market and we've started to get some traction.
But we're also finding that it's leading us to other stuff that we didn't anticipate. So we thought these would all be empty buildings. The first two loans we did, one was 30% occupied, one was 70%. It was just someone needed to buy out a partner. They wanted to do an expansion.
There was different situations. So again, we don't know how big it's going to be. We're going to walk before we run. And it's going to lead us to other things. We find that the more we're in the market talking to people about different things, trying to solve their problems, the more we're able to expand what we do.
So I don't really have a good answer for you, but that's it.
The deal you just pulled off this month in California? It's sub-five cap rate. I'm assuming it's fully occupied or maxed out. Can you speak to the growth rate you expect there? I can't imagine your cost of capital is below the 5% at this point, But you had to harvest there had to be a capital event like you said to harvest this promoted interest.
Can you go through your return based on IRR calculation? Or what's the upside here for providing something in California like that sub-five?
So the yield to us is not sub-five, start with. Our first yield would be about 6.3, right? Because we didn't pay any dollars out of our pocket for $73,000,000 of the purchase price we effectively cashed in our promote. So California, those markets in California have not had and we don't anticipate them to have the supply pressure that we've seen in other markets. We have experienced and expect to continue to experience greater than portfolio average revenue growth in those markets.
So I'm sure Zach underwrote them at 3% revenue growth because that's the maximum he underwrites anything at. But our expectations in California in our history has been that we've achieved greater than that. So these are very mature, very stable properties. There's not a lot of value add opportunities on them. It's really a revenue growth play.
But there's also very, very little downside to these. We've been managing them for years. We know them. As you know, as storage gets older, it gets a higher percentage of longer term tenants, they get more mature.
Thanks, Joe. Thank you for the presentation. So given the amount of supply that's in the market, obviously, you've done a good job of explaining how it's going to impact your portfolio on a much more MIPO level. But how much of those developments, let's call it a few $1,000,000,000 per year over the next few years, is going to do you think will actually turn into some sort of investment opportunity? Do you think that's going to all those developments are in long term ownership hands?
Or is there a high likelihood that a lot of those will be transacted in some shape or form?
I think the latter. I think a lot of the developers that we see are more merchant developers or they have raised private equity money that is IRR driven. And as these developments lease up and maybe don't meet the expectations of the bank or the investor or the developer, I think people are going to want to take their chips off the table, particularly if they can make a little bit of profit. So we anticipate that there will be opportunities to take advantage of disappointed developers, if you will.
Two more questions just to make sure we stay on time.
Joe, so you guys talk about culture a lot. And when we've had conversations, you always say culture is what sets you apart from your peers. I'm sure there's a lot of employees that kind of shuffle around the industry. So what is it about your culture that sets you apart from your peers? And what is it that your employees that have worked at elsewhere when they come to EXR, what are the few things they notice that are different?
We're a value driven company. And I think it's easy for people to say that. But we have 5 corporate values that we talk about all the time and we try to live. And I'm sure we're not perfect and I'm sure we make mistakes. But people are encouraged in this company to if they see something that is contrary to our values to raise their hand and say this is not right.
And that these values revolve around how we act, how we treat each other, what our goals are, what type of passion we bring to work every day. I think we just we do a number of things that exhibit these values. And I'll give you a couple of examples. Twice a year, actually three times this year, Clint and myself and some of the other senior executives will go out and we'll have 9 or 10 meetings in 3 days, breakfast, lunch, dinner, breakfast, lunch, dinner in 9 different cities or 10 different cities. We'll get in a room like this.
We'll bring in 50 to 65 store managers. I'll give them a brief presentation. And then we'll do speed dating, where I the senior executives go to each table for 15 minutes and move. And the concept was within a 2 year timeframe, every employee in this company had a chance to sit down and ask the CEO 1 on 1 or in small groups, ask questions. And we listen.
We get some great ideas. We had a great pricing idea 2 town halls ago that came out from a store manager. And we it benefits us in that if I think I can understand how a store is being run by sitting in my office in Salt Lake City, I'm fooling myself to get out and talk to the store managers like that is very important. And it also makes the store managers feel like they're part of the team and they are part of the team and that they're heard and that they have this voice. So that's one thing that we do.
We do all sites calls. We have many benefits, we think. I mean, at the end of the day, if you look at our payroll, we pay our site managers 30% more than public storage pay centers. Why do we do that? Those are the people taking care of the stores and the customers.
Those are the people going face to face with the customer at the end of the day. And we think we get a better quality store manager out of that. And we think that it improves our performance at the stores. Our stores almost all our stores are closed on Sundays, right? We tell our store managers, we guarantee you will have one day with your family every week, right?
That's very unusual in retail. We get a lot of people from the retail sales position. We attract better people because that's something we can offer them. Do we lose a couple of leases every Sunday? Maybe, maybe not.
Our performance would indicate not. But again, that's something we do differently that we think our employees value and we get more out of them in return. Clint will talk some more about this later.
One last question and then we'll move on to our next presenter.
So you spent some time on supply. You've also touched on technology and some of the advancements you're working on. I'm wondering as you think about supply and we look back historically, the impact supply has had. Are you seeing anything whether it's new technology to be able to better weather some of this supply storming, whether it hold occupancy more, hold rent, withstand what's coming here in
the next year or 2? It's a great question. So Dana is next to come up and talk about marketing. And one of the things is getting as many people into the funnel as possible. And how do you make people aware of your store and get them onto your website or calling the call center or walking into your store?
And that's the first step, getting as many people into the funnel as possible, right? Because as you said, there's only so much demand out there. And then once they're in the funnel, how do you convert them? How do you make sure you change that into a lease? So your pricing has to be right, right or right enough.
And then you have to have the store manager that we just talked about convert that opportunity into a sale. So our store managers are taught to do 6 things for every single time someone walks in the office, stand up, greet that person by name. If you call the call center, they'll say, Jeremy, how's your move going? I understand you're moving. You have some personal connection with you and do some other things.
So we focus a lot on how do you fill the funnel and then how do you convert those opportunities to rentals. Dan will talk some
more about that. I think
to say our occupancy obviously has weathered this better than I
would say our occupancy obviously has weathered this better than the last one. During the last
building cycle, you saw occupancy fall. If you look at the big companies today that have a large presence on the Internet, they have weathered it much better because while you may not be able to generate demand, you could potentially steal demand. And I think the big companies have done
a good job at that.
Thank you, everyone. Our next presenter will be Samrat Sande, continuing with the executive section focusing on operations. Thanks, Jeff.
Just want to do a quick raise of hand. How many of us are here for the first time in Salt Lake? Few. How many skiers in the group? Just a few.
Okay, good. As Jeff said, my name is Samrat Sundi. I think I know some of you. I work in operations. I've been here about 16 years now.
And in the interest of skiing, I love skiing, but I'm a horrible skier. I'll make everyone else look good, even if you're not a skier. We'll start I'll Like Joe said, we'll go down. Normally, we don't want to talk with you. We'll talk high level what's going on with numbers, what's going on in markets.
Today, we peel the onion a little bit. I'll give you a little taste of what goes on behind the scenes in the operations world. Everything we do in operations is driven around these 4 pillars: people, efficiency, product and customer. In the next 5, 10 minutes, we'll take a couple of these pillars and give you examples of what we do in these pillars. Let's start with the efficiency pillar.
Let's go here. So Joe talked about how new supply is impacting us. And we'll share with you a tool that we use to figure out to look at data, help us from an analytical standpoint and be efficient in how we run the business. So Here's a question, a business scenario. What's going on in Dallas?
We hear a lot of new supply coming in. And how is performance in Dallas? What do we do in Dallas? Because revenue growth is slowing down, occupancies are dropping. So we will now jump into a tool.
We have a tool, a Microsoft tool called Power BI. Anyone familiar with Power BI? Just one percent. So I'm glad Scott raised his hands up. He should be.
And we'll give you a little tour of what how we use Power BI to answer the question, what's going on in Dallas and why. It's a Microsoft tool. It's a home for all our data reporting and we use it for analytics. And as soon as we get over this, is so there's a dash fields I'll just talk while this comes up. There's a dashboard, you'll see actually my dashboard that will pop up here.
We have a dashboard for different levels of organization. Our store managers have a version of Power BI. Joe has a version of it and the dashboards are audience appropriate. It reflects the KPIs you want to show to different audiences. Here it is.
So this is the tool here. Let's go see what's going on in Dallas. So we click one of the tools one of the tiles are called property financials. Brett here is is pushing the button here. We'll go to one of the tasks called revenue growth map here.
So at the first glance, I'll just give a few things here. And I'm pointing on the screen here. I would ignore the numbers. These numbers are not this number is for the data for the month of September, but I would ignore these numbers. Don't pay too attention.
Just pay attention to the story. Let not the data come in the middle of that. That's a joke. This is the map of our country. This reflects all our stores or our mature stores in the country.
Brett, if we can go into Dallas, so let's go more inside of Dallas. Let's go one more level and that is good. So just let me explain what this map is here. Each circle here is one of our mature stores. Red is and this is for year over year revenue growth.
Dark red is bad, dark green is good. So we can see and the size of the circle is the amount of revenue coming from that store. So if we take a couple of examples here, we'll see here this store in Dallas, Southwest North Central. Its revenue growth is just 0.2%, almost flat and the revenue coming from is about $220,000
So a few things we
learned from this map. 1, when we hear about Dallas is not performing well, lots of new supply coming in, what do we do in Dallas? We're thinking should we drop rates? Should we have some promotion? Should we spend more?
One we can see, it's not uniform. I can almost draw a little circle here and see, look at all these green dots at South Dallas, Duncanville, DeSola, all these are positive here. North Dallas, anyone from Dallas here? North Dallas, Plano, Lewisville, Northeast, a little bit Northwest, there's a lot of red here, a lot of new supply here. Even Fort Worth is mixed, some yellow, some red.
So this tells us, 1, we cannot treat every store the same. We cannot treat every submarket the same. Now if you want to find out why is this diversity in the Dallas market, we go to another Power BI map. And if you go here, the Power BI map here with competitive map here, this data is coming from Yardi and from what we gather ourselves. It has all our competitors listed.
We will go and click here, just by market, we've clicked Dallas, North and the suburbs. And we'll click for just ease of this discussion, we click this year right here. We can see by the year of opening, let's say we want to see what are the market stores that have opened the last 3 years in the Dallas market. So we've clicked those and now let's go into the Dallas market. You can see all the new supply that has opened in the last 3 years in just the market we just saw.
And here, each of the dot is one competitor that has opened up, including our stores that have opened the last 3 years. The blue dot is the life, orange is public storage, red is cube, everyone else and green is us and everyone else is gray. And we can see here, it's it highly correlates to the revenue growth map we saw. There's not much new supply here except the one here. I think this is in a short storage here.
You can hover over this
and you can see who the competitor is, when they opened. But you can see here why did we have those green dot circles there and why there was so much red out here. It's because we have a lot more supply up here than down here. That tells us that when we go into these markets and we want to decide what to do with stores that are underperforming or performing, we need to have different strategies for these stores. On this map also, we can see the let's go to this one public storage in Lewis Hill here.
Brett, if you can just click here, just click that orange dot here.
We can see that.
And if you don't mind clicking on that orange dot, you'll see here it's public storage. It's 124,000 square facility with some more data. This level of data goes, you can see it here, but also goes into a database on what do we do with the Dallas market. Thanks, Brett. If you can go back to the presentation.
Our number 2 example that I want to share with all of you on how we try to be efficient is our district managers have a number of stores they manage. This data is here is number of stores managed by, on average, by our district manager. 4 years back, on an average, about 14.5 stores were being managed by our district manager. We have 109 DMs today. On average, they're managing 16.3.
And there are lots of ways we've achieved this over 10% efficiency growth. Things like, one is by natural, but as we add more stores, density increases, so the drive time from one store to the other reduces, so we can ask our deals to do a little more. Another example, when we foreclose on units and we sell the units in auction, you have to go through a process of auction, a checklist and it has to be signed off by the district manager. That process is outsourced. We have a third party vendor that does it for us, so that DMs can focus on more on what they do best and therefore we can increase the number of stores that the DMs manage.
The last thing we look at is on the people pillar and what do we do on the people side. So here's an example of what we do on the people pillar. We have a sales process. If you walk into our store as a customer, we'll follow a process, we'll stand up, greet you, if possible, open the door for you and we go through these steps, greet access needs, talk to the customer while we're walking, showing them the unit, talk about our rates, the discounts, sell the value and we'll see how we're doing. How do we get to all these different steps and what actions do our managers take?
We'll take it a step further. We'll then we shop our stores using a 3rd party vendor. So we have a vendor that goes and shops multiple times a year, goes into our store as a customer and goes through a process, exact same process on how we are doing the sales process. After the visit is over, they submit they fill in a survey of 30, 40 questions. And here's an example of one of the questions.
This is one of the first questions we ask, which is, how were you greeted when you first entered the location? This is the shopper answering it after their experience. And this data is for a market. Again, I wouldn't pay attention to much data, but about 90% of the time in this survey, the shoppers said they were greeted very enthusiastically, 10% not so much. So we know, 1, this is an area we need to focus on if this is not where we want it to be.
But how do we know whether this is an important part of our business? We'll take this, throw it to our scientists and then we'll try to correlate each of these questions with performance. So here's an example. Here's a plot. We'll take that question and say, how many of the reservations that came in converted into a rental for us?
And where the greeting was enthusiastic, what was the conversion ratio? And where the greeting was not so enthusiastic, what was the conversion ratio? In this example, you can see there's a 2%, 2.5% higher conversion ratio because of just how we are greeting our customers. We feed this data point back into the sales process to further fine tune what do we focus on in the sales process, What do we have to do better so that we can improve the conversion ratios? There are some things we were asking in the past that had no correlation and that is not part of our sales process today.
And with that, we can now open up for questions.
So this 3rd party firm that you hired to shop your stores, are you shopping the competitors too and getting that data?
No. It's a good question. We don't use them. It's too expensive for us to shop them. We have not we gathered that kind of information both ourselves.
I'll go shop competitors. We'll ask people to go and shop, but we have not used that for shopping competitors.
If you look at that those 6 items, I don't know if you want to put them back, what do you think are EXR's competitive advantages in those relative to your public peer set? Where do you think when you shop the other stores, how you differentiate yourself relative to the other experiences a customer would get?
So I can't tell you about what competitors are doing, right? What I would tell you is all the pieces there that drive the behavior for the manager is not just intuitive and gut based. As we saw, it's very data driven. So here's an example. When we saw in the sales process, what our data shows us is the better we do in the first couple of minutes in that sales interaction and the last 2 minutes when we close the sale is what matters the most.
The middle is not so critical. So we realize that the first impression when the customer drives into the office or drives into the curb, walks into the office, has a couple of minutes interaction with the manager, has correlation with the conversion. And how do we close the sale? How do we ask the customer, what does it take you to sign the lease today, right now, right in front of me to have the sense of urgency? The middle does not have that higher correlation.
So where and the data behind this gives us comfort on where do we focus on the sales process. I don't think so. I don't think we have found correlation between where the opportunity is coming from. We do have a little more information on the customer if it's the customer is coming from the web or the call center because they've already had a reservation with us. And so purely walk in, the interaction is a little different.
But there's no different there's not much difference in what our managers do when the opportunity comes from a different channel. Does that answer your question?
Let's just take 1 or 2 more. And Scott is also available to take questions in addition to Sumra.
The detailed analysis you do around each of the stores and the supply around them, I think is very interesting. And I appreciate what you're saying about almost on every single store basis looking at the strategy based on that. But how do you do the cost benefit analysis of being so detailed on each store, the kind of the man hours required for that, the administrative overhead, the infrastructure, the internal and all the costs associated with that relative to what you think you can actually get out of this idea of having very specific strategies around each store rather than same strategy for a general area where you can just kind of get scale?
Sure. Actually, the first sitting on your right can answer that question really well. Chandra is our Ravi Majin, but he drives a lot of our models. All this data we feed into different into our models. Once the model is built, the more the data we provide, the more we get out of it.
But the level of intelligence when we saw the map, it helps us create some hypothesis of what should we looking or what should we build a model around. It's not that complicated once you start peeling the onion and start putting all the pieces together. And what we've seen here is actually not even it's a little smaller, IOTA, what we do. We can go further into the store also, and it's a different strategy for different units. For example, we looked at new supply and say, even if you have a new when you have a new competitor open next to our store, it's going to impact us.
One of the things we'll see sometimes and you see it in Dallas also is our non climate control units are not getting severely impacted. Our climate control units are, especially smaller ones, which makes intuitive sense because all the new supply is what, 5x5 climate control, 4 levels up. So if you have a 10x20 drive up, those are more resilient. All that information is being gathered with the data and what we see. So it gives us output on terms of let's not drop rates in the big non climate control units.
We have to drop rates, drop more in the small climate controlled units.
State your name before your question as well. That would be helpful for the listening audience.
Yes, Jeremy Metz with BMO. Just you've talked a lot about the importance of people and interaction in this process that all this data feeds into that. So how does that play into the concept of a customer being able to fully lease a unit online and never have to interact or come to a store?
[SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] So right now, all our customers interact with our managers when they rent a unit or lease. We think we'll get to a phase where there will be a certain proportion of customers who may not want to interact with the customer and we are working on solutions around that. We think we can provide go ahead.
I was going to say, in future presentations, there will be additional discussion around some of the evolutions with sales process channels, etcetera. So
if you have more
to add, you can, but we'll get to that.
I think when James talks, he'll be a good one to ask that question. I hate to punt your question. Okay. Perfect.
Thank you, Samrat. Thank you. Our next presentation is going to be on marketing. And as Dana are you mic'd up Dana? It's coming up.
Dana will be our presenter. I'm going to have her introduce herself and give you a little more detail about her personally. But just one thing that I would say is, as we're out talking to people on the road, one of the things we commonly talk about is tenure at Extra Space and the ability to recruit talent from other industries and people who started somewhere very different than storage, but have now been with Extra Space for a long time. So I'll let Dana tell a little more about that. But Dana Hathaway?
Thank you, Jeff. Good morning. So just a quick introduction. As Jeff mentioned, I've been with the company a little while. I'm celebrating my 20th anniversary in July.
Prior to that, I had some time at Advertising Agency as well as 3Com, where a handful of us came from as part of former CEOs Association. So really excited to be here. When I came to Extra Space 20 years ago, I wouldn't have told you I would have stayed for 20 years. But I think it's a testament to what you heard Joe say when he talked about our culture. It's a place where you can grow, where you have strong values and a very good work life balance.
So it's been a fun opportunity for me to be here and I'm excited to be with you today. I'm going to take you through what we do from a marketing perspective to help drive revenue for the company and make sure that we're producing shareholder value as we do that. We always try and do that while still making sure we take care of the customers because we believe those go hand in hand. Now one thing about customers that you may not know is that they're all not the same. Not surprised, right?
But customers are different and it's up to us to understand our customers and how they're different, so we can maximize the customers that we come into the funnel. So we could bring customers in all day long into that funnel that you've heard us reference, but that doesn't mean we'll get the most revenue possible. So we try and understand them as intimately as we can. A lot of that has to do with the data and scale that we have, which gives us the ability to know our customers so well. So as I go through this presentation, there's 3 things I'm going to hit on.
That's how we drive traffic, how we convert that traffic and then how we maximize that customer experience as much as possible. In order to do this, there's something that we take a lot of pride and So even before they're a customer in that pre need phase, we're in touch with them and helping them understand who we are and why in the future they might want to interact with us. I like to call this brain share. We try and get as much brain share with potential customers as we can. And this goes all the way through the customer journey until they move out, where at each touch point, we're trying to understand what's relevant to the customers during this time that we should be sharing or interacting with them.
So let's get started. 1st, on the drive traffic area. The first step of this is what we refer to as the pre need. This is where we're trying to establish that brain share that I just referenced. And we like to point out phones as an example here.
So I know everyone in here has a phone close by. If you were to pull that out, my guess would be the vast majority of them have the Apple symbol on the back. Am I wrong? I don't see many people nodding now. Blackberries.
Blackberries. Good. Hold on to that. Very retro, right? But this is the power of brand, right?
It's very interesting when you look at these phones, they're a commodity product, much like storage. But something amazing has happened in this industry where they've made you think that you need to have one over the other. One of these is dramatically more expensive. But when you look at them side by side, they virtually do the same things. As I was reviewing this presentation the other night at home, my 9 year old son saw this slide and I said, which one would you take?
And he was like, no question, the apple. He didn't even hesitate. And I said, why? You're 9 years old. How do you know you want the apple?
And he said, the logo is cool. I love going in the store. They treat me well. And they just I just love the experience. He's 9 years old.
He captured it perfectly for me, the power of the brand. So how do we do this in Well, we've invested a lot of time and energy over the last 3 or 4 years in trying to understand how we can differentiate ourselves even down to the brand, the colors, the look, the feel, that experience that my 9 year old son described. Let me tell you a few things we've done. So first of all, we started with our properties. Some of you may be aware of but we're going through and changing our color scheme to be more modern and relevant for our audience.
We happen to know that the color that we chose is also one of the most visible colors to the eye. So there's some science behind this color. It attracts you without you even knowing that it's happening. And by the way, you're seeing more and more of this color in the retail world, if you've noticed. We also have looked at our messaging and our tone.
What are we saying? How are we communicating with our customers? Are we speaking only about the features and benefits that everybody in the industry is fighting for attention over? We're trying to push away from that and we've done a pretty good job over the years. I want to talk about an example.
This messaging and this tone is hard to do just at the properties, but luckily we have a digital platform where most consumers are shopping today. So we can play around quickly, easily test and then make adjustments as needed and test more and continually learn. So one thing that we learned during this research is that our customers care a lot more just about price, location and these other features and benefits that most people are solely focusing on. While those are important, they're almost expected today. And so what they really want to know is much like that Apple experience, what are you going to do?
What does your experience include are a place that's really important during these life transitions that our customers are going through. And so they're looking for someone who cares enough to put that in a safe place and make them feel good about helping them get to that better tomorrow. They're in the middle of trying to get somewhere better. And so we've spent some time and energy trying to develop content and messaging that appeals to them, again, to get that brain share. So what we did is we started with the 2nd largest search engine to test this.
Anyone know who that is? YouTube, owned by Google, the 1st largest search engine. Surprise. So we went to YouTube with some video content to see if we could connect with our customers in a new and different way. I want to show you this couple of minute video.
So, you're going to have a baby.
You're going to have a baby.
You're going to have a baby.
You're going to get a lot of advice.
Ignore 90% of it. It's it's worthless. Here's some good advice.
Two things I wish I knew before I became fair. Okay.
Number 10. Everything you're doing
is probably the best to somebody and the worst thing that you can possibly do to somebody else. So just do what works for you and don't get on the Internet because you can Google anything and everybody has an opinion. You'll know how
to take care of them.
Do not care one ounce what other people think about you.
Bam. Yeah.
Number 9.
Get on a schedule.
Get on a schedule. Get on a schedule
if you want to lift. Schedule is key to sleep. Schedule.
Number
8. Everybody leaves this out.
So parenting is hard. You can't. Sometimes you just can't handle it.
Take just an hour. Go to grandma's. Drop the baby off. Go get some ice cream. Take a 20 minute nap.
Make a date night once a week and don't skip it.
Number 7.
This is important
instead of having to like mold them to what you want.
Discover who they are and let them be. Number 6. Be prepared for the unexpected because it will happen.
Like maybe the possibility of having twins.
There is a chance that your baby could go flying down a hill and then roll out of her car seat onto the road, which may have happened. Number 5, you've got to make room for the baby.
Crib, changing table, car seat, stroller. Two strollers, actually. That's enough that went into our room, even though he had a crib in his own room. And the toys, more crap.
He has own room. He's £5. He has his
own room, right? I don't have my own room.
Number 4,
you're going to look back and you're going to say, I wish those times will come back. So keep them. Don't give them all away.
They'll only wear it once, but you'll keep it forever.
Memories are the only thing that you'll have left, doctor. All is said and done. Not most me. Be grateful for your kids. Be grateful.
Things that you are prepared
for can
turn out to be good things in the end.
Oh, yeah. Worth it. All the poop and snot and screaming and crying and fighting, worth it. All of it. Totally worth it.
To cherish every single minute. We would never have asked for the challenge, but we were so grateful for what she taught us. We're grateful every day for her life. The best thing that ever happened to us.
Number 2, don't be too hard on yourself.
It's gonna be okay.
Some days you're just not gonna have a lot of patience, and that's okay.
It really is all just spilled milk.
The house can wait. All of the chores can wait.
You have to remember that this is a massive change in your life. And you're going to feel every emotion there is to feel, those deep, deep, deep emotions on either side of the spectrum.
Number 1.
The one thing that you just you can't understand, that you can't prepare for that you're not going to know until you experience this.
All the love.
Be prepared to love something more than you ever thought you
could because because you haven't. You haven't yet. And it will be
the best thing that you've ever done in your whole life.
If I wasn't a mom, I can't imagine. It's been too wonderful. Just relax. You're going to be great, hopefully.
Okay. So storage was mentioned very briefly, right, when the reference to stuff came up. But it was much more about who we are as a brand, about life transitions, about recognizing our customers are going through those, showing optimism, showing hope that we can help them get to where they're going. So why does this matter? What did it do for us?
Well, we quickly in 24 hours had over 42,000,000 views between social and organic. So this is when a viral goes video, you can't plan for this other than to create good content that connects with your customers. And so what this does for us is takes that brain share that I'm talking about. So our brand becomes more meaningful to people. And when they have that need, they will look to us.
In addition, it gave us a platform of learning as a marketing department, an opportunity we realized that had been untapped in the industry. So we continue to test videos, now partnering with Google to understand how to target the audiences and refine who we're really going after with more purpose of driving them into the funnel and seeing if we could create more rentals from that. So over the years, we've done tests. 1 of the tests we did was in 4 markets. And we looked at brand awareness in those markets before after a video launch that we did.
Different videos, but same concept of trying to connect with our customers. We saw almost a 200% increase in brand awareness in the before and after of those markets by executing videos that connect with our customers and then give them a call to action to interact with us. In addition, we took this same concept and applied it more broadly across all of our social channels, realizing we had an opportunity to drive traffic in a way we hadn't before. So we deployed this concept across multiple life transitions, realizing everything from organization to 6 By doing this, we've seen almost a 600% increase in sessions that we've driven from our social channels to our website. So this is something that we're continuing to be very active in and has tremendous benefit on our organic search results.
So this is the first part of the journey that I've talked about in driving traffic to our website. Now I want to take you over to what happens with that traffic. Once we have brain share, how do we turn that into traffic? And this we can't talk about without talking about Google. Google is arguably the most complex algorithm in the world.
It's responsible for 2 thirds of all searches that happen. Now to understand Google, we have to understand how complex it's become. That it's no longer just about bidding for keywords and expecting that everyone sitting in this room is going to have the same result. It doesn't work like that anymore. In fact, it's gotten more complex because of multiple device formats, including mobile.
So if a couple of you wouldn't mind, if you pull out your mobile phone, and I want to give you just a quick guidance on a search I want you to do. So you're all here from out of town. Last night, you had free time and you wanted to go out to dinner and you wanted a local favorite. So go ahead based on that criteria alone and type in what you're going to search for. And raise your hand, just need 2 people if you're willing to share quickly.
Any takers? I see a couple of people up here on these front tables searching. Who's got a result up? Or even put a term in. Okay, Clint, right here with the microphone.
Thank you. So just tell me what you searched?
I searched local restaurants and it came up Frank's Restaurants, Spitz and Cafe Trio.
Okay. Are those the paid ads? Let me take a quick peek here. Okay, one other person that we can compare this to right here. Okay, so real quick, he searched local restaurants.
What was your search term, sir?
Local food favorites.
Local food favorites. Tell me some of those results.
Embarrassed to say Sonic Drive In came up. Sonic
Drive In.
Trader Joe's and P. M. Chang's.
Okay. So we did not even have 2 that overlapped in your search results. Very similar search terms, but not any overlap. That's how complex it is. It has to do with the devices that you're using, your ISP, your search history, the search term and several other possibly 100 criteria that's being looked at.
So the reason for this is it's being very personalized on an individual basis. Why does this matter? As a marketer, we have to understand these complexities in order to connect with as many potential people as possible that might be the best audience for us. So let's take a look at the search layout. Most of you are probably familiar with this, but just a quick reminder, there's 3 components to the search page as we look at it.
The top one is the paid ads, Easy to know because it has the little ad symbol next to it. Then you have your local section, right, which is often referred to as the map pack. And then you have your organic below that. So we kind of treat these in 2 areas from our strategy perspective. We have the paid advertising and then the local section organic we refer to often as SEO, but those 2 combined are handled by our SEO team.
So let's dive into each of them a little bit fact. For all intents and purposes when you look at it, right? Cost is certainly a factor. So when we look at this in the basic auction, the person who bids the highest is at the top and then so forth. But remember how complex Google is.
They don't do anything in simple terms. So they don't treat it this way. There's another component that plays into how your search results will appear. And that's what we refer to as relevancy. So, this is just for example's sake and but there are some truths to this.
So, first of all, it may really happen where the person who is on top, in this example, it's us, but may pay less than the people below them. How does that happen? It's because of what we hear is the quality score of your advertising. So Google's sole job is to connect us as consumers with the products we're looking for as quickly as possible. So the better we do as advertisers as giving Google signals that, hey, we're the best option for you to display for this search term, the more they reward us.
Now it's that simple on the surface, but there's hundreds of data points they're looking at. So some of those are your ad headline, how relevant is it, the content here, are you giving the information that's needed for the consumer to act. We have our phone number. We have some reviews listed. If you notice some differences here and down here at the bottom, indoor car storage, sure that's storage, but I didn't type in car storage.
So I'm not as relevant as the 2 ads above. And there's just this is lighter in terms of content. They're not taking advantage of as many pieces of that ad as they could. Google watches this and rewards you accordingly. They also watch, once I click this ad and go to the landing page, is that a good smooth experience for the consumer?
Do they interact or do they bounce? So all of these pieces are being watched and play into actually how much you have to bid and pay for the various search terms. So that's the first piece is understanding the complexity of the auction and making sure you have a team that has the depth and knowledge to be able to react, especially when you're bidding on potentially millions of keywords for 1700 facilities. It gets pretty complex quickly. The second piece I want to hit on real quickly is that you have to have a tool that works for you and your complexities to feed Google your bids, right?
So they don't they'll take your bids and they'll react to the data that they have, which is the click through rates, cost per clicks, etcetera, Google's internal data. But what about all your business data? You want that to be considered as well. So as we looked at these tools and even tried several of them over the years, we realized that none of them could do what we wanted them to do in order to maximize revenue. So this is where our great partnership comes in between marketing and the data science team, who you'll hear more from later.
But we went to them with this problem and said nothing is out there that's transformer fans. And this has had tremendous results. You'll hear more about it from the data science team. But what I want to hit on is that it's allowed us to decrease our cost per click while driving up our conversion rates, our click through rates by over 30%. This is a tremendous benefit when you're also dealing with Google inflation year over year.
So more on Optimus Prime from the data science team. The third thing I want to touch on quickly with Google and how we approach this is our partnership with them. You know that partnerships are one of the key foundations that we have as a company. And this is true in the marketing team as well. So we have a strong partnership with Google.
This is not because we're a top spender as an advertising. There's companies that spend tremendously more. It is because of our level of sophistication and how we approach advertising. They love to get in a room with us. We love to get in the room with them as well and talk about different ways that we can advertise and different ways we can pull that lever and how can we be more relevant to our consumers.
So because of this relationship over the years, they've invited us to be on their performance advertising council. So this is something we're proud of. It's a limited group. There's no more than a couple dozen people in the room and it's the likes of Walmart, Airbnb and those were 2 of the companies we were sitting next to in the last time we attended. So this allows us to the inside story as much as possible with Google.
They talk to us about betas and where we can participate in betas and even throw out ideas that aren't even betas yet and help us flush those out. So it's something that helps us understand what's coming and gives us a leg up. So I'm going to switch gears now to the local and world. So I've tried to paint this picture with you by showing you a few numbers. The first one that's going to come up on screen is, yes, 3,500,000,000.
That is the number of average searches that happens on any given day on Google's platform. It's an astounding number. Couple more things that I want you to keep in mind. Anyone
want to
guess how many dots are on this screen? Just shout it out. 100 times 2. There is 200 dots on the screen. That represents the number of ranking factors that Google takes into consideration as they're trying to decide who to put where on the page or if to put you on the page.
Of course, we don't know all those factors. They don't share that with you, but we know some and we have to respond accordingly. So a few of them we know is accuracy of our data, supercritical, past standing with Google, your history with them. And then site load time. These are all pieces of data that give us an insight to how we can treat our platform and handle our data so that we rank well.
But that's not the end of the story. We also know that on any given year, there's likely to be more than 600 changes to their algorithm, which will impact ranking. So, while we're trying to understand what those factors are, we also have to keep up with the changes or else we quickly could be relevant one day and not relevant the next. One of my favorite pieces of data here is that every day, Google sees more than 500 1,000,000 never before seen searches. Why is that?
It's because of the different devices that you're seeing. It's because of mobile becoming so prevalent, voice search. We now drive down the road and can just speak to our phones who are saying more. I used to just type in storage, right? But now I can say, show me storage facilities in Sugarhouse with the best reviews.
So my searches are getting longer, more detailed. This gives organic a tremendous opportunity to go after and find the best customers, but also highly complex with all those search terms that are available. So it's that team's job to understand what are the best keywords for us to find the best customers and then how do we create content that's meaningful and relevant to not only rank for those keywords, but also to get consumers to
interact with
us and choose us
over the other options that are out there. 5 100,000 changes to our data. So this is everything from our listings to make sure that they're fully optimized to our website content to make sure it's the right content to connect with customers and the search engines as well as websites that are off our digital assets and where partnerships are influencers that we may be working with. So I hope that paints the picture of how complex the organic space is. It is a tremendous benefit for us in driving traffic.
And we're really proud of our organic results. So once we have all this traffic, what's the next step? You heard me say at the beginning, once we have the traffic, we have to convert it, right? We have to have a website that connects with those customers as much as the traffic did. So I want to talk quickly about how we do that.
We have a 3 step process. The first thing we do is use our data. This is a theme at Extra Space and we take great pride in it. So this here you're seeing, you're going to start to see a scrolling there it is, a scrolling flashlight on the screen. This is a tool we use called ClickTel and it records every single session on our website.
No, we don't go through them 1 by 1. That would be boring and monotonous, right? But what we do is aggregate this data to give us meaningful insights. It shows us what's working well. And so we make sure if there's an opportunity to make it prominent or do something else like that, but it also shows us where our customers are getting hung up, what's stopping them from going to the next page.
And this gives us testing ideas, so we can constantly test and improve our conversion rates. And that's the next step as we test. We do AV testing based on learnings that we get from ClickTel and other insights we have available. So let me show you one example. This is our San Francisco City page and these are individual facility pages that a customer can go to from that city page.
What we saw when looking at the data is our customers were going to on average 2.5 facility pages. We call this pogo sticking. They were going back and forth. That's painful as a consumer, right? We likely were having a bounce rate that was big and we were also not converting as many as we wanted to.
So from there, we come up with testing ideas. And in this case, we came up with what we call a comparison shopping tool, much like you have on And they need on the page to quickly make a decision and move forward in the funnel. And we put this out there and we test. In the case of that one, we saw almost a 5% increase in opportunity to reservation, right? So we're constantly putting these out.
And over the last 5 years because of this testing program, we've seen more than 100% increase in our conversion rate on our website. So this is how we make sure that that traffic is being fully maximized that comes to our website. And we're taking advantage getting the most qualified customers into our facilities. It doesn't stop there though. You heard Joe and even Somrat reference how important the facility and the store manager are in that conversion process.
Well, in order to make sure that we still get as many opportunities or reservations to the facility, we continue to nurture that relationship through email, text marketing along the way. So we've been doing this program for a while and we used email marketing. Then we realized, you know what, people are on mobile devices. We have to make sure those emails are optimized for their mobile screen and not the desktop. Believe it or not, a lot of companies still aren't doing that today.
And then we added in text. And then we even said, you know what, you have customers who are reserving different lengths out. So I may reserve for 2 days from today, you may reserve for 14 days out. The e mails that go during those time frames should be personalized based on the time that you know it's going to take me. And so content is sent to help you get through those through that length of time you have until you're moving.
These e mail campaigns have won a couple awards over the years for the personalized approach we've taken and they're being entered to win additional awards right now. Okay. So we've nurtured them and the next step is they come to the facility. This is really important because we've done a lot of work to show consumers how professional we are, how relevant we are, how easy we are, that can't break when they show up at the facility. So we've done a lot of research with Forrester as a partner to understand what has to happen at that experience.
What do we have to do to make sure that they pull up in their car and get out of the car and not just drive by? So our properties, we've invested a lot, as you heard me say earlier, to make sure they're clean, they're relevant, they're well lit. They make you feel like you're in a safe place. And we take a lot of pride in these pictures and how well they look. We also know that today the store manager is still a critical part of that experience.
And so we're looking at how do we integrate that store manager. You heard Somrat talk about the sales process. We're also looking at in the future, if that store manager doesn't need to be there, what is it that they're giving them that we can provide in other ways? So a lot of research is being done there. But in the research with Forrester, came up with this conversion pyramid we call it.
These are factors that came out. Some of them will be no surprise as to what's important to have during that experience in order to make sure we convert the customers. What was a bit of a surprise or where we tried to do better is the ones highlighted in green. While price and location and accessibility are expected, they're table stakes table We better be providing those is what the consumers think. These other ones, condition of building, filling and staff are what tip the scale in terms of getting a conversion or not oftentimes.
So filling was always been interesting to me. That green new color that we put out there, we're being told over and over it makes me feel safe. It's brighter. It reflects the light differently. So some of these things we're doing are having a direct impact on how the consumers feel and whether they convert or not when they come in.
We heard Sommert talk about our sales process. A lot of that stems from this research where we know we need to interact with our consumers in a positive hopeful way to help them move forward with the journey that they are experiencing. So we have finished this customer journey at the site with the store manager. And then finally, the last piece of the puzzle that I've been talking about today, how do we maximize that relationship? It still is important to us to interact with our customers once they get in the door and take care of them.
There's an opportunity for reviews. There's an opportunity for referrals. We want to make sure that we're there. So there's 3 things I want to hit on quickly. We spent a lot of time trying to increase customer These sound so basic and simple, but I know if I went around These sound so basic and simple, but I know if I went around the room, we would all have stories of retail experiences that did not meet these needs.
So we're making it a priority to make sure we do these things. A couple of tools we use, we have customer surveys, which we've done for years, and those go out at different points of the customer lifecycle. So we can see where we're doing well and where we need to improve. We also do what we call customer captures. So we spend time on the property talking to the customers as we walk around.
We do that here from Salt Lake when we're traveling as an executive team. We also have our district managers, our store managers do this as well. And not only has it shown some really neat stories in ways that give you a lot of pride in how good our store managers are, We've also found things that are broken that they just have been dealing with because they didn't know any better to come tell a store manager. But because we find out, we can make their experience even better. And then finally, community management.
So we do this through social. And this is primarily Facebook. Today, people don't call 1800 numbers anymore to complain and wait to get through that IVR. They have a much faster avenue through Facebook. And And they know that if I go post something on Facebook, all the world, anyone who is following, which is usually a big group, is going to see.
And so that company is see faster than oftentimes a store manager or district manager. And we can do it with the same tone and same voice and either minimize or remove a barrier that a customer might be having with us. So these are all tools that we use to help enhance and maximize that customer experience on the back end. So just in conclusion, it's through these three areas that I mentioned, our ability to drive, convert and maximize the customer experience and traffic coming in that we help produce revenue and drive shareholder value. Thank you.
And with that, James Overturf, our is going to come up and we're available to answer questions.
Todd Thomas with Key I was just curious with some of this discussion, if you've been able to quantify some of the premium pricing or pricing in general that you've been able to command in terms of some of the search results, your organic search results and if you sort of stratify where you shake out in certain markets, what that means for pricing if you're first, second or third, if you have that information or data?
So how it impacts our ability to price at a higher level?
Correct or does it. So how does it impact pricing in general depending on how your search results shake out in a market?
Sorry, it's a lever I think that we always look at. There's really 3 or 4 competitors usually in the bid. Public storage, extra space storage and spare foot are usually in that bid.
It's a component that we use. But we're
always as we'll talk about in okay, big time. And so, especially with the ability okay, big time. And so especially with the ability for people to quickly look for another solution. And so that price has to be in the realm of possibility. And it does help us we're always we're constantly experimenting with, do we fill the funnel as full as we possibly can and keep prices low, lower Or do we are we more selective in that way?
But it depends on the market and kind of those local market dynamics. So it's not really a one size fits all
strategy. I'm not sure if this is going to be in the next session. But once you've been able to drive the traffic, convert the customer, bring them in, how do you keep them for longer and continue to get that increase? The example you showed someone was pissed off that their price was going up. So what sort of elements are you doing in that communication with the existing customer?
And I don't know if you have sort of average length of stay in a typical self storage unit, how many times is a customer coming back and forth where you have that ability to physically interact with them and maybe some of the tools or things that you're doing around there to sort of keep the customer for the longest period of time and drive as much revenue out of them as possible?
Yes, sure. So you'll hear on the revenue side from the data science team. On the how we get customers to stay, I think part of it is in how we drive the traffic to us. So we talked about not all customers are equal. So we try to get the right customers to us first.
And then there's a couple of things. First of all, a good majority of the customers, once they get into that facility, they don't want to interact with you a lot, right? They want to get their stuff in there and then be out of your hair out of your way. So we try and respect that with balance of communications and information that can be relevant. If we have articles or different information that we communicate with them.
And then a lot of this is where the store managers are so critical, where they do the right thing at the right time. So if those customers are coming by and interacting with our product, store managers have a relationship with most of those customers because they are there enough. And that's why you can see sometimes when these rate increase questions come in, they are able to get through those in an easier way in a lot of cases because of that relationship with the store manager. Does that help?
Thanks. Ryan Lumb from Green Street. So if I go on Google, type in flight to New York, usually the top piece, I can actually get the flight directly on Google. How long until that happens with storage? And to what extent are you preparing for that?
Sure. Great question. So that's the Google Shopping. It's something that we've been in conversation with Google for over a year now. We think it's a better experience for the customers to come directly to us because all the variables involved in renting and consumers renting a storage unit haven't done that before.
And there's actually a lot of intricacies and questions involved that couldn't be handled in that shopping nav bar. Now that doesn't mean it won't happen. They're still looking at our product, but they have a lot of other retail products that they think make a lot more sense to execute before ours. So we're in conversations with them and we'll be ready when it happens.
Hi, Shirley Wu from Bank of America. So considering how much mobile has changed and how much people are using it so much more now, how is your strategy adapted to that segment? And do you see opportunities to kind of capitalize on that segment as well?
Yes, obviously, the mobile devices are our largest spend now, even though there is still quite a bit of volume on desktop. And so we're we have some strategies right now. We're trying to increase our site speeds. Google is indexing your mobile experience first in ranking factors. And so we have an advantage in that space just because of our technologies and some of the things we are doing behind the scenes.
But in the future, we don't know what it's a lot of people think it's going to be voice like Alexa's, Google Homes and things like that. So that's another thing we're looking at. But storage is one of those things, it's a little further down the list for consumers when they're talking to their Alexa or their Google Home. They're not trying to shop for storage or ordering pizza, getting the weather, those sort of things. But it's on our radar definitely.
But desktop, laptop is diminishing in importance. But it's very important because there's a lot of volume there. So you got to play both sides.
Eric Fink with Green Street.
How should we think about property location now with the advent of marketing and online search?
Still very important. We want to be physically visible and digitally visible. If you have both those components, you're going to do very well. And we can drive traffic to, I'd say, less than optimal locations. We've proven our ability to do that through our platform.
And our call center as you'll see later today. But it just makes it so much easier if you have a very visible product out there. People are inherently aware of that. And that's another reason we've moved to more in your face color and presence with our properties. It makes our job a lot easier if it's physically visible.
As you touched on you mentioned SpareFoot, which I think is, I guess, an aggregator for self storage. Do you does a significant amount of traffic come from aggregators like SpareFoot? And if so, do you do any special partnerships to make sure you rank a little higher
on the
searches? Well, SpareFoot is the largest aggregator out there. We actually played in that space for a little while and decided sparefoot sparingly in markets where it may be a little tougher with competition and such. Our volume is not huge. We'd rather do it on our own and build that brand rather than kind of commoditize it through these aggregators.
It is a useful tool though, but the square foot also can't rank in the Google Maps because they don't have physical locations. So that's another big advantage that we have in that space.
I was just wondering, you spent obviously a lot of time on your Internet presence, but do you ever consider television or advertising during sports on television? It's probably the one time people are watching live versus
other. So the Super
Bowl ad we're going to show?
Yes. No, I mean this has been a question as long as I have been in extra space. And it's being where the customers are, right? But at the best cost for us to get the most traffic. And so yes, we are constantly looking at that stuff.
We have done a lot of different things in the past. And I would say the baby video that you saw, while that's not out there on mainstream television, it was on YouTube, which gets more traffic oftentimes than traditional television. This year we are looking at potential new channels that consumers are interacting with. But we are going to be where the most consumers are at the best price for us. Joe?
How much did the baby video cost is what Joe asked. That was under $10,000 So you can't make a commercial for mainstream TV for that price. We'll take that in advice from the future videos.
Well, thank you. We now have a 15 minute break scheduled. So we'd like to start promptly back up at 10:30 for our next section. So take a few minutes, take the break if you need. There's some snacks and drinks out here in the foyer and we'll fire it back up at 10:30.
All right. Let's go ahead and continue. During the break as we were visiting with folks a couple of questions came up that I'll just offer some clarification because if one person asked perhaps it was on other people's minds as well. The first one was related to our bridge loan program. Just one clarification, we aren't doing any construction lending.
So all of these loans are on completed properties where a certificate of occupancy has already been achieved
and are in
either lease up anywhere from lease up to mature. So just one clarification there. The second one is someone said, wow, that's a lot of red dots on that map, Sommerat showed. Do you have that many negative markets? And we should have clarified in Sommerat's dashboard, red in his case is below portfolio average.
So in some cases you might have had a red or kind of an orange that could be 3% for example growth. So just two clarifications there. Now moving on to our next set of presenters. One of the most common questions that we get is related to revenue management and wanting to understand better some of the revenue models at Extra Space. Are going to have a presentation that will get into that as well as data science and how the 2 of those departments work together both with pricing and revenue management but other applications as well.
So we'll turn the time over now to Chandra Madhakuri, Vice President of Data Science and Scott Hansen, Senior Director of Revenue Management.
Thank you, Jeff. I am Chandra Madhukuri. I've been with Extra Space for over 8 years now. And before joining Extra Space, I was working for a software company that did revenue management software for airlines and hotels. And I was first hired here to do something similar for Extra Space.
Since I came in, we started building a revenue management system. We created a data science group. And we will chat through the course of the presentation, Scott and I will walk you through some of the things that we do. Now you follow our revenue growth and we are a strong performer in terms of our year over year revenue growth. And we have done a very good job of that over the last 10 years.
Lot of groups at Extra Space are responsible for it. You just heard Dana speak. She and her team do a tremendous job in driving demand. And we also have very good store managers that convert this demand into rentals for us. All of these are important drivers when it comes to our revenue growth story.
Now over the next 30 minutes, we will walk you through what we do from a revenue management standpoint to drive revenue growth. Price is the most important lever that we control from a revenue management standpoint. Now if we cannot any day unit is left open without a customer, we are losing revenue. And we cannot maximize revenues where we drop rates and get our units fully occupied either. So we had to find that sweet spot, sweet spot that generates maximum revenues.
And we have to do that at scale. We are managing over 1600 properties and within these properties there are several different products. So 70,000 different products that we need to set prices and promotions for. And to do an effective job of pricing, we have to understand the demand trends. We have to understand the churn that each of our products are seeing.
And we also have to understand consumer preferences. Now this can get really complicated to do and to do an effective job of this, we have invested a lot in our pricing platforms. Machines also alone cannot solve this pricing problem or cannot effectively drive the revenue. So what we have at Extra Space is a mix of platform and people to drive our revenue strategy. So on the people side, we can imagine situations where in Odessa, Texas for example, there is a lot of new energy exploration and that had a huge impact on the demand for storage for example.
And that is not being picked up by the model. So we have to make an adjustment with respect to price for this for that city and for that market. And that's some of the things that the revenue managers do. They do pricing exceptions. In addition to that, because they look at a vast number of properties and review the pricing and see the performance, they also help us to connect the dots and identify areas where the machine can do better.
We have 5 revenue managers and they are responsible for different divisions and driving revenue for individual their individual portfolios. The other group that rolls up to me is the data science group. And this group is responsible for maintaining and enhancing our pricing platform. In addition to that, we also work closely with digital marketing. We work closely with paid search.
And we also work closely with our web optimization team. On the web optimization front, Dana talked about lot of AB testing that happens. And we help the web optimization team in that front. We help them figure out how long to run a test and when a test is executed, how do you call a test as a win or a loss. In general, as a general rule at Extra Space, we try to rely on hard data rather than subjective judgments when making business decisions and Data Science Group plays an important role in that.
We provide guidance on how to set up tests whether what's the best strategy to set up a test. Do we need to randomize visitors? Do we need to randomize properties? What's the best test design to answer a particular business problem. Over the last 8 years, we have spent a lot of effort in improving our pricing platforms.
And Scott will walk you through details of how some of our pricing models work. In addition to working with pricing and paid search teams, we also work with call center. 1 of the differentiating factors within our the way our data science team operates is the focus to collaborate. It is common for data scientists to go to the call center, listen to calls. And we get over a 1000000 calls every year to our call center.
And we have over 100 agents. And all these agents are different in terms of their skill level. So last year, we worked on a project where we tried to optimally route the calls that come to the call center to the right agent to maximize our portfolio performance. And we have seen some successes doing that. And there is potential for us to do more of that in 2019.
So to give you a better flavor of how the data science team works, the kinds of projects that we take up, I will walk you through a project that we did with paid search team. So everyone would be would have searched on Google and Dana talked about paid ads. At Extra Space, we spend over $20,000,000 on getting traffic from paid ads because this is an important channel for us. We get more than a third of our reservations from paid search. So this is an important avenue for us to acquire customers.
Unfortunately, the budget is not infinite where we can just start to bid to the top and to the first position every single time because Joe insists that we have to spend our money efficiently. For us, that means that we need to lower our cost for acquisition or our CPAs. So we invested in developing a system we call it Optimus Prime. Just by the name Optimus Prime, you can guess the inclination or interest of the people or the data scientists who build this product. So the way the page search program works is, we have to be able to bid on a keyword level.
There are millions of keywords and all these keywords are different based on a variety of factors. The type of keyword, what location you are bidding on, the device that you are bidding on, the geography that you are bidding for, all of these have an influence on how the search results stands out. Let me go into details of 4 factors that influence the decisions that we bidding decisions that we make on keywords. So, keyword terms, so there are several types of keywords. So, for example, I someone can type self storage and that is an exact keyword, we bid on self storage.
On the other hand, someone could say cheap storage downtown Houston for parking. And we may not bid on that exact long keyword, but we bid on a phrase cheap storage. So if we bid high enough on the cheap storage phrase then we will show up in when someone searches this long keyword. And broad keyword could be a term like storage. If storage shows up somewhere in the search, we will show up there.
Now why this is important is because each of these different categories of keywords are different in terms of the type of customers that we are going after and they have a different intent and potentially can have a different lifetime value associated with each of these different types of keywords. Similarly, the platforms that we bid on, Google and Bing shows as if we have equal share in Google and Bing that is not the case. Google by far dominates our page search budget and also device and location. Some we know when a keyword comes in, in some cases we know exactly the location that the keyword is coming from. In others we do not, then that would become more generic keyword.
The more targeted keyword, more likely the intent is higher. So, what we then do is we would identify keywords based on combination of all these different factors and then determine whether this particular keyword is good for us in terms of the likelihood of conversion rate, in terms of does this keyword come in a location where our occupancies are lower, where we have room to add new LTV? Now that information would be used in our bidding and higher LTV. Now that information would be used in our bidding process to then determine what is the optimal bid that we could put on this keyword. And we do that for millions of keywords at a time.
And this model runs every single day with updated information and provides this information back to Google. So we enhance our bid. There are actually plans to do this intraday as we get information during the day. So when we first rolled this out, this was a huge win for us in terms of our 2 main metrics that we were trying to drive here. Cost per acquisitions, we had a big impact of dropping the cost per acquisitions and also increasing our volume or the number of customers coming through our paid search program.
So as Dara pointed out, these are the kinds of efficiencies that we are looking for as we try to keep our CPAs flat or even try to reduce them. And this is hard to do because Google always there is the cost per click is always increasing in Google. More recently so since it's when we first rolled this out a couple of years back, desktop was dominating. So we got most of our reservations at that time from desktop. Things change so quickly in the digital marketing environment because within this short 2 year timeframe mobile now is the dominant place where we are getting reservations from.
So last year, we changed how Optimus Prime works. We changed it to work in a more mobile first world. And we have seen an improvement in that. So we compared the latest version of Optimus Prime last year with the version before that and we have seen a win there. And the digital marketing environment is dynamic and it continues to change and we have to continue to adapt to this changing environment.
And the number of factors that drive the intent or conversion rate, we haven't figured out all the factors yet. There are a lot of things that we need to do to even optimize our performance even further. And our roadmap for this optimized prime product is filled for the next 12 months. So there are a lot of tests that are lined up that can potentially improve the performance even further than this. So for the next few slides, Scott Hanson, he is the Senior Director of Revenue Management.
He will walk you through revenue management and how some of the models work and some of the testing that we do there.
Thanks Chandra. So again, it's Scott Hanson. I've been with Extra Space for about 5 years. Prior to Extra Space was about 18 years of big box retail, the later half kind of in the pricing world. Extra Space has been awesome.
One of the things I love about it is it's a larger company so you have resources and data. It's like the size of a cruise ship but we're able to still turn like a jet ski. So a lot of the culture around testing and applying different things and be able to react quickly has been awesome. So it's one of my favorite pieces about the company. And we're going to talk a little bit more on how some of the pricing works.
And like Chandra said, there's a model behind this. There's actually several pricing models. We're going to go into a little more detail on one of them that's more common in most of our stores. But pricing isn't the whole thing. So there's the ability to move pricing up or pricing down.
But customers don't just convert on just the pricing number alone. There's other factors that come in. What promotion do you have in front of them that they're seeing? How long are you letting them reserve inventory? If you go to our website or our call center, you're going to reserve a unit and it's going to say, yes, we'll hold this price and promo and that piece of inventory for X amount of days.
And sometimes it's 14, it could be as short as 3 or it might be up to 8 or there's a variety of different factors that we'll use to determine the right reservation window. And I'll get into a little bit more with some testing we did around that as well. So all of these factors are set on a daily basis. They can change on a daily basis. They don't always.
Really depends on what activity is happening. But all of these are set by our pricing model that's ran by the data science group.
And
we'll get into what the revenue managers do in a little bit. But to give you an idea of how one of these models work, we're going to explain the one that we have on probably about 1200 of our facilities. So this would be our mature pricing system. Now it uses a lot of data that we know about the facility. So as we have these stores year after year, we collect more on what happens with rentals, with vacates, what time of month it is, if there's students in the area, I mean all of these variable factors come in and help us determine the right price to set.
To give you one example of how that works, we can say that maybe we're at the end of August and we're looking at a group of units maybe these are 10 by 10s. And right now I have 4 of them vacant. So I'm at 96% occupancy out of 100 units that are there. And based on what we know about this property, we're likely to have 15 customers vacate in the near term. So our model isn't just considering it has 4 vacant units.
It's really looking at I've got 19 available pieces of inventory that I need to move in this near term. How it does how it comes up with the price on it, it actually spits out more than 3 price points that just fits nicely on the slide. But there's a price sensitivity number that we have at a store level even down to a unit level. And this price elasticity tells us for example if we price the units at $146 I'm likely to get 12 rentals in the near future. That's going to get me to 92% occupancy.
I'll make $17.52 in new customer revenue. That's option A. Now if I lower the price, again, we have a lot of the data that says here's what you're going to have vacate and here's kind of the price elasticity of that unit. If you drop it down to 121 in this scenario actually get 17 rentals. So end up at 98% occupancy, a couple of grand in new customer revenue.
Continuing down this track if I pull the price back to $99 here I'm going to get 22 rentals. Anyone maybe see a flaw in 22 rentals though? Yes, we don't have 22 available units right? I've got 19 that I'm dealing with. So in reality what's going to happen in this scenario is we'd end up at 100 percent occupancy in this unit type and only making $1881 So at some point, you're lowering your price so much that you either run up against you don't have the available supply or maybe the discount doesn't offset how much you're giving away to every customer coming in.
So when our models go through and calculate what's the right price promo and all those variables in there, it's really looking at which one's going to make me the most amount of money based on what I know about this facility and this unit type. What's my available inventory today? What do I anticipate is going to be coming up in the future? And what's the right price point that drives the highest amount of revenue. So all of those factors again set daily basis by the pricing models that the data scientists team run.
Chandra mentioned one a little bit earlier. When do the revenue managers come in? So he used Odessa, Texas as an example. This was one where the facilities just running the normal course of business and such and the oil and energy industry had left a few years ago as oil prices went down. Then our site managers started seeing a lot more customers come back in.
And they're talking to them and say, hey, what brings you in? And like, yes, we're moving back into the area. I need to pack some stuff in here while we get moved in. And in those conversation it comes up what industry you're in and we find out they're in energy. And as all of these sites start to see, hey, this is happening a lot more.
We're getting more and more of these. They're reaching out to their district managers saying, hey, we've got a lot of people moving in and sell tied to this specific industry. That DM is reaching out to our team. So my revenue manager team is kind of the main interface between what the pricing model wants to do and the feedback that we get from the field. And taking that into account like in this example here my team would go in and we may push the price up, remove promos, even adjust reservation windows down.
The idea being something's happening in that local market that our model can't anticipate because it's not like the oil industry moved in, in September of every year, year after year. This is a one time event that's causing a spike in demand. We see the demand coming in. What can we do to maximize revenue on that demand? We get the input from the field, we make adjustments to the model, it produces a new price point and then we use that to just drive a higher revenue.
Other examples you'd see of this, if construction happens in front of a store and really impacts access to the site, it could have the reverse effect of this. If a lot of the walk in traffic is kind of getting cut down because it's just a lot harder to get to, we may have to make up for that with some more aggressive pricing to capture more online demand that's out there between the website and the call center. Sometimes it can be an entire market, new supply that comes in. Joe mentioned Atlanta or summer had Atlanta in there, Dallas has came up, Denver has been once for several years. When you dump a lot of new supply in there, that's a different factor you have to consider this year that didn't exist maybe in the same store last year.
So the model using a forecast may not be the most accurate on its own, but we have different systems that we can put it on. There's more eyes with the revenue management team of what are the different steps we want to take to try to take advantage of all the demand we can or minimize the impact as much as we can for something that could pull down of our occupancy. So all of those pieces are set. Again revenue management team and data science is kind of the blend of how the 2 work together to try to drive the highest revenue. Now I'll give you an example of another test that our teams do.
So as we look at the business Chandra said that the revenue managers are very close to seeing what's happening on a property level with performance and using the resource of the data science team we're able to say, hey, we think we could do something better here and improve our models based on some factors that we see out there. So one we had a couple of years ago had to do with managing our inventory more efficiently. If you hit our website now you'd typically see some different things pop up on here around inventory. Maybe at the top of the screen here where it says Actfast 1 Unit Left that really does mean we have 1 unit. We get a lot of questions on it's like that a fake number you're just making that up.
It's really 1 unit that's left. On the bottom of the screen, you'd see us as Actfast limited units. So as the inventory gets constrained, we're able to make some callouts to take advantage and create some urgency with that customer to move a little quicker. If you want it, you may want to get it right now. Now when we had gone into this testing, our previous reservation windows for how long we would let customers hold inventory was 14 days.
So they could always just book it up to 14 days out. Most people don't take 14 days to move in but that's what we had out there and so they'd book it and move in sometime within that range. We wanted to limit that down a little bit and test something different. So as someone clicks on the inventory to reserve it, they see a screen like this. It says hold your unit price for 14 days.
This is what we've always had up until a couple of years ago. And what the team brought, the revenue manager said, if you hold out inventory for 2 weeks and we know not every person that books online actually moves in. There's some people that don't because their needs change or whatever it is. We don't get 100% conversion online yet. Dana is still working on that piece.
But because they don't maybe we could do something different with our inventory and cut down this day. Now it's easy to throw out let's just make them all 3 days or 7 days or whatever it is. But we wanted to be more a lot more logical in how we apply. So we did a few things. We started to look at what days people reserve and when they typically move in.
And how can we be more efficient with managing the inventory. So if you're hitting our website today, a couple of different things you could see. Let you hold the inventory until Saturday.
Saturday is one of the bigger move in
days, a lot of the let you hold the inventory until Saturday. Saturday is one of the bigger move in days. A lot of people look online during the week while they're at work or at home and then they end up moving in on Saturday when they're off. So on Monday it may let you reserve the inventory until Saturday. Maybe if you're looking today it might also let you reserve the inventory until Saturday.
So a lot of them can just be lined up to the next weekend because that's when we know most people are going to move in. Sometimes it can be longer. We actually have some that will be up to 30 days. If I've got a lot of inventory available in a certain unit type and really not any chance of running out of that inventory in the near term, I may open up that window for longer. And that tends to capture some people that tend to be a little bit more planners.
They're thinking 2, 3 weeks out. They're really valuable customers. And it may capture in some of those as well. We also added another piece overbooking essentially. So as we get down to that one unit left when someone goes to click reserve they get a different message on the screen.
And what it's calling out here is this is the last one of its size. It's available on a 1st come first serve basis. And we do cut down the days that they can typically hold that out for, 3, maybe 4 or 5, but it's a lot more reduced than what you'd see in our typical inventory. Now overbooking gave us another advantage. This allows me to take multiple reservations against the last unit left.
So again, knowing not every single reservation is going to convert into a rental, if I'm down to 1 unit and I can take a couple opportunities against it, that dramatically increases the likelihood I'm going to have some customer in that unit within the next few days. If the customer sees us on the website we're showing them the messaging here. What we're reserving for them is the price and the promotion as long as the inventory is available. So it's kind of like a Black Friday ad. You see the ad, here's the price on it.
You just have to get there and get it before everyone else does. In any scenario when someone makes a reservation on our website or our call center within 10 to 15 minutes, our store managers are typically calling them back, say, hey, saw your reservation, welcome to Extra Space, answer any questions. I did see you reserved the last one of its size. So how soon can we get you down here and they're trying to stress that urgency to get the customer down to the property. We'll occasionally have scenarios and we found this in the testing of 2 people reserve the last unit.
1 of them shows up in rents and the other one still wants a unit. And what we'll normally do there is the sites are going to call the customer that already someone moved in, they're going to call the other person and say, hey, that 5 by 10 you reserved someone else picked it up. I've got maybe a 5 by 8 or a 10 by 12 or they're to try to bounce them into another size at our stores to make the customer happy. Occasionally, if we're completely out of a product, we'll try to bounce into one of our sister stores. It's pretty rare that we'll run into a scenario where we can't fulfill or help that customer out.
But what overbooking did for us is turn our inventory a lot faster and increase the amount of rentals that we're getting in. It was worth well over $1,000,000 for us in the 1st year that we rolled this out. So it was a great example of revenue managers seeing kind of a business opportunity out there with how close they are to the properties and working with the data science team to apply some thought and logic behind what's the best way to execute this to drive a higher revenue.
All right.
Next, we're
going to run through and I heard
some questions earlier on existing customer rate increases. So this is how we're growing the revenues of the existing customer base with our facility. With our scale that we have now, we push out over 100,000 increases per month. So one of the big advantages here is we can do a lot of testing and have a large data set to determine what really works and what doesn't work. We can test up quite a bit of stuff and we can also learn very quickly because of the scale that we have in here.
A couple of numbers behind it or less numbers I should say more of ranges. So our average increase is somewhere in the high single digit area. It's not a flat percentage that we throw out and just push across the board. There's a lot that goes into it determine to determine what's the amount that we want to push on customer A and customer B. A lot of it's the great proprietary secret sauce that we don't share.
But to kind of give you an example, if someone moves into a parking space and we give them
a hefty rate increase, it's very easy for them
to put their keys in their car and go somewhere else. At the same time, if someone's in a giant upstairs unit, it's going to take them 3 weekends and a lot of neighbors to go empty that thing out. And I don't want you to think we just go push every upstairs unit a lot and every parking I mean, there's several 20 something odd attributes that go into determining what we do. None of which has to do with how a customer voted, what their income level is or anything that's like a protected class. It's all what we know about that rental and how sticky that within 90 days of receiving that notification.
And we see about 20 Thanks for assuring with extra space. We hope you come back if we need us again and tell us a little bit about why you moved out. The biggest answer we get is I don't need storage anymore. They've moved in with someone else or they've moved into their house. Whatever the need that caused them to get storage in the 1st place is now solved.
If we can figure out how to get people just to stay in storage units and even with nothing in there, that would be awesome for us. But that's not the case that we're in right now. Now on the right side of the screen, we've got another 100 customers here. And again, the numbers we use are a lot bigger. This just helps make the percentage and the math easy.
But on these 100 customers, they are due for a rent increase and we don't push them 1. We look at how many of them move out within 90 days of when they would have received the increase if we actually sent them 1. And we find that about 18 of them still move out. We do the same survey. We ask them why.
And they say it's because I don't need storage anymore. So it does vary a little bit through the year, but we'll find that our existing customer rate increase program drives a churn percentage of maybe an additional churn of around 1% to 3%. So that's with the numbers we have. Now I know if I throw in some mid upper teen or 20% or 30% increase number of go push everyone this month, I'm going to have a lot different result on this. I'm going to drive a lot more churn.
It's probably not going to be worth the revenue we've gained by pushing out massive increases. At the same time, if I pull that back and say I gave everyone a 1% increase once a year, it's not like I'm going to get a lot more people to stay longer and I'll probably lose quite a bit of revenue and leave a lot of money on the table. So this is something that we continue to do month after month of this holdback group to help us look at the various tests that we're running, what's the difference between the regular existing customer rate increase pool, what does our holdback pool look like. And with the scale and size that we have, we're able to come to some pretty good and quick solutions on different things that we want to try with maximizing revenue through rate increases. And with that, we're to questions.
Eric Frank from Green Street calling again. Do you layer in any macroeconomic fundamentals into your revenue management model?
So we continuously look for correlations with the macroeconomic fundamentals into this. So we have done some research with respect to things like unemployment rate or consumer confidence. So at least for the last several years, there haven't been any major changes in those macroeconomic factors. So right now, we do not have them, but that is something that we continuously monitor them. So potentially, they could be added.
We have flexibility to make those adjustments as we see fit.
And some of it, I'd
say, is taken into account a little bit and how we first initially set pricing. I mean, the rent rates in Santa Monica are far superior to the rent rates in El Paso, Texas. The income levels are also different and housing is different. So some of that's already built into how you start the pricing at a store.
Yes. I was wondering if you can expand a little more on Optimus Prime. You talked about how you saw 25% increase in the page search cost reduction, 30% increase in traffic from it. It's been about 5 years. I assume a lot of that happened initially when you really start optimizing the 1st 2, 3 years.
So how much opportunities are left to really drive that? And thinking about the cost per click inflation from Google, can you comment on what you're seeing in that front as well?
James, can you take the cost per click question?
Sure. Cost per clicks continue to rise. But it's not Google doing it. It's us doing it to each other. It's an open bid.
And so we're competing against other people in the space. We have seen, I think, depends on the seasonality, at certain points last year, it was up almost 40% year over year. So the game is to convert the traffic that you're getting at a much higher rate. And so what we try to do is target the right people at the right time and use pricing as a conversion tool. Pricing is not a demand creating tool.
It's secondary to getting people into the site. So the better we can target people, higher converting, higher propensity to convert and a higher value over time and reduce that customer churn, that's going to come into play too. So as Chandra said, we've been doing this for a while, but there's a ton of opportunity out there with Optimus Prime.
I think there is opportunity especially around lifetime value figuring that puzzle out. We are not completely there yet. So for example, we have different types of customers coming in and the lifetime value is anywhere from 1 I mean, they say anywhere from 1 month to 10 years. And that is an extremely skewed curve. And even if you make slight shift to the right of that curve increase the length of stay at the margins, we believe there is massive revenue benefits to be had.
So acquiring the right customer,
I think that's where
a lot of effort is happening right now.
Before I
take the
next question,
one other thing I would add on that point going back to Dana's presentation, it's been pretty significant game changer is the quality score that's factored in
for paid search. So even if
the market as a whole like James mentioned inflated significantly to the extent you have a better quality rating you're not necessarily been another real benefit for those who are strong in the SEO. So that's been another real benefit
for those who are strong
on the SEO side and getting that quality score helps curb some of that inflation because it's not equal across all participants.
Brandon Benjamin, American Century. Specifically for the current tenant rent decisions, I guess I'm curious what other kind of data can you legally kind of push the envelope, get from customers to start making that next level of revenue management decision, whether it's 1 for divorce, 0 for not divorce or something like that. I guess talk a little bit more about that kind of next generation of data that will drive these decisions.
Sure.
I think there's a lot of data that we can collect from our tenants. And I'm going to talk about this in the next section when we talk about privacy. And I think that's going to be a huge trend in our not only our space, but the country in general over the next few years that we got to be very cognizant of that. So when we look at like segments of customers, we put them in segments based on certain factors. The number one factor we have of determining customer value right now is the date that they move in to the property, depending on the property.
So real basic example, we have a property by Princeton University in New Jersey. And guess what happens around April May? The people that move in, in April May are going to be a less valued customer because they're students than someone that moves in, let's say, last week, the 1st couple of weeks of January. That's simplistically how it works. Our customers are notorious and storage customers in general are notoriously bad at predicting how long they're going to stay.
So that's one of the data points that we collect is how long you're going to stay, how long you plan to use storage. The length of stay is usually 2x what they say, but sometimes it's right on. So to Chandra's point, it's noisy data right now and it's directional. And we got to be very careful about the data that we consume and make big assumptions about that data. We had a meeting yesterday, Chandra and I gave him 3 more projects, data projects we want to look at.
But it's mostly due to customer it's revolving around customer behavior once they become customers. And I don't want to tell you what those are, but there's some significant data points I think the whole industry is missing that we're starting to dive into, getting away from segments and demographics and population because we've tried to do this. We basically serve everyone in the United States, every income class, every ethnicity, education level, apartment owners or apartment renters, homeowners, and it's really different for every location. You could go 4 miles in Salt Lake City and be in a completely different demographic area. So there's not one customer we're after.
People need to have money and a need. And that's really it.
You spent some time talking about the churn rate when you give an increase, we don't give an increase. I wonder if you can talk a little bit about what the impact of current pricing of the vacant units has on the existing customers, right? I got to assume today a consumer self storage is much more technologically savvy that can figure out and go online and know where you're offering current rate versus what they're paying? And how has that evolved into your revenue capture rate where people would come back and say, God, you're giving Josh $100 for his 10 by 10 and I'm currently paying $150 that's out of whack?
Yes. So the current asking rates is one of the factors that's in there to determine how much of an increase we're going to push. We don't want we're not going to send someone an increase and put them at 2x or 3x the
asking rates. I mean, there's some thresholds and
caps in place to make
sure that they're rates. I mean there's some thresholds and caps in place to make sure that they're we're not putting in people in scenarios that's just like what on earth is going on here. We also do give the ability for our site managers to work with customers. So let's say I do send out an increase and it's the customer looks and they think, hey, this is a little on the heftier side, maybe they look online, hey, there's a difference here. A lot of them, I mean, okay, are you going to go move out?
Most of them don't. But some that might be a little bit more concerned with it, they can go talk to our site manager, our site managers can work with the DM and they can make rate adjustments there if it's the right thing to do for both the customer and the business. But those considerations can be done.
But more so where your current street rate that you're offering versus the in place and that divergence and how does that
impact? If I looked at people that have been with us for about 5 years on typically the existing customer rate increase program is keeping them in check and around maybe somewhere in the mid single digits of our current asking rates. So it's growing that existing pool at the rates that our asking rates are moving.
Also we have to remember the is an important part of our business. So our median length of stay is around 6 months. So which means that 50% of our customers move out. So a lot of customers move out after within 1 year. So we're talking about a small portion of customers who will see that even see the divergence from the street rate that they will have to have had to go through the rate increase program multiple cycles before we're even talking about it.
What percentage of customers take the store rate versus the web rate?
Not disclose that the percentage they get street versus something sub street.
I mean, I got to assume people are there. They would be able to go on
the web and the dramatic difference was quite large. I mean, is it 25% or 50% just some range of how many?
Again, we haven't given it, but and there is a gap. But what's I think surprising people as I talk to people is how many people still get street, both in walk in customers but as well as through the call center and we'll see a little bit of kind of an example of how that sales process works. But it's still a hefty range that gets that.
So more than 50% are taking street versus the web rate? Fewer. I'm saying you said a hefty amount. I'm just trying to figure out.
I mean,
it's more so. 100%.
Yes. You're
going to take the microphone away.
But I
just don't know if that's a headwind just as people technology is so easy today and it's only going to get easier that I can't imagine a customer not going online just to check. And it's a pretty wide gap. So I'm surprised that it's not a
I'll trim the range for you. It is sub-fifty, I think it's fair.
And then last one, just in terms of how do you combat against fraudulent reservations? So all those people in Malvern and other places about holding your inventory offline?
Year, they can feel free to do that. But it is one of our big focuses, not the fraud, but let's say it's 50%. 50% of people make a reservation, they move in, 50% don't.
Is that the number?
It's close. Yes. And so we have certain metrics that we follow. And because that traffic costs money. And the more we can convert, that's one of our key goals as a company.
And the higher we can get that number, the better. It's always shocks me that people that take the time and effort to make reservation don't move in. So we're doing some research behind that of why they don't move in.
Jonathan Hughes, Raymond James. How has the RevMan system changed how you plan to address your rate strategy in the next inevitable economic downturn?
So we are continuously looking at options to improve our revenue management system. And so we are trying to play with I mean, there are several parameters within the revenue management model. And so to adjust to a new business environment would be in part adjusting some of the parameters in the platform. So for example, we could make the system more reactive, more reactive to more recent information, more recent demand trends and that will have an impact right there. And there are also other things that we are we will be looking at.
So some of that look touched on supply data and some other features like that is might be some opportunities to bring those informations inside the platform and automatically make some adjustments. So we haven't fleshed out all the details, but we have a lot of ideas in mind on how to get there.
One comment that I would add to that. I think many of you have heard us say this. In situations where we have a clear game changer in terms of the environment is, that store be it a new competitor right across the street or a closed road that's rerouting traffic. In those situations, we're going to pull it off the primary revenue model because there's just so much that's changed so quickly and go to more basic, more occupancy type driven models, earlier models that we use, they're going to be a little more reactive more quickly.
Thanks. Todd Thomas, KeyBanc. You talked about how long customers stay versus their initial expectations and a few other aspects around customer behavior. I was just wondering if you have any sense today. And you also you talked about the 20% that move out with a rate increase or the 18% that move out without a rate increase.
It's usually because they don't need storage any longer. Do you have a sense today, if you think about your renter base or how much of your occupancy today is comprised of tenants or customers that no longer need storage today? How much of that renter basis may be discretionary?
At some point, I think the vast majority of our customers, depending on length of stay, are it's a kind of momentum based business. And but it's hard to know when that occurs. So our old I shouldn't say old, our former CEO, Spencer Kirk, is a great example of this. He moved to Virginia for a couple of years, put some things in storage, and it just gains momentum. Now does he really need that still?
Or did it did that need go away? I do think there's a certain segment of our customers who are always going to need storage to some extent. And so but when that kind of flips to more of a discretionary or momentum based transaction form, we don't know when that occurs because at a personal level.
You've seen the average length of stay to edge out and increase over time. But if you look back throughout history, throughout prior cycles, what's caused that to pull back or to contract?
Just a bunch of move outs. 2,008, I believe in the fall is when we saw probably the most predominant move out. Move in activity didn't change a whole lot. Move out activity over a period of time spiked and then it ameliorated since then. So if you look at a 10 year, and I think you guys have seen this graph that Jeff shows, is move out activity over time.
It's in a very tight band. We kind of had a black swan event during that timeframe, which we can't predict. And that's something we got to potentially put in the model at some point because the year over year changes are going to be just
so bizarre. So has the average length of stay since the financial crisis, since 2 1008, it hasn't pulled back at all. During that time frame, it's continuously edged out.
Yes. We're talking days kind of thing. It's not months because what properties do you include in that pool? Do you include your core stores that are 20 years old or it's
kind of hard to
get to that number. But we that's one of our goals is to increase that length of stay marginally on a year over year basis.
We'll take Mark's question and then one from Jeremy and call it good there.
Okay. Mark Howard Johnson, BlackRock. So clearly with Dana and with you guys, there's just tremendous amount of information flow, right? And a lot of it objective, some subjective. But at the end of the day, somebody's got to make the call.
Somebody's got to price a unit, somebody's got to decide to spend that. Could you talk about the decision making authority and how it's delegated? So that where's the end decision
made?
So there is no
for pricing, there is no approval process. So the way things work is we have our revenue management These rates get These rates get executed on the website, on a call center for our stores. And now in the case of Odessa, Texas, for example, where there is this huge influx of storage demand, then there is an override process in that case where you have a district manager, then reaching out to a revenue manager and say, hey, can we increase rates here? And revenue manager puts an override at that point. So actually, the good thing about the way we are doing the business, there isn't much indication.
The systems drive a lot of decision making and then we have an override process to adjust things.
We'll have a quarterly meeting with the executives and the pricing teams. Well, we'll discuss are we still on strategy? Are we still good to go here? But Joe is not coming down on a day to day basis with his green visor on saying, we will now lower prices by 5%. That doesn't that's not occurring.
It's this. We're taking more and more control away from the field to a more centralized process because it takes a lot of the subjectivity out of it and the bet on the machine rather than the human. But we still need that interaction as a fail safe and a guardrail.
Yes. Just quickly going back to earlier conversation about how many folks are taking the street rates. For the reservations that convert, what percentage is originated on your website versus the call center versus just walk ins?
So again, we haven't given specifics there.
But kind of general
terms, you're approximately a third, a 3rd,
a 3rd.
There's a little bit of distinction there. But it's relatively balanced right now. Jeremy,
I would say the our goal is to get as many people to convert on the website as possible.
Do you know that's a cheaper event?
Potentially, yes.
If I walk in, I'm going to
pay $190 versus $110 on the web.
Yes, but at I
walk in, I'm going
to pay $190 versus 100 and 10 on the web. Yes. But at the same time, we're also testing things within the web environment too. So keep that in mind also. The web is going to constantly increase, we think.
But Google could make an algorithm change tomorrow where it could increase our call center volumes a lot. So it's about that conversion level and what levers that we pull. And so I will say that if you looked at us for the last 20 years and tried to come up with a strategy that we had, web versus call center versus walk in, I don't think you'd be able to kind of connect the dots, because we're always testing that. Literally, how many tests do we have going on? I don't know anyone.
Dozens probably right now.
Yes. I do want to correct when I said there's no approval process for pricing. There is in a sense an approval process but more at a strategy level. So you have we bring in executives at that level. So and they usually communicate to us at that level.
And the machines do most of the execution with the help of overrides from revenue managers.
A a little more detail to Michael, you also have to take conversion rates, move in rates, length of stays, not just the price. So that customer could be much more valuable than a call center customer who might take the 1st month free or a walk in customer takes a street pay. And we look at it as a blended solution.
Yes. Tayo? Tayo
Cusoneo from Jefferies. I hear what you're saying about situations always kind of dynamic, how you kind of figure out all the different pieces to kind of maximize revenue. But are there any like 2 or 3 bright lines versus always the rule of law that you always follow in the systems?
Sure. We hired Chandra how many years ago, 8 years ago. And he says to me after about 2 months, he says, James, the more customers we have the better. Brilliant. So that's something we've always espoused to is having as many customers as we can, because you're not going to raise rents to an empty unit.
And so we have probably gone more in that direction into more of a high occupancy model because really it's the easiest thing to get, but it's also the hardest thing to maintain.
More customers the better.
Thank you, gentlemen. We're going to have James stay up here for our next session. We're also going to invite up Braun McCall and James Hafen. Braun is our Senior Vice President of IT and James Hafen is our Vice President of Product Innovation. So the 3 of them are going to tag team this next section talking about IT and Innovation at Extra Space.
Great. Thanks, Jeff. Everyone doing all right? So, as Jeff said, going to talk about kind of innovation and where we're headed. I think as an industry, I think we're at a very interesting point in our industry and as a company, because there's a lot of macro factors affecting our business today.
We talk about supply. I'm going to talk about changes to technology and the rapid changes in technology and also big changes in the consumer coming up. Our challenge is how do we respond to these macro changes going on. We got to be really careful because we have a limited resources, limited time. And just because we can doesn't mean we should.
And so and I know we're also at a kind of a quandary because we want to invest in the future, but also maximize near term shareholder performance. Without investing in the future, it could put that those cash flows at risk at some point. So that's something that I spend a lot of time thinking about. So I'm going to go through some of the macro changes. I'm going to send it over to James to talk about some of our innovation and then Ron about kind of the core infrastructure that we're constantly augmenting and building.
So I've been with the company for 20 years. Currently, the IT functions, pricing and revenue management, marketing what am I missing? Call center reports into me. And a lot of people have asked, why would a marketing person have all this under their control? I asked them, no one wants it, I guess, the responsibility, I guess.
So we're the largest consumer. The marketing team is probably the largest consumer of data within our company. And we saw huge advantages a few years ago by bringing data science revenue management under more of a customer acquisition fold. You've seen the huge increases of efficiency on the web, in our pricing, and I think our performance speaks for itself. But this is, I think, a big competitive advantage for our company and we want to keep it a competitive advantage.
So let's talk about some of the macro changes going on. The first is competition. There's more competition and the competition is getting more and more sophisticated, especially from the top players. These guys are all working on stuff that we are. I don't think there's a lot of secrets in the industry.
It's a data centric industry now. I think with public storage, they're going to probably make some inroads from the customer experience standpoint going forward. Life Storage obviously gone through a big change with their name. And CuteSmart does a very good job. So these guys are getting more and more sophisticated as we are.
So it's kind of an arms race out there. We have kind of this disruptive forces going on in the industry too. This is not a major threat today. But as consumers change and maybe those needs change over time, storage needs, these companies may make more of a dent. Right now, we're not feeling it.
We looked at this business several years ago. It hasn't changed a whole lot in terms of our view, but it is something we need to
keep an eye on.
And then we have SpareFoot. SpareFoot has been the leading aggregator in space for several years now. And recently they've also acquired 2 software companies. They've got a toehold in probably 20,000 properties throughout the country now through their software and through their aggregation business. So there's something there's someone that we need to consider also.
So sophistication has come into our industry in terms of technology. Also technology continues to accelerate. I don't know who has a teenage children, but they have these phones that they do everything on it besides talk to people on the phone. This has just gone crazy over the last 10 years. So I believe who was here 10 years ago at our investor event?
Todd? Stubbs was here. These are some technology changes that have just occurred in the last 10 years, okay? These are products and services that weren't here 10 years ago. The iPad, drones, VR, Lyft, Uber.
Uber might be cheating on, I think that was maybe 2,008 or 2,007. Airbnb, Instagram, Snapchat, WhatsApp, Google Chrome, Spotify, Venmo, look how fast things have changed. Let's just look at the last 5 years, how fast things have changed. Who uses Google Lens, Google Translate for shopping probably the biggest contribution technology is Snapchat filters. So one of them I didn't show is Google Home, Google or Alexa, Amazon Alexa, things like that at the home.
So this technology will continue to accelerate. So terms like augmentation, automation, digitization, dis intermediation and mobilization aren't just buzzwords. These things are going to change the way we work, how we interact with each other, and this is going to accelerate quicker and quicker over time as technology and processing speed increases. So what are the specific things we're looking at from a technology perspective that is going to impact us? This is something we got to keep an eye on as our friends at Google, okay?
Now public service announcement for everyone is Google is not a search engine. It is a monetization device. They take all this fairness out of it, these hearings on Capitol Hill, they could care less about being agnostic and secular. They want to make money, okay? That's all they care about.
So putting the right ad in front of you at the right time that you click on it and puts money in their pocket. That's their only consideration. Google is wants to keep you on the Internet all the time. I know in New York City, I think they've rolled out a Wi Fi at Grand Central in Europe throughout. The reason they're doing that is to keep you on the Internet, to have you post things, to log your travel, to throw pins down, to buy things.
This is enabling Google and other technology providers to have a more all encompassing view of the customer. I don't know if who's used Google Lens lately, but this is something that is going to have a big impact and I think in storage at some point because being able to price things by looking at them via your phone. So, mostly retail functions right now where you can look at items. So people that have posted pictures of products and their transactions, Google is using that to once again put something in front of you, you're going to click on and transact with so they get paid. This is something we could use as storage as people look at a storage property, okay, or drive by a storage property, knowing their location, knowing what certain segments they're in.
How can we as an industry and as a company capitalize on some of these innovations that Google is introducing. Another big impact of technology on Extra Space is going to be the Internet of Everything, being able to digitally monitor and remotely monitor signage systems, HVAC systems, access and security systems, water penetration, lighting systems and solar, has going to have a big impact on extra space and the industry as a whole. 5 gs is going to have a massive impact. The increases between 3 gs and 4 gs or 10x between 4 gs and 5 gs is going to be about 1,000. So the ability for people to get high speed delivery of content data without getting on an unsecured Wi Fi network is going to be huge.
And this is going to have a major impact on our business. Privacy, GDPR, the General Data Protection Regulation rollout in Europe in May before Governor Jerry Brown left office. They instituted 1 in California. This is going to be huge. And it's basically the right to know how your data is being used and shared at a moment's notice and the right to be forgotten.
So from a consumer standpoint, this is great. As a consumer, I think it's great. As a business, it's going to suck. It's going to be really tough. Google just got fined, I think, last week $62,000,000 for violating this.
That's a drop in the bucket for Google. But imagine how that could impact a small business or a single self storage operator. So in California, businesses have to be above a certain size right now. And the worry is, is that each state is going to have its own GDPR. And if that's the case, it is going to be so complicated and such a burden for companies.
Google is lobbying right now that we just do a nationwide thing. So it's not in California, Nevada, it's nationwide and we can address it from there. The last macro trend I'm going to talk about before I hand it over to James Haven is changes in the consumer. Okay. Who knows what this means?
Anyone? I, we, we, we. Okay. I want what I want, when I want. It's the new consumer.
They want to transact with businesses and interact with businesses how they want to do it, okay? If we're not making our products easier to use, easier to interact with, easier to transact with, we're done. Customers today are more experimental, information savvy. They want a seamless digital physical integration. They want to have any drop off in the experience they have from you between your website and your site that you go into and vice versa.
They're extremely device dependent. They do everything via their phones. And I'm stereotyping here, mostly looking at millennials and Gen Z, but it is in older generations too. And they want to be patted on the back about making good decisions. So they want a relationship with the businesses they transact with and interact with.
Demographic changes, This is huge. So, if you take a look at where is it? Right in the middle. Okay. The if you this is the number of customers that moved in, in 2018.
This is their age. Okay, as it compares to the overall percentage of the population. So as you can see, we're very well represented with the baby boomers, Gen X and millennials. Everyone thought the millennials weren't going to use storage. They're using it at a very high rate, okay?
The question is going to be, is the Gen Z or Gen Touch, those between the ages of 1523, are they going to use this product in the same way? Who has children this age? Children? They see the world differently than we did. So are they going to use the product in the same way, in the same and does the product have to change?
And that's what we have to address. So the big question we have to answer is, so what initiatives, investments are we going to pursue in 2019 beyond that will allow extra space to maximize shareholder value, while at the same time building a platform for future growth? So our answer is kind of the Wayne Gretzky quote is we want to skate to where the puck is going to be not where the puck is. So we have to understand our customers. We got to understand how they're going to interact with this product in the future.
How what's in there what do they desire, okay? We got to make this an extremely frictionless experience for our customer. Right now, the vast majority of operators in our space
and we're guilty of this too, is we make it kind of hard.
People are going through these life changes. And we don't make those life changes any less stressful oftentimes. We actually sometimes make it more stressful. And we have to take away that stress. And so what James is going
to talk about is some
of these things that we're looking at. We're going to be purposely kind of vague on these for several reasons. And then Ron is going to talk about kind of the infrastructure that's being augmented and improved over time.
Thanks.
So by way of introduction, my name is James Haytham. I am the newest member of the team you're going to hear from today. I've been back at Extra Space for about 6 months now. I say back because I actually joined Extra Space back in 1999 and I was part of that original team that came in here when the company had 40 or 50 properties I believe and they had ambitious goals to grow to about 400 in the portfolio. And the technology at the time was constrained.
There was just no way to do it efficiently. So we built a technology platform to grow the company. And I think it was successful enough. We ended up spinning that out in about 2002 to a company called Centership where I spent the next 10, 11, 12 years innovating and doing technology concerns specifically for the self storage industry until we finally sold that company the Yardi Systems where I spent about 4 years after that. Back at Extra Space now during my time away,
I got to see a lot of storage operators.
I got to work with some of the biggest vendors in the space, really got to know the industry. And I can tell you one thing, I'm really happy to be back at Extra Space, just the class of the industries and proud to be here. So came back 6 months ago and we started a product development group. What is product development at Extra Space? Well, we'd like to say it's exactly like product development in any other retail company or technology company and it's a shift, a reorientation of our focus.
We don't want to be thought of as a pure REIT play necessarily. We want to be innovative. We want to ideate. We want to push the envelope forward on what this company can do. We've been doing it for 20 years starting back in 1999 when the direction changed and the company decided to grow.
And we're trying to do that again and stay ahead of our competition. So our main charge and what we're working on more than anything is executing on this digital vision. We want to make it frictionless for our customers to do business with us wherever they want, wherever that makes sense and to move the dial forward. And we're going to focus on this in my presentation exclusively. It starts with the customers.
The customer experience is the key of everything we're focused on right now and driving product innovation forward. We're kind of that merge area between technology, customer and the core business, the fundamentals that we've been successful on for the duration of our company's history and not changing our core business, but building on it accretively with value add on new products, services and technologies. So this is the role of product development. And we're just getting started. We're 6 months into this.
So what are we talking about? We're talking about actual new products, things that don't exist today that can push us forward in how we're servicing our customers. They may be services and they may be products that are enabling. They are behind the scenes, things that aren't customer facing, but they have downstream value in what they enable for us in other product sets. Enhancements to existing products that we offer today and then partnerships even acquisitions.
We're focused on all of those. For the net benefit of driving new revenue streams, efficiencies which can't be ignored, there are ways we can run our properties more efficiently. And we've talked about that several times today. Product enablement, which I just hit on. But more than anything, we're really focused on this customer experience lift and changing the way our customers do business with us today.
Getting to some stats that kind of talk about this. 80% of customers this is according to some research we have from Salesforce, 80% of customers believe that the experience they have with a vendor is as important as the product or services themselves. It's incredible. And 67% say that their standards are rising. I would say rising not higher than ever, but continuing to rise.
Conversely, most companies are missing the boat on this. 51% say companies fall short of their expectations for great customer experience. And 54% say they don't believe companies have their best interest in mind. And not to throw more cold water on this, but there's other statistics we've seen that suggest younger generations, millennials, Gen Z have increasing distrust in the largest players in a particular space. Extra Space obviously being one of the largest players in our space.
We have to work hard to improve this experience and continue to gain the trust of the customers that are driving our business. 62% will share a bad experience online. And something that wasn't intuitive to me is to learn that 72% will share a great experience online. And this is critical especially for the millennials and the Gen Z folks that are coming up and will be our customers in the future. They rely on references and referrals and reviews.
This is where they're making their consumer decisions. 67% and this is the big opportunity for us say that they'll pay more for a better customer experience. And as James talked about on the data privacy side, there's also increasing research that suggests they will trade their data for a good customer experience if they trust that you'll be a good steward of that data. And as Chandra's team and Scott Hansel went over that data is critical to what we're doing in other areas of the company. We want that data.
Our business isn't changing very much, but customer expectations are and rapidly. So I'm going to go through a couple of product examples that are kind of poster children for what we're trying to do. So Kroger, if you're familiar with Kroger, anyone here ever use the ClickList product at their local Kroger supermarket? Order your stuff online, somebody goes to the supermarket for you, puts it into a car, you pay online, you pull up, they deliver it to your car. Great customer experience.
But they don't stop there. If you're in the store, you obviously have the option of self-service, checkout, go through the kiosk. These devices you can take through the store, scan everything as you're going along, as you're putting it into your bag, pay on the device, walk out the door. The experience is as you want it. And if this is your preferred way of doing business, if you still want to check out the old way, have someone bag your groceries, talk to the cashier at your checkout, you still have that option.
There's even test pilots going on in Midwest Kroger stores where you can walk around with a shopping list on your phone and they have digitized price tags, price labels on the shelves. And as you walk down the aisle by the product you're looking for that digital price tag will light up with an icon, your persona that you've programmed into the phone to let you know where your product is and help your shopping experience be expedited and get you out the store as fast as possible. And then of course everybody including Kroger is working on autonomous vehicles for delivery and get groceries to your home without having to leave. So I have a question. How many ways can you order a Domino's pizza?
Does anyone in the room know? Anyone? Just someone take a guess. Scott, you're saying what? 4?
10? 6. 6. You're all lit off. 27 ways to order a pizza from Domino's.
You can text a pizza emoji to them. You can ask your Alexa device to deliver your order.
You can
go online. You can walk in the store. 27 ways to order a mediocre pizza from Domino's. If you want a really good pizza, you're going to go somewhere else. But they've made it so easy and the experience can be so satisfying that it has increased their stock profits.
What was the number? 1500%. 1500% in the last 5 years.
It was 5 years,
which exceeds our growth. 27 ways. Do you know how many ways you can sign a lease or rent a property at Extra Space Storage? 1. 1.
That's what we have to change and we have to change that rapidly. So in product development, a lot of words get thrown around. We talk about automation, artificial intelligence efficiencies and they're all critical components of what we're doing in the product development team. But these terms often get turned around as pejoratives especially when you're talking some of our field employees. It sounds like we're trying to save a buck as opposed to doing what's right for the customer or increase the experience of our customer.
The words we'd rather talk about and the phrases we want to be the buzzwords from our team are things like omnichannel, making it able for our tenants to reach us however they want. A frictionless experience, ecosystems that work together regardless of the channel they come through, I have a high quality consistent experience. Going to the website does not feel different than actually walking into the property and dealing with the managers. And of course people and we've talked about this all day long and I think it's critical. 85% of transactions today, retail transactions still happen in a store in a brick and mortar building.
Even with the advent of Amazon and online shopping, 85% of those interactions are still happening in place. It doesn't matter how cool it was to order that pizza through your Alexa device, if it gets there late, if your driver is rude, if it's cold, if they mess up your order, all of the CX wins of having 27 ways to order that pizza are lost when the interaction happens at delivering the product. And our people continue to be the core component of what we're doing. Clean facilities, well lit facilities, fantastic people are what kind of glue this digital experience together with the physical experience of coming on-site. And that's what we're about.
We're a real estate estate play. When you come on our properties, we want you to feel safe, welcome and secure. And that's where I'll stop and
hand it over to Bron. All right. Thanks. Thanks, James. So just a reminder, I'm Bron McCall, Senior Vice President and Chief Technology Officer.
I've been with Extra Space for 8 years now. Prior to that, I was Chief Information Officer at Flying J for 10 years. So what I want to I'm going to go quick here because I know we're coming up on the lunch hour here. But a couple of things. You've heard Joe on earnings calls talk about how we're continuously improving our systems.
And what this chart shows is a few examples of those improvements over the last 5 years. And what this has done is really provide us a modern and solid foundation for this digital transformation and all the solutions that James Hayfin talked about. Not only that though, these all these solutions we've implemented have provided their own cost and process efficiencies to the business as well as scalability for the future. So if we're going to deliver like a tech company, we need to be structured like a tech company. And James alluded to this a little bit.
One of the things we've done over the last couple of years is really organize the company to really deliver on innovation. And so we've got James Happen's team, the product development team. On the left side of this chart is primarily product engineering. So they work hand in hand with James' team in delivering these products. And when we say products, just to make sure it's clear, those are those systems that primarily touch the customer.
So the website, point of sale, apps, call center, those types of things we call products. On the right hand side over here is core IT. And they're focused on delivering back office systems and the infrastructure and network telecom. We have over 90 people today that are really focused on technology in the organization. Now Utah is a very competitive tech market.
Maybe you've heard the term before, Silicon Slopes. We are in the middle of that. And we are competing with companies like Adobe and Pluralsight and Domo and Qualtrics. And one of the things that we've done to really focus on attracting and retaining that great talent that we need to deliver on this innovation is culture. And what you're seeing here is just one of the quarterly survey that we do to really monitor our culture.
We publish these results and talk to our teams and identify ways that we can improve our culture. And I believe it's having a big impact. We've added a lot of team members to the IT department over the last year. And the level of talent that we're attracting is just tremendous. I just really couldn't be more impressed.
The last thing I'm going to talk about here is that I think differentiates us is how we think about our technology work today. And it really we everything we do falls into 1 of 4 categories. I'm going to cover these quickly. 1st, we're going to start on the left hand side here of what we consider visible work. So feature work is delivering new features, new capabilities to the system.
And I want to use a car analogy because I think this will help you understand what I'm talking about. So the same thing if you're talking about a car would be like fancy new wheels or a flashy paint job, very visible, right? The next type of work is bug work. And that's exactly what you think it is, fixing bugs and errors within the systems. The same thing on the car would be fixing broken parts.
So both of these are very visible type of work. You can see the value the business value very easily, right? Let's focus let's now go over to the Invisible side. Architecture is upgrading major components. So these aren't system overhauls.
These are just upgrading components of your various systems. Same thing in a car would be like maybe upgrading the transmission or various components on the engine. The last one here is what we call technical debt. These are the
things you just need to
do to keep systems running efficiently. On a car, this would be oil changes and tire rotations. So one of the things that most companies today spend most of their time on the visible side because it's very easy to see the business value in those things And the stuff on the invisible side gets neglected. We have taken approach to provide equal time to each of these types of work. And the value in that is we always have systems that are operating at peak performance.
We going forward, we should never have really disruptive major system overhauls that need to occur. And it will really help us deliver in this fast paced world that we heard from both James Overturf and James Haython. Last thing here to close, just back to the answer slide that James talked about earlier. How are we going to continue to win? And it's by continuing to leverage this foundation that we've built, focusing on the customer and building that frictionless customer experience.
It's going to be really important for us to continue to win in this new world. I want to thank you for your time today. Thank you for spending a couple of days with us. And I don't know if we have a few minutes for questions, but turn it over.
A few questions and we have the microphone in the back. Everybody's hungry.
Jonathan Hughes, Raymond James. What's the biggest technological risk you see over the next 5 years?
I think the biggest technological risk is not doing business with the customer the way they want to do business with us. Like James said, we want to provide a solution whether it be high-tech or high touch, right? If someone wants to talk to someone on the phone, great, we got to have that solution for them. We can't send everyone down the same path anymore. So much like Domino's, Kroger, just interacting with people they how they want to be interacted with.
That's the biggest risk. From a technology perspective, I mean, we got privacy issues, data security issues, just like every other company. But I think the biggest risk is you don't you have an irrelevant product for how people want to interact with you.
And what I would add to that, and James alluded to this, is in doing it well and doing it seamlessly. It's one thing to be able to do it. It's another to be able to do it in a way where the customer is having a smooth positive experience that in our case maximizes revenue as well and not compromising the experience or the profit generation just
to do something.
Hi. Brian Jones from Neuberger Berman. Just a few thoughts on the pickup and delivery guys, clutter and make space. I think you guys and PSA in the past have tried that business. It was difficult to scale, it was difficult to run profitably.
Have you have these players figured out anything in terms of building out that business profitably or are they kind of in startup, build a brand, find customers and we'll worry about making money in the future? I'm not privy to the performance. We have not seen them have a big impact on our business. Even in New York City where I think it makes the most sense, we're not seeing a massive amount of vacancy in smaller say. But I think what we got to look at with those companies is they're not really real estate companies.
They're a logistics company. And that infrastructure that you need to build is vastly different from infrastructure that we've built. I think at some point, especially Gen Z, this is a product that makes sense for them because of the on demand ability to do this. There's also other startups kind of where SquareFoot got started where it's kind of a crowdsource storage where you can offer your garage up or a space in a safe. I mean, we've seen some really odd examples.
And we've talked to those companies and they seem to be making progress too. So I think it speaks to there is going to be a need for storage in the future. It's just how we provide it to them. I just don't see the form factor that we currently have and our industry has in place being as relevant as it is in the future as it is now. And so we've all got to move in that direction.
Right. And just additional color that I would add to that, while we don't have access to books and don't know profitability levels per se, I think one thing that's interesting to see is how the number of participants is shrinking. So you're seeing that a lot of those companies don't have the staying power, presumably either because they weren't profitable or haven't been able to raise additional capital during that kind of infancy build customers or market share stage. So we've definitely seen the number of competitors trimming, which perhaps is indicative of profitability. The other is how they've changed pricing strategies.
So the original proposition customer was we can do this for the same cost as storage or less. And we've seen over the last couple of years that go from pricing parity to certainly
at a premium. So to the
extent that there is that demand there, at least today, it comes at a price and a premium.
More restrictive delivery options and things like that as they figure it out. I think it will have a place. I'm just not sure how big a place it's going to bigger place they're going to have.
All right. Thank you, gentlemen. Appreciate it. We're now to our lunch break. Lunch is ready.
It's here out in the foyer. Go ahead, serve out. You're welcome to bring it back in here. Let's plan on taking 30 minutes before a break on our webcast. We'll try to reconvene here at 12:30.
You're certainly welcome to keep eating during the next presentation, which will be from our people department. All right. We're going to go ahead and get started with our lunch speaker now. But as I mentioned before, please keep eating. There's more food out there.
They mentioned there's also a little bit of desserts and churros and a few things. So feel free to cut in and out and refill your plates. But our lunch speaker, as I mentioned, is from our People department. This is Clint Halverson, Vice President of People. A lot of you probably recognize Clint.
He's been the jack of all trades at Extra Space and has worked in a lot of different roles before people in IR. So it should be a familiar face for many of you. With that, we'll turn it over to Clint.
Thanks, Jeff. It's James Overturf did IR before me and then I did IR and now Jeff. And James and I just sit back and say, man, we were morons. We didn't know what we were doing. Jeff's doing a great job.
It's always fun when you get up at people and you're watching the webcast and you can see the attendance just nosedive because everyone wants to hear about people. I want to talk a little bit about our culture and what we do to kind of differentiate Extra Space from a people standpoint today. As Jeff said, I've been with Extra Space for 13 years.
I've done operations IR and
for the last
people.
So we try and structure our team on the people side to do 3 main things. We want to attract, develop and retain top talent. We want to have the best talent. We want to make sure we're training them and that we're retaining them for the long haul. It's a lot easier to retain that amazing talent than to continue to refill the pipeline.
Wanted to give you guys just some stats on our workforce. This isn't data that we put out there a lot, but this will give you a feel for the size of our workforce. If anything here you see it's a balance for us with over 82% of our employees being in Somrath's world and being out in the field. So balancing getting great strong operators out in the field with having sharp dynamic talent in the store support center that's doing all these great things that we've talked about today. So we spend a lot of time trying to make sure that we're balancing that focus and getting the right talent to be at the right spot on the team.
You know, Ki Bin asked a question of Joe early on in the day. Why is your culture a differentiator for you? And why does that really make a difference in your business? And for us, our culture is really everything. We try and balance an amazing employee experience with a wonderful customer experience when they come in the door.
And then we try and take all those things that Dana talked about having that professional consistent image and brand and kind of bake that all together for that overall view of our culture. So this is our corporate compass and we put this out in front of everybody. This is kind of what drives us and what we try and do. I want to point out here at the middle are our 5 values. And when Joe talked in response to Ki Bin's question earlier, he mentioned those values.
And as an HR guy, the best answer I could have to Ki Bin's question about culture is to have our CEO stand up here and share personal meaningful experiences. And hopefully you guys have seen that today that from everybody that's been up here that passion, that drive for excellence, that drive for innovation is something that we live every day. And that's really important for us. We're very selective when we hire. Our hiring process takes a little bit longer, but we want to make sure that they live those values and that they're just inherent in who they are when they join our team.
So our culture becomes extremely important for us And we'd like to get feedback. Joe talked about our town halls. We love to get feedback from our people. And one of the ways that we try and do that is through Glassdoor. We feel our people are a little more honest when they go out online.
And so we go to Glassdoor and look and we feel pretty good about these results. We try not to put Joe's out there too much. We don't want him to be too excited about those ratings, but Joe does a great job of driving the team. And overall, we feel like we have a really good ranking. If you break these down in all these various areas, we stack up really well against the over 700,000 companies that are out on Glassdoor.
We think we do a really nice job of having a well balanced culture that attracts and retains people. And we're pretty proud of the fact we stack up well against our peers as well. We stack up well against our competitors. When you look at all the various aspects that define a culture, we feel we stack up really well in the storage industry. And I think that is a differentiator for us.
But we're not satisfied with this. We like to measure ourselves against larger retailers. On the people we know we're a real estate business, but on the people side, we're a retail business. And so we like to stack our people up against other retailers. And we're really proud of this that we've got a culture that will stand against some of the largest brands known for great cultures out there.
And we feel really good about that. And we think our people love working here. Like Joe mentioned, we won recognition for that. And we're in the top 100 companies to work for in the country. And we think our people love working here and that's huge for us.
And Ki Bin and I were talking over lunch about how people that join us from other storage operators or from other industries feel about the company and is it a big shock to them and is it the technology or what's the bigger shock? And really the biggest shock is that culture. We try and empower those people at the site level to engage with their customers, to make decisions, to manage their property and we try and grow them for the long haul. We also do internal pulsing of our people. We love to get feedback from our people on what we can do.
So every year we do an engagement survey and we ask our people how are we doing, what can we do better, what should we focus on in the future. It helps us put a roadmap together that helps guide where we're going to go over the next year to 3 years. So what are the cultural things that we're going to focus on to enhance that employee experience? So the blue line up here is a benchmark. We use a tool through Burson by Deloitte, a subsidiary of Deloitte and Touche that does culture and engagement.
We use their tool and this is how we stack up against all the companies that use their tool. So we feel pretty good about that benchmark and how our people feel internally as well. One of the biggest things we focus on as a people team is getting the right talent onto the team. And if you look at the sheer volume of applications that we get in for a very small relative number of hires compared to the number of applications, we have to do a lot of work to keep that pipeline flowing. We're particularly proud that last year during one of the toughest labor markets that we saw, the team did all they could to try and keep that pipeline full and we were able to come in with almost 10,000 more applicants in 2018 than we had in 2017, even though it was a tighter labor market.
We were able to control our turnover. Our turnover did tick up slightly year over year 2017 to 2018, but we do feel that we were able to bring in good talent and to keep the pipeline full and to we reduced our days to fill by 5 days, which I think is also critical for us. I think you have heard Joe talk about in the past, but we've been able to bring our days to fill down dramatically, which helps us save costs in the long run and keep positions full. But we feel good about that. I think the other thing on this side that we try and do is use technology to help us identify who's great.
We partnered with a company called Talent Plus. Talent Plus is a surveying tool. So everybody that applies to work at Extra Space is asked to take this survey. And it looks at whether or not employees have the inherent talent to be successful at that role. So do they find joy in doing those things that are going to make them successful in customer service at the site level?
Or if they're going to be a leader in the company, do they have those inherent skills or talents that will make them successful as a leader? Those are they their fallback traits, those things that just will make them successful in our culture. And we've had that in place for about a year and seeing really great success with that helping us to identify great talent that will fit culturally at Extra Space. Hiring is important, but for us we hire a lot of assistant managers. Out of those 100 hires, over 1,000 of those were assistant managers that came into our properties.
Over 85% of our store managers are promoted from within. And that's important to us. We want to continue to promote and grow people from within. So we build out advanced programs along the way. So if you come in as an assistant manager, you get your job down, we'll put you into a development program that will take you through being a store manager.
What do I need to learn? How do I look at the financials? How do I take that next role? So that when we have an opening, that person's ready to step in and take that opportunity. And then we do that from store manager to district team lead and from district team lead into our district manager and training program.
We like to build and develop that store level talent in house because we think that's also a differentiator, helps us to more effectively execute. Samrat talked earlier about our customer centered sales process. And we do use a lot of analytics when we look at that. But it's training and getting people that can truly connect with that customer. And we think we can find the right people and we can help them understand that sales process then we don't want to let them go.
We want to train and develop them in house to continue to execute. And then on the leadership side, we try and build our leaders. And historically, we've always been really good at promoting from within. We would take a property account and say, hey, you're a great accountant. We're now going to put you over 8 or 9 other accountants.
You're going to be a manager. But we didn't give them any support to be a leader.
So
they were great at debits and credits, but they weren't great at leading people. So over the last few years, we've put what we call launch in place, But launch is to take those people that are great contributors within the organization and help them be great leaders and to set a clear expectation for them of what it means to be a leader at Extra Space. How do you emulate those values every day? How do you balance that compass in what you're doing every day? So we do launch for our managers of individual contributors.
And then once they're ready and they're at that point in their career that they're going to maybe transition to being a leader of leaders. They're going to lead a team of managers. Then we'll put them through our leadership development program. And we pick a fairly small group every year to go through this program. We give them mentors.
We give them guidance. We help them through this program, so that when they're ready they can step into that next role. And then from those leaders of leaders we identify who are our next senior leaders in the company and how can we help them step from being in the tactical day to day to step more into a strategic role and to look at the business more strategically to look at holistically of running a larger department. We take our high potential people we put them in to our executive development program and we keep that fairly small every year. We try not to force people in that just to keep the program full.
If we don't have someone that's ready, we'll wait until they're ready and then launch a small program. And we have had huge success with that. About 65% to 70% of the people that we put through our
executive development program end up in senior
leadership at Extra Space. And development program end up in senior leadership at Extra Space. And we found huge success. We give them real world problems to work on. We have them work in teams.
We give them some time in there. They're otherwise already full schedule to be a part of this program. And it keeps a continuous focus on making sure we're growing our talent in house. We're keeping our talent, we're building our talent because ultimately it's like we said earlier, our culture is everything for us. Our people are everything for us.
Clearly as a real estate company, our most valuable asset is going to be our real estate. But our most important asset is our people. And we really believe that and we live that every day to try and make sure that we're balancing our culture with the business. And that if we can keep good talented people on the team, develop them and retain them, then we're going to have that competitive advantage to do a little bit better. Okay.
And
have.
So he asked how does our 34% turnover compare to others in the industry? From the data that we can gather, we're on the lower end for the industry. For retail in general, we're a little lower as well. But I mean the easier data to get as you know is retail data. It's not readily published in the storage industry, but from anecdotally from what we hear it's on the lower end.
Yes. So our Scott asked that I clarify corporate versus store turnover. So that's our overall turnover. Our store turnover last year was around 31%, 32% and then our corporate turnover last year was just over 20%. So and that's high for us at corporate.
We typically run much lower at corporate, but that's a tight labor market and the types of positions we're looking for. So the reason that 34 comes in higher is our call center comes in much higher, call center comes in around the 75% range on turnover.
And so what are the factors that's causing that turnover? Recognizing the fact that it's below peers and below retail, what are the common factors? Because I got to assume that some of it is probably forced turnover and some of it is voluntary turnover. So maybe if you can break that out and what are the things you can do to sort of retain because the cost of hiring in terms of time, 25 days to get someone in just sucks up a lot of cost?
Yes, it does. So we voluntary versus involuntary, I would tell you voluntary is much higher than involuntary. I'd probably say 85, 15. Voluntary turnover for a myriad of reasons, obviously for our site managers, which accounts for a large portion of this. It's in a lot of cases an entry level job.
And as they grow in their careers and they want to move up and they want to develop, they're looking for other opportunities or looking for other industries or different things. So that's we get a lot of reasons, better paying jobs, same industry, different industry. We track all that data and we watch that. What we really try and look at though are we in line with the benefits package, are we in line with compensation, are we losing out For those things we can control because sometimes there's simply things we can't control that they've gone to college, they've graduated, and now they're ready to do something different or things along those lines. In Salt Lake or at our store support center, we find huge competition right now for talent in James' world and bronze world.
As I'm sure you're all aware, we have an area here in Utah called Silicon Slopes. We have a lot Silicon Valley competitors that have moved offices here and that tech and marketing talent is at a premium right now and we see a lot of turnover right now in those areas.
On the Glassdoor ratings, one thing stuck out where it said the percentage of current employees was very high in those rating scores relative to everybody else. So is that something that you're pushing down to try to, I'm not going to say bolster, but is there a deliberate activity to for Glassdoor ratings?
What we do try and do on Glassdoor ratings, we try and highlight one of our departments or divisions out in the field every month. So we try and put pictures out on Glassdoor to give those coming to Glassdoor a real view of what it's like to work at Extra Space. And we know that a majority of our candidates check Glassdoor before they come work here. So we want to give them that real world view into what we're doing. So we highlight a new division or department every month.
And when we do that, we ask that department, hey, if you wouldn't mind going out and giving a comment then so that keeps our reviews fresh and
current. Good questions. One addition on that, Michael. I
Great.
So we'll next move on to a presentation by our acquisitions group. Zach Dickens is walking to the front here. He's our Senior Vice President of Real Estate. And also just wanted to mention, sitting at the back table, our Chief Legal Officer slipped in during the lunch break or I think right before the lunch break. This is Gwen MacNeil, who's joined us, not formally presenting today, but I would certainly invite you to visit with her this afternoon.
She'll be with us at dinner tonight with any questions legal, but also a much broader than that as a member of the executive team. So with that, Zack, take
it away. Okay.
Thank you. Pleased to be with you here today. We're going to take you through a couple of different things today. And I first should introduce myself. Early on in the Silicon Slopes era, right?
Clint, you referenced that. It's early on in the Silicon Slopes era, right? Clint, you referenced that. It's kind of interesting though to come to this company where I felt like I was leaving high-tech for low tech. But what I found was a marriage in this company of the bricks and mortar with the technology aspect.
So our roadmap today that I'd like to take you through is talk through a couple of examples, real life examples. Now I chose these, so recognize I'm going to show you some nice properties that we acquired over the years. But I also want you to know that I'm going to give you a report card about what we've done in general through over a decade of acquisition activity. So that gives you a little context. But a couple of these are very interesting.
We're going to take you through this a C of O example which is our first group there followed by a value add property that we picked up that was underperforming. And then finally, I'll give you my report card, which is really showing you the performance of how we've done since 2006. So we'll take it from there. The certificate of occupancy stores is a big part of our growth as of late, but it started years ago. And so now we have something around 70 stores that have gone through this process.
I'll disclose to you and show you some of our track record associated with that. But obviously, when you do the certificate of occupancy, you typically are committing to acquiring a turnkey type of project. These sometimes take a year or 2 of lead time when we actually are introduced to the project to when they deliver. But what it does for us is brings in a beautiful looking building like here's one in Portland, Oregon. This was delivered to us by a group called GetSpace.
And GetSpace wanted to have a that because it really augmented our properties in the area. So it's really best in class. What it does is though is we really look to our partners and we together are a team when we do this. The partner obviously helps in the site selection. They have to work through the navigation of the entitlement process and dealing with all the building codes and all the hassles of development.
They also incur the dead deal cost if deals aren't brought to us. So we like that risk profile that there's less risk associated with this and we get a good product at the end of the day. Our construction team and Noah will be here, he oversees a group of construction managers. He'll talk to this a little bit, but they make sure that they visit every month, that the construction is going according to plan, they're using the quality of materials and designing to the spec that we would have them design to. So that's part of the C of O.
Now from our aspect, it really creates a win win. The developer again assumes all that development risk. And what we feel comfortable with is you've seen the senior management team here talk about the different aspects of our company is that we're able to navigate through the absorption process very efficiently. We're comfortable in that realm. And we view that as being worth the exchange of the risk profile for the upside of the properties.
I brought you a great example. This one is a property in the Northeast. Sits in Dedham, Massachusetts, which is a suburb of Boston. It sits on the Dedham Roxbury border, very difficult to develop in this market, high barriers to entry. So we really relied on the local developer there to run through the paces of getting this project approved.
Like I said, high barrier to entry market and often it's the local individuals, the developers in the local markets that tend to know the zoning board. They tend to know the mayors. We don't have that grasp typically of how to do that in many markets where it's not worth the effort. Again, it was located in a high barrier to entry market and we like the underlying demographics. Now I'm going to give you the 3 mile radius demographics.
But when I show you where our customers come from, you'll say, well, that 3 mile doesn't really apply. I mean, it might be when I first started in the industry, they would draw rings around properties and say that's your trade area. But when you go in through this process with me, you'll see how that's more nuanced. Again, good median household income. The population density is higher than our portfolio average in this market.
Average home values are very good. And what I liked about this property again reiterating the high barrier to entry market is there's only 3.5 square feet per capita. Many of you know this metric, right? It's 8 right now, 7.5 to 8 in the United States square feet for every individual. So also the store is not a huge store.
There's a lot of value in getting the right size of the property. It's not $120,000 net rentable, but very manageable, about $67,000 net rentable. And then the price per pound, which was $140 per square foot is I think appropriately priced. If you look at the cost of the land and the construction cost today that while that is a little maybe a little on the high end, it's very justified by what the valuation of this property is. When I break it down for you, you'll see.
So I talked about the 3 mile market as being kind of the go to original type of market. But when we mapped out and by the way the blue dots or the blue callouts those are our customers. Before we even got into looking at this project, we mapped all of our customers from our existing store, not the one we were targeting doing, right? We looked and we said, okay, where do our folks come from to our store? And the red is the 3 mile radius that circles our store.
And you can obviously see look at the market. It's not Dedham, it's way up into Boston, up into Newton even, up north, some up in beyond Waltham. So that for us is valuable. And this is where our data comes to bear and gives us better opportunities to research markets that others don't have. So obviously the travel time will affect the markets as well as other barriers.
I mean think about this. There's probably even psychological barriers of where you live in a city, right? Here in Salt Lake, some people won't venture if they live on the east side of the valley to the west side or vice versa. They just don't tend to cross a certain boundary. Sometimes there's man made obstacles in the way.
There may be a freeway that cuts through there. There may be a pond or a lake or something that prevents you. So obviously, we think about those. But knowledge is key to making good business decisions. And this is where we excel I think.
So there's a I gave you a lot of information on this next slide. But when you look up if you we have 2 existing stores in this One is in Dedham. That's the Ally Drive. I guess the other one is also in Dedham. It's on Milton Street.
So the red are the Milton Street customers and then the blue you can see are the Allied Drive customers. The concept here is like well we've covered a lot of that area. Is there a threat of cannibalization that could occur? But when we looked at the 3.5 square feet per capita, I think intuitively we felt like this is a market that we could run-in and needs supplies, undersupplied. And the rents reflect that.
So here's our new business opportunity. It's on the Providence Highway that sits out there with good traffic flows past it. So then we go and we look at our competitive map and we want to be hyper vigilant for any new development that's happening in the area. You can see there's a U Haul, a prime self storage, that's the key in the middle of the page there, a live storage, the public storage and then the 2 aforementioned extra space. But we looked at that corridor, we said this is good real estate.
And intuitively, I think everyone would think, yes, this might work. So let's try it out. When we get into our underwriting though, and I apologize that the graphic is a little small, but what helps us to do the valuation side of it is clearly to look at our what we call sister stores or the other stores we manage or we own in the market and operate. Here you can see that we've got a couple of those stores that I pointed out earlier, the Milton Street and Ally Drive. And they're not overly large.
And you can see that we were keeping occupancy in the very high 90s on the Ally Drive at 97%. And the Milton Street was right at 90%. So we felt comfortable in underwriting ours to a 90% physical occupancy. Then we of course have a lot of add on discounting and bad debt. We know what the write offs are going to be.
And then finally, I think this rounds out kind of the revenue side is that we know what rents we're commanding. So it's a very straightforward process of getting this underwritten for us. And then we layer on it other fees like late fees or admin fees, merchandise sales, those types of things that also augment the income that comes from the property. So we go through this process and then we look at the expenses and I won't go through this and bore you with the details. But we clearly know how it is to operate in those markets.
So our payroll should be set up right. So there's not a lot of risk I think in looking at the expense side of it. And typically, the expenses fall into big buckets. You sort of have a 1 third payroll, 1 third your property taxes and 1 third everything else. And so if you can get those right, you feel confident when you're underwriting us.
So here's the little report on what happened there. So this 1st month is actually 1.5 months of operating. And we didn't expect to see there's no way I underwrote a third of it being full by the end of the 1st month. But it was kind of astounding to us is that we had the ability and it opened right into the sweet spot of the season of the rental season. And we just felt like this was off to a great start.
So then we realized that we could keep the rents aggressively priced in this market and facilitate a lease up. You can see the line below it in the gray. 2015. So that
gives you a
little perspective. Now you might say I cherry picked this. The reason I gave you this one is because I want to give you enough operating history that you could get a sense of it. And it is a good property, right? So I want to make sure that I point that out to you.
Here's the revenues. And typically, with that fast lease up, you're obviously going to be above the what we had forecasted for revenues and it painted a nice picture. Here's the NOI. As you can see, it's a little staggered because operating expenses aren't always flat lined, straight lined throughout, but we did well on this one. Here's the actual yields by year.
And you can see that we probably underwrote this to a high where we kind of sit down and look at what we're underwriting to a stabilized cap rate. We wanted to achieve right around an 8% and we were able to do that and go beyond in year 4. I've annualized the 7 months to give you the year 4. But the real value creation I can see is obviously in the ongoing cash flow, but then the value of the real estate went up to we paid $12,500,000 for something that's arguably worth more than $23,000,000 today out of the cap rates there. That's a good looking property, isn't it?
So what I would share with you today is kind of their experience so that this is not an isolated experience. But we have our wholly owned properties as well as managed and joint venture properties in this 161 properties and showing the lease up that's occurred. Most properties reach physical stabilization north of 80%, somewhere in the 18 to 26 month period. I kind of thought during that time period of when these came online, the average is right around 24 months or thereabouts. The markets that tend to do the best early part of the cycle are Florida and the California stores, and you can see that.
The big blue line down the center is the middle of it. So those that are below it are Texas and the Midwest where the supply became more of an issue later in the cycle. But that gives you a sense of our lease up trajectory there. So I'm just showing you here the layout, as Joe mentioned earlier, about 70 stores. As they populate here you'll see that we're in certain markets where we hope to expand, one of which is the Minneapolis market.
Like the rents in the Minneapolis area. We also went into Milwaukee, Wisconsin. But for the map speaks to me is the beauty of what our program is. It's a lot of diverse markets. For example, we had one in Denver, Colorado.
And Denver, Colorado has had a lot of supply being delivered. We were concerned about that market. But really if you look at all of our new stores, they're really in different areas. And as Joe pointed out earlier, it's such a micro market that it's still okay to be in Denver as long as you pick your good neighborhoods and you know what the supply is and who's coming in. And that's something we're able to do on a large scale basis.
So that's the one side of it. Now I have another acquisition. And this one's in Cherry Hill, New Jersey. If you know where this market is, it's just outside to the east of the Philadelphia market. It really is had kind of average barriers to entry.
And when we looked at this, we were kind of intrigued because the original owner wasn't performing very well. And we said this is a value add opportunity. I wasn't too keen on the Stripes at the time neither was the team, but the branding is a little different, right? This is Treasure Island. They operate in that market.
There's moderate underlying demographics, more like the national average. As you can see there, the median household income is just under 60,000 dollars You can see the value of the homes is under $200,000 And the bigger concern for me was at 6.8 square feet per capita, but that's still better than the national average. So we wanted to see how we did with this and the properties on the larger side at near $100,000 net rentable. And but the price entry point was much better here than it was in Dedham, right, dollars 65 per square foot. So it has the makings of a really good property, but it wasn't any more than 70% leased when we took it over.
So there's the location of the property just outside of Philadelphia and then our store which is just down the street that we managed for another group and then bought in from the program through the acquisitions program. But the blue again is the existing Extra Space customers of our store. So again, it's well beyond a 3 mile radius and we know where these customers are coming from. We lay out on the map here the different competitors in the market. Public Storage is doing well in the market.
CubeSmart, there's a Metro Self Storage and U Haul like this market so much that they expanded. Now an expansion property obviously has ripple effects throughout the market and I'll show you the differences in some of the numbers is that we were able to again the pro form a you can see we were our pro form a flip the colors on you sorry this is green is now our pro form a here and the gray is the actual. It was off to a little slower of a start, but we moved it up to 90% full. We discounted on this one to get customers in. It's part of what we did.
And the effect of the U Haul was real at the beginning. And you can see again, this is our revenues and we lagged for the 1st 6 months. But then after that, the property rebounded. And I really credit team here as you talk to the technology side of it, the marketing side of it, the people side of it, all made the difference in this property. So here's our yields.
Again, I picked a good store. We spent a lot of money trying to upgrade the exterior of it and make the doors become just pop at the property so you can see them. We still share a common line. There's an Ashley Furniture and an Ollie's discount retail operator next door. But what's encouraging here is obviously the results that we can drive.
And again, arguably at a 5 cap, this is approaching $14,000,000 in value and we were in at $7,800,000 just a few years ago. So that's really how we create the value in our stores is by implementing all of these systems and we want to do accretive acquisitions. And so what I'm going to show you on the next slide is kind of my report card to what I get to senior management and the executive team to review what we do, but it's also to build credibility in our underwriting. Are we able to predict with accuracy the outcome of these stores? And I'll take you through this.
But so this is by year. And the concept here is and again this is not include lease up properties. This is not our cap rate. This is our 1st year yield of what we predicted on the store versus what the actual performance was. It covers nearly 600 properties, dollars 5,300,000,000 worth of acquisition activity.
But again, there's not lease up stores in this mix per se. There has value add, so it's they're not turnkey. But the idea would be like let's look at let's pick a year, 2014. We projected on that year, any deliveries we had at 6.3%, but we really only came in at a 5.9% and likely that was due to property tax reassessments and a certain area of the country that was sluggish in its growth. But you can see though that that's where the years of the delivery and 1 year out you could go back and just look at our report card.
And we were basically over that period of 12 years 11 basis points ahead of where we thought. So that to me is a good report card and my team is doing a good job there on that. Now 2 years out it becomes even more meaningful because this is the time in which the assets have been in our system longer. We're seeing real results, right? So the same concept is those that came in, let's take 2016, anything by 2 years out that would be 20 17 I'm sorry, 2018, basically the time period of what the actual reporting is, 6.1 to 6.1 and we're happy with that outcome.
But historically we've had some wind in our sails and our results actual results have exceeded by 0.5% on the yield. So we're happy with that outcome. We don't try to sandbag, but we want to do accretive and predictable types of acquisitions. But there's my report card. Now you can see in the graph though they do mirror pretty well.
So really thank you for letting me take you through a couple of those transactions and show you what our thinking is. The point of my presentation was really to show you that you can leverage these data points and make good investments with what we do. So I'd open it up for any questions. It can be about this or acquisitions in general.
So I've got one for
you, Zach. Thank you, Jeff.
That I just jotted down as you were talking. You talked about physical occupancy. Yes. Generally stabilizing 18 to 26 months, which sounds great. Yes.
What about economic stabilization?
So economic is what pays the bills, right, at the end of the day. We can there's a couple of levers we can obviously use. We can use discounting. You can use other promotions. You can lighten up on the rent.
So what we find is that economic typically lags by about 12 months thereafter. We'll get the physical occupancy first, 24 months out on average, and then another 12 to kind of get to that stabilization. We'll push up on the rents. Our existing customer rate increases will take effect. Those 2 combined gets us the result we want
after that.
Okay. Other questions?
I've got one here and then we'll come
Eric Fech with Green Street. Do you ever see yourself
opening up a development arm again?
Not today. I think today in the development Not today.
I think today in the development
aspect and we did this a few years ago. I'm glad you asked the question, right? Part of the genius of the C of O program is that we didn't have to do all the brain damage to get these things built. If you think about the time it takes to bring a product online, it's a 2, 3 year lead time. We feel like our resources are better served today in finding good acquisition opportunities, working with development partners who are local, getting product into the system and that's been our route preferred route today.
Now I wouldn't take that off the table, but I think in today's environment, being a developer for the next couple of years is going to be a hard thing to do. Joe might have a response as well here.
Just to add, we do have a handful of developments underway. Our preferred approach to development is to do it with a partner where someone who's local, whose uncle sits on the planning board, who's been through the process before, who knows the right attorney, and most importantly, where we can negotiate an allocation of risk. So we're not taking too much risk. The greatest risk in development first is land entitlement. We don't want to have anything to do with that risk.
And then after that you have cost risk, you have time risk. The more we can partner with people and push those risks to their side of the table in return for development fees and potentially promote, we can still get in at cost without taking full development risk. But as access, this is not the time to go for a board and development program. The opportunities are few and far between.
Noah is going to be
up here in a moment. Noah might talk to this, but they're part of our growth strategy is also to take our select properties. And when there's an opportunity to expand an existing property, time is well spent in that regard of analyzing that, seeing if it's right for an opportunity there to expand. So that might be a form of quasi development. It does add more product to our existing footprint.
Yes. Sameer Kanal from Evercore. Can you just generally maybe talk about sort of the pipeline that you have from an acquisition standpoint, cap rates, what you've seen that?
Yes. No, I'd be happy to. So as we enter into 2019 right now, we had some developments under the C of O program that were to have developed and delivered in the Q4, but those ended up not delivering on time. Again, it's back to the issues with development. Sometimes you're waiting on the city.
Maybe labor is in tight demand right now, so projects are always getting developed and delivered on time. So that's pushed into 2019. So many of those 4th quarters slated acquisitions. And we've disclosed all those on the C of O have moved in. Joe also referenced a nice acquisition we did at the beginning of the year, which was the $280,000,000 of gross value on an acquisition.
But this is a healthy year. We anticipate it will be a lot like last year with our volume. We don't know. That's the hard thing when we sit down and have to make a goal every year is that we don't know what opportunities will present themselves. And the best position we can be is to be nimble and have a good balance sheet that's ready to look for opportunities out there.
If you noticed on the map, they just sort of appeared in certain regions because there were good opportunities in those specific cases, right? So we anticipate that it will be a similar year to last year, and we'll wait to see where we are. But pipeline looks
good. What about pricing?
Oh, you wanted pricing as well. So as Joe pointed out earlier, I think that was in Joe's slides, the different donuts of where we see properties come from, pricing is very aggressive today on the marketed highly marketed deals. We're not the best competitors out there right now today because it wouldn't be accretive to our shareholders, right? So that's the fundamental principle. So I'm seeing pricing though in major cities getting very aggressive, right?
And there's a large range and you as well as I know how that range can be based on quality and all those other things. But there is a in the major urban corridors, under 5% cap rates that you're seeing today. Someone like Colliers or Marcus Milichow can give you more specifics on it, but I see a whole range. What we really look for when we acquire properties is not how necessarily historically it's done, but how our systems will apply to the property and do better. So we'll see yields that will be north of 6% and beyond depending on the market.
That's an internal number that we take much like I just showed you there. But yes, the pricing today is pretty aggressive. But if we find a property that meets the threshold for our return expectations and fulfills a need in the market from a standpoint of being well located and fits into our footprint, we'll look at those opportunities. And hopefully but you know that range of cap rates is out there today.
Had a question here. Yes, sorry for the follow-up. I know you it looks like you obviously use your data, your internal data very effectively in underwriting new acquisitions. How do you think about property type? My observation is not much difference in quality as long as the location is good.
So it looks like there's a lot of construction in multi story, you know, climate controlled units that it seems like dried up units just based on the economics, it's really hard to build. Is there any thought of pushing to that category and maybe paying a premium price for that knowing that it's going to be really hard to add that type of supply in the future? It's interesting that
you do bring this up. The marketing people always want the best looking properties, but they all tend to lease. So I don't know that there's a strategy that we have getting in a particular type other than the drive services a certain segment of the population that really likes the convenience. These typically are people who like larger units, maybe they're small business operators and owners, right, that they look their landscaping crews. They seem to really like that aspect of it.
And it's the convenience there. If you go into the climate control, I mean, obviously, there's the benefits of the climate control, but people then have to go to an elevator. And there's pluses and minuses. I don't know that we're trying to target any particular we don't have that outlook. We have the outlook of what services the needs the best in that community.
That's kind of a roundabout way of saying like both service a certain segment of the population extremely well. And if there if we have some vacancies, we tend to discount to the point where those lease and it works all around. But you're right about the evolution of this industry has gone more vertical. That's true. Yes, it's a good question.
And each jurisdiction is a little bit different. But I think by and large though they both have a place in the current market. Was there another
question out there?
He asked his question.
All good.
It's Mark
Howard Johnson, BlackRock again. Dispositions, should group handle that? And if not, can we just hear, I mean, you've got 800 and some odd owned properties, some of them have to be in demographic areas that aren't working, where you're looking forward sort of saying, the numbers same store numbers are going to be poor. So are you calling your portfolio? If so, how much and
how do you think about it?
Today, we go through an exercise. Noah, I don't know if this is part of your presentation, you might want to address it more head on. Noah actually's group has looked at it for various asset management reasons. He looks at the asset management side of it. We over time have looked for opportunities and have sold for strategic reasons to partners that we wanted to be in with a partner where then they wanted this type of asset.
Noah, you can go into that more of it, but each year Noah puts or it's an ongoing process, but it looks at the list and he ranks properties. And you can talk about the one you have on the market today if you're interested, but it really is through a whole process that we go through. Currently, we don't have a large portfolio of properties that we would sell, but we're looking at those opportunities. Joe referenced earlier 36 properties that were sold into a strategic partnership with a JV partner that really met our needs. I think where we looked at that market and we just said what are the growth opportunities in that market.
And as Joe said, those were slower growing but stable properties and high performing along that lines of just being consistent. And we took the money and we reinvested it in other areas. There may be opportunities like that down the road. Noah, why don't you take a minute and just talk about that program if you can. Other question up here?
Clint, I don't know if we can give him a microphone. Thank you.
Hi. You talked you showed up some of the metrics, median household income, population, home values, square foot per capita and then you marry that with the data coming out of your existing assets in terms of what the trend line has been, what your occupancies, what your rents are. So out of
those sort of macro variables, which ones have the most predictive power to how your store will ultimately perform? So the segments in which storage is pretty universal, right? And typically, we look at if you were to think about population densities and incomes, the market that tends to work the best and there's quite a few, but it's the higher dense, more dense population areas along with the income. Obviously, more people, more money, more disposable income, those are all good. But we also find that if you're in a wealthier area and maybe the population is a little lighter, suburban markets, you still have a lot of people with toys and other belongings and couches and all that good stuff.
If you think about the other end of the spectrum, if you're in a low area with low population and low wealth, that doesn't tend to work very well. And so that's kind of the area we steer clear of. For me, the biggest guiding principle is how are our existing stores doing, right? Because for us, that's a way to really go out and use that data to our advantage and where we have stores in that market that helps substantiate the rents. Now if we're going into a new market, we tend to go out and do a lot of market studies, surveys and figure out what the occupancies are because we don't have that readily available, but we do the homework, so to speak.
And it paints a pretty easy picture. I'd like to say there's a silver bullet. If you look and see who our customers are, they really come from all segments of population. So it's tough for us to narrow that down. But as you know and I know, storage is working in all communities throughout America in certain aspects, right?
It has
to do a little bit with supply as well.
How does the process about when you look in the acquisition, whether you want to do it wholly owned or with institutional capital?
So it's kind of a question about what we think the growth prospects are for the property and the value that we get to. We'll often go and have those JV partners who have a lower cost of capital because we're not always the lowest cost of capital out there competing in the market. If we were, we'd be even more acquisitive than we are. But we want to look for those partnerships where we can get in and that the partner is very satisfied with it in a predictable way. And it really comes down to the aspect of are we meeting their hurdle requirements for the return on the investment that they're looking for.
What helps extra space in this is typically that we have a profit from our management company and the management fees and also tenant insurance that we sell. So that helps enhance our returns. And so we like the partners where that makes sense.
And last one is how do
you think about your cost
of capital, right? So what is that input that you have? How has it evolved? And how does it sort of look out in terms of where it will go?
Okay.
So our cost of capital is obviously observable from our share price and that sort of thing. But what we want to do though is obviously meet where I have plenty of cushion and a growth opportunity in a property. So it informs us where we get plenty of cushion typically above the cost of capital that we would feel internally or talk about. So it does inform our growth as long as we're feeling like we're getting an adequate return on that cost of capital down the road. I don't know Yes.
Exactly. It spits out a number and then we use that to compare. But all properties aren't created equal. Some have a lot more growth opportunity and we like those that growth opportunity. So it's not a hard and fast rule.
It's more nuanced. Where do we think we can take this property over the years and get above that hurdle? So it might be in our best interest to take on a property that is growing into that higher yield. That's true.
Michael, the other thing I would add is We don't try to spot price equity just because obviously that can change. How we capitalize a deal differs from how we underwrite a deal. So we're going to try to underwrite a deal to make sure we have plenty of cushion and make sure that all of our deals are accretive. And then depending on timing and when we close an acquisition, we may use all debt or we may over equitize a deal if
we feel like our stock is trading at an appropriate price.
Question here?
Okay, perfect.
So I remember in the earlier days of the self storage roll up story, you would be able to buy an asset at 6, you would be able to overlay that with the kind of secret sauce from Extra Space, make that a 7, outside of the normal market growth. Yes. Are you finding that opportunity to harder to come by because a lot of the properties have been professionally managed through a joint venture or third party management that you guys have done to yourselves. So that kind of additional pop and accretion is hard to
come by going forward? Well, yes, because it's already in the system, right? But I would say there's
obviously more opportunity for the pop that you're talking
about, Ki Bin, on assets that you opportunity for the pop
that you're talking about, Ki Bin, on assets that haven't
been in our system and haven't been professionally managed. So that's been primarily a large source of our growth. Now with the ones we manage though, typically what happens on the Now with the ones we manage though, typically what happens on those is given our relationship with the folks that we manage where they give us a first look on the asset. And not everything comes down to pricing. You would think it would, right, and market exposure.
But what we can do with those folks is that we offer a fair price It's still accretive to our shareholders, but it gets them to a closing much quicker. And where we feel very comfortable is we know the numbers through and through. So it derisks sort of that proposition of buying a new property, right? So for those reasons, we really like that. And quite frankly, a lot of folks want to deal with us because we're easy to deal with.
We have a great reputation. And we're not we don't go back and re trade on pricing. Other things we can offer, and I'll just mention this and Joe mentioned it earlier, is that the operating partnership units are a real good currency for these folks that are thinking about tax deferments, maybe even estate planning. So those are good areas that we are able to kind of have a leg up on the competition. It It makes the difference.
I wouldn't say that those are appreciably lesser on the returns. They tend to be very good and perform long term. And we know what we're getting into, right?
Todd Thomas, KeyBanc. Thanks, Todd. In the charts that you showed your report card, so in the 1st year cash yields, the 17 acquisitions fell short by almost 20 basis points. Yes. So 17 basis points.
And then on the 2 year, so you have 2016 at 3 basis points.
And then what happens here is that it levels off.
Yes, outperformed slightly, but it's thinned out considerably from the prior years. I guess, first, do you expect that trend to continue for the next 1 or 2 years as you build out the report card further? You have another year of acquisitions you're working through, right? And then also, have you gone back and taken a look at what caused some of that spread to sort of
Yes.
I can speak specifically to that. In general, what I think happened here, Todd, is that also that we refined our underwriting. So this is just a measurement against my underwriting, right? Obviously, you know where cap rates have gone in the last few years. But really, it's I think we've gotten a little bit more accurate in our 2nd year forecasting.
Let me go back. The reason we missed this, the 17 basis points here, was primarily driven by a couple of properties where our tax reassessments hit earlier in a cycle than we thought and it really hurt our NOI numbers. So this is based off NOI. If you look at our projections on revenues, they were right in line of what we thought. But when I went back with the property taxes of a couple of assets that hit sooner in the reassessment cycle, some jurisdictions do it on a 3 year cycle, We guessed wrong.
So we're going to get caught up to that down the road. Your greater point is, is there new maybe competition coming into the market that may be dampening our results? And I think you're seeing some of that happen in areas of the country. Again, it's the micro market you have to look at. But I would anticipate that in the cycle, we'll see a little bit more of that slowdown.
I attribute this more to our tightness of underwriting and that we just we're being more realistic honestly about that and we tend to have some above and some below depending on the year.
Take one more question if there is.
Jonathan?
How do you look at acquisitions relative to replacement costs? And then one of your peers won't buy if it's basically like 120 percent of cost per foot. Is it do you look at that when you evaluate acquisitions? Or is it simply just a spread gain?
For us, we do look at it,
but it's not the end
all be all. It's more of a spread game. I think at the end of the day, that's an important kind of touchstone to go back to and say, is this making sense for the market? But every property has a story, right? And if we're getting the yield and the spread that makes sense, that's what the market is going to pay at the end of the day, right?
So to be beholden to a replacement cost is sometimes difficult. What the replacement cost doesn't always have in that number is the difficulty of getting storage built in that community. So if you can go into a high barrier to entry market, you'd be willing to pay the appropriate cap rate for that market. And you would look at the other number, but then recognize that that number doesn't reflect everything about the property and the difficulty of that. While it's a we look at it, it's not the end all be all.
It's a
yield that we're more interested in.
Perfect.
Thanks, Zach.
Thanks, Jeff. Appreciate it.
And our next and our final presenter here for this portion of our presentation and the final presenter that will be available on the webcast is Noah Springer. Noah has a number of things for us. He leads our 3rd party management efforts as well as our asset management group, as was mentioned. And then with that, Noah, take it away.
Appreciate it. Thanks, guys. How many yen did we say are going skiing or snowmobiling tomorrow? A few. I don't what's wrong with the rest of you guys, but we got, I think, 70 inches of snow in the last 6 days.
And I'm excited to maybe hear the report on your return flight back to New York when you sit down with whomever you sit next to on your flight and ask they'll ask you, so you're in Utah. What did you do? Did you ski? Did you Sunit's film festival started today? Did you guys do that?
Did you snow? It? What did you do? You're going to say, I ate warm churros and nacho cheese in the basement of a Hilton and talked about storage. And that's awesome.
So welcome to Utah. It sounds great. Before you guys are going with us tomorrow, I'm excited to do that. It's really fun. We've done this quite a few times.
Did it with some analysts a few years ago. And then we've done it with a lot of different partners and management partners over the years. And there seem to be a reputation of every time we go out, someone gets hurt. So good luck. But it's always way more exciting when we do something like that.
The worst injury we had was, I think, a woman twisted her ankle when she stepped off of the snowmobile. So it's usually user error, has nothing to do with the conditions of the snowmobiles. Now I'm not trying to make fun of anybody for coming to Utah and not doing anything but sitting here because we go to New York often. And the last time I was there was with Stubs actually. And we're walking through the streets of New York, and Scott thinks he knows everything.
And as we flew back, people asked us the same thing. So you guys were in New York, best restaurants in the whole world. And where did you guys go? And every single time Stubbs has to answer Chang's. That's as far as we get.
And the lettuce wraps there are phenomenal. So if you guys ever have a chance, it's really good. And he goes Unlimited Breadsticks too is another big hit for him. So an Olive Garden is always a good one in New York when you guys have a chance. As Jeff mentioned, I oversee third party management.
I also oversee our construction development group and our asset management group. In that, there's a lot of different things. And we're going to talk mostly about 3rd party management. So that's really been a hot topic for a lot of people lately. And as we do that, I want to refer back to Joe's slides that he talked about at the very beginning, which were the 3 buckets.
And we're really going to be talking about the bucket that was on the far left. There's really owned properties within extra space and JV properties with an extra space and managed properties and extra space. The bucket I'm going to talk about mostly for the managed side is the non owned fee managed properties that we have. There's about 536 of those stores that we have to date. And even though we talk about these partners as managed partners, we oftentimes call them partners.
I don't want you guys to confuse that with JV partners or anyone else because we would talk about our managed partners the same way as we would with our JV partners. The important thing that we tell everyone that we manage for is that, while we call them partners, every single store that's in Extra Space is managed the exact same. It's a really important thing to look at for anyone that's coming onto our platform. 1 of the questions that anyone ever asks is, I'm going to bring my property to you. You're going to manage it, but you have one in the same market down the street, across the street, how do I know that I'm getting all those same rentals that I should be getting?
Well, it's very easy. Every store is run the same. What Dana talked about with marketing, what Chandra talked about with revenue management, whatever we do in the system, it all runs the exact same. Now something that we're really excited about and happy about is that we've been doing, really in its current form, 3rd party management for the last 10 years. We started this in 2000 and 8.
And since then, we've added many stores, but we hit 500 stores in the system. You have to remember that within the managed pool, we bring on properties. And at the same time, properties are going away where people are selling. We might be buying those or someone else might be buying those. And so the number always kind of goes up and down.
It isn't just a gross add, and that's what the number is. We always we look at the gross adds and also the net adds. So while we've added a lot of properties, we're at about 536 right now. And as I said, it was an exciting thing for us to get to 10 years of 3rd party management in its current form. Now, why do we do 3rd party management?
One of
the big things for us is size and scale. It allows us, as Joe said, we have about, what, 1600 stores, 500 and some of those are 3rd party managed, 220 of those are JVs. Over 700 stores, 750 something are in the system that we don't have ownership of at all or a large part of ownership of with the JVs. So this allows us to round out markets. It allows us to be in states where we wouldn't be.
It allows us to spread our cost over a lot more stores and leverage the size and increase the buying power that we have in a lot of areas. Now the other reason, and I'm going to show you here kind of our growth trajectory, and we've also added our friends up there that we compete with. You can see where Extra Space has been since 2011. Since then, we've really grown tremendously and we're really proud of that number. Now, something that's also interesting about this and we'll talk about in a second is we like to do this because it's profitable for us.
And while acquisitions and what Zach is doing on buying stores is more profitable, every time we buy a store accretively, it adds a lot more money than a store that we manage. But we still make money on the tenant insurance and the management fees. Now this isn't a huge number, but it does allow us to run it where we can grow and grow profitably. I can't say this for every other management company. I don't know how their cost structure is.
But I do know that it's a reason for us to continue in the business. Now, something that's inevitable and going to come up at some point with every owner that comes to us as well as you guys is, what about tenant insurance? And we hear that our competitors give away tenant insurance and we don't. And that's right. Whether that's with our managed partners or whether that's with the people that we have JVs with, extra space as the management company keeps all the tenant insurance.
We take on all the risk, and we keep all the reward from that and anything that comes with that. It's been a profitable thing for us. And that allows us to stay in the management business. If we weren't doing this for tenant insurance or if we were doing this solely for the management fee, we really wouldn't be in the business as much as we are because it wouldn't be as profitable as it is for us. Another reason why we do third party management and there's kind of the numbers and the scale and you can see that go along.
And you guys have seen in our supplementals and our financials, you can see where we are. But you can see here, the bottom number is actually the tenant insurance. And I'm sorry, the bottom number is the management fee and the top number is the tenant insurance. At some point, tenant insurance really eclipsed where we are in management fees and interesting time for us. But as we continue to do that, we continue to bring these stores on, it continues to get more and more profitable for us.
Outside of size, scale and management fees is really the data. This goes along with scale, but you can just imagine what James' team with revenue management, the call center, marketing 14, 15, 1600 stores. And so data is a very valuable thing for us in pricing and in marketing. Also acquisitions. Joe showed at the very beginning, I think we called the donut slide, it's a slide with about 6 or 7 circles.
And those circles show where our properties came from as we did acquisitions. When you look at that slide, you can see that it comes from many different sources. A lot of those aren't brokered deals. Many of those deals that we purchase are from joint ventures or the managed pool of properties. And we continue to do that and will continue to do that.
Now, we don't have any right of first refusal and we don't have anything that mandates that our partners have to sell to us in any of the managed groups. In some of the JVs, we might have that. But in the managed pool, there are, I don't think, any management agreements that we have that mandate that they have to sell to us at any point or at any time. We really rely on being a good partner with our partners so that when they do want to sell that we're the natural buyer for that and they do come to us. And oftentimes that happens.
I could count on one hand the few number of times that a property has been sold when we haven't had a first shot at it to do that. Now that doesn't mean we're going to buy every single one. We want to make sure that we get it for a fair price. And sometimes our partners aren't necessarily willing to sell for a fair price. So they want more than we want to offer, then they can go somewhere else.
And that's okay. Now I've had a lot of questions from people in the audience here about, Noah, why would you guys manage for someone and increase the value of their property and they have to pay more money for it instead of just buying the property when it was doing less well before you guys brought on your system. The issue with that is before we brought the property on and the value was down here and then we increased the value to up here and bought it, it's because there was no deal down here. And the partner knows that his property is probably mismanaged and he doesn't want to sell for this price. So we're looking to increase the value, make money in tenant insurance and fees on the meantime, and actually buy it for a fair price here, not overpay and not underpay, but really do it for a fair price.
Now as you can see what we did in 2018, we added about 149 stores. Those are the gross additions that we brought on. And a lot of those stores were development properties.
This really follows the industry as
to what the industry is doing right now. In years past, when there was less development going on, we were adding a lot more existing stores. I would anticipate that as development yields go down and less people develop and properties may suffer a little bit in markets where a lot of development has happened, you'll see this number shift quite a bit. And we'll bring in more existing stores and less development stores because what extra space can do from our management platform is really increase the operational efficiencies and bring owners more money. And as they are as properties get more and more difficult to manage, we'll continue to do better for them as they come out of the platform.
Now, this is a quick chart. And on the side, it's hard to see there, but you can see this is where the states are where we added these stores. Divided out the whole United States, that's what it is. Florida, Texas, Colorado, California, Illinois and the Carolinas, everything else is a little less than half. That really follows where the development has been.
And it shouldn't be a surprise that where we're bringing stores on is those areas. Now, who are our partners?
You can
see here this makeup is very similar to the industry. 45% of our partners have 1 to 4 stores. It's about 2.8 stores per partner. There isn't one partner that really controls the whole management platform. If anyone up and walks away, does this devastate anything?
No. Is it fun? Not really. But it's not going to tear the platform apart because there isn't one partner that really has everything for us. Now, this is tough.
Managing for 100 and 67 different partnership groups is not super easy. Every single person has different wants and needs and desires. But what's important about Extra Space is that we manage the stores in a box and we manage it with our system. It's on our platform and it runs like an Extra space. Even though there's 167 partners with 2.8 stores, we make sure that they fit into how we run the store.
They can't come back and say, I want to do something vastly different with revenue management or I want to try a different marketing system. We all keep it on the same platform and run it for it. That's the only way that the system works. The pipeline that we have is about 500 properties. And those are stores that range from new developments that will be coming on to deals that we have in the system that are likely to come on the next, I would say, up to the next 24 months or so.
That pipeline, while it looks really nice at 500 stores, isn't going to be what we bring A lot of these developments fall out. A lot of these might even be duplicates. A lot of these might go somewhere else. And so while we look at that, I would say half of those will probably go away. And will be somewhere around 250 the actual stores that we bring on, which will indicate that in 2019 2020, we'll be very similar to what we did in 2018.
Now we can't just bring on any property. We have to run this by people within extra space. And so one of the things that Scott asked me to talk about is our Management Plus approval committee. And we actually sit down with a number of different disciplines within Extra Space every time that we bring a property on or before we bring a property on actually, just like an investment committee, to sit down with operations and accounting and revenue management and legal to make sure that people understand this is the store that's coming on and this is where we're going and we're doing. The deal is looked at the same way that you would look at it in an investment committee and looked at for this from the standpoint of do we want to be here and do we want to operate the store.
Now this also brings up the question of bringing on this many properties. Right now, I think it's about 1.3 or 1.4 business days that we bring on a store. It's often. Transitions are hard. And bringing on these stores has a lot of different things to do.
There are dealing with the owner. There's dealing with the store. There's dealing with employees. A lot of things happen in these transitions. But it's also one of the most important things that we do.
And as you can see, a few years ago, we looked at this kind of graph. And this is isn't going to give you any numbers, but it kind of gives you an idea as to what can happen with the store. For some time, when we first started this program, we realized these transitions weren't going as well as we wanted them to because there might be something that happens. Maybe it's the phone lines are tough to transition over. Maybe we aren't getting signs up in the right amount of time.
Maybe the employees left before they were hired and there was some issue. So we've really focused on this. I think now we have a 4 or 5 person team and their sole job is to bring stores on to extra space. You can see what happens is take that dollar line and it doesn't really matter what it is, maybe that's NOI or revenue or even occupancy, it doesn't really matter. But it was as we looked at this, we said there's probably a time frame of about 6 months that the store might be dropping and then coming back on.
So what we need to do is look at that and say, transition team, let's take that and how do we at least cut this in half and say, let's not take a store and have it go down over the 1st 6 months. Let's actually increase this and do really well. So we challenged that team, and they're really able to get this to about 3 months and do much better in this. Now, what we've been able to do recently is this is very seamless transitions. It isn't perfect.
It's still hard. There's a lot of things that happen with this. In fact, we have a slide just kind of show you. We did almost 200 transitions, 103 point task list on this. And as we did this and sometimes made mistakes, we then went back and said, what do we have to do to get better?
And I just took a screenshot here. This is the kind of the reported issues of transitions as we brought them up. The tough one here and the hardest thing for us has really been, I don't know how we do this, but it's phone lines. I think this was from, it was November. I can't remember how many stores we brought on.
But you can see there's a lot of things that happen with this. So it isn't just bring on a store and everybody's happy. There's a lot of things that happen. So as soon as people start asking us about our competitors, which we'll get into in just a second, and they say, Oh, my gosh, a new competitor jumps into the market, how are they going to do? They're just going to eat extra space at lunch.
There's a lot more to it than just having a low fee and being able to bring on stores. Transitions are just a hard thing. Ask anyone in the business, how many stores did you bring on? How many stores do you bring on really well is a different question. How happy are those owners after you brought the store on is a different question.
Now why do people choose extra space? We've talked about this a lot. Culture is a really important thing here. People can feel it. Partners can understand that when we're running a store for them that we run our store the same and we run their store the same.
There's no question about it. They can go to our call center and sit down and see how those stores are being rented from the call center. They can sit down with the revenue managers and say exactly how is this being done so that everything is done fairly across the board. Performance. You guys have all seen this slide.
This is the average quarters. At the end of the day, people don't pick us because of Zach's toothy smile or Scott's great physique, but they really look at us and say, how much money am I going to make over the time frame that Extra Space is running this property? And if it's going to be less, then they're either going to not come on or they're going to go somewhere else. Every single time before we bring on a property, we do a pro form a. And in that pro form a, we take 3 similar properties, as similar as we can possibly find in the market or very comparable properties in the area and kind of rack and stack against their store and say, this is what it's going look like for the next 3 years where we need to manage your property.
And as we put that up against it, you can almost see it every single time. And it might not be in expenses. We might be paying our employees a little bit more. We might be doing something else on the marketing side. But when it comes down to NOI, we have to make them more money than they're receiving before.
And if we don't, then they go away. And you can look at our platform and see how many people have left our system because of our performance is almost 0. It's very, very few. I'd also say that, as I said in the beginning, we've been doing this for 10 years. We have a track record and we've gone out and we actually survey our partners very often and say, how is it?
How are you feeling? Are we happy? Is everything good? And it comes back overwhelmingly positive. That was another question.
As we get into our competitors, there's one here that last year at about the same time, everyone came to me and said, Oh, my gosh, Noah, there's this other company that's going to get into the business and all our business is going to go away. I said, I don't think so. In fact, our partners are really pretty happy with us. And we're doing really pretty well. And we went out and talked to almost every single one of our partners and asked them this question.
You're with us. Are you going to go away? Overwhelmingly, people said no. Now we've had oh, I think we've had 2 different partnership groups leave us and go to a different company in 2018. That was a total of 4 stores.
And like I said, we have about 200 different partnership groups. And I think I have another 7 or 8 partnership groups that I'm happy to send over to another competitor. So when those 2 came to us and they asked us, hey, I really want to renegotiate on my fee. I want some tenant insurance or I might go somewhere else. I said, You know what?
I think that's a great idea. And we can either have you guys go now or later, but let's kind of make that transition and go. And so it's been a good thing for us to offload a few people. Cube is really our biggest competitor. As people come to us, it's really between us and them most of the time.
They're a good operator. They're really good people. I like them a lot. They do well. Partners pick us for different reasons that they pick you.
I still think our performance is a lot better. I still think that the people that we have, the district managers we have, the site managers we have, the training, the marketing, the revenue management is head and shoulders above any competitor out there. But Cube is a good competitor. While they do a good job, they've really increased what they have, but they've done it at a price. And they've had to give away quite a bit in tenant insurance to get there.
And that's been something that we haven't been willing to break. And as we look at that, we would say, look, while extra space might not be the low cost leader, we might be the Nordstrom of retail. If you want to go with someone else, this is an asset that you've saved all your money for all your life and your retirement, and you've decided to take that asset and you don't want to take the maybe a little more higher cost and get more performance and you want to go to the low cost leader, well, that's up to you. But there's many people that look at us and say, I need the best in the business and we go with extra space. Life Storage has really tried to do this, and these are the 3 REITs.
They've done an okay job in the industry. Again, great operator, very good people, do a good job. Just hasn't really been their focus. They've been focused on a few other things. And so they haven't brought on nearly the number of stores as the rest of us over time.
Now, well, us and these 3 get a lot of the attention on 3rd party management. You have to remember that the storage business is way bigger than just this. And the number of management companies that are out there is tremendous compared to these other 3 that are on the board. You can see here, those first two really have over 250, maybe 260 stores on their platform. There's quite a few other options.
So as other people come to us and analysts come to us and say, What are we going to do? Someone entered the business. Well, there's always been a lot of people in the business. It hasn't just always been us. We've just been able to take more of our fair share than everyone else.
There's a lot of people that are doing this and a lot of people doing this that are cheaper than us. Now, while there's a lot out there, you can see the industry puts out different awards. And for the last since 2011, Extra Space has won best third party management company in that time frame. So we're very happy with that and pleased with our company. Again, that isn't just bringing on stores, but it's everything that we do while the stores are on the system.
Now as Jeff mentioned, I oversee the 3rd party management side of the business as well as asset management. And I'll talk a little bit about that. And I know there was a question about dispositions, we can talk about that as well. Main thing for asset management really for us is, how can we get more dollars out of the existing stores that we have? What can we do?
Now this is outside of the realm of operations. Operations is going to work on leasing the stores up and increasing the rates. In What can we do to transition from a piece of fallow ground into more stores, more units? You can see last year we completed about 6 projects. While these aren't huge projects, it's not Zacks deals.
We're not going to do $1,000,000,000 worth of value add projects. We're still going to get some of these done. What's interesting about these, even though they're small projects, it still takes a long time to do this. This is the entitlement process that it is in storage that no zoning board, no city council is super excited to hear from the storage guy. It takes a long time to get these through.
But when we do, it works out really well. In fact, you can see here, it's a piece of land. This is in, I believe it's in, Plainview, where we here's our store. Here's just an extra piece of dirt that we had. It came along with an acquisition that we look at those and say, you know what, the occupancy and the rates are such that it allows us to do more buildings here.
And we can add this and increase it. Now Zach's buying deals that we'll call them 7 caps. We're looking at this and hopefully getting a lot better a 7 cap on these deals because we already own this land. It's putting up the buildings, sometimes taking buildings out. In fact, we have one here.
You can see in 2018, we added a lot of new projects. And in 2019, we anticipate completing about 20 more projects. The total construction amount is about $60,000,000 on those 20 projects that we'll finish in 2019. This is another one of these projects that I was talking about. Well, it isn't always just empty pieces of dirt.
This is in Miami. This is the Don Shula right here, right there. The Don Shula Expressway in Miami. And our office currently is right here. That you come into the store And as we've looked at this, and while everyone's looked at Miami and said, Oh, my gosh, Miami is so oversupplied and you should never put more storage there and what are we going to do?
This is in Kendall, outside of Miami. And it's allowed us to look at this property and say, this property has been occupied at over 95 percent for the last 3 years. We continue to push rates. There's no climate control at this property. So we've gone at it and looked at it and said, you know what?
Let's put another building on top of this and take out those units, go up 3 stories and actually make very visible property along the express way there, add more units in, and it works out really well for us. There's not going to be tons of these projects. There's going to be some of these projects. It's tough to take out a store and put up more because the tenants continue to pay where it is. Now when we have these opportunities, we'll continue to look for them and do more.
As of right now, like I said, we have about 20, we have 60, 70 or so in the pipeline, and that'll probably get cut down tremendously as we move along. Now there are other questions about dispositions. When it comes to dispositions, as Extra Space is a long term owner of self storage, we look at our portfolio often and say, what ones would we take out? When it comes to very difficult to operate stores, we would sell those. And in fact, there's one on the market right now in Ballston Spa.
That's in New York. I've never heard of it. I bet they have an Olive Garden, so Scott's probably been there. And in Ballston Spa, it's 3.5 or 4 hours away from any of our other properties. It makes it very difficult for us to manage.
That came along in a very large portfolio that we purchased. And when we brought that on, we said, at
some point, we're probably going to
have to dispose of this. That's kind of what the dispositions are. Now, we do also have stores that we look at and we don't keep, we would call them limbo properties. And a limbo store will be somewhere in between, do we sell it? Do we scrape it?
Do we rebuild it? Do we just do major CapEx? Do we try to go through every single property and have a plan as to what we're going to be doing? There isn't any one store that's kind of wondering what we're going to do there. And then the other thing that we have is kind of dry powder of stores that if at some point we need to sell stores, maybe there's a JV that comes up that we want to put this into, similar to the one that we completed Q1 in 2018.
Then we have those at the ready. And so we leave those stores, and that's ready to go. And if markets come up and we have these in quite a few different markets where we say, we're worried about this market, but we could sell it into a JV and maybe derisk our position a little bit in this market, that's an option for us. And we do keep that list. But I wouldn't say that it's something that we would be planning on doing a bunch of dispositions in the near future.
That's what I have for you guys. Any other questions?
Hi. Eric Finkle from Green Street. Is there any concern with all this development coming online and that's where most of your new additions are coming from? Obviously, I haven't lost a lot of stores as you said. Do you have any concern that some of these merchant builders or private owners will use your services to lease up their property quickly then dispose of you in few years?
Yes.
It's a
good question. I do think that that's going to happen sometimes. The difference of us and our competitors is that because we do cost more, I don't think people are willing to come to us and say, it's a little easier for them to take a cheaper provider to do that quick in and out. Now we also have big termination fees and we've since increased this quite a bit that if someone does come on from the first 3 years. Now, by year 3, a lot is burned off.
But in year 1, it hurts a little bit for them to go away.
Great question. I mean, you talked about the competitive landscape in 3rd party management. Obviously, we know PSA is looking to get into in a big way. I mean, you mentioned a lot of them. Can you talk about the margin side of the business?
Where is it? How has that trended? Do you see that narrowing a little bit?
Yes. The margin is in tenant insurance. Yes. It's while we make money on the fees, your cost to manage is really eaten up by the management fees. And where you make money is the tenant insurance.
For us, there's a lot more margin there than our competitors because we keep all of that. The other companies that are splitting tenant insurance have less margin to lose, and I think that's probably going to hurt a little bit. It hurts us. While it does hurt us, it hurts us a lot less because there's just more padding.
What's the cost to an owner to switch managers which could come with signage and all that? I mean what would be the value as a percentage of asset or to think about it
that way? Never thought of it as a percent of value of the asset. So to come on to the platform, to come on to us, depends on where they're at and what they're doing. For us, we're going to work on different deals. And while we might flex on the fee that we would give them, we don't flex on the tenant insurance.
We also might flex on paying for some of the upfront costs. That might be for resigning the property or repainting the property or something along those lines to bring it on to the platform. There's still a lot of things that go into it. And I would say the biggest cost to an owner in a transition, if a transition goes poorly, is the drop in occupancy. Exactly.
That's not looked at a lot by a lot of owners. But by year I'm sorry, by month 4, 5, 6, they're looking back and it can be a tough time. That's why the transition point of this is so important that you can keep that and go forward from day 1.
Once you get them in, tend to keep them for a long time.
Once you
get them in. Until there's a sale of the asset.
Yes. And then
of that $500,000,000 what percentage is development? And how early in that process? Because I would assume if they're building, they got to figure out whether they're going to paint it orange, green, what sign they're going to use that's you know?
Yes. Okay. So for our stores, the 536 I'm sorry, were you talking about the pipeline? The future pipeline. The future pipeline.
I would say it's probably a little more than half, 65% or so. That would be developments that would be coming in. It runs the gamut from, I have an idea that I might want to put storage here, to we have a deal signed that's going to be coming up and come on in February. Yes, people are coming to us pretty early. And we're consulting with them pretty early on because they want to come in and make sure that our operations is okay with how the store is being built.
They want to make sure that it's our colors. They want to make sure that the paint is done the right way. It's tough to go into a city and say, Hey, I'm going to use wasabi green, and then 2 months later, come in and say, Guess what, it changed to orange and purple. You don't want to do that. So people are trying to come up pretty early.
Any other questions for Noah?
All right.
Noah, thanks. Thanks, guys. I've got Scott there with the microphone. Scott, if you'll stay with me for a minute. Are there any last minute questions related to any of the presentations that have been given that either Scott or myself can address before we take a little break and then move on to our property tour.
All right. Looks like we're ready. With that, we'd like to thank our streaming audience. We're going to cut you off at this point. For the group here in Salt Lake City, please take 15 minutes or so to gather things.
If you need to run back up to your room, we'll meet out front at about quarter after. Let's see, we maybe quarter 20 after, we'll load up in advance. We've got about a 5 to 10 minute drive over to the property and appreciate your attention. Thank you.