Good day, ladies and gentlemen, welcome to the Extra Space Storage Inc. third quarter 2016 earnings conference call. At this time, all participants are in listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. If anyone should require assistance during the program, please press star then zero on your touchtone telephone. As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Jeff Norman, Senior Director of Investor Relations for Extra Space Storage.
Thank you, Jonathan. Welcome to Extra Space Storage's third quarter 2016 earnings call. In addition to our press release, we have furnished unaudited supplemental financial information on our website. Please remember that management's prepared remarks and the answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act. Actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the company's business. These forward-looking statements are qualified by the cautionary statements contained in the company's latest filings with the SEC, which we encourage our listeners to review. Forward-looking statements represent management's estimates as of today, Thursday, October 27th, 2016. The company assumes no obligation to revise or update any forward-looking statements because of changing market conditions or other circumstances after the date of this conference call.
I would now like to turn the call over to Spencer Kirk, Chief Executive Officer.
Hello, everyone. As many of you know, last month, I announced that I will be retiring at the end of the year, that I will be succeeded by our Chief Investment Officer, Joe Margolis. I've had the opportunity to work with Joe for more than 18 years. He was instrumental in structuring our first JV with Prudential in 1998. He served on our board of directors for more than a decade, he has excelled in his role as our chief investment officer. At this time, I'd like to turn the time over to Joe.
Thank you, Spencer. Good afternoon, everybody. It has been great to meet with many of you face-to-face since we announced Spencer's retirement, and I look forward to getting to know you better through future interactions. It was another strong quarter for Extra Space. FFO per share as adjusted grew 26% year-over-year. This growth was the result of more than solid operating performance. It was also fueled by accretive acquisitions, joint ventures, third-party management, and an optimized balance sheet. We are focused on using all of these levers to continue to grow shareholder value. Operationally, we continued to push rates to new and existing customers in the quarter and experienced average street rate growth of approximately 7%, similar to 2015. This growth was partially offset by an increase in bad debt and discounts, which resulted in same-store revenue growth of 6.1%.
Discounts, while still very low from a historical measure, are up from an all-time low in 2015. Expenses increased only 1.4%, which led to NOI growth of 7.8%. Quarter end occupancy was strong at 93%. Year to date, we have acquired $825 million in wholly owned stores. With very few exceptions, these acquisitions were not broadly marketed, but came from our JV, managed, and other relationships. The largest of the off-market transactions closed on September 16th, when we purchased Prudential's majority interest in 23 stores for $238 million. Concurrently, we sold our minority interest to Prudential in the remaining 42 stores in the joint venture for $35 million. We will continue to manage these stores. In addition, we are under agreement with the JV partner to purchase its majority interest in 11 stores for approximately $153 million.
We plan to close this transaction in the fourth quarter, which will result in wholly owned acquisitions of $1 billion in 2016. We also expect to close $255 million in C of O acquisitions in 2016. $90 million of these will be wholly owned, and the remainder will be in joint ventures with our investment in these ventures totaling $53 million. Our JV strategy and our C of O program are working and are creating value year in and year out. I would now like to turn the time over to Scott.
Thanks, Joe. Last night, we reported FFO as adjusted of a $1.02 per share, exceeding the high end of our guidance by $0.02. Including costs associated with acquisitions and non-cash interest expense, FFO was $1 per share for the quarter. The beat was primarily the result of stronger than anticipated performance from our 2015 acquisitions, specifically SmartStop. We also benefited from the collection of $1 million in business interruption insurance proceeds. As Joe mentioned, our same-store revenue growth was driven by higher rates to new and existing customers. This is consistent with our guidance, which assumed no benefit from occupancy and a headwind from discounts in the second half of 2016. We continue to have solid revenue and NOI growth throughout our diversified portfolio.
Our top-performing markets in the quarter included Las Vegas, Los Angeles, Sacramento, San Diego, and Tampa, St. Pete, with revenue growth in the high single digits. The slowest markets were Boston, Chicago, Denver, Houston, and Memphis. With the exception of Denver, which represents about 1% of our revenue, all of our markets showed positive revenue growth year-over-year. Subsequent to the end of the quarter, we completed a $1.15 billion unsecured credit facility. The facility consists of a $500 million revolving line of credit, a five-year, $430 million term loan, and a seven-year, $220 million term loan. The credit facility has an accordion feature that allows us to increase total capacity to $1.5 billion. At closing, we drew $300 million on the five-year tranche and paid off and terminated three of our four bilateral revolving lines of credit. The five- and seven-year tranches have delayed draw features.
We will access the remaining available term balances as needed to finance future acquisitions and to pay off debt. This unsecured facility further diversifies our capital structure and reduces our average interest rate. Our goal is to have access to multiple types of capital, to ladder our securities, and to maintain financial flexibility. This credit facility helps accomplish all of these goals. Due to the outperformance of our 2015 acquisitions, we are increasing our annual FFO guidance. FFO as adjusted is now estimated to be $3.78 to $3.80 per share. FFO is now estimated to be $3.63 to $3.65 per share. This guidance includes $0.05 of dilution from our 2015 and 2016 C of O stores. It also includes acquisitions that, as anticipated, will require time to be brought up to our performance standards. As these properties move towards our portfolio average, we expect outsized NOI growth.
I'll now turn the time back to Spencer.
Thanks, Scott. This is my final earnings call as the CEO of Extra Space. I've enjoyed working with each of you, and I'm grateful for the relationships and friendships that have been developed over the years. Going forward, I will continue to be actively involved as a member of the board, and I will remain the company's largest individual shareholder. My interests are perfectly aligned with those of our shareholders. Thinking back seven and a half years ago when I took over as CEO, it wasn't about my predecessor, Ken Woolley, and today, it isn't about Spence Kirk. It's always been about our competent and capable executive team, which has an average tenure of 14 years. I am 100% comfortable that Joe Margolis is the right person at the right time to lead this very strong team.
Our unique structure and our ability to execute a clear business strategy has allowed us to be among the fastest-growing REITs in the nation. None of that changes with this transition. Over the last five years, we have profitably acquired over $5 billion of real estate. These acquisitions alone would constitute one of the largest storage companies in the nation. When you combine that kind of external growth with the industry's best operating platform, which just delivered its 24th consecutive quarter of double-digit FFO growth, Extra Space is well-positioned to continue to deliver outsized growth for years to come. With that, let's turn it over to Jeff to start the Q&A.
Thank you, Spencer. In order to ensure we have adequate time to address everyone's questions, I would ask that everyone keep your initial questions brief. If time allows, we will address follow-on questions once everyone has had an opportunity to ask their initial questions. With that, we'll turn it over to Jonathan to start our Q&A.
Thank you. Ladies and gentlemen, if you have a question at this time, please press star then one on your touch-tone telephone. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. Our first question comes from the line of RJ Milligan from Baird. Your question please.
Yep. Good afternoon, guys. First off, congratulations, Spencer. It's been great working with you, so congratulations.
Thank you
on the retirement.
Thank you.
Scott, I had a question in terms of the acquisitions and sort of plans for long-term funding. Obviously, a lot more acquisitions this quarter and for the year, more than planned. Given where the stock price is trading, curious what your plans are for funding those acquisitions and if you'd be comfortable raising equity at the current price.
Yeah. First of all, I would tell you that we don't look at our current stock price anytime we make an acquisition decision. It's not made with a short-term cost of capital in mind. We always look at the long-term cost. We've always tried to have many sources of capital, and right now, I would tell you that we still do. Debt is an option. We just closed this facility that gives us a fair amount of capacity. The preferred market's still very good. Our stock price, we don't like it as much today as we have in the past, but I think that we'll always look to access the cheapest cost of capital, which could also include joint ventures or even proceeds from the sales of properties.
Would you be willing to increase debt levels for the short term, until maybe you have a better stock price?
Marginally, yes, we would.
Okay, I'll get back in the queue. Thanks, guys.
All the best, RJ. Thank you.
Thank you. Our next question comes from the line of Juan Sanabria from Bank of America Merrill Lynch. Your question please.
Hi. Good afternoon, guys. I was just hoping you could talk a little bit about the state of demand. If I look at
Page 20 of your supplemental, it looks like rentable square feet on the same store basis declined year-over-year for the three months and for the nine months. You kind of talked about concessions going up. Just curious about the health of demand and kind of what you're having to offer to get people to sign the leases.
Yeah. I'm assuming you're looking at the rentals and vacates in our supplementals.
Correct.
The first thing I'd tell you is, we always tell people to be careful of looking at rentals and vacates. It depends a little bit on what happened last year. We focus more on occupancy and revenue growth. I would tell you demand is still solid. We are very near our record high occupancy for this time of year. Last year was our best year ever. While we are slightly below last year, it's still very solid. We're still seeing rate growth in our street rates. For the quarter, we grew 6%-7%, and we continue to push those here into the fourth quarter.
Any color on concessions to get people in and how that's changed as a % of revenue or absolute $ terms?
Yeah. Our discounts are up slightly from where they were. Last year was the kind of bottom. As a % of revenues, if you take discounts divided by revenues, you were around 3%. Current year, they've ticked up slightly from there, they're going to tick up for a couple of things. One is the fact that our rates are up, the second thing that affects discounts obviously is how many rentals you're doing that month. With rentals being down slightly, that helps. With rates being up, that hurts. In addition, we are offering slightly more discounts right now to try to compensate a little bit for our drop in occupancy. We ended the quarter about 40 basis points below where we were last year. We would like to pick up a little bit of that going into the slow season here.
Thank you.
Thank you. Our next question comes from the line of Jeremy Metz from UBS. Your question please.
Hey, guys. Yeah, just two quick ones. In terms of the joint venture acquisitions, can you talk about what prompted these? Was this driven by your partners coming to you and saying they wanted to sell? Any insight into why now, and then did you have a ROFO on those?
I'll answer the second piece. We have a ROFO in all of our joint ventures, but that was not the triggering factor here. We've done five transactions with four different joint ventures, all managed by Prudential. Each venture's run by a different portfolio manager, has a different strategy, and the catalyst for the transaction in each case was different. In some case, we got an unsolicited offer for a property that we didn't want to sell. That started the discussion. In another case, the portfolio manager wanted to change up his geographical diversification and wanted to sell a bunch of properties, primarily in California. From our standpoint, though, the similarity in each venture was that we had an embedded promote in the venture that we could not get to without a capital transaction.
We restructured Earlier this year, we restructured two of the accounts without a capital transaction and realized over $40 million in promote. In the purchases we've done from the two single client accounts, the sales proceeds to the venture will be sufficient to satisfy the accrued preferred return, pay down some capital, and put us in a position going forward where we will be cash flow promoted in the ventures.
Appreciate that color. I just had one second one on supply. Any changes in the supply picture in terms of expected starts out there? Any new markets where you're seeing it start to get more heated than maybe you initially thought?
I think the picture looks pretty much the same to us. We see increasing supply from a period where there was very little supply. The markets that we see supply are the markets that have limited barriers to entry, primarily. In the many markets in California and others, we don't see that supply. Maybe a new market we're starting to focus on would be Austin, Texas. Overall, supply, we are in a development cycle. We're seeing increased supply. We're seeing in some instances, it affects our operations, in some instances it doesn't. On a portfolio level, we still perceive it to be at a manageable, moderate level.
Jeremy, I would maybe add one thing to that is clearly as these properties open, there's demand. If you look in our supplementals and look at the occupancy of our C of O deals, these properties are leasing up extremely quickly. Obviously there's some type of pent-up demand.
By the way, Jeremy, it's Spencer. One of the things you need to know is just because a macro market might have a lot of supply, doesn't necessarily mean that it's going to impact certain individual sites. A lot of noise has been made about South Florida and Miami. Well, this past quarter, our revenues were up 6.8% and NOI was up 7.3%. There can be new supply in Miami, but apparently today it's not having any impact that's discernible on our property level performance because those sites aren't within a three or four or five-mile radius of our current operations. It all depends as you look at across the country as to the impact of supply.
Thanks.
Thanks, Jeremy.
Thank you. Our next question comes from the line of Wes Golladay from RBC. Your question, please.
Hi, guys. It looks like the street rates are still pretty healthy, renewal rates are pretty good, concessions are slightly higher, and occupancy is just a tad lower than you'd expect. We're seeing about 150 basis points sequential decline in revenue growth for likely three quarters in a row, potentially, to get to the low end of guidance. What is going on? Is it just you guys are above market and you're just resetting back to a more normal level? Is that the driver, or is it the concessions? What is driving the 150 bps a quarter?
Year to date, we've had 150 basis points per quarter. Q1 to Q2 to Q3, it's been 150 basis points per quarter. That's coming off of all-time highs, record NOI growth. I would tell you the rate of decline has slowed from the second going into the third quarter. It was fairly steep, and then, later in the third quarter, it has absolutely slowed.
Okay. Would it be potentially you guys are just above market for even though new lease growth or effective rent was growing or street rate was growing, call it 5%, you guys might've been above, and as your portfolio starts to reset back to where the market is, the pace of decline will start to moderate and maybe start to re-accelerate again. Is that how we should look at it?
I would tell you it's tough by market because every market's a little bit different. Some markets, it truly is new supply. Other markets, it's that we have grown 15% for two years in a row. We wouldn't expect to grow 15% again next year. Denver is a combination of supply, plus Denver in 2014 grew double digits, 2015 double digits. 2016, it's now, in this quarter, went slightly negative. It varies by market, but overall, you're coming off of record highs. It's just the timing of when you're coming off of those.
Okay. As I recall, you guys do have some governors that you don't want to be too far above market. It sounds like Denver, you guys might've been somewhere where the governors were at, and then you had the new supply, and that's why we're seeing such a drastic decline in Denver, and that'll probably be the most extreme example. Is that a fair assessment?
I think that's probably fair. The one thing we do have, like you mentioned, is the governor. What governs that is street rates. If street rates are increasing, you do have the ability to increase existing customers also. If street rates aren't moving, then your existing customers won't be getting rate increases at some point also.
Okay. Lastly, just on the, there's a lot of new supply, and we always talked about how it'll affect your current operations. What do you see as far as the managed business or maybe your C of O business? How much share of the new development can you take in your market, be there developers wanting to affiliate with Extra Space? I see some developments in Charlotte that will be managed by you. I just wondered how much opportunity it is for you.
Boy, thank you very much for asking that question because we always talk about development as a risk to our business, while development also provides an opportunity for us. If you look at our supplements and see how our C of O assets are leasing up, you can get an idea of what good investments those are gonna be and the value those are gonna add to our shareholders. Also on the managed side, as you point out, the vast majority of our incoming, our pipeline of managed stores are new developments. We will be able to grow that platform. We are growing it this year, even though we had some sales out of the Management Plus platform. Be able to continue to grow that business both as a revenue generator, a source of additional data, and a pipeline for future acquisitions.
Okay, thanks a lot. Congrats, Spencer, and congrats, Joe.
Thanks.
Thanks.
Thanks, Wes.
Thank you. Our next question comes from the line of Smedes Rose from Citigroup. Your question, please.
Hi, how are you? I wanted to just ask if you're seeing any changes in seller expectations, despite very healthy fundamentals still, the pace obviously has declined. I was wondering if you've changed your underwriting at all, given a little bit the slowdown of the industry, or are you seeing any kind of change in private market cap rates?
Well, sellers always have unrealistic expectations, and I think they still have unrealistic expectations. To the point of your question, we feel that the cap rate compression has stopped and that things are still trading at very healthy prices, but perhaps there's fewer bidders, and there's not as much pressure on pricing. I think through this period, we have done a good job of being realistic and disciplined in our underwriting. Because of that, we have not been successful with widely marketed deals. Only about 12% of the deals we've approved this year in our real estate committee were from a broker. Everything else came through some type of relationship or off-market transaction. We have not changed our underwriting. We continue to try to be disciplined, and I think we're gonna continue to be largely unsuccessful in the bid auction market until there's a significant change.
Okay, just switching to C of O deals for a second, have you seen any sort of change in the frequency of folks approaching you with these kinds of deals, say, versus 6 months ago?
I think we've always had a very strong pipeline of C of O deals, we see storage is still very healthy business. Folks who have not been in storage before, want to get into storage and want to be developers and approach us in a pretty consistent basis. I think the pipeline is still strong, we're very selective, both in terms of who we want the developers to be and which projects we want to commit to in terms of what else is being developed in that area.
Okay, thanks. That's helpful. Spencer, I wanted to add on my best wishes to you as well going forward. Thank you.
Thank you very much, Smedes.
Thank you. Our next question comes from the line of George Hoglund from Jefferies. Your question, please.
Yes. First off, Spencer, just enjoy retirement. It's been a pleasure working with you.
Likewise, George. Thank you.
I guess my two questions have to do with two specific markets. I guess one in New York, if you can just comment a bit on the performance on the sequential slowdown in revenue growth. Also in Denver, sort of what drove that large increase in same store expenses up 25%?
I'll take the Denver one first. Then maybe Joe, if you want to take New York. The Denver one is actually a property tax increase in expenses. It's not that the taxes this year went up, it's a comp from last year where we won an appeal last year, so you had expenses go down because we got effectively a lower rate or cash back. It's really more of a year-over-year comparison on the expense side than a big increase in expenses.
New York is a little bit of a mystery to us. It's a good market. There's some development coming online. The saturation is extremely low. Perhaps it's a market where valet is making a little bit of an inroad, we have a hard time understanding and predicting the New York market right now.
Okay. Thanks for the color.
Thanks, George.
Thank you. Our next question comes from the line of Todd Thomas from KeyBanc Capital. Your question, please.
Yeah. Hi, good afternoon. Spencer, best of luck in retirement. Good luck. Just a first question, Joe or Scott maybe, just following up on the discounting, can you just talk a little bit more about the discounting in the quarter, maybe quantify what % of customers received discounts in the quarter, how that compared year-over-year?
Yeah. Year-over-year, current year, about 58% of our new customers received a discount compared to last year, it was 47% of our new customers. That can be a little misleading sometimes because it's going to depend on which discount they received. Even though fewer customers last year received a discount, it's possible you could have given more discounts if you gave a larger discount. That is, majority of our customers coming in the door are getting a discount as they come in.
Okay. How should we think about that discounting in the context of the 7% higher asking rents that were mentioned year-over-year? I mean, what does that mean for move-in rates in the quarter on a year-over-year basis?
discounts, assuming all things were equal, a 7% increase in asking rates would be a 7% increase in discounts. I would tell you they are slightly higher than that because we have increased the percentage of customers getting the discount. We've also, dependent on the market, dependent on occupancy, we will continue to change discounts offered, the specific discount offered. It's not significantly higher, but it is higher, and it is affecting your net rental income.
Okay. Just maybe for Joe, just like a bigger picture question here. Just sticking with revenue growth and the deceleration that we're seeing today, realizing we're coming off record highs, are there any signs of stabilization today, whether it is discounting or something else though that you might be able to point to? Or do you think that this deceleration on a broader portfolio level could continue over the next several quarters?
Our view is that the deceleration is going to moderate and flatten out, and we are going to revert to more normal rates of growth. Self-storage normal, which historically has been higher than other property types. We're already feeling that, and that's what we expect.
Okay. It seems like your comments suggest then that you think that you just sort of moderate and sort of stairstep down to a level that stabilizes in the coming quarters then?
Correct.
Okay. Thank you.
Thanks, Todd.
Thank you. Our next question comes from the line of Ki Bin Kim from SunTrust. Your question, please.
Thanks. Spencer, it was great working with you, and best of luck.
Certainly. Thanks, Ki Bin.
You are welcome. Maybe we could just start off with, maybe you could provide some October stats on street rate growth and promotions.
Yeah, our street rate growth for October is slightly lower than where it was in the third quarter, you are mid fives in street rate growth, mid to upper fives, depending on kind of the time. Discounts are pretty similar to what they were in the third quarter, up slightly.
Okay.
The reason we're adjusting discounts and pricing is obviously to try to recoup some of the occupancy that we were down.
Right. If I look at your adjusted guidance and what it implies for the fourth quarter, we're roughly looking at like a low 5% same store revenue growth rate. What's interesting about that is that probably your rent per occupied square foot growth rate for the first time is going to surpass the same store revenue growth rate. At least it's trending that way. It feels like there's maybe some levers, whether that's promotions like we talked about or existing customer rate increases having a lower benefit to the same store revenue numbers or just decrease in street rates. It feels like there's some other levers that are giving away. I was wondering if you had any thoughts on that.
Yeah, I would tell you in terms of levers, the majority of our growth, the end of last year and all of this year has been street rate growth. Existing customer rate increases don't add a lot. It is almost entirely rate growth. That has been offset slightly by discounts and bad debt has increased nominally also.
Okay. I guess in the same line of questioning, I know we tend to focus a lot on the supply issues. Maybe just something on the demand side. It feels like even your good markets are not just, I'm not talking about just L.A., but just overall, some of the great markets are becoming just very good and just kind of toning down a notch. Is there something that you can point to on the demand side? Are customers shopping price more often, or is there just less traffic, or are there some things that you're seeing out there that is pointing towards just a little bit weaker demand than what we're used to?
I think what we're seeing is just the cyclicality of markets. We did a study, we looked at almost 90 markets over a 10-year period. One thing you see is that markets are strong and then markets are less strong. They're not correlated, and they move in all different directions. Our number one market for 10-year NOI growth is Chicago, which is now one of our weaker markets. We fully expect to see markets like Sacramento be very strong for a few years and then perhaps be not as strong. One of our markets now that we reported as a weaker market is Boston. Boston is not a market that's been impacted by a lot of supply. It's just kind of in that cyclical pattern that we see.
We're very happy to have designed a portfolio that is highly diversified across many, many markets that will smooth out the ups and downs of individual markets.
Okay. Thank you.
Thank you.
Thank you. Our next question comes from the line of Vikram Malhotra from Morgan Stanley. Your question, please.
Thank you. Congrats, Spencer, on retirement, and congrats, Joe, on the new role. Two quick questions. On the comments about steady state, can you give us some context? If I look at like the last 10 years, self-storage same store NOI is probably in the 4%-5% same store NOI range. I'm just trying to understand, like, when you say steady state, given sort of all the changes in technology, et cetera, is that somewhere in between the long-term average and today's numbers? Can you just give us some sense of what steady state means?
I would tell you we're reverting back to that historical average of 4%-5%. I think as a company, that's largely our belief. You're going to have times it's above that, they're not going to be way above, and there's times where you're going to be below that, and they're not going to be way below. It's the beauty of self-storage is that it is a fairly stable property type.
Okay. On supply and talking to several private operators, it seems like in markets where there was this uptick in supply, given the subsequent performance, it seems like some projects are getting either pushed out or delayed. It's also just taking longer to get new projects started, just given capacity issues, in terms of contractors. I'm just wondering if you've seen that in any markets.
We see that across all markets, that a fairly sizable percentage of planned projects do not get built because of local opposition, increase in construction costs, difficulty getting financing, land costs get too high, whatever it is. That being said, there are projects being added to the funnel, a good portion of them don't make it through the funnel, there's still more projects getting added to the funnel. I think the factors you talked about will slow and moderate the development cycle but not stop it.
Okay, great. Thank you.
Thanks, Vikram.
Thank you. Our next question comes from the line of Gaurav Mehta from Cantor Fitzgerald. Your question, please.
Yeah, thanks. A couple of quick ones. Number 1, for your existing customers, have you seen any pushback from your tenants on rent increases, and can you comment on % of move-out for rent increases in your portfolio?
We have not seen any changes, if that's the question. We still have a very small percentage of customers who will actually go get their boxes and move out when they get a rate increase. We continue to, every time we sent out a rate increase, keep a control group and measure the control group's move-out rate against the folks who got the rate increase. I think about 1% of the people move out. There's been no change in that. It's something we continue to monitor, and it proves to us that the rate increase program continues to be valuable.
Okay. Second, you talked about discounts, higher discounts in the quarter. Were there any markets where you had to use more discounts than others?
Any market that's showing softness in terms of occupancy or rate, we will typically increase the discounts. As we look at the levers we have to pull, you're going to look first to increase your spend on the web. The last thing you want to do is decrease your rate. In terms of magnitude, you'll typically increase your spend on the web, you'll increase your discounts, or you will change your rate. You typically want to do them in that order because of the long-term cost or benefit.
Okay, thank you.
Thanks, Gaurav.
Thank you. Our next question comes from the line of Gwen Clark from Evercore ISI. Your question, please.
Hi. Can you give us an update on how you're thinking about valet storage, the threat to the industry, and then also some color on sites like SpareFoot?
Yeah. We've done quite a bit in terms of research on the valet storage. We don't see it as an imminent threat. We understand it a lot. We've done deliveries with several companies. We have done click-throughs to see if they choose them over us. Right now, based on the way it's priced, we do not see it as a major threat. The other thing we have is the ability to get into that business fairly quickly. We have the real estate, we have the customer list. Not a huge threat at this time.
Okay, that's helpful. On a different note, it looks like Denver was one of the first of the markets to go negative. Can you give us an update on how to think about what markets could be next and what would be driving that?
It's tough to predict the future. If you looked at a market that has had 15% growth two years in a row and had a lot of new supply, I think that it's probable that market is not going to do great next year.
Okay.
I can't think of any more of those offhand here.
All right. Understood. Thank you.
Thanks, Gwen.
Thank you. Our next question comes from the line of Ryan Burke from Green Street Advisors. Your question, please.
Thank you. Scott, I appreciate the comment in regards to not focusing necessarily on what your share price is today in terms of driving your external growth strategy, but what is it that the team looks for that would, or that will eventually tell you that it is time to slow growth from that perspective?
I would tell you when things are not accretive anymore. In other words, what you're paying for a property is greater than your cost of capital. We're very careful in terms of assessing our cost of equity as well as assessing our cost of debt and trying to look at that long term and having realistic growth assumptions. I think that's what could cause you bigger problem, is if pricing stays extremely low going forward.
Okay. You've obviously seen great success on producing this double-digit FFO growth over many consecutive quarters now. Do you consider that a hard target internally as you're looking at acquisitions, or is that more just an outcome of the strategy that you've employed and you're okay with not producing double-digit FFO growth at a certain point in time?
No, we are not okay with not producing. That's too many negatives, sorry. Our goal, we are very focused on producing double-digit FFO growth, both through acquisitions and all the other levers we have to pull to do that, whether that's, as we talked about, restructuring our ventures, our Management Plus platform. We will add over 9,000 units this year through expansions or conversions, where we turn 10 by 10s into five by five. We are very focused on that goal.
Okay, thanks. Just wanted to make sure that we sort of round out quantifying the rent growth trends for the quarter. I think what we heard is sort of 6 to 7-ish percent, both street rate growth and move-in rate growth. Are the increases to your existing customers, have they changed at all?
No, they're still high single digits.
High single. Okay. Are you able to quantify what the roll-down is from move-out to move-in for the quarter?
Yeah, it depends on what we're doing with street rates, but they're typically low to mid single digits, and they can get as bad as high single digits. Right now, you're more in the low to mid with the fact that you've been pushing your street rates.
Okay. Got it. Thank you.
Thanks, Ryan.
Thank you. Our next question comes from the line of Todd Stender from Wells Fargo. Your question, please.
Thanks, guys. I just want to get a sense of how you're evaluating your cost of capital, how you're deploying capital at this point in the cycle. Can you talk about the three buckets that you invested in? The JV assets, that sound like they're pretty mature. I think you acquired three properties outside of that in the quarter, and then your C of O deals. Is there a way to quantify your return expectations side by side with those three?
A lot of questions all in one, Todd. I think I'd tell you, we're very focused on the long-term cost of capital. That's going to take into consideration debt as well as equity, and it's going to be the mix of debt and equity. In terms of returns, we are typically a cap rate buyer. We also consider your replacement costs. We also look at IRRs, and we also look at cash-on-cash yield. Because we are a long-term holder, I think cash-on-cash is probably the most relevant one that we focus on, rather than just looking at a cap rate today or a stabilized cap rate, what's the return? Because that equalizes. If you look at a seven-year cash-on-cash return on a C of O deal, you now can compare that to how is that cash-on-cash yield to an acquisition. I would tell you, we're focused on long-term cost of capital.
We're focused on cap rates and cash-on-cash yield.
I guess the other thing, Todd, is if you look at those 3 types of acquisitions, they all serve a different purpose, right? The assets we buy from a joint venture partner that we manage, we have already maximized performance. There's less upside in those assets, but there's also less risk. We know them inside and out. We know exactly what the performance is. They're already branded. Those are kind of our safest, lowest returning assets. The C of O deals, where we're taking full lease-up risk, no construction risk, and we have the period of dilution that Scott mentioned, those are higher returning type deals in return for taking that lease-up risk. The deals we buy on market, they span the globe. Our first-year cap rate on acquired deals range from 2.7%-8%.
That just tells you how much juice there is or lease-up or value add there is in those deals. Those could be anywhere along the spectrum.
What are you guys expecting? What's the cash-on-cash return for the Pru assets? Because it sounds like we're going to see some more JV assets being pulled in in Q4. What kind of return expectations there?
The deal we just announced with PRISA II, where we dissolved that joint venture and purchased 23 assets, the forward 12 cap rate on that was a 5.8%. That gives you a sense of that.
Yeah. It's tough to give you the cash-on-cash yields because they vary so much depending on lease-up, C of O versus this. I would tell you, a JV is more like buying the safe annuity and-
Yeah
some of the others are more swinging for the fences. Much higher returns.
Great. Thank you.
Thanks, Todd.
Thank you. Our next question comes from the line of Juan Sanabria from Bank of America Merrill Lynch. Your question please.
Hi, just to follow up on Todd's question, just curious what your typical return is for the CO deals that you're looking at today that are in the pipeline.
We try to target 200 basis points over what we believe we would buy a stabilized asset for in that market. We're looking at stabilized cap rates of the 31 COs we've approved this year between 6.5% and 10%. That will give you a seven-year cash-on-cash between high 5% to 8%.
Okay.
All unlevered.
Could you give us just a snapshot, it sounded like SmartStop was a big driver of kind of outsized non-same-store growth of where that portfolio stands today?
Yeah. SmartStop, compared to our underwriting assumptions, all year has been outperforming in terms of revenue growth. It continued to outperform in revenue growth. Our problem has been on the expense side, where we've been spending higher than our original projections. In the quarter, the expenses actually came in right on budget, and our revenues continued higher. We actually were about $1.1 million ahead for the quarter for SmartStop alone in NOI.
What's the occupancy there?
You are just over 90%.
Okay. Just one last question. I think it was Joe, and correct me if I'm wrong, may have said that the on-demand or valet could have been a driver of maybe some deceleration in New York. Do you guys have any sense of market share in New York or other large metros for the on-demand or valet?
We really don't. Talking to some folks who have large exposure in Manhattan in particular, they had a hypothesis that business may be gaining some traction there, but it's really just a guess at this point.
In any other markets that kind of mimic Manhattan? Is it like San Francisco?
We haven't heard that yet.
Okay. Thank you.
Thanks, Juan.
Thank you. Our next question comes from the line of Neil Malkin from RBC Capital Markets. Your question please.
Hey, guys, and Spencer, just wanted to say congrats, and it was good working with you. I know everyone else has said that, but wanted to get that in myself.
Thank you, Neil. I appreciate it.
Sure. My question, two questions. One, how many people in the quarter were eligible in your total renter population to receive a renewal?
In terms of how many people were eligible, it's tough to
Percentage-wise, I mean. Sorry.
percentage-wise, we give about, well, it's one twelfth basically because we're raising rents every month, but we give about 80,000 rental increases every single month.
Okay. I just wondered because you do the five and nine.
Yeah
thinking people are there for. Go ahead.
Yeah. Some people don't stay the full year, though. Some people get that and get both, and other people don't get both. They just get the first. Some people don't get it. Some people may only get.
Sorry. It winds up working to about roughly like saying someone gets one per year because of the churn and people leaving, et cetera.
About 10% of our customers actually get them every single month, is what it turns out to be. It's slightly higher than one twelfth.
Okay.
Oh, sorry. Lower.
Right. Okay. My last question's on expenses for next year. Obviously, I know you guys aren't giving guidance, but would you expect to see maybe more pressure on expenses just from real estate, number one, because you have more deliveries coming, so maybe more price discovery from municipalities. Number two is, as you get more competition, you'd be spending more on marketing, things along those lines that would hit the expense side.
I would tell you from a property tax perspective, it will be above inflation. I mean, the last couple of years, we've seen 4%-6%. We expect that again next year. We hope to be able to grow less than inflation in some of the other areas by some of the things we're doing. Hopefully that will offset some of it. In terms of marketing, hopefully as we grow, we will start to experience some of the size and scale benefits. We hope to keep that somewhere near inflationary also.
Thank you, guys.
Thanks, Neil.
Thank you. Our next question comes from the line of Todd Stender from Wells Fargo. Your question please.
Hi. Thanks for taking the follow-up. Just back to the migration from a secured balance sheet to the unsecured, does that do anything to your cost of debt? I know you're a nimble borrower on a secured basis, but now on an apples-to-apples basis, you think that'll adjust your cost of debt down? That's part one. Part two is, do you think that helps your valuation in the stock as you guys kind of move towards a more, I'd say, modern era REIT?
Yeah, I would tell you it does a couple things for us. One is hopefully it decreases our average cost of debt. Two, hopefully it extends out the average length to maturity. In terms of whether or not that increases the value, I think that I'll leave that to the investors and the analysts.
Great. Thank you.
Thanks, Todd.
Thank you. Our next question comes from the line of Gwen Clark from Evercore ISI. Your question please.
Hi. Thanks for taking my follow-up. I think there's some confusion about what normalized growth means for the sector and for Extra Space. Can you try to quantify it a bit more specifically?
There are a lot of numbers out there, Gwen, it's Spencer. If you look back over the last 10+ years, it's hard to get an exact read on this, because you've got some occupancy gains and other things mixed in there. Some numbers that I've used in the past, for the 10-year average for this group, the storage sector operators specifically, the NOI growth has been about 5.3%. That's a very healthy report card in the world of REITs by any measure. Extra Space has done a little bit better than that. We have averaged about 6.7% over that 10+ year period, and the last quarter we just reported was 7.8%. We're still way above the historical norm.
You can pull out some of the occupancy and other things that might be inflating some of those numbers, my personal opinion is, not only today, but going forward, storage will be amongst the best, if not the best performing asset class. We've seen some deceleration. I'm personally a little surprised at the negativity, I have a high degree of confidence that storage and Extra Space in particular, are going to put up excellent results by any measure in the world of REITs. I don't think any of that changes. Reverting to maybe more normal historical trends, it's still impressive.
Okay, that's helpful. It seems like there's clearly some benefit from occupancy and then in more recent years, the TI. If you were to try and take out the occupancy gain and then take out the benefit from the TIs, which are probably kind of reached peak penetration, do you have an idea of what the revenue growth would be like?
I'd have to get back with you on that. For me to shoot off the hip wouldn't be the right thing to do.
Okay, understood. Thank you very much.
Thanks, Gwen.
Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Spencer Kirk, CEO, for any further remarks.
Again, this is very heartfelt. It's been a pleasure working with each of you. Thank you for making the last seven and a half years so enjoyable. I appreciate your support and interest in Extra Space, we'll look forward to next quarter's call.
Thank you, ladies and gentlemen.