Good day, ladies and gentlemen. Welcome to the Q2 2016 Extra Space Storage Inc. earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. If anyone should require operator assistance at any time, please press star then zero on your touch-tone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Jeff Norman, Senior Director of Investor Relations for Extra Space. You may begin.
Thank you, Shane. Welcome to Extra Space Storage's second 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 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, July 28, 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. It was another solid quarter for Extra Space. We produced same-store revenue growth of 7.6%, primarily from rate. Expenses increased 3.1%, which led to NOI growth of 9.4%. Quarter end occupancy was very strong at 94.4%. FFO per share, as adjusted, grew more than 25% year-over-year. This exceptional growth is the result of solid operating performance, accretive acquisitions, joint ventures, third-party management, and optimized balance sheet. These growth components have produced 23 consecutive quarters of double-digit FFO growth and enabled a second quarter dividend increase of 32%. Year to date, we have closed over a half a billion dollars in wholly owned acquisitions, bringing the total property count to 1,412 Extra Space branded stores. Marketed acquisitions continue to be as competitive as we have ever seen. We continue to be disciplined and only transact at levels that are beneficial for our shareholders.
We've been particularly successful sourcing off-market transactions through our joint ventures, third party, and other relationships. We believe that the 630 Extra Space branded stores, which are not wholly owned, will continue to provide outsized acquisition opportunities. I'd now like to turn the time over to Scott.
Thank you, Spencer. Last night, we reported FFO as adjusted of $0.94 per share, meeting the high end of our guidance. Including costs associated with acquisitions and non-cash interest expense, FFO was $0.91 per share for the quarter. Our same-store revenue growth was driven by higher rates to new and existing customers. This is consistent with our guidance, which assumed minimal benefit from occupancy and discounts. The change in our same-store pool from 2015 to 2016 positively impacted our revenue growth by 30 basis points for the quarter. Our top performing markets included Atlanta, Tampa, St. Pete, and most of the state of California, all of which experienced double-digit revenue growth. The slowest markets were Chicago, Denver, Memphis and Washington, D.C., each of which still had positive revenue growth.
Our 2015 acquisitions, including SmartStop, are performing in line with our estimates, and lease-up times on our C of O deals are significantly faster than underwriting and our historical norms. Year to date, we have closed or have under contract to close $547 million of wholly owned acquisitions. In addition, we have $248 million in joint venture acquisitions closed or under contract. Our investment in these JVs will be $81 million this year. All of these acquisitions are expected to close in 2016. During the quarter, we restructured two of our joint ventures to realize the value of our promote. The promote was exchanged for additional ownership in the joint ventures, increasing our equity position by over $40 million. At this time, we reaffirm our full year guidance. FFO as adjusted is estimated to be $3.71 to $3.78 per share. FFO is estimated to be $3.59 to $3.66 per share.
This guidance includes $0.05 of dilution from our 2015 and 2016 C of O stores. It also includes 2015 and 2016 acquisitions that as anticipated, will require time to be brought up to our performance standards. As these properties move towards our portfolio average, we expect outsized NOI growth. I will now turn the time back to Spencer.
Thanks, Scott. While our unprecedented revenue and NOI growth have moderated, our ability to produce the industry's best FFO growth year in and year out has not moderated. This quarter's FFO as adjusted grew 25.3%. This is the result of our multifaceted strategy, which includes the industry's leading operating platform, the industry's most successful acquisition program, the industry's largest third-party management platform, the industry's largest and most successful JV program, and a management team that clearly understands that growing FFO is our number one priority. In closing, as we expected, our same-store performance has gone from phenomenal to excellent, and FFO growth is still phenomenal. Let's turn the time over to Jeff to start the Q&A session.
Thank you, Spencer. For our Q&A session, we are also joined by Joe Margolis, our Chief Investment Officer. In order to ensure that 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 the opportunity to ask their initial questions. With that, we'll turn it over to Shane to start our Q&A.
Ladies and gentlemen, if you have a question at this time, please press star, then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from the line of Ki Bin Kim of SunTrust. Your line is now open.
Thank you. Hi, everyone. I just wanted to ask you a couple of questions regarding those same-store revenue trends, the deceleration from about 9% to 7.5%. If I put it in perspective, that 7.5% growth, we get it. I mean, it's still better than almost any other readout there. At the same time, the decline is bigger than what we've seen from your portfolio in quite some time, and some of that growth also carries with it just good pricing momentum you've experienced over the past year. It may not necessarily be reflective of new customer activity today. The question is, what is really happening on the front lines with new customer activity in terms of just your price sensitivity and what's happening with street rates year-over-year, promotion usage, things like that?
Yeah. Ki Bin, this is Scott. The deceleration from Q1 to Q2 and from last year, I would tell you, is largely the result of no occupancy delta and not significant discount delta. Last year, we benefited 200 to 300 basis points of occupancy in discount delta. This year, that's gone to minimal amounts. Our current street rates and our current achieved rates are still very solid. We're still getting, call it 6% to 8%, I think, right. More recently it's been about 7%. We're still seeing very good street rate and achieved rate growth.
If I take that into consideration, it sounds like, I mean, obviously you had the occupancy benefit loss, are promotions almost going the other way, where it's higher year-over-year?
Promotions are
Maybe they've
Yeah, I would tell you promotions are moving in line with rate. In other words, if rates are up 7%, discounts are up 7% also. Discounts may be up slightly, but not significantly at all, or not materially. It's moving with rate.
I guess what I meant was, for new customers moving in, what is the % of new customers moving in that are getting a promotion this time around?
It's between 60% and 65%, that's not very much above last year. Last year was similar numbers, call it 60 to low 60s. You also have to look not just at the % of customers getting the discount, you have to look at what discount they're getting. It may be they're getting a discount, but it's first month half off or something smaller than they received last year.
Okay. Thank you, guys.
Thanks, Ki Bin.
Thank you. Our next question comes from the line of Gwen Clark of Evercore ISI. Your line is now open.
Oh, hi, guys. Good afternoon.
Hi, Gwen.
Just a quick question. On the C of O pipeline, it looks like a chunk of the assets will be wholly owned, while others will be in a JV structure. Can you talk about the decision-making process you go through when evaluating these?
Sure. This is Joe Margolis. We have set up several programs with local developers where they, in targeted markets, they will source C of O opportunities for us to review and we'll, in a programmatic basis, execute a number of those in joint venture in those markets.
Okay. Do you have the right of first refusal in the event that the partner would like to exit eventually?
Yes. In all of our ventures, we have protections on exit, so we have the opportunity to purchase. That's a very important tool for us to make sure that we have.
Okay. That is helpful. Thank you very much.
Thanks, Gwen.
Thank you. Our next question comes from the line of Todd Thomas of KeyBanc Capital Markets. Your line is now open.
Hi. Thanks. Question on new supply. I guess two questions really. One, any changes in the number of completions you're expecting in 2016 and 2017? Two, you've talked about we've heard about Chicago, Denver, and Houston as seeing new supply lead to some relative softness. I'm just wondering if there are any other markets on your radar at this point.
Good question, Todd. It's Spencer. First of all, our best guesstimate for 2016 is 700 properties likely to be delivered 2017, maybe a little bit more. I think more importantly, in the last two and a half years, if I could just provide a little color, 45 stores came online within a three-mile radius of one of our properties, and we still delivered outstanding performance. Within that same three-mile ring, we see an additional 46 properties to come online sometime 2016, 2017. Yeah, in some markets, there's been a little disruption of new supply in Denver, Boston, San Antonio, we're feeling the effect, but there are other markets where it's not disruptive because there's virtually no new supply. You think of Northern California and Southern California, we're doing phenomenally well.
While there is supply, the effect has yet to be felt system-wide, and this is one of the beauties of geographic diversification.
I was just wondering if you're seeing any change at all in existing renters' behavior as it pertains to rent increases. Are you seeing any change in move-outs associated with rent increases at all?
No. Existing customer rate increases continue to work beautifully. No change.
The other thing I would add to that, Todd, is customers are actually staying a little bit longer. We are seeing our length of stay increase.
Where's that at, today?
You are up by about a month, from where they were three to five years ago, so closer to 14 months. That's everyone that has moved in and moved out, versus everyone that is in your property today.
Okay. Thank you.
Thanks, Todd.
Thank you. Our next question comes from the line of George Hoglund of Jefferies. Your line is now open.
Hey, guys. Just looking at the back half of the year and same store occupancy as last year, the end of 3Q, you had 93.6%, and the end of 4Q is 92.9%. I'm just wondering, as you're from today looking towards the back half of the year, do you think, year-over-year, occupancy would be relatively flat, or do you think you might be able to eke out some gains on a year-over-year basis?
At this point, we're assuming that it's going to be flat, zero delta from last year.
Okay, thanks. Also on some of the markets that had lower performance this quarter relative to the broader portfolio, obviously, we just touched on some of it due to new supply, but are there other factors you were seeing that could be characteristic of just certain individual markets that led to a weaker performance, for example, like Memphis?
Yeah. I would tell you new supply obviously affects it, but also you've got to look at prior year performance. For instance, Chicago today is not doing great for us. A couple of years ago, if you look at a 10-year average, Chicago has been very strong for us. I think that you can't continue to raise rates 16% year after year after year, I think that some of these markets probably just have a little bit of fatigue year-over-year, and you're coming up against some very tough comps.
Okay. Thanks, guys.
Thanks, George.
Thank you. Our next question comes from the line of Juan Sanabria of Bank of America. Your line is now open.
Hi. Just a question on what you're seeing on the West Coast markets. One of the themes from some of your other REIT non-self storage peers has been a weakening in demand, maybe slightly weaker job growth in the Bay Area, in San Francisco. Anything you're seeing in the data you look at in terms of traffic or anything like that gives you a picture of what you're seeing on the ground, whether it's staying still strong or any softening?
We have not seen the softening yet. We've seen it from some of the other property types. We've heard them talk about it on their calls and whatnot. As of today, those markets are still very strong for us.
Okay, great. Just a bigger picture question, in terms of competition, full service providers. Can you give us any sense of what kind of market share those players may have in some of the top markets like in New York or San Francisco? Any views on the potential disruption of that technology or that business's viability at this point?
Yeah. Juan, it's Spencer. Number 1, for the full service valet, concierge, whatever you want to call it, we would say their market share today, to the best of our knowledge, in any market is de minimis. For this company, we don't believe it's a viable business model.
Why is that? Is it just the cost of transportation, or what makes you so confident?
Well, we've studied it extensively. We have looked at the mechanics of what it really takes to provide that full service on demand at a price point that is competitive. I think, Juan, the fact that none of the large storage REITs have made any announcement that they're getting into this ought to be a pretty good indicator that they don't see the dollars out there as well. There have been a lot of potential disruptors that have announced themselves in the past that would cause pain to the storage industry. For whatever reason, it just has not materialized. We still think that storage offers the best value for a customer, anytime you try to put two people in a truck and transport it across the George Washington Bridge and do so at a cost-effective price point, we can't get there mathematically or economically.
Thank you very much.
Thanks, Juan.
Thank you. Our next question comes from the line of Smedes Rose of Citigroup. Your line is now open.
Hi, thanks. Spencer, just a couple of questions. If you go back to the beginning of the year, just remind us, has your supply outlook for the number of facilities coming on this year, I think it may be a little bit increased from what you initially thought, or is that the same at around 700? It seems to me that it's gone up, but maybe I'm remembering it wrong.
I think I gave a range. I don't remember. I'd have to look at the transcripts, but five to seven.
Okay. I guess my question is, do you feel like facilities under construction are just opening faster, or are you guys discovering more on the margin? It seems like overall, based on commentary from private participants as well, that the pace of supply is starting to increase after many years of having a lot of gating issues. Is that something that you would agree with or not?
Yes. I think there is more talk, there's more action. There's more supply, which is why if you go to one of my prior questions, it doesn't matter if 700 properties or 800 properties are being built, or 1,000 properties are being built. What matters is if those properties are built right across the street or next door, or within one or two miles of your property, that you're currently operating. As I indicated, over a two-and-a-half year period, we only identified 45 properties in our entire portfolio within a three-mile ring. Smedes, if you think about a three-mile ring in one of the boroughs of New York or downtown San Francisco, your trade area isn't three miles. We were generous on the 45 property count. Your trade area might be a mile or less in a dense metropolitan area.
If you think about 46 properties that we have identified that are permitted and/or in some stage of construction to come out of the ground in 2016 or 2017, also within that three-mile ring. Yes, there is competition. Properties are being built. The question is, when will we feel the impact? Today the impact has been localized to a few specific markets, and there are many markets where it's not felt at all. We're going to have to wait and see how it plays out. Yes, there is supply and it's coming. Question is, when will the impact be felt system wide?
Okay, that's helpful. I just wanted to ask you too, as you look at acquisition opportunities, are you seeing any particular difference between kind of primary markets and smaller secondary markets in terms of pricing or maybe the relative quality of portfolios?
This is Joe again. Yeah, there's a premium for secondary or tertiary markets that I think is getting squeezed as people are unable to place their money into primary markets, then all of a sudden Raleigh looks good. There's probably also a premium in terms of quality.
Okay. Given that, against that background, would you be interested in selling? You sold some, I saw in the quarter, I think, would you be interested in selling more against that improving pricing in secondary markets?
Our sales are driven by one of two things, our view of future growth opportunities. If we feel that there's a market that future growth is not going to be as robust as alternative places we could put that money. Secondly, where we have management inefficiencies. Maybe we bought a portfolio and there's a property that is in a remote area, we don't have sufficient scale to bring the full force of our management machine to, we'll put that on a sales list.
Okay, that's helpful. Thank you.
Thanks, Smedes.
Thank you. Our next question comes from the line of Jeremy Metz of UBS. Sir, your line is now open.
Hey, guys. Scott, you touched on this a little earlier, but I guess I kind of wanted to ask it a little differently. If I go back to the last call, you talked about tweaking your model to focus more on occupancy heading into the peak leasing season. Obviously, occupancy is still very good at over 93%, especially relative to historical levels. I think your expectations were for 75 to 100 basis points of occupancy growth this year. I just wondered if you could give us some color on maybe what happened here, given that it doesn't really sound like it was a supply issue.
Yeah. Our models obviously are always going to focus on maximizing revenue. When we looked at the models early in the year and the end of last year and estimated where the model would take us, we estimated that we would have more occupancy benefit than we have had. The model has taken more rate and not pushed as much towards occupancy. There are certain markets where we have maybe tweaked the model a little bit in markets such as Denver, where we have seen some softening of occupancy. A couple of other markets where we've seen supply, we've had to do manual inputs into the model, just because things were going on within that sub-market or that overall market that it's impossible for the model to read.
Okay. Maybe just sticking with the specific markets, can you just give us a little color on what's going on in Boston and Washington, D.C.? Particularly Boston, it seemed like revenue growth decelerated quite a bit, I don't know if that's maybe just the tougher comps you alluded to earlier there.
I would tell you Boston is one that is up against tougher comps. We've seen some construction, but not significant amounts of construction. Boston was a very strong market for us last year. Washington, D.C., is another market that has never been great. I wouldn't tell you it decelerated significantly. It's been steady.
Okay. Just one quick one on the expense side. I'm guessing it was small, but did you get a benefit this quarter from lower snow costs in the quarter?
We actually had snow costs slightly above where we had estimated. We had a late storm, it's timing of some invoices and things like that. We'd made some accruals, but our snow was slightly higher than what we were estimating.
All right. Thanks, guys.
Thanks, Jeremy.
Thank you. Our next question comes from the line of Vikram Malhotra of Morgan Stanley. Sir, your line is now open.
Thank you. Just going back to rate, and in particular just street rates. You talked obviously about this quarter rate being the primary driver and then back half, no real change in occupancy year-over-year. Just mechanically and maybe strategically in the fourth and the first quarter as we move ahead, how should we think about your ability to push street rates relative to a year ago, but also just relative to the overall rate? Really the question being, is this 7% rate growth that you're seeing, could it be tough to do that in sort of 4Q, 1Q, when you just naturally pull back on rate?
I would tell you, Vikram, over time, I think it's going to be difficult. Whether that's 4Q or Q1, I don't know. I think it's going to depend a little bit on the strength of markets. I think things will, at some point, revert more to the historical norm. I think that's just going to be natural. It's the beauty of a diversified portfolio. Some markets will be stronger than others. You've seen some markets revert more to that historical norm already and others are lagging.
Okay. Just on payroll, I guess your costs were fine. One of your peers had slightly higher costs. I'm just wondering, as the supply comes on, or you've seen at least in certain markets supply come on, any pickup in attrition, maybe managers saying there are other opportunities and just broadly, what are you seeing for wages?
Our payroll and our turnover is very similar to prior years. We are not seeing a lot of pressure on our wages. There's been some discussion about minimum wage. It's not become an issue for us just based on where we pay our managers today already.
Okay. Thank you.
Thanks, Vikram.
Thank you. Our next question comes from the line of Wes Golladay of RBC Capital Markets. Your line is now open.
Hi. Thank you. Hey, guys. Looking at moderating trends, what do you think the new normal, I guess, five to 10-year growth rate is? What is a at-trend growth rate that you guys will eventually get to?
Wes, it's Spencer. Let me give you just a little performance. You've got revenue expenses. I'm going to focus on NOI, because that's really where the rubber meets the road. Over the last 10 years, the simple average for NOI growth for the entire sector has been 5.3%. For Extra Space during that same 10-year period, it's been 6.7%. The fact that we've just posted 9.4% ought to tell you that even with some moderation, we're still way above any historical norm. I don't see us falling off a cliff by any stretch. Storage, if you go back to 1998 when I started with the company, was used by about 6% of the U.S. population. Today, that number is more than 9% of the U.S. population. One of the questions is, does that top out at 10, 11, 12, 13%?
I don't know. I think that at the end of the day, we're in a really good position to maximize revenue. As I tried to state in my closing comments, look, NOI is only one contributor to our overall FFO performance. You look at joint ventures, the most successful acquisition program in the industry, and all of the other elements that I enumerated, which I'm not going to repeat, they all contribute to what we're trying to do, and that's grow FFO. We've got multiple levers that we're pulling to produce the industry's best FFO growth year in and year out.
Yeah. Okay. Thank you for that. Looking at Atlanta, that market's been doing fantastic for six quarters in a row. Anything special going on there? Is it just new, I guess, properties entering the comp pool, or just a very good market?
It's just a good market for us. I think, again, it's the cyclical nature of it. I think Atlanta's doing really well today. I think next year it could slow a little.
Okay. Thank you.
Thanks, Wes.
Thank you. Our next question comes from the line of Ryan Burke of Green Street Advisors. Sir, your line is now open.
Thank you. To try and encapsulate some of the comments that you already made from the perspective of moderating growth, would you say that you're more concerned looking forward about potential changes in consumer demand? Are you more concerned about the impact of new supply, call it 12-24 months out?
I would tell you it's probably I think supply will have some impact, but I think also it's somewhat the fatigue within a market. At some point, you can't continue to push rates at 9%.
Okay. You're still acquiring in scale. You had a big increase in additions to your C of O development pipeline this quarter. Does the trend towards moderating NOI growth change your outlook for external growth, acquisitions and/or development looking out beyond 2016?
We've been successful in keeping up our acquisitions pace primarily through off-market transactions and transactions we're able to generate through our Management Plus or joint venture pipeline. Pricing on the open market for some of the reasons you mentioned is difficult for us to get our minds around in general. We still think that these other avenues of growth are going to be available to us, and will continue.
Okay. Thanks, Joe. One last quick one. Are there any discernible trends in terms of why, I call it smaller owners are selling, particularly in your third-party managed asset pool?
Prices are good, and particularly in the stores we've managed, we've been able to take their NOI up to very attractive levels, and it's a good time to be a seller.
Okay. Thank you.
Thanks, Ryan.
Thank you. Our next question comes from the line of Todd Stender of Wells Fargo. Sir, your line is now open.
Thanks, guys. Just looking at revenue management. Can you share some of the specifics that revenue management was telling you in Q2? Just as far as pushing rate, potentially at the expense of occupancy. As you look at the second half of the year, we're right now at peak season, anything you can share from the past and the future about what revenue management's kind of pointing to right now?
Todd, it's Spencer. As you look at our revenue management algorithm, which has 56 different inputs, the whole philosophical underpinning is not about rate or occupancy. It's about maximizing revenue for a particular unit size code and a particular property based on what we know about those elements that are under consideration. It's not rate, it's not occupancy, it's revenue.
That's helpful. Thank you, Spencer. We got an update in June at NAREIT about SmartStop. Any trends you can share? Any updates? When does that hit the same-store pool?
In terms of trends in the update at NAREIT, I would tell you it continues to be ahead in revenues and behind on expenses. When we said it's performing within our expectations, that's in terms of NOI. Revenues are better, expenses are higher. Majority of those expenses are timing. We've probably spent more earlier on R&M and on some of the office supplies and repair maintenance type supplies than we originally estimated, and we hope to recover some of those throughout the year. Overall, revenues are strong. In terms of same-store pool, it will go in next year, January 2017.
Okay. Thank you.
Thanks, Todd.
Thank you. Our next question comes from the line of Paul Adornato of BMO Capital. Sir, your line is now open.
Thanks. One source of confusion among analysts and investors, I think, is just getting consistency in terms of the number of new stores opening, the supply pipeline. I know that you guys, I believe, have been trying to square and come up with either some sort of cooperative view or some third-party sources. Was wondering if you could provide an update on those efforts.
Paul, it's Spencer. Just a couple of observations. Number one, we do triangulate to the best of our ability using broker data, our own external field observations, the hardware vendors' data, and just what we hear from other sources to come up with an estimate. When we talk about 700 properties being built in the United States at this time, you have to recognize there are 14 states we don't even do business in. Back to my earlier comment, it really doesn't matter what the number is. It just matters what the number of properties are that are being built within your competitive trade ring, whether it's one mile, two mile, three miles.
I don't know how, as an industry at this point, we provide something that all analysts can triangulate on, but I think each of the individual public companies have generally been guiding toward what's coming up out of the ground that is within the trade area. Because if it's not in the trade area, it doesn't matter.
Got it. Thanks for that color. Appreciate it.
Thanks, Paul.
Thank you. Our next question comes from the line of Jonathan Hughes of Raymond James. Sir, your line is now open.
Hey, guys, thanks for taking my question. I know you mentioned earlier that SmartStop was ahead of revenues and behind on expenses. Could you give us an update on maybe where occupancy is today?
I actually don't have that right in front of me. I know it's been trending in line with our estimates.
Okay. Scott, you mentioned occupancy is now expected to be flat for the year. As tenants are getting stickier and the use of storage becomes adopted by more people, do you think occupancy could surpass maybe 95% in the next several years? Is that 95 the max, or are you at max occupancy right now in terms of the same-store pool?
Our philosophy and our understanding is we think that we are approaching max occupancy. The reason being is it takes time for units to turn. They typically sit vacant for a certain number of days before the new renter moves in. They don't necessarily pass each other in the hall as one is moving out and the next one is moving in. That comes from a lot of factors, whether it's demand or whether that's our reservation policy at the time, where we allow someone to reserve a unit for maybe 7 days or 14 days, depending on the occupancy of that unit. That reservation may or may not turn into a rental. At some point, you are theoretically full. We have estimated that to be around 96%. 95, is it possible? Yeah. Right now, we're not estimating we'll hit it this year.
Okay. Thank you for the color. Appreciate it.
Thank you, Jonathan.
Thank you. Our next question comes from the line of Steve Sakwa of Evercore ISI. Sir, your line is now open.
Thanks. Most of my questions have been asked and answered, but just in terms of the acquisition pipeline, I understand you guys are looking at a lot and being more disciplined about what you want to buy, but can you kind of just maybe help frame maybe kind of what's on the market, either actively or maybe quietly, and just try and help us kind of think through, how much pricing, I guess, has changed over the last year or so in terms of cap rates?
There's a good amount of product on the market. I would say that a lot of it is of lesser quality. We think cap rates have compressed a little bit this year, maybe 25 or 50 basis points. Clearly, there's a big premium for portfolios. We saw that in the large portfolio transaction that was previously announced by one of our peers. It's a competitive landscape. The secret of self-storage is out. There's a lot of money chasing it.
Right. I guess, Spencer, if pricing's getting harder or more expensive on each deal, does that mean that kind of return hurdles have to come down in order for you to make these deals pencil? Are you willing to just accept kind of lower IRRs today than you were, say, a year or two ago? Are you just able to squeeze more out of the portfolios and get better growth in order to maintain those high unlevered IRRs?
I think I would answer yes to most of your questions on that, Steve. The fact of the matter is, the market is red hot and for Extra Space, looking at 630 assets that are not wholly owned that are in our system, to us is a meaningful acquisition pipeline that we can go after for years to come. I believe that every market travels in cycles. Although things might be extremely competitive today, that necessarily won't be the case in future years. For us, we're going to continue to use a multi-pronged approach to growing this company. I've talked about several growth levers that we're employing to make sure that we deliver the industry's best result.
Steve, I'd maybe add one other possibility to kind of your realm of possibilities there. That is the deal doesn't actually sell. At some point, pricing will get to that point if it continues to not meet people's IRR hurdles and their return hurdles. Possible things don't transact.
I guess lastly, as was previously mentioned, you've seen us do a few more transactions in a JV structure because we get a premium return through that structure, which helps kind of bridge the gap between market pricing and the return that we're trying to get for our shareholders.
Okay, thanks. That's it from me.
Thanks, Steve.
Thanks.
Thank you. We have a follow-up question from the line of Ki Bin Kim of SunTrust. Sir, your line is now open.
Thank you. Just a couple quick ones here. In regards to the properties where you do have new supply competing with you, I think you said 45 properties within 3-mile radius. When you look at the dynamics of what you can do with pricing in those type of markets where there is more supply coming, how does street rates or promotions or a combination of compare to what you said earlier about achieving about a 7% street rate with relatively flat promotions? When you look at those micro markets, how much does it differ?
It obviously differs by market, by property. If you look at where we compete with brand new properties that are opening, I'll give you a couple of examples. We had one up in Harlem where we had a property opened by one of our peers, a large property that filled up quickly. Our property still grew at almost 10% that year. That's not to say it couldn't have grown at 15, but we still had very solid growth. We've had another property or two where for a year's time we had flat or slightly negative growth, but we haven't seen them fall off the map by any sense here.
Okay. Just a quick question on your balance sheet. You have about 22% floating rate debt. Given the interest rate environment, any thoughts on maybe changing that?
We're pretty happy with where we are. We don't see it going up significantly. If you look at the markets historically, at least recently, the bets on variable rate debt have been right, and we feel like it's at a point that is good for our shareholders as well as prudent.
Okay, thanks again.
Thanks, Ki Bin.
Thank you. We have a follow-up question from the line of George Hoglund of Jefferies. Sir, your line is now open.
You had mentioned earlier that one of the biggest headwinds is the renter fatigue. When you look at that would be for the same-store portfolio. When you look at what's in the non-same-store portfolio, including SmartStop, do you view a large difference in terms of how much renter fatigue is in that non-same-store portfolio? That's sort of part one. Part two is for new properties that come online from the C of O deals, obviously, no renter fatigue in a new property. Do you see sort of more rent growth potential going forward with these newly opened properties?
I would tell you in terms of properties we buy that were not managed as well as C of O properties, there's more runway. Typically, these properties are at lower rates than our properties, so we have the ability to push them for longer. Typically, in a C of O store, we open at a rate that's below market. So we have the ability to push rates longer because it takes them a little bit of time to get them up to street rates or what are normal market rates.
George, it's Spencer. There's one other thing on this renter fatigue. I wouldn't take it too far because more than 50% of our customers walking in the door have never used self-storage ever. They don't even know what they're up against. It's the more mature properties where you've got a lot of really long-term tenants that you might start to feel it.
Okay, thanks for the color.
Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.