Extra Space Storage Inc

NYSE:EXR

Earnings Call Transcript 2018-Q1

[Operator]

Good day, ladies and gentlemen, and welcome to the First Quarter 2018 Extra Space Storage Inc. Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded.

I would now like to turn the call over to Mr. Jeff Norman, Vice President, Investor Relations. Sir, you may begin.

[Jeff Norman, executive]

Thank you, Chelsea. Welcome to Extra Space Storage's First Quarter 2018 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 statement 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, Wednesday, May 2, 2018. The company assumes no obligation to revise or update any forward-looking statements because of the changing market conditions or other circumstances after the date of this conference call.

I would now like to turn the call over to Joe Margolis, Chief Executive Officer.

[Joseph Margolis, executive]

Hello, everyone. Thank you for joining us for our first quarter call and for your interest in Extra Space Storage. 4 months into the year, 2018 is progressing as planned. We held occupancy through the winter months and ended the quarter with over 92%, 10 basis points ahead of 2017.

The steady demand for our need-based product, together with our ability to capture customers, not only allowed us to maintain occupancy but also gave us pricing power. This pricing power drove same-store revenue growth of 5.2% in the quarter and positions us well heading into the summer leasing season.

We continue to see new supply, which has an impact on performance in certain submarkets. However, our digital marketing platform is doing a great job driving qualified traffic, and our proprietary revenue management systems are optimizing price and promotion to convert the traffic to rentals. Our technological advantage over smaller operators, together with our diversified portfolio, have led to steady performance.

In periods of elevated supply and heightened competition, the advantages held by the larger operators become more apparent, and we see that in the market today.

We continue to have success acquiring properties through off-market transactions. In the quarter, we invested $71 million in 6 acquisitions and completed a $40 million development. All but one of these acquisitions were from existing relationships where we did not have to compete on the open market.

Subsequent to quarter-end, we closed a buyout of a joint venture partner's interest in a 14-property portfolio for $204 million. While the cap rate for the portfolio was at market, the sale resulted in Extra Space realizing an embedded promoted interest in the joint venture of $14 million. After crediting the promoted interest to Extra Space, the effective first year cap rate was approximately 6%. We continue to explore opportunities to enhance shareholder returns through mutually beneficial partnerships.

We also continue to see significant growth in our third-party management platform. In the quarter, we added 41 stores and we expect to add a similar amount in the second quarter. Additions to our third-party platform continue to be a mix of newly constructed and existing properties, bringing high-quality stores into our system as well as additional income.

Between our third-party program and our JV stores, we have 672 managed stores, which continues to be the largest in the business.

I would now like to turn the time over to Scott.

[P. Stubbs, executive]

Thank you, Joe, and hello, everyone. Our core FFO for the quarter was $1.09 per share, exceeding the high end of our guidance by $0.01. The beat was primarily due to better-than-expected property performance and lower-than-anticipated interest expense due to the timing of acquisitions.

As Joe mentioned, our same-store revenue growth was 5.2% for the quarter. This was primarily driven by new customer rate growth, which was up 4% to 5% year-over-year. Discounts were down a percentage of revenue in Q1. However, we project discounts to increase in upcoming quarters as we expect to use them more heavily in the summer months.

Same-store expenses were up 6.9%, which is a significant increase from the low expense levels we have seen in the last several quarters. However, it was not a surprise. Due to a very difficult Q1 2017 expense comp of negative 2%, we expected higher expense growth in the first quarter.

The increases can largely be attributed to property taxes, which, while elevated, were on budget; and outsized snow removal and utility expenses. Snow removal and utility overages were driven by weather events in the Northeast and came in approximately $1 million over budget and $1.1 million over last year's numbers.

We've revised our guidance and annual assumptions for 2018. We raised the bottom end of our same-store revenue guidance by 25 basis points to 3.5% to 4.25%. We have done the same for the same-store expense growth, which is also revised at 3.5% to 4.25%, resulting in same-store NOI growth of 3.25% to 4.5%.

We also increased our acquisition guidance to $600 million to reflect the JV buyout we just closed. Of the $600 million, $482 million is closed or under contract. The $118 million that is not closed or under contract is projected to close towards the end of the year and won't have a material impact on our earnings.

Seller pricing expectations are still high and we are committed to being disciplined. While we expect additional opportunities throughout the year, we will only transact the prices that will create value for our shareholders even if that means investing less than our guidance.

Our full year core FFO is estimated to be between $4.57 and $4.66 per share. In 2018, we anticipate $0.06 of dilution from value-add acquisitions and an additional $0.15 of dilution from C of O stores for a total dilution of $0.21. Our investments in our C of O stores and value-add acquisitions continue to improve the quality of our portfolio and generate long-term growth for our shareholders.

With that, now let's turn it over to Jeff to start our Q&A

[Jeff Norman, executive]

Thank you, Scott. [Operator Instructions] And with that, Chelsea, go ahead and start our Q&A session.

[Operator]

[Operator Instructions] And our first question comes from the line of Juan Sanabria of Bank of America Merrill Lynch.

[Juan Sanabria, analyst]

I was just hoping you can comment on the strength of demand. Seems like you had more vacates than move-ins this quarter and last quarter. So just curious if you can give broader comments as to what that is and just your view on demand. And how should we think about that, given the fact that your occupancy went up? I'm not sure if it was just the size of the units.

[Joseph Margolis, executive]

So demand continues to be very steady. We don't see any turndown in demand across any of our channels. Our net rentals were actually up in the first quarter, and we're very positive on that in the winter months.

[Juan Sanabria, analyst]

Was there any impact from the weather, though? Because it looked like move-ins versus move-outs were kind of negative, and this is the second quarter in a row.

[Joseph Margolis, executive]

I think if you look at move-ins in the first quarter versus move-outs in the first quarter, you'll see we were positive and very consistent with our 8-year average.

[Juan Sanabria, analyst]

Okay. And then just on Street rates. I was just hoping you could give us any color on the net effect of Street rates throughout the first quarter and into April, and how you're seeing things trending.

[P. Stubbs, executive]

Yes. During the first quarter, we saw new customers come in at rates that are 4% to 5% above last year, and April continues to be pretty consistent with the first quarter.

[Operator]

Our next question comes from Nick Yulico with UBS.

[Nicholas Yulico, analyst]

I guess, question on the guidance. I mean, even though you did have a modest raise to the guidance, it seems that the first quarter was well ahead of the full year guidance range. So could you just explain what's -- what factors we should be thinking about in the back half of the year that create some slow in growth?

[Joseph Margolis, executive]

So we project, as Scott mentioned in his remarks, that we're going to have -- we're going to use the discounting tool more in the summer and that will provide a little bit of a drag. We're continuing to face development cycle, new supply, and that affects certain of our properties. That being said, we feel we're putting up good numbers and performing well in the face of the new supply. And we have increasing interest rates, which also be an effect.

[P. Stubbs, executive]

Nick, if you look at the big changes in guidance, they're primarily related to interest expense, which obviously increases due to the $200 million acquisition which we financed all with debt. And then, also, we increased interest expense slightly due to a change in the LIBOR curve, which you've seen recently. In addition to that, we had a slight adjustment in our tenant insurance and a couple of other items. But those are the big kind of puts and takes, and then also the benefit of the $200 million acquisition we just did.

[Nicholas Yulico, analyst]

Okay. And then question on supply. What are your thoughts on the supply impact this year and -- versus last year or maybe on a 3-year moving period? How are you thinking about where we are in the supply cycle? And which markets within your portfolio you think are facing the most competition from a new supply standpoint right now?

[Joseph Margolis, executive]

We're certainly right in the heart of the development cycle and more of our stores are being impacted this year than last year. And the markets that are problematic continue to be some of the markets that we've talked about in the past, New York City, Dallas, we see South Florida. And then we're starting to see markets like Tampa or Portland, Phoenix that we're actually doing very well in now, but we feel there is some supply coming in those markets. Again, and I don't feel like I want to repeat myself, but even in the face of this development cycle, we're coming out of the winter months at 92% occupied -- occupancy with positive rent growth. And we have many markets that we're not facing similar supply challenges. We have a broadly diversified portfolio and we have highly, highly developed proprietary systems that maximize revenue in the face of new competition. So we're not ignoring new supply, we understand what it is, our guidance reflects it, but we're able to operate pretty well in the face of these conditions.

[Operator]

Our next question comes from Smedes Rose with Citi.

[Bennett Rose, analyst]

Just to follow up on that. I wanted to ask you. Do you -- you mentioned that seller pricing hasn't really changed, your expectations are still high. So are facilities transacting? Or are people -- are they just waiting leading and thinking that at some point they'll get the price they want? It just seems surprising that pricing wouldn't have come down somewhat given deceleration that leaps across all of the public companies in terms of same store. And I guess along with that, are you seeing any changes in the availability of capital for developers in terms of either from lenders or our shrinking returns, then changing their thoughts about new development?

[Joseph Margolis, executive]

Smedes, I'm surprised as you are that we haven't seen any increases in cap rates. Certainly, deceleration increasing in interest rates, other factors would make you think there should be some price movement. But I think all of that is offset by just a large, large amount of lots and different types of capital seeking exposure to self-storage space. And deals are transacting and we see lots of capital from large private equity funds to more regional people who just put together a small pool of money, and they're buying self-storage. On the development side, there are factors that I would expect to slow down the development factor. Construction costs have increased even before the steel tariffs were announced. Steel was up 15%. Construction costs are up. Labor cost are up. Interest rate costs are up. So when you take all of those factors on the cost side and if you do honest underwriting on the revenue side, development yields are starting to shrink. And it's certainly our hope that, that will slow down some of the development that should be taking place right now.

[Bennett Rose, analyst]

Okay. And then when you mentioned -- you bought out your JV partner's interest, which wasn't included in your initial outlook at the 4Q. I mean, so was that something they came to you with? Or was it something you were working but you weren't sure that it would be completed this year? Or just how did that, I guess, change from last report to this one?

[Joseph Margolis, executive]

We were working on it at the last report, but it was not in any way firmed up. We did not know about it earlier -- much earlier than that. This is a single client account of one of our partners that is in somewhat of a drawdown mode and they're liquidating properties to generate cash, and we were able to take advantage of that.

[Operator]

Our next question comes from George Hoglund with Jefferies.

[George Hoglund, analyst]

Just one question continuing on the capital interest in the space. With all this demand from private equity looking to get in the space, do you think at some point we see them try to go out to one of the public companies to get a larger portfolio? Or why haven't we seen that happen to date?

[Joseph Margolis, executive]

Well, that's hard to comment on other than it's a management-intensive business. And if someone was going to make a play for a large company, they would have to have a way to operate it. And I'm assuming if they're going after a public company that means they're not happy with the current operators, so they have to figure that out. I don't know whether that's -- if that's going to happen or not.

[George Hoglund, analyst]

Okay. And then just on the buying out JVs, do you think there's greater interest from some of your JV partners to liquidate sooner rather than later? Or is there -- are you noticing any change in sort of desire for your partners to remain invested?

[Joseph Margolis, executive]

So we have a variety of partners. Some are with perpetual life open-end funds that may never sell, and others are either closed-end funds or IR-driven or have other incentives, and it's truly a case-by-case basis.

[Operator]

And our next question comes from Jeremy Metz with BMO Capital Markets.

[Robert Metz, analyst]

Scott, acquisition volumes were more than double your initial expectations here. You mentioned earlier funding this with debt. I'm sure it's just a rounding issue, but your share count guidance is down 100,000. The stock today that, call it, 12% to 13% premium to consensus NAV. So can you just talk your decision here to fund activity with debt, thoughts around using your equity for currency? And then is this something we should look for if you're able to continue to source additional deals from here?

[P. Stubbs, executive]

Yes. So our guidance is up from $400 million to $600 million. So we are not quite double. We left the same $50 million in equity in there. We're always looking at the best source of capital. I think that equity is always an option. It's -- for modeling purposes, we used the $50 million and it doesn't really move your ratios much to go from $400 million to $600 million. In terms of your share count, part of that is timing on when those OP units were issued, they pushed towards later in the year. And again, we're always going to try to use the cheapest cost of capital possible. And equity, if we were to ever issue equity, you'd want to do it when your stock is appropriately valued and you'd want to do it when you have somewhere to put that money to work. We don't look to issue equity just to pay down debt. We feel like equity is more expensive than debt.

[Joseph Margolis, executive]

And overall, we're targeting to remain leverage neutral. So while we'll fund this with debt, we're -- because of our NOI growth, we're maintaining a leverage-neutral position.

[Robert Metz, analyst]

Okay. Appreciate that. And then sticking with the acquisitions, you talked about generating a lot of off-market activity here. Can you just kind of give some color on what's driving increased activity maybe relative to some of your initial expectations? I know it's a little hard to forecast acquisitions, but wondering if the activity is a result of sellers today who previously were holding on but maybe just want to completely sell on now given the rising supply are good, but even -- but lower revenue growth expectation at this point.

[Joseph Margolis, executive]

So the -- all of the increase in our expectations is this one transaction, the JV buyout. Other than that, our acquisition volumes are as projected. But we are seeing folks who have built a new self-storage facility. They're somewhere in the lease-up process. And either it's not going as well as the expected or it's not going as well as the bank's expected, or they're nervous about the future and they want to take their chips off the table, we are seeing some of those opportunities. But again, pricing has got to be right for us to transact, Scott.

[P. Stubbs, executive]

And if you look at where our acquisitions are weighted this year, excluding this $200 million transaction, there's a lot of C of O deals that we've been working on for the past several years and those are just completing this year and will close this year.

[Operator]

And our next question comes from Jonathan Hughes with Raymond James.

[Jonathan Hughes, analyst]

So looking at the New York same-store pool, revenues there were up almost 4%, but that was down a little bit from the fourth quarter. And I know that's one of the more supply-impacted markets. But could you just talk about what happened there? Was it just new openings or maybe the properties added this year were responsible for the deceleration? Just trying to understand what happened there because I was expecting that to actually accelerate from the fourth quarter.

[Joseph Margolis, executive]

Yes. I'm not sure it was such a change that we can -- 1 quarter change of that magnitude can -- we can call a trend or point to some big change in the market. We continue to do much better outside of the boroughs. We have about 4% revenue increase outside of the boroughs. And inside the boroughs, we are sub-2%. That being said, we only have 8 stores in the boroughs, so it's a very small sample. But we don't see any significant change in the market.

[Jonathan Hughes, analyst]

Okay. That's helpful. And then just one more. The boost to revenue growth from the new same-store assets was about 30 basis points in the quarter. And I think, Scott, you mentioned last call, it should be more like 50 basis points at the start of the year. Just curious if that glide will be a less drastic decline or if there was something in the first quarter that led to that being a little less than you discussed in February?

[P. Stubbs, executive]

I would tell you, it proceeded pretty similar to what we expected. I think that we expected there to be a boost this year but not as large as last year. I don't recall saying the 50. I think we are expecting it to be closer to where it is today, and then going to 0 by the end of the year. So I would tell you, our same-store -- the benefit from change in pool is pretty similar to what we were expecting.

[Operator]

And our next question comes from Rob Simone with Evercore ISI.

[Robert Simone, analyst]

Most of my questions have been answered. But just really quickly on the expense growth and the added snow removal and utilities in the Northeast. April was kind of a poor month weather-wise as well. I guess, I'm just wondering how much -- or if any of the guidance raise on expense growth was some carryover of the bad weather in April or whether that was all Q1-related. Just trying to figure out if there's any cushion, so to speak, built in there at all.

[P. Stubbs, executive]

No. Our expenses did not change materially in April. Anything that's happened is what we built in.

[Operator]

Our next question is from Todd Stender with Wells Fargo.

[Todd Stender, analyst]

Can we hear more on the portfolio that you acquired subsequent to Q1, where it's located, occupancy and why does it make sense to acquire that? I know the partner was stepping aside, but maybe just thinking about your growth expectations.

[Joseph Margolis, executive]

Sure. So 14 properties in 12 states, very highly diversified across the country. These are properties that we acquired in the Storage USA transaction, so they're older properties. We know them a very well. They're stabilized. As you know, as properties get older, they get a larger proportion of long-term customers, so they just get more and more stable. And we -- acquiring from a JV partner from a management is a very safe transaction for us. We know the assets very well. We know the cash flows. We know if the roof leaks, et cetera, et cetera. We have no transition costs, no branding costs, no broker costs. We acquired them at a -- we didn't steal the properties in any way, we acquired them in the market cap rate in the mid-5s. But one of the big benefits here is this venture had a very traditional promote structure where, upon liquidation, if the venture received a certain return threshold, any points above that, we got a disproportionate share of those of funds, we got to promote. And now it's $14 million in this case. And that was nowhere on our books and we're unable to access that without this type of transaction. So even without that, this was a good market safe deal for us. But with that, it provided us with some additional benefit.

[Todd Stender, analyst]

Do you get that promote? Is that a -- how is that booked? Is that going to show up in Q2? How do you reconcile that?

[Joseph Margolis, executive]

So in effect, it reduces the purchase price. So if the 100% purchase price is $225 million, we don't have to pay for our 5%, nor do we have to pay for the $14 million. So it just reduces cash out of our pockets to buy $225 million worth of real estate.

[Todd Stender, analyst]

Got it. Are you assuming any mortgage debt? And is the rest going on your line?

[Joseph Margolis, executive]

So there was about $89 million worth of debt that we assumed and we're currently considering whether to keep that or extend it or do something with that debt. But as of today, we assume that debt and the rest went on our line.

[Operator]

And our next question comes from Vikram Malhotra with Morgan Stanley.

[Vikram Malhotra, analyst]

I just want to go back to the discounting that you mentioned. Can you talk about what is causing you to try to test the discounting increase, the discounting across your markets? And can you clarify, is this discount higher relative to last year in the second and third quarter? Or is it more of a sequential trend?

[P. Stubbs, executive]

Yes. I would tell you it's an assumption where discounts will be higher in the summer months. And the assumption is, in order to keep rate, we are going to discount more. You really have the option of cutting rates, increasing discounts, increasing marketing spend. And kind of based on our plan this summer, the assumption is we will increase discounts.

[Vikram Malhotra, analyst]

And sorry, the increase again is relative to last year or relative to just -- the way you exited the quarter?

[P. Stubbs, executive]

Yes. It's more relative to last year.

[Vikram Malhotra, analyst]

Okay. And then just one more. I think big-picture question, and correct me if I'm wrong. I think on the last call, you had indicated stability in revenue likely to tick up in the back half of the year. I'm wondering if that's still your expectation or any signs that you could see certain markets accelerate?

[P. Stubbs, executive]

Yes. That is -- continues to be our expectation that, primarily due to the summer month-discounting which is going, which may depress those months a little bit, we'll see acceleration in the back half of the year.

[Operator]

And our next question comes from Ki Bin Kim with SunTrust.

[Ki Bin Kim, analyst]

Can you just put a little more color into the discount patterns in terms of like what percentage of customers are receiving it last year versus this year? And when you talk about -- maybe you're using it more in the summer, how does that look like?

[P. Stubbs, executive]

Yes. So last year in the first quarter, about 82% of our customers coming in the door got discounts compared to 59% in the first quarter of '18. So last year, you're discounting at just over 4% of revenue. This year, you're just under 4% of revenue in the first quarter. During the summer months, you have 60% of customers roughly, in the second and third quarter, getting discounts and was -- and then, call it, just under 4%. We're assuming that will be above 4% and above the 60% of new customers coming in the door and getting discounts. And part of it is also a discount mix. It might be last year you were giving half a month free, now it's a full month free.

[Ki Bin Kim, analyst]

And is there something, just generally speaking, that you're doing with pricing systems or the way you advertise or the way you manage your properties today versus maybe a few years ago? Just because to push rate 4% to 5% with less discounts and holding occupancy is a rare thing.

[Joseph Margolis, executive]

I would tell you that we've had the same goal throughout, which is to maximize revenue, and that we are always testing and trying different things to achieve that goal.

[Operator]

Our next question is from Eric Frankel with Green Street Advisors.

[Eric Frankel, analyst]

I'm obviously a little bit new to the company, but I'm trying to reconcile your Page 19 showing how the acquired same-store pool versus the new same-store pool. There's about a 40 basis point impact to NOI. If I take a look at your past sups, it looks like the impact should be greater. Can you just clarify what -- how -- can you just clarify how that calculation works? It seems like the impact should be closer to 100 basis points, but just based on what your 2016 wholly owned acquisitions generally looks like, your revenues and expenses for the -- for prior quarters. But I'm hoping you can explain that a little bit further.

[P. Stubbs, executive]

Yes. I would tell you, it really depends on the number of stores you're adding to the same-store pool each year and then the mix of those stores. So going from '16 to '17, we added the SmartStop acquisition. It was 122 stores that we had purchased that still had a small amount of rate growth in them and maybe a small amount of lease-up, so last year received a bigger benefit. The stores that moved in from '17 to '18, they were more core stores. So they were acquisitions we had made from some of our joint venture partners, where these stores went back to Storage USA. So just it's the mix of the stores that you're moving in and kind of the upside in those stores. And we've always kept the same definition, but we've also wanted to break out if there is a benefit from the -- some of these types of stores. So this year, it's more just a mix of the stores.

[Eric Frankel, analyst]

I'll follow offline, too. One other question, you had referenced earlier in the call how you work on the Certificate of Occupancy years in advance as these developments kind of come through. Have you ever thought about doing some sort of forward equity issuance based on your -- if you think your equity is attractively priced, but you're -- through the C of O deal you have to close maybe 2 or 3 years from now. Have you ever thought about structuring your deal that way?

[P. Stubbs, executive]

Always something we're looking at. Any time we consider equity, you'll always look at the forward and what the pros and cons are with that. So...

[Joseph Margolis, executive]

Some of the C of O deals we agree to issue OP units for. So in effect that is a forward equity issuance.

[Operator]

And our next question is from Wes Golladay with RBC Capital Markets.

[Wes Golladay, analyst]

Want to know on the markets where there's heavy supply, have you experienced increased term from some of your stickier tenants, the ones that have been with you for multiple years? And if not, have you noticed a major variance in your older assets versus your newer assets in markets where there is heavy supply?

[Joseph Margolis, executive]

So we see very, very few customers gone at -- rent a truck, pick up their stuff and go across the street to the new supply. New supply is more of an effect on your incoming rentals than on people picking up and moving. What was the second part of the question?

[Wes Golladay, analyst]

Yes. So okay, under that logic, would some of your older assets actually fare better in a market where there is heavy supply? Because I assume you'd have a larger component of the mix of tenants there would be those multi-year tenants so they could actually potentially fare better than the newer assets?

[Joseph Margolis, executive]

Yes. Really 2 reasons. One is what you point out, is the mix of tenants. But the other is, frequently, our older assets are an older generation. They are a lot of single-story drive-up units. And much of the new supply are multistory interior climate control. And we have a product that they don't have. The older drive-up is very attractive and some of the new supply can't offer that.

[Wes Golladay, analyst]

Okay. And then on the financing front, the move-up in LIBOR has been pretty sharp. Has that changed your view on potentially terming out more of the debt if we were to get a pullback in the financing of market?

[P. Stubbs, executive]

Yes. We're looking to term out debt. We're looking to extend our average loan, the term. We're always looking, obviously, to manage the variable rate debt that we have. So very focused on that today and we are willing to take a little bit of pain today to extend term and make -- take advantage of some of those opportunities.

[Operator]

And our next question is from Todd Thomas with KeyBanc Capital Markets.

[Todd Thomas, analyst]

Just first question. I was curious if you could give us an update on occupancy, maybe through the end of April here and where that stands year-over-year?

[Joseph Margolis, executive]

Occupancy continues to be pretty steady, with perhaps a slight move in the right direction.

[Todd Thomas, analyst]

So seasonally, it's moving higher. Any comment around where that is sort of on a year-over-year basis?

[P. Stubbs, executive]

Very similar to where we ended the quarter.

[Todd Thomas, analyst]

Okay. Got it. And then just following up back to the discounting that you talked about, maybe a little bit of a clarification, I suppose. I think you said that the discounting will be used to maintain rate. Can you just explain that? It sounds like you might be moving asking rents higher to offset the higher discount, so effectively maintaining rates or maybe still increasing rates -- move-in rates. Is that the right read? Or is there something else that you're suggesting?

[P. Stubbs, executive]

I'm not saying that we are looking to increase them significantly more than what we've done in the first quarter, but we feel like we will have to increase discounts going forward in order to maintain that kind of 4% to 5% revenue growth in our new customer rate growth.

[Todd Thomas, analyst]

Okay. And the changes to the discounting policy here over the next several months here, is that expected to be broad-based across the portfolio? Or will it be concentrated in some of the supply-impacted markets mostly?

[P. Stubbs, executive]

It's across the portfolio. But obviously, our highly occupied property might have different discounting policy than one that has less occupancy. So...

[Todd Thomas, analyst]

Sure. And then just lastly, in terms of the comments around new supply, it seems like you're expecting supply. In some of the markets that you mentioned I think Phoenix, Tampa, Portland, you're expecting maybe a little bit of a greater impact today than you have previously. Is that right? And if so, sort of what's changed or given you that indication?

[Joseph Margolis, executive]

That is correct. And as we track -- do our best to track quarter-to-quarter on not only new deliveries but what's in the pipeline in permitting our new construction, we see development moving from markets like Dallas that are saturated to other markets and we then base our projections on what we think is going to happen at those markets. It's hard to be exact because a lot of stuff that is planned doesn't eventually get built. But a good proportion of it does and it impacts our stores.

[Operator]

Our next question comes from Steve Sakwa with Evercore ISI.

[Steve Sakwa, analyst]

I guess Wes had kind of asked the question on the debt side. But I just was hoping, Scott, you could give a little more detail. You've got to think about 2/3 of your debt when you look at the column with the extension expiring between '20 and '22. So I'm just curious how you're thinking about proactively maybe pulling some of that forward to take some of the risk off the table now. Or is that stuff that you just have to kind of wait until the natural expiration? And I guess, how far out on the curve are you willing to go today between 5 and 10 years on debt terms?

[P. Stubbs, executive]

Yes. So we are actively working with lenders on the -- many of the loans coming due in '19, '20 and '21, we're willing to extend those out to 2025, and we're looking to get the spreads down and then we're trying to work through some of the swap issues. Because many of those loans that come due in 2022 for -- 2020, for instance, have swaps on them. And so we are trying to work through swap issues, extending swaps, getting things reswapped, letting things go variable, trying to work through a balance of that. But the goal, obviously, is to try to lock in some of that rate and extend the term today. And like I said, I think that there are times when we're willing to take a little bit of pain today. So part of our increase in our interest rate today is some of that pain. We are actively negotiating on -- of the 2020 loans that are coming due, if you assume that we exercise the contractual extensions and then do a couple of the refinancing that we're working on today, the amount coming due in 2020 is under $1 billion. So actively working on and actively looking to extend the term and lock-in rate.

[Steve Sakwa, analyst]

Okay. And if you had to maybe ballpark sort of the benefit of more likely the pain, what are you sort of looking at in terms of an average increase in rate kind of all-in and between base rate and kind of maybe spreads coming down?

[P. Stubbs, executive]

Spreads, if you take a loan that was done 2 or 3 years ago, your spread would've been 1 60 to 1 80 over. Today, the market rate's more 1 40 in terms of a spread. But rates have gone higher on us. So on average, they are going up but it depends really on when we did the loan.

[Steve Sakwa, analyst]

Okay. That's helpful. And then maybe just back on development, Joe, we continue to see, the FTR data isn't really showing much of a letup, and I realize that the data bounces around kind of month-to-month. But just given the private developers continue to make a lot of money on the CO deals and, to our knowledge, there really hasn't been much pain on the development front with these developers. I guess, it sounds like you continue to expect the supply to remain high, although your comments about pricing going up and the yields coming down would suggest maybe that gets dampened. But that just doesn't seem to be showing up in the data just yet. What are we missing?

[Joseph Margolis, executive]

I'm not sure you're missing anything other than it's important to slice the gross data by market. So the fact that the same amount of stores may get delivered in one year or the next year, if they're delivered in different markets, it will have less of an impact, right? If everything keeps getting built in Dallas and Miami, it's going to be a disaster. But it's not the case. People are starting to look elsewhere and build elsewhere. So there's still a lot of development, but it's -- I think it's getting spread more rationally, if you will, across markets. Don't mean to suggest everything is rational, every development that's going in makes sense, but there is some market forces pushing development to where it should be.

[Steve Sakwa, analyst]

Okay. And can you think of many examples in the markets that you compete in where developers have actually pulled back or not gone forward with projects because costs sort of became prohibitively expensive or the yield's just in pencil? Or is that just not really happening yet?

[Joseph Margolis, executive]

So it's interesting. If you talk to the folks who have been in the business for some period of time who are a little more experienced, they absolutely are canceling projects and pulling back. And the folks you see who are more excited about going forward are maybe more of the newcomers to the markets, to the business.

[Operator]

And our next question is from Todd Stender with Wells Fargo.

[Todd Stender, analyst]

Just one follow-up. I'm not sure if I missed this. The third-party managed properties, they ramped pretty good. Upwards of about 10% growth, it looks like. Is this a reflection of you've got newly built properties out there where the builder requires it from the lender to have it managed or they just literally need a platform to manage it? Maybe any color there on how you ramped it up so quickly.

[Joseph Margolis, executive]

I think that is one factor, absolutely. A second factor I would tell you is that the performance of the large operators just continues to outpace on a larger and larger basis the smaller operators. And as the market gets tough, even the existing operators realize they need a professional platform. So about 40% of the stores that we're bringing on are existing stores, are not new developments. So I think you're right, and then I think it's also second factor.

[Todd Stender, analyst]

And just a quick follow-up on that. For the existing stores, how often are you in the competitive situation to manage that property?

[Joseph Margolis, executive]

So I would tell you that for folks who we already manage for, almost never. Although we do have some folks we manage for that's split between us and [ Q ] . For new people, they almost always will look at more than one option. And we're not -- we are the high-cost option, right? We're not the cheapest out there. We're the most expensive out there. And as our numbers show, we've been able to compete very, very well based on not how much we charge but how much money we're going to put into the owners' pockets.

[Operator]

And I'm showing no further questions at this time. I would now like to turn the call back to Mr. Joe Margolis, Chief Executive Officer, for any closing remarks.

[Joseph Margolis, executive]

Thank you all for joining us today. 2018 is shaping up as expected, and we anticipate another strong year for Extra Space. We continue to experience solid property level NOI growth and consistent external growth through acquisitions and third-party management. Our investments in people, technology and systems have strengthened our operational platform, and we have had excellent execution throughout the organization, resulting in continued peer outperformance.

I want to thank you all for your interest in Extra Space and participating, and I hope everyone has a good day.

[Operator]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may now disconnect. Everyone, have a great day.