Extra Space Storage inc (EXR) Q2 2021 Earnings Call Transcript

Table of Contents Contents:Prepared Remarks:Questions and Answers:Call participants: Image source: The Motley Fool. Extra Space

Image source: The Motley Fool.

Extra Space Storage inc (NYSE:EXR)
Q2 2021 Earnings Call
Jul 28, 2021, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for standing by, and welcome to the Q2 2021 Extra Space Storage Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to your host, Senior Vice President, Capital Markets, Jeff Norman. Please go ahead.

Jeff NormanVice President of Investor Relations and Corporate Communications

Thank you, Latif. Welcome to Extra Space Storage’s Second Quarter 2021 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, July 28, 2021. 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 Joe Margolis, Chief Executive Officer.

Joseph D. MargolisChief Executive Officer

Thanks, Jeff, and thanks, everyone, for joining the call. Before I turn to the results, I want to take a moment and congratulate the entire Extra Space team. One of our goals for this year was to get to 2021 stores in the year 2021. And we’ve achieved that, which is a great thing. When I first started with Extra Space, we had 12 stores and it’s incredible to see the exceptional growth of this company, the value we’ve created for our shareholders. So I want to thank all the folks at Extra Space who contributed to our achieving that goal. I’m also happy to announce that we recently published our 2020 sustainability report with disclosures and information related to the company’s environmental, social and governance initiatives. I invite our listeners to review the report on the Sustainability page of our Investor Relations website.

Heading into this quarter — I’m sorry, heading into the second quarter, our management team had high expectations due to our record high occupancy levels, significant pricing power and a relatively easy 2020 comparable, and actual performance far exceeded these elevated expectations. Same-store occupancy set another new high watermark at the end of June at 97%, which is incredible, as you consider the diversification of our national portfolio. The elevated occupancy led to exceptional pricing power with achieved rates to new customers in the quarter over 60% higher than 2020 levels. While this is inflated by an artificially low prior year comp, achieve rates were over 30% greater than 2019 levels and accelerated through the quarter. In addition to the benefit from new customer rates, we have continued to bring existing customers closer to current street rates as more of the state of emergency rate restrictions are lifted throughout the country. Other income is no longer a drag on revenue due to late fees improving year-over-year and actually contributed 20 basis points to revenue growth in the quarter. And finally, higher discounts, primarily due to higher rates were offset by lower bad debt.

These drivers produced same-store revenue growth of 13.6%, a 900 basis point acceleration from Q1, and same-store NOI growth of 20.2%, an acceleration of over 1,300 basis points. In addition, our external growth initiatives produced steady returns outside of the same-store pool, resulting in FFO growth of 33.3%. Turning to external growth. The acquisition market continues to be, in our view, expensive. Given the pricing we are seeing in the market, we have listed an additional 17 stores for outright disposition, which we expect to close during the back half of 2021. We continue to be actively engaged in acquisitions, but we remain disciplined. Year-to-date, we have been able to close or put under contract acquisitions totaling $400 million of Extra Space investment. These are primarily lease-up properties and several of the properties came from our Bridge Loan Program. We have increased our 2021 acquisition guidance to $500 million in Extra Space investments. Looking forward, many of our acquisitions will be completed in joint ventures, and we have plenty of capital to invest if we find additional opportunities that create long-term value for our shareholders. We were active on the third-party management front, adding 39 stores in the quarter and a total of 100 stores through the first six months.

Our growth was partially offset by dispositions where owners sold their properties. In the quarter, we purchased 11 of these stores in the REIT or in one of our joint ventures. Our first half outperformance coupled with steady external growth and the improved outlook for the second half of 2021 allowed us to increase our annual FFO guidance by $0.50 or 8.3% at the midpoint. While we still assume a seasonal occupancy moderation of approximately 300 basis points from this summer’s peak to the winter trough, the moderation will begin from a higher starting point than we previously expected. As a result, we assume minimal impact on revenue growth from the negative occupancy delta in the back half of the year. Our guidance assumes moderating but still strong rate growth for the duration of 2021, which should result in another great year for Extra Space Storage.

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

Scott StubbsExecutive Vice President and Chief Financial Officer

Thanks, Joe, and hello, everyone. As Joe mentioned, we had an excellent quarter with accelerating same-store revenue growth driven by all-time high occupancy and strong rental rate growth to new and existing customers. Core FFO for the quarter was $1.64 per share, a year-over-year increase of 33.3%. Property performance was the primary driver of the beat with additional contribution coming from growth in tenant insurance income and management fees. Despite property tax increases of 6%, we delivered a reduction in same-store expenses in the quarter. These increases were offset primarily by 13% savings in payroll and 31% savings in marketing.

Our guidance assumes payroll savings will continue throughout the year, however, at lower levels due to wage pressure across the U.S. Marketing spend will depend on our use of this lever to drive top line revenue, but it should also remain down for the year. In May, we completed our inaugural investment-grade public bond offering, issuing $450 million in 10-year bonds at 2.55%. Access to the investment-grade bond market provides another deep capital source at low rates and will allow us to further extend our average maturities. Our year-to-date dispositions, equity issuances and NOI have resulted in a reduction in our leverage. Our quarter end net debt-to-EBITDA was 4.8 times, giving us significant dry powder for investment opportunities since we generally target a range of 5.5 to 6 times on this metric. Last night, we revised our 2021 guidance and annual assumptions.

We raised our same-store revenue range to 10% to 11%. Same-store expense growth was reduced to 0% to 1%, resulting in same-store NOI growth of 13.5% to 15.5%, a 750 basis point increase at the midpoint. These improvements in our same-store expectations are due to better-than-expected achieved rates, higher occupancy and lower payroll and marketing expense. We raised our full year core FFO range to be $6.45 to $6.60 per share, a $0.50 or 8.3% increase at the midpoint. Due to stronger lease-up performance, we dropped our anticipated dilution from value-add acquisitions and C of O stores from $0.14 to $0.12. We’re excited by our strong performance year-to-date and the success of our customer acquisition, revenue management, operational and growth strategies across our highly diversified portfolio.

With that, let’s turn it over to Latif to start our Q&A.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Jeff Spector of Bank of America.

Jeff SpectorBank of America — Analyst

Good afternoon and congratulations on the quarter. Joe, my first question is on the point you discussed on seasonal occupancy and the moderation. You’re still building into guidance 300 basis points. Are there any signposts right now pointing to that? Or to be fair, would you say that there’s still some conservatism here?

Joseph D. MargolisChief Executive Officer

Thanks, Jeff. Thanks for the question and for your kind words. So far, we don’t see any signs of it. And we are actually over 97% occupied in July. So we’re still waiting for that moderation to begin, but we do believe that slowly over time, customer behavior will revert to normal.

Jeff SpectorBank of America — Analyst

Okay. I guess let’s flip the question then on the other side in customer acquisition. I mean where are the surprises coming from because we’ve been talking about the moderation. And of course, this past year has been much stronger than expected. I guess let’s talk about customer acquisitions. Is it particular regions? Where are they coming from? Any changes? What are the nice surprises you’ve seen just even in, let’s say, the last quarter or last month?

Joseph D. MargolisChief Executive Officer

Yes. It’s really on the vacate side, I would say. Our Q2 vacates were 10% below 2019 vacates, right? They used — 2020 as a comp doesn’t really help. So we still see people staying in the units and gives us fewer units to rent up and more pricing power, and it’s all good.

Jeff SpectorBank of America — Analyst

Great. Thank you.

Joseph D. MargolisChief Executive Officer

Thanks, Jeff.

Operator

Our next question comes from Juan Sanabria of BMO Capital.

Juan SanabriaBMO Capital Markets — Analyst

Hi. Good morning. Just hoping we could touch on rate growth. How are you guys thinking about that growth going forward? The year-over-year comps have been clearly impacted by COVID discounting, but your in-place rents are at record levels, near $18 a square foot. If we look back to 2015, ’16, you had kind of two years of rate growth of about 6.5%. Do you think we could see something similar in terms of the quantum and duration of the year-over-year growth in in-place rates?

Scott StubbsExecutive Vice President and Chief Financial Officer

Yes. Juan, I can maybe walk you through some of our assumptions, and I’m not sure I can tell you exactly what’s going to happen. I think that’s the big question here. We’ve seen very good rate growth. If you look at our rates year-over-year, we mentioned that we’re 60% ahead of where we were last year. Last year was an odd comp. If you look at it compared to 2019, you’re 30% ahead. So we continue to push our street rates. And the expectation is that we will continue to push them through the year. We do come up against a more difficult comp at the end of this year as we started pushing rates at the end of last year.

So that is one thing that we’re looking at as we move into the fall. A couple of other maybe data points, discounts are up slightly in the quarter, mainly due to rates being higher. Our discounting strategy hasn’t changed significantly. We’ll continue to use them as a tool, but we’ll continue to monitor those also. Our existing customer rate increases are running above where they’ve historically been, and part of that is an odd comp again from last year, where last year you had many state of emergencies where we paused rate increases. And so from a year-over-year perspective, those existing customer rate increases are contributing more than they were last year.

Juan SanabriaBMO Capital Markets — Analyst

And if you guys just look at the net street rates for new customers, have you seen any sequential deceleration in the pace of that growth through July?

Scott StubbsExecutive Vice President and Chief Financial Officer

No significant change in July from what we’ve seen in June.

Juan SanabriaBMO Capital Markets — Analyst

Perfect. Thank you very much.

Scott StubbsExecutive Vice President and Chief Financial Officer

Thanks, Juan.

Operator

Our next question comes from Todd Thomas of KeyBanc Capital Markets.

Todd ThomasKeyBanc Capital Markets — Analyst

Hi. Thanks. In terms of the revised guidance, and Joe, I appreciate the comments around revenue growth in the back half of the year. But I’m just curious, and maybe Scott can chime in here, but what are you anticipating for same-store revenue and same-store NOI growth as you exit the year? If you can maybe provide some detail around the trajectory throughout the balance of the year based on what’s implied by the revised guidance, that would be helpful.

Scott StubbsExecutive Vice President and Chief Financial Officer

Yes. It’s — without providing exact kind of monthly sequential here, I’ll just give you a few data points. We are seeing rate contributing more in terms of the overall percentage as the occupancy delta wears off. By the end of the year, occupancy won’t be benefiting us, and it’s all coming from rate. But we do not expect it to accelerate significantly through the rest of the year, but also contribute through the remainder of the year as we come up against these tougher comps.

Todd ThomasKeyBanc Capital Markets — Analyst

Okay. And what’s the spread right now between rates for customers moving out and the achieved rates on customers moving in?

Scott StubbsExecutive Vice President and Chief Financial Officer

Yes, the disclosure we’ve given maybe a little bit different than that. What we’ve typically disclosed is our in-place rents compared to our new move-ins. And that right now is high teens, which I would tell you right now is exceptional. And typically in the summer months, it’s flat to slightly positive, meaning customers moving in pay slightly more than our in-place rents. And this year, it’s high teens, which is as good as we’ve seen.

Todd ThomasKeyBanc Capital Markets — Analyst

Okay. And just last question for Joe. Your comments on investments. I think you mentioned — you characterized the market as expensive and said that you would look to do more investments through joint ventures. And the joint venture platform used to be a bit bigger, and you’ve been acquiring assets from within the JV platform. With all the capital looking to invest in storage, would you look to do something of size and maybe generate premium returns and backfill the pipeline a bit at the same time?

Joseph D. MargolisChief Executive Officer

So we are kind of governor and what we’re willing to do isn’t how big or small it is, it’s what we view the risk-adjusted returns to be. So we’ll do as big a deal, and we have capital to do as big a deal as necessary or is available, provided the risk-adjusted returns are good or we’ll buy one-off stores. And historically, we’ve done both. And we’re not focused on what’s too big or what’s too small. We’re just fully focused on what we believe the risk-adjusted returns to our shareholders are.

Todd ThomasKeyBanc Capital Markets — Analyst

Okay. Should we expect investments going forward to be primarily weighted toward joint ventures versus on-balance sheet investments?

Joseph D. MargolisChief Executive Officer

I think that’s a fair assumption given where pricing is today. We can significantly improve the price — the returns to our shareholders by investing in the joint venture structure, which makes deals that we would look at as dilutive on a wholly owned basis being accretive to us in a joint venture structure.

Todd ThomasKeyBanc Capital Markets — Analyst

Alright. Thank you.

Joseph D. MargolisChief Executive Officer

Sure.

Operator

Our next question comes from Smedes Rose of Citi.

Smedes RoseCitigroup Inc. — Analyst

Hi. Thanks. I was just wondering you mentioned existing customers are coming closer to kind of overall market levels, assuming so what sort of percent, I guess, of the portfolio maybe — will still be subject to more rent increases, I guess, maybe as restrictions come off? Or is that pretty much behind you now?

Scott StubbsExecutive Vice President and Chief Financial Officer

So we only have a few markets that have restrictions in place. So they’re very limited to a few specific California markets that have restrictions that go back to buyers from several years ago. You have a few others across the U.S. that are between 10% and 20%. So the majority of the portfolio is open to rate increases. There are a few that still have some limit.

Smedes RoseCitigroup Inc. — Analyst

Okay. Thanks. And then, could you talk just a little bit more about what you’re seeing on the labor side? You mentioned some of the savings — sort of updated what you’re seeing there. But I mean are you having to pay people more? Are you having trouble staffing? Or how are you — just a little more color around how that’s working out.

Joseph D. MargolisChief Executive Officer

Yes, it’s a significant issue that we’re working with. We have fewer applicants for open spots. It takes longer to fill and it’s more expensive. So we’re working real hard to try to be appropriately staffed with quality people. We do see that as supplemental unemployment insurance burns off in certain states, the problem gets better. So — I’m sorry, the problem ameliorates. So we’re hoping that, that pattern continues, but we absolutely are aware that there’s wage pressure, we’re feeling it, and it’s going to be an issue we’re going to have to deal with.

Smedes RoseCitigroup Inc. — Analyst

Okay. Okay. And then just last question, I was just interested to see that you did not reup your ATM in the second quarter, and you mentioned that you would do it in the third quarter. Was there a reason for not doing it during the second quarter?

Scott StubbsExecutive Vice President and Chief Financial Officer

Yes, we were focused on getting our inaugural bond offering done. We then turned to recasting our credit facility. Both projects were done during the quarter. We feel like we had a great quarter of getting those done, and then we’ll refile the ATM as we finish the quarter and file the Q.

Smedes RoseCitigroup Inc. — Analyst

Okay. Thank you.

Scott StubbsExecutive Vice President and Chief Financial Officer

Thanks, Smedes.

Operator

Our next question comes from Michael Goldsmith of UBS.

Michael GoldsmithUBS Investment Bank — Analyst

Good afternoon. Thanks for taking my questions. How are you thinking about managing the interplay between occupancy and rate? I understand the goal is to maximize revenue. But like how are your models thinking about pushing rate maybe at the expense of occupancy in this environment?

Joseph D. MargolisChief Executive Officer

Yes. So it’s a great question, and you’re right to focus on the different levers that lead to maximizing revenue. But I would suggest there’s many others. It’s not just occupancy and rate, it’s marketing spend, it’s discounting, it’s days you allow customers to reserve a unit. There’s many other tools we can use to maximize revenue. And the data scientists and the algorithms take all of these factors into play in setting daily pricing and occupancy targets to try to maximize revenue.

Michael GoldsmithUBS Investment Bank — Analyst

That’s helpful. And what are you seeing on the supply front. Given the strength of trends and they’ve remained strong, does supply pressure inevitably come back? And if so, how far away are we from that?

Joseph D. MargolisChief Executive Officer

Really good question. So based on what we see on the ground that affects our same-store pool, so not national statistics, things we care about. We continue to believe that there is going to be some moderation of deliveries in 2021 from 2020, just like there was from 2019 to 2020. But that being said, I think we’re going to see more development in the future. Just this week, I talked to two developers who had projects that did not hit underwriting, they were making no money and they’re selling them and they’re getting bailed out by current pricing.

And I asked both of them what they’re going to do with the proceeds, and they said, we’re going to go stick shovels in the ground. So between great fundamentals, low interest rates, lots of capital floating into the space, albeit I get that costs are higher. I think we’re going to continue to see development, and it’s going to be something we’re going to have to deal with just like we’ve been dealing with for the past four or five years, no difference. And that being said, I’d point out that one of the advantages of having a broadly diversified portfolio like Extra Space is we have exposures to many, many different markets, some of which are heading into a development cycle, some of which are coming out of a development cycle, some of which have never been affected by development. And all those markets are in some different stage. And because of that diversification, our returns are smoothed out.

Michael GoldsmithUBS Investment Bank — Analyst

Very helpful. And just if I can squeeze one last in. On the acquisition front, has there been any change in market conditions from the first to the second quarter? And are you seeing any new bidders?

Joseph D. MargolisChief Executive Officer

I’m not sure there’s new bidders from the first to the second quarter. I mean there’s certainly a lot of new entrants in the market. It’s hard for me on the top of my head to think about one that appeared in the second quarter. I don’t see any material change. I think there’s a lot of capital, interest rates are low, and self-storage has proven itself to be a great investment.

Michael GoldsmithUBS Investment Bank — Analyst

Thank you very much. Good luck on the second half.

Joseph D. MargolisChief Executive Officer

Thank you so much.

Operator

Our next question comes from Samir Khanal of Evercore.

Samir KhanalEvercore — Analyst

Thank you for taking my questions. I guess just sticking on supply, I mean, are there any — just to elaborate a little bit more on maybe the markets that are a bit — any indication or initial kind of concerns that you’re seeing in any markets to call out?

Joseph D. MargolisChief Executive Officer

I think our list of markets is pretty similar to the list of markets we’ve had in the past. The boroughs of New York, we continue to be concerned about. And we continue because of that new development have results there that are below our portfolio average. Northern New Jersey, Atlanta, Vegas maybe a new market on the list we’re starting to watch. Philadelphia also maybe a new market. Those are, I would say, the markets that where we have significant exposure that we’re focused on right now.

Samir KhanalEvercore — Analyst

And I guess my second question is really around — on the disposition side. I mean could you see yourself bring more assets to market considering how strong pricing has been here?

Joseph D. MargolisChief Executive Officer

So we closed the disposition of 16 assets into a joint venture. And we expect to close the second half of that transaction shortly to reduce our interest in the venture further. We have another 17 assets on the market now for outright sale. We have a couple ordinance that we’re working on to get in a position to sell, but nothing major. And we’re constantly looking at the portfolio and trying to decide what moves would be optimal to rebalance to have the right amount of exposure in different markets. So we’ll always consider it, but that’s what we have on the plate now.

Samir KhanalEvercore — Analyst

Got it. Thank you so much.

Joseph D. MargolisChief Executive Officer

Sure.

Operator

Our next question comes from Caitlin Burrows of Goldman Sachs.

Caitlin BurrowsGoldman Sachs — Analyst

Hi, everyone. Maybe just a question on the Bridge Loan Program. The guidance now assumes that you retain $100 million of Bridge loans this year, but it seems like you’re running below that pace considering what you’ve closed and sold so far this year. So wondering if you can go through the outlook there and what visibility you have to activity in the second half?

Joseph D. MargolisChief Executive Officer

Yes. That’s a great question. So yes, we are behind initial projections in terms of timing. We are confident we’re going to achieve our guidance. It is going to be more back-end loaded. We currently have $200 million worth of loans with signed term sheets and deposits to close in the back half of this year and the beginning of next year. So nothing is guaranteed, but I’m pretty comfortable we will get to our guidance.

Caitlin BurrowsGoldman Sachs — Analyst

Got it. Okay. And then just in terms of the customers, I know you mentioned that you’re finding that there’s lower vacates than you’ve had in the past. But just wondering if you could talk a little bit about the new interest that you’re seeing for space that’s helping that occupancy too. Do you have any insight into what’s driving customer storage needs this year and how that compares to the past?

Joseph D. MargolisChief Executive Officer

So this is more of a longer-term answer, not just this year. But we saw during the pandemic the reasons people gave us for storage. Traditionally, the number one reason has been they’re somewhere in the moving process. And then that declined and what increased during the pandemic was lack of space, and that became the number one reason for a while. Those lines have since crossed again.

But we interpret lack of space as I’m at home and I need a bedroom to — for in-home school or in-home office or a workout room or I’m going to find a cleaner garage or whatever. And those customers tend to stay longer than customers who give the reason of staying is moving. So I would point to that as why we’re seeing currently declining vacates. And I don’t think all of those customers eventually take their stuff out of storage and convert the home office back to a bedroom or whatever. I think some of — not all of them, but I think some portion of them will be longer-term customers.

Caitlin BurrowsGoldman Sachs — Analyst

Okay. Thank you.

Joseph D. MargolisChief Executive Officer

Sure.

Operator

Our next question comes from Spenser Allaway of Green Street.

Spenser AllawayGreen Street — Analyst

Thank you. Just going back to the transaction market once more. Have you guys observed any shift in pricing spreads just in terms of quality or any notable outliers in terms of geography?

Joseph D. MargolisChief Executive Officer

So we’re not very, very active in tertiary markets. So it’s hard for me to comment about that. I would tell you that for good stores in primary and secondary markets, there’s very, very little spread in pricing.

Spenser AllawayGreen Street — Analyst

Okay. And then just in terms of your inaugural public bond offering, what role should we anticipate the unsecured market playing for you guys in terms of its source of funds moving forward?

Scott StubbsExecutive Vice President and Chief Financial Officer

So I think that you’ll see us be a repeat issuer going forward. There’s two or three things driving that. I mean, obviously, you’re always looking at the rate, and you’re trying to get the lowest rate possible. I think that we’re looking to extend the tenure of our debt. And then we want to have as many capital sources as possible. So we are going to access the capital source that we feel like is the most advantageous to us at this time.

Spenser AllawayGreen Street — Analyst

Great. Thank you.

Scott StubbsExecutive Vice President and Chief Financial Officer

Thanks, Spenser.

Operator

Our next question comes from Mike Mueller of JPMorgan.

Mike MuellerJPMorgan — Analyst

You talked about buying lease-up assets. So I was curious for the $500 million that’s baked into acquisition guidance. Can you give us a sense as to what an average going-in cap rate or average occupancy would be?

Joseph D. MargolisChief Executive Officer

So I’ll talk about our recent deals because I think to talk about deals that we signed up last year that closed this year is probably not indicative of current pricing. So our — for the wholly owned lease-up deals, we have recently approved, our first year yield is 3.1%, low 3s with an average 17 months to stabilization at an average stabilized cap of 6%. So we’re happy to accept or willing to accept that initial dilution because we have confidence in our ability to underwrite lease-up and get to those accretive returns. For the deals we’ve done in ventures, the first year yield to Extra Space, not at the deal level, is 7.2%, 13 months average to stabilization and a stabilized yield of almost 11%. So you can see how the venture structure significantly helps our returns.

Mike MuellerJPMorgan — Analyst

Got it. Got it. And is that — what’s the typical occupancy on the wholly owned where you’re getting that 3% initial versus the 7% for the JV? Is it comparable — it’s not a comparable — going-in occupancy, would it be?

Joseph D. MargolisChief Executive Officer

So the occupancies were higher than you would imagine. A lot of them were in the 60s or 80s. But that’s physical occupancy, and we look at stabilization when you get to both physical occupancy and rate stabilization, right? We have one that’s — or a couple there in the 90s physical occupancies, but have significant rate growth before they get to economic stabilization. Does that make sense, did I explain that correctly?

Mike MuellerJPMorgan — Analyst

I think so, I think so. That was it. Thank you.

Operator

Our next question comes from Ronald Kamdem of Morgan Stanley.

Ronald KamdemMorgan Stanley — Analyst

Hey. Thanks for taking my questions. Just going back to the ECRI questions that was asked earlier. Maybe thinking about the entire portfolio, number one, just what percentage does still have some sort of restrictions on it? Is it sort of 5%? Is it 10%? And the second question is, are you able to sort of charge even higher ECRI than you have historically given the rate environment?

Scott StubbsExecutive Vice President and Chief Financial Officer

I don’t have the exact percent in front of me, but it’s a small percent, a very low percent. So even in California, it’s not a majority.

Ronald KamdemMorgan Stanley — Analyst

Got it. And then on the ability to push the rate increases, are you seeing sort of an ability to do it at a higher and faster level than historical, given sort of the record rate environment?

Scott StubbsExecutive Vice President and Chief Financial Officer

That is what we are currently doing. We’re pushing things more toward street rate today, and part of that has to do with the fact that sometimes you’ve had rate caps in place or state of emergencies that have been in place that have hindered our ability to raise rates for the past 12 to 18 months depending on the location. And so we have brought them up more significantly as well as the fact that many of these customers moved in very steep discounts that were unprecedented also.

Ronald KamdemMorgan Stanley — Analyst

Got it. Makes sense. And then my last question was just on the preferred investments. Is there anything that changed? Or is there any call risk with sort of the pricing environment that you’re seeing today on those preferreds? Or are they sort of [Indecipherable] maturity? Thank you.

Joseph D. MargolisChief Executive Officer

So one of the things we’ve changed in our guidance this year is there is a $100 million piece of the preferred to JCAP that opens in the end of October, I believe. And our initial guidance had assumed that was outstanding for the entire year. And given how well the properties are doing, the company is doing, we have changed our assumption that, that gets paid off prior to year-end, reducing our dividend income from that. So I think it’s a safe assumption that, that company will want to retire 12% money as soon as it can.

Ronald KamdemMorgan Stanley — Analyst

Makes sense. Thank you.

Joseph D. MargolisChief Executive Officer

Sure.

Operator

[Operator Instructions] We have a follow-up question from Smedes Rose of Citi.

Smedes RoseCitigroup Inc. — Analyst

Hi. Thanks. Just two more quick ones. The first one, I wanted to ask you, it looked like the third-party managed platform, the number of assets under management declined sequentially on a net basis. And I was just wondering, is that just — you just see that as a normal ebb and flow of business? Or is there anything in particular that went on during the quarter? And then the second question was, could you just talk about length of stay? I think last — on your last call, you mentioned that length of stay had shortened a little bit. And I was just wondering, is it returning back to maybe what you’ve seen historically?

Joseph D. MargolisChief Executive Officer

So Smedes, I think you’re right to observe that we have a lot of churn in our management platform. A lot of people are taking advantage of pricing in the market and selling. But even given that churn, we continue to grow that platform. We ended the year at 724 properties. We ended the first quarter at 763. We ended the second quarter at 768. And that includes 19 properties that left the platform that we bought. So we continue to grow that. We have a very, very healthy pipeline. We project to add net 100 to 130 properties this year. It’s not guaranteed. We don’t know what else is going to sell. But we continue to grow that quarter after quarter and expect to continue to do that.

Scott StubbsExecutive Vice President and Chief Financial Officer

Smedes, I think that also might be a little confusing when you look at the buckets. We’re moving sometimes between buckets. And so when you take the total of JV and third party, it actually did move slightly as we had some JV partners sell some of the assets in the quarter. But the third-party management business, just the third-party management actually saw a net increase. And then the second question, Smedes, on the length of stay. Our length of stay is now back up. We saw a tick down slightly and then it’s back up today.

Smedes RoseCitigroup Inc. — Analyst

Thank you.

Scott StubbsExecutive Vice President and Chief Financial Officer

Thanks, Smedes.

Operator

Our next question is a follow-up from Juan Sanabria of BMO Capital.

Juan SanabriaBMO Capital Markets — Analyst

Just a follow-up on the balance sheet, which you noted is in a very strong position, 4.8 times at the end of June. How should we expect that to trend? And where do you see capital going? And as a kind of a side question, how much in proceeds should we expect from the 17 assets that are now being marketed for disposition?

Scott StubbsExecutive Vice President and Chief Financial Officer

So the 17 assets that are being marketed for disposition are over $200 million. In terms of where we expect to spend our next dollar or where we expect to borrow, I think it will depend on the opportunities to invest. I think that we’ll look at the cheapest cost of capital, whether that’s debt. I think that we typically want to operate in that 5.5 to 6 times. Today, we’re sub-five. So we do have a lot of capacity there. And I think depending on the size of the deal, you would also consider equity at times. But right now, we do have a leverage capacity.

Juan SanabriaBMO Capital Markets — Analyst

Okay. But the focus for incremental spend sounds like it’s on acquisitions via the joint ventures, there’s not necessarily new investments that could be used as you think about kind of taking the balance sheet to where you want to from a target leverage perspective?

Joseph D. MargolisChief Executive Officer

So the — with the exception of the second half of the joint venture sale, that recapitalization, if you will, that I mentioned earlier, we believe future joint venture acquisitions will not be out of our portfolio, they’ll be from the market. So it won’t produce additional investable dollars for us. We’ll invest a portion of the acquisition price.

Juan SanabriaBMO Capital Markets — Analyst

Got it. Thank you.

Scott StubbsExecutive Vice President and Chief Financial Officer

Thanks, Juan.

Operator

Our next question comes from Kevin Stein of Stifel.

Kevin SteinStifel — Analyst

Good morning, guys. I was just wondering on the expense side. I know marketing and payroll expenses were down. I was just wondering if you could give us some color on what’s driving that and how sustainable that is going forward?

Scott StubbsExecutive Vice President and Chief Financial Officer

Yes. On the expense side, we mentioned we had an increase of property taxes. Our property taxes are running about 6% year-over-year. On the payroll side, we have seen a decrease. That’s driven by a couple of things. One is a year-over-year comparable that is quite easy from last year. Last year, first half of the year, you were essentially fully staffed, and we were providing some — we were generous in the COVID benefits, making sure that our employees were taken care of. In terms of going forward and the — how sustainable that decline in payroll is, I think it’s to be seen.

We expect some benefit, but not necessarily to the degree we saw in the first and second quarter as we are expecting some wage pressure, and we have more difficult comps in the back half of the year. In terms of the marketing, we are expecting a benefit. But again, if that’s always the wildcard to some degree in that — if we do see an opportunity to spend on marketing, we will use that if we feel like we can get higher rate and higher occupancy.

Kevin SteinStifel — Analyst

Okay. That’s helpful. Thanks.

Scott StubbsExecutive Vice President and Chief Financial Officer

Thanks, Kevin.

Operator

Our next question comes from Caitlin Burrows of Goldman Sachs.

Caitlin BurrowsGoldman Sachs — Analyst

I had a follow-up question again on the acquisitions. You guys gave some detail earlier about how in the, I think, wholly owned properties you were looking at the initial yield was 3.1%, stabilized was 6%, and then in the JV properties, it was 7.2% initial and stabilized almost 11%. I was just wondering if there was any real detail you could give us into what’s driving that difference? Is it just fees that you earn in the joint venture or something else?

Joseph D. MargolisChief Executive Officer

So the primary driver is we collect the management fee from the joint venture, and we retain 100% of that tenant insurance income. So we’re retaining all of that income against a much smaller capital investment versus 100% capital investment. In some of our ventures, we do get acquisition fees or other fees. We also have the opportunity to earn promotes, and in some of our older ventures, we are earning promoted — cash flow promotes, but that’s not assumed in any of these numbers.

Caitlin BurrowsGoldman Sachs — Analyst

Got it. Okay. And then just maybe obvious, but in raising the acquisition guidance to the $500 million, then that just means that this year volume of transaction will be that much higher, just your portion is going to be $500 million. Is that it?

Joseph D. MargolisChief Executive Officer

Correct. That’s correct.

Caitlin BurrowsGoldman Sachs — Analyst

Okay. Thank you.

Joseph D. MargolisChief Executive Officer

Thank you.

Operator

Our next question comes from Todd Thomas of KeyBanc Capital Markets.

Todd ThomasKeyBanc Capital Markets — Analyst

Hi. Thanks. Two quick follow-ups here. First, I think the comments from earlier were that rate growth does not accelerate in the second half of the year, but the revenue growth for guidance for the second half of the year implies an increase versus the first half. And you talked about the contribution from occupancy gains diminishing as we move further into the back half of the year. So it would seem that rate growth is expected to accelerate. Can you just clarify those comments, or perhaps I misheard?

Scott StubbsExecutive Vice President and Chief Financial Officer

Yes. So I think really what you’re — what I’m saying is Q3 is better than Q1. So Q1 is dragging it down, Q3 will bring it up. Q4 will also be better than Q1. But I’m saying they’re not accelerating from where they are today in June and into July.

Todd ThomasKeyBanc Capital Markets — Analyst

Okay. Okay. And then seasonally, what’s typically the beginning of the off-peak season for you where move-outs are higher than move-ins? And are you expecting anything different from a seasonality standpoint this year with schools and return to schools relative to last year?

Scott StubbsExecutive Vice President and Chief Financial Officer

Peak occupancy from a month-end perspective is July. From an actual — when it peaks, it’s mid-August, but then you do see some decline as students move out, and we are expecting some of those students to move out and typical student volatility.

Todd ThomasKeyBanc Capital Markets — Analyst

Okay. And that begins — that coincides with that mid-August timing?

Scott StubbsExecutive Vice President and Chief Financial Officer

Correct.

Todd ThomasKeyBanc Capital Markets — Analyst

Okay. Alright. Got it. Thank you.

Scott StubbsExecutive Vice President and Chief Financial Officer

Thank you.

Operator

At this time, I’d like to turn the call back over to CEO, Joe Margolis for closing remarks. Sir?

Joseph D. MargolisChief Executive Officer

Thank you. Thanks, everyone, for participating in the call and your interest and support of Extra Space. I mean, obviously, we’re having a fantastic year. We have all-time high occupancy, exceptional new customer rate growth. We’re continuing our innovative external growth strategies as well as innovating at the store level, and we expect to have a very strong same-store and core FFO growth this year. Thank you again, and have a good day.

Operator

[Operator Closing Remarks]

Duration: 47 minutes

Call participants:

Jeff NormanVice President of Investor Relations and Corporate Communications

Joseph D. MargolisChief Executive Officer

Scott StubbsExecutive Vice President and Chief Financial Officer

Jeff SpectorBank of America — Analyst

Juan SanabriaBMO Capital Markets — Analyst

Todd ThomasKeyBanc Capital Markets — Analyst

Smedes RoseCitigroup Inc. — Analyst

Michael GoldsmithUBS Investment Bank — Analyst

Samir KhanalEvercore — Analyst

Caitlin BurrowsGoldman Sachs — Analyst

Spenser AllawayGreen Street — Analyst

Mike MuellerJPMorgan — Analyst

Ronald KamdemMorgan Stanley — Analyst

Kevin SteinStifel — Analyst

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