Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Extra Space Storage Inc (NYSE:EXR)
Q3 2019 Earnings Call
Oct 30, 2019, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Third Quarter 2019 Extra Space Storage Incorporated Earnings Conference Call. [Operator Instructions]. After the speakers presentation, there will be a question-and-answer session. [Operator Instructions].

I would now like to hand the conference over to your speaker, Mr. Jeff Norman. Please begin sir.

Jeffrey Norman -- Vice President of Investor Relations & Corporate Communications

Thank you, Norma. Welcome to Extra Space Storage's third quarter 2019 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, October 30 2019. 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. Margolis -- Chief Executive Officer

Thanks, Jeff. Hello everyone. Thank you for joining us for our third quarter call and for your interest in Extra Space Storage. We completed another busy and competitive leasing season. The sector headlines coming out of the summer or the same themes we have been hearing from much of the year.

Many markets are feeling the headwind of new supply and digital advertising is as expensive as we have ever seen it. External growth through traditional acquisitions is challenging due to capital flows into the sector. We also continue to see pressure on multiple expense line items, including property taxes. And despite these headwinds, we had another solid quarter, allowing us to increase our annual guidance. As expected, we have started to experience the increased moderation in the second half of the year, which was projected in our guidance.

However, our diversified portfolio, sophisticated platform and strong operations team continued to be resilient. We continue to have pricing power with in place customers and have maintained very strong occupancies at our properties. We also continue to actively explore external growth opportunities that present attractive risk-adjusted returns. In addition to our acquisitions, we added five new stores to the platform in New York City, through a previously announced net lease transaction with W.P Carey. We also closed several bridge loans and expect to complete over $100 million in total originations in our first year with approximately $45 million of the balances held by Extra Space.

Yesterday, we closed a $150 million preferred equity investment with SmartStop, with an additional $50 million committed for investment in the next 12 months. The investment has a dividend of 6.25%, which begins to escalate after year five. This investment is senior to a significant amount of common equity and strengthens our ongoing relationship with SmartStop.

Our third-party management platform continues to see exceptional growth. In the quarter, we added 42 managed stores bringing our year-to-date total to 136, between our third-party program in our JV stores, we have 877 managed stores with the strong remaining pipeline for Q4 and for 2020.

I would now like to turn the time over to Scott Stubbs, our CFO.

Scott Stubbs -- Executive Vice President & Chief Financial Officer

Thank you, Joe, and hello everyone. Our core FFO for the quarter was $1.24 per share meeting consensus, but $0.01 below the high end of our guidance. This was due to delays in completion of several solar projects and the related tax credits, resulting in higher income tax expense. These tax credits will be recognized next year once these projects are completed.

Rental and tenant insurance revenue outperformed the expectations. Revenue growth was primarily driven by achieved rate growth with lower discount usage also providing a benefit. Year-over-year occupancy bounce back in Q3 and was flat at quarter end, Like last year same-store expenses were elevated due to increases in property tax and marketing expense.

We continue to be pleased with the quality of our balance sheet and our access to all types of capital. During the quarter we accessed our ATM and issued slightly over $100 million in equity at an average price of $119.30 per share. Year to date, we have issued just over $200 million on our ATM. These funds were used for acquisitions and to reduce the balances on our revolving lines.

During the quarter, we also exercise the accordion feature in our credit facility. This transaction provided several benefits; first it reduced interest costs; second, it converted $500 million in secured debt to unsecured; and third, it extended the average term. Subsequent to quarter end, we completed a $300 million 10 year private placement transaction at the rate of 3.47%, further enhancing our unencumbered property pool.

Due to our property outperformance year-to-date, we have raised our annual same-store guidance to 3% to 3.5%. We revised our expense guidance to an annual range of 4.5% to 5%, These changes result in annual same-store NOI guidance of 2.25% to 3% a 25 basis point increase at the midpoint. We are also raising our core FFO guidance to $4.84 to $4.87 per share. Our FFO guidance includes $0.07 of dilution from value add acquisitions and an additional $0.16 of dilution from CFO stores for total dilution of $0.23, which is unchanged from our initial guidance.

With that let's turn it over to Norma to start our Q&A.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Smedes Rose of Citi. Your line is open.

Smedes Rose -- Citigroup -- Analyst

Hi, thanks. I wanted to ask you just really if you could just talk about move-in rates in the quarter versus move out rates and the gap there and kind of how that's been trending so far in the fourth quarter?

Scott Stubbs -- Executive Vice President & Chief Financial Officer

Yes. Smedes, thanks. At the end of the second quarter, when we looked at how we are performing we looked at -- one of the things that we've focused on was our occupancy and our occupancy was down about 60 basis points. And while we're always solving for revenue and trying to maximize revenue, we did a couple of things in the quarter to bring that occupancy back to flat. And so during the quarter we decreased rates and we increased our occupancy So we went from being down 60 basis points to being flat at the end of the quarter and then today, we're actually 10 basis point ahead in October. So lowering rates obviously help. Now, when I talk about lowering rates, I'm saying our achieved -- our achieved rate was actually lower during the third quarter. At the end of the quarter and where we are today is our achieved rates are actually slightly negative year-over-year, our achieved rates are slightly negative to the tune of low single digits.

Smedes Rose -- Citigroup -- Analyst

Okay. And then are you thinking about any changes, I guess in your pricing strategies going forward in order to retain higher paying in place customers or any thoughts around that?

Scott Stubbs -- Executive Vice President & Chief Financial Officer

Yeah, no significant changes in our pricing strategy. One thing that will happen in the fourth quarter is we do lose the benefit of our discounts. And so, what I mean by that is discounts are provided about a 40 basis point tailwind for us for the year and in the fourth quarter, we really lap when we changed our strategy and so the fourth quarter is comparable year-over-year.

Smedes Rose -- Citigroup -- Analyst

Okay, thanks. And then Joe, could you just talk about the SmartStop investment you've bought the portfolio from them before is this investment a lead up to the similar transaction? Or is it just an attractive return?

Joseph D. Margolis -- Chief Executive Officer

Hopefully,both, I mean we've had a good and long relationship with SmartStop as you point out, we bought the large portfolio from them in 2015 and in connection with that transaction, we made a loan to them, which they fully paid back and without default. We managed almost 100 stores for them until they internalized management. So we know, this company and these properties very, very well . This was a good investment for us accretive investment. We are in a very comfortable position from a risk standpoint and we also feel it strengthens our relationship with the company, and hopefully we'll do more with them in the future.

Smedes Rose -- Citigroup -- Analyst

Okay, thank you.

Scott Stubbs -- Executive Vice President & Chief Financial Officer

Thanks, Smedes.

Operator

Thank you. And our next question comes from Shirley Wu of Bank of America. Your line is open.

Shirley Wu -- Bank of America -- Analyst

Hey guys, thanks for taking the question. So my first question has to do with guidance, you raised both revenue and NOI. But the midpoint of guidance implies a drastic sequential deceleration in revenues to 1.6% in 4Q and negative NOI for 4Q, so I was wondering if you could provide some more color on the cadence for the remainder of the year and what it would take to get the higher level and that this guidance range is?

Scott Stubbs -- Executive Vice President & Chief Financial Officer

Yes. So if you look at how we perform year-to-date and then how we're performing into October, you're correct. It would take a pretty significant decrease in the fourth quarter to hit the low end of guidance and we do not feel like that's likely. If you look at our cadence into the fourth quarter, we -- our guidance does assume some continued moderation as well as that loss of the discount benefit of 40 basis points.

Shirley Wu -- Bank of America -- Analyst

Okay.

Okay. Thanks for the color. And on my second question goes to marketing. So 3Q is up around almost 24%. So could you give us some thoughts on your strategy moving forward as you can reflect on what you've seen this year, and the effectiveness of the marketing strategy and your thoughts about using marketing into 2020 as well?

Joseph D. Margolis -- Chief Executive Officer

Sure. So I think the first thing to make sure we all understand is the marketing dollars, we spend, have a very good ROI on them that we are spending more money in marketing, we wish we didn't have to, but it is leading to more folks in the stores paying rent and we get a good return on our marketing dollars. We expect marketing expense to remain elevated and our job is to make sure we are as smart as we can possibly be with our marketing dollars in terms of bidding on the right terms in the right places at the right time and also finding alternatives to Google to drive business to our stores.

Shirley Wu -- Bank of America -- Analyst

Got it. Thanks, Joe.

Joseph D. Margolis -- Chief Executive Officer

You're welcome.

Operator

Thank you. And our next question comes from the line of Jeremy Metz with BMO Capital Markets. Your line is open.

Jeremy Metz -- BMO Capital Markets -- Analyst

Hey guys, just trying to connect the dots here, Joe between your comments in the opening about acquisitions being more challenging due to capital flows in the sector, this is something we've been hearing about for a while. And you've still managed to find your share of deals over time, a lot of that came through the third party platform. So wondering if that's dried up a little here and therefore even if temporarily and therefore maybe SmartStop deal a little more compelling, which from a return perspective It's fine at the 6.25% in the quarter, but when we just compare that to where you've been able to buy and stabilize at and even the same with your CO [Phonetic] deals that has generally been higher. So, any color on that?

Joseph D. Margolis -- Chief Executive Officer

Sure, yes, thanks for the opportunity to clarify. First to your last point, I think relative return always goes with relative risks, so, yeah, this is a $6.25 [Phonetic] dividend payment, but it is a ahead of hundreds of millions of dollars significant amount of common equity. So the return may not be as good is doing a CO deal, but the risk is significantly significantly less. And in this point in the market cycle, we are very focused on risk. So my comments on the introduction about capital flows and difficulty finding deals really, focuses on traditional marketed deals. Once the deal gets out to the market and the broker, has it and there is many, many bidders, I think it's very difficult for us to be that high bidder and capture that deal. That being said, we've been very active on the acquisition side, through the end of the third quarter, we purchased $362 million, we've invested $362 million in acquisitions.

We have another $52 million, $50 milllion, $52 million under contract to close this year, we hope to find a couple of other deals in addition, we'll do a little over $100 million in our bridge loan program. We did the net lease deal, which has no capital outlay, but a good return. So while we haven't been able to purchase a lot in the market by having our good relationships, buying things from our JV partners or management plus, finding creative deals. We've been able to have what I think is a good year on the growth front.

Jeremy Metz -- BMO Capital Markets -- Analyst

Yes and sticking just with the growth angle here. Can you talk about the environment today for CO [Phonetic] deals you've previously mentioned the void you've seen and funding some lease up deal that's why you started the bridge loan program. But are you still seeing a lot of pre-sale type opportunities or even conversely opportunities for outright purchases of lease-up deals that are hitting underwriting or developers wanting to get out?

Joseph D. Margolis -- Chief Executive Officer

So we see few CO opportunities, part of that is the moderation in development and part of that is our view of the acceptable return level to take that risk of a lease-up store in this environment. That being said, we have our committee so far as it has approved five new deals [Indecipherable] of deals in 2019, one in Hawaii in a package of four will do joint venture in Minneapolis in and around Minneapolis.

On the lease up side, there are -- those opportunities coming up of partially leased stores being brought to the market and I believe sellers' expectations versus I'll say Extra Space's pricing, there is still some gap there in many instances, but we look at a lot of them and we underwrite a lot of them and we will participate when we think the pricing is right.

Jeremy Metz -- BMO Capital Markets -- Analyst

Great, thanks guys.

Scott Stubbs -- Executive Vice President & Chief Financial Officer

Thanks, Jeremy.

Operator

Thank you. And our next question comes from Steve Sakwa of Evercore ISI. Your line is open.

Steve Sakwa -- Evercore ISI -- Analyst

Thanks. I guess the question is really around sort of the deceleration that you've seen throughout the year and the implied revenue guide, it was somewhere maybe in kind of the mid to upper ones to maybe the low twos for Q4, which is down from a little over 4% in the first quarter. And I'm just as you think about kind of the exit velocity of '19 in fourth quarter going into 2020. How do we think about that sort of two-ish kind of revenue number as it relates to maybe growth all of next year?

Scott Stubbs -- Executive Vice President & Chief Financial Officer

So I would tell you we are in the process of doing our budgets and we're probably not ready to give 2020 guidance. But I think that you have seen deceleration throughout the year starting the year closer to 4%. And then, ending this quarter, closer to 3% and then some implied deceleration in the fourth quarter. So I think that as we roll out the budgets and take a look at where we are -- It was supply because I think a portion of the supply this projected for '19 will actually push into '20 and so until we kind of have some of those moving pieces stop moving, it's really difficult to give that number without knowing that and so look for that in the February call.

Steve Sakwa -- Evercore ISI -- Analyst

Okay. I can appreciate that. It may just, is there anything in the 2019 numbers, whether it was, it's a same-store pool shift or just kind of any one-time items that may have kind of elevated the '19 number versus '20 putting kind of fundamentals aside?

Joseph D. Margolis -- Chief Executive Officer

Yes. Our effective the same store shift is pretty modest, it's depending on how you if you're looking at the prior year or the two prior years, this 10 to 30 basis points. So that really doesn't have a big effect on the numbers.

Scott Stubbs -- Executive Vice President & Chief Financial Officer

Yes, I think in the quarter was about 10 basis points, Steve. And then if you look on the expense side, we expect property taxes to still be elevated, but hopefully less elevated. We expect them to be above inflation, but we budgeted 5% to 6% for the last couple of years. We're hoping that that number is down, we haven't finalized our budget yet, but we're hoping it's more in the 3% to 5% range.

Steve Sakwa -- Evercore ISI -- Analyst

Okay. And then I guess Joe, you made the comment about the Google marketing and trying to find other ways given just how expensive that channel has become, I'm just curious, what are some of those other options. I mean have you use them in the past and how effective are those versus kind of the Google click paid advertising?

Joseph D. Margolis -- Chief Executive Officer

So social media is very small now but growing pretty quickly. So, that's an interesting avenue that we and others are trying. We actually in the last quarter went back to some hard billboards and doing some things like that. So we are running other avenues. And I think it's way too early to say how effective that will be and what will be the winners and what may not be the winners.

Steve Sakwa -- Evercore ISI -- Analyst

Okay, and that's it from me. Thanks.

Scott Stubbs -- Executive Vice President & Chief Financial Officer

Thank you.

Operator

Thank you. And our next question comes from Todd Thomas of KeyBanc Capital Markets. Your line is open.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Hi, thanks. The first question in terms of the price adjustments that you made late last quarter to support the recovery in occupancy you operate nearly 1,800 stores and I'm just curious if you saw bigger swings are more volatile pricing from competitors at that time, as they look to to gain ground and drive customer traffic when you made those changes across the platform?

Scott Stubbs -- Executive Vice President & Chief Financial Officer

I'm not sure it's specific to the quarter. I think we've seen people adjusting prices throughout the year and obviously very aggressive in markets with new supply.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Okay. And in terms of discounting, it seems a little bit more less pronounced today than I think we've seen in sort of prior cycles and you mentioned was lower year-over-year in the quarter might smooth out a little bit going forward. But we've heard from others that discounting is down. Also, can you explain why discounting appears to be sort of less effective today or is that not really the right way to think about it necessarily?

Scott Stubbs -- Executive Vice President & Chief Financial Officer

I think it's probably not the correct way to think about it, we're typically looking at different strategies and testing and right now we have been on the marketing spend and adjusting pricing slightly to be more effective in discounting. Last year we were more aggressive with discounting this year, less aggressive. And last year we held rate a little bit better, this year we've had to give a little bit on rate.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Okay. But, so the response overall from discounting though it's still there. If you increase discounting you still feel that you can increase customer traffic to the system?

Scott Stubbs -- Executive Vice President & Chief Financial Officer

It's still an effective tool, but we've done some of the others, be more effective this year.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Okay and then just last question on the bridge loan program. I was just wondering if you can provide a little bit more detail on the outlook for that book heading into 2020. I think you said $100 million is sort of the volume that you're going to do this year, would you expect to see that grow in 2020 and sort of what kind of rates are you getting and how large of an investment and in -- would you be willing to do with on the bridge program?

Joseph D. Margolis -- Chief Executive Officer

Sure. So I would expect the bridge loan program to grow significantly. I would say at least double in 2020. Rates we get range from plus or minus LIBOR plus $400. So when we started it we thought it all be empty stores coming right on COs and in terms we found lots of other situations folks wanted with partially leased stores. So some of those rates are lower and then picked our highest rate so far has been LIBOR plus $440. So plus or minus LIBOR plus $400. The return to us depends on whether we use our debt partner to take the a piece, if you will, in which case we can be up to LIBOR plus $800, $900 on RFPs. And then I think the last question was, how much will -- we will do with that, I think that's meant to be seen the type of volume, we're talking about right now is very comfortable for us given our different avenues of capital, but one of the reasons we arrange this program with a debt partner who is not only to enhance our returns, but to be able to control how much capital we had in the program.

So we have that tools to make sure that we're in a comfortable place.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Okay, all right, thank you.

Scott Stubbs -- Executive Vice President & Chief Financial Officer

Thanks Todd.

Operator

Thank you. And our next question comes from Ki Bin Kim with SunTrust. Your line is open.

Ki Bin Kim -- SunTrust -- Analyst

Good afternoon. So obviously expenses are a little bit elevated right now, shouldn't be a big surprise but as we lap to higher expenses comps getting easier mathematically. But should we expect continued inflation and expenses. I'm talking about marketing and also things like property taxes, as we get into next year?

Scott Stubbs -- Executive Vice President & Chief Financial Officer

Yeah Ki Bin. I would expect property taxes to be above inflation. Hopefully, they come off where they've been the last couple of years. Marketing, I would expect to be above inflation. And then I think that we will see some pressure on wages and part of that is because we have such a hard comp from this year. Our wages have been very low year-over-year this year and we don't expect that us to be able to maintain that.

Ki Bin Kim -- SunTrust -- Analyst

Okay and I don't want to spend too much time on the SmartStop deal, but the safety nets comment you made, Joe. It also does rely on the common equity being in the money, I don't know the SmartStop portfolio in and out but given the vintage of it do you feel pretty comfortable that the common equity that you're ahead of is actually in the money to a deep degree?

Joseph D. Margolis -- Chief Executive Officer

So we do know the SmartStop portfolio in and out. We managed almost all of these stores for a long period of time before they internalized management and we also know the company very well and have a lot of comfort both from our knowledge of them and also from restriction -- kind of typical market restrictions in the documents of what they are allowed to do as a company and not allowed to do.

So, we feel very, very comfortable with this transaction, from a risk standpoint.

Ki Bin Kim -- SunTrust -- Analyst

Okay, thanks. And just last question, what type of IRRs are you targeting for acquisitions?

Scott Stubbs -- Executive Vice President & Chief Financial Officer

So we -- certainly run the IRRs and look at IRRs, but it's really not the focus of what we do right because of how we underwrite because to create an IRR you have to have a whole period and the terminal cap rate and we generally hold things for a very, very long time and I can't guess at what cap rates are going to be in 7 years or 10 years or 15 years.

So we look much more at cash flows over a seven-year period and what the average cash flows will be and focus much more on that.

Ki Bin Kim -- SunTrust -- Analyst

Okay, thank you.

Joseph D. Margolis -- Chief Executive Officer

Thank you Ki Bin.

Operator

Thank you. [Operator Instructions] And our next question comes from Ronald Camden of Morgan Stanley. Your line is open.

Ronald Camden -- Morgan Stanley -- Analyst

Hey, thanks for taking my question. Just back to the marketing spend, just a few, is there any more color in terms of how much is the rise basically actually just cost per click is increasing versus just more usage of the marketing and is there any broad regions or, that or areas or markets where it's maybe more elevated than the average?

Joseph D. Margolis -- Chief Executive Officer

Yeah, it's fairly difficult to break down that way we would tell you it primarily relates to the inflationary aspect of it and us being more aggressive on our bids and less to do with the additional clicks or the additional rentals from that.

Ronald Camden -- Morgan Stanley -- Analyst

Got it. Helpful. And then the last one was just on, I think there is a lot of talks about technology and upgrading the platform. Is there any low hanging fruit lacked on the payroll side, so obviously you've done a great job of keeping that pretty tight this year, but is there have been further opportunity sort of automate in sort of continue to reduce that line item?

Joseph D. Margolis -- Chief Executive Officer

So a couple of things. I think there are always things we can do to improve to centralize to get more efficient technology performed some jobs but that being said, I think the wage pressure we're seeing in this country, with the low unemployment is going to override that at least in the short-term this next year. And also we put a high value on our people and whether it's the data scientist here in Salt Lake City or the folks in the store, who are face to face with the customer every day and we are a business that has very high operating margins.

So the incremental cost of having a very high quality employee in front of the customers versus losing wanted to rentals a month, it -- it's to us that's an easy equation and we want to make sure we have good and high quality people in our stores, and if that means we're going to see some pressure on the wage side and that's a trade, we're willing to make.

Ronald Camden -- Morgan Stanley -- Analyst

Got it. And then the last question was, I don't know if you provide any updated thoughts on just your supply outlook maybe nothing has changed there. But just curious how you guys are thinking about it now? Thank you.

Joseph D. Margolis -- Chief Executive Officer

Sure. We don't have a lot of new thoughts on supply. We continue to believe that 2020 there will be some moderation from 2019, but not wholesale falling off the cliff. We will see some markets that will be in worse positions and we'll see some markets that will be in better positioned as they lease up, and of course we with our broadly diversified portfolio also have exposure to a lot of markets that have never been in the supply headwind situation. So we will continue to have pressures on supply in 2020, but we're happy to believe and see delivery starting to moderate.

Ronald Camden -- Morgan Stanley -- Analyst

Helpful, thanks, so much.

Joseph D. Margolis -- Chief Executive Officer

Sure. Thank you.

Scott Stubbs -- Executive Vice President & Chief Financial Officer

Thanks, Ron.

Operator

Thank you. And our next question comes from Ryan Lumb of Green Street Advisors. Your line is open.

Ryan Lumb -- Lumb of Green Street Advisors -- Analyst

Thanks. Going back to the preferred deal are there multiple other opportunities on the horizon that are similar to this and you know as we're going to become a sort of a pillar of the capital or asset light model, or is this sort of a one-off deal just based on the relationship that you guys have with SmartStop?

Scott Stubbs -- Executive Vice President & Chief Financial Officer

I would say more the -- more of the latter than the former kind of similar to the net lease deal, a company we had a relationship with had a specific need in situation and we were able to plug that hole and fill it. We're not out seeking to start up preferred equity shop but if another opportunity arose that had similar risk reward characteristics and provided a good return to us we would certainly look at it.

Ryan Lumb -- Lumb of Green Street Advisors -- Analyst

Sure. And then last quarter, Joe, I think you said that you don't see any moderation in demand anywhere. Can you just say, is that still your view today or in if there is any sort of market level color on demand what direction demand is is moving broadly?

Joseph D. Margolis -- Chief Executive Officer

That is still our view today is that demand is very steady and very strong and all of our challenges are due to supply and not demand.

Ryan Lumb -- Lumb of Green Street Advisors -- Analyst

Sure. That's all from me. Thanks guys.

Scott Stubbs -- Executive Vice President & Chief Financial Officer

Thanks, Ryan.

Operator

Thank you. And our next question comes from Todd Stender of Wells Fargo. Your line is open.

Todd Stender -- Wells Fargo -- Analyst

Hi, thanks. Just on the acquisition front, you didn't buy any stabilized stores in your wholly owned portfolio, but you've been remain active in joint ventures. Can we just hear some of the underwriting metrics like maybe growth expectations in-place occupancy and how they're I guess adequate for you to invest in and the joint venture but not wholly owned?

Joseph D. Margolis -- Chief Executive Officer

So underwriting metrics vary by market, we would underwrite stronger rent growth in Los Angeles than in Dallas, for example. So I can't give you, you know, we don't have a menu that we pick all of our assumptions off but that's created on a deal by deal basis based on the specific sub-market opportunity. And we're lucky to have 1,800 stores and have a lot of data about what goes on in these markets. So we feel we can underwrite very accurately. With respect to why do something in a joint venture versus wholly owned joint ventures do a number of things for us, one is they spread risk we have smaller dollar investment in a particular asset. Secondly, it enhances returns in a couple of ways, one is we get all the tenant insurance on a smaller investment based on a 100% own. We get a management fee in many of them, we get the opportunity to earn a promote down the road.

So our return levels are higher in a joint venture.

Todd Stender -- Wells Fargo -- Analyst

Thank you. Were these on a slower growth expectation range, I know there is a little more leverage you can add and I appreciate your comments there that how you distinguish but how about these in particular, or maybe a little more lease-up?

Joseph D. Margolis -- Chief Executive Officer

So when you say these...

Todd Stender -- Wells Fargo -- Analyst

The other three sorry, yeah, that three you acquired in the quarter just distinguishing why these went into a joint venture, maybe the slower growth expectations. Any little context, you can provide might help?

Joseph D. Margolis -- Chief Executive Officer

So these were three assets in Albuquerque, New Mexico that on a wholly owned basis we didn't feel provided a risk-reward metric that we are comfortable for our shareholders.

Todd Stender -- Wells Fargo -- Analyst

Got it. Okay, that's helpful. And then just going back to the guidance, just the twp categories that I think among others differentiate you guys from your peers is tenant insurance income and then the management fees, they both increased. Just as a reminder, can we hear anything that you can provide based on margins? How you're achieving these kind of growth for both any context, you can provide around both? Thanks.

Scott Stubbs -- Executive Vice President & Chief Financial Officer

Yes. So, our management fee business has grown primarily just by adding properties and a large portion of those properties are lease-up assets. So, as their revenues go up our management fee also goes up, many of them when they come on at day 1 or just earning the minimum management fee. And so, as they start to get more occupied, we obviously make more money. In terms of tenant insurance business as we add properties we add tenant insurance, we also have the ability to increase penetration in many of our lease up stores have higher penetration is just because you have the opportunity to offer tenant insurance from day one versus, we typically don't go back and try to increase our penetration with existing customers.

Todd Stender -- Wells Fargo -- Analyst

And the lease-up Scott for that, that's a higher penetration 7 to 8 out of 10 tenants get it, is that fair? Or 10 you should say?

Scott Stubbs -- Executive Vice President & Chief Financial Officer

I would tell you it's a little higher than that, your overall penetration is just north of 70 and on a lease-up stores typically higher than that.

Todd Stender -- Wells Fargo -- Analyst

Okay, thank you.

Joseph D. Margolis -- Chief Executive Officer

Thanks, Scott.

Operator

Thank you. And we have a follow-up with Smedes Rose with Citi. Your line is open.

Michael Bilerman -- Citigroup -- Analyst

Hey, it's Michael Bilerman here with Smedes. I was wondering you can talk a little about the competitive environment relative to PSA in the sense of they're bigger focus over the last, let's call it 12 to 18 months on two fronts, one is on the capex front in improving their front door and really investing in property of tomorrow, their 5th generation and the second that has really big focus on asset management in the second being a focus, if they hadn't done before in the third-party management business. And I'm just wondering how you've seen any impact from those two relative to the markets that you compete in?

Joseph D. Margolis -- Chief Executive Officer

So much more comfortable talking about what we're doing than what public storage is doing. I mean, we started a 7-year rebranding program to rebrand all of our stores and we're into four years of that and the vast majority of our REIT stores have now been rebranded less, less of our JV managed stores, but we've been putting that type of capital into our properties for a number of years now, and we think we have benefited in terms of performance from those capital investments. And in terms of the management business, you know, public Storage is a good manager, they know how to run properties, CubeSmart is a good manager, they know how to run properties we have good competitors on that side. We don't get every piece of business, but we hold on pricing, which is more expensive than our competitors because we want to remain a profitable business. And we've been able to keep growing this business. We've added 136 stores gross through the end of the third quarter, we've lost 43 stores but 25 of those 43, we purchased store became net leases. So they just shifted on the platform.

So through three quarters, we've added 93 stores and our pipeline looks very similar going forward. And so while we have good competitors in that business, we're still able to win at least our share of the business.

Michael Bilerman -- Citigroup -- Analyst

Right. And I'm not trying to say anything that is wrong for what you're doing, It's just when others in the marketplace, do something right, you've, you can't control the amount of supply, you can control what you built, but you can't control what other people built?

Joseph D. Margolis -- Chief Executive Officer

Sure.

Michael Bilerman -- Citigroup -- Analyst

And you can control what competitors in if you have a competitor that has decided to change the way they are operating right and invest a lot of capital in their assets. One would imagine that could have an impact on the entire marketplace in effect all competitors, including yourselves. Right? So that's what I was really trying to understand whether any part of this year's performance you feel has had some impact from the competitive set, and maybe it's not PSA specific, but the market getting better in that sense, it's a tougher environment well for you to compete in?

Joseph D. Margolis -- Chief Executive Officer

You know what, I think that's a fair comment. I think it is a tougher environment to compete in and our competitors don't sit still and they decided to put capital into their buildings or decided to get into management business, or improving our pricing systems or whatever they're doing. And we fully understand that it's not a static environment and that's why we need to get better at everything we do, we need to continue to invest in technology and we need to continue to refine our pricing systems or our keyword bidding systems, we need to do more data analytics, more testing and we do that all the time and we don't -- maybe talk about it enough.

But if our competitors are running to catch up we need to run, just as fast to stay ahead.

Michael Bilerman -- Citigroup -- Analyst

All right. It's not faster, what you've done in the past. We have back in January [Phonetic] when we were sitting in Salt Lake you spent a lot of time on Optimus Prime and leveraging Google and being able to really target individual search words to really reduce pricing, you talked a little bit about how Google has gotten more expenses as your system has not been able to figure out a way to start to cut into some of that increase at all?

Joseph D. Margolis -- Chief Executive Officer

I believe they have I believe our systems are very good at spending money where it has an impact and not bidding on terms if that's the system you're talking about where there is not a very strong return. It doesn't look like it good because the increase has been so much. But we have been very careful to make sure we're spending money where it's -- where it has a positive impact. And I think the bottom line, kind of proof is in the putting -- is the results of we're putting up [Phonetic] .

Michael Bilerman -- Citigroup -- Analyst

Yeah. Last one, just on Vale, you had the UPS announced, their initiatives and I think with Atlanta and the test market during the quarter. You obviously had MakeSpace partner up with Iron Mountain, is there, has there been any impact that you see changing in the marketplace from those sorts of initiatives?

Joseph D. Margolis -- Chief Executive Officer

We just haven't felt the impact. We look at our small units in urban markets where those Vale companies are operating, look at the occupancy in the rents. And -- I don't know if they're getting the customer. It isn't a traditional storage customer or if we're able to maintain our performance in spite of them nibbling at the edges, but we just haven't felt that yet.

Michael Bilerman -- Citigroup -- Analyst

Okay, thanks for the time, Jeff.

Scott Stubbs -- Executive Vice President & Chief Financial Officer

Thanks, Michael.

Joseph D. Margolis -- Chief Executive Officer

Appreciate it. Michael.

Operator

Thank you. And I'm currently showing no further questions. I would like to turn the call back over to Mr. Joe Margolis for closing comments.

Joseph D. Margolis -- Chief Executive Officer

Great, thank you everyone for joining us today. We are 10 months into the year now and what is really gratifying to me as I look back is how the year has played out as we expected. We went into this year, knowing we would face headwinds from new supply and that we would have to be nimble and creative to address the challenges in those particular markets.

We went into knowing the traditional acquisitions would be difficult due to capital flows into this sector and that we would have to be innovative to create accretive growth opportunities and I think we've done that. And we went into the year knowing that expecting to have continued growth in our third-party management business. And as we just talked about, we've had a great year in that front.

The two surprises we've had this year is the higher marketing expenses, and we've had to had to deal with that and maintain performance in spite of those increased costs. And the second surprise has been at the moderation in revenue growth has taken longer to occur and that's benefited us and allowed us to increase our guidance.

So looking back over the 10 months, I'm very happy and proud that our systems and teams has handled the environment, that the machine is worked and we've been able to put up the performance that we have so far and we expect to, for the remainder of the year. Thank you very much for your interest in Extra Space. I hope everyone has a great rest of their days.

Operator

[Operator Closing Remarks]

Duration: 45 minutes

Call participants:

Jeffrey Norman -- Vice President of Investor Relations & Corporate Communications

Joseph D. Margolis -- Chief Executive Officer

Scott Stubbs -- Executive Vice President & Chief Financial Officer

Smedes Rose -- Citigroup -- Analyst

Shirley Wu -- Bank of America -- Analyst

Jeremy Metz -- BMO Capital Markets -- Analyst

Steve Sakwa -- Evercore ISI -- Analyst

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Ki Bin Kim -- SunTrust -- Analyst

Ronald Camden -- Morgan Stanley -- Analyst

Ryan Lumb -- Lumb of Green Street Advisors -- Analyst

Todd Stender -- Wells Fargo -- Analyst

Michael Bilerman -- Citigroup -- Analyst

More EXR analysis

All earnings call transcripts

AlphaStreet Logo