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Extra Space Storage Inc (NYSE:EXR)
Q4 2020 Earnings Call
Feb 23, 2021, 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 Extra Space Storage Fourth Quarter Earnings Conference Call. [Operator Instructions] Please note that today's conference is being recorded.

[Operator Instructions] I would now like to hand the conference over to your speaker today, Jeff Norman, Vice President of Capital Markets. Thank you. Please go ahead, sir.

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

Thank you Cindy. Welcome to Extra Space Storage's fourth quarter 2020 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, February 23rd, 2021. The Company assumes no obligation to revise or update any forward-looking statement 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. And Joe, you may be on mute. Operator, do we have Joe's line connected.

Joseph D. Margolis -- Chief Executive Officer

Thanks Jeff. Can you hear me now?

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

Yes, we hear you now. Thank you.

Joseph D. Margolis -- Chief Executive Officer

Sorry everyone. Thanks Jeff, and thank you, everyone, for joining today's call. I hope everyone and their families remain healthy and that your 2021 is off to a good start.

In my 35 years in real estate, I can't remember another year with as many positive and negative twist and turns in such a short period of time as we saw in 2020. The range of emotions I felt from March, when I was worried about the daily safety of our employees and customers; to April, when I wondered when rental demand in our sector would return; to September, when we saw some of the strongest occupancy and rental rate fundamentals in our Company's history are hard to describe.

I am proud of our team's resilience in how well they responded to 2020's unprecedented challenges. Our team's efforts together with our balanced portfolio, sophisticated platform and innovative external growth efforts yielded a great result in the fourth quarter. We ended the year with same-store occupancy of 94.8%, an all-time year-end high for Extra Space.

Our elevated occupancy has given us significant pricing power, which we have experienced since August and a return to positive same-store revenue growth in the fourth quarter of 2.3%, a 380 basis point acceleration from the third quarter. We also had excellent expense control with a 0.6% decrease in same-store expenses, resulting in 3.4% NOI growth in the quarter.

Our return to positive NOI gains coupled with strong external investment activity yielded core FFO growth of 16.5% in the quarter. Despite the challenges of the year, the fourth quarter was full of accomplishments, including completion of two preferred equity investments totaling $350 million, $147 million in acquisitions, $168 million in bridge loan closings, the addition of 44 stores to our management platform, and receipt of NAREIT's Leader in the Light award, recognizing Extra Space for its sustainability efforts. This is the first time a storage company has received this award.

While we are excited about the accomplishments of 2020, we are even more optimistic about how our efforts have positioned us for 2021. Rentals continue to be steady and vacates continue to be muted. We are heading into 2021 with the highest occupancy we have ever experienced at this time of year and expect rental rates to remain strong. We have already added 51 third-party management stores in 2021 and our acquisition, management and bridge loan pipelines are robust.

But we are also mindful of the risks we face. We recognize that current or potential government regulations could impede same-store revenue and expense performance. We believe that vacates may eventually return to more normal levels and we recognize that the challenges related to new supply have not subsided completely and will continue to suppress rate growth in many markets. As in the past, our team is prepared to use all our available tools to optimize performance in the face of any risks which materialize.

In short, despite significant turbulence, we had a very successful 2020 and look forward to an even better 2021. We continue to execute on our strategy to maximize shareholders' long-term value and to deliver the results our shareholders have come to expect from Extra Space Storage.

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

P. Scott Stubbs -- Executive Vice President & Chief Financial Officer

Thank you, Joe, and hello, everyone. As Joe mentioned, we had a great fourth quarter with reaccelerating same-store revenue growth driven by all-time high occupancy and strong rental rate growth to new customers. Late fees and other income continue to be lower year-over-year and partially offset rental income, but we saw improvement in both line items from levels experienced in the third quarter.

We lowered expenses in all controllable expense categories in the quarter and despite property tax increases of 6.4%, we still delivered a reduction in same-store expenses overall. This resulted in same-store NOI growth of 3.4%. Core FFO for the quarter was $1.48, a year-over-year increase of 16.5% and well above consensus estimates. Our same-store performance was the primary driver of the outperformance with additional contribution from growth in tenant reinsurance income, management fees, and interest and investment income.

We continue to evolve our balance sheet to reduce secured debt and increase the size of our unencumbered pool. Our efforts resulted in Moody's issuing Extra Space a BAA2 credit rating on January 28th, our second investment grade credit rating now providing us access to the public bond market.

We are excited to add another capital option to finance future growth, reduced total cost of debt, and further ladder our maturities. At year-end, we had higher than normal revolver balances and variable rate debt due to the elevated capital activity that took place in the fourth quarter, including settling our convertible notes, completing preferred equity investments, and closing substantial bridge loan and acquisition volume.

A significant portion of these transactions were temporarily funded by draws on our revolving lines. We are comfortable doing so -- we were comfortable doing so knowing we were actively issuing on our ATM, had pending bridge loan sales and are recapitalizing stores into a JV, which bring our revolver balances down to historical levels.

Last night, we provided guidance and annual assumptions for 2021 with ranges that are wider than previous -- than in previous years to address some of the uncertainty related to COVID-19 and its impact on customer behavior and government regulation. Our new same-store pool includes a total of 860 stores, which is essentially flat with last year. The number of new stores added to the pool was generally offset by sites removed due to disposition or redevelopment.

We anticipate the changes in the same-store pool will benefit our 2021 same-store revenue growth by approximately 20 basis points. Same-store revenue is expected to increase 4.25% to 5.5%, driven by higher occupancy in the first half of the year and elevated rates in new and existing -- to new and existing customers.

Same-store expense growth is expected to be 3.5% to 4.5%, primarily driven by higher property tax expense. Our revenue and expense guidance results in same-store NOI growth range of 4.25% to 6.25%. The acquisition market continues to be expensive and we will remain disciplined but opportunistic. We expect to do significant acquisition volume and plan to close a number of transactions with joint venture partners.

Our guidance assumes $350 million in Extra Space investment, approximately $180 million of which is closed or under contract. We also expect to close approximately $400 million of bridge loans and plan to retain 20% to 25% of those balances or approximately $100 million in 2021. We have plenty of capital to invest if we find additional opportunities that create long-term value for shareholders and we will be creative as we deploy capital in the sector.

Our full year core FFO is estimated to be between $5.85 and $6.05 per share. We anticipate $0.16 of dilution from value-add acquisitions or C of O stores, down $0.04 from 2020. We also added additional guidance related to our expected interest income for 2021 as well as notes clarifying the recognition of our preferred investments in SmartStop and NexPoint, which can be found in the outlook tables of our earnings release.

As Joe mentioned, 2020 has been a memorable year for Extra Space. We are excited to turn the page and are already on our way to a very strong 2021.

And with that, let's turn it over to Cindy to start our Q&A.

Questions and Answers:

Operator

[Operator Instructions] And our first question comes from Alua Askarbek with Bank of America.

Alua Askarbek -- Bank of America Merrill Lynch -- Analyst

Hi, everyone. Thank you for taking the questions today and congrats on a great quarter. And it looks like 2021 is going to be great for you guys as well. So, I just wanted to start off and ask a little bit more on what you guys are expecting for revenues this year? So, how are you thinking about occupancy for the first half versus the second half and a little bit more on the rental rate assumptions?

P. Scott Stubbs -- Executive Vice President & Chief Financial Officer

Yeah. Alua this is Scott. I can give you a little bit more detail in terms of what our guidance assumes. We are assuming that our occupancy stays strong. So, in January and into February, our gap has actually expanded to be just over 300 basis points. So what's happened is January and February typically have lower occupancy, declining occupancy. We haven't seen that. So we moved from 240 basis point delta in occupancy to over 300 basis points where we are today.

So we are assuming that occupancy holds at this high level through the end of the summer, at which point we expect occupancy to fall more to historical levels. So last year in the fourth quarter, third and fourth quarter we saw occupancy 200 basis points to 300 basis points higher than normal. This year, we expect that to be a 100 basis points to 200 basis points headwind for us. So we expect it to be lower and to fall back more to historical levels.

We expect the first quarter to be strong in terms of revenue growth continuing to accelerate from the fourth quarter. The second quarter should be the peak and that is mainly due to some easy comps from last year and then continued good into the third quarter with the end of the third quarter and fourth quarter being challenging.

Alua Askarbek -- Bank of America Merrill Lynch -- Analyst

Got it. Okay, makes sense. And then I guess just a little bit more on the third-party management for 2021. You mentioned that you already added 51 new stores. Can we expect a large acceleration in third-party management compared to 2020 and 2019?

Joseph D. Margolis -- Chief Executive Officer

So, this is Joe. The -- and thank you for your kind words about our performance. It's not Scott and me, it's over 4,000 employees who every day bring their best work and have really done an outstanding job. With respect to third-party management, our activity in January and February with 51 stores added is a little elevated because we took 37 stores on in connection with the JCAP transaction. So I would expect our 2021 activity to be similar to our 2020 activity in terms of gains.

Alua Askarbek -- Bank of America Merrill Lynch -- Analyst

Okay, got it. Thank you so much.

Joseph D. Margolis -- Chief Executive Officer

Thank you.

P. Scott Stubbs -- Executive Vice President & Chief Financial Officer

Thank you, Alua.

Operator

Your next question comes from Spenser Allaway with Green Street.

Spenser Allaway -- Green Street Advisors -- Analyst

Hi, thank you. Can you guys just provide a little bit of color on how existing customer rate increases have been trending just relative to your historical norms? And do you suspect that you're going to be able to continue pushing these pretty aggressively in '21?

Joseph D. Margolis -- Chief Executive Officer

So we're still subject to restrictions on existing customer rate increase in many markets across the country and that -- you know we abide by all those regulations and that of course is the limit to us. Absent that, our ECRI increases average high-single-digits, 10%, about the same as always. And interestingly, we continue to move out rates in response to ECRI and we have seen no increase in move-out rates.

So, hopefully, at some point those regulations -- restrictions are lifted and we can get back to fully normal behavior. But we are limited now. We understood that and took that into account in our guidance, and hopefully, we can get back to normal sooner rather than later.

Spenser Allaway -- Green Street Advisors -- Analyst

Okay, thank you. And then just to make sure, on growth front, are you guys currently seeing more opportunity with stabilized assets or with assets in some sort of lease-up right now?

Joseph D. Margolis -- Chief Executive Officer

I'm sorry, more opportunities with what type of assets? I couldn't understand you.

Spenser Allaway -- Green Street Advisors -- Analyst

Stabilized versus assets in some form of lease-up.

Joseph D. Margolis -- Chief Executive Officer

Yeah, than you very much. So -- and sorry about that. So, what we bought is more lease-up assets. Stabilized -- pricing on stabilized assets is very hard for us to make sense of. We will probably be more active on that front in 2021 with joint venture partners, just to make the pricing makes sense to us. But everything we bought in 2020 was lease-up. You know if you kind of average, we were in the mid-3s first year and stabilized on average in 17 months in the mid-6s. So I think that's the best use of our acquisition dollars today.

Spenser Allaway -- Green Street Advisors -- Analyst

Okay, thank you.

Joseph D. Margolis -- Chief Executive Officer

Sure.

Operator

Your next question comes from Rick Skidmore with Goldman Sachs.

Richard Skidmore -- Goldman Sachs -- Analyst

Good morning, Joe and Scott. Question on Joe for the -- on the supply growth, how are you seeing supply across your markets? You mentioned kind of flattish. But are there any particular markets where you're seeing outsized supply growth? Or how are you thinking about supply in 2021 and into 2022? Thank you.

Joseph D. Margolis -- Chief Executive Officer

Sure. Thanks. Good question. So supply is still an issue, that's the short answer. We did see substantial pull back in 2020 due to COVID. We -- I'm going to speak to our same-store pool, not national statistics, I'll speak to what matters to us. We had projected in 2020 that about 30% of our same-store pool would be impacted by new supply and when you look at the actual numbers, it was only around 21%. So almost a third got pushed or canceled because of COVID.

In 2022, we project 22% of our same-store pool will be impacted by new stores and I think there will be, like there is every year, some number of those stores get delayed or maybe even canceled. So we are seeing an incremental decrease in new supply and that's good news. But I would caution you on two fronts; one is, we still have significant supply delivered in many markets over the last several years and we're working through that and that affects our ability to push rate.

And secondly, with the performance of storage, particularly in comparison to other asset classes, I would not be surprised if that attracts more capital, more developers to the market. So new supply isn't going away. It's not in many -- every market, but in the markets where it is, it's something we need to deal with.

Richard Skidmore -- Goldman Sachs -- Analyst

Thank you. And then, Joe, just maybe one other follow-up on the bridge loan program. You mentioned, I think $400 million targeted for 2021. Is that sort of in the pipeline or is that an aspirational goal? Maybe help us frame that and then how you think about the path forward from some of these bridge loan and other investments that you're making to help with the FFO growth?

Joseph D. Margolis -- Chief Executive Officer

So, we have about $196 million in the pipeline. So we believe $400 million is an achievable goal and the bridge loan program is very accretive for us because the whole note reach [Phonetic] maybe in the 5% to 6% but by the time we sell the A and keep the B, the rate we're getting is 9%, 10%, 11% plus we're getting management of the stores and the economics there. We also hope to buy a bunch of these and I think we bought one and have two that we're targeting to buy. And it's an immature program. But as we get deeper into it, I hope it turns into an acquisition pipeline as well.

Richard Skidmore -- Goldman Sachs -- Analyst

Thank you.

Joseph D. Margolis -- Chief Executive Officer

Sure.

Operator

Your next question comes from Smedes Rose with Citi.

Smedes Rose -- Citi Investment Research -- Analyst

Hi, thanks. I wanted to ask you -- so migration has been a big topic over this period or this pandemic and I was just wondering, are you starting to see that at all across your portfolio and does it make you sort of change, wherein you're thinking about where you might want to invest in the future as you look at acquisitions?

Joseph D. Margolis -- Chief Executive Officer

Thanks Smedes. So, we haven't seen differential in performance between the markets that have been called out as people are fleeing San Francisco or people are fleeing New York and the markets that people are supposedly fleeing to. And I don't know if that's because people are storing their stuff in Manhattan before they go out to Borough, New Jersey and at some point, that will unwind. But as of now, we don't see performance differential based on that reported phenomenon. What we do see is performance difference based on new supply, to go back to the previous question. That's where we have the weakest power.

I'll also tell you, there's been a number of articles coming out recently that question whether the urban flight is as widespread as been reported in COVID. I just read an article that most of the people leaving San Francisco are settling in the counties around San Francisco, they're not going to Utah or Florida or Texas.

And then lastly, and this is just one man's opinion, I don't believe COVID is the death of New York City. I believe young people like to live in cities. Cities have a lot of advantages. And I don't believe that this is the death of the big cities. So to answer your question, we're much more focused on micro markets as we look to buy things, and we're not -- we have not yet adjusted our investment strategy based on urban flight.

Smedes Rose -- Citi Investment Research -- Analyst

Okay, thank you for that. I just wanted to ask you too, your net-adds in the fourth quarter for third-party management were quite a bit lower than the gross additions. And I just was wondering what sort of caused that churn and is that something that you would expect to see going forward, perhaps, seeing it like from the first quarter.

Joseph D. Margolis -- Chief Executive Officer

Yeah, great question. So, we had 38 stores leave our platform in the fourth quarter and 87 leave our platform in 2020, almost all of them were because of sales. Very, very few were a change in managers. We bought 15 of those 87 stores, not a huge percentage and the issue is pricing. We try to remain disciplined and not overpay, in our view, for things. There is also some subset of these stores that are not of a quality we want to own. We have to manage but not own.

So given where prices is, I would expect that we continue to have sales. I hope we can do a better job through structures that we buy more of them, but our number one goal is not to do something that's dilutive to our shareholder's value. So if pricing gets beyond what we think is reasonable, we're going to do our best to transition the store to the new buyer.

Smedes Rose -- Citi Investment Research -- Analyst

Okay, thank you. Appreciate it.

Joseph D. Margolis -- Chief Executive Officer

Sure. Thanks Smedes.

Operator

Your next question comes from Todd Thomas with KeyBanc Capital Markets.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Hi, good afternoon. First question, Scott, apologies if I missed this, but what were move-in rates or move in rate growth, I guess, in the quarter and in January and what are you seeing early in February?

P. Scott Stubbs -- Executive Vice President & Chief Financial Officer

Yeah. So, our achieved rates in the fourth quarter and really for the back half of the year, we're about 10% year -- ahead of where they were the prior year. And in the first quarter of this year, January and February, we're seeing rates be at very similar levels, about 10% ahead of where they were last year.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Okay. And then, just following up on rental rate trends and just given how the industry has tightened up here over the last couple of quarters. And you've seen a lot of rent growth during the off peak season which Joe, I think, you noted began in August. As we think about the peak leasing season ramping up now, is it possible that we see rate increases similar to what Extra Space and the industry has experienced historically during the peak periods from where rates are today and is that factored into guidance?

P. Scott Stubbs -- Executive Vice President & Chief Financial Officer

So, we are assuming that the first quarter we continue these rate that we've been -- we've been experiencing. Second quarter, our achieved rates, we would expect to be very strong, because if you remember, in the second quarter when things really dropped, we dropped rates 20% to 30%. And so when you're looking at a rate that was 20% to 30% lower and then it's already 10% above, you're going to see some significant rate growth for customers that move in at April, May even into early June and those are all factored into our guidance.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Okay. And how far above -- where are rates today relative to sort of that March, April, May timeframe?

P. Scott Stubbs -- Executive Vice President & Chief Financial Officer

So if you -- I'll just give you one point of reference and that's our achieved -- I mean our achieved rate compared to our in-place rents and this isn't necessarily the move-out rate versus the move-in rate. Our in-place rents are actually above our achieved rates today. Now remember, this is the time of year when this is usually the most negative, meaning your achieved rates in January and February it's the highest -- your existing customer rates are compared to your achieved rates on an annual basis.

So the fact that our rates are up 10% year-over-year in February is good. So our in-place rents are about high single-digits above where the achieved rates are today.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Okay, that's helpful. And then just one question, the taxes in the TRS that are forecast to be up to about $19 million to $20 million. I know in the past you've executed on sort of a variety of different strategies to minimize that tax expenses. Are there any opportunities that you see today as you look ahead?

P. Scott Stubbs -- Executive Vice President & Chief Financial Officer

So we are continuing to take advantage of some solar opportunities where you -- where you continue to use that from an ESG perspective and a sustainability perspective as well as some tax benefits. That's the big one that we have today.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Okay. Do you see any potential downside to that -- the tax expense in the TRS going forward?

P. Scott Stubbs -- Executive Vice President & Chief Financial Officer

So, I think it will depend a little bit on where rates -- tax rates go, and then also what happens with solar credits. I think that you've seen them burning off. I would expect with the change in President, they could initiate additional credits but those are -- we'll continue to monitor those.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Okay. All right, thank you.

P. Scott Stubbs -- Executive Vice President & Chief Financial Officer

Thanks Todd.

Operator

Your next question comes from Ki Bin Kim with Truist.

Ki Bin Kim -- Truist Financial -- Analyst

Thanks. Great quarter and great guidance. So, I'm curious, are the kind of rent increase ceilings like California and other cities might have put in place, what is implicit in your guidance in terms of those policies loosening up? Are you assuming that you can push rates further in the back half in California or is that just going to be upside -- potential upside to guidance?

Joseph D. Margolis -- Chief Executive Officer

So, we don't assumes that we gets relief from those in the first half of 2021. The back half of 2021, I believe, we still are moderating some of those rates. So there is some upside to that. But there's also a downside if something turns in the wrong direction and additional restrictions are put into place.

Ki Bin Kim -- Truist Financial -- Analyst

Got it. And just going back to the supply topic, you talked about the percent impact to your same-store pool. But I'm curious about the decimal impact, so not just 30% being impacted or 21% being impacted but the decimal impact is -- at the end of the day, when all is said and done, if it decimal impact, is that even better?

Joseph D. Margolis -- Chief Executive Officer

I'm not sure I understood the question. So we've tried to be clear on this call and others that supply is the biggest factor that's impeding our performance in that, in markets like the Boroughs in Northern New Jersey and Texas markets, Florida markets etc. our ability to raise rents. We can fill the stores up.

We can keep them in -- at very high occupancy rates. It's -- our ability to raise rent is impacted by the new supply. Ki Bin, I don't know if that answered your question and if not let me know and I'll try better.

Ki Bin Kim -- Truist Financial -- Analyst

Well, you said I think about 21% we're seeing are so called impacted by supply, but that could mean 10% more supply coming to those markets or it could be 2% more spike in those markets. So that's how I was trying to gauge if it's leaning one way or another.

Joseph D. Margolis -- Chief Executive Officer

Yeah there, it -- listen, this is a micro-market business and that's an astute comment, it varies widely. We've had situations where we've had properties come in very close to an existing property, brand new development and because of traffic patterns or barriers like bridges or rivers or whatever specific reason, we've had absolutely no impact on our property. We also see that it's better for a store to -- new store to come into a market where it's 10 square feet per person than two square feet per person, because the percentage increase on a market that's full and has 10 square feet per person, you'd only have to capture a marginal part of everyone's demand to fill your store up, where if it's only two square foot per person and you're increasing supply by 50%, that's a more difficult -- at least in the short term, a more difficult problem.

So it is absolutely a -- we get these numbers 21%, 30% whatever, it is a market-by-market, store-by-store analysis and that's how we do it for our guidance. We create individual budgets based on what we know could happen in the markets for each store. We do our best to project performance and we roll that all up and that becomes our guidance.

Ki Bin Kim -- Truist Financial -- Analyst

Got it, thank you.

Joseph D. Margolis -- Chief Executive Officer

Sure.

Operator

The next question comes from Todd Stender with Wells Fargo.

Todd Stender -- Wells Fargo -- Analyst

Hi, thanks. Just listening to your posture calling for some moderation in occupancy. Certainly, these are historic highs and it's probably prudent to do so. But what drives that move lower? Are you assuming some housing transaction slowing? Is it frozen consumer behavior that begins to thaw [Phonetic] and people naturally start to move out after a 13 or 14 months. Maybe where do you kind of point to?

P. Scott Stubbs -- Executive Vice President & Chief Financial Officer

So Todd I would tell you -- oh, go ahead Joe.

Joseph D. Margolis -- Chief Executive Officer

Sorry Scott. So, our elevated occupancy, one of the very important factors is moderation in vacates. And at some point, COIVD is going to be in the rear view mirror and we believe customer behavior will return to normal. Now, I don't think that means there is going to be an end of COVID day and someone is going to flip the switch and everyone runs to move out of their storages, right.

We know that our customers are -- have a great deal of inertia and it's not high in their list and it may take them some time. We know that the largest increase in reason for storage we've seen over COVID is de cluttering of the house. And I don't think just because COVID is over, people are going to want to reclutter their house, right, that this may be a more permanent change. But with all that being said, we do believe vacates will eventually get back to more normal levels, and that will cause a reduction in occupancy.

Todd Stender -- Wells Fargo -- Analyst

Understood. Thanks, Joe. One more, just in the terms of maybe just sticking with bridge loans, you did sell some of your bridge loans, looks like you have a little bit more sold already this year. So it gives you a seat at the table when you want to go acquire a property, but now you've sold some, does that now limit your ability to acquire on that deal and -- that's one.

And then two, how liquid is that market if you guys are trying to lighten up on loans or maybe it's a risk mitigation effort, maybe just some context there?

Joseph D. Margolis -- Chief Executive Officer

So there, once we have sold an A-piece and we have sold $76 million of additional A-pieces in 2021. It does complicate the purchase, because we can wave our portion of the prepayment penalty. But the A-piece solid is not going to do that because they not getting any benefit from our purchase. So that is a challenge. Obviously as you get closer to maturity and those burn off, it's less of the challenge.

We -- the second part of the question, when we started this program, we had a co-lending partner that we would co-originate the loans and at closing, close them with -- where we only help the B-piece. And we found that better execution over time was for us to close in all both pieces, package up the As into more meaningful chunks and then sell them.

So that means we hold the As on our balance sheet for some period of time and you saw in the fourth quarter, how having those sold elevated our debt somewhat. But it gives us better execution particularly because now we have two buyers of the A-note. So there is some competition and redundancy for that and that seems to be working really well for us.

Todd Stender -- Wells Fargo -- Analyst

Great, thank you.

Joseph D. Margolis -- Chief Executive Officer

Sure.

Operator

Your next question comes from Mike Mueller with J.P. Morgan.

Michael Mueller -- J.P. Morgan -- Analyst

Yeah, hi. Scott, want to go back to, when you were talking about occupancy being strong up to 300 basis points through the summer and then you made a comment about a headwind down to a 100 basis points. Were you implying that by year-end, the occupancy comp was going to be a negative 100 basis points or your 300 basis points positive was going to shrink to 100 basis points positive?

P. Scott Stubbs -- Executive Vice President & Chief Financial Officer

So in the back half of 2020, it was 200 basis point to 300 basis point benefit, and we are assuming that in the back half of 2021, it is a 100 basis point to 200 basis point headwind. So it's a negative comp year-over-year in the back half of 2021.

Michael Mueller -- J.P. Morgan -- Analyst

Got it. Okay, that's helpful. And then, when you were talking about the portion or the markets where you still run into rental increase restrictions, how significant is that as a percentage of the whole portfolio.

Joseph D. Margolis -- Chief Executive Officer

Sort of thinking how to measure that. Some of the rental rate restrictions are at a level that it's not that meaningful, right. In Alabama, you can't increase your rates more than 25% or Kansas to 25%. Now those are biggest states. But that gives you the idea. And other like California where it's 10% and it's a meaningful state for us, that is much more of a restriction. So we think the opportunity cost if you will, in 2021 because we were not able to raise the rates, is meaningful. It's likely over $10 million, but it's all included in our guidance.

Michael Mueller -- J.P. Morgan -- Analyst

Got it. Okay, that was it. Thank you.

Operator

Your next question comes from Ronald Kamdem with Morgan Stanley.

Ronald Kamdem -- Morgan Stanley -- Analyst

Hey, congrats in the quarter. Just two quick ones from me. One is just on the same-store expense guidance, you could just -- if you haven't already talked about, how should we think about sort of the property taxes and the payroll, which is sort of the largest items in terms of their contribution? Thanks.

P. Scott Stubbs -- Executive Vice President & Chief Financial Officer

Yeah. So I can give you our assumptions in our guidance. The over -- about 55% of the increase actually relates to payroll -- to property tax increases and we are assuming that they're about 5.5% higher than they were in 2020. Our payroll increase is about 2%, increased year-over-year and that makes up another 10%. And then, we are assuming R&M is going up. We've had a couple of years with the down and we've had some benefit from lower comps with snow removal. So we think that's going to be a tough comp. We've seen some of that in the Northeast already to-date. So that's some of the larger assumptions in the 2021 guidance.

Ronald Kamdem -- Morgan Stanley -- Analyst

Got it. My second question was just on the four assets that were sold. Just any color around there, maybe cap rates or why was it sold? Was it just a great offer? Just curious what the situations where there. Thanks.

Joseph D. Margolis -- Chief Executive Officer

I would tell you, we thought the pricing was very good otherwise we wouldn't have sold. We retain management of the stores. We retain certain right of first refusals to buy them if they ever want to sell. I would tell you it was a tax motivated buyer and we were able to drive what I thought was very attractive terms because they have that motivation.

Ronald Kamdem -- Morgan Stanley -- Analyst

Helpful, Many thanks.

Joseph D. Margolis -- Chief Executive Officer

I'm sorry.

P. Scott Stubbs -- Executive Vice President & Chief Financial Officer

Thanks Mark.

Ronald Kamdem -- Morgan Stanley -- Analyst

So I said, thank you.

Joseph D. Margolis -- Chief Executive Officer

Okay, thank you very much.

Operator

Your next question comes from Michael Lehman with Evercore ISI.

Michael Lehman -- Evercore ISI -- Analyst

Hi guys. Thanks for taking my question. Just a quick follow-up on supply, how much of your outlook includes the possibility of conversions from retail to storage with the amount of -- of kind of reliance on e-commerce that's been happening?

Joseph D. Margolis -- Chief Executive Officer

So, when we know about it, it's absolutely included in our projections. Our folks in the field are charged with knowing what's going on in their micro-market and what can be converted. That being said, I think that is -- and we've done a bunch of that. We have a number of stores that are old retail centers.

There is challenges to that. I don't think that's going to be a giant source of new self-storage. Some of the dark retail is dark retail for a reason and you don't -- we wouldn't want to put a storage site there. Some is dark retail but not zoned probably for a storage. And there is a lot of other physical issues with doing that. So there certainly will be some of that, but I don't see a wave -- a giant wave of new supply from retail conversions.

Michael Lehman -- Evercore ISI -- Analyst

Got it. Okay, that's it from me.

Joseph D. Margolis -- Chief Executive Officer

Thank you.

Operator

Your next question comes from Ki Bin Kim with Truist.

Ki Bin Kim -- Truist Financial -- Analyst

Oh, didn't realize I'll be back so quick. Just wanted to talk big picture about your bridge loan program, not just like what's in 2021 -- plain '21 guidance, but just longer term. Should we view this program as going to be in place for the indefinite future or is this more, there is a market opportunity that you're taking advantage of. So maybe in three years it really winds down. I'm just trying to understand the scope of the program long-term.

Joseph D. Margolis -- Chief Executive Officer

So, we don't have a perfect crystal ball. Our belief is that there will be a demand for what we're doing now into the future. I also believe that it's incumbent on us to always understand where the capital voids are in the market and how we can make good risk-adjusted returns based on those capital voids. So if our current program gets smaller in the future because that capital need is not as great, I hope that our team and I expect that our team to find the next opportunity.

One thing I think Extra Space has done well over the years is being innovative with the external growth and that means not executing the same strategy regardless of where you are in the market cycle. It's trying to understand that market cycle and see where you can make outsized returns at acceptable levels of risk. Right now that's bridge loans and I hope it continues forever, but if it doesn't, we'll find something else.

Ki Bin Kim -- Truist Financial -- Analyst

Right. And I would say I'm assuming there is a pretty wide funnel and what you end up closing is pretty select -- selective. But just curious, can you just describe like the deals that you've actually turned down and how big that funnel is at the top?

Joseph D. Margolis -- Chief Executive Officer

Sure. So the -- I think the two biggest limitations on the funnel at top is, we won't make construction loans. We could -- we could make lots and lots of loans if we're willing to make construction loans. But the great thing about the bridge loan program is if it goes bad and we have to take the property over that's 75% or 80% of underwritten value. We already operate it. We're happy to own it. That's not a bad result as opposed to taking over a half built defaulted construction project, we have no interest in that. So that's one limitation on the top of the funnel.

The second is we have to manage the store and that some people are self-manage and want to continue that and they don't want us to manage the store, and then we won't do it. After that, we get to property quality, location, underwriting, we can get to the proceeds that the borrower wants, but there is -- we have a substantial pipeline and we feel confident we can hit our guidance for this year.

Ki Bin Kim -- Truist Financial -- Analyst

Okay. Thanks again.

Joseph D. Margolis -- Chief Executive Officer

Sure. Thanks Ki Bin.

Operator

I'm showing no further questions at this time, I would now like to turn the conference back to Mr Joe Margolis, Chief Executive Officer.

Joseph D. Margolis -- Chief Executive Officer

Great, thanks everyone for your interest in Extra Space and your support over the years. We're really looking forward to a strong 2021, strong double-digit core FFO growth. And appreciate your interest. I hope everyone and their families and well. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 45 minutes

Call participants:

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

Joseph D. Margolis -- Chief Executive Officer

P. Scott Stubbs -- Executive Vice President & Chief Financial Officer

Alua Askarbek -- Bank of America Merrill Lynch -- Analyst

Spenser Allaway -- Green Street Advisors -- Analyst

Richard Skidmore -- Goldman Sachs -- Analyst

Smedes Rose -- Citi Investment Research -- Analyst

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Ki Bin Kim -- Truist Financial -- Analyst

Todd Stender -- Wells Fargo -- Analyst

Michael Mueller -- J.P. Morgan -- Analyst

Ronald Kamdem -- Morgan Stanley -- Analyst

Michael Lehman -- Evercore ISI -- Analyst

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