Q3 2019 Earnings Call

Three Q and this has been a few quarters of elevated marketing already last you think about the last few quarters and the effectiveness of marketing versus some of them are traditional levers like.

Right side, the discounting how are you thinking about the strategy going forward, whether that's in Fourq youre into 2020 on the marketing expense.

Sure. Thanks releases Carmel I'll take that one.

We use similar mix of tools in the third quarter that we have throughout the year. So I won't go into details or those in particular, but lower move ins or lower a move in rates and less promotional discounts so year over year.

Got it speaking directly to advertising as we've discussed on previous calls we've been increasing our spend through 2018 and 29 team as we've grown incrementally more confident in the demand response, we've received.

Through that channel so advertising was up 70% in the quarter, we pulled pretty hard on this lever this quarter in order to get move ins during the seasonally busy move in period.

In July August and September .

We like the returns we've been getting from advertising third quarter included the incremental move ins were achieving.

For the incremental cost.

It was marginal returns are attractive that advertising expense is up front, while the customer value will be earned over time.

And kind of stepping back public storage has real advantages online and we're taking advantage of those first of which is our brand name.

Synonymous with our product a top search term within the sector.

Almost half of our paid search volume comes in on brand searches, which drive efficiencies as well as conversion.

And away from paid channels, a meaningful portion of our move ins come directly to us on paid.

Two thirds.

The second component is scale, we have top market shares in the top metropolitan markets in the United States, which allows for a better richer shopping experience for our customers and good conversion at the local level.

So this level lever continues to work with occupancy ending up the quarter 70 basis points.

Operator, we will be joining you momentarily.

This lever.

He prepared to provide your conference I'd number and any additional information required by.

Yeah I.

I think the.

Hosting this conference call.

We clearly.

All information has been.

Strategically made.

The decision.

People.

On the border.

Yeah.

The conference.

The increase that.

Fall may be recorded and.

Not.

Okay.

The fact that we have a very.

You for your.

And competitive customer end buyer.

Nine for the next.

But we knew going.

The reason we could lever.

And likely to see as much.

Thank you for your patience.

But he because again.

Yeah.

Those are currently.

Fine for the.

Next available.

Quarters.

Oh.

Thank you for your patience.

The two.

Can stay on the.

In terms of volume.

In terms of moving and move.

How can move out volume.

Sure.

<unk> was down more.

On may have her gone.

Can be.

Yeah.

Year to date and really through last year as well move outs were down one.

Another conference I'd number.

So we continue to see a very good performance from our existing tenant base as length of stays have extended.

And move outs have declined so great stable existing tenant base, which is really supported by a solid labor a macro environment.

In terms of rate I mentioned this a moment ago.

Our move in rates were down about 5% for the quarter, so pretty consistent with what we saw in second quarter.

Move out rates.

Were also down modestly 0.6% so all of that's disclosed in the in the 10-Q.

Great. Thank you.

Thank you Shirley.

Our next question comes from one of Jeremy Metz demo capital markets.

Hey, guys.

Joe maybe just to start it'd be great you get your broad view on this status supply as we sit here today and as we look across your top markets. Some of the weaker ones were expected.

Supply and acts more or less generally there.

But as we look across your footprint and you know the impacts a year on specific portfolio.

Can you maybe talk about where we're at an occurrence supply cycle relative to your four French where you know where they may be peaking and may start to recover next year versus where some markers are still needed at battle.

Okay sure.

Again, what we've been talking to now obviously for some time is the elevated level supply that's been coming into many markets now for a number of years starting in 2016 went about $2 billion nationally came in.

To the markets and then you know that doubled in 2017 to 4 billion 2018 5 billion by all accounts 2019 is going to equal 2018, and our view of 2020 is we will likely see some deep.

Increase in again deliveries and it may be anywhere from say, 10% to 20%. We're hoping clearly has many others are that it's 20% or even better but we continue to track markets and statistics that are guiding us to about that you know again, 15% to 20% down.

So you take that into.

Consideration Holistically you know again over this time period, you've seen anywhere from 1600 to 2000, new properties in our markets, that's about 120 million square feet.

And you know again market to market, particularly where this elevated supplies head we see the most commanding headwinds. So you know maybe more specifically your question Jeremy So where are we today.

The good news fried you know deliveries have been elevated in markets like Denver, Charlotte Houston Austin in Chicago, those have all been poster child markets for these elevated level of deliveries and tougher operating markets, but we're now starting to see that supply volumes.

Decrease in some cases pretty dramatically, but you know where we're still dealing with the lingering effects of the amount of supply. So you take Denver for instance, in 2018 little over 2 million square feet went into that market.

Good news is it was less than half of that this year and again, it's going to notched down likely in 2000 in 20, but holistically that market seen about a 35% increase of supply and that time period compared to existing base of assets.

So you've got to continue to maneuver around that elevated level of activity.

Again using markets like Charlotte Austin, Chicago is it and Houston as examples where any one of those markets hit you know a million plus level of deliveries Houston more extreme it's a big market no question, but it hit at about two and a half million square feet of completions in 2018.

Its ratcheted down and we like the impact of that but again, we're gonna have to continue to maneuver around again, how we're dealing with customer acquisition pricing et cetera.

The flip side is we're still not out of the woods could you go back again to our prediction about what's going to happen in 2020, with plus or minus about $4 billion of assets coming into the markets and we're going to see that impact as we are tracking and again. These are statistics tied to was.

Under construction and in development. Okay. So this isn't.

These aren't deals that are planned or potentially contemplated there in motion. Okay. So you're going to see more impact in Portland, Boston, Seattle, many parts of Florida.

D.C. Minneapolis, and New York. So you know we're clear headed about the things that were likely to need to do there. We've got a good playbook, we're going to continue to.

Drive a lot of the things that we can to maximize revenue opportunity maximize opportunity and customer acquisition.

The the third element I'll talk to as well is the fact that we do have and we like what we're seeing in our own development pipeline.

So we've got about $540 million than today's pipeline.

We shifted out of markets like Texas as a whole for the most part where the last two or three years, we put a lot of development activity into both Houston and Dallas to a lesser degree in the Austin, but now we're going into a broader number of markets, where we're seeing.

Again opportunities to get good traction of these new developments and then if you even look at our legacy if you want to call that are the development pipeline that we deliver since 2013. It continues to lease up quite well I mentioned in my opening comments that you know this quarter, we saw about 21% and a lie growth in that portfolio.

Collectively it's about a 1.4 billion dollar investment and it today is.

Roughly at about 80%, so we like and we'll see very good traction out of that.

In coming quarters, because again, we've got more occupancy and we've got the impact of mature revenue opportunities, which again is clearly part of our successful strategy as we again, both develop and mature these assets.

And can you just touch on county quickly in that context as well.

Touch on him I'm, sorry way just in the context of where we're at what kind of where do you view is on supply for across your California, Oh in California itself. So yes, okay. So for the most park, California is in very good shape now going south to north there's parts of San Diego County, we're keeping a close eye on.

In two because there's some elevated deliveries and some of the outer markets within San Diego County.

Orange County, and La County for the most part or are pretty.

I would say inactive from a new development standpoint, primarily because there's very little land available and it's very expensive. If in fact, you're able to find anything here right here in the Elie Metro market, maybe a little bit more activity out and.

The inland Empire, then you go up into the Bay area again, San Francisco, South San Francisco.

No no worries there a little bit a heavy activity in the San Jose market that we're keeping a close eye on but again not a big.

Amount of inventory on a percentage of existing base. So we continue to see in in our own development pipeline in these markets, where we've really had the opportunity to take existing assets for the most part and do some pretty meaningful expansions and again repeating what I just said around the.

Traction, we're getting from that activity the expansions that we're doing our leasing up really well. So we're very pleased by that seeing very good traction and again for the most part I would say, California is a pretty good shape.

Appreciate that color in the second one from a quick lasers to I want to go back to the move out rates. Tom you mentioned, the 60 basis points year, historically or even just looking back to past few years or at least you've had a rent roll down which makes sense in the context of rising rents in the in place bomb traction.

That's now flipped here the past two quarters. So just wondering is that warm reflection of the overall rents you're bringing customers in that or is it a reflection at all and strategy shift in how aggressive you are I'm pushing in place rents just given the widening spread to market there.

I think is largely the fact that as folks move in and lower rates.

The move and move outs are coming out at lower rates. That's the biggest driver there no no real shift in strategy on existing tenant rate increases you know the.

We've talked about modestly lengthening length of stays which has contributed to contribution from existing tenant rate increases, but no real shift in strategy there.

So the decrease about rental rates is driven by move in its coming at lower rates.

Thanks for the time.

Thanks, Jamie.

Our next question comes from the line of Smedes Rose City.

Hi, Thanks, I wanted to ask you and your key to talk about kind of the appeal essentially of the fifth generation products that are that are coming to market and Im just wondering is there an opportunity to take advantage of what apparently it's still very strong pricing for older stabilized assets maybe in Europe .

Portfolio and redeploy assets in.

Some of the growth markets, you talked about earlier with newer facilities.

Yeah sure Smedes so.

Couple of different areas to talk to their so.

First of all I think it's well known that one of the benefits of the the product type itself is you can go through decades of you know use on our assets and they can be every bit as.

Vibrant in today's world and even more so in many cases than what they were originally developed so there's very little obsolescence that we're seeing anywhere in the portfolio.

What were doing though to actually continue to enhance even some of those revenue streams and again amplify performance property. The property with some of our older assets is a program we've talked a little bit about which is our property of tomorrow program, where we're going through and putting to your point.

I mean, what we would call fifth generation attributes into many of these assets, where we can again enhance the curb appeal the asset through more modern paint schemes sign edge, we're improving the office and customer areas that align with some of the technology.

Issue or technology strategies that Weve had.

We're.

At this point going through California from a first wave standpoint, where we've taken about 125 of our generation one through three or four properties some of which might be say 30, or 40 years old there and phenomenal locations. They drive very good occupancy and rent levels, but we're going to hopefully even.

See that much more opportunity once we've basically taking them taking them through.

The various stages of the.

Elements that we would include in our generation brand new properties. So.

That's a working quite well, we're getting good reception from both customers.

And our employees as well and then we're also you know now rolling that program into.

A number of markets.

Nationally, which will include in the first quarter parts of Florida.

Well, we've touched many parts of the boroughs if not all of those properties, we're going to go into other parts of New York, We've already gone into markets like Chicago for instance, and the Carolinas So anyway. We're.

We're pretty excited about what we're doing now from a cost standpoint, we've talked about this program.

In the context of ultimately being you know about a half a billion dollars are more once we get through the entire portfolio 2019, we will have spent about $110 million on the program and in 2020 will likely spend even a little bit more again as we touched the markets I talked to so so.

Far we're we're very pleased and as we're doing this we're also making some technological updates to the properties were as we speak re lighting interior ltds on assets for both energy efficiency and again better customer environments, we have begun changing out.

Our access control systems, which is now based on a centralized system, what weve, which we've never had before is going to give us a lot of good.

Data that we haven't had around customer activity.

We are adding solar to a number of properties. So we've got a number of different elements of the overall program in motion and like I mentioned, we're getting very good feedback from it and like the results.

Great and then I just wanted to ask you to you last quarter mentioned that the third party management platform, it's largely geared to Predevelopment and development properties. Just given you know it looks like a continued kind of deceleration and trends across multiple markets is there an opportunity to bring on our convert more independence I guess more aggressively.

To your platform or.

Is that your strategy over there so I.

You know again, we were seeing our pipeline.

Definitely continue to build the pipeline is dominated by assets that are in various stages stages of development.

Thats pretty typical for you know again, that's kind of a platform you know.

Again from what the industry as a whole has seen we haven't however, also seeing some opportunities to bring more stabilized assets into the program to and.

You know again, a number of owners are clearly interested and are anxious to come into our platform because they like and see the amount of.

Revenue generation that we can provide to them based on all the metrics that we're able to again weve into their assets, whether again, it's purely based on our brand the optimization that we get through search our marketing efforts of the scale that we got in markets. So again it it's a program were.

I'm pleased relative to the momentum that we've got in it we signed in the quarter of 13 additional assets. So today, we've got about 75 properties in the program and as I mentioned the of backlog continues to build.

Great. Thank you.

Our next question comes from the line of Todd Thomas of Keybanc capital markets.

Hi, Thanks.

Thanks for the comments on supply I, just wanted to follow up on that and on rates.

Tom You mentioned moving rents, where you were down 5% in the quarter.

They have been down since late 2017 and the decrease.

And moving rents seems to be increasing a bit here as you think about where we are in the cycle with regards to supply and the absorption of new supply that's taking place across the industry. So it sounds like you're still seeing some good traction on the occupancy side, but where do you think we are in the process of seeing.

Asking rents adjust any any thoughts on that.

Yes, I do think if you go back several years he's added consistent trend of using move in rate or is it drives volume. It really is a market by market dynamic. So as we think about where it's going in future years, a lot of it will be dependent on what happens in those markets. So just looking at at move in rates for the third.

In order for example, you have markets like Los Angeles, or Phoenix, where you're up call. It low to mid single digits on move in rates.

Given what's going on there.

The flip side is you've got Florida markets, like Miami, Miami, and Tampa, which are being impacted by new supply.

And those move in rates are down call it 5% to 10% I'd throw houston into that that bucket as well and so the move in rates were using or not across the board. It's really a tactic to drive volume in areas, where we're competing for new customers and.

In a more competitive environment.

As we move in to 220 20.

We're likely to see the mix of those markets continue to shift so is as we've spoken about in the past it looking back at the markets that were more challenged in prior year, we've seen some of those markets actually improve meaningfully so a market like Chicago, Washington, DC. There was maybe more impacted earlier on in the cycle.

It seems better traction this year than they were last year as we head into 2020, it's going to be a different mix of markets, but you know they go let Joe speak to the new supply in aggregate by market, but it's a it's a pretty dynamic management on our end.

As we seek to maximize revenue within those local submarkets.

Hi.

Okay and then.

I realize you send out far fewer brand increased letters I suppose into the off peak leasing season, but.

Does the current environment.

You are experiencing here in the market does it cause you to to consider easing up a little bit on on the number of customers that you might be sending letters to or the rate at which you might push and also can you remind us whether there is sort of a governor in place around how much of a percent above street you.

You know, you'll you'll increase existing customers rates.

Sure So strategy wise, we plan on using consistent.

Plans through the fourth and next years first quarter in the slow season. So we do send rental rate increases throughout the year and we'll do so in the coming quarters in terms of the magnitude in the quantity they were looking to to optimize.

Is that at the tenant level.

We think we do better on that you're in a year out.

So.

Ultimately, what we're seeking to do is maximize revenue.

So we take into consideration that probabilities of Vacates as well as the cost of that vacated replacing that tenant et cetera. So I think very throughout the year, but consistent strategies.

No no change or more conservatism or more aggressiveness as we get into the next few quarters.

In terms of a governor yes, there are things in place that we use in order to.

To make sure that we are maximizing that revenue overtime.

And so there's there's.

Different governors in place in different strategies reuse and different types of environments.

But certainly street rate in the rate with which and new customer would move in is a key component of the strategy. So is tenants get higher above above street rate the cost of that tenant leading is higher.

Okay. That's helpful. Thank you.

Our next question comes from the line or Steve Sakwa of Evercore ISI.

Hi, Thanks to guess good morning out there I first question I guess is just in terms of sort of the monthly trends you saw in the third quarter was there anything noticeable as it relates to kind of the same store revenue trend I realize occupancy ended kind of on a strong note at the end of the period and an average occupancy was up 40.

And I'm, just curious kind of how things trended throughout the quarter.

Sure. So in terms of operating trends through the quarter, we actually did see improving trends from July through September we did do some things in September the aided that including or typical labor day sale that we extended a bit this year to drive traffic and ultimately we like that from a revenue standpoint.

Both in the quarter as well is moving forward. So we did see a modestly improving trends through the quarter from July through September .

As we head into October generally consistent trends, so nothing really to speak too.

Other than okay, and and I realize you guys don't provide guidance, but you know historically kind of the guidepost for revenue growth has been to kind of looked at that annual contract rent per foot in sort of looked at the average occupancy in the end of period occupancy and.

For the third quarter that kind of gave you a range of one three to one six and that the actual number came in a little bit below that and as you look at the fourth quarter, it's kind of pencilling in for call. It 50, excuse me 50 basis points to about 80 basis points, which would be sort of further slowdown the is or just something we're sort of should be thinking about as we head into Q4 and into next.

Sure.

No Steve what I I would point you to that those are.

Metrics that we think create guidelines I mean, there can obviously be somber you know variation in and out of different conditions, but you know there at the other day there they're relatively within the zone and you know what I would point to as well you know Tom mentioned that you know through October we've seen.

Consistent occupancy impact and again, that's intentional, meaning we saw that in the quarter or 70%.

Our 70 basis point increase and.

Moment is <unk>.

In about that same zone. So it ties to the strategic things that we're continuing to do it again, a tough acquisition customer acquisition environment to do something that others. Maybe don't have the same capabilities do which is really still in this environment lift occupancy a with you know a broader intent of that.

Ultimately gives us many things we like around revenue generation. So we're continuing to do that and I think we've set the stage for Q4, a pretty well as we intended to do.

Okay, and I guess, just lastly on the marketing expense is there anyway to sort of just help separate kind of the actual cost per click or that the actual costs from kind of the Google search versus kind of the income increased usage of the Google search and and you know sort of search paid advertising type.

Stuff. So I'm, just trying to sort of this aggregate the pricing increases versus I guess volume of usage.

Sure I would.

Yeah without getting into specifics around keyword bit strategies or otherwise I would say, it's a good mix of both increased cost per click as well as increased.

Increase bids to drive volume, so I'm a good mix of both.

Okay. Thanks, that's it for me thank you.

Our next question comes from line of Ki bin Kim essentially.

[noise] things I'm just wanted to follow up on Steve's questions first Sunday expense.

Hey, this elevated level hi, it's obviously, a purposeful shouldn't be a surprise.

I'm curious, though as we head into next year.

As we Comped Eve higher numbers.

Is this the new norm and we should expect increases from here. This level on up or is this sublet just kind of artificially high because it's part of about uniques part of the strategy for today that might normalize lower going forward.

Sure. So keep that I think there's a couple of things that highlight one is clearly we pulled out of this lever pretty hard in the third quarter and just spoke to some of the strategy thinking behind it from a revenue standpoint, but I think you're stepping back its managed very much dynamically at the local keyword level and so as we monitor.

Her what the returns are we're going to awfully our strategies. There thereafter, so we can't predict exactly what's going to happen going forward.

Got to step back in terms of advertising spend and you think about where we are in and what we're battling from a customer acquisition standpoint, and just provide a little historical context. So if you go back in time advertising as a percentage of revenue for public storage at the end of the last cycle beginning of this cycle hovered between.

Call it two and 3% of revenue.

The customer acquisition environment got very healthy and certainly fundamentals were very solid in the beginning in middle part of this cycle, we decreased our advertising spend in 2016 for example, advertising spend was just a touch over 1% of revenue.

In the same store pool.

Yeah, we're looking now a year to date, it's hovering just under 2%. So it gives you some context that you have always been increasing marketing spend we've been doing so from a low base in what was a very attractive customer acquisition environment. In 2014, 15, 16 and now we're in a certainly a more.

Challenging and competitive environment, we're using that tool like.

Like we have in the past two up to drive new move ins and occupancy.

Okay, that's helpful and.

Going back to the revenue questions then street rates. So this quarter, you're moving rates were down 5.3%.

Your extended the labor day sale, although a bit longer.

You got dogs, the games like you're looking for with lower rates and higher advertising. So I'm just curious if you're setting yourself up for.

For a seems to revenue growth to potentially reaccelerate in fourth quarter, because maybe you're the customers you've you've drawn into your company are paying that 50% off rate.

Some of them move out some real estate and you'll get the higher rent.

Maybe I can see isn't cash line day, one so maybe there's some below 10 games to recapture in fourth quarter.

I know that's a big question, but it just maybe it feels like <unk>.

Fourq you might look better than Threeq you.

So keep that maybe what I'd say is we obviously like the strategies, we used in the third quarter or some of them have short term impacts certainly we're looking them to manage medium to longer term revenue and ultimate customer lifetime value.

Through that that lifetime, you know in terms of whether we're re accelerating rating or decelerating, we continue to face real real challenges from an operating standpoint, particularly on move and in many of our supply impacted markets, that's not going to change as we get into the fourth quarter and Weve continued to see that through October .

You're looking at certain certain markets that have.

I had been more challenging you look at markets like Atlanta for example that has had a more challenging third quarter and into the fourth quarter and we're going to continue to see markets like that that will be a a drag on both moving volumes as well as revenue as we get into the fourth quarter.

Okay. Thank you.

Do you.

Again, ladies and gentlemen in order to ask a question simply press Star then the number one on your telephone keypad.

Our next question comes from line as Rob Ronald attendance of Morgan Stanley .

Hey, two quick ones me first is just.

Sort of due to a good job laying out some of the markets that that that you mentioned or maybe seeing elevated supply.

Just just started could you have a sense of when I think about private equity and private capital investors as has the appetite for the product you know from their standpoint changed at all or is it still a pretty attractive sort of asset class even in those markets that may meet me have had me I've had maybe too much supply early on it.

Michael.

Yeah, Ronald I think again.

That investor type continues to.

Look at self storage as a product and very positive terms I'm, we're seeing more entrants either come into or.

Yes, basically kind of scout or the industry you know.

In a variety of different ways, where we're seeing again that type of investment vehicles, you know come in a variety of different markets more often than not they're looking for scale, which can be challenging from time to time.

Cap rates really haven't adjusted for the most part but yeah. There's there's definitely a Matt you know a fair amount of capital that still wants to come into the market.

And you know some of those buyers may be you know thinking in terms of that I would say you know could be somewhat risky because they may be basing it off a pro forma as that may or may not make sense me yeah Mace, maybe based on you know levels and traction that we are seeing one or two years.

As a go that have certainly continue to change so its a new and different dynamic thats come into the sector and.

By all accounts, we don't see that shifting anytime soon.

Great and my second question I think on previous calls you sort of mentioned that I'm sort of the acquisition opportunity maybe had increase I think you didn't mention buying some math that's off of auction. Just maybe can you give an update on that is that is that something you're seeing it and what does that mean for.

'cause potential acquisition volumes next year is this something we could see ramp up significantly.

Sure. So again, you know statistically obviously you can see.

You know again through what we've done in the third quarter and then what we've got in our pipeline, whether you've already closed or under contract for the fourth quarter I'm more likely you know to acquire plus or minus about $375 million of assets. This year and you know that's you know to add to what we did you know from.

Our acquisition volume in 2018 for instance, and you know as I've talked to you know the last couple of quarters. We do see you know more and more onerous coming to us in a variety of different stages, whether they've already built assets. They maybe in the first year to lease up.

They're not making either pro formas or revenue projections and they've got some level of I would call. It anxiety I wouldn't call. It a pronounced flat out stress at this point, but there's definitely more anxiety related conversations that we're having.

By virtue of that we're seeing sellers being far more reasonable around valuations.

That's clearly what has led to some of the acquisition volume that we've already done this year and continue to see you know come our way we've been able to capture some.

Really nice assets in a number of markets that we wanted to build scale into and were.

Anticipating that there's more of that to calm.

And you know the other factor that I would tell you the is starting to percolate a bit more than we've seen recently is even what I would call entitled land, whether an owner again may have acquired a piece of property, one two or three years ago.

Again, anticipating pro forma as the.

They felt confident about one two or three years ago, clearly things have shifted their reassessing their own development returns and we're seeing more opportunities to actually engage and particularly.

And potentially buying some interesting opportunities there.

Helpful. Thank you.

You bet.

Our next question comes from the line of Eric Frankel of Green Street Advisors.

Right. Thank you I don't want to beat the and the marketing expense a issue is to death, but I wouldn't like to maybe just better understand the the rise in the cost per click phenomenon is that just related to just larger loan Neil.

Overall supply and some more competitive unit from the market, that's causing people to being more aggressive marketing space is it valet storage and it's nothing else. What do you think is the issue or is it just something or is it just monopoly practice of search.

I think it's a good mix of a lot of the factors you highlighted.

It's a combination of your traditional operators being willing to spend more to acquire more customers.

You know as we've increased our spend we've seen incremental volume and I suspect others have as well and so there is a component of your existing folks being more competitive certainly is it. The Google platform is is a great one and the fact that its auction based so they they let us compete within their there.

Sandbox and so the environments more competitive and you see folks being more aggressive them in their cost per click there are also.

Not only to your big public Reits, but also your regional operators that have been more aggressive as well as your some of your non traditional storage folks like valley for instance, some of those.

Operators had been more aggressive in cost per click as well so that all adds to a higher cost per click environment.

Which.

As we look at our spend that's a component of it but then we need.

Again at the local level do we.

We do we like the bids in the volumes that were seeing what do we get if we increase what do we get if we decrease and that's what we're managing and ultimately I spoke earlier, we like the returns.

We'll see whether the rest of the the environment and the rest of our competitors like the returns as cost per click continue to go higher but we like what we're seeing.

Right. Okay. Just another quick follow up regarding I guess the valley third just obviously quite a new initiative, the U.P.S. announced there and initial foray into sort of a valley a story because if you have any thoughts on how that might impact the the self storage industry going forward, if that if that model it they spend that model.

Yeah.

Yeah Eric.

Definitely an interesting announcement and you know we've tracked we've experimented we've.

Done a variety of different customer surveys around this whole concept of a valet.

You know on demand type platform and.

Thus far we continue to see very little disruption and or change in our own customer behavior, because we continue to see pretty distinct differences between what that product offering is compared to what traditional self storage is.

So you know the one thing that you know you P.S., obviously has that others. Prior have not is you know more of a logistical network.

The platform right now is based on.

Kind of been concept so.

Not clearly understanding what way it might evolve over time, they're testing it out in one market. So we're going to.

Continue to watch and understand as we have with the other platforms, but overall the whole valet model, we continue to see as one that might be.

More akin to a.

Traditional moving and storage type customer versus the traditional self storage customer.

A big difference you know to a self storage model is you literally pay for access each and every time you want your goods and then at the end today, you don't even know where they are so those are two pretty big hurdles relative to what again, a core self storage customer traditionally wants which is.

Access and.

And basically again, knowing that they can you know again.

Get to their goods without having to pay fees to do so so we'll continue to track it and a.

And see what evolves.

Okay. Thank you you bet.

Our next question comes from the line as Todd Stender I lost five now.

Hi, Thanks, just back to the elevated marketing spend.

Definitely tip tend to negative same store NOI territory, it's hitting stock today as you know.

But just wanted to get a sense of where you guys you're thinking about guidance, maybe just for some key metrics to set the red expectations obviously.

You're not running your business on a quarterly basis, it's for the long term, but when you get an outsized expense item like this that pops upset does contribute or do you guys trending negatives just wanted to get a sense if need be sitting around expectations going forward.

Sure so.

You're right, we don't provide guidance and we and we don't manage for the short term and we've talked about how we thought about the advertising spend for the quarter in terms of line by line expectations for expense.

Growth I would point you to our 10-Q, particularly any mdna, where we do walk through what the trends are within each of those items.

Yeah, I won't go through it into tail off because obviously the folks and the phone can can go through and read it but I think the expense pressures generally continue to mount be in property taxes property level payroll and the like so even away from marketing expenses. There's no question that.

Operating expenses have been more under pressure this year, and we think thats likely to continue for many years line items, but I'd point you to the 10-Q in terms of.

Some guidance as to where we're headed.

Got it thank you.

Thank you.

Our next question comes from the weren't as Michael Mueller of Jpmorgan.

Yes, Hi, I'm, just going back to the other topic rank growth realized rent growth.

I mean, what I guess was different in Q3 compared to Q2, because if we look at the prior quarter going from Q1 to Q2, we saw a pickup in the growth rate, we saw a pickup in on and I've read path as well, but then it ended up even with the marketing spend.

Coming in maybe a little bit better than half of what the Q2 was.

So I guess was there anything abnormal in hindsight that you see in that Q2 print or you know.

Was there something abnormal and what appears to be though you know the in print the Q3 levels of.

What's the 0.7% realized rent growth and 1.1% red bathroom.

Sure I wouldn't point to anything in particular, you know as you move through the second quarter and ended the third quarter. The busy season with lower move in rates that is a big drag through those quarters on contract rent growth.

We've seen that this year you've seen in previous years as well. So there's there's nothing really new there you know maybe pointing to one factor that may be made the second quarter, a little bit better in the third quarter, maybe a little bit worse. If you look at discount trends for example, which are component of revenue discounts were down almost seven.

Percent in the second quarter were down about 4% in the third quarter. So there's lots of moving pieces there, but generally if you look back.

Wow, we've been battling this new supply.

Between second quarter, and third quarter, we've seen contract rent growth decelerate over that time period pretty simply because.

We've been using lower rates in many of our markets in order to drive that volume as those folks move in during the summer that contract rent growth declines.

Got it that's helpful. Okay. Thank you.

Right.

Our next question comes from Atlanta, Smedes Rose City.

It's Michael Bilerman Smedes.

Yeah last couple of years Youve.

Tap the unsecured debt market right. So you are sitting on about a billing and a half of U.S. unsecured and you put some capital out in Europe from the natural hedge so your staking shurgard.

As well.

Sort of curious what your appetite today is to take in additional yeah. I know you redeeming the preferred and reissued but didn't know if there was an appetite given how low rates are.

To raise that capital.

Sure. Thanks, Michael you know I think as we've talked about in the past, we do it appetite to add incremental debt.

As well as incremental preferred.

As we have uses of capital. So so far this year, we've issued over $1 billion a capital as you've highlighted their preferred activity is largely band to refinance existing preferred and we're hopeful we have the opportunity to continue to do that as we move through the fourth quarter as a series that becomes callable in the fourth quarter.

But stepping back from a strategy standpoint, we plan on using both unsecured debt, which we can get attractive rates to your point.

As well as preferred stock, which is a higher cost, but historically speaking right now is offering very historically attractive coupons or sub 5%.

Well, we achieved in September so we'd like both markets and we plan on using both going forward.

I guess is there an appetite to maybe take advantage of the spread you can get to increase cash flow in your operating fundamentals.

On a little bit weaker right, so take advantage of being able to lock in.

10, 20, or even 30 year paper.

Refinancing prefer urge capture to 250 basis points of positive spread.

And at least held.

Offset some of the dilution from weaker corn portfolio.

Sure. So yeah, we have been reducing the.

The cost of our preferred portfolio by refinancing it we like the $4 billion a preferred we have outstanding we think it's a.

Very good source of permanent capital.

You know.

Taking what you said to the extreme we could use the revolver and redeem some preferred but from our standpoint, we like that permanent capital in stack 'em, we will seek to refinance it to better rates and going forward in order to find acquisition and development activity, we will be using both debt as we did earlier in the year as well as preferred.

And then just going back to the valley discussion and I would say make spaces.

Combination with Iron Mountain from a strategic perspective gave them the distribution and logistics network.

That others.

I didn't have before have you seen any impact at all and is this.

As they gone deeper into a lot of the markets how you're in.

Yeah, Michael I wouldn't.

Hey, we've seen anything pronounced in different it it's still goes back to the way I characterize the product as a whole. So again, we've seen very little disruption and again change in again the core customer the continues to look for all the.

The benefits of a self storage product. So we're you know we're going to continue to monitor and see what comes from any of these realignments that are going on you know it's interesting the clutter actually when a different direction.

Actually bought hard assets, which is very different even from a traditional valley model. So.

Again, there seems to be a lot of movement, you know in that space as a whole and we'll continue to see what evolves from it.

And then sort of my last one just I recognize you know there's a lot of fires going on within California, right now I do hope all of your friends family and co workers are thanks.

Disaster. Unfortunately, it's one of the drivers of your demand.

Is there any sort of thought in terms of what this could be doing any from just perhaps a lack of demand because maybe your facilities are closed and there's no power.

And then do doesn't drive anything else getting California is your largest market.

Yeah.

Again, we're obviously creeping up a close I Miss and appreciate the good wishes because theres a lot of stress in some of the the areas, both northern and southern California with you know the fire season that we have at hand, but at the moment, we haven't seen any direct impact.

Our own portfolio and.

You know what what can be unusual with fire advances traditionally they in themselves really don't create a lot of elevated activity.

So you know obviously, that's always dependent upon where this specific fires are and to what degree.

What are what comes with it they seem to be like for like very different events and say, a hurricane where we see a lot more broader disruption or impact to particular market, but we're keeping our fingers crossed the California you can get through this Ah you know in a in a good way, but it's there's a lot of stress out there.

Thanks for the tax sure. Thanks, Michael.

Oh last question will come from the line of John Peterson of Jefferies.

Great, Thanks, but am I getting good one.

So you've got a few public.

Players out there to do that land.

Some of the other.

Self storage.

Owners I'm wondering if thats something you guys have considered doing possibly as a way to grow your third party management business to leverage a cost of capital and just given your position in the industry.

Yeah, John I wouldn't tell you that and intentional focus point of ours right. Now you know there is a lot of capital that you know in this space at large so.

We are going to continue to be more focus on growing our own a portfolio through our own direct investments et cetera, and you know really havent tapped into kind of a a lending arm and.

You know seem far more Ah different things that we continued with our balance sheet.

Okay all right. Thank you.

Thank you. Thank you.

And that was our final question I'd like to turn the floor back over to management for any additional or closing remark.

Thanks, Maria Thanks to all of you for joining us today look forward to seeing many of you in a couple of weeks.

Thank you ladies and gentlemen, this does conclude today's conference call you may now disconnect.