Q3 2020 Public Storage Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the public storage third quarter 2020 earnings Conference call.
At this time, all participants have been placed in a listen only mode and the floor will be open for your questions. Following the presentation.
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It is now my pleasure to turn the floor over to Ryan Burke, Vice President of Investor Relations Ryan you may begin.
Thank you Christy Hello, everyone. Thank you for joining us for third quarter 2020 earnings call I'd be what.
Joe Russell and Tom Boyle.
Before we begin we want to remind you that aside from those of historical facts. All statements. On this call are forward looking in nature and are subject to risks and uncertainties that could cause actual results to differ materially from those statements.
The risks and other factors could adversely affect our business and future results as described in yesterday's earnings release and in our reports filed with the SEC. All forward looking statements speak only as of today and I'm on November 5th 2020, we assume no obligation to update or revise any of the statements whether as a result of new information future events or otherwise.
A reconciliation to GAAP of the non-GAAP financial measures. We provide on this call is included in our earnings release, you can find our earnings release SEC reports and audio replay of this conference call on our website at public storage Dotcom, we do ask that you initially limit yourself to two questions of course feel free to jump back in queue after that.
With that I will turn the call over to Joe.
Thank you Ryan and thanks for joining us today.
Had a solid quarter and now we'd like to open the call for questions.
Thank you at this time, if you would like to ask a question Press Star then the number one on your telephone keypad.
And your first question is from a loop as part of Bank of America.
Good morning, everyone. Thank you for taking my question. So just looking at the transaction market. It seems like it was a good amount of activity in Threeq you on.
You guys alluded that you alluded to that during your Twoq call, but there's also a surprising amount of portfolio deals can you give us some color about what you're seeing in the market currently and any of the opportunities going forward and then also any color on cap rates and the recent 34 portfolio property portfolio deal under contract right now okay.
Okay Shirley.
The.
Acquisition market clearly has opened up.
We've been tracking it through the pandemic and spoke about.
Early months, where a number of sellers paused and more reticent to bring properties into.
End of the market, but we've clearly seen.
Many more do the reverse where they've looked at this environment as an opportune time to bring assets into the acquisition arena.
The thing that sort of a number of things will continue to fuel that one is.
Still very good time to do a trade centers.
Very low.
Interest rates availability of capital there is a lot of capital sitting on the sidelines, that's been anxious to get into the storage sector and frankly.
The storage sector continued to perform well so there's been a window of opportunity to do that we've seen increase over the last month, particularly in the quarter that set us up well to have a very active 2020.
The things that we continue to do our look for assets that are particularly well positioned from a location and quality standpoint that meet our requirements relative to location and opportunity to round out presence whether in our prime core markets or other markets that we want to add.
Additional product too.
The thing that was unusual and we're encouraged by is we also as you pass.
A sizeable single portfolio under contract that we think is a great set of assets that will be.
Very good for us to bring into the portfolio in total at 36 properties across 15 markets.
13 different states.
24 of the assets are open and operating both are relatively new average ages two to three years I would call them class a properties and very good locations and we're very excited to bring them into the portfolio knowing that we're looking for opportunities to lease up.
Properties, because we have very good customer demand. So they will be easily integrated and we anticipate closing the first 24 of those assets.
At the end of the year.
With that portfolio, which were also well poised to capture and.
Look for some I think interesting growth and performance opportunities as or 12 additional properties in various phases of development that will be completed through 2021.
Again class a well located assets and we're really pleased by the ability to capture that total portfolio. Another interesting part of the portfolio. It was it is an off market deal. So it speaks to the level of relationships that we continue to build across the storage sector.
This relationship has evolved over.
Longer period of time, and we continue to look for those opportunities where they may play through.
Beyond the large portfolio that I just talked about we're also seeing a number of small smaller opportunities, which we've been seeing through 2020 and frankly, what we saw even in 2019, so with that we're poised to have a very strong acquisition year. This year I would tell you from a cap rate standpoint.
With the amount of.
Capital and the cost of that capital, we're really not seeing any easing of cap rates and we'll have to continue to monitor that.
We clearly have.
Good access to capital ourselves our own cost of capital continues to be very.
Very attractive Tom can give you a little color later in the call about what we see relative to funding through either the preferred market or the debt markets, but we're clearly seeing some good opportunities to put that capital to work and we are continuing to look and hunt for additional acquisitions going forward.
Great. Thank you and then just a little bit on rent increases to existing customers and on the beginning you guys noted that you're not going to be increasing rents as much as he did.
Hi years, but.
I would now I guess now cases are kind of going up but is there do you have an expectation when you're going to be able to get back to your historical events.
Yes, well, let me give you a little bit of context. This is Tom around what we've been doing through the quarter on existing tenants and then what we think the outlook is.
As we noted in the 10-Q, we did resume and we discussed on the last call we resumed existing tenant rate increases in the third quarter. We did so initially on a test basis and have since increased the volumes of of those rental rate increases that we set out as we grow more confidence in the performance of our existing tenants.
Since we didnt send any increases in the second quarter. We did have a quote unquote backlog of potential tenants to increase rent on in the third quarter and we did send those catch up rental rate increases.
As you noted those increases went out with a lower magnitude of increase given overall mindfulness of our customer base in.
In this crisis environment and as you highlight its still very dynamic as well as state and local price regulations in many of our markets.
We expect some of that to continue as we move through future quarters, certainly navigating this dynamic healthcare environment is unpredictable we.
We would expect that the existing tenant rate increases will continue to be a modest drag on in place rent growth as we move forward.
Stepping back customer activity has been solid and.
I just highlighted existing tenant performance has been good that's across the board. So thats collections are better payment patterns have accelerated move outs are down length of stays are extending and new customer demand is solid so we're seeing good trends there.
And overall move in activity has been good.
But existing tenants will continue to be a modest drag going forward.
Great. Thank you.
Thank you. Your next question is from Smedes Rose City.
Hi, Thanks, Hi, My question was really just about move out activity. Your your portfolio is always kind of generally had an upward bias in occupancy, but you did note that move outs have slowed and I just kind of wondering as things kind of normalize I mean do you have a sense of how much occupancy.
I'd be higher based on the slowdown in move out activity just trying to think about how your occupancy they change over the next few quarters. This things maybe get back to normal and what might you do to encourage some of those customers just to stay I guess.
Sure. So I'll provide a little context around the move out activity because it has been one of the surprises as we move through this pandemic period as we rewind to April and early May we had move in volumes and move out volumes that were lower but as we moved in.
The May and June and then into the third quarter move in activity has increased but move out activity has remained muted.
Dissecting the geographies that customer 10 years, the customer segments, with which move outs or lower it is really across the board and clearly being driven by.
The current health care environment, and you highlighted and Weve discussed in the 10-Q in the Mdna the likelihood at some point that.
That rate of deceleration will moderate and.
And we talked about in previous calls the fact that in other recessionary environments, we've actually seen the opposite play through with higher move outs, given consumer stress weve not experienced at this time and in fact, it was pretty consistent through the third quarter give you a sense each of the months in the third quarter salt.
12% to 15% declines in move out volumes and as I mentioned, it's across geographies across customer tenure bands.
And customer segments, so really broad based decline in move outs pair.
Paired with good collection activity.
And accepting the rental rate increases that we've that we sent to date. So we've been encouraged by the existing tenants. We do have a month our eyes on.
What could play out as we move in this dynamic environment.
And we'll be watching that very closely but through October move outs continue to be lower.
Yes smedes.
So what whats playing through right now the again month by month, we're seeing more sustained and consistent consumer behavior work from home.
Is additive meeting is another factor that we're seeing from a service standpoint.
Relative to the customers coming to the portfolio and what's driving that decision you've got a number of markets, whether you label them as urban or high density and war related to even concentrations of tax all use the bay area for instance, where we see.
System wide, our highest level of occupancy.
Allison's of employees have been given the latitude to move out of that market, either temporarily or potentially permanently and are shifting and amplifying the need for self storage as either their deal.
Dealing with the health crisis, and the flexibility that they've got to work.
At home or a completely different location seeing similar impacts rate again in the heart of our New York set of assets. So that's additive the housing market is very strong right now that's always a traditional and very good driver for our business but.
Housing sales are up over 20% as we speak on a year over year basis and it is the driver. So you've got layers of different consumer patterns that are playing through that.
Our pointing to more sustained and Poland prolong prolong need for storage space. So we don't know when and to what degree it will shift back to quote unquote normal environment, but the amount of sustained activity that we're seeing now into the eight month of this health crisis.
Continues to be quite good.
Okay. That's great color and then just wondering maybe broadly you've talked before just kind of what you're seeing on the supply outlook. Overall are you seeing any kind of.
Change is on the increment per.
Versus your last update on just overall nationwide supply dollars in development I think you typically talk.
Talking about yes, not I wouldn't say anything to point to that materially different we do think that 2020 will plus or minus calculate to be about four or so billion dollars set of deliveries across.
All of our markets here in the United States.
The anticipated shift down into deliveries and 20 to 21.
Was something in the range of 15, or so percent. So we could still see that degradation and deliveries, but frankly, it's still high.
And.
With the continued interest.
From an investor base to get into the self storage sector and the performance of the product type itself continues to have even in this challenging environment.
As I mentioned earlier, there is still a fair amount of capital that wants to get into the space, whether it's through acquisitions or even development. So it's.
Do something that we're keeping a close eye on but.
It really hasn't changed that much from our prior outlook.
Great. Okay. Thank you guys.
Yes.
Thank you. Your next question is from Spencer Alloway of Green Street.
Thank you.
Can you provide a little bit more color on what drove the material deceleration in marketing spend for the quarter and where you see that's trending for the balance of the year.
Sure so stepping back on on marketing spend you know thats been a tool that we've utilized along with promotional discounts.
And and move in rates over the past several years and what was a tough customer acquisition environment.
Given that the impact of new supply in many of our markets and so we did increase our spend over the last several years and have like the returns that we've seen.
Utilizing.
Advertising spend and that really is across paid search affiliate social media, we use television in the second quarter, it's kind of a broad based advertising approach to attract new customers.
We do have real advantages in using advertising is tool given our brand name and presence online and.
And so we like that too when we will continue to use it as we navigate this dynamic environment in the second quarter.
Given the lower top of funnel demand, we were more aggressive on marketing spend and as top of funnel demand improved as we moved into the third quarter, we remove some of that advertising support but as you note our advertising spend was up about eight or 9% in the quarter.
We will continue to use that tool as we play through whats the dynamic environment, but we did not need the level of support we saw in the second quarter, given improved top of funnel trends.
Okay and.
And then maybe just lastly, we recently saw large storage transaction with Blackstone a firing that simply add portfolio was this the deal you guys looked at and can you comment on whether the portfolio. When it then it's interesting you.
So.
We're active in all markets and have you.
The opportunity to look at most deals so.
I'll comment on is we're highly entrenched in both.
Most if not all the deals that are happening in a variety of different types of transactions large and small and we are.
Our continuing to track and see the level activity I'm, not really going to comment on.
Our view and perception of that particular portfolio, but we're highly entrenched in our acquisition team.
Credibly engage whether there.
Marketed deals as that particular, one was or deals that are not marketed which points to the portfolio I talked about earlier.
Yeah, I'd, maybe just highlight that transaction is emblematic of what Joe highlighted earlier around institutional capital looking to invest in self storage because of its performance through cycles.
So it's interesting to see another institutional player put a significant amount of capital into the sector.
Thank you.
Thank you. Your next question is from Todd Thomas of Keybanc capital markets.
Hi, Thanks.
Helpful color on some of the move out trends can can you comment on move in trends throughout the quarter and through October what the cadence was like and then.
The strength in move in rates was was rather significant.
They were at rates were higher in the quarter than they have been in several years did you push move in rates above market. During the quarter, just given where your occupancy is or was that increase sort of more commensurate with the market rent growth in your view.
Sure Todd so kind of stepping back on the move in trends like I did with move out trends. We did see move in activity kind of surge in March than we saw it really slowed down in April we moved into a third phase that we call internally kind of recovery in May and June.
And then really since July Onest, we've seen an improvement in top of funnel demand.
Pair that with reduced move out activity as I just highlighted means that occupancy has moved higher in really all of our markets across the country in.
And that improved occupancy certainly reduce the inventory levels that we had and that that really persisted through the quarter. We finished the second quarter up about 50 basis points in occupancy. We finished the third quarter up 200 basis points were sitting here. We finished October up 230 basis points in occupancy.
Yeah.
And so you know customer trends being move in and move out have been good.
And with lower inventory, that's allowed us to achieve higher move in rates.
Move in rates were up 8.2% in the quarter in October to give you a sense. You know this strength is top of funnel and the move out trends have continued which has led move in volumes to be up about <unk> percent in October and move in rates up about 10%.
So the trends have continued.
And obviously seeing the benefit of.
Demand for storage, both from our existing tenants, who want to continue to use storage in this environment as Joe mentioned for many reasons as well as new customers that are seeking space.
Okay, and obviously there is.
Just a lot of I guess sort of ins and outs.
When you think about.
Demand, but Joe I'm curious in a mark in a market like New York You know you mentioned San Francisco.
Where a lot of workers have flexibility to work from home and move out of some of these high cost markets.
It's that the data and headlines suggest is happening.
Why is that out migration activity translating into strong demand in those markets and do you expect that to moderate or maybe unwind I guess to some extent over time is that a risk in your view.
Well, it's a it's a spectrum of different drivers Todd So part of the flexibility for instance, if you look at the Bay area that many tech workers have been given is when.
Yes, a big.
Employer many.
Many of whom you yeah.
None of us can point to give signals and or time frames, where they may not be pulling their.
They are employees back not for one or two months for the first six months to a year.
Coupled with giving them full flexibility to be somewhere else.
That that could vary so some employees will still come back there is no question about that but it may be.
For several months or several quarters, depending again on the unknown timing of the pandemic itself.
And then to.
To what degree these become permanent.
Relocations and then some commensurate impact on the need to keep.
Goods or whatever they are keeping it in one of our units in that particular market will be.
We will be a question and can't predict it.
I don't know.
Fortunately again, if you look at the Bay area for instance, we have.
An opportunity to stand out there because we've got a very well placed portfolio, it's very difficult to add new supply there. So the inherent need for that space in that market long term quite high Theres no question about it.
And it's difficult to build there so it's not a market by any means that we're concerned about from an oversupply standpoint.
Cetera. This has just been a very unusual environment, where this demand has been so elevated where.
I mentioned, we've got system high occupancy.
90, 798% this time a year I mean, we have never seen that before.
So.
Well, it's to be determined it's hard to predict and the flexibility in the way in which employees, whether they are tech oriented or other traditional office users.
Change overtime is to be determined, but Tom mentioned, we're seeing.
It's just not in these urban or more dense markets, we're seeing healthy demand across the entire system. We frankly don't have a market that's down in occupancy.
It continues to percolate, our lease up of our newly built and acquired assets is very strong and consumer demand continues to be.
Very very active particularly the for this time of year.
Yeah, and Todd maybe just to provide a couple other marketing anecdotes for you markets like Charlotte for instance, we've seen very good incoming demand in a market that has that been suffering from new supply over the last several years, we've seen good new customer demand improving occupancy is improving rates.
Even within the San Francisco Bay area, while you can clearly make a case for very urban peninsula and the city of San Francisco, we've seen strength in our lease ups in San Jose for instance.
In a strong housing market there so there is.
We have a well placed portfolio around the country and we're seeing good demand in both markets that that may see outflow as well as those that are seeing inflow.
Right, that's interesting or is the demand for larger units.
Are you seeing that.
As individuals or maybe looking to rent larger spaces for their their apartments or homes for actually a period of time opposite which is strength year over year is actually been in smaller spaces versus larger displays bases, believing that yes. So theoretically you could.
Argue that again, if you just think of the demand tied to work from home, it's just not somebody holistically.
Leaving an entire house or apartment. It may also be a very healthy level demand tied to just needing that extra closet or that extra.
Bedroom or that area, but not only because it's work from home to maybe a family members come back or whatever and.
There are layers and layers of demand factors that were tracking but.
As we've said, it's it's solid demand.
Okay alright, thank you.
Q.
Thank you. Your next question is from Ki bin Kim of Truest.
Hey, good morning out there.
Going back to some of the acquisitions, we made in the quarter and fourth quarter.
Can you just provide some more color or parameters around yields at least we're stabilized portion.
You are keeping I'm not going to give you specifics about the the actual yield I would tell you is similar to the same ranges that we look for overtime, which on a stabilized basis would be.
5% to 6% plus on a cash on cash yield.
Or or north of that the thing that.
I Didnt mention about the portfolio that we will be closing this quarter is the occupancy is about 35%.
We look at that as a very good thing relative to again the opportunity to lease up.
Base based on the demand factors that were seeing great locations that these assets are.
Hi, too and the quality of the assets. So it's a very good opportunity for us to stabilize those assets to put our own marketing operational tactics and strategies into them and we feel it will have very good.
Returns once we get the assets stabilize as you well know that can take anywhere from three to four years on a normalized basis not only once you get to stabilize occupancy, but more stabilize revenue and pricing metrics. So we'll we'll continue to look for again the stabilization of those assets, but as I mentioned very high.
Quality.
Good solid assets and adds in many ways you could consider it almost like a near term or.
More recent set of.
Recently delivered development on our part so again very good opportunity to drive good value from them.
Okay. Thanks.
And when I look at your same store revenue improved slightly to negative 2.7%.
Minus 3% last quarter, but.
Obviously, the underlying drivers are pointing towards a much better place.
Place right, where street rates are up 8% better occupancy and things like that.
So I was wondering if you could provide some more.
More details behind.
Yes.
The transitory nature of the underlying drivers and how that might benefit same store revenue going forward.
Particular things like these.
The existing customer rate increases I'm not sure how much normally it contribute whereas in Threeq you had that in and going forward. How do you expect that to the normalized so just trying to understand that magnitude a little better.
Sure Ki bin it's Tom you know I think we spent some time talking last quarter around the the cumulative impact of the pandemic, which was likely to continue to impact revenue growth trend as we move forward and we did see that.
End of the third quarter.
Operating metrics have removed more quickly than financial metrics, and we let's pick apart the occupancy and rate equation I commented earlier around how occupancy trends have improved with a combination of better top of funnel activity as well as lower move out volumes.
And so thats improved occupancy trends in many of our markets. We have reached occupancy is that or frictional, meaning we are at 90, 798% occupancy in the middle of the month, which is a frictional in our industry.
So it's a matter of what will play through with the rate in some of those markets as we move forward as you just highlighted and we spoke about earlier.
Existing tenant rate increases are not going to be a contributing factor to improving.
Rent trends given the magnitude of the increases are likely to be lower as we move forward through the fourth quarter.
That said just looking at in place rents.
From June Thirtyth at at June Thirtyth in place rents were down 3.1% and we finished the quarter September 30 down, 1.8% and with existing tenants not contributing to that improvement.
That negative impact was more than offset by improved customer activity and the reduction of rent roll down you know if you look at the third quarter of.
20.
19 rent roll down was about 15% and as we moved into the third quarter of 2020 that narrowed down to about 4% so improved rent roll down more than offsetting the degradation from existing tenant rate increase drew.
Drag in the quarter.
Looking forward aggregate contract rents recovered so occupancy and rent combined to positive 20 basis points at September 30.
And we've continued to see good customer trends through October so better rental income trends.
Fees, which has been a negative contributor to revenue growth in both the second and third quarters, we anticipate to continue to do so as we move forward and Thats really driven.
By customers paying their rent, which is a great thing, but is a degradation in revenue growth.
I think we spoke a little bit about that on the last call Ki bin but we continue to see that would anticipate that through the fourth quarter and into the first quarter of next year.
Okay. Thank you.
Thanks.
Your next question is from Steve Sakwa of Evercore ISI.
Hi, Thanks, good morning there.
Just a quick question on the balance sheet, Tom you've got like a billion to preferred that I guess are callable throughout 2021.
Im just sort of curious on your thoughts about replacing them with new preferred I think your last deal was sub 4% and how do you sort of way that maybe again just kind.
Kind of putting some more debt on the balance sheet, just given how lowly levered you are.
Where do you think the comparable say 30 year kind of debt issuance would be for you today versus preferred.
Preferred offering.
Sure So Steve you highlighted what.
It's a good opportunity in 2021, which is another year of potential preferred refinancing activity.
Be it with debt or preferred looking.
Looking at our preferred balance we like having around a $4 billion preferred balance in the capital stack, we think it it's good for the business through cycles.
And the Optionality, both to have perpetual capital in the capital stack, but at the same time if interest rates.
Decrease over time, the ability to call them like we did this year and you are highlighting the opportunity for next year.
So throughout this year we.
We redeemed about 1 billion to have preferred we havent issued quite that much yet.
And we were active in the bond market in Europe in January.
Financing markets as Joe highlighted earlier are as attractive as they have ever been preferreds or sub 4% for us today, which is a record low which presents that opportunity and we have great access to debt capital to as we said in previous settings will look to utilize both preferred and debt for.
Incremental financing activity as we move through 2021.
For both preferred refinancing as well as for potential acquisition opportunities and development funding, which clearly as Joe highlighted earlier is accelerating as we move through the fourth quarter. So good access to capital and we'll utilize both and we hope that we have the opportunity to refinance in 2021 like we did in 2020 and 2019.
Yeah, just do you have a sense for where like a 30 year bond offering if you wanted to go longer out on the sort of curves how that would compare to perhaps offering.
30 year bond is going to be cheaper 10 year bond is going to be even cheaper than that five year bond even cheaper than that so we've got lots of tools in the toolkit.
Okay and then just on on the acquisition front you guys from time to time that Thats, obviously look outside the U.S. and spend some time in Australia, Joe I'm, just curious sort of where your head is today about looking for international opportunities.
Outside of the domestic opportunities.
Yes, Steve we're going to continue to look both domestically and internationally. So.
We have cleared.
Clearly the opportunity from a knowledge base weve.
Learned a lot through our involvement and success through the shurgard investment and we feel over time that we can continue to grow both here domestically and internationally, it's always going to be subject to.
And types of opportunities and the.
Particular market that may be for whatever set of reasons well time from an attractive point.
Point to either enter or find appropriate opportunities. So we're going to continue to assess opportunities both here domestically and internationally.
Great. Thank you.
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Thank you. Your next question is from Ronald Camden of Morgan Stanley.
Hey, Thanks for the time and the first one is just circling back on the demand question.
Just trying to understand obviously looking at the analysis.
Just looking for sort of more dramatic in terms of is there anything that stands out in terms of the.
The demand driver in this period, whether it be college student small businesses.
Work from home or or just people, leaving the city and the reason I asked that is you know one of the questions. We get a lot is presumably.
Once the vaccine is here and it normalizes really trying to get at which drivers are going to stay in speak around and what's drivers were really just sort of a one timer and maybe what you demand drivers we may not be thinking about again once we normalize thanks.
Yes, Ron that.
Certainly something that we're going to continue to track as the different demand factors play through it's hard to predict the sustainability or the likelihood that some of them are here permanently or are there going to shift up and down.
I already talked a little bit about the work from home demand factor, that's clearly new at this level of magnitude and whether or not that sustains from a demand standpoint standpoint, after the pandemic settles down or.
Not is to be determined many companies are looking at work from home platforms is different and new way of enhancing productivity and employee satisfaction, but the.
Theoretical argument against that is there may be the opposite playing through too so it's a little bit.
Hard to predict.
And at the moment, we're just going to continue to survey and understand and see these drivers the.
The interesting thing is there.
All additive and there continue to drive as we've talked about very optimized performance will continue to learn from this and it's brought frankly, a healthy a new set of customers into the store sector never use product before so I think long term that's a good thing the adoption of the product continue.
I used to grow statistically.
And it once again is proving that the product is highly resilient is highly adaptable and consumers like it so.
The things that we continue to do also our find ways of making the customer interaction that much more effective making it a much more easy.
Decision and transaction so many of the tools that we've been putting into our technological.
Channels and options for customers are serving us well about.
About 40 plus percent of our move in volume in the third quarter came from our E rental platform that frankly was in test mode before the pandemic came about but.
Statistically we moved in 115000 customers directly through that channel and that transaction takes about five minutes and consumers love It and that's not just because of the pandemic. It's just a great an easy way to capture a storage unit. So we've got different things that we're also able to test in a very challenging.
Environment like this like this that are frankly, giving us even new and different tools that could.
Lead to different levels of.
Dealing with customers in a very different way than we were doing before the again are very aligned with their ability to think even more positively about needing a storage facility because it's not much use are easier to capture it that much more cost effective.
Great and then my second question was just digging in deeper a little bit into acquisition, just trying to get sort of a harder numbers and quantifying it.
Clearly our cost of capital you talked about sort of the pipeline.
Hello deals identified of at least 700 million.
The question is is.
They're just for PS day, when you when you sort of.
Take a step back and look at your Ti as there are 500 billion, maybe even more of acquisition opportunities out there for the company the air or.
Just trying to understand what's the mitigating factor is there is there not enough sellers the two competitive but the company decide tomorrow to take acquisition.
What would be the mitigating factor to getting to a number like that well.
Well I wouldn't say is.
As.
Simple simple as saying, we turn it on in switching but let's just go by whatever we can get our hands on we have very disciplined analytics that we use that give us the right guide posts to say because these are the relative and.
I would say.
Better timed.
Opportunities to deploy capital. This is at the moment, a good window to do that or cost of capital as Tom reiterated is very very good our access to capitals very good we know most of the markets that we operated in much better than others do so we have different ways for us.
To step back and understand the relative.
Ultimate capital allocation performance and ability to drive value through not only our acquisition environment, but our development and redevelopment activities. So we have all those tools, we continue to analyze them and we've got a balance sheet that can.
Clearly accommodate multiple factors of the volume and we are even talking about this quarter. So I don't see that as any way a limit or and we're going to continue to evaluate the timing and the quality and the fit of any particular acquisition, whether its one off whether it's a medium size portfolio or or a sizable ones.
Helpful. Thank you.
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Thank you. Your next question is from Jonathan Hughes of Raymond James.
Hey, good morning this.
This is an extension to Steve's earlier question.
What do you and the board believe is the appropriate amount of leverage all four legacy self storage REIT share prices are up low double digits year to date on a total return basis, yes.
Balance sheet to range from three turns of leverage PPSA, including preferred to more than six turns it appears so during a.
100 year pandemic in recession, when balance sheets should have mattered. Most it hasn't really benefited PSC I'm just curious if your views towards leverage have changed at all over the past eight months.
Yes, what I would say is that a perspective around the leverage is long term held belief that we should have a conservative balance sheet that allows us to invest through cycles.
No that allowed us access to capital throughout this year as you highlighted and I think this year's been somewhat unique in fact, we're in a deep recession and financing markets have been.
Attractive throughout.
You know I I think we've also highlighted that we have capacity to utilize that balance sheet in times like this to fund acquisitions and we're doing that in the second half of this year. So we definitely have some capacity from here to add incremental leverage.
And we're doing that as we move forward in terms of the appropriate amount of leverage we think a conservative long term view.
And a single a rating is an appropriate place for a read of our size scale and capability.
So early you said have you like having 4 billion on preferred and the cap stack I mean, how how do you arrive at that exact number why not more I guess you said you alluded to you can use more preferred to go consolidate share but.
No are you talking upwards of another turn I think leverages four turns back and it was seven.
Yes, John Banana range.
4 billion I, Didnt mean that that would be the maximum I meant it more that I liked having 4 billion. So I would consider that and why did I say 4 billion. It's because about the amount. We have currently outstanding meeting I liked the amount we have outstanding and overtime, we'd anticipate that to grow and would.
We anticipate our our debt balance to grow as the company continues to grow and our EBITDA grows and the business grows.
Okay, and just want to make sure it wasn't like an arbitrary you like the number four or something like that.
And then one more for [laughter] I figured as much I just you know.
The four stuck out to me.
What about.
Funding acquisitions on a leverage neutral basis by raising common equity I realize it hasn't been done and I think decades, but plenty of other large read still raise common equity to grow on a leverage neutral basis, and given you're trading at a low four implied cap and above any of you that would actually be accretive 10 Navy.
Is that a possibility.
Sure you know common equity isn't the tool kit and it's something that we.
And we could utilize as you highlight.
At the same time, we do have capability to finance.
With the debt and preferred markets and debt and preferred is cheaper than common equity. So we have the ability to do that over time.
But it certainly in the tool kit the company over time is used it more for strategic opportunities, but as the company grows its certainly.
An option to finance as well as debt and preferred.
And the like so.
It's in the tool kit, but certainly a recently we've been utilizing debt and preferred because we have capacity to do so.
Got it all right. Thanks for the time.
Thanks.
Thank you as a reminder to ask a question press Star then the number one on your telephone keypad.
Your next question is from Juan Sanabria BMO capital markets.
Hi, Good morning, just hoping we could talk a little bit about move that from a different perspective I believe you mentioned earlier in the call you typically see move outs.
During a normal quote unquote recession, so could you give us some just helpful to Anders is.
What that had been historically figure many cycles and.
Hi, just to think about the downside risk is if somebody is.
Got it said that maybe onetime in nature do.
At some point.
Sure I mean, obviously, we don't know that it when we may find ourselves in a position where move outs would accelerate we do think that the current trends are impacted by the healthcare crisis that were navigating through in terms of prior crises.
If you look back.
At the financial crisis, we saw move outs for several quarters up in the mid single digits.
And so that's an example of what what we've learned certainly through this experiences that.
Everyone is unique and so our ability to to point to that is what will happen when the pandemic eases I think is limited and we're going to be certainly watching very closely in terms of what consumer activity will be like as we move through future quarters, and I would say it's unpredictable.
And it's unpredictable because of the healthcare nature of this crisis as well as the government activities.
To reduce the spread of the virus so.
It's unpredictable.
Actable past recessions would point to something like mid single digits increase.
Well this time be like last time, we don't know.
Fair enough.
Just on the length of stay that you brought up as well.
What well all yet today.
And kind of how is that trended and at what point.
If at all do you quantify kind of the magic number where you can maybe sneak in one more rate increase.
We've had a median length of stay.
Sure. So in terms of the benefit of length of stay you highlighted it which is okay. We get to see those longer term tenants stay with US we don't have to replace them and we have the opportunity to increase the rent overtime.
And that's already been playing out as we move through.
2019 and into 2020 that.
Length of stays where extending last year, and we started to get the beneficial impact of sending more rental rate increases last year and as we moved into the second half of this year with the decrease move outs more customers have been eligible for.
Rental rate increases this year and if this continues would anticipate that into beginning of next year as well and thats been somewhat of an offset to the fact that as I highlighted earlier, we've been sending lower magnitude rental rate increases, but I would say that's been on the margin at this point and if the trend continues it will it will accelerate.
So what is the average or median length of stay.
It's about 10 months.
Okay.
And just one last Super quick one did you say that the average occupancy was 35% for the portfolio to acquiring.
When it's not and development, we've got yet in others.
Sure Yeah, there's 24 properties that.
Our operating it.
Our on average two to three years at most an age. So they are in early phases of lease up so that portion of the 36 property portfolio is about 35% occupied.
And there are 12 properties that are under construction that will be delivered.
And.
2021 quarter by quarter so.
The lease up opportunity.
On the existing 24 is very good.
Yes, but not necessarily yielding anything today.
I mean, they've got to cure and.
Stabilized levels of performance, but we're very confident.
As I mentioned relative to the quality of the location.
The class a.
Buildings, and we're very confident across the markets that they are positioning that will do quite well with them.
Thank you.
Thank you. Your next question is from Rick Skidmore at Goldman Sachs.
Good morning, Joe and Tom just didn't really quick one on cost of operations.
It declined from the second to the third quarter, which is kind of a typical for the seasonal what was happening is that just lower personnel cost and then as you look forward on that line do you expect lower move outs to help to bring that line down overtime or do we should we expect kind of the normal seasonal pattern.
Yeah, Rick we're definitely looking for and seeing opportunity from an optimization standpoint too.
Find ways of.
Moderating the pressure tied to payroll as a whole, whether it's property and or supervisory. So you saw some of that in the quarter.
We are looking for and finding ways of.
Optimizing operations on a number of fronts utilities also in the quarter were down nicely thats tied to some intentional investments that we've made from an LTV standpoint, So we've now got.
Our entire 2600 or so portfolio on exterior Ltd.
Flights and we track.
Transition.
Maybe about a third so far the portfolio from an interior samcor standpoint, less so we're seeing nice savings relative to the utility costs and utilities were down a little over 9% in the quarter.
Repairs and maintenance were down that can vary quarter to quarter depending on.
Some of the repairs necessary across the portfolio, but we saw a good metric there.
And overall, we continue to look for ways of optimizing costs comps have been focused on looking at new and different ways of optimizing our marketing spend to so although it was up it wasn't up as much as it's been in the last few quarters. So again, we're looking for different ways of optimizing that spend too.
Yeah.
Thanks, Joe.
Thank you.
Thank you. Your next question is from Mike Mueller of JP Morgan.
Yes, hi, most questions have been answered, but can you just give us a quick update on third Party management Committee.
How that's been trending.
Sure Mike.
So the program as a whole we've got.
113 properties in the program, we added seven in the quarter the activity.
From a backlog standpoint, and delivery standpoint is in some ways matching that kind of activity, we're seeing on our own direct acquisition front. So we're seeing good percolation of.
Owners that are interested in coming into the system and we are finding high quality assets and like the way that the program continues to build the dominant factor as it has been since we came out of the business is tied to the new deliveries. So we've got a healthy and growing.
Pipeline of.
New assets that will also be coming in to the portfolio over the next few quarters.
Okay. Thank you thank.
Thank you.
Thank you. Your next question is from Jon Petersen of Jefferies.
Oh, Thanks, very very said this but the portfolio you guys are buying is that from your third party management.
Business and okay. So no. It's how are they how are they currently branded.
They have their own.
Okay.
And then I guess, how should we think about the third party management business in terms of an acquisition takeout.
Kind of pipeline for you guys going forward I think it's a it's a natural adjunct to that business and we've had.
A handful of situations that have percolated on that front, we'll see how it plays overtime.
But it's overall a great opportunity to build relationships with.
Owners, whether they're one off owners may only own one or two assets or other owners that have multiple assets and multiple markets. So it's been and will continue to be a healthy way of broadening our tie to a different owner pool out there.
So we'll continue to look for and develop those kinds of relationships to as a program builds but the portfolio. The large portfolio that were closing on this quarter was not in our platform.
Got it all right that's it thanks.
Yes.
You have a follow up from Steve Sakwa of Evercore ISI.
Hi, Thanks, I just wanted to circle back on late fees and just trying to understand how much of the two.
Drop was sort of an inability to to charge customers in light of the pandemic, Ken which it is.
More auto pay and less cash pay and therefore fees are just naturally down how much of it is maybe customers that will normally paying those have left the portfolio just trying to kind of understand what's what's driving that.
Yes, Steve So I'll provide a little bit more color around customer collections in aggregate because that is the primary reason why fees are down and so as we look at rent collections really starting in the second quarter and persisting through the third and been very solid and.
Some of the things you highlighted are contributing I eat auto pay is at a modestly higher percentage, but even away from auto pay tenants customer payment patterns have accelerated and we're charging less in terms of fees and so obviously, if you don't charge it you're not going to collect it.
Our receivables have been down around 30% through the quarter and.
Thats persisted through the.
The the delinquency period for tenants, meaning that receivable is down about 30%. We wrote off about 30% less rent, we had about 30% fewer auctions in the quarter. So overall customer health and payment patterns have improved and that has led to lower fees primarily.
From late fees, which are charged for customers not paying their rent within a grace period.
But also contributed from <unk> law.
Longer into the delinquency period lean fees aniline sale fees, but primarily driven by that.
The the Grace period, ending late fee in the first month of customers delinquency.
So would you look at this as a bigger structural change or you look at this is just it's kind of a point in time more cyclical or do you expect these to kind of stay down more permanently.
No I think early on in the pandemic, we thought that it may have been more transitory and do his customer being supported by government stimulus certainly that was the case through April and unemployment benefits and the like if some of that has been put in the rear view mirror the trends.
If continued.
It's something we're watching very closely month over month I would tell you that trends continued through October and payment patterns have been very good through the early part of November as well so it feels like at least.
For the foreseeable future or near to medium term, we're anticipating that will be the case, but we're watching it very closely.
Okay, great. Thanks, that's it.
Thanks, Steve Thanks, Steve.
Thank you ill now hand, the call back over to Ryan Burke for any additional or closing remarks.
Thank you Christie and thanks to all of you for joining us today have a good day.
Thank you. This does conclude today's conference call you may now disconnect.
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