Q3 2021 Public Storage Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by and welcome to the public storage third quarter 2021 earnings call. At this time, all participants have been placed in a listen only mode and the floor will be opened for your questions. Following the presentation.
If you have a question at that time. Please press star one on your telephone keypad, if you wish to move yourself from the queue piece close. This time. Please press the pound key is now my pleasure to turn the floor over to Ryan Burke, Vice President of Investor Relations Ryan you may begin.
Thank you Emma however on thank you for joining us for our third quarter 2021 earnings call I'm here with Joe Russell CEO, Tom Boyle, CFO, and Mike Mcgowan Senior Vice President of acquisitions.
Before we began we want to remind you that certain matters discussed during this call may constitute forward looking statements within the meaning of the federal Securities laws. These forward looking statements are subject to certain economic risks and uncertainties. All forward looking statements speak only as of today November 2nd 2021 and we assume no obligation to update <unk>.
Our supplement statements to become untrue because of subsequent events 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 press release supplement report SEC reports.
A replay of this conference call on our website public storage Dot com.
As usual, we do ask that you keep yourself limited to two questions to begin with of course, if you have more feel free to jump back in queue with that I'll turn the call over to Joe.
Thanks, Ryan Good morning, and thank you for joining us.
I'd like to begin with the obvious overall business is excellent.
I do want to thank the entire team at public storage for their efforts our team members from our properties to the corporate office and back are focused on driving this level of performance.
Across our industry and consistently throughout our markets more customers than ever before had been drawn to the benefits of using self storage.
We are often characterized additive demand coming from life events, which we've referred to as the four DS.
Divorce death dislocation and disasters.
For the last several quarters, a 50 has emerged decluttering.
Customers needing more space at home due to the shifts in working and living environments across all markets.
Unfortunately, the customers that have come to us during the pandemic are now behaving more like traditional customers, meaning they are staying in place as they have come to appreciate the convenience and cost benefit of using self storage.
Particularly as residential and commercial spaces become more expensive.
With that said demand remains historically strong.
In the third quarter, our revenue NOI and cash flow per share foot reached record levels once again.
As we wrap up 2021, the outlook for 2022 and beyond is favorable as well.
The utilization rate of self storage continues to climb as it has for decades, which is now at 11% of the U S population.
Millennials and Gen Z two.
Two big user groups are aging into our core customer life stage, driven once again by about five days.
And public storage is leading the self storage industry transformation towards a customer experience that provides digital as well as traditional options across the entire customer journey.
We have a deep seated commitment to listen to what our customers want and they were giving us vibrant input the directs our priorities.
This has led to some exciting changes in our customer offerings.
One example, we have spoken to is our industry, leading E rental platform.
Today, nearly 50% of our customers are renting with us through the E rental online lease.
Year to date, nearly 500000 customers have chosen E rental to secure a unit.
It's fast intuitive and self directed taking.
Taking just a few minutes to complete a rental.
And option many customers have been anxious to use.
And the quality of this customer has been impressive.
In early 2021, we also introduce the P. S app, which nearly 1 million customers have now downloaded, allowing EZ tools to manage your account and navigate our properties digitally enhanced free.
These are two great examples of how our investment in technology is transforming our operating model and it's a win win for both customers and our operating efficiencies.
Daily headlines across multiple industries, however, remind us there are challenging consequences impacting the economy in terms of labor pressure and self storage is not immune.
We are actively investing in our team through increased wages and new more specialized positions that are providing even greater upward mobility for our skilled property teammates.
On the leadership front, we have also strengthened our ranks and announced yesterday that David Lee has joined public storage as Chief operating officer.
David previously served as senior Vice President of operations for the U B S store.
With responsibility for more than 5200 retail locations in the U S and Canada.
We are excited to have him on board.
Now to another area I'm pleased to share with you our external growth initiatives.
Our four factor external growth platform is centered on acquisitions.
Development redevelopment and third party management.
All areas are seeing strong growth.
Starting with acquisitions in 2021, the self storage industry will likely see approximately $18 billion or more of assets trade.
This is a tremendous amount of volume and opportunity.
Owners have been motivated to bring assets to market to monetize our investments while some also plan for potential tax changes.
Year to date, we have acquired or under contract on $5 $1 billion of acquisitions or about 30% of the industry volume this year.
This is this was comprised of 233 properties across $21 1 million square feet with average occupancy of 56%.
Which is providing a significant embedded growth opportunity once we place these assets onto the public storage platform.
The transaction span a wide spectrum of geographies portfolios and one off purchases with both market and off market deals.
We continue to be looked at as a preferred buyer based on our knowledge transaction efficiency and ability to easily fund transactions.
Of note, 65% of this quarter's volume is tied to the all storage portfolio, which we are acquiring for $1 5 billion.
All storage is a high quality portfolio of 56 properties, primarily located in Dallas Fort worth.
Dallas Fort worth has been one of the best storage self storage markets over the past 15 years with population growth nearly two times that of the national average.
Our own portfolio in Dallas Fort worth produced annual NOI growth of 150 basis points higher than our national average.
The all storage properties also give us additional exposure to new higher growth submarkets, particularly in and around Fort worth.
Many of the properties were recently developed resulting in our current 75% occupancy level, which provides significant upside as we move them onto our industry leading platform.
The transaction is immediately accretive to <unk> and accretion will accelerate through two stabilization at nearly 6%.
Direct NOI yield.
And combined with owned and other assets under contract we are expanding our already significant platform in this vibrant market to approximately 200 assets or by 64%.
The remaining 35% or $1 $1 billion of the acquisitions closed or under contract will provide significant growth as well.
These assets are geographically diversified across the country.
Price of single acquisitions, two smaller portfolios ranging in size from $40 million to $200 million.
Totaling $3 9 million square feet with average occupancy of 50% at $179 per square foot.
Now to development and redevelopment, where our pipeline has grown by $70 million to $731 million this quarter.
We are seeing good opportunity to build new properties from the ground up in addition to expanding our existing assets.
Nationally our development team is underwriting well located land sites as we continue to leverage our expertise as the largest developer in the self storage industry.
This quarter. We also added 28 properties to our third party management platform.
Increasing properties under management to 145.
We plan to reach 500 assets by 2025.
Of note. We have also acquired 14 assets from our third party management platform as well.
In summary, since the beginning of 2019, we have expanded our portfolio square footage by 22% with a total investment of approximately $7 billion equaling 36 million square feet.
For an average of $193 per square foot.
Which is clearly produced strong growth and value creation that we expect will continue.
Now I will turn the call over to Tom.
Thanks, Joe our financial.
Performance accelerated into the third quarter our.
Our same store revenue increased 14% compared to the third quarter of 2020 that performance represented a sequential improvement in growth of three 2% the second quarter driven by rate too.
Two factors led to the acceleration in realized rent per foot.
First strong demand, eliminating inventory, which allowed us to achieve move in rates, they were up 24% versus 2020 and 33% versus 2019.
Secondly, existing tenant rate increases contributed comparing to a period in 2020, when we were significantly impacted by rental rate regulation in many markets.
Now onto expenses.
Team did a great job executing in this environment. Once again lower expenses were driven by property payroll utilities marketing and a timing benefit or property taxes.
On property payroll as Joe discussed on October one we increased property manager wages, which will lead to higher expenses going forward, but will be partially offset by efficiencies in labor hours tied to the operating model transformation, we discussed at our Investor day in May.
On property tax we will expense our annual estimate ratably through the year, leading to an approximately 13 cent benefit year to date.
In reversing two of 13 cent headwind in the fourth quarter. This will lead to more stable quarter over quarter expenses in the future.
In total net operating income for the same store pool of stabilized properties was up 21, 7% in the quarter.
In addition to the same store the lease up and performance of recently acquired and developed facilities was also a standout in the quarter.
Adding $53 million in NOI in the quarter were 30 Nf L.
As we sit here today coming off the peak part of the leasing season existing customer behavior is solid with move outs down year over year in the quarter and new customer demand remaining robust.
So with that let's shift to the outlook, we raised our core <unk> guidance by 55 at the midpoint or four 5%.
Looking at the drivers we increased our outlook for same store revenue to grow from nine five to 10, 5% in 2021 that outlook implies a modest deceleration in revenue growth in the fourth quarter against very tough comps.
Our current expectations are for occupancy to moderate from here.
150 basis points to the end of the year that.
That would lay into occupancy at the healthy 2020 levels at the end of the year.
But big picture the Baton has clearly been passed to rate growth, where we continue to see strength.
Our expectations are for zero to 0.5% same store expense growth as a reminder, that implies an increase of circa 30% in the fourth quarter driven by the property tax timing I've discussed.
We also increased our guidance for non same store performance given the acceleration of acquisitions and strong lease up of our own stabilized facilities.
Now on the balance sheet.
We have one of the industry's leading balance sheet set up well to finance the transaction volumes. We've seen this year, we plan on funding the all storage acquisitions with unsecured debt and we remain poised to grow with capacity to fund. The continued activity that Joe has discussed with that I'll turn it back to you Joe. Thanks.
Thanks, Tom.
We are optimistic about our business and for good reason.
As always that come A&D capabilities tied to the public storage brand.
High quality and well located portfolio.
The industry, leading operating platform and most important of all our people have us well positioned for sustainable growth and value creation.
Now I'll open the call up for questions.
At this time, if you'd like to ask a question. Please press star one on your Touchtone phone.
You may remove yourself from the queue at any time by pressing the turnkey.
Once again that is star and wanted to ask a question and we will take our first question from Jeff Spector with Bank of America.
Great. Good afternoon, and thank you and congrats on the quarter I'm not sure. If there's if we're allowed to question. So I guess my first would be on the new higher David Lee.
Very interesting I guess.
Joe you can provide a little bit more details on.
David's role and what you see him you know bringing to public storage. Please.
Sure Jeff first.
We're excited about David joining the executive leadership team, we've built over a number of decades now a great operations team.
Today the teams comprised of over 5000 of or you know of our associates, who are committed to deliver exceptional customer service, while clearly adapting to the many changes that we've been talking about.
So david's joining us at an exciting time.
His role will be to continue leading what we call the customer journey, where we're unlocking and delivering new tools to our teams and offering different channels and experiences right at the front lines for our customers and with that his engagement.
With the team as a whole will be very important as we move the entire team forward through a very dynamic time, not only for the company, but for the industry.
Clearly his skills were attractive based on its 20 years or so with the UBS organization. The UBS store platform more particularly so we're very excited about his fresh perspective as we continue.
The various changes to our overall operating model and definitely look forward to the contributions EBIT brings to the entire management team.
Great that sounds great and hopefully if I have a second you know Joel I always considered it to be conservative with your comments. So it's encouraging to hear the outlook for 'twenty, two and beyond looks favorable.
You know, we're getting a lot of questions on supply supply in 'twenty three I guess.
Can you elaborate.
Looking for guidance, but you know what makes you feel comfortable to make that statement and then I guess in particular supply.
Yes, Jeff.
Thing that has been a nice window for us over the last year to two is the.
Reduction in national deliveries of new storage product, we've talked about that for some time, where this year, there's likely to be about $3 $5 billion or so of new deliveries put into the markets nationally compared to the peak that we saw in 2019 of about $5 billion, we're likely to see that number.
Trend down again in 2022.
Particularly with some of the hurdles that are out there from a development standpoint that we clearly see day in and day out that includes the time it takes to get a property entitled many of the cities are clearly understaffed and we're seeing longer processes actually to get something as simple as a a permit.
Our use our occupancy use permit for a property come through two more commanding issues that were saying even from the costs and availability.
Components of construction and then labor itself. So there are some different.
And.
I would say commanding issues at any developer today has to go through to operate in this kind of an environment. So that's likely to produce again. This downdraft draft that worse, we're predicting for 2022.
Now having said all that our industry has you will know is very fragmented the development.
Industry as a whole tied to self storage is too very fragmented and it's hard to predict.
What level of activity might resurface in different markets based on frankly, the continued very strong performance of the sector. So we're keeping a very close eye on that as we've talked about we've got a deep team across the entire national.
Set of opportunities that we're working on and we're also seeing activity that's coming through our third party management platform as well that is tied to future development.
It will be with US. The question is how much more momentum comes out of the environment, we're dealing with as we speak which.
As one of the long term attributes of self storage, it's great business. So, we'll see and monitor the impact that's likely to have but we feel at this point. We continue to have a very good run rate to go out and capture good land sites with a deep development team and the knowledge, we've got across all of our markets.
Okay. Thank you.
Thank you.
We'll go next to Smedes rose of Citi.
Hi, Thanks.
I wanted to ask a little bit more about the.
The decision to load up more in Dallas, and maybe if you could just talk a little bit about the.
Process, how competitive it was to get this portfolio and then I can.
Correct me, if I'm wrong, but I guess I think of Dallas, because at fairly low barrier to entry market and I'm just wondering.
Are there any risks to meeting these stabilized yields that you're that you're targeting.
Yeah sure Smedes.
First off I mean, we have a long standing commitment to Dallas, we have seen as I mentioned in my opening comments are good.
Growth has come out of that market, you're right. It has been a market that's been prone to.
Our site level, an outsized level of development from time to time, but.
Frankly, the embedded growth that we see that's tied to a very business friendly economy.
Costs, including taxes.
Cost of housing is.
Et cetera centrally located within the United States, you know great infrastructure, it's a huge draw for both business and.
Overall population growth. So what came with this portfolio was an opportunity to leapfrog our position that was already.
A top position in that market, where we have had approximately 120 existing assets as well as a dozen or so third party management properties.
Leapfrogging it by another 52 to 53 properties, so huge opportunity to grow and actually put additional.
Our presence in parts of the Dallas Fort worth market, particularly Fort worth that we were lighter than and Fort worth for instance, like Dallas as a whole or the Dallas Fort worth.
<unk> is growing dramatically. So we're really encouraged by that population growth.
You know it was very strong good house hold.
Income and we really like the multiple attributes that we will see and continue to see with our industry leading position in that particular market.
Mike Mcgowan's with us I'm going to hand, the mic over to him. He can give you a little color on what came through with the process. We went through to actually capture the portfolio.
Thanks, Joe So it was a competitive process it was quietly marketed.
With more or less a few select people that could take down a transaction of this size.
In reference to your side your question about the location of the new supply coming in this developer really did a great job of putting a footprint of 50 properties and markets that were so far ahead of his time out in areas that are having high barriers for new storage to come in he built large.
<unk> is in those marketplaces kept a lot of competitors out at the same time and really for US we're starting to see the same type of.
Issues with zoning of getting new storage and a lot of these newer areas in these high growth areas, which are the better areas of the Dallas Fort worth market. So for us it puts us in a great position to be in new markets, we want to be in and gives us a very strong presence in all those markets to do it that those big gaps for us at the same time.
And one other thing smeets from a integration and assimilation standpoint.
We have as we did with EZ storage, a great opportunity to bring in the majority of their operations team, we're excited about adding.
Those new members to the public storage team there in Dallas Fort worth.
The opportunity for us to integrate these assets and put them under the public storage brand will be very efficient clearly were very skilled at that.
Coming right off the experience, we just had in Washington Metro with EZ storage. So we're very confident that in very short period of time, we can transfer the 60 plus thousand customers that are coming with this portfolio into our own sit.
Our systems and.
Our own opportunity to drive value based on the way that we're gonna be able to run those properties as we do our entire portfolio.
Okay, great. Thank you I appreciate it.
Well go next to Hans <unk> with BMO.
Hi, good morning, Thank you.
Just hoping you could talk a little bit about on the acquisition side, the yields going in and target stabilized for the third quarter transactions as well as what's on the dock, including all stores you talked about a little bit about it on a stabilized basis, but curious on the on the go and maybe I'll just from a modeling perspective.
Sure. So this is Tom so as Joe mentioned, a lot of the activities in the third quarter into the fourth quarter is on stabilized activity and so what you see.
If you think about average occupancies in that 50% I would have that in your mindset and then from a yield standpoint, we obviously gave you a sense for all storage what those yields are call. It two 6% on their operating platform in the third quarter. So that gives you a starting point.
And I would say across the other property is probably similar type yields.
Even with a little bit lower occupancy. So I think that gives you a starting point clearly we have confidence in our ability to lease. These properties up you know one of the things that.
That Joe mentioned.
Earlier around our confidence in our operating platform in Dallas Fort worth similar to Washington D. C and if you look at our EZ transaction from earlier in the year when we acquired that at 86% occupied we got it to 94% through the busy season.
And really strong growth in a market, where we're out of inventory. So to give you a sense of few of those properties. We took over in the 40% Occupancies and got them up to 90% by the end of the busy season, which is clearly strong leasing activity.
In Dallas Similarly were out of inventory, we successfully leased up our activity that we've built and bought over the last several years and are poised to take over these all storage properties here over the next several months.
Yeah, what I'd add.
As again, we've talked to and Mike and his team have been very focused on for the last year and a half in particular a lot of great assets have been built over the last five or six years.
And we've really had the opportunity to capture a very high quality assets.
Mostly recently built in this cycle.
And what we feel are good values, but good opportunities to grow performance. That's why we haven't been shy about taking on any level of on stabilized occupancy in these assets as Tom mentioned, we're very confident particularly in this environment relative to our lease up capabilities as.
As well as taking them to stabilization in an era, where we're seeing very very good consumer and business demand frankly.
Great.
Just hoping you could speak to the latest data points, maybe it's through October from an occupancy and a rate perspective, you know what.
The implied guidance for the fourth quarter is 150 basis point.
Occupancy moderation just curious on kind of how we stand to date on that.
Yeah sure Smedes just to give you a sense as to where October ended the.
The year over year.
GAAP in occupancy we were at one 2% at the end of September that has fallen a touch to around a positive 75 basis point gap at this point. So we are seeing that a modest moderation in occupancy as we move into the fourth quarter here, but continued strength on rate.
So we continue to see good good growth there you know some of the markets.
That we're seeing the most strength south East Miami Atlanta.
The sunbelt in aggregate continuing to see.
Greater than 50% move in rate growth at this time of year compared to 2019, so really strong pricing momentum.
Here, despite modest declines in year over year occupancy.
Thank you.
Sure.
Well go next to Michael Goldsmith with UBS.
Hey, Michael.
On mute.
Okay.
We will go next to Todd Thomas with Keybanc capital.
Hi, Thanks, good morning out there.
First question I wanted to circle back to investments.
For jobs.
With with all storage now.
You've disclosed your youre, taking up leverage to four three times on a pro forma basis and there are a couple of other larger scale portfolio is reportedly on the market and a lot more product. Besides those portfolios that you discussed.
Still have room to take leverage up obviously, you have a lot of.
Access to capital as well, but your dry powders decreasing a bit if youre looking to stay in that four to five times range that you discussed at the Investor day earlier in the year. So I'm curious what the appetite is like for additional larger scale deals and then.
We saw that youre issuing $80 million of units for the deals under contract should we assume that PSA is open to issuing.
More equity or equity today as part of the funding plans going forward.
So first of all I'll address the environment Holistically, Todd and Tom can give you a little bit more color around what I would call the tools in our tool kit, but.
The environment continues to be very vibrant we're seeing are about.
Vast.
Array of different types of sellers coming to market and we feel well poised with the.
Capacity of our balance sheet to continue to be a very efficient.
Acquire and we want to maintain that because we think it's highly advantageous even in a market like this where it's quite competitive depending on the.
The type of asset and the location.
Asian et cetera that might come through so we feel very well poised our balance sheet has been and will continue to be a great.
Competitive advantage for us and we will continue to as I mentioned look at many of the tools in our toolkit. So Tom can give you a little more color on that but we're very confident we will continue to be able to embrace this environment.
With a whole range of different opportunities that may come through.
Yeah, Thanks, Joe and as you mentioned, we do have strong access to capital with our balance sheet positioned the way. It is and we're confident in our ability to continue to fund acquisition activity with a broad set of tools. So we spoke about using unsecured debt and we've used unsecured debt really over the last several years to fund activity.
That doesn't mean that we're not open to other alternatives, including common equity or JV equity as we discussed at.
At our Investor day to the extent that volumes are both high quality attractive financial return.
We would certainly be open and welcome the opportunity to use a broad variety of tools in the toolkit overtime, but for all storage in particular, we plan to fund it with unsecured debt and we feel good about the leverage level, where it is today.
Okay, and then if I could ask one more just about the existing customer rent increases.
And Tom when you look at the 14% of revenue growth in the quarter.
You talked about you know there was a small portion that was related to occupancy when you look at the balance.
The revenue growth in the in the period, how should we think about that contribution.
Between the higher move in rates that you described and the impact from from ECR eyes.
Yeah. That's a good question so really on a year to date basis, we've seen a pretty balanced contribution between the move in move out dynamics on one side and then the existing tenant rate increases both contributing meaningfully I would put them at roughly on par with each other in terms of the the contribution I do think.
Going forward.
One of the things we disclosed them is our move out activity and the move out rates. So move out rates are starting to catch up with move in rates. They they have not caught up yet, but they're starting to catch up and that will start to be a headwind on the contribution from the move in and move outside.
We.
We will still have existing tenant rate increases as a tailwind from here given that market rents are.
Increases that we've seen across the country.
Okay and would the Cri program would you expect to see that moderate at all.
As as the.
As move out rates catch up a bit there or.
Do you have to do you have to take your foot off the gas a little bit.
As that happens on the existing customer rent increases or is that not the case.
Say that you know.
Listing tenant rate increases something that's managed very dynamically.
Across the country and really across.
Across the tenant base and I think the way to think about that as one of the benefits of the current environment is higher market rents and that lowers the cost to replace that tenant if they elect to leave the kind of base continues to be quite sticky, which gives us confidence to continue to send increases.
To the tenant base as.
As we think about you know where we're going forward in fact, one of the contributors to higher move out rates is actually the fact that we're being successful in increasing rental rates on that existing tenant base. So I would I would say almost the reverse which is as we're successful on existing tenant rate increases I would anticipate that that move out rate will move higher.
Move out rate, meaning the rents that are that people are paying that do elect to leave us.
Okay, great. Thank you.
Thanks Todd.
We'll go next to Caitlin Burrows with Goldman Sachs.
Hi, there maybe one on development I guess, if this can definitely be a great opportunity, but one of the hurdles is that ability to continue getting land and attractive areas. Just wondering if you could go through kind of how this process is going now and kind of any.
Dunno difficulties that you are running into to continue it.
Well that that goes right down to the knowledge and the focus you have to have relative to what's transpiring in any given sub market. So as you know.
<unk> spoken to we've got a very deep seated team across the entire.
Portfolio.
Portfolio that we operate today and in markets that we continue to look for additional growth as well.
The.
Opportunity to acquire land over the last year and a half or so it's been.
Somewhat elevated because we've seen that tapering down of deliveries so not quite as much as a ground up development momentum again coming from a very fragmented.
Set of developers out there but.
Still very competitive there's a lot of knowledge you need to have to find and locate the exact right location, that's complementary to future growth of that particular asset the kind of dynamics that come from competition as well as population.
Growth et cetera, so a lot of different factors come into the way that we're able to select the land sites very differently than most because of the amount of data that we have day in and day out relative to our presence already across 39 states and being a top owner and nearly every one of those submarkets.
The business, though it's very entrepreneurial from a overall.
Overall self storage standpoints, so theres competition that can come through.
And as I mentioned in some cases, it may become more elevated than we've seen over the last year and a half so keeping a very close eye on it but we feel like we've got very good tools to not only find great land sites to actually execute even in an environment, where it's tough to get either entitlements and or justify that.
Costs that are tied particularly from component costs and labor costs that are playing through to actually develop.
Facilities in an environment, where we're seeing a high degree of inflation at the moment.
And actually on the inflation point I was wondering just given.
Revenues are up a lot the business is really strong.
We're down can you go through what impact you think inflation is having or will have on your business both from like a revenue or expense side.
Well you know.
You know one thing that's advantageous to self storage in general. The fact, we have a month to month lease business. So it's a huge opportunity to actually react to the kind of cost pressures that may play through from inflationary pressures.
So that's an advantage.
The product itself affords us to actually monitor and.
React to any of those inflationary pressures.
We're confident that we can maneuver through those pressures, but it's something we have to keep very close to and that's why we and every part of our business. We constantly look for efficiencies and the ways that we can continue to look at operating and running our business as cost effectively as possible.
Got it thanks.
Thank you.
Well go next to Keybank Kim curious.
Thanks, a lot good morning out there.
So.
A simple question on same store revenue.
Yes.
The mines don't increase in 2022, how much upside is there already and it seems so revenue.
Looking for 2022 guidance already keeps it [laughter] not guidance this is quite a.
Below the low point, so even if market rents grow like how much is the starting point you think.
Yeah, well I think yeah. There's a few things there one is we continue to see strength in market rents. So I understand the question, you're suggesting but I think we continue to see strong demand for self storage across the country, but but if you look at the markets with the strongest growth really driven by macroeconomic demographic and.
Asian shifts that we think are are poised to continue here, which is helpful.
So you know clearly there there's been a move in market rents higher and existing tenant rate increases.
Have been moving the current tenant base higher alongside that now over the course of last year and really the <unk>.
Through.
Good portion of this year and in some markets continuing today, we have had pricing regulations on us.
Because the state of emergencies and the impact of the of the health care environment, and that's definitely been a headwind as it relates to the existing tenant base and moving them in the same manner that market rents are going so I think that another way to say that is there is some embedded rate growth that's available to the extent that we continue to see.
Normalization from a health care standpoint, and in state of emergencies continued to.
To expire.
The most notable of which is in Los Angeles County, not related to pandemic related to fire several years ago that we continue to monitor.
And.
How how impactful was that I.
I guess said another way how much money was left on the people.
As compared to cut portfolio.
Yes, I guess just for us to get a sense of how meaningful that could be.
Yeah. So you know one of the things that we've that we look at is what the impact of those.
Pricing restrictions have been on us versus what our models would have otherwise suggested that we send the increases out at night I I ran these numbers for last quarter. So I'll give you precisely what it was for last quarter I don't have it for this quarter, but through the first part of the year first half of the year. It was about a 300 basis point.
The impact to same store revenue growth in the first half of the year. So anticipate that that's largely remained pretty consistent through the third quarter.
But that gives you a sense of the magnitude.
Got it alright, thank you.
Sure.
Well go next to Rob Simone with hedging risk management.
Hey, guys. Thanks for taking the question.
Hope all is well I have a longer term question on third party management so.
I guess you got.
Guys are somewhat unique in that unlike some of your peers.
And it's a credit to you actually attribute expenses to that platform, specifically, which is really helpful. I guess between now and the 500 stores what is kind of like the crossover point for you guys or could you talk a little bit about the crossover point when you kind of get firmly into the green.
In that business and then like from a margin perspective, what do you think that could potentially scale too and I asked that because we're kind of used to looking at property management fees as a singular line item with a lot of the costs kind of buried in other segments or in G&A. So just kind of trying to pick your brains on how you think about that.
Yeah sure. So there's a couple of components in there.
One is obviously, we've been ramping the size of that business and one of the most vibrant areas of demand from our customer base for that business line is from folks that have developed new properties and so as we take on those properties.
<unk> ability of a new property is less than one of one that has stabilized obviously given that the revenue nature of the fees and so as we ramp that program similar to our development business almost there there's a.
A ramping of the profitability of each individual store. So said another way, it's going to take several years before that.
The volumes that we're anticipating really start to produce the P&L impact that you might anticipate.
The second piece of your question relates.
It relates to what are the margins of that business.
And.
There's a couple of factors there so.
One is clearly the geographic mix of of the properties themselves with the operating costs are tied.
Tied to them, but if you just look at them overall and you say, okay, where can we get to from a margin basis versus the fees, we're charging I think a.
Annabelle margin is probably in the 20% to 30%.
But again a lot of variability as we add a significant number of properties. So that's store base over the next several years.
Got it got it and when do you guys ever consider.
I mean, I know obviously you are deploying a lot of capital right now and there is still some capacity, but would you ever consider kind of like a JV program with maybe you know the.
The capital partner I know Joe mentioned in his remarks that.
A lot of folks out there are kind of rethinking about their timing to exit.
Are there opportunities to do like a JV program or are you also participated in a third party management and it just kind of like it grows the pie so to speak.
There will likely be opportunities just like that Rob. So I would tell you that we're open to a variety of different scenarios as we're engaging and different ownership groups, whether they're currently or anxious to get into self storage. So that's definitely something that we'll continue to.
Evaluate and as those opportunities arise we will certainly.
Be able to give you more color on those.
Yeah understood. Okay, just just kind of thinking about the strategic thinking alright. Thanks, guys I appreciate it okay. Thank.
Thank you. Thank you.
We'll go next to Jonathan Hughes with Raymond James.
Yeah.
Hey, good morning on the West Coast.
Just kind of continue.
Continuation from Todd's question earlier on using equity financing for acquisitions did those sellers ask for E $80 million of units to avoid triggering tax events or did you offer those as a sweetener to get a deal done we just havent seen I think shares of units offer.
Since shurgard like 15 years ago.
Yeah, no. It's a good question and it really is driven by the fact that there are sellers out there that are interested in accepting our shares as currency and that's something we're open to.
You're right. It's the first time, we've done it.
A number of years.
But we're open to it and it can be an attractive way to.
To to transact with with sellers that are interested there.
Okay.
And I mean is that perhaps the share price.
Moves a little higher the cost of equity gets a little more attractive than you would be open to using this shares or units for large portfolio deals like another several billion dollar acquisition that's fair.
Sure you know I think the.
The way, we think about the return profile of our deals is typically on an unlevered basis and so we're evaluating what the return profile is either on a leveraged neutral basis or unlevered basis, and so you know as well.
We look at ultimately the financing of these transactions we've had the opportunity to continue to use unsecured debt and preferred.
The core piece of the capital structure, but as volumes grow it will make good financial sense to continue to broaden the sources of capital and.
The benefits of that growth will continue even with using maybe higher cost equity or or JV equity potentially.
Yeah, Okay, and then I just had one more if I may one of <unk>.
Your peers.
Said, they expected greater than inflation level of onsite labor cost increases next year.
Fair to say, we'll see that maybe even a slightly higher level from your portfolio. Since you did just bump wages seven.
Seven 5% a month ago.
So as I mentioned, Jonathan and you have the labor markets highly competitive it's a definitely somewhat unpredictable as well, but I'll tell you, it's a difficult time too.
Attract and retain a personality.
Any level of skill across the entire organization. So we're going to continue to look at.
The benefits of making.
Either changes to the wage rates and or a balancing that with a variety of different efficiencies, we're seeing with the transition of our operating model as well so we're going to continue to.
Monitor that and likely see you know again, a very competitive environment going into next year.
Alright, thanks for the time.
Thanks.
Once again that is star one to ask a question I will take the next question is from Ronald Camden with Morgan Stanley.
Hey.
Thanks, so much for the time when you talk about I think you made a comment about the expansion of the portfolio.
You know, 19% since that's sort of 2020.
Clearly you're in a very strong strong markets strong demand and so forth, but over the next two to three to four years does that lend itself to opportunities to to think about what markets you really want to own long term.
And potentially sell some assets.
Now clearly not today, given how strong the markets are but just how you're thinking about sort of the portfolio long term.
Yeah, Yeah, Ron Thats definitely something that we have a.
I would call it a fluid analytical approach to meaning that we're always.
You know looking to and understanding the impact and.
Value of.
Assets across multiple markets evaluating the benefit of either.
Continuing owning and or at whatever point thinking about <unk>.
Recycling any level of capital tied tied to existing assets. So that's an ongoing process that will continue to.
Look too and it's definitely part of the internal process that we use relative to the way that we're.
Seeing value creation from existing assets, and then the opportunity potentially to recycle.
Great and then my second question was just.
Asking the C. O O appointment question a different way I know you mentioned opportunities maybe introduced new products to the operations T. But should we think about this as sort of incremental change or is this a revolutionary sort of new ways of sort of doing business and operating just trying to get a little.
More color, how we should think about the impact of the CLO.
Well I'd go back to the things that we described at our Investor Day, where we gave you know a fair amount of detail on a variety of ways that we're enhancing our operating model through investments in technology and then different.
Channels and different.
Yeah.
Opportunities were giving customers to engage with us across a whole spectrum as well as the things that we continue to be focused on relative to people development and the types of opportunities internally that we think are very.
Very well suited to continue to grow the quality of our workforce so that.
The role that Davids.
Davids coming into isn't new to the company in the context of our goals and the strategies that we have it's just an added level of <unk>.
<unk> ship that we think is.
Prudent as we move the business forward and we're accelerating the pace of change that.
So the amount of investment that we're making in our people directly as well as the technological platforms, particularly as it relates to the digitization of the business. So it's.
One added layer of leadership that we think is well timed and we really look forward to continuing to.
Optimize the way that we're running the portfolio as a whole, including the way that we're also engaging and giving a.
Variety of different opportunities to our existing employee base. So really good time for him to come into the business and as I mentioned, we're excited about the fresh perspective, he's going to have as well.
Helpful. Thank you.
Thank you.
Well go next to Spenser always think street.
Thank you.
Widespread supply chain issues that we've been seeing an increasing number of companies keeping what's being called just in case inventory have you guys noted any incremental business related demand in recent months.
You mean from just core customers coming to us the.
Differently or trying to use space because of.
Maybe keeping goods are more immediate availability.
Yeah, Yeah, exactly yeah, I I Couldnt point to Spencer and exact lift in demand based on that but it wouldn't surprise me based on the variety of different business customers that do.
Do use <unk>.
Self storage in a way that's.
More spot oriented where they may have a elevated level of demand.
But they need to cater to and by virtue of that storage can fit that need quite easily.
No.
There's likely some benefit that we're seeing from that.
In many many markets.
Okay, and then just on the expense side, where would occupancy needs.
<unk> for us to begin to see marketing cost creep back up in a material manner.
Uh huh.
Spencer I would say that that's a pretty dynamic.
And local decision that we manage and I wouldn't necessarily say, it's an occupancy based item as it relates to what we're seeing in the customer funnel. So advertising has a benefit to increase top of funnel right. The number of people that are say.
Searching for public storage or or finding public storage when they go to search for self storage and so.
That is helpful in markets, where we're seeing top of funnel demand erode, but.
But we have other tools as we're managing revenue be it a pricing promotion et cetera that will impact conversion.
Within that funnel and so I would say.
We're watching the different components of the funnel and what the returns are associated with pulling those different levers.
To date, we continue to see strong top of funnel demand across the board.
Web visits for instance, in the quarter were up north of 20% across the system.
Calls into our call center were roughly flat. So overall, it's still very solid top of funnel demand, which led to the decision making around marketing in the quarter.
As we've demonstrated in the past if we start to see those dynamics change.
We typically do see pretty good returns on our advertising spend in <unk>.
We'll pull that lever as well.
That's very helpful. Thank you.
Thanks.
Yeah.
Well go next to Mike Mueller with JP Morgan.
Yeah, Hi, I was wondering for all storage would you assume for rate growth through 2025 to get to your 6% stabilized yield expectation.
Yeah. So one of the things that we looked at them.
Within the portfolio is obviously, there's a pool of properties that have recently been delivered that we have the opportunity to lease up and then ultimately stabilize on a rate basis.
Until we go through our underwriting process of I've seen what our stores in the area and what competition competition is and ultimately what we think we can squeeze from a revenue standpoint within our own revenue management platform.
Underwrite those there.
And then on the stabilized stores, we call them stabilize but the reality is that they're not in our platform and like we're seeing them in acquisitions to date really through last year, we have an opportunity to put our operating platform and systems in place and drive further improvement. So you can see for instance, where our overall Dallas.
Portfolio rental rates are.
And obviously these properties are have their own submarkets in an underwritten rates.
But that gives you a sense as to the upside in rental rates that are we think we can achieve in the portfolio over time.
What are you embedding additional rate growth.
Beyond current market or just kind of pulling them up to current market.
Assuming that it's capped out there.
Yeah, It's a combination of where we think rates are today, so spot rates and then ultimately that the runway we see for rental rate activity.
Counterbalanced with you know one of the questions earlier around.
Rental rate risk due to new development within that market in those submarkets, which is a consideration as we think about it afford rents as well so a combination of a number of those things, but I would.
Got you to the presentation, where you can see our same store rents in Dallas.
Punching at $15.
<unk> per foot versus the in place rents there in the third quarter at about $11. So there's definitely occupancy and rental rate upside.
Okay, Okay that was it thank.
Thank you.
Thanks.
Well go next to Smedes rose with Citi.
Hey, it's Michael Bilerman here with Smedes, Joe just wanted to go back to the hiring of.
Okay.
You've gone down that you the company has gone down this path previously and every time that CEO came on it there wasn't it never stuck.
And so I'm just curious at the start.
As you know we hired for the CLO position, what's different this go around versus other initiatives in the past on this topic.
Well, yes part of the history, Michael I don't know if I agree it never stopped I mean, we've had in our history, obviously predating my tenure here.
Periods of time, where you had multiple year T O O positions in place and then by virtue of the dynamics of the business. We made different changes for instance.
Taking some senior leaders for instance.
On sabbatical to go over to shurgard for one or two years at a time et cetera. So.
It's been somewhat of a I would agree somewhat of a fluid.
Position by name, but by responsibility and focus it's been with US consistently one of the things that is different relative to the opportunity that we see at this point to bring in as I characterize you know.
Even more fresh perspective, and more additive leadership capability to that overall role as the dramatic.
Growth and change in our business.
I've noted we've acquired a sizable amount of assets over the last couple of years literally the size of some of our competitors.
And.
It's been a great opportunity for us to continue to think about how the business is changing the different tools that were putting in place the investments that we're making and as importantly, the skills and the development of our employee base tied to operation. So it's a great time for us to put even.
That much more emphasis on the role and we're excited about what we can continue to do with David's leadership coming in and.
The things that we're very very focused on relative to the overall effectiveness of our operations team as well as a whole.
What are the sort of top three priorities for him.
In the next sort of call. It 90 to 180 days can you talk about any restructuring underneath him in terms of the team are how.
Youre going about sort of.
But as you've talked about the business is changing right.
So you Didnt have 50% doing online contactless a few years ago.
A little bit about what the priorities are and things like that well his number of priorities has come in and one of the business I mean, that's that's the way we've all come into the business.
Being as focused on the front lines as possible.
And that's you know that that's definitely a top priority and it's not to come in and make massive change of retool something that's broke its an opportunity to enhance and optimize many of the great foundational investments that we've made that frankly are statistically.
In a whole different league than what you're seeing with other operational platforms as I mentioned in rental 50% of our customers using your rental that's amazing.
We're plus or minus 40 to 50000 customers a month are using that channel that did not exist.
Lessening our more than 18 months ago. So we're confident that we have a foundation that continues to unlock really good opportunities the way, we're running the entire operational team.
And we're excited about what we can do with David coming on the team as well.
Can you give us some insights on what David did at UBS in terms of the changes that he initiated either.
The store level, which.
My local UPN store it has gotten a lot better over the year. So hopefully he was a driver of that but talk a little bit about sort of the characteristics and what drew you to him about what he's been able to accomplish in his prior role well.
Well.
There's no question that that platform is very transaction oriented it's very customer centric it's tied to.
Again advancement and their own operating model.
And we really liked many of the skills and the attributes of that kind of a transactional environment and how it relates to what we see in self storage. So a lot of very good.
Things that we can.
Learn from that environment, and then he'll be learning from our environment as well and we can create the best of both worlds.
Great and just last question on this topic.
You don't have a lot of I think it's only in the Hawaii asset in terms of having store front retail at the self storage facility.
Is that an opportunity.
That youre thinking about and I think someone mentioned revolutionary or you're thinking differently about the storefront real estate that you have and given the fact, you mentioned 50% of the people are doing it online how much is that store French.
Frenchie Asian or added in things that you can bring into that real estate to drive incremental.
Our cash flow.
Could you be an Amazon pickup and delivery service type of things like is that part of the.
Focus at all for the company.
It's a good question and I will tell you there is a whole variety of strategic opportunities that will be more than happy to share as they evolve. There's you know a lot of creativity that continues to surround the customer driven.
Demands that we're seeing as customers continue to shift the way they want to interact with any type of business, particularly ours and we think there are very vibrant opportunities going forward and as those arise will.
I'll be sharing those with you.
Okay. Thanks, Joe Thank.
Thank you.
And we will take our final question from Michael Goldsmith with UBS.
Good afternoon, John and Tom Thanks, a lot for taking my questions. How do you think about the risks associated with doing several large acquisitions at a time when yields are as low as they've been and can you talk about how public storage can maximize the growth of these acquisitions on your platforms.
<unk>.
Oh, Yeah sure Michael you know I mentioned you know we.
We've had obviously a fair amount of volume over the last couple of years, but it ties to the scale and the ability on our part to integrate assets whether on a one off basis smaller even large portfolio. So.
Even when it is it's highly concentrated with what you saw with EZ storage and now again with.
<unk>, all storage portfolio, and two big metropolitan markets, but it points to the ability that we have from a structure and our scale and operating prowess standpoint. So we are deep in these markets. We've got you know.
Very strong teams that run these assets day in and day out our systems allow very efficient integration.
And we've been doing this for many many years and with the investment we've made with our technological platform. We certainly can do it in higher degrees of volume and higher degrees of concentration.
The.
The yields that we will likely see from this integration are.
As we've mentioned are compelling.
Again, it ties to the fact that we have the inherent.
Skill and benefit from the investments that we've made in to do just this.
So our capital structure is well suited to continue to fund the kind of growth that we've seen and there's no question. The team as a whole as I mentioned in my opening comments is continuing to have great job with the integration and the ability for us to actually improve pretty dramatically. The performance in most of the assets we continue to buy.
Hi.
Yes.
That's helpful.
The second year in a row where teams.
<unk> seen moderation from the peak in the summer to the end of the year is less than in the past. So do we think this is the new norm.
Or is this kind of just kind of unique circumstances surrounding.
The last couple of years, and we should return to a more.
Oh more seasonal.
The decline in.
In future years, how are you.
Thinking about that.
Yeah. So last year was certainly a unique year, where we saw different seasonal patterns because of the nature of the health care environment last year, and we didn't see much.
Much if any of an occupancy decline as we move through the year. This year, we did see a more seasonal pattern and frankly had the benefit of some of the seasonal demand drivers things like home sales and DIY projects over the summer for instance.
College students etcetera that will add to demand in the summer, but then we'll then move out as we move into the fall. So there was that out of the demand. This year, but we are seeing a little bit more moderation no doubt one of the reasons why we're seeing that moderation is the continued stickiness of the tenant base and so we've had fewer.
Move ins this year.
And so.
Recent move ins are the most likely to move out and.
So we've had a contribution of that benefit and a little bit more seasonality. This year I do think that the seasonal demand drivers that have been driving self storage demand for years will continue to play out over the next several years and so we operate a seasonal business and it will be going forward. The degree of it you know, we'll need to see year in and year.
Route, but we are seeing a little bit more this year, but still really encouraging overall customer behavior.
Behavior.
And then just one last one for me you mentioned the change in tax laws.
I guess a catalyst for the <unk> transaction volumes. This year do you expect the transaction volumes to dry up next year or kind of continue at an elevated pace.
Thanks.
Well the amount of motivation.
Seems to be strong, let's just put it that way relative to existing owners wanting to bring more product to market. So.
Mike and his team continue to be very busy as we transition into things, we're working on going into 2022. So.
Always tough to predict but at the moment it looks like 2022 could be.
Okay.
Yeah.
Okay.
Yes.
Yeah.
Yeah.
I will now hand, the call back over to Ryan Burke for any additional or closing remarks.
Thanks, Emma on behalf of the entire team on our side I want to thank everybody for joining us today I look forward to speak with many of you next week and in the coming weeks and take care.
This does conclude today's program. Thank you for your participation you may disconnect at anytime.
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