Q4 2021 Extra Space Storage Inc Earnings Call
Good day, and thank you for standing by. Welcome to the fourth quarter 2021 Extra Space Storage earnings conference call. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session. To ask a question during the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded and if you require any further assistance please press star zero.
I'd like now to hand the conference over to your speaker today, Jeff Norman, Senior Vice President Capital markets. Please go ahead.
Thank you, Victor. Welcome to Extra Space Storage's fourth-quarter 2021 earnings call.
In addition to our press release, we have furnished unaudited supplemental financial information on our website.
Please remember that management's prepared remarks and answers to your questions may contain forward-looking statements.
As defined in the private Securities Litigation Reform Act.
Actual results could differ materially from those stated or implied by our forward looking statements.
Due to risks and uncertainties.
[inaudible] the company's business.
These forward-looking statements are qualified by the cautionary statements contained in the company's latest filings with the SEC, which we encourage our listeners to review.
Forward-looking statements represent management's estimate estimates as of today February 24th, 2022.
The company assumes no obligation to revise or update any forward-looking statements because of changing market conditions or other circumstances after the date of this conference call. I'd now like to turn the time over to Joe Margolis, Chief Executive Officer.
Thanks, Jeff and thank you everyone for joining today's call.
It is incredibly sad to wake up this morning to news of war in Europe.
Ignoring the human loss and suffering this will entail.
We're also thinking of how this tragic event will affect economic growth oil prices inflation interest rates and ultimately our business and our company.
Economic growth oil prices inflation interest rates and ultimately our business and our company.
Events like this certainly give us some perspective on our business and our lives and in some ways makes discussing the performance and outlook of our company seem less important.
Well, we don't know how all of this will play out we do know that historically self storage has been a needed product in good and bad economic times.
That the cash flow we produce is very stable much more so than many other types of real estate.
And that our company and balance sheet are structured and prepared to prosper in all economic conditions.
Now turning to results.
We had a remarkable fourth quarter. To cap off another strong year at Extra Space Storage.
Property level performance was exceptional across the board.
Same store revenue growth in the quarter was 18.3%.
Revenue growth was primarily driven by two factors.
First are same store occupancy of 95.3%.
Which was the year-end high for Extra Space for the second year in a row.
Secondly, still on new and existing customer rate growth.
Expense growth remained in check at 2.5%, resulting in same-store NOI growth up 24.2%.
We also had significant external growth in the quarter.
We acquired 66 stores on a wholly-owned basis or in joint ventures for a total investment from extra space of approximately $850 million.
Total acquisition investment for the full year was $1.3 billion, primarily in relatively small transactions.
We also closed a $187 million in bridge loans in the quarter.
Bringing the annual total to $333 million.
We continue to execute on our strategy to sell a significant portion of our lower yielding first mortgage balances to our deck partners.
We also continue to acquire properties originally sourced through our lending platform.
To date, we've acquired 15 properties sourced two loans for $181 million.
We added 69 stores to our management platform in the quarter for a total of 265 stores for the full year.
To give context, including acquisitions, we onboarded 1.3 properties per business day in 2021.
We experienced higher dispositions with more stores leaving our platform due to third party owners selling properties.
But we were able to buy 58 of these either wholly owned or with one of our joint venture partner.
Our property NOI plus our external growth efforts resulted in core FFO growth of 29.1% in the corner.
I am proud of the Extra Space team.
Their many contributions to our growth in 2021 and for how they have positioned us for another strong year in 2022.
We are also proud to have been recognized not only for our performance.
But the sustainable nature of the company we have built.
For the second year in a row, we were named one of [NAREIT] leaders in the light for our sustainability efforts and we are proud to be the only storage company to have received this award.
For the second year in a row, we were named one of [NAREIT] leaders in the light for our sustainability efforts and we are proud to be the only storage company to have received this award.
Looking forward, industry fundamentals remain very strong occupancy levels remain at historically high levels, resulting in elevated pricing power to new and existing customers.
Despite very difficult comparables, the strong market fundamentals and our team's ability to execute gives us the confidence to guide to double-digit same-store revenue growth again in 2022.
And FFO growth of over 13% at the midpoint.
In light of this strength, we raised our dividend to $1.50 per share.
50% increase year over year.
We are off to a great start in 2022, and we expect another exceptional year for Extra Space Storage .
I would now like to turn the time over to Scott to walk through some of the details of performance in the fourth quarter as well as our 2022 guidance.
Thanks, Joe and hello, everyone.
As Joe mentioned, we had a great fourth quarter and year with our 2021 core FFO coming in 6 cents above the high end of our guidance. Our outperformance relative to our guidance was driven by the property by property performance and higher than expected interest income, partially offset by higher than expected interest expense.
As Joe mentioned, we had a great fourth quarter and year with our 2021 core FFO coming in 6 cents above the high end of our guidance. Our outperformance relative to our guidance was driven by the property by property performance and higher than expected interest income, partially offset by higher than expected interest expense.
Interest expense.
Interest expense.
Our external growth in the quarter was capitalized by $210 million in sales proceeds from the disposition of 17 stores. We also issued $276 million in LP units and we drew on our revolving lines of credit.
Our balance sheet has never been stronger and we will term out our revolving balances through future unsecured debt issuances.
Currently only 8% of our debt maturities over the next mature over the next two years.
And our focus will be to lengthen our average debt maturity and to further ladder our maturing balances.
Our unencumbered pool is now over $12 billion and our net debt to trailing 12 EBITDA is at five times. We continue to have access to many types of capital, giving us significant capacity for future growth.
Last night, we provided guidance and annual assumptions for 2022, our new same-store pool includes a total of 870 stores are relatively small net increase from last year with new additions partially offset by.
By sites removed due to disposition or redevelopment.
Same-store revenue is expected to increase 10.5 to 12.5% driven primarily by rate growth. Same-store expense growth is expected to be 6 to 7.5%, primarily driven by higher payroll marketing expense and property tax expense.
Same-store revenue is expected to increase 10.5 to 12.5% driven primarily by rate growth. Same-store expense growth is expected to be 6 to 7.5%, primarily driven by higher payroll marketing expense and property tax expense.
Our revenue and expense guidance result in a same-store NOI range of 11.5 to 14.5%.
The acquisition market continues to be competitive and we will remain disciplined but opportunistic we plan to continue our strategy of looking for off-market opportunities and plan to capitalize a portion of our acquisition volume with joint venture partners, our guidance assumes $500 million in extra space investment.
Approximately half of which is already closed or under contract. We also expect to close $400 million in bridge, of bridge loans and plan to retain $120 million in new balances in 2022.
We have plenty of capital to invest if we find additional opportunities to create long term value for our shareholders and we will continue to be creative as we deploy capital in the sector.
To support our 2021 and 2022 property growth, we made significant investments in our people our infrastructure and our technology. This resulted in higher G&A expense in the fourth quarter, and we anticipate a higher run rate in 2022.
This is primarily driven by payroll and technology R&D, which are advanced initiatives that will support our growth for years to come.
The return of historical G&A expenses temporarily paused during the pandemic also contributes to this this increase.
Our core FFO is estimated to be between $7.70 and $7.95 per share. We anticipate 23 cents of dilution from value add acquisitions and CFO stores up 12 cents from 2021 due to the significant acquisition volume of non stabilized properties in the fourth quarter.
<unk> in the fourth quarter.
Interest income will be somewhat weighted to the first quarter due to the timing of note sales and potential modification of our next point investment.
2021 was a great year for Extra Space and we're already on our way to another strong year in 2022.
With that, let's turn it over to Victor to start our Q&A.
Thank you.
As a reminder, to ask a question you will need to press star one on your telephone and to withdraw your question just press the pound key.
And your first question comes from the line of Elvis Rodriguez from Bank of America, you may begin.
Good morning out there and congrats on the quarter and year.
Joe, a quick question on strategy from an acquisition perspective, I think if I recall correctly, you had about 700 million.
At the.
In your guidance at the end of 3Q, but did $1.3 billion what type of opportunities are you seeing.
Have already closed on call it $250 million year to date, what type of opportunities are you seeing?
And what gives you sort of some comfort or pause on the $500 million that you shared? And maybe being able to do more as the year progresses.
Great. Thank you, Elvis.
So we saw a good number of kind of year end tax motivated transactions.
Come in the fourth quarter, we were able to execute on those most of them almost all of them were single properties or groupings.
Of a very small number of properties. We also were able to do one larger portfolio, where we were not the high bidder on the portfolio, but through OPE units and shares we were able to offer the seller some tax deferment, which allowed us to capture that transaction as well.
Looking forward.
Our target of five guidance of 500 million is an assumption, we're pretty far along the way to getting there.
If there are opportunities to do more deals.
We certainly have lots and lots of different capital sources and debt capacity to do it and we will do it.
Do it but.
But what's in our guidance is $500 million.
And then just as a follow up are you able to share cap rate on your 4Q acquisitions?
Cap rate on your <unk> acquisitions.
So almost all of our fourth quarter acquisitions were unstabilised lease-up deals.
Were unstable is lease up deals.
And on a wholly-owned basis. First-year yield and this is totally loaded this includes cost to manage, CAPEX, tax reassessment our expense structure.
On a wholly owned basis.
First year yield and this is totally loaded this includes cost to manage capex tax reassessment our expense structure.
Was in the threes.
It was in the low to mid threes first year and we stabilized in the fives and a little over a year, maybe 15% to 17 months with average stabilization for those deals.
In.
The fives and a little over a little over a year, maybe 15% to 17 months with average stabilization for those deals.
When you do those same deals in a joint venture structure.
You can add 200 to 225 basis points to those numbers. So first year in the mid 5s and stabilizing in the high 7s.
200 to 225 basis points to those numbers. So first year in the mid fives and stabilizing in the high Sevens.
Great, and then for my second question, maybe for Scott.
Can you talk about the floating rate debt and your portfolio? I know you mentioned potentially doing an unsecured deal.
Sometime this year to term out some of the line of credit there. But can you talk about the overall variable debt?
As a part of your structure and how comfortable you are given the rise in rates?
I mean, obviously, you prefer rates can be falling but they are rising today.
So a part of our strategy has always been to have some component of variable rate debt. We typically have operated 20% to 30% variable rate debt. It gets a little higher when we have more drawn on our lines of credit and we are terming some things out. This year, we have about $535 million drawn at the end of the year, so that caused us to be about 25% variable rate debt.
Variable rate debt.
As we look forward in ways that we hedge, one of the natural hedges that we do have is we do loan money. We have these bridge loans and different types of investments that are variable rate instruments.
So there is somewhat of a natural hedge on a portion of that but we also will look to term out our draws on our line of credit this year through the bond market.
Yeah.
Thank you.
Thanks. Elvis.
Our next question comes from the line of Juan Sanabria from BMO capital markets, you may begin.
Alright, thanks for the time and good morning, just wanted to ask what benefit if any is assumed or expected from the lifting of restrictions. And can you give us any color on award that represents the most upside?
Alright, thanks for the time and good morning, just wanted to ask what benefit if any is assumed or expected from the lifting of restrictions. And can you give us any color on award that represents the most upside?
If any is assumed or expected from the lifting of restrictions and can you give us any color on award that represents the most upside.
Sure, Juan.
So.
So the short answer is we believe that lifting of this state of emergencies in California will give us about 50 basis points across the portfolio and lift and obviously theres a lot of assumptions to go into this primarily.
Lifting of this state of emergencies in California, who will give us about 50 basis points across the portfolio and lift and obviously theres a lot of assumptions to go into this primarily.
What's the length of stay to future lease to stay of the tenants that have gotten these increases.
<unk>.
These increases so.
Our guidance assumes 50 basis points.
And that 50 is revenues I'm assuming.
Yes.
Okay. And then just hoping on the expense side, you could flesh out a little bit about how much ballpark you're expecting kind of the major line items to move for '22
Just hoping on the expense side, you could flesh out a little bit about how much ballpark youre expecting kind of the major line items to move for.
that's embedded into your guidance.
Juan, our guidance assumes close to 7% on the payroll number and that is not only wage inflation, but that is operating more closer to fully staffed last year, you actually had negative payroll and so it's a really tough comp.
And then property taxes, we're assuming about 5.5% growth and then marketing about 10% growth.
Great. Thank you very much.
Thanks, Juan.
Our next question comes from the line of Michael Goldsmith from UBS. You may begin.
Good morning. Thanks a lot for taking my question. You had a very strong 2021, nearly 20% same-store NOI growth, 14% same-store revenue growth.
Wondering how much of the gain from last year is influencing how you guide for the upcoming year, it's been clear from those.
Like you and your peers that have guided our report at this point that the strength of the performance in 2021 is influencing expectations in 2022 and within that given your same-store revenue guidance of 10.5 to 12.5%. And the comparisons are considerably harder in the back half how should we think.
About the performance in the upcoming year.
From first half versus second half. Thank you.
Yes, so clearly a strong 2021 influences performance in 2022.
Our strong 2021 influences performance in 2022.
For a number of reasons. One is we have very high occupancy, which gives us pricing power, particularly when we still see strong demand.
Diminution in demand.
Secondly, as rates go up and we put new tenants in that it takes a while to flow into.
[That rate] takes a while to flow into performance.
As we put tenants in the later half of 2021, that helps gives us a rise throughout 2022.
In the later half of 2021 that helps gives us a rise throughout 2022.
And then we already mentioned ECRI.
Already mentioned EPRI.
But you are right that even with the strong performance that we expect throughout the year, our comps are tougher at the back half of the year.
So the rate of growth will moderate even though we should have strong performance throughout the year.
Yes.
But are you able to help kind of frame it? Like do we start the year at kind of the high end of the guidance and at the low end of the guidance?
[inaudible] just kind of the difference widening or the difference will be greater than that?
Just kind of the difference widening over the difference be greater than that.
So we obviously finished the fourth quarter really strong. So we would expect the first quarter to be our strongest quarter. We would expect our first quarter it'd be really good I mean, we don't see it moving down significantly partly because you had easier comps from last year.
And then that rate of growth declines throughout the year as we get tougher comps, we don't expect rates necessarily to go backwards and we expect to have pricing power, but the comp to be more difficult. Therefore, the rate of growth the decline as we move through the year.
Understood. And as a follow-up. You touched on a little bit on existing customer rent increases. For 2022, is there any change in your approach to them given the environment?
<unk>.
Given the environment, are you looking to push the magnitude of rent increases harder or more frequently or maybe pull some rent increases up prior to the peak leasing season? Just trying to get better understanding like the level of confidence.
Surrounding the same-store revenue growth that's driven by the rate piece. Thanks.
No.
So with respect to ECRI, we're coming off a period where it was really unusual where we voluntarily stopped where we were.
Restricted by the government for a long time, where we had outsized.
Rent growth, which increased the gap between what people were paying and current street rate.
I would imagine in '22 we would get back to a more normalized protocol for ECRI.
I'll get back to a more normalized.
Protocol for <unk> EC.
Hi.
Sure.
What's the second half of the question? Can you repeat the second half of the question? I'm sorry.
Just.
It was related to the magnitude of the rent increases more frequently or would you pull some rent increases prior to the peak leasing season to create vacancy.
To create vacancy when you have the most potential for the most captive audience.
When you have the most potential for the most captive audience.
Yes, and I'm sorry repeat that question.
I'm, sorry repeat that question.
We're always trying to maximize revenue and not not.
Not [make bread] on the shelf, so I don't think we are planning to create vacancy.
Our planning to create vacancy.
So we will have more vacancy [into leasing season].
We have natural churn every month.
And the ability to raise existing customers rate increase.
The ability to raise existing customers rate increase.
We're trying to continuously maximize revenue and not look at particular months of the year.
Thank you very much, good luck in 2022.
Sure.
And our next question comes from the line of Ki Bin Kim from Truist, you may begin.
Thanks. Good morning out there.
So going back to your capital deployment, obviously, you guys had a pretty robust quarter in 4Q.
I was just curious high level.
Did you just end up seeing more deals fit in your bullseye or did the size of your full value change?
And similar question for CofO deals and noticed that your CofO pipeline really expanded notably.
Notably.
Similar question there.
So I think if you look at the pattern of acquisitions in any year.
I think if you look at the pattern of acquisitions in any year.
It's back and loaded, I think there is a normal seasonality.
It was probably more it was more pronounced this year and we just saw more deals that made sense. We didn't change our underwriting of our discipline. We just happen to be able to capture more opportunities and we do have more CofO now. We did see more of those opportunities that made sense for us.
Opportunities that made sense for us.
But again nowhere near where we were in '16, '17, '18.
Got it. And implicit in your 2022 same-store revenue guidance. What are you thinking for street rate growth compared to what it was in 4Q?
So we will see. In terms of street rate growth for the year, I can tell you a little bit about our assumptions of what we're seeing in the first quarter. So our achieved rates in the first quarter. So far have been very similar to the fourth quarter. Our achieved rates were up 20% in the fourth quarter, we're seeing that into this year. We haven't seen significant
degradation in occupancy. Our occupancy is slightly below where we were before.
Our rate of growth will slow in terms of street rates and what I mean by that is we pushed rates as much as 20% to 40% depending on the month, depending on the comp from the prior year. We don't expect that in 2022. So we don't necessarily look to think that we will decrease rates, but we do not expect that kind of growth in 2022.
Spect that kind of growth in 2022.
If I could pick a little bit more.
Pick a little bit more.
Try to get a little more out of the answer.
Any kind of range you can provide?
They're going to be better in the first quarter than in the back half of the year. I think that's really all we can provide and part of that has to do with the comp in the front half versus the back half of the year.
Okay. Thank you, guys.
Thanks, Ki Bin.
Our next question comes from the line of Kevin Stein from Stifel. You may begin.
Good morning.
I was just wondering if you saw what $200 million of properties. I was just wondering.
The reason for selling or was it just really good pricing?
Or is there any strategic reason for that?
I would say both. I mean we always look to optimize our portfolio.
Either select markets or individual assets, where we prefer to have less exposure.
And to do so in a period of time where cap rates are at historic lows is very advantageous. We sold about half of the sales we did last year into a venture where we were able to keep management and some exposure to those assets and the other rough half.
We sold outright, but we're able to keep management of 12 of the 14 properties.
<unk>.
So I think it's both.
Strategic play and also happens to be good market timing.
Okay. Thanks.
Okay.
Our next question will come from the line of Todd Thomas from Keybanc capital markets, you may begin.
Thomas from Keybanc capital markets, you may begin.
Hi. Thanks.
I was wondering if you could talk about the contribution to FOO.
That's embedded in the guidance from non-same-store growth in '22 and can you share how much of an NOI yield increase you're anticipating on the non-same store.
So make sure I understand the question.
You are trying to understand.
Where, in addition to the property NOI, where the growth is coming from?
For the contribution outside of non same store or the properties.
Yes, so outside of the same store. I think in the prepared remarks, you mentioned sort of a mid 3% initial yield stabilizing in the mid fives on what was acquired during the full year plus some other non-same store assets CofO deals et cetera.
C of O deals et cetera.
What's sort of embedded in the guidance for NOI?
Hi.
For the NOI yield uptick that you are anticipating on the non-same-store in '22.
Yes, maybe the best way to think of it Todd is if you take the same-store performance, which would give them and look at your NOI there you're at the midpoint you're 13.
13.
And then you look at the FFO growth and our FFO growth is slightly higher than that so effectively all of the non-same store properties are contributing to the level that the G&A is going up that your interest expense is going up so it's effectively a wash. So the non-same store is a wash in terms of offsetting the other increases.
So you have several other increases happening here. You have G&A going up, you have interest expense going up and then you have an additional.
Amount of dilution from some of the lease up stores that we bought at the end of last year. We have 23 this year versus our dilution from last year.
Okay.
Okay.
Okay. And for the management fee.
And.
On for.
The management fee.
And tenant reinsurance income growth.
The guidance there.
What's that based on in terms of net growth to the third-party management platform? I mean, how many ads are you anticipating throughout the year?
So management fees.
And tenant insurance, both increased by the increase in joint ventures from last year as well as an additional 100 stores net is what our guidance assumes for next year.
Okay. So up a 100 stores net in '22, got it.
Okay, and then just lastly, I think Scott, you mentioned.
When you were talking about where achieved rates were year to date.
When you were talking about where achieved rates were year to date.
<unk> achieved rates, where our year to date.
Similar to the fourth quarter, I think you mentioned that occupancy spread.
Similar to the fourth quarter, I think you mentioned that occupancy spread.
Just a little bit here to start the year. Can you just tell us where occupancy is today and what that year over year spread looks like?
Your spread is slightly negative I'm trying to.
Slightly negative I'm trying to.
The best way to explain it, we have two different numbers you have a you are about negative 40 bps year over year, but you are also comparing our new same-store pool. So just wanted to make sure we're not solving for the exact amount and again, we're not solving for occupancy.
So we view this as still being in a really good spot.
But when we're at 94.6today and we're pushing rates as hard as we are.
Occupancy is one component of this.
Okay. Okay. So 94.6% is for the new same store that's occupancy as of today.
Occupancy as of today.
That's correct.
Okay. Got it, alright, thank you.
Thanks Todd.
Our next question comes from the line of Samir Khanal from Evercore you may begin.
Hey, Scott just on the occupancy question what are you baking in sort of in the second half of the year, so that solar Pete.
End of the year decline.
Yeah, so without giving exact occupancy I can maybe just give you a little bit of input we're not assuming that we get a benefit from occupancy in 2022 last year in 2021, I think we got 250 basis points of benefit from occupancy and then I believe we are ending the year slightly negative to where we're starting.
And where we ended the year this year, but again no benefit that we experienced in 2021 and so we do see occupancy is still being strong.
In 2022.
Okay, and then I guess on the other.
On the guidance for G&A.
I think it did go up I think it was about $20 million just trying to see if there's anything sort of onetime in nature. There I know you talked about <unk>.
Joel and kind of return to global.
But I know you've talked about investments in technology as well. So is there anything kind of onetime in nature that we need to think about as we think about sort of 23.
So im not sure if they're onetime in nature, but we're certainly making longer term investments.
Have been immediate payoff. So our company is growing very fast and we're making investments in.
Structures that will be.
Facilitate continued growth at the pace that we want and we're also making certain technology and R&D investments.
Won't add anything in 2022, but will be long term beneficial and accretive.
The flip side, which I don't think.
Temporary or is the increase in payroll and I think we're just in a new payroll environment and.
That that's going to be ongoing in my opinion.
Okay. Thank you.
Sure.
Our next question comes from the line of Smedes Rose from Citi You may begin.
Hi, Thank you.
Just wanted to ask a little more on the acquisitions outlook and you and others are seeing a pretty market slowdown from last year's elevated activity I'm wondering is it anything youre seeing seeing on the.
Sort of the quality of the assets there for sale or is there just less stuff for sale instead of purposeful pullback on your part or maybe you could just talk just a little bit more about.
What youre seeing maybe what's changed since last year.
Smedes as I said earlier I think there is a seasonality to this and there is a natural slowdown early in the year. We are still seeing things on the market for sale I don't think quality is very different than it was last year and prior years.
There is some stuff with good quality and some stuff.
Less quality.
But I think your overall thesis is right it's hard to imagine.
The volume in 2022 will match 2021 I was just.
Enormous year in number of transactions.
I'm talking about the industry not necessarily for us right.
Great.
And then could you just update us on what's been happening with the length of stay.
Whereas maybe where it was at pre pandemic as a reminder.
So length of stay has.
Has steadily increased from the beginning of the pandemic to now.
We're now at about two thirds of our customers have been with us longer than one year, and maybe 42 or 43% of our customers have been with us longer than two years.
And those are absolute all time highest we've never had that level of long term customers in the portfolio.
Okay Alright.
Alright, thank you.
Thanks, Amit.
Our next question comes from the line of Caitlin Burrows from Goldman Sachs You may begin.
Hi, Good morning, maybe just a question on supply wondering if you guys could go through your current expectation for supply in 'twenty, two and maybe even 'twenty three and how much visibility you think you have at this point and what's shaping those views.
So we continue to see a moderation in supply we look at store new deliveries that affect our stores so not national statistics of markets, we're not in.
And then if you look over the last three years and into 2022.
Been a steady moderation of 28% of our stores.
Affected by new supply in 2000, 1923, and 2000 2020 in 2021.
Best projection is about 18% in 2022, so new supply Hasnt gone away stores are still being delivered we get the opportunity to manage an awful lot of those which is a good thing for us.
But it but it is.
Is moderating.
2023, I don't have any predictions for yet I am concerned that given the tremendous performance in the asset class.
The amount of.
Capital seeking exposure to storage.
We'll see an uptick in new development, and we know how to manage through that we've done that before and we will provide opportunities for us either to manage stores or participate like our Seo deals.
Or make bridge loans.
I would not at all be surprised to see this pattern of moderation of deliveries reverse itself in 2023.
Got it Okay and then maybe just following up on some prior points. I know you mentioned you don't expect the same amount of rent growth in 'twenty to 'twenty, one, but with such high occupancy and rents. What are you currently seeing in terms of price sensitivity of customers and maybe how that ends up impacting whether they decide to stay or go.
Well, we certainly track.
Folks who vacate after they get a rent increase notices from us and that has increased over time so.
As we have.
Sent out these notices we see more tenants vacating because of that.
That's not problematic for us because.
It's not to a number yet that it doesn't make sense to hand out to rate increases and demand is so strong.
Very easily able to backfill those tenants.
At those higher rates or I guess, what ends up being that spread between the new person in that proposed rent increase.
Yes at those higher rates.
Great Okay. Thanks.
Our next question will come from David <unk> from Green Street, you may begin.
Good morning, just wanted to touch on interest rates and cap rate markets, certainly expecting a number of rate hikes. This year I imagine you haven't seen that bleed into the transaction market just yet, but how quickly would you expect cap rates to rise in a rising rate environment, just given that you've mentioned before there was the largest new capital.
<unk> storage exposure.
It's the right question right and traditionally as interest rates go up cap rates go up.
But the fact that you mentioned that there is so much capital wanting to invest in self storage.
May cause that to lag may cause rates to go up and cap rates not to react immediately but it's an unknown and a very important question.
And to that extent, if we were to see cap rates rise and perhaps your cost of equity capital, mostly unchanged would that entice you to be able to get more aggressive on the acquisition front.
Sure if our cost of capital was the same in cap rates went up that would that would spur us to.
To be more active.
Sure.
Got it and one last question real quick on migratory patterns and just national ability is hurting.
<unk> heard a number of market participants cite that as a demand driver in the last several quarters. We're also seems to be some data out there from the residential side that seems to suggest that moving activity really hasnt materially changed since pre COVID-19 levels is there something specifically since the pandemic was brought on about moving activity that has led to customer.
We're seeing a little bit stickier than they have in the past.
So I would posit that the stickier customers are not moving customers the customers, where we've seen length of stay increased the most are the customers did cite lack of space.
The reason for story, not those who say moving.
So for kind of a simple example is.
The individuals who turned the extra bedroom into a home office or room for kids to go to school in.
Tend to be slower to turn that back to what it was if they do it at all than someone who's moving in at some point moving don't need the storage anymore.
Got it great. Thanks.
Sure.
Yes.
And our next question comes from the line of Ronald Camden from Morgan Stanley You may begin.
Hey, most of my questions have been asked but just wanted to go back to the.
Comment on sort of the exploration and the contribution.
Same store revenue I think you talked about 50 basis points, hopefully, we can get a little bit more color is that is that mostly <unk> la <unk> and maybe what's what do you think is sort of the mark to market on the pull on that on that part of the business with these expirations.
Yes that was I am sorry, if I wasn't clear that that was the 50 basis points was as a result of California, which is mostly a leg for us lifting their state of emergency.
Yeah.
Got it and then so any sense of what the.
That seems a little trying to get a sense of the conservatism baked into that any idea of what the mark to market.
Beyond that portfolio and how that compares to the rest.
The mark to market being the gap between in place and what we're raising people too.
Exactly.
Okay.
So.
Sure.
So we sent out.
Rate increase notices for those tenants.
We obviously know what that all adds up to but it's not a number we are willing to share.
Okay No worries.
That's all my questions. Thank you.
Sure.
Your next question comes from the line of Mike Mueller from Jpmorgan you may begin.
Yes, Hi, just a couple of quick ones here first of all I know you talked about yields.
<unk> fourth quarter acquisitions, but what was the average occupancy.
For what you acquired in the fourth quarter and then is the focus in 'twenty two.
To buy assets with a lot of lease up potential as well.
So I'll answer those in reverse questions, Yes, I think most of our opportunities in 2022, we will continue to be stores that tap. Some some lease up some value add average occupancy try to look up real quickly, but I don't think its going to be a <unk>.
Number because many times you have stores that are at.
Hi, Hi, Occupancies it looked like they're close to stabilized, but theyre not at economic stabilization right you have gotten to that high occupancy by leasing it up below market. So the uplift is in moving rates to market not necessarily in gaining a lot of occupancy.
Got it that makes sense and then I guess just one other question in terms of returns when Youre sitting here and looking at our C of O deal how different is that targeted return versus.
What maybe.
A typical if there is a typical operating property that you would come across that has a decent amount of lease up potential.
Yes.
So it kind of depends on time right.
So if you.
Looking at a property that you think is going to stabilize three years out just to be simplistic.
And you compare that to a lease up property that stabilized as 24 months out.
Our lease up properties that stabilizes 12 months out obviously for each of those you want to be compensated a little bit more.
For the additional time that it takes you to get there so yields will be highest on the Seo and lowest on the property that stabilizes in nine months or six months.
And then the other factor is.
Our view of the risk of achieving those.
Those numbers and others, maybe strategic factors to buying the store not buy in the store.
Okay.
Okay. Thank you.
Our next question is going to win.
Keegan Karl from Baird you may begin.
Hey, guys. Thanks for taking the question I was just wondering if we could dive in a little bit more of the R&D.
R&D expense side of things can you.
Can you give us some more color on the investment how it's being allocated maybe how it compares to historical average.
Okay.
Could you ask that question again please.
Yes. So in regards to your tech spending on R&D, just kind of curious can you give us any color.
And how it's being allocated and how it relates to your historical average.
Yeah.
So I would say it is higher than it has been historically and in terms of getting into the details of what we're investing in things like that we feel like it's probably not something we'd talked about on a public call because we feel like it's something that gives us a potentially competitive advantage.
Got it I guess just from our seat.
Is it fair to assume that maybe some of these investments over the longer term.
Sort of mitigate and offset some of your future future payroll expenses that you're expecting to be permanent.
Yeah.
So I would say that's part of it.
Certainly are looking to become more efficient.
Fishing and have the right amount of staffing at various stores.
But in no way are we.
Giving up on store managers or don't value, our store managers, who understand the importance. They have on the revenue line item and what they add in terms of increased revenue at the store.
Taking care of this store et cetera, I would also say that's probably a minority of what we're focused on in terms of kind of innovative ways to participate in this business.
Got it thanks for the time guys.
Sure. Thanks Jacob.
And once again strong for questions.
Our next question comes from China.
Elvis Rodriguez from Bank of America May begin.
Hey, Scott just a quick follow up on the marketing spend you said.
Plus 10% year over year.
Can you share how the impact of the privacy changes that are happening with cookies et cetera.
Pac being sort of your online search spend.
Yes, it's not impacting us as of now.
Yeah.
Okay.
Thank you.
Alright. Thanks.
And once again Thats star one for questions.
And I'm not showing any further questions in the queue at this moment I would like to turn the call back over to speakers for any closing remarks.
Great I want to thank everyone for your interest in extra space and for your good questions today.
Clearly we are in a very healthy business, we're set up very well for 2022, and we're excited to talk to you about our performance throughout the year. Thank you very much and have a great day.
And this concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
Okay.
Yes.
Great.
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Thanks.
Yes.
Hi.
Okay.
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