Q3 2022 Public Storage Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the public storage third quarter 2022 earnings call. At this time, all participants have been placed in a listen only mode and the floor will be open for your questions. Following the presentation. If you have a question at that.
Time, Please press star one on your telephone keypad, if you wish to remove yourself from the queue. Please press star two.
It is now my pleasure to turn the floor over to Ryan Burke, Vice President of Investor Relations Ryan you may begin.
Thank you Katie Hello, everyone. Thank you for joining us for our third quarter 2022 earnings call I'm here with Joe Russell and Tom Boyle.
Four we began we want to remind you that certain matters discussed during this call may constitute forward looking statements within the meaning of 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 <unk> 2022, and we assume no obligation to update revise or supplement statements that become untrue because of subsequent events a.
A reconciliation to GAAP and 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 and an audio replay of this conference call on our website public storage Dot com. We do ask that you initially limit yourself to two questions of course after that feel free to jump in with further questions follow ups.
With that I will turn the call over to Joe.
Thank you Ryan good morning, and thank you for joining us.
I will highlight our view of 2022 as we head into the last two months of the year and then Tom will cover more specifics in the quarter.
At the beginning of this year, our expectation was we were poised for exceptional earnings growth, which is clearly played through.
With that we raised our outlook on strong NOI performance.
Same store and non same store assets, along with continued improvement in ancillary revenue.
In total core <unk> is set to grow by over 20% for the second consecutive year.
Looking back on both 2021 and now 2022, we have been particularly advantaged by a number of enduring demand factors that continue to drive historic performance.
Customers are drawn to use self storage, even in an environment, where some top line drivers are decelerating, such as home sales and market to market and migration levels.
The appeal and rationale to use storage is still tied to a sensible financial and need based decision where the cost of shelter, whether you own a red has increased dramatically.
In addition, our customer survey data points to needing more space at home.
As the second and elevated driver to use storage.
Hybrid work environments for instance are proving to be sustainable to be a sustainable reason for additional need for storage.
For our business customers renting a storage unit as a compelling alternative to taking down more expensive less flexible industrial space.
As demand has remained very good existing customers too are staying longer giving us the ability to optimize rate increases and occupancy.
On a macro basis, new supply of competitive product has been flat to down from peak deliveries in 2019.
Nationally markets have been able to absorb the more subdued pace of new development.
Our view is that new development will also be static for the near term as risk levels tied to development have increased particularly due to city approval time frames.
Higher component costs and the dramatic increases in the cost of construction lending.
With this said it has become harder to predict the economic environment, we are heading into with record inflation and consensus that a recession is imminent.
We are however, highly confident we have excellent tools to maneuver changing macro conditions.
These include.
The industry, leading 200 million square foot portfolio of well located assets in every large scale market nationally.
The most recognized brand in the self storage industry.
Cost efficient online marketing prowess to guide new customers to our platform.
A broad and growing base of digital channels to source, new customers, while improving customer and employee satisfaction.
Historically high operating margins now above 80% and operational efficiency.
A massive non same store portfolio, which continues to grow through acquisitions and development that is now 50 million square feet with excellent earnings power with over $150 million of additional NOI to come.
A well primed low leverage and low risk balance sheet with $900 million of cash and no debt expirations through 2023.
And finally, the most experienced team in the self storage sector.
Now I'll hand, the call over to Tom.
Thanks, Joe.
We reported core <unk> of $4 13 for the quarter, representing 28% growth over the third quarter of 2021.
Let's look at the contributors for the quarter.
In the same store, our revenue increased 14, 7% and breaking down the components.
Realized rents per occupied square foot were up a strong 17, 2% matching last quarter's performance.
Weighted average occupancy declined two 4%.
The moderation in occupancy from June to September represented a return to typical pre pandemic seasonal occupancy decline of 150 basis points.
The strong 14, 7% growth moderated slightly from last quarter's 15, 9% growth as expected.
That said, Los Angeles was again, a particularly strong contributor.
Accelerating from 17% same store revenue growth in the second quarter to 20% in the third quarter.
Now on to expenses.
Same store direct cost of operations were up 17, seven 8% in the quarter.
We increased our marketing spend in the quarter compared to last year. When we were largely quiet in most of our markets and we saw good returns on those AD dollars spent.
Our strategic initiatives, including operating model transformation, resulting from digital investments.
Led and solar investments helped to offset a portion of the wage and utility inflation.
And I note. The recent inflation reduction act added incentives for further solar investments as we ramp our own activity to reach over 1000 properties with solar on our routes in the coming years.
In total net operating income at the same store pool was up 17% for the quarter.
In addition to the same store the lease up and performance of recently acquired or developed facilities was once again strong contributing $139 million in NOI for the quarter up 68%.
There is significant growth ahead from this pool properties as Joe noted.
Which is a good segue to our outlook for the remainder of the year.
As Joe mentioned, we raised our core <unk> outlook for the year by <unk> 20 at the midpoint or one 3% to $15 55.
Our most recent outlook.
The improved outlook is driven by better than expected performance in our same store pool continued strong growth from our non same store pool as well as our tenant insurance business.
And shifting gears now to our balance sheet, our capital and liquidity position remains rock solid.
We have a well lathered long term debt profile with limited floating rate exposure and over $4 billion of preferred stock with perpetual fixed distributions.
Our leverage of three three times net debt and preferred to EBITDA combined with $900 million of cash on hand at quarter end puts us in a very strong position heading into 2023.
It's our strategy to position ourselves for strong access and cost of capital to invest through cycles.
Over the past couple of years, we've had the opportunity to use that balance sheet to grow and we're ready to do it again.
With that I'll turn it back to the operator to open it up for questions.
Thank you at this time, if you would 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 star Q. Once again that is star one to ask a question.
We'll pause a moment to allow questions to queue.
Thank you our first question will come from Michael Goldsmith with UBS. Your line is now open.
Good morning, good afternoon, and thanks, a lot for taking my question is last year.
Realized rent growth and same store rent growth accelerated through the year and then heading into 2022, perhaps the expectation was that it was getting the seller each similar to the acceleration in Scotland's remained very strong. So given these moving pieces and what we're seeing is a start to a written.
Turn to normal seasonality, how do we how should we think about the key events or trajectory.
And growth in same store revenue growth going forward.
Sure. Good question, Michael and I think you highlighted some of the moving pieces there well as we came into the year. We were expecting continued strong rate momentum and have been pretty consistent around that and we've seen that through the first part of the year paired with more typical seasonal behavior in the Aki.
Vinci rises and falls that we in.
In the industry see year end and year out with maybe the exception of the last couple.
On the rate growth side, it's really been driven by two factors.
One is.
Really strong move in rent growth over the last several years.
We've spoken in the past around some of our strongest markets like Miami and now for Us Los Angeles, as well with rent restrictions no longer in place and that's been a really additive driver Miami.
To date.
Move in rents were up 9% again on top of significant growth in prior years.
The other side of that is then the existing tenant base and Joe spoke earlier to the Bihar.
Behavior of our existing tenants and a long length of stays that we've experienced over the last several years and we're sitting now at record length of stays within the portfolio and Thats allowed us to send more rental rate increases because there is more long term tenants.
And at a higher magnitude because of the.
The overall rent environment, which has led to increased realized rents.
This quarter matched last quarter.
We have been expecting a moderation.
Through the back half of this year and would anticipate that that plays through in the fourth quarter and it's clearly embedded in our guidance.
But year to date, we've been able to take advantage of that environment.
And have achieved strong rental rate growth throughout.
I guess.
Yes.
Yeah.
Follow up to that is just.
Given.
<unk>.
Given these factors that we have visibility into combined.
Street rate growth, which is flattish to down let's say like how long do you have visibility into kind of a continued gain realized rent growth.
Just on these factors.
Some of the other things.
With worsening.
Any potential worsening in street rates or you just like how long do you have visibility into how lumpy the rent growth.
I get it you are asking about 2023 now so.
Looking at what we're experiencing on move in rent growth, we have seen the moderation in move in rent growth as we move through the year that we've been anticipating and speaking to.
Move in rent growth and frankly move ins were quite strong in the quarter. We had move in volumes were up 9% move in rates were up 3%, but that 3% is clearly a moderation from where we were earlier in the year and would anticipate that to continue to moderate through the fourth quarter, but as we look forward from here.
Our guidance would imply that we will exit the year with revenue growing at call, it, 10% plus or minus which sets us up really well heading into 2023, recognizing it could be an uncertain environment into 2023 will be starting from a period of strength.
That's what I'd point you to.
That's helpful.
Expenses have been elevated you have several initiatives to offset the pressures such as technology.
To reduce store hours, where solar lawsuit utility costs.
Still a big gap between the same store revenue growth in the same store expense growth is narrowing so how should we think about the gap here.
Tony convergence revenue growth moderates and expense growth kind of remains LNG.
Even accelerating.
Yeah as revenue growth Decelerates.
We could see a narrowing of that I'd say, we have tools and you highlighted some of them from an initiative standpoint that have been frankly underway for a number of years to help mitigate some of the pressures there.
And heading into 2023 of the team will be acutely focused on.
Managing expenses in what's a tough environment.
I'm not sure I would have much to add to that.
Thank you very much good luck in the fourth quarter.
Thanks, Michael.
Thank you. Our next question will come from Lindsay Duncan with Bank of America. Your line is now open.
Yes, hi, good morning, Thanks for taking my question.
I just wanted to ask about how bad debt trended through the quarter.
If you could just give any color around.
Our level of delinquent payment.
If that picked up at all or Jeff.
Anything different from the prior quarter.
Sure.
The.
Behavior of our customer base, even from a delinquency standpoint, I think as I can to the.
The elevated and consistent behavior, we're seeing from a length of stay and what I mean by that is.
<unk> customer base as a whole continues to.
Operate from a delinquency standpoint at nearly historically low levels, it's elevated up somewhat from where we were say a year ago, but nowhere close to what we saw pre pandemic or what you would consider typical environments consumer balance sheets statistically appear to be.
And decent if not surprisingly good shape going into 2023, we're seeing this in a number of different.
Reports that we track relative to some of the banking platforms and other tracking mechanisms tied to the overall health of the consumer.
And from an unemployment standpoint, we're clearly also seen very little disruption in fact surprisingly good.
<unk> relative to overall employment levels.
And then Holistically, that's still just ties back to my opening comments, which from a financial and need based standpoint storage continues to be a very necessary.
Source of.
Either relief for an even more space or other reasons that consumers continue to value and pay for on a much more consistent base their storage facilities storage units. So overall, keeping a very close sign up but nothing alarming by any means.
Okay. Thank you helpful color.
And.
So my second question I wanted to get more commentary around market performance.
And particularly with <unk>.
Move in rate increase there.
We've seen that.
We're seeing that growth moderates are there specific markets, where you had cat.
Q back off on.
Rate increases for newness and more so than others and if you could.
Comment on what the.
The acceleration, we've seen in Allys market and how that's expected Q.
Trends going forward that would be helpful.
Yeah, I'll start and then Tom can give you a little bit more color on some of the specific markets you.
You mentioned La for instance, very strong growth in that market and we think that serves us well going into 2023. It is clearly our largest market and we've been.
Held back now for some period of time I E over three years, but we see very good.
Rate growth and momentum in that market as we speak.
Florida as a whole continues to be still quite strong we're seeing very good inherent drivers and.
Good absorption of not only move in rates, but existing customer rate increases as well.
And then from an overall standpoint as I mentioned, we're seeing pretty muted new deliveries. So that too has not been an overarching pain point literally in any of the markets that we operate in that's a very good thing it's been a good thing for the sector for the last couple of years, and we don't see that changing in any material fashion going into 2023.
And frankly, keeping a close eye on 2024, but not an elevated concern there either.
Tom you can give a little bit more color on some of the trends otherwise that we're seeing in specific markets.
Say overall the trends we're seeing in move in rates generally link up to the markets that are performing the best overall from a revenue standpoint, so I already highlighted Miami, which continues to be a strong market.
Seeing move in rent growth of 25% to 30% a year any longer but is up 9% in the quarter one of our stronger markets as you'd anticipate Los Angeles is in this in a similar ZIP code there.
In terms of markets that that have seen slower rent growth again, very consistent with overall performance and highlight our San Francisco and New York that while positive on a mood and rent growth.
Year over year is a more modest level of growth call it low single digits.
Great. Thank you so much.
Thank you.
Thank you. Our next question will come from Samir Khanal with Evercore. Your line is now open.
Hey, good morning, everyone.
You guys have done a great job on the expense side.
Can you help us understand.
How you've been able to sort of keep a lid on expense growth or better manage expenses. When many companies are raising expense growth guidance across the REIT sector and I guess, how much of this is sustainable into next year your ability to sort of control expenses or manage expense. Thanks.
Yes, Samir al.
I'll give you a couple of.
General comments and again, Tom can add more context, but.
It goes back to a number of very intentional investments that we've made year by year.
Many of which have been digitally oriented.
Helped us optimize the amount of labor hours for instance, our second highest.
<unk> costs.
<unk>.
In the P&L.
And it's given us the ability to predict optimize and rationalize.
The amount of labor that is necessary.
<unk> has been very positively impacted by another digital tool, which is R. E rental platform now 55 plus percent of our customer base is choosing that to transact with us. It's a digital experience obviously it doesn't require at the counter labor. So we can shift some of that.
Traditional labor to other.
Priorities property to property, so thats been a very good optimization tool it hasn't in any way relieved us of some of the pressure we're seeing from our hourly basis, but it's certainly been a very effective tool to minimize that impact.
We're also making strong investments Tom mentioned some of the things that we've started to do over the last couple of years with solar utilities are under a lot of pressure market to market. We've got a great opportunity in an accelerated investment going into our solar platform.
As I mentioned 200 million square feet of assets that equates to about 150 million square feet or more of rooftops that are wide open for investments.
And then another thing that continues to change in the business that we continue to optimize as the amount of remote operations property to property that makes sense. We've been testing. This for the last three years, we've got a fleet of kiosks for instance in our portfolio that today is about 200.
Continuing to evaluate that property by property.
And we're just looking for any and all tools to continue to rationalize the pressure Youre speaking to and we've been pleased and it's certainly playing through in our margins, which this quarter again were over 80%. So Tom you can add any additional color to that Joe I think you covered it well.
Okay, and then I guess on my My second question is clearly great growth is still strong here, but tell me if I'm wrong, but when I look at occupancy.
It looks like you had a level I mean, maybe even 30 40 basis points above of 19 year when I look at <unk> I guess, how should we think about.
The trade off.
How are you managing between sort of rate growth and occupancy at this point and sort of into next year.
Yes sure.
Sure Samir happy to dig into that a little bit as I highlighted earlier and we did see a typical seasonal decline in occupancy.
As we look at occupancy performance.
At the end of September .
We're about 90% 90 basis points over 2019 also over $18 17 performance. So.
This is an area of.
Revenue maximization, ultimately seeking to achieve and are comfortable in that.
82% to 95% occupancy level, which we spent the entire quarter in.
And feel like we have the tools to ultimately maximize and optimize revenue in that ZIP code and and so feel good about where occupancy is today and clearly have had the benefit of being able to push rent both for new customers and existing within that that occupancy.
ZIP code.
Okay. Thank you.
Thank you.
Thank you. Our next question will come from Smedes Rose with Citi. Your line is now open.
Oh, hi, thank you.
Just kind of wanted to follow up on that last question as you look into 2023 and Joe you mentioned.
<unk>.
A lot of people see recession is eminent at this point would you expect promotional and marketing spend next year to get back towards kind of pre pandemic levels.
And just kind of interested in hearing more about.
Your sort of willingness I guess to protect.
Occupancy youre getting more aggressive potentially on the on the pricing side.
The economy shows a significant downshift.
Yeah, I mean, I would say stepping back.
Certainly have good tools to.
To manage different types of operating environments, and I think it's too early to speculate exactly what 2023 will look like but going back in time.
Have used promotional discounts.
We've used advertising in a more meaningful way.
Throughout the pandemic and getting to 2020 in 2021, we really didn't need to use things like promotional discounts our advertising because demand was so strong.
We could be heading into an environment, where where that won't be the case and even in the quarter, we used probably.
More typical levels of <unk>.
Advertising and promotional even in a strong environment, so thinking about advertising spend in the quarter. We spent about one 5% of revenue in the quarter and that's towards the low end of our historical range of call it 1% to 3%.
In 2019 for instance, we were towards the higher end there on a promotional basis.
Similarly last year, we were hardly offering any promotions.
This year, we had a very modest promotional discounts in the quarter about 38% of our customers that moved in the quarter.
Received promotions in a typical year in the third quarter, that's more like 70% and so we're still running at levels that gives us a lot of tools heading into next year to navigate what could be a recessionary environment.
And we'll certainly use those to our advantage in that environment.
Yes.
I'm not sure.
If that answers question, yes, no thats helpful. The other thing I just wanted to ask you is did you see a significant uptick in.
Tenant insurance claims in Florida in the aftermath of hurricane in or is that.
Is there something in your numbers that might be worth calling out around that or are you or does it not really show up in a meaningful way.
Yes, yes, smedes first of all.
Fortunately, we did not see heavy impact from the hurricane itself. Our team did an admirable job on a number of fronts, we close.
Plus or minus 100 properties or so for a period of a few days.
First and foremost to keep employees and customers in a very safe environment.
We were very fortunate as I mentioned, we only had 12 months to 15 properties that had I would call any level of significant impact mostly flooding related.
The property claims or roughly $2 million or so and then the tenant insurance claims or at this point I expect it to be about $4 million.
Statistically we are dealing with.
Plus or minus a 3000 3500 units so.
Very small and as I mentioned unfortunate occurrence for us.
Relative to where properties are located in the impact we're clearly seeing obviously a lot of retooling going on to those areas for overall recovery, but.
Unfortunately, not a lot of economic impact to us specifically.
Okay. Thank you.
Thank you.
Thank you. Our next question will come from Keybanc, Ken with the Truest your line's open.
Thanks, Good morning.
So can you help describe what the EC ROI program.
Looked like in 2022 in terms of level of increases or frequency.
And how do you think this program might change moving forward in an environment, where we're potentially going to see negative rates and negative occupancy.
So.
Sure keeping an.
Answer and Joe can chime in as well so.
The way, we think about existing tenant rate increases.
Really around.
Breaking it into a couple components one is understanding how our customers are behaving and we have a wealth of information and testing data going back years, and it's a constant constant dynamic testing environment that we live through kind of month to month.
And that gives us the ability to predict how customers will behave.
And how they'll react to different sorts of of increases.
And what we've experienced over the last couple of years and Joe highlighted this earlier as customers have found a lot of value in our storage units and and Thats frankly increase through the pandemic length of stays are at record highs and so the number of tenants eligible to receive an increase have moved higher over the last several years and they behaved really well.
So as we've experienced.
Now nine months or 10 months through 2020 to that consumer base has remained remarkably consistent I E. The models are predicting what it is custom.
Customers are going to react to and we're seeing very consistent performance.
The second component is around when a customer does vacate what's the cost to replace that tenant and certainly over the past.
A couple of years the cost of to replace that tenant has decreased as moving.
<unk> has been strong move in rates have been higher and as we move through 2022 as anticipated some of that is moderating and I would note move and demand continues to be very healthy.
As I noted earlier, we had a good move in quarter with move in volumes up 9%.
But moderating from earlier in the year and so that component of the existing tenant rate increase program is likely to result in moderating overall activity as we move forward.
But that's just one piece of it and as consumers continue to behave well and length of stays are longer.
That gives us incremental.
Tools on the other side of the equation and effect.
And going to your comments about record length of stay you're move out activity was up 12%.
I'm just curious.
As the group of customers that are moving out is that all different kinds of mix, meaning.
Meaning are customers that had been in there longer over a year moving out to a higher degree than before or is it pretty consistent.
It's pretty consistent what we've seen is really across the board.
Depending on <unk>.
You slice and dice that tenants by demography, psychographics et cetera, you'd see relatively broad based increases in vacate levels up from the really lows that we experienced in 2020 in 2021, but move out volumes remain attractive frankly versus pre pandemic.
Levels.
And so again, both the mix of tenants has moved more favorably and as you slice and dice that tenant base.
Continue to perform well versus pre pandemic levels, although off of last year is really recognize.
Okay. Thank you.
Our record lows.
Thanks Steven.
Thank you. Our next question will come from one in Santa <unk> with BMO capital markets. Your line is now open.
Alright.
I was just hoping to talk about the consumer a little bit.
You kind of talked about how occupancy was above pre COVID-19 levels.
In a position of strength, but yet the new street rate growth is kind of <unk>.
Low single digits well below.
Headline inflation, so just curious on.
How we should really think about strong demand limited vacates higher length of stay but the street rates.
Modest still positive, but modest despite having record occupancies and it's just it's a lot.
Bit of.
Just why would that be.
The case that youre, not able to extract more from street rates as this disorder.
Counterpoint.
So their ability to pay a price sensitivity that you guys are seeing in the.
And the revenue management.
What's causing that yes.
One maybe I'd highlight we have had an ability to increase moving through most of the year and we've had some moderation.
As expected as we move through the year I think as we've moved into the fall and into.
Into a more seasonal decline in occupancy we've seen the industry broadly.
Way from us.
Lowering our rental rates because they have more inventory and I think that thats to be expected and we certainly have seen that over the last couple of months, which is leading to a different environment than what we saw last year right, which we didn't see a seasonal decline in occupancy. So as you think about that.
Scarcity of inventory different year over year, youre going to see a different rental rate behavior across the industry and we've seen that and we're not.
We're seeing some moderation in I think.
The rest of the industry looking at web scrapes that many of you.
The report are showing some declines as well the flip side is web visits continue to be strong our web visits. So as you think about having a little bit more inventory, maybe a little bit more of a seasonal decline in rental rates. The overall demand environment remains healthy web visits were flat basically right on top of what.
It was a record year last year through the third quarter. So.
Speaking to the move in environment and the move in volumes.
Performing well through the third quarter is the counterbalance to that rate discussion.
And then just.
For Los Angeles, how much more.
Can you capture.
Bringing existing customers.
Right.
Yes, how much more juice do you have left for for that to continue to accelerate sequentially or are you kind of gotten back to levels, where it is.
You would've wanted if you had it not been for those around restrictions.
Yes.
Los Angeles, certainly one of our top performing markets and we've got more to go there frankly, I mean, you step back and you think about.
Not only the fact that we've been handcuffed for three plus years.
As a market, where there's very little new product coming into the market.
Very good dynamics relative to inherent deep seeded demand, we've seen a little bit of move out volume, but it's come right back on the move inside Occupancies are still quite strong and we think we've got good pricing opportunities even going into 2023. So this this is not ended.
Thanks, and just a quick last one can you give us any update on the October data, whether it's occupancy or street rates and how those trended at the end of August through the end of October .
Yeah occupancy.
As we look at the end of October .
Climbed a little bit as we would anticipate as we move through the fall. So I think the occupancy ended up at $93 eight or.
Were $92 eight rather at the end of October down from the $93 three at the end of September again generally in line with our expectations move in rates for the quarter and move in volumes move in volumes again quite strong and in move in volumes up 10% ish move in rate did decline a couple of percent.
So that moderation in asking rent given the seasonality.
Ah.
Has played through October as well, but overall a good move in month in October as well.
So was it down 2% negative to year over year, Yeah, Yeah down a couple of okay.
Thank you Sir.
Thank you once again, if you would like to ask a question. Please press star one to join the queue.
Our next question will come from Spenser <unk> with Green Street. Your line is now open.
Thank you good morning.
I apologize if I missed this but could you comment on cap rates and what youre seeing in terms of the breadth of our volume of assets being marketed today.
Sure Spencer.
Predictably this has been a far lighter year as far as sector trading.
At the beginning of the year, we saw a little bit of carryover from the volume that play through in 2021, which obviously was historic but.
Quarter by quarter, we've seen the realisation set in.
Interest rates continue to rise and cap rates.
Adjusted in Lockstep I would tell you that.
As always the more stabilized.
Your profile or more highly desirable stabilized assets are likely going to trade at a lower cap rate than otherwise, but I would tell you.
Year over year, we're probably in a zone, where cap rates are adjusted by 100 basis points or so.
'twenty, one was an opportune time to be a seller to command.
In many cases historic valuations with a lot of bidding activity at the table. It is a very different environment today.
Close to $1 billion or more come into the market and I doubt, we'll between now and the end of the year.
And what we've been able to do is find the same type of asset that we've been very successful integrating in our portfolio with what we feel is a more compelling investment opportunity, where we're inheriting are taking on lease up opportunity.
The $760 million or so that we've transacted on so far this year average occupancies hovering around 60% or so.
It gives us that upside but the.
The amount of volume needs to continue to grow to really lock step with what really will be.
Basically settle out as a different cap environment cap rate environment, but its cap rates are higher.
Okay. That's really helpful and just given all of that commentary in the current economic landscape. I was just wondering if you could walk us through your capital allocation priority list. I mean, you sort of just touched on that but where do you see the most value creation today as you look across your various growth avenues.
Sure. It always starts with development. So our development pipeline is $1 billion now and it has been and we still see the inherent opportunity to drive the highest level of value through our development activities, whether it's with ground up or redevelopment assets the teams working.
Hard finding.
<unk> strong opportunities to either.
Down vacant land sites or retool existing properties, whether we own or going into redevelopment.
On an existing asset of some form.
So we're still seeing very good returns and we're keeping the team very busy looking for even in this environment and opportunity to do what we can do very differently, which is source deals with fewer competitors at the table I.
I will tell you there's been a growing population of owners that are coming to us.
Speaking to the risk I noted in my opening comments it is far riskier there'll be a developer today than it was one two or three years ago.
Part of that's been driven by a very new dynamic, which is much higher construction costs lending.
And then just the availability of it frankly, and then on top of that we've got inflation playing through so if you don't have the mechanisms to.
Bat down some of the very intense component cost increases you may find yourself in a very different environment relative to the ultimate return youre going to see on an asset.
Land can be more or less expensive, depending on the particular market, but there could be more competition. There too. So long story short more risk of development, but for our own purposes. It's still the highest rate of return that we're seeing from a capital allocation standpoint, and we're very pleased by the deliveries that we put into the market and what we've got going into 2020.
Now as far as acquisitions again going right back to my prior comments were.
Definitely seeing a different environment relative to the cap rates that are playing through but we are finding good assets still bring into the portfolio, where we can more often not buy underperforming assets for a variety of reasons pull them right in their portfolio and get good upside from that.
So it's been.
Our unique.
The environment for us to go out and find something stabilize that we're just going to pay a top per square foot value for it because frankly, we can do better things with our own capital by taking other assets that aren't either mature or have some level of additional upside and that's been a really good investment opportunity for us not only with the $5 1 billion that we acquired last.
Year, but the $760 million that we acquired this year.
That's great color. Thank you so much.
Okay. Thank you.
Thank you. Our next question will come from Mike Mueller with Jpmorgan. Your line is now open.
Yeah, Hi, I guess kind of as a follow up to the prior question. What do you. What are you underwriting for Timeframes and returns on developments that you're starting today versus something you were started a year ago.
Sure, Mike, we typically underwrite and this hasnt changed over the last couple of years. Despite the fact that that lease up has been quite strong we typically underwrite three years to four years to get to <unk>.
Two stabilized NOI levels and obviously, we're in an industry, where you start a new property at zero percent occupancy and it takes some time to to attract new tenants that facility and stabilize that tenant base and the ultimate revenue there. So.
Still looking at underwriting three to four years of stabilization.
Got it and I guess on Joe's prior comments about cap rates being up 100 basis points is that the political too for I guess the value add acquisitions that youre buying we're going in at 60, 70% leased at a low yield that exit that ultimate stabilized cap rate would you say that that's up about 100 as well.
What you are looking at.
Yes, I think it applies to the.
Overall spectrum of different.
I think pretty obvious impact from much higher interest rate levels.
Got it okay. Thanks.
Okay. Thanks, Mike.
Thank you. Our next question will come from Todd Thomas with Keybanc Capital. Your line is now open.
Hi, Thanks.
I just wanted to stick with investments.
Tom in your prepared remarks, you mentioned that you are ready to use the balance sheet to grow and that it's well positioned and so.
Just following up on sort of the line of questioning around investments.
It sounds like cap rates are moving higher what would you look for in terms of acquisitions to become more aggressive and put the balance sheet to work a bit more.
And what's the spread like today with the movement that you're seeing in.
Cap rates between stabilized NOI yields on developments and stabilized acquisitions.
So yeah, Todd I'll talk the first part of your question and then Tom can give you a little more color on the spreads but.
The playbook that we have I would say is similar to what you've seen us do over the last two years or more which is to find and unlock opportunities relative to on the acquisition side.
Types of assets that we think we're going to be much more benefited by by bringing in.
Underperforming assets, putting them on our platform and getting actually very quick.
Improvement and you've seen that with big scale.
Portfolios that we've taken down clearly 2022 has not been an environment, where we've seen the bigger legacy portfolios coming to the market but.
The smaller opportunities are at the table.
It takes a little bit more volume, obviously to get to the level of investment that we saw in 2021, but the team's working really hard we're open for business, we see compelling reasons to go into a variety of different markets, where we can additive Lee put.
Assets into the platform integrate them very quickly and see that upside on development again, it's as broad based as acquisitions and meaning that we've got.
50, plus properties in our pipeline right now in all parts of the United States, We've got a deep seated team we're looking for.
Very good well located sites and we're going to continue to find good capital allocation opportunities through that platform as well.
So.
The investment arena tied to acquisitions is far less predictable.
And because development is much more intentional obviously, but we're.
We're ready.
Got the balance sheet, well primed, we'll see how.
Things change going into environment, where we may or may not be in this imminent recession that too can present different opportunities that I think we're very well suited to go out and use our balance sheet to grow the portfolio just as Tom indicated.
Yeah, and then Todd your question around clearly the debt markets have been moving I think.
Taking a step back what we're looking at at the real estate itself in underwriting the cash flow profile associated with that real estate.
And we have more and more tools each year to do so thinking about certainly what we think we can stabilize a property at but then also thinking about what the growth profile is in submarkets. So it depends.
Asset to asset Submarket to Submarket, we use the tools that our data science team has developed around predictive analytics for rent growth.
And that all factors into that cash flow profile.
So on an Unlevered basis, we will also look at replacement cost and whats the basis that we're achieving with the asset as well. So all of those go into the mix and certainly a range there.
On the cost of capital front no question that costs have moved higher.
But we do find ourselves in a place where we have on a relative basis versus the industry attractive both cost and access to capital.
And while the spreads have come down certainly on a levered basis, we're looking at the acquisitions that we're purchasing in the fourth quarter, we feel very good about the Unlevered returns, we're going to achieve and the <unk> accretion that we will achieve in the coming years.
And how do those Unlevered returns are what's the spread look like between the acquisitions today that you're seeing and what's in the market relative to what you're developing right I think your your ste.
Stabilized yield expectations the NOI the future NOI that you were discussing that.
Outline for us on developments.
Relative to market cap rates are.
It was pretty wide over the last couple of years my sense is that that's narrowing right now what's that spread look like today.
Yeah as you think about development we do.
Underwrite and seek to achieve a higher return on development because of the risk profile and the lease up that we just spoke to taking three years to four years of of lease up there, but ultimately we're plugging those assets that we've designed.
The building we designed the unit mix, we've picked the location and then were plugging it into the largest and most efficient operating platform in the country and so that gives us an ability to achieve strong yields on those development projects.
Looking at the yields that we've historically targeted we're looking at 8% plus stabilized yields and we feel good about those sorts of yields.
Continuing moving forward and the Unlevered returns associated with the debt profile.
Okay, and just a quick follow up on something that you mentioned related to occupancy earlier I. Appreciate the color on that you provided on October .
But can you can you talk about the range of occupancy loss that you might expect now throughout the balance of the off peak rental season through through the end of the year and really into 'twenty three.
Thank you I heard you say, 92% to 95% is kind of the right range to think about occupancy was that what you were referring to and sort of pointing to and what we should think about sort of.
Trough to peak or peak to trough going forward at this point.
Yeah, I mean, I think generally speaking that range that I was speaking to is how the company has operated and maximize revenue through the years I would say, there's definitely a difference by market and so today Los Angeles demand remains strong, we obviously haven't been able to move rental rate increases for some time so.
These are lower year over year in Los Angeles, you typically see higher occupancy in the Los Angeles or San Francisco, given the limited new inventory that's added to those markets on a year over year basis.
Year end and year out the flip side is some of the Texas markets, where you do see more inventory each year, but at the same time, you're seeing very strong population growth to support that you typically don't see those same levels of occupancy and so youre not going to see that that level in the Houston per se and ultimately.
The revenue.
Jim is looking to maximize the revenue of each individual unit no matter, where it is across the country and so that's going to lead to a different <unk>.
<unk> volume discussion, depending on where you are.
So hopefully that's some context in terms of.
Where we'd anticipate heading through the fourth quarter, we've been consistent that we were expecting a more seasonal occupancy decline we've seen that through the third quarter and we expect that to continue through the fourth quarter, obviously market by market.
Which would point you down towards towards that 92% sort of occupancy towards the end of the year and again from a year over year standpoint.
That would be relatively consistent with where we are now and would track consistent to 2019 type levels.
Okay, great. Thank you.
Sure.
Thank you. Our next question will come from Ronald Camden with Morgan Stanley . Your line is now open.
Hey, sorry, just going back to the marketing.
Sort of the marketing expenses.
And so forth maybe can you just a little bit more commentary on market specific sort of what drove that year over year.
Year increases thanks.
Sure.
Youre, commenting on the year over year increase, but I'd say largely you didn't spend in most markets last year and so yes, there's some big increases on a year over year basis coming from zero or close to zero and in many markets last year.
Ultimately the marketing spend is managed dynamically by the same team that prices are units and so that's part of the ingredient on on maximizing NOI and maximizing revenue and so that's managed dynamically in the Submarkets.
No question there are some markets that we've supported more than less this year.
Areas that have more inventory to lease typically.
Typically we will receive more marketing support.
I'd say, Los Angeles is probably still our lowest marketing spend market per property given the strong demand dynamics, we've seen there in our largest market.
But stepping back like I said earlier, our overall marketing spend for the quarter was about one 5% of revenue, which is towards the lower end of historical ranges, which gives us tools heading into next year.
But when you don't spend much in the prior year or at all and Submarkets the year over year comparison can look like a big increase.
Great that makes sense and then just my last one would be on just on the ECR eyes.
When you sort of take a step back and you look at the portfolio right record brands look at the macro environment inflation and potentially going into a recession.
You think about.
Sort of the pricing algorithms, there and is there anything that.
The company would consider or think about maybe doing differently I don't know if its stress testing or just trying to figure out if the customer or the recommendations may be a little bit different this time versus previous cycles like how do you guys sort of.
Square that circle.
As you go into next year.
That's a great. It's a great question and I think that what you just highlighted is core to how we price across for existing tenants as well as for new tenants, which is continuous testing as I mentioned earlier, we have a wealth of information going back in time as well as in the current time period, we sent over 1 million.
Rental rate increases a year that allows us the ability to do significant testing and hold outs to understand whether consumers are behaving as we anticipate.
And how that would be that consumer would behave in a different.
Level of increase etcetera, So that's kind of core to the process and certainly we'll be heading into 2023 as well.
Thanks.
Thank you.
Thank you. It appears we have no further questions at this time I would now like to turn the program back over to Ryan Burke for any additional or closing remarks.
Thank you Katie and thanks to all of you for joining us have a good day.
Thank you ladies and gentlemen. This concludes today's event you may now disconnect.
Okay.
Thank you.
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