Q4 2022 Extra Space Storage Inc Earnings Call

February 23, 2023

Yeah.

Good day and thank you for all for standing by and welcome to the Q4 2022 extra space Storage, Inc. Earnings Conference call. At this time, all participants are in a listen only mode.

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.

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Advisor today's conference is being recorded I would now like to hand, the conference over to Jeff Garvin. Please go ahead.

Thank you Chris.

Welcome to extra space storage is fourth quarter 2022 earnings call.

In addition to our press release, we have finished an audit 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.

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 associated with 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 managements estimates as of today February 23 2023.

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 would now like to turn the call over to Joe Margolis, Chief Executive Officer.

Thanks, Jeff and thank you everyone for joining today's call.

We had another strong quarter to cap off an exceptional year. Our 2022 same store revenue growth of 17, 4% is the highest in our company's history and for the second consecutive year core <unk> growth was above 20%.

I am proud of the extra space team for another year of strong performance across all aspects of the business.

Now speaking to the fourth quarter, despite difficult comps and the return of seasonality same store revenue growth was ahead of our expectations at 11, 8%.

Vacates continue to normalize during the quarter and demand remained seasonally steady.

Leading to strong same store occupancy levels ending the year at 94, 2%.

Our high occupancy allowed us to maximize revenue and grow customer rates across the portfolio.

Despite offering lower rates to new customers total net rent per square foot increased 12, 8% year over year.

We experienced expense pressure across many line items with same store expense growth at six 7%, resulting in same store NOI growth up 13, 4%.

We were busy on the external growth front acquiring 10 stores in the REIT are in joint ventures, adding 46 stores gross to our third party management platform and closing over $250 million and bridge loans.

We were also very focused on integrating our 2022 strategic acquisitions, including the storage Express portfolio, which is already slightly ahead of our underwriting.

We anticipate full integration of the properties onto our platform by the end of the second quarter, which will provide additional digital marketing revenue management and operational efficiencies.

We have also started to test new operational strategies at both storage express and extra space stores and we are beginning to see some early external growth opportunities in new and existing markets for storage Express.

Our strong property NOI plus our external growth efforts resulted in core <unk> growth of nine 4% in the quarter and 22, 1% for the year.

This allowed our board of directors to increase our first quarter dividend by 8% contributing to a total of five year increase of 108%.

As we look forward to 2023, we are encouraged by the fundamentals of the business.

New supply continues to moderate from 2018, 2019 peaks and we expect even lower competition from new supply in our markets in 2023.

Custom customer demand has been steady occupancy has remained high and same store revenue growth remained above 10% through December .

Our strong occupancy has allowed us to sequentially increase rates month over month to new customers since November and we believe elevated occupancy will give us greater pricing power with new and existing customers as we move through the leasing season.

We expect to face continued expense pressures, but at lower levels than experienced in 2022.

Resulting in same store NOI guidance of three to five 5%.

While this level of growth represents moderation from 2022 levels. It is in line with historical norms and.

And we believe it will compare well to other asset classes in the current environment.

Our investment strategy is long term focused and we have made strategic decisions. We believe will result in solid long term returns for our shareholders.

In the fourth quarter, we modified the term.

Of our 300 million preferred investment and next point trading yield for longer duration and additional managed properties.

We also continued our acquisition strategy, which focuses on asset light structures.

Non stabilized stores, our acquisitions with long term strategic implications, including storage Express.

While some of these initiatives cause short term dilution, we believe they provide more total value for our shareholders over time and unlock additional growth channels for years to come.

Before handing the time over to Scott I would also like to congratulate the extra space team for receiving our third consecutive leader in the Light Award NAREIT highest ESG and sustainability honor for our real estate companies.

We are proud to be recognized as a REIT that delivered strong financial results.

It has also created a sustainable portfolio and company that is positioned to continue providing results for the long haul.

Turning the time over to Scott now.

Thanks, Joe and Hello, everyone.

We had a strong fourth quarter, beating the high end of our <unk> range by <unk> <unk> driven by better property net operating income.

Total same store expense growth improved from third quarter levels due to lower repairs and maintenance expense and success with property tax appeals.

Payroll expense growth, while still high improved quarter over quarter, a trend that we expect to continue into 2023.

Turning to the balance sheet <unk>.

During the quarter, we swapped a total of $400 million of our variable rate debt, reducing our floating interest rate exposure to under 29% of total debt net of variable rate bridge loan receivables.

We will continue to take steps to reduce our variable rate debt and we will be methodical in our approach recognizing the forward interest rate curves signal lower rates in the future.

Subsequent to quarter end, we completed a $335 million unsecured term loan and used the proceeds to pay down our revolving balances we.

We have no material maturities in 2023, and we will likely access the investment grade bond market for growth capital needs, assuming it remains orderly.

Last night, we released our 2023 guidance like last year, we have provided wider same store revenue and NOI ranges to capture the different scenarios that we believe are possible given the unusual 2022 comparable.

Our guidance assumes positive same store revenue growth for the full year. However, the pattern, maybe a little different than in prior periods or.

Our guidance assumes the growth rate will moderate more quickly in the first half of the year due to the exceptionally difficult first half comps.

Trough in this summer.

Modestly reaccelerate later in the year.

Same store expenses have improved from 2022 levels at 5% to 6%, resulting in projected same store NOI of three to five 5%.

Our 2023 core <unk> range is $8 $38 60 per share.

Much of our NOI growth is offset by by the first year headwind of our investment in non stabilized properties, which carry approximately 25 of dilution. The modify modification of the next point preferred and higher interest rates, while each of these headwinds flows our 2023.

Growth, we believe they will result in stronger long term growth rates over a multiyear period for our shareholders.

Our guidance includes relatively modest investment in acquisitions of $250 million due to current market conditions.

Third party management increase have been stronger than normal at this time of year and we believe most of our 2023 growth will be through capital light channels.

That said, we have plenty of dry plenty of dry powder, and we will be opportunistic if we identify accretive ways to expand our portfolio and investments to maximize <unk> growth.

We are off to a great start in 2023, and we are confident in our ability to maintain healthy growth through the year as received storage fundamentals normalizing to historical levels.

We believe storage as an asset class is among the most resilient in both inflationary and recessionary environments and then our highly diversified portfolio is well positioned for another solid year.

With that operator, let's open it up for questions.

Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you need to press star one on your telephone and wait for your name to be announced to withdraw your question Press Star One again, please standby, while we compile the Q&A roster.

Our first question comes from Michael Goldsmith of UBS. Your line is open. Please go ahead.

Yes.

Good morning, Thanks, a lot for taking my question, Scott you talked a little bit about the cadence through 'twenty three that you expect.

Same store revenue growth rate will moderate.

Well, Marty or quickly trough in the summer and then modestly re accelerated late in the year.

I guess my question is as we.

As we think about.

The exit rate for the year does that.

I guess that implies kind of like a mid high single digit.

The.

The growth rate in the first half and then kind of in the low mid single digit in the back half is that the right way to think about it and is that kind of like does that back half implications mean youre kind of return to what is considered like a quote unquote steady state or normal.

Growth rates for the industry.

So I think it's hard to speak for the industry I think we're obviously speaking for US I think that your assumptions are correct based on the comments, we've given in our prepared remarks.

I think the one point I'd, maybe make as it does not assume that we go negative or to zero at any point in the year.

Thanks for that and.

My follow up question is just on the components.

That gets you daily.

What are the expectations around occupancy street rate.

And your ability to pass along we will continue elevated ECR rise that's going to allow you to.

Generate this and then I guess.

Also implied kind of some of the benefit from a lot of the.

The elevated street rates in <unk>.

<unk> experienced over the last couple of years does that does that kind of burning off through the first half of this year. Thank you.

Yes, so obviously, we're always solving for revenue so maybe some of the over to more detail on those if you are on the high end of the range. It assumes that we have more pricing power at the low end would imply that maybe.

Or have less pricing power. It also assumes that we continue to have the ability to raise existing customer rates and we would assume that we would be operating throughout the year at a slight negative occupancy delta but.

Other than that we're solving more for revenue.

Thank you very much good luck in 2023.

Thanks, Michael.

Thank you and one moment for our next question.

Our next question comes from Jeffrey Spector with Bofa Securities. Your line is open.

Great. Thank you first question I feel like I need to ask.

Are you are you happy with your scale today.

And on the acquisition front, continuing to hit kind of let's say singles and doubles to increase that scale.

Joe as you talked about you really added on some new.

Technology initiatives or new programs that you can.

Used throughout your portfolio at some point.

So scale is important in this business and we have sufficient scale in almost every market we operate in.

We're happy to gain more scale.

But not at any cost.

Want to be smart and our growth and we wanted to make sure that we're making long term accretive investor investments and frequently we use structure to do so.

Our strategic investment for example in storage Express.

We will open up new acquisition channels for us some new markets, but a lot in our existing markets and we expect we will gain some scale to that as well.

Thank you and then.

History, Oh, sorry.

Is there something else.

No I was just saying I was acknowledging your thank you in saying thank you to you.

Thank you.

If I can ask a second.

On the operations just so we can compare to your peer that's already reported provided guidance. So it's apples to apples in your guidance.

Bottom at the lower end of the range.

Specifically were flat, let's say a recession a hard landing.

The upper end of the range, a soft landing and if not how would you describe your guidance.

So.

It's hard to say what constitutes a recession what constitutes a soft landing clearly the lower end of our guidance reflects more economic weakness that gives us less pricing power as Scott said and the upper end of the guidance.

<unk>.

Talking about same store guidance now.

Is.

More reflective of the stronger consumer and a stronger economy.

Okay. Thank you I'm, sorry can I just ask one follow up there is a limit.

Okay. Thanks. So then I guess my follow up is again Im just trying to help.

Putting think about how the year ended what we've heard so far again, even your competitor.

And we all knew that the first half is tough comps.

I guess what are what are what are we looking for in terms of upside to the.

We are let's say peak leasing would be stronger than expected may be stronger than the mid point is are we focusing more on occupancy.

Street rate like what are some of the things that we can we should be focusing on.

So.

Again, I'll reference Scott thing, we're going to focus on revenue and whatever tools, we can use b that occupancy or discounts of marketing spend.

All the different tools, we can use to maximize revenue will clearly be looking at top of the funnel demand which is.

Very indicative of.

<unk>.

What we can eventually charge our conversion rate to different channels.

But at the end of the day, we're solving for for revenue and we will.

We will use the various components.

Best we see fit to maximize long term revenue.

Great. Thank you and congratulations on 22.

Thanks, Jeff.

While lower for our next question.

This question comes from the line of Todd Thomas with Keybanc capital markets. Your line is open.

Yes, hi, thanks.

First question I guess, just following up on the guidance a little bit.

I guess, maybe maybe first what are you seeing in terms of occupancy trends today.

Where is occupancy what does that look like year over year, and then Scott you mentioned in terms of the guidance that youre expecting occupancy to be lower year over year, but consistent with.

What you said about the sort of cadence of revenue growth do you expect occupancy.

It would be sort of flat or higher year over year in the second half of 'twenty three.

And so one thing I would point to on occupancy we have a really tough comp early on last year now that being said, we're happy with where we are today with today, where we're at 93, 5%. We've actually closed our gap slightly since we started the year and so we're happy with where we are I think when we look at our guidance in the op.

<unk> here, it's going to be in rate. If you look at how our rates have done more recently, we've actually raised them month over month, starting in November which is odd for this time of year and your normal year lowering rates November December January February February you bottom out and this has been on and that we have raised them each month.

Since November .

Okay.

Okay, and then what does the guidance for tenant reinsurance income and management fee income growth.

Does that assume in terms of net growth to the third party management platform during the year.

Okay.

So we are continue to be continuing to add properties. The one thing that we have is it's a bit of a weird comp with last year, where we lost some stores that were stabilized and so you have the full revenue impact last year, and we're assuming we replace them more with lease up stores and so a lease up store obviously is.

Very low tenant insurance penetration some of them are actually at our management fee minimums, so that should grow throughout the year. In addition, we bought several properties out of our third party management and those properties. If they are wholly owned we no longer collect management fees on those I believe about 16 properties out of that pool. This year.

39, 39, total, but 16 were wholly owned 16 into Jb's yet.

Okay.

Does the guidance assume.

Net growth to the third party management platform during the year or sort of unchanged.

Relative to where you ended the year.

So we have modeled in our guidance pretty modest growth in the third party management business and that's because a lot of the growth tends to be from transactions in the transaction market is muted at least in the started the year now.

Now that being said for the first two months of the year, we have experienced much better demand and much better action in the third party management then as.

Model and we'll see if that continues for the rest of the year.

Okay, and then if I could just sneak in one more here also Joe back back to investments.

You talked about investments, you're making that often.

<unk> upfront, but.

There's really good attractive long term value creation in the future.

That strategy change at all today just given.

Maybe the current outlook a little bit more uncertainty.

Perhaps you dialed back on investments that arent stabilized and that are at lower initial yields yields or do you sort of keep feeding that pipeline and is that strategy different for <unk>.

Single asset acquisitions versus larger portfolio is larger scale.

Transactions or do you view them similarly.

So I don't think we dialed back in this sense, if we see what we believe is a long term attractive investment that we wanted to acquire it I would think we might do more in joint ventures too.

New or avoid that initial dilution than we have in the past we had last year for the REIT. We bought almost everything we bought was lease up value add and we increased our dilution from 'twenty to 'twenty five.

<unk>.

A little bit of a headwind.

Given our pipeline and I don't know what the rest of the year is going to bring but at least as we stand today.

We will likely go in the other direction next year and realize a bunch of that 25.

Okay, and then any thoughts on how you think about that between single asset deals or larger scale transactions would that be the same response.

Yes.

The variables when we look at a single asset versus a large transaction.

Include availability of our capital availability of joint venture capital how.

How we feel about the deal.

Timing, sometimes timing forces you in one direction.

So we will look at every opportunity in and of itself and the unique characteristics of that opportunity will lead us to what we feel would be the best execution for our shareholders.

Okay.

Alright, great. Thank you.

Thank you.

One moment for our next question.

This question comes from the line of Kian Karl with Wolfe Research. Your line is open.

Hey, guys. Thanks for the questions I know this is kind of touched on first so maybe just a little bit more information. So your interest expense is obviously going to grow significantly year over year.

How much of a change in your view.

Long term. This is have regarding floating rate I know you. Obviously said you are looking at the forward curve, but things changed so just kind of curious here.

So our guidance, obviously, we took up a point in time with that interest rate curve. It moves almost every single day it depends a little bit on what the fed does.

How they speak on conference calls things like that so it's our best guess today.

It also.

It takes our current portfolio as it is today and applies that curve is basically what we're doing keegan.

Okay, but I mean, that's not going to change like Youre still pass you mentioned, 20% to 30% is your ideal range for floating rate debt, that's still the case today.

I think youll see us look to work that down, but we do believe in some variable rate debt.

And I think that we're in a little higher today than we would like to be and so youll see us look to term some of that either out either through the bond market or use swaps to.

Move that to more fixed going forward.

Okay and second one here just kind of given what's going on with the broader peer group and you guys alluding earlier that youre interested in possible scale would you guys be interested in getting involved at all of the current potential deal out there.

So we're not going to comment on.

Deals that.

Or in the market.

Alright.

Thanks for the time guys.

Thanks, Kian, one one moment for our next question.

This next question.

She comes from the line of Smedes Rose with Citi. Your line is open.

Hi, Thank you.

I just wanted to community.

A little more color around the expense components, maybe just how what are you seeing in terms of payroll and benefits and maybe how you're thinking about marketing costs, which had a pretty probably ultimately low last year and I think that you're going to go up some but maybe just a little bit.

Detail around those.

And probably just give you some color around what our guidance assumes this next year. So our guidance for the year, we gave 5% to 6%.

Let's start maybe with a couple of the big items that are below that number so payroll assumes 4% growth.

Our.

Property taxes are about 4% growth marketing is slightly higher it's more in the 10% range and then the other one is we're expecting it to be a difficult property and casualty market and so we're expecting to see that grow more we also are seeing things grow like.

Electricity and gas those are more in the high single digits, but we have done some things to offset that with our solar program and over 50% of our stores at solar so while it's a high percentage is not a huge number.

Okay. Thanks, and then I was just wondering when you modify the next client relationship with there.

Any particular reason to do that now.

Just kind of wondering if you could maybe provide a little more detail around that and you've got the right did I get the right approach refusal.

Sure so.

Pre modification there were two instruments of $100 million preferred into $200 million preferred.

$100 million was opened for prepayment thats, probably that way to say it but whatever the equivalent is in preferred equity and the $200 million would open this year.

No.

We were in the situation, where they could have paid off those instruments and we would have had no investment. So we felt it was better to extend the terms.

Reduce the rate, which is costly tests this year, but long term, we are getting a very accretive rate on those dollars and.

And we picked up 11 management stores initially an agreement that we will manage everything for them in the future the management contracts run three years past the.

Pay off of the preferred so theyre very long term management contract and as you point out our right of first offer not a writer first refusal right.

Yes.

Okay. Okay. Thank you.

Okay.

We'll look for the next question.

The next question comes from Spenser <unk> of Green Street. Please go ahead.

Thank you.

Maybe just another one on capital deployment, you mentioned the focus on asset light channel, but can you maybe more specifically walk us through your capital allocation priority list.

What are you seeing the best return on investment right now as you look across the various asset light.

Avenue of growth.

So.

Redevelopment of existing properties.

This is Barry.

Very relatively safe on the risk reward profile, we have the asset we know the market we run on the store for some period of time, so building on excess land building on RV lots, taking single story turning into multi story.

That is relatively asset light bank, we already own the land, we already have a lot of the infrastructure and as returns.

5% to 10%.

So we will continue to do that in fact, we will ramp that up over the next few years that we will continue to do.

The bridge loan program is we're seeing.

Much stronger demand than that than we thought you saw our numbers for the fourth quarter, we're really happy with that we expect to have a very strong year then.

The benefits of that include.

The economics of managing the stores.

The ability.

The opportunity to buy many of them we brought a good number of them over time, and then of course, the economics of the loan itself and we can make that capital light because we retain the option at any time and have been selling a pieces.

Management business, which we expect another strong year as the as a very very capital light option and will absolutely prioritize that with the other two.

<unk> ventures were a little quieter in the fourth quarter and in the first quarter. This year than we were for the first three quarters of last year as our joint venture partners have some of the <unk>.

Capital.

Issues that we know those types of private equity funds are having now, but I expect them to be back some time in the year and then we will pick up on the joint venture program.

And we're always in discussions with folks about innovative and unique structures and we hope to do some of those as well.

Okay. Thank you and then.

Activity has accelerated with the return of seasonality are there any markets or regions that stand out with greater move out activity or to the contrary have been stickier than others.

Yes, some of the markets that have been a little softer for us Sacramento is probably the most difficult one for US Phoenix has slowed in Las Vegas are really the three that I would point to is maybe.

Really below the average.

Okay.

Thank you.

Thanks Spencer.

One moment for the next question.

This question comes from the line of Ronald Camden with Morgan Stanley . Please go ahead.

Okay.

Hey, just two quick ones going back to the comments on sort of a rent rent growth. Thank you mentioned, you've been able to sort of push rents since November which is unusual for this time of the year for the past couple of months, just maybe a little bit more details around that particularly interested in the ECR I at what the intensity is today versus may.

The peak of Covid.

And what the guidance assumes.

So each cri during the peak of Covid was very constrained by governmental regulations and.

Then as those.

Regulations dropped off kind of state by state.

We had.

Kind of catch up Cri, where we had greater than normal if you will rent increases because we had this wider than normal gap between what customers were paying and what was street rate.

As we look forward into 2023, we expect the cri to continue to be an important tool for us.

Customers are reacting the same way to ECR notices as they have in the past in fact the ink.

Incremental move out for me Cri has trended down and as.

Is heading towards isn't there yet, but it is heading towards more historical norm levels. So I don't think we will have the same kind of outsized Cri did we did it.

When the rent restrictions were first lifted in the gaps.

We are extra large.

R E Cri will be important, particularly as we're giving up some right now to get customers in so theyre coming in at a discounted rate and will have the opportunity to get them to market rate at.

At the appropriate time.

Great and then maybe just a bigger picture question about sort of top of the funnel demand.

You hear a lot about sort of economic the economy slowing down housing activity has slowed.

D var, presumably moving less than they were during the pandemic by it sounds like what youre seeing on the ground at that top of the funnel demand I think you mentioned.

Just as good as you've seen at so trying to get a sense of what in your mind. What do you think is driving that what are you hearing from customers.

On the top of the funnel.

So I think we have.

Systems and methods to capture the demand thats out there that gives us a competitive been advantage certainly a competitive advantage over.

The smaller operators and I hope and we certainly strive to have a competitive advantage over our public peers as well.

Our ability to capture the demand Thats out there and then convert a high percentage of it is really really crucial and important to driving our success, particularly where demand does soften a little in demand.

Demand has softened from the peaks of Covid It just back to more historical levels.

Great. That's it for me thanks, so much.

Thank you one moment for our next question.

A reminder, if you do wish to ask a question just press star one on your telephone and wait for your name to be announced.

Our next question comes from Juan Sanabria of BMO capital markets. Your line is open.

Hi, good morning.

I think Joe maybe you could expand a little bit upon some of the comments you made in your prepared remarks at the outset about testing new strategies and opportunities with both new and existing markets with.

With regards to what you acquired in storage express it in your own existing portfolio.

What that means.

And what we can see will be opened up here going forward.

Sure I can give you an example of that so we have.

This year converted two existing storage express stores, two extra space stores put in a manager and we will run them in our our typical model and we are in the process of converting five extra space storage to the storage Express.

Our method of operation and three of those are in our primary markets Chicago Seattle in Vegas. So we're really interested in seeing how these two.

Different operating models work in different markets and learn what type of store market situations characteristic.

More remote managed model works and where we can maximize performance with the manager in the store.

<unk>.

I think this will allow us.

Not only to optimize our current portfolio, but to grow in our current markets using two different operating styles.

Is the brand the same across both of those or is that kind of a separate port altogether, just wanted to make sure I understood that piece.

So we are running two brands, we have extra space and storage express in.

That is <unk>.

Something we will learn more about over time, and we'll see where it takes us.

Okay, Great and then just curious on the transactions market, where you see.

The stabilized cap rates that they are searching for.

Today, given the changes in cost of capital and how that's evolved over the last two.

<unk> months wholesale Panama tires, so just curious on our stabilized cap rates Argos.

So they are higher.

I think it's very difficult to say given the paucity of transactions.

Each transaction is sort of that.

That sort of is unique.

Its own characteristic.

If you put a gun to my head I would say stabilized cap rates are in the low fives, but.

It depends a lot on the individual deal.

And given our cost of capital that doesn't work for us on a wholly owned basis.

And then just one more if you wouldn't mind, what's the street rates that you kind of exited the year and what are you experiencing in January on a year over year basis.

Okay.

So today, we are it's really at that time of year, when you're really at the bottom. If you look at our churn where our move out rates compared to our move ins were about a negative churn of about 23%.

It is slightly more than it was in prior years, but again. This is the worst time of year. It should start getting better in March.

Thank you.

Thanks Juan.

One moment for the next question.

This question comes from the line of Steve <unk> with Evercore ISI go ahead.

Yes, Thanks, I guess its still good morning out there.

Scott I just wanted to come back to the comment and maybe the one Joe made about kind of the first half second half and just make sure I didn't misunderstand when I know you've got very tough comps.

Certainly in the first half.

But are you, suggesting that like the Q4 same store revenue growth will be above the first quarter same store revenue growth and that you'll be accelerating into 'twenty four I just want to make sure when I think about the cadence of same store revenue growth throughout the year properly.

And maybe just give a little bit more of a reference point, we ended last year double digit so we're coming down from there and what we're suggesting is with the.

Difficult comps. It obviously is decelerating more quickly because of those comps, but the first quarter. The implication is as the first quarter will be your best you then trough in that mid part of the year and then a slight reacceleration in the back half.

Yeah.

I wouldn't put it as anything other than a slight acceleration from that from that trough from the midpoint mid part of the year.

Got you okay. Thanks.

And then I just wanted to clarify on the on the kind of the loan book because I've seen some different numbers.

I think on the guidance page you said that the loan book would.

We have about $650 million of outstanding balance.

I look back at I guess, the notes receivable page in the supplemental I'm, just trying to square up kind of the notes.

Its receivable balances at the end of the year I guess things that are slated to close it sounds like this year almost seem like theyre above the $6 50, now maybe you're not keeping all of that and some of those will be sold but I was just trying to.

Broadly thinking how much new money is going out whats getting we paid what's the net investment in the loan book this year.

So maybe a little difference in how we were doing guidance this year versus last year. This year, what we what we guided to was the average balance outstanding. So that's a little different than what we were showing in prior years I think we're showing more loan closings and it was getting difficult to do with sales and things like that we ended the year at $490 million.

Above $490 million in terms of outstanding balances. So that average of $6 50 implies that many of the loans that were closing in the first half of the year, we carry throughout the year, but we will continue to sell some loans will still continue to sell some of those pieces.

Okay, and just as a quick follow up is that about the level that you think that business will be running out on a go forward basis or could you see that number of scaling up I guess chose comment suggest that there is a lot of activity out there, but I didn't know how large you wanted to make that.

Business and as a as a percentage of <unk> going forward.

Yeah.

The business has so many benefits to us I'd be happy to continue to grow it, particularly with our ability to sell a notes and manage the amount of capital we have committed to it.

But it is somewhat of a treadmill right. We are going to get to a point, where these loans start to mature we don't have a lot of maturities this year, but starting next year and that will kind of naturally.

Constrain the growth.

What I mean.

Alright. So you think like 650 is a reasonable balance to try and keep with things coming in and out going forward.

Yeah.

Want to agree or disagree with that because we may have opportunities to grow it past that or we may buy a bunch of the collateral and bring it below that so.

I know you are looking for me to give you a spot number but I really can't.

That's okay. That's right. Thank you.

Yes.

Thank you one moment for our next question.

This question comes from the line of Keybanc kill of choice Youre line is open.

Thanks, Good morning, just going back to the move in rate question, If our street rates.

What was it year over year.

In the fourth quarter and on a year over year basis, how has that trended into February .

And broadly speaking what's assumed at the midpoint of guidance for 2003.

Hey, Ben.

The.

The negative churn.

Let's just go to our achieved rate our achieved rate in the fourth quarter was just over 15% negative at trough in November .

<unk> continued to get better through February that year over year Delta. So in February were about negative 11%.

And also I'd point to the fact that these are really difficult comps in 2021 those are the highest rates we've ever experienced so while they are negative just I think.

It's relevant to point out that comp from the prior year.

And did you want to could you comment on what's implicit in our guidance.

Yes.

So guidance, we focus more on the growth month over month, if you look back to last year, we actually started experiencing negative rate negative achieved great growth in June and so our rates were negative in June and the assumption is as they start to move positive and have that pricing power as well.

Move into rental season.

Okay, and Wanda Wildcards is.

What's happening with the housing market and how that might be impacted in terms of people moving downside or upside in that might use storage.

I guess, how are you thinking about that wildcard as we head into 2023, and if you are assuming that as more of a normal type of environment or does it stay kind of challenging.

So I think our assumption is that none of us feel like the economy is really really good today I think thats. Most people here would tell you that but the assumption is as it continues like it is today we have not.

Guided or anything in our guidance implies a severe recession or a big downturn.

Clearly, we think a healthy housing market is better for self storage, but self storage does well in good times as well as bad so.

It impacts it, but maybe not as negatively as other parts of the economy.

Okay, and if I can squeeze a quick third one here.

Your guidance and your share count you're assuming all the opa is converted to common stock.

Just touch on that.

Our share counts have always assumed the as if converted.

Okay. So it's not an actual conversion okay got it.

It's no change correct, it's the as if converted method.

Okay. Thank you.

Thank you Dan.

And thank you for your questions that completes our Q&A segments. At this time I will turn it back over to Joe Margolis and team for any closing remarks.

Great. Thank you. Thank you everyone for your interest in extra space storage I hope we've communicated that we are really well positioned to have a solid year in 2023, and we're fortunate to be in an asset class that will succeed in whatever economic climate, we face.

And I feel lucky to have the best team and operating platform that will set us up for success in 2023 and the years to come. Thank you very much everyone have a great day.

And thank you for your participation in today's conference that does conclude the program you may all disconnect.

[music].

Good day and thank you for all for standing by and welcome to the Q4 2022 extra space Storage, Inc. Earnings Conference call. At this time, all participants are in a listen only mode.

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 then you will hear an automated message advising your hand is raised to withdraw your question Press Star one again.

Advised that today's conference is being recorded I would now like to hand, the conference over to Jeff <unk>. Please go ahead.

Thank you Chris.

Welcome to extra space storage is fourth quarter 2022 earnings call.

In addition to our press release, we have finished unaudited 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.

Buying in the private Securities Litigation Reform Act.

Actual results could differ materially from those stated or implied by our forward looking statements.

Risks and uncertainties associated with the company's business.

These forward looking statements are qualified by the cautionary statements contained in the Companys latest filings with the SEC, which we encourage our listeners to review.

Forward looking statements represent managements estimates as of today February 23 2023.

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 would now like to turn the call over to Joe Margolis, Chief Executive Officer.

Thanks, Jeff and thank you everyone for joining today's call.

I am proud of the extra space team for another year of strong performance across all aspects of the business.

Now speaking to the fourth quarter, despite difficult comps and the return of seasonality same store revenue growth was ahead of our expectations at 11, 8%.

Vacates continued to normalize during the quarter and demand remained seasonally steady.

Leading to strong same store occupancy levels ending the year at 94, 2%.

Our high occupancy allowed us to maximize revenue and grow customer rates across the portfolio.

Despite offering lower rates to new customers.

Total net rent per square foot increased 12, 8% year over year.

We experienced expense pressure across many line items with same store expense growth of six 7%.

Resulting in same store NOI growth up 13, 4%.