Public Storage - Q3 2023
October 31, 2023
Transcript
Operator (participant)
Greetings, and welcome to the Public Storage third quarter 2023 earnings call. At this time, all participants are on a listen-only mode. A brief question-and-answer session will follow the formal presentation. If you'd like to ask a question at that time, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. If anyone should require operator assistance during the conference call, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ryan Burke, Vice President of Investor Relations for Public Storage. Thank you, Mr. Burke. You may begin.
Ryan Burke (VP of Investor Relations)
Thank you, Rob. Hello, everyone. Thank you for joining us for our third quarter 2023 earnings call. I'm here with Joe Russell and Tom Boyle. Before we begin, we want to remind you that certain matters discussed during this call may constitute forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to certain economic risks and uncertainties. All forward-looking statements speak only as of today, October 31st, 2023, and we assume no obligation to update, revise, or supplement statements that become untrue because of subsequent events. A reconciliation to GAAP of the non-GAAP financial measures we provide on this call is included in our earnings release. You can find our press release, supplement report, SEC reports, and an audio replay of this conference call on our website at publicstorage.com. We do ask that you initially keep your questions to two.
Of course, after that, feel free to jump back in the queue. With that, I'll turn the call over to Joe.
Joe Russell (President and CEO)
Thank you, Ryan, and thank you all for joining us today. Tom and I will walk you through a few highlights for Q3, and then I'll open up the call for questions. Each team at Public Storage is successfully exercising our platform-wide advantages in a more competitive environment, as demonstrated by third quarter performance and our raised outlook for the remainder of 2023. As we entered this year, unexpectedly, we saw a new move-in customer demand for the sector shift lower, particularly with softening existing home sales due to the rapid rise in home mortgage rates. On the flip side, there has been solid and increased demand from new customers that are renters. They have proven to be very good customers as well, particularly from a length of stay perspective.
We have the right team, technologies, and analytics to determine the appropriate mix of marketing, promotions, and rental rates. Drawn by these top-of-funnel tools, along with our leading brand, self-storage users are clearly choosing Public Storage. Our strong move-in volume, coupled with healthy in-place customer behavior, has led to better-than-expected occupancy trends, with our same-store occupancy gap narrowing from 250 basis points at the beginning of the year to 120 basis points at the end of September, and to 60 basis points as of today. Our digital and operating model transformation continues to be a significant enhancement to customer experience and our financial profile. Customers benefit from having digital options at their fingertips across their entire journey.
Our proprietary digital ecosystem is a compelling reason to choose us, with over 60% of our customers running through our online leasing platform, and today, we have more than 1.4 million PS app users. Our financial profile benefits as well. We are putting these digital tools in the hands of our customers and employees for convenience, combined with in-person, on-site customer service when and where it is needed. The result is a better customer experience and enhanced margins, particularly in regard to labor efficiencies. We are also growing our portfolio amidst broader market dislocation. Our industry-leading NOI margins, multifactor in-house operating platform, access and cost of capital, and growth-oriented balance sheet put us in a very unique position.
So far this year, we have acquired more than $2.6 billion worth of properties, including the $2.2 billion Simply Self Storage portfolio, comprising 127 properties. As is our regular practice, every property was fully integrated into the Public Storage platform on day one, and we welcomed over 250 new associates and approximately 90,000 customers. We are also ahead of schedule on re-imaging the entire portfolio to Public Storage to ensure the maximum benefit from our industry-leading brand. We will have also delivered $375 million in development by year-end and have a pipeline of nearly $1 billion of development to be delivered over the next two years.
Since we updated you last quarter, the sharp move in interest rates has backed up the acquisition market, with fewer deals likely to trade by year-end, typically a busy time of year for asset closings. We are actively engaged with a full range of owners that give us confidence that some sellers' expectations will adjust as the cost of capital has clearly increased. Our advantages enable us to acquire and develop when others can't. We have a strong appetite to grow our portfolio as seller expectations continue to correct, and we have a matching ability to execute. Now I'll turn the call over to Tom.
Tom Boyle (CFO and Chief Investment Officer)
Thanks, Joe. We reported Core FFO of $4.33 per share for the third quarter, representing 5.6% growth year-over-year, excluding the contribution from PS Business Parks. Looking at the key components for the quarter, same-store revenues increased 2.5%. As Joe mentioned, move-in rental rates continue to be lower for us in the industry, but we're seeing strong move-in volume along with the right mix of marketing spend and promotions. Our existing customer base continues to perform well, with move-out volumes further moderating this quarter. These trends largely continued in October, with the year-over-year occupancy gap narrowing to 60 basis points as of today, as Joe mentioned. On expenses, same-store cost of operations were up 2.8%, leading to 2.4% stabilized same-store NOI growth at an industry-leading operating margin of 80%.
Our largest market, Los Angeles, continues to lead our portfolio. The 214 properties in the same-store pool grew NOI by 6% on steady demand and limited new supply of facilities. In addition to the same-store, the lease-up and performance of recently acquired and developed facilities continues to be a standout, with NOI increasing nearly 20% year-over-year in the quarter. This pool of 685 properties in more than 60 million sq ft comprises nearly 30% of our total portfolio today and is a strong contributor to FFO growth today and into the future. Shifting toward the outlook, we sit here in October, raising our core FFO range once again, increasing both the low and high ends to $16.60 at the low end $16.85 at the high end.
Last but not least, our capital and liquidity position remain rock solid. We are well positioned with a strong appetite for growth, coupled with the ability to execute in a dynamic capital markets environment. Rob, with that, let's please open it up to Q&A.
Operator (participant)
Thank you. We will now be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. My first question comes from Michael Goldsmith with UBS. Please proceed with your question.
Michael Goldsmith (US REITs Analyst)
Good afternoon. Thanks a lot for taking my question. You continue to navigate the environment well, though the guidance implies continued deceleration into the fourth quarter for same-store revenue growth and same-store NOI growth, with both turning negative at the midpoint. So what are you seeing in October that, to this point, and, and how are you viewing how the last two months of the year will play out?
Tom Boyle (CFO and Chief Investment Officer)
Yeah, thanks, Michael. Good question. So I'll provide a little bit of context on the same-store revenue outlook for the remainder of the year, and then specifically speak to October. So as we've spoken to in the prepared remarks, the environment for new move-ins continues to be competitive, and that's persisted through the second half as we sit here in October. We in the industry are responding with lower rental rates, promotions, as well as advertising. But on the flip side, we're seeing good move-in volume growth. Those tenants are staying longer than last year, and our existing tenant base has been strong.
When we look at the exit rates for move-in rates and occupancy, to give you a sense what's assumed in our outlook, on move-in rates, we assume that at the midpoint, move-in rents are down circa 18% at the midpoint. The high end of our outlook assumes 13% decline year-over-year, and the low end, 22%. On the occupancy side, the midpoint assumes that we hold the year-over-year decline from September at about 120 basis points decline year-over-year. At the high end of the range, we nearly close the gap to last year by the end of December, and obviously, at the low end, we go backwards on occupancy towards the end of the year. Speaking specifically to October, we've seen again, good volumes, but at lower rates.
As we look at the move-in rental rate decline, on an apples-to-apples basis, move-in rents are down, call it 18% in October to date. Obviously, today, we'll wrap up the month. We and others ran some fall and Halloween sales on select units in the back half that will cause a little bit of a decline in that towards the back half of the month. But overall, seeing very good volumes. Volumes up nearly 9% in the month of October. So the tools that Joe highlighted continue to work very well. And I would point again to existing customers performing well. Move-outs were down or actually are down year-over-year this month to date. And the occupancy gap, as Joe highlighted, has improved to down about 60 basis points today. So we're seeing good traffic and existing tenant performance.
Michael Goldsmith (US REITs Analyst)
Thanks for that. That's really helpful. My follow-up question is on the existing customer. You've talked about in the, in the past with the existing customer, how they respond is a function of price sensitivity, or ECRI is a function of price sensitivity and the replacement cost. You know, given the pressure on move-in rates, you know, how do you think about your ECRI philosophy heading into the back half of the year or heading into the through the fourth quarter, just given what you've seen from the customer? And then... separately, as a follow-up to the first part, is there any change in your guidance philosophy?
You've been able to hold your guidance pretty flat through the year, or at least the high end of the guidance hasn't been raised as the low end has moved up, and now you finally touched the high end. So any change in philosophy on the guidance as well? Thanks.
Tom Boyle (CFO and Chief Investment Officer)
Okay, that's a lot, Michael, but let's step through that. So on the existing customer rate increases, I would reiterate what we've been saying really all year, which is on the first component, which you highlighted, which is customer behavior, and our expectations for customer behavior continued to be met or exceeded, frankly, as we moved through the year. And so that side of the equation has been quite strong. It's been one of the drivers that's led to better performance through the year. And then the second component, cost to replace, continues to get more challenging. So as we've highlighted throughout the year to date, that's led to lower magnitudes and lower frequencies of increase to customers. But no real change there in terms of talking points.
The second component of your question related to guidance, and so we did lift the lower end, as well as the higher end of our guidance range, this quarter. And, you know, in February, we were pretty upfront and described the different pathways that we could take through the year. We've been encouraged by the pathways that we've ultimately executed upon, and are towards the high end of that range, and again, lifted the high end this quarter. And I think I used some guideposts around the macroeconomy at that time as well, to frame the outlook.
I think we're all somewhat pleasantly surprised by the macroeconomy and obviously a strong third quarter GDP print, that, that further reinforces, you know, the performance towards the higher end of that, that original guidance range.
Joe Russell (President and CEO)
And yeah, Michael, one thing, just a little bit more context on existing customers. Again, we're all looking to the prints that Tom just mentioned, but you know, month by month, you know, through this year, we've been quite and pleasantly surprised by the consistent behavior of existing customers. We're not seeing any new or emerging stress coming through. The economy continues to support our customer base quite well. We're not seeing, again, any level of additive stress, high delinquencies, et cetera. So, you know, continuing to see very, very consistent behavior from existing customers, which is very good for the business. And again, assuming the economy at large continues to do what it's doing, we think we're in very good shape, again, going through the rest of this quarter and then setting up for 2024.
Michael Goldsmith (US REITs Analyst)
Thank you very much.
Operator (participant)
Our next question comes from Steve Sakwa with Evercore ISI. Please proceed with your question.
Steve Sakwa (Senior Managing Director and Senior Equity Research Analyst)
Great, thanks. Maybe first, just talking on the transaction market. It sounds like, you know, you're maybe starting to see some sellers capitulate. I'm just wondering, Joe, how have you guys changed your underwriting criteria, you know, on the either revenue, NOI growth side, IRR side, cap rate side, and, and how wide do you think the bid-ask spread is today?
Joe Russell (President and CEO)
Yeah, Steve. So again, a lot of moving parts there. And as you spoke to, we, you know, clearly need to be very conscious of changing cost of capital. You know, one of the things that, step-by-step, as I alluded to, with, you know, a very high degree of dialogue we're having with all different types of owners, the realization of, you know, a different trading market is starting to play through.
You know, clearly, you know, some entities may have more pressure points, likely not tied to the actual performance of the asset or the portfolio, but maybe more particularly tied to any capital event that may be emerging, again, tied to the very different environment that an owner would go through to reset, an existing capital structure, and you know, how to deal with that and/or different pressure points to bring a particular asset or portfolio to the market. So we, you know, have seen, you know, the migration, and the realization that the environment has clearly changed. As I mentioned, you know, we're anticipating very low levels of trading volume between today and the end of the year, which is somewhat unusual, particularly, you know, for the fourth quarter.
But, you know, what we've been seeing with the iterative discussions with many entities is the realization that, you know, things have changed quite a bit. In our own underwriting, we have put different hurdles in place relative to those facts, which we should. So our own cost to capital has changed, and we are, again, seeing, you know, a difference in bid to ask. But I will tell you that gap, you know, depending on the situation of a particular owner, is shifting, and we hope that too puts us in very good shape to actually transact, in a different environment. And very uniquely, as I mentioned, we can do this, unlike most others.
So the capital, that we have available, the balance sheet, our ability to transact very quickly is serving us well, and we're going to continue to exercise that opportunity, as we see fit, relative to the types of hurdles we hope to achieve through this very different trading environment.
Steve Sakwa (Senior Managing Director and Senior Equity Research Analyst)
Okay, and maybe just to clarify a few numbers that Tom threw out. Just when you talked about move-in rents down 18%, just to be clear, you're talking about move-in rents in Q4 versus move-in rents in the year-ago period. And if that's true, yeah, I guess I'm just trying to look at what is the spread between the move-in rents and the move-out rents? Because I think that widened out a bit in Q3, and I'm just curious what your expectations are for Q4 and maybe moving into the first half of 2024.
Tom Boyle (CFO and Chief Investment Officer)
Yeah, good question, Steve, so, and clarification. So yeah, I was speaking to a year-over-year metric there. And then to the second component of your question about the difference between move-in and move-out rates, I think in the third quarter, that differential was about 26%. And, you know, as we've talked about in the past, we don't manage to that number specifically, right? So we talk about our existing tenant rate increase program being driven by predictive analytics on individual customers and units, and understanding the expected sensitivity of that customer over time, and how we can influence that. And on the flip side, right, we're dynamically managing rental rates. And so, we're trying to attract customers and maximize revenue through a combination of rental rate and move-in volumes.
And so what spits out of that more dynamic, you know, at the local level, management, is that differential in gap. And again, that gap suggests that we're earning good revenue on the existing customer-tenant base that continues to perform quite well. To your question around how do we think about that gap today? Clearly, it's in a range that we've operated in in the past. I think the first quarter, that gap was about 24% or 25%, so not dissimilar to where we are now. And as you're suggesting, as we move through the fourth quarter and into the first quarter again, based on the assumptions around move-in rents, we're likely to see that gap increase a little bit more, and that's something we're comfortable operating in.
Steve Sakwa (Senior Managing Director and Senior Equity Research Analyst)
Great. Thanks for the answers.
Joe Russell (President and CEO)
Thanks, Steve.
Operator (participant)
Our next question comes from Spenser Allaway with Green Street Advisors. Please proceed with your question.
Spenser Allaway (Senior Analyst)
Thank you. Apologies if I missed this, but are you guys able to provide some color on the cap rates as it relates to the 3Q acquisitions and the acquisitions that you're under contract or have completed so far in 4Q?
Joe Russell (President and CEO)
So maybe a little perspective on how cap rates are trending, Spenser, and then, you know, deal by deal, there's, you know, likely to be a range in the actual cap rate, depending on the asset itself or the portfolio from a stabilization standpoint, et cetera. But if you kind of step back and look to where the environment was going back to 2021, you know, we were in a range of, you know, +4% or so on a cap rate basis, shifted up, you know, to 2022 to 5%. You know, this year, I would say we're at a 6% handle, trending potentially to a 7%.
So, again, reflective of the change in cost of capital, you know, Steve's question about, you know, this gap from a seller expectation standpoint, you know, does take a little bit of time from a realization standpoint, but we do see that trend continuing. And, you know, we're using that as an opportunity to continue to find appropriately, you know, priced assets to bring into the portfolio. And as I mentioned, we've got a number of different situations playing through that we're confident, you know, at some point will likely trade. It just takes us, you know, some period of time, depending on the pressure points and the timing of a particular seller.
Spenser Allaway (Senior Analyst)
Okay. That's very helpful. Thank you. And then, are you guys able to provide any update, if there is any, on the integration of your new tenant insurance platform?
Tom Boyle (CFO and Chief Investment Officer)
Sure. So I think you're speaking to our Savvy program. So we announced-
Spenser Allaway (Senior Analyst)
Yes, sir.
Tom Boyle (CFO and Chief Investment Officer)
That we'd be, we would be launching that program here in next month in November. And it's an initiative where we're launching the industry to offer our tenant insurance program to other operators. This really came out of our third-party management business. In dialogue with some of the operators, they've continued to like to operate the portfolios themselves in our dialogue, but they've said, "Hey, but what about that tenant insurance piece? Can we talk about that on a standalone basis?" and they were intrigued by that. As you know, we share a portion of the premiums that we collect on our third-party managed properties with the owners of those facilities.
So we've been working to streamline and simplify our tenant insurance process, including making it easy to use digitally, something our customers have embraced over the past couple of years, and we think the industry can benefit from. So in that press release, we noted that we've been working with Storable, which is the largest software provider in the industry, to be able to offer that same experience on their property management software, and we're going to be launching that starting here in November. In terms of the opportunity, it's obviously very early days. We're launching it next month, but the addressable market, frankly, could be larger than third-party management, for those that are interested in a different tenant insurance component, but just getting started there.
I'd say stepping back, it's just another way for us to create a win-win with other owners in the industry and build relationships that could bear fruit in a multitude of different ways over time.
Spenser Allaway (Senior Analyst)
Okay, great. Thank you, guys.
Joe Russell (President and CEO)
Thank you.
Tom Boyle (CFO and Chief Investment Officer)
Thank you.
Operator (participant)
Our next question is from Juan Sanabria with BMO Capital Markets. Please proceed with your question.
Juan Sanabria (Managing Director)
Hi, good morning. Just hoping to follow up on a prior point on the ECRI commentary. So has the quantum and/or pace of increases that you're looking to pass through to existing customers moderated throughout this year? And do you expect? And if not, do you expect that to happen in 2024 at some point, if the current environment continues into next year?
Joe Russell (President and CEO)
Yeah, Juan, it's moderated throughout the year as that cost to replace component has gotten more costly, right? I mean, stepping back a couple of years ago, right, we're in an environment where in many markets, we had a benefit to replace, which is pretty unusual in the sector. And now we're back to a point in time where there's a cost to replace. And so as we move through this year and frankly, as we moved through last year, too, the cost to replace grew. And so on a year-over-year basis, the contributions from existing customer rate increases has declined modestly year over year. Now, the flip side of that is the new move-in volume that we've been getting really over the last year is supportive, right?
Because the more tenants that are coming in will receive those increases over time, and so that will benefit the 2023 back half as well as 2024, given the significant volumes of move-in activity we've seen.
Juan Sanabria (Managing Director)
And then I was just hoping you could spend a couple minutes on Los Angeles. I know you had some benefits starting last year as the rental restrictions rolled off. Where are we in that? Is that done? And any benefit that is gonna wear off as we kind of roll the calendar forward a year?
Joe Russell (President and CEO)
Yeah, sure, Juan. Yeah, just to step back, as you know, you know, Los Angeles is our largest market. We've got 229 properties, you know, here in the L.A. Basin, you know, another 26 properties in San Diego. But as a, you know, full Southern California portfolio, L.A. in particular, we're beyond the correction or the opportunity that was at hand based on the price constraints that we had for that three-year period.
So the level of performance you're seeing now is truly indicative of the quality of the market and the strength that that size portfolio, the location, and the overall dynamics that we see here in Southern California continue to provide, which is, again, very, very healthy levels of new customer activity, very healthy levels of existing customer behavior in a market that, again, we have a very outsized level of not only presence, but, you know, a very strong portfolio. We've talked about this, you know, to some degree recently, but, you know, it's also a portfolio that we've touched holistically from our Property of Tomorrow program.
We've invested, you know, $80+ million in the assets, to pull them into, you know, a very, ideal position relative to curb appeal, other attributes that we've added through Property of Tomorrow, enhancements, et cetera. So all things considered, the market's humming along quite well, and, we think we'll continue to see good activity and good performance, going forward.
Juan Sanabria (Managing Director)
Just one last quick follow-up, if you don't mind. You mentioned occupancy was down 60 basis points year-over-year at the end of October, but what's the absolute occupancy percentage, if you don't mind sharing that?
Joe Russell (President and CEO)
The occupancy percentage as we sit here today, I'm not sure, is directly relevant to what the period-end occupancies are going to be. Obviously, we're getting towards the end of the month. Today will be a move-out day at many of our facilities. So I guess I'd suggest that not too dissimilar to where we were in September, you know, the occupancies are north of 93% today, but expect them to be in the 92s as we finish the business day up here.
Juan Sanabria (Managing Director)
Thank you.
Tom Boyle (CFO and Chief Investment Officer)
Thanks, Juan.
Joe Russell (President and CEO)
Thank you.
Operator (participant)
Our next question is from Jeff Spector with Bank of America. Please proceed with your question.
Jeff Spector (Managing Director and Head of US REITs)
Great, thank you. I just, I guess I wanted to ask about the market in general, just thinking, listening to your comments and thinking about, you know, is there an equilibrium, like some point where, I don't know if it's national occupancy, something to alleviate the pressure on, you know, new rates? Or do you not really care because your volumes are so strong? Like, how are you thinking about that as, you know, we're trying to forecast and think about the coming months and into 2024?
Tom Boyle (CFO and Chief Investment Officer)
You know, Jeff, there's a lot there. I guess what I'd suggest is, if you think about this year, right? We came into this year expecting that the move-in environment would be more competitive, and that was based on our outlook and what we were seeing. No question, housing having a component of that with record last 20-year record-high mortgage rates, as Joe mentioned, that's led to a slowdown in demand. The flip side is we've seen good activity from renters, as we've highlighted, but the move-in environment has gotten more competitive, right? Our facilities, in particular, if you rewind a couple of years, were full, and frankly, we were turning customers away in 2021, because we were so full, and we were pushing rate.
And so the combination of that dynamic and where we are now, you know, has led to a correction. And I think in terms of move-in rents, maybe an overcorrection in certain markets where, you know, the industry as a whole is reacting to an environment where, you know, the larger operators are taking their typical move-in volumes, and the overall demand environment is a little softer than where it was maybe two years ago. But demand continues to be relatively healthy. If you go back in time for self-storage, it's just nowhere near what it was in 2021. And no question, that's led to declining move-in rents.
And as we look at how our business has performed through this year, that has been the one notable component of the revenue algorithm that has underpunched expectations, i.e., move-in rents have been lower than what we anticipated. The good thing is, on the flip side, move-in volumes, to your point, have been strong, existing tenant behavior's been good, move-outs have moderated, so obviously leading to us increasing our outlook as we move through the year. But I, I don't wanna shy away from the fact that move-in rents have been a particular soft spot as we move through the year.
Joe Russell (President and CEO)
And yeah, on top of that, Jeff, you know, again, need to be reflective of, you know, the three tools that, you know, we continue to speak to: marketing, promotions, and rental rates. Those are tools that are highly interrelated, right down to a per property and per customer basis, relative to the way that we can optimize the utility of each of those with the data that we have, the amount of demand, volume, and knowledge that we have relative to any particular trade area. You know, more often than not, we're typically competing with owners that have far few tools of any depth and/or ability to judge and react to any of the dynamics that Tom just spoke to. These, frankly, are tools that are deep-seated. We've used them in a whole variety of different economic arenas.
Clearly, the last three years or so, you know, most operators haven't had to rely on those tools very frequently. We're very good at using those tools, and frankly, we've become better even over, you know, the, you know, the near term relative to our own utility of data, the knowledge that we have, and then what we'll continue to unlock relative to all the operational efficiencies as well. So we feel very encouraged that, you know, we're using those tools to not only drive top-of-funnel demand, but conversion, you know, to the move-in activity that we're reporting, and we're gonna continue to keep them very sharp and active.
Jeff Spector (Managing Director and Head of US REITs)
Great. Thank you. Very helpful. And just one question, clarification, please. On the 60 basis points year-over-year for occupancy, was that the end of period or the average? If it was end of period, can you state the average?
Tom Boyle (CFO and Chief Investment Officer)
For the month of October. Well, we started the month at down 120 basis points, where we're finishing up down 60 basis points, so the average is right about in the middle, midpoint there.
Jeff Spector (Managing Director and Head of US REITs)
Okay, thank you.
Operator (participant)
Our next question comes from Todd Thomas with KeyBanc Capital Markets. Please proceed with your question.
Todd Thomas (Managing Director and Senior Equity Research Analyst)
Hi, thanks. First question, I just wanted to follow up on that, the last question, about move-in rents. You know, Tom, you talked about move-in volumes being stronger than expected, and it sounds like you've, you know, you've taken share from other operators. Joe, you mentioned in your prepared remarks that customers are choosing Public Storage more and more.
In this environment, a more competitive environment, I guess, really, you know, without sort of an increase in overall demand, even if occupancy stabilizes in Public Storage's portfolio, which, you know, I think the high end of your guidance now assumes at year-end, do you foresee, you know, the ability for move-in rents to stabilize or begin to stabilize, or will they continue to drift lower until overall industry occupancy really stabilizes and maybe finds a bottom?
Tom Boyle (CFO and Chief Investment Officer)
Yeah, I think that there's a number of factors at play, and certainly, as I noted, you know, we were in an environment where move-in rents, you know, you pick a market, move-in rents in Miami, for instance, were up significantly in the 2020, 2021, 2022 time period, and we're giving some of that back. And I think as an industry, no question, that's playing through. But as we think about the different components at play as we head into 2024 and 2025, you know, housing has gotten a lot of airtime this year around its impact to demand. No question, that's a component of demand, and that's been softer.
If you look at existing home sales over time, they've been in a range of call it 4 million-7 million existing home sales per year. We're trading right around that 4 million today, which if you go back and look at the financial crisis or other periods where the housing market has slowed down, pretty consistent. So we worked through that decline as we moved through 2023. So that's helpful as we think about the setup into 2024 and 2025, and the fact that existing home sales aren't likely to take another significant leg lower, but obviously, we'll see how that plays out.
The other side is renters and people that run out of space and home, you know, there's less movement, and frankly, those are good storage customers, and they tend to have longer length of stays in some instances, in many instances. And so we've seen that benefit as we moved through this year, longer length of stays for move-ins this year, and have been getting good customers, which again, supports 2024 and 2025, supports occupancy, I think for the industry overall. So those are all helpful as we move into 2024 and 2025, and I'd add to that, the fact that the development environment continues to be quite challenging. Construction costs are up over the last several years. City processes continue to be challenging, with understaffing and delays.
No question, cost of capital in the construction lending environment is gonna lead to lower levels of deliveries as we go into 2024 and 2025. All of those things are helpful as we think about stabilizing rental rates in some of the markets that maybe I even characterize as maybe overcorrecting in some instances.
I also think getting into the busy season next year will be quite helpful, right? We go into a time period in the spring where seasonally, you're going to see more demand. This year, we didn't have much of a season partially attributable to the housing environment. So the comps from a seasonal standpoint next year are a little easier, and we'll have to see the benefit of what plays through in 2024 to the dynamics with move-in rental rates heading into March, April, and May of next year.
Todd Thomas (Managing Director and Senior Equity Research Analyst)
Okay, that's helpful. Then my other question is around the development and expansion pipeline, which decreased a little bit in the quarter versus last quarter. I realize it's just one quarter, not necessarily a trend, but you know, the environment is more challenging today, and I'm just curious if that is intentional at all as you look for either rents to stabilize or greater certainty around lease up, or if it's just timing related. But really just wondering if your return requirements, maybe to start new projects, have really changed at all in the current environment.
Joe Russell (President and CEO)
So yeah, to you know, again, give full perspective on the focus and the priority we continue to put into our development and redevelopment capabilities, it continues to be our most vibrant opportunity from a return on invested capital standpoint. So we think that, you know, ironically or counterintuitively, this is actually even a better environment for us to source and compete for, A, land sites, and B, you know, work certain properties through entitlement development processes where others are retrenching. You know, the lending environment, particularly tied to construction loans, continues to be much more constrained.
In fact, you know, with the pressure into regional banks, where most of the construction lending goes on, particularly tied to, you know, one-off construction loans for self-storage, again, very, very tough hurdles for any developer to meet very differently than we've seen over the last several years. This, you know, continues to be a good opportunity for us to compete very differently and ideally look for expansion opportunities, you know, for the portfolio as a whole. You know, the slight reduction, Todd, to your point, was just, you know, that was just a one-off quarter impact from some deliveries that took place.
But, you know, the team's working very hard to continue to not only operate in an environment where, yes, some of the hurdles are being adjusted, but you know, development's a long game as well. You know, we're dealing with multi-year processes, not only to get a particular asset approved and launched from a construction standpoint, but then, you know, a number of years beyond that to get them stabilized. So in this environment, particularly, you've got to have very strong fortitude to get through those time frames, particularly with cost of capital being very different. But we look at this as an ideal opportunity for us to continue to leverage the skills, the strong balance sheet, and our knowledge, market to market. The team's well-seeded nationally.
We continue to find, you know, new and different opportunities, region by region, across the country, and we're gonna continue to work hard to not only unlock ground-up development, but redevelopment activity as well. So, it continues to be a very vibrant part of the business that we're gonna continue to focus on very strongly.
Todd Thomas (Managing Director and Senior Equity Research Analyst)
Thank you.
Joe Russell (President and CEO)
Thank you.
Operator (participant)
Our next question comes from Smedes Rose with Citi. Please proceed with your question.
Smedes Rose (Director)
Hi, thanks. I just wanted to follow up. You mentioned expectations of lower deliveries, I think, industry-wide in 2024 and 2025. Can you just quantify that a little more in terms of either dollars invested you're seeing in the space or a % increase in existing supply? And are there any markets where you see, you know, outsized growth coming up for one reason or another, or anywhere it looks particularly favorable, meaning, like, very little growth?
Joe Russell (President and CEO)
Yeah, Smedes, a lot of moving parts there, but step by step, and, you know, we've been speaking to this for some time, you know, we, we've been seeing the unusually difficult hurdles you go through to get projects, A, approved, and then, B, funded. And now, you know, again, with the constraints I just spoke to in the lending environment, you know, getting them into production themselves. So, you know, statistically, we think most of the information out there is not accurate because it's not reflective of the continued deceleration in annual deliveries.
You know, from a step-by-step basics, going from this year to 2024 and likely into 2025, we think that, you know, the pool of assets that had been predicted to deliver are probably shrinking by ± at least 10% or more on a per annum basis. You know, we had kind of ratcheted down to a delivery level nationally, ±3 billion or so of assets, you know, in the 2022-2023 time frame, and that's gonna continue to notch down, in our view, based on all the constraints that I just spoke to. It's a very good thing for the industry as a whole. Can't really point to any, you know, number of markets that at the moment are overburdened from a delivery standpoint outside of potentially Las Vegas, you know, Phoenix to a degree.
Portland's, you know, starting to work through it, but, you know, a little bit of an outstretched level of new deliveries in that market as well. But you know, frankly, the good news is the amount of deliveries that have come to the market over the last couple of years has been slower, and it's likely to continue to get slower from a volume standpoint going in the next couple of years.
Smedes Rose (Director)
Great. Thank you. And then I just wanted to ask, too, you, you mentioned that, I think in the past, that renters tend to have a longer length of stay. So are you seeing that in the portfolio now? Could you just talk a little bit more about where length of stay is and the changes you might be seeing?
Tom Boyle (CFO and Chief Investment Officer)
Yeah, in terms of length of stay overall continues to be quite strong. So we've spoken a lot over the last couple of years in terms of how that's extended from, call it, 32, 33 months on average, if you take a snapshot of all of our tenants in place pre-pandemic, to more like 35, 36, and that persists today. And then, that's persisting in an environment where we're obviously adding more new tenants, which brings that average down. So continue to see strong, strong trends there. Customers that have been with us for longer than two years continues to punch well above where we were pre-pandemic, in the 40s as the percentage of the total tenant base, and that continues to be the most, most stable and important component of the tenant base.
Operator (participant)
Thank you. Our next question comes from Eric Luebchow with Wells Fargo. Please proceed with your question.
Eric Luebchow (Director and Senior Equity Research Analyst)
I appreciate the question, guys. I wanted to go back to the ECRI discussion from earlier. I think you talked about higher cost to replace as, you know, somewhat moderated your ability to push through ECRIs to some degree. But does that dynamic shift at all, given you're loading more new customers now at lower rates? Can you push ECRIs harder and faster with this cohort, given the cost to replace, presumably for them, is slightly lower than your in-place customer?
Tom Boyle (CFO and Chief Investment Officer)
Yeah, that's spot on, Eric. So as we talk about the tenant base overall, right, the cost to replace has gone higher. But those new tenants that have moved in this year, right, don't have that same dynamic, and are more like customers than in prior years with a lower cost to replace, and are likely to receive higher magnitude and frequency of increases, which is supportive as we move more customers in through 2023 into 2024 and 2025.
Eric Luebchow (Director and Senior Equity Research Analyst)
Okay, great. And then just one last one. Maybe you could touch on the cost side. You've seen, you know, marketing expenses, payroll, utilities continue to increase. So especially with an uncertain demand backdrop into next year, you know, how, if you can talk about how effectively you'll be able to manage your costs and any cost line items that we should be aware of that will be pressure points in your NOI growth outlook for next year?
Tom Boyle (CFO and Chief Investment Officer)
Yeah. So I guess starting with marketing, right? Marketing is the one that this quarter was up most notably. We continue to get very good returns on the marketing spend that we're utilizing, and that is a process that we manage dynamically at the local level in conjunction with promotions and rental rates, as Joe highlighted earlier. If you look at marketing spend over time, we've historically been in a range of, say, 1%-3% of revenue spent on marketing. We got all the way down to 1% or so in 2021. And I think this quarter we sat right around 2%, 2.1%.
So there's continues to be room, at least from a historical lens, for us to continue to increase that and see good return associated with that, and we'll do that. I would think about marketing spend on the expense line item certainly will create higher levels of expense growth, but that's gonna be an NOI positive investment, given the returns we're seeing. The other line items, utilities, as well as, property payroll, continue to be areas that our strategic initiatives that we outlined at Investor Day continue to bear fruit. So as we close 2023, we will meet our 25% payroll hour reduction that we highlighted at Investor Day.
That's helped to offset as we've gone through initiatives around technology, as well as specialization and centralization of property roles that are leading to career advancement opportunities and as well as good efficiencies and good customer experience. So that's one side that will continue through 2024 to benefit us. And the other is our solar power programs. We'd like to put solar on over 1,000 roofs, and today, we're sitting with solar. We'll finish the year with around 500 of those complete, and we think there's more to go there, which will help offset utility pressure, and in addition to that, be good for the environment and our carbon emissions.
Eric Luebchow (Director and Senior Equity Research Analyst)
All right. Thank you, guys. Appreciate it.
Tom Boyle (CFO and Chief Investment Officer)
Thanks, Eric.
Operator (participant)
Our next question is from Keegan Carl with Wolfe Research. Please proceed with your question.
Keegan Carl (Senior VP of Equity Research)
Yeah. So I hate to belabor the point on ECRI, but maybe just on 4Q in particular, when do you guys typically stop sending rates for the year? And does the current operating environment change that plan at all versus historical levels?
Tom Boyle (CFO and Chief Investment Officer)
No, as I've noted, you know, the existing customer base continues to perform as expected, and frankly, very stable versus the prior several years, which is encouraging. So our program continues. It's part of how we manage revenues, and that's not gonna change. Won't change in the fourth quarter, and don't anticipate it to change into 2024, you know, barring any significant shock or change. So that continues to be a strong point as it relates to the overall customer base, and wouldn't point to anything significant there.
Keegan Carl (Senior VP of Equity Research)
I guess just to clarify, though, do you—you're comfortable sending increases throughout the entire year, like, or the quarter, you're not gonna stop around the holidays? I thought that was a trend that's typically in self-storage.
Tom Boyle (CFO and Chief Investment Officer)
No, we send increases throughout the year.
Keegan Carl (Senior VP of Equity Research)
Okay. And then just shifting gears here. So you guys obviously overearned on your interest income in the quarter, just given the hold on to cash prior to closing on Simply. Just curious what a good run rate for this would be going forward?
Tom Boyle (CFO and Chief Investment Officer)
Yeah, that's a good question. So, as everyone's aware, we announced the Simply transaction on a Monday in July. We did the financing associated with that transaction on the same day, which, you know, was meant to match fund both the acquisition as well as the financing associated with it. In hindsight, that looks pretty good because interest rates are up over 100 basis points since that time period. But the other benefit was we obviously sat on that cash for a period of time, and believe it or not, we actually eked out a positive spread on that cash versus our financing costs, given where we can earn on cash, about 3 basis points, so nothing to write home about.
But it certainly led to both higher interest income for the quarter, as well as higher interest expense, because we were sitting on that cash, and we had raised it for a period of time. So no real impact to FFO, but certainly drove incremental. And then if you think about that, that interest and other income line, right? You just doing some simple math, $2.2 billion in cash and sitting on it, earning a little over 5%, I think we get the numbers for 50 days of about a $15 million benefit during the quarter. So you could think about that as not recurring. We won't be sitting on that $2.2 billion of cash in the fourth quarter.
Keegan Carl (Senior VP of Equity Research)
Got it. Thanks for the time, guys, and Happy Halloween!
Tom Boyle (CFO and Chief Investment Officer)
Thanks, Keegan.
Joe Russell (President and CEO)
Thank you.
Tom Boyle (CFO and Chief Investment Officer)
Happy Halloween.
Operator (participant)
Our next question comes from Ron, Ron Kamdem with Morgan Stanley. Please proceed with your question.
Ron Kamdem (Managing Director)
Hey, just two quick ones. I think you guys were one of the first this year to talk about the potential with same-store revenue to go negative, and obviously, in the guidance in 4Q, it implies that it does that. And, you know, I think we could sort of use your wisdom as we're thinking about sort of next year. If I go back to that move-in, move-out spread down 26% in 3Q, which got a little bit worse, it sort of suggests that things are still sort of decelerating. So the question really is, like, as we're thinking about next year, is it occupancy response? Is it length of stay?
Like, what sort of factors should we be watching to get a sense of the direction of the same-store trend into next year?
Tom Boyle (CFO and Chief Investment Officer)
Well, Ron, I think there's a few things there that I'll, I'll pick out and comment on. One is, certainly, we started 2023 at a point of, you know, particular strength and, right, rents were significantly higher. I've commented on some of the positives and negatives that have played through this year, but no question, growth rates have moderated through the year. Commented on move-in rates, in particular, have been softer than expected, and I think that's certainly the case as we move through the third and the fourth quarter here.
Going into 2024, you know, I'm not going to speak to specifics, but one of the things that we spent a good bit of time on earlier in the year talking about this year was that comps eased in the second half because the environment started to change last year. I would suggest that that's not just a second half of 2023 thing, it's also into 2024, as we work through a demand environment that softened through 2023, as well as move-in rents that declined through 2023.
And so for the same reasons that we, you know, discussed about moderation in deceleration or easy comps in the second half of 2023, maybe we haven't seen that as much as we initially envisioned, but we've also seen, you know, the levels of performance of the existing tenants make up some of that rental rate comp dynamic. But we're still, to your point, looking at negative same-store revenue growth at the midpoint in the fourth quarter. To your point, we were highlighting that in February. You know, our outlook for the fourth quarter has gotten better as we moved through the year. You know, I think the midpoint now is down 50 basis points in same-store revenue.
So, you know, almost there at flat, which is frankly an improvement from where we were sitting starting the year. And to your point on 2024, I think I've probably said as much as I should, and we'll be providing a good bit more detail in February on the assumptions and fresh guidance for the year.
Ron Kamdem (Managing Director)
Great. And then my second question was just going back to the supply question, but instead of just like the macro forecast, do you guys have a sense of how much of the portfolio is actually competing directly with new supply? High level, is it a quarter? Is it half? Just trying to get a sense of the range of the actual assets that are competing with new supply. Thanks.
Joe Russell (President and CEO)
Yeah, that's going to vary, Ron, market to market. You know, there's a whole spectrum. You know, as I mentioned, our largest market, you know, being here in Southern California, you know, almost no new supply to speak to. You know, other parts of the country that are, you know, well known to be the tougher markets to develop into, you know, have same and similar dynamics. You know, I mentioned on the other end of the spectrum, you know, we're keeping a close eye on the amount of deliveries that are playing through in Phoenix and Las Vegas. But you know, frankly, it goes right down to a very submarket impact.
And I would say it's, you know, it's less than and continuing to shrink below the lower number you pointed to, i.e., you know, whether it's 20% or lower, it's definitely a factor below that, and I think will continue to shrink, which, as I mentioned earlier, is a very good thing for the industry as a whole.
Ron Kamdem (Managing Director)
Thanks so much.
Joe Russell (President and CEO)
Thank you.
Operator (participant)
Our next question is from Caitlin Burrows with Goldman Sachs. Please proceed with your question.
Caitlin Burrows (VP)
Hi, just a couple of quick follow-ups, I think. I was wondering, I know the Simply Self Storage deal is still pretty fresh, but wondering if you could go through whether you've started to realize any synergies and/or just go through the near-term strategies you're implementing.
Joe Russell (President and CEO)
Yeah, Caitlin. You know, I mentioned in my opening comments that, you know, our goal with that portfolio, which is, to date, you know, our largest private transaction, you know, with 127 assets coming to us. You know, the benefit that we saw in that portfolio is, you know, it crosses 18 different states. It didn't put any undue burden on our ops team, market to market.
And frankly, over the last three or four years, we've become very good at integration on a whole level of different scale, market to market, where we've seen certain portfolios, you know, with you know dozens of assets, whether it was ezStorage in the Washington, D.C. market or the portfolio that you know we bought in Dallas-Fort Worth, that you know again was again very efficiently brought into the portfolio on a much more concentrated basis. But this portfolio from an advantage and integration standpoint was different. It was definitely sizable and we were able to deploy many of the techniques that we've used over the last few years, you know, to integrate those assets. Now, from a data integration standpoint, again, our toolkit has become incredibly strong relative to the efficiency.
As I mentioned, we pulled 90,000 customers onto our portfolio overnight. That synergy continues to play quite well now that we're in the 7th week or so of owning those assets. We were able to integrate and train, you know, 250+ new employees that came to us from that portfolio. Great additions to the platform as well. So that opportunity, from a training, synergy, and adaptability standpoint, has gone very effectively. And, you know, we're also leveraging many of the things we do day in and day out to drive margins. Again, with the scale that we've got, you know, market to market, the ability for us to see optimization. So we really haven't seen any shortfalls at all, and if anything, we've been pleasantly surprised with the continued strength of that portfolio.
Occupancy is holding quite well. The transition from, you know, both customers to our platform, the transition from the branding is going very effectively. We'll have that finished, you know, no later than the end of the year. We see definite inherent value to transitioning what were once blue properties to orange properties, and we're very excited about what we've got ahead of us because we think that that portfolio as a whole is very additive to the scale that we've got across the 18 states that I spoke to. Very pleased by, again, the tools that we've got and the ability to exercise the synergies. You know, Tom spoke, you know, to some length this morning about many of the tools we're using right now from a revenue management standpoint, whether it's tied to new customer, top-of-funnel demand, and/or existing customer opportunities.
So those two are different toggles that we're deploying into that portfolio as we speak, and not seeing anything that's going sideways. In fact, more encouraged that things are actually even better than what we predicted when we underwrote the portfolio.
Caitlin Burrows (VP)
Great. And then maybe another quick one. I know we've talked a number of different ways about the lower expected deliveries in 2024 and 2025, which is encouraging. So that would suggest that you've started to see development start slow. I was just wondering if you could talk about the magnitude of that slowdown and/or when it started, like, how new is that?
Joe Russell (President and CEO)
Well, it's been, you know, year by year transitionary. You know, we hit a peak of deliveries back in the 2019 or so timeframe, you know, with ±, say, $5 billion of assets that were, you know, again, out of the market, which, actually equates about 5% of additional inventory. As I mentioned, you know, this year it's down to about, you know, $3 billion or about 3%. We think that that's gonna notch down by at least another 10% factor each successive year between 2024 and 2025. By the time we get to 2025, we may be in the, you know, the low 2% range of deliveries from an inventory standpoint.
To your point, that's a good thing, and gives us a very different opportunity to leverage our opportunity as not only the largest developer in the sector, but the only public developer of assets. You know, we're able to do, you know, many things even more efficiently because of the scale we've got with our own development team and the amount of capital that we can sensibly deploy into development and redevelopment opportunities.
Caitlin Burrows (VP)
Mm-hmm. Okay, thanks.
Joe Russell (President and CEO)
Thank you.
Operator (participant)
Our next question comes from Ki Bin Kim with Truist Securities. Please proceed with your question.
Ki Bin Kim (Managing Director)
Thank you. So you guys mentioned that you were testing out some additional promotion activity in October, call it a fall or Halloween special. I was just curious, do you plan on keeping that type of promotional activity past October into November, or will those come off?
Tom Boyle (CFO and Chief Investment Officer)
Yeah, Ki Bin, you know, sales are something that the company's been doing for, for years and years. If you go back and, and look at pre-pandemic activities, you know, the company started doing Memorial Day sales, going back probably more than a decade ago, and has seen good, good traction from that. And so around holidays, we oftentimes will, will run sales and, and get some traction. And we offer, discounts on select units, in our markets that we operate in, and-
We've seen good traction on that this year. We did a Memorial Day sale, we did a Labor Day sale, and this one, I don't know if you wanna call it a Halloween sale or what. I think we call it a fall sale on the website, but it'll wrap up today. And we see good customer demand traffic, and others in the industry do, too. You know, the big public REITs generally run these types of sales as well. And so they're good traffic drivers, and they get the team in the field excited as well, and we see good conversion there.
So, it's a part of the business that's been around for some time, and, you know, we'll continue to use it as we have in the past. We didn't use them in 2021, 2022, because we frankly were too full for it to make a lot of sense. But, we're back to an occupancy environment where it makes good sense, and so we're utilizing it again.
Ki Bin Kim (Managing Director)
Okay. On the debt maturities, you have a U.S. note and a Euro note coming due next year. Just any high-level thoughts you can share on refinancing plans?
Tom Boyle (CFO and Chief Investment Officer)
Yeah, we'll plan to refinance those as we get into 2024. The $700 million U.S. note is a floating rate note, and we'll plan to refinance that, as we get into the first part of the year.
Ki Bin Kim (Managing Director)
I'm assuming the spreads will be pretty similar, or what? Should I expect that to change?
Tom Boyle (CFO and Chief Investment Officer)
It depends on ultimately what tenor we issue and the nature of the interest rates at the time, but it's a floating rate note, as I said, so it's at market from a benchmark rate standpoint. So there won't be a significant headwind associated with refinancing that particular note. It'll be more around spreads and we'll update you on financing costs as we get into the first quarter. Frankly, that's it. I mean, if you look at our balance sheet overall, we obviously have a very long-dated set of financing tools, most notably the over $4 billion of preferred stock that we don't need to refinance ever, but we can refinance at our election to the extent interest rates change.
And we have a very well-laddered maturity profile. So you're highlighting some refinancing we have in 2024. We have modest in 2025, a little bit more in 2026, but overall, a very small percentage of the capital structure is coming due in any given year.
Ki Bin Kim (Managing Director)
Okay. Thank you.
Tom Boyle (CFO and Chief Investment Officer)
Thanks, Ki Bin.
Operator (participant)
As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. One moment while we poll for questions. Our next question comes from Mike Mueller with JPMorgan. Please proceed with your question.
Mike Mueller (Managing Director)
Yeah, hi. Just a, just a real quick one here. Joe, when you were talking about cap rates trending to 6%-7%, is, is that- was that meant to be a day one cap rate if you're buying a stabilized asset? Or is that more the yield that you're looking at if you're buying vacancy and assuming the lease-up risk?
Joe Russell (President and CEO)
Yeah, I mean, again, that would be on our view, what a stabilized expectation would be. If you're dealing with a, you know, highly stabilized existing asset, that too, I think would be, you know, in that similar zone. There's always gonna be a gap or some kind of a, you know, a risk that you're gonna inherit that. You know, time and again, we've been more comfortable doing that, knowing if we can buy an underperforming asset at a going-in lower yield, we'll be able to extract the kind of ultimate, you know, value and, you know, yield hurdle that we're speaking to. So those are the stabilized yields that we're aiming at, Mike, as we're looking at, you know, investments in this arena right now.
Mike Mueller (Managing Director)
Got it. Okay, thank you.
Joe Russell (President and CEO)
You bet.
Operator (participant)
There are no further questions at this time. I'd like to turn the floor back over to Ryan Burke for closing comments.
Ryan Burke (VP of Investor Relations)
Thanks, Rob, and thanks to all of you out there for joining us today. Have a great Halloween, and we'll talk to you soon.
Operator (participant)
This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.