Extra Space Storage Inc

Ladies and gentlemen, thank you for standing by and welcome to the Q2 2020 Extra Space Storage, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the speaker's presentation, there will be a question and answer session. To ask a question via the telephone, please press star and the number one on your telephone keypad. I would now like to hand the conference over to your speaker today, Mr. Jeff Norman. Thank you. Please go ahead, sir.

Thank you, Oren. Welcome to Extra Space Storage's second quarter 2020 earnings call. In addition to our press release, we have furnished unaudited supplemental financial information on our website. Please remember that management's prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act. Actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties 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 management's estimates as of today, August 5, 2020. The company assumes no obligation to revise or update any forward-looking statements because of changing market conditions or other circumstances after the date of this conference call. I'd now like to turn the call over to Joe Margolis, Chief Executive Officer.

Thank you, Jeff, and thank you everyone for joining us on today's call. The second quarter presented unique challenges to our country, our industry, and Extra Space. I am incredibly thankful to our employees who have continued to operate our stores, service our customers, grow our company, strengthen our balance sheet, and to do all the day-to-day blocking and tackling that allows us to optimize our performance. All this good work was done in unusual and sometimes difficult working situations, and often with added personal and family stress and uncertainty. It is said that crisis does not create character but reveals character, and I could not be prouder of the character the extra space team has shown during these past several months. This quarter also presented a stark reminder of racial injustice in our country. Approximately 40% of our teammates are black or other people of color. And I am proud that recruiting, developing and retaining diverse talent has been a focus of our company for many years, and is not a new initiative. However, The tragic events of the last two months reinforced to me that while Extra Space is a values-driven company with a great inclusive culture, we can do better. In response, we have enhanced our existing diversity and inclusion initiatives and have taken several concrete steps to improve as a company. These steps are consistent with our company values, and I am committed that our response will not be limited to making statements or temporary steps, but will be continuing and substantive. Turning to our performance in the second quarter, most importantly, we were able to grow FFO in the quarter on a year-over-year basis. We have started to see several positive trends, on which Scott will provide further detail. Our platform is able to find and capture high value customers. Rentals have normalized and vacates remain muted. As a result, our occupancy is at an all time high and prices have begun to move in the right direction. Where we can, we have resumed more normal pricing, operational practices and auctions. However, These positive trends should not obscure the macro and industry-specific risks we still face. There are still uncertainties with respect to the course and length of the virus, its economic impact, and its effect on consumers and their willingness to pay for storage. While our occupancy is at an all-time high, until recently we have not been allowed to initiate the auction process in several markets which represent approximately 47% of our same-store NOI. As a result, at the end of June, approximately 150 basis points of our occupancy is from non-paying tenants due to delays in auction. By the end of July, this inflated occupancy increased to approximately 200 basis points. We are now moving forward with auctions in most states, But due to notice periods, actual auctions in several states won't begin until September, which will be outside of the peak leasing season for re-tenanting these units. Occupancy has also benefited from lower than normal vacates. I do not personally believe that the moderation in vacates represents a permanent behavioral shift of our customers. Instead, at some point, more historically normal activity will resume and we will see vacates increase, putting further pressure on occupancy when we may not have our full set of tools available to optimize returns due to government state of emergency orders or regulations. Also, the non-COVID headwinds that we had coming into 2020 are still present. While we believe the pandemic has delayed new deliveries and may reduce new projects and planning, properties are still being delivered and there is still excess inventory leasing up in many markets, which is suppressing rate growth. So while we are encouraged by recent results, there are enough remaining uncertainties and risks that we are not in a position to reinstate guidance. The possible outcomes remain too broad for guidance to be meaningful, depending on how the risks I've outlined play out. We will continue to be transparent on all metrics and answer questions that you may have. And we will continue to work hard every day and remain laser-focused on maximizing shareholders' long-term value. And I'd like to wish Scott a happy birthday and turn the time over him to walk through some of the metrics that I mentioned.

Thank you, Joe. And hello, everyone. All of our properties are open and have been fully operating since May. We modified our stores by adding plexiglass partitions, stanchions to direct the flow of traffic, and sanitation stations to provide a safer experience for our customers and our employees. These updates have been effective, and as demand started to pick up through the quarter, our rentals rebounded, improving from a negative 35% year over year delta in April to a positive 4% rental growth rate in June. Vacants for the quarter were approximately 17% lower year over year, resulting in strong occupancy growth, which went from a negative 60 basis point year over year gap at the end of April to a positive 100 basis point gap at the end of the quarter. At the end of July, this has expanded to 150 basis points. However, this increased occupancy came at a price. Our average achieved rate for the quarter was down approximately 17%. And as Joe mentioned, our quarter end occupancy was inflated by 150 basis points from non-paying customers. In May, we restarted our collection efforts which have been successful. Accounts receivable less than 60 days have dropped back to historical levels. However, due to delayed auctions in key states such as California, New Jersey, and New York, we are still working accounts receivable greater than 60 days through the system. Today, accounts receivable greater than 60 days as a percentage of rental income are running approximately 325 basis points higher than historical levels. And we have recognized the loss on aged accounts receivable based on estimated collections. All of these factors together with temporarily pausing existing customer rate increases in March, April, and May will continue to drag on revenue growth in the back half of the year. While street rates and rental activity have improved significantly, It will take time for the impact of May and June's lower achieved rate to flow through to revenue, and we do not anticipate positive same-store revenue growth in the second half of the year. While we are being proactive with controlling expenses to offset lower revenue, we will continue to have expense pressure from payroll, property taxes, and marketing expense. Property-level performance will continue to be challenged in the back half of the year, but we are finding success in other parts of the business and have strengthened our balance sheet. We continue to find ways to grow externally and to accretively deploy capital in the self storage space. We have closed 52 million in bridge loans year to date with another 170 million under agreement to close in 2020 and 2021. In July, we purchased a $103 million senior mezzanine note at a discount with an anticipated yield to maturity of 6.1%. Our third-party management platform provides capital-like growth, providing management fees and tenant insurance driving non-same-store income. We are also vigilantly pursuing acquisition opportunities and will act swiftly when we identify transactions that we believe add value to our shareholders. We continue to strengthen our balance sheet with the addition of a new $300 million revolving credit facility and the closing of a $425 million private placement transaction during the quarter. Funds from the private placement transaction will be taken through delayed draw to pay off our convertible notes and will increase our weighted average debt maturity. As Joe mentioned, We haven't been immune to the impact of COVID-19, and the pandemic has had and will continue to have an adverse impact on our business. That said, it is good to be in storage, and our company is well positioned to navigate the current landscape. Our team has a track record of consistent, high-level execution, and we will continue to find ways to provide value to our shareholders, regardless of the economic climate. With that, let's turn it over to Oren to start our Q&A.

Yes, sir. And ladies and gentlemen, as a reminder to ask a question, that is star and the number one on your telephone keypad. To withdraw your question, please press the pound key. And our first question comes from a Rick Skidmore from Goldman Sachs.

Hi, good morning, Joe and Scott. Scott, can you talk about the company's bad debt policy and how you think about expensing and what the amount was in the quarter that you expensed and how you think about the accounts receivable was greater than 50 days going forward. Thanks.

Yeah, thanks, Rick. So our bad debt has historically run at 1.6 to 1.8 percentage of our revenue. During the quarter, our bad debt expense was about 50% higher than that. And that primarily has to do with the older accounts receivable and the things that have gone to auction. our policy is to reserve for the majority of all accounts receivable that are 90 days or more past due. So, much of what's in the 60 days and certainly almost all of what's in the 90 days or more past due has already flown through bad debt.

Got it. Thank you. And then maybe just shifting, Joe, to supply growth and talk about supply. What are you seeing in terms of perhaps delays in supply growth and deliveries? And which particular markets do you see that supply growth particularly challenging currently?

So we do see delays in delivery of new product. One of the reasons – well, we did have a good – quarter with respect to new properties taken into our management platform. It was a little less than anticipated because some projects were delayed and won't be taken on until later in the year. But we absolutely are both experiencing and seeing delays in new products being delivered. The markets that we're concerned with are still the same markets that we were concerned with before. It's Texas and Florida, Portland, boroughs of New York City, and markets like that. COVID hasn't changed the markets that are faced with supply versus the ones that aren't.

Thank you very much.

Thank you.

And our next question comes from a rose from Citibank.

Hi, Harry. It's me. It's Sidney. I wanted to ask you just a little bit more about the existing customer rate increases. I think in June, you provided an update where you were able to increase rates in 27 out of 40 states in which you were operating. What is that now? And I guess what percentage of customers are, you know, have been or are expected to receive rate increases and Maybe you could just talk a little bit about the acceptance rate, you know, what you've seen so far as you push out rate increases for those who can get them.

So there's six states now where we're prohibited from issuing existing customer rate increase notices. And a few of those states we have some meaningful exposure to. And then there's another – 14 states where our ability is limited to a certain percentage. And in some case, that percentage is so high, it's a meaningless limit. So far, as we have reinstituted existing customer rate increase notices, we have not seen any change in behavior. We have not seen increased move outs in response to those notices. Although I would also caution you you know, it's something we're closely monitoring and we're probably still early in that game. We're interested to see what happens when, you know, when the additional unemployment insurance runs out and factors like that. So something we're watching closely, Smeets.

Okay. And then could you just talk a little bit more about the Neslo that you mentioned that you purchased? Is that backed by a portfolio of assets and kind of how are you thinking about that investment? Is it, you know, kind of loan to own or just to get the yield or maybe a little more color there?

Sure. So it's absolutely a portfolio of 64 self-storage assets. You know, they're in markets that overlay our footprint. And as with any loan we make, if we end up having felony assets, we're fully capable of operating them and adding value. And that's not a negative experience for us. So, you know, we are always looking for opportunities to smartly invest our shareholders' money in a creative position with a good risk posture. Our position in the first year is about $53 a square foot, so we feel pretty good about that. We think we're getting a fair return, and we're very comfortable with the risk posture of the investment.

Okay, great. Thank you. Appreciate it.

Sure. And your next question comes from Mr. Jeff Spector from Bank of America.

Thank you. Good afternoon. I appreciate, Joe, your balanced comments and your introductory remarks and just trying to think about many of the lessons you learned today during some of the worst months we've seen, let's say, you know, March, April, into May, and recognizing, of course, the risks in the coming months, would you do anything different in the coming months, let's say, if the, you know, the reopenings or closings continue versus what you initially did? So...

I can't tell you we were perfect, right? We certainly did things and learned lessons that we will apply in the future. One thing that I will tell you that a company like Extra Space that has a large portfolio has an advantage is we don't have to guess too much of things. So as we were going, as we were faced with many of these new situations, we very quickly tried different things in a test basis in, you know, several hundred stores and learned what worked and what didn't. So we didn't have to make kind of final decisions for the whole portfolio. And that was very beneficial because we were, you know, faced with, you know, new customer situation, new customer behavior. We were able to quickly get to what performed best. And we'll certainly take those lessons with us in the future and also take our testing culture and approach to new situations with us as well.

Thank you. And, I mean, again, just thinking about the comments in particular, you know, the risk of with the auctions and, you know, a lot of them, let's say, happening in September outside peak leasing. I mean, we've heard – Other sectors, people comment that this year, maybe there's no peak leasing. Maybe there's just a steady leasing. Maybe there's even pent-up demand. Again, I'm just trying to get a feel for your comments, and I totally respect and get the comments that we need to be cautious here. There's still a lot of risk. I think expectations coming into the year, by the way, were pretty low. But, I mean, do you think that there actually was a peak leasing, or – Or is this just a – could the fall surprise us?

I agree with you. I think we don't know. I think we're in a new situation, and we don't know if there will be steady leasing, if there is pent-up demand, or if we'll see the more traditional leasing patterns. And, you know, it's one of the reasons we're uncomfortable, you know, providing guidance on what's going to happen for the rest of the year because there are these unknowns.

Okay, totally get that. Thank you very much.

Thank you.

And our next question comes from Mr. Todd Thomas from KeyBank Capital Market.

Hi, thanks. Just first question, following up on the bad debt expense, Scott, you indicated that historically the reserves 1.6% to 1.8% of revenue, so 50% greater this quarter in incrementals. 80 to 90 basis points of bad debt, is that going to trend higher in future quarters or will that normalize beginning in third quarter as you work through, you know, some of the auctions and delinquencies?

So, we would, you know, I think July will be a little bit higher, but we would expect it to normalize going forward. And what we're basing that on is if you look at our zero to 60 ARs, they're back to historical norms. They're not continuing to grow. So assuming that continues, that trend continues, those zero to 60s become your 60 plus if they were not paying. And so the fact that they've gone back to historical norms, hopefully everything else goes back to historical norms from here. So by the end of July, you've recognized the majority of your bad debt related to this.

Okay. And then, you know, the delayed auction activity that's causing that disinflated, you know, sort of physical occupancy have Have you started getting back units at all or, you know, with notice periods, as you mentioned, is that process really just beginning now? And then, you know, as we think about the auction activity increasing in the months ahead, you know, is that going to result in an influx of rentable units and effective, you know, sort of increase in supply coming back to the market over the next few months, or is that not the right way to think about it?

Sure. We have, you know, one of the negatives of the delay in auction is the opportunity cost and not being able to get the unit back. So, we actually absolutely will try where we can to work with our tenants and make some arrangement where they turn the unit back to us so we can re-tenant it. But the majority of the units have to go through the auction process. We won't get them back until, you know, late in the third quarter. And at that point, we'll have to re-tenant them. And, you know, kind of similar to Jeff's question earlier, we'll see what the environment is then to do so.

Okay. And then can you just comment on, you know, what the recovery rates or I guess the collection rates have been? been like on, you know, the ARs here? Are you seeing bigger write-offs than you have historically? You know, is there any information you can share on that?

Yeah, Todd, our recoveries have actually been slightly better than the historical norm. Now, we'll see if that continues, but that's been our experience so far on the auctions that have happened. What do you attribute that to? You know, some of these people might just be choosing not to pay, and so they may just be paying late versus, you know, having a true problem. You know, I don't know for sure. That's some of our speculation.

One thing we see across other asset classes is when the government tells you you don't have to pay, or the government tells you there's no penalty if you don't have to pay. Some people just choose not to do so.

Okay, thank you.

And our next question comes from a Mr. Samir with Evercore.

Yeah, good afternoon, guys. Hey, Scott, as we think about the headwinds we're facing now, and you've talked about the occupancy for being inflated, you know, 200 basis points, the 325 basis points of AR, which could potentially be, you know, bad debt, is this a setup to a quarter the third quarter, where things are going to get worse before they get better, or do you think the second quarter is sort of the trough in revenue growth, and then there's sort of enough tailwinds where we start to see improvement going into the back half of this year, where things are still negative but less bad?

Yeah, so first of all, I think just to clarify one thing, that AR, the majority of that has, a large majority of that has already been written off, so you basically reserve for it in the second quarter. Once they hit that 60 to 90 days, especially the 90-day accounts receivable, have been reserved for. So we don't expect that to be a negative in the third quarter to the degree it was in the second quarter. We do expect those units coming back online to be a potential, you know, headwind for us.

And what about just kind of following up with the tailwinds? Do you think there's enough sort of tailwinds here to see some improvement in revenue growth work things are going to be less negative, or that's too early to say right now?

So we, I mean, we always hope for and we have confidence in our team and our systems that we're going to, you know, get every dollar we can and optimize performance. But I would tell you there's enough uncertainties in macro economy and in other factors that we can't say for certain now.

Okay, and I guess just another question for me, and I know this was addressed a little bit earlier on ECRIs, but just maybe a little bit more color. You know, California is well documented with sort of a 10% max or increase in that, and I think some of the other states and municipalities have applied restrictions as well. But do you think, how should we think about sort of the pushbacks you're getting from states and municipalities? And it's not really a question for this year's growth, but As we think about maybe growth into next year, how should we think about growth from an ECRI perspective?

Well, we would hope that these restrictions would be lifted and we can go back to our normal operating practice with respect to ECRI auctions. But we don't control that. So our job is to control what we can control and maximize performance, and follow the law in other places.

Samir, the other thing I would maybe add there is, you know, they're not necessarily additive in a normal year, but in a year like this where they are going to be below average, if you have certain states that either don't allow them or allow them to a limited amount, it does make it difficult to to continue to grow your revenues, especially for customers who came in at a level significantly below street rate. It's difficult for us to move them more quickly to the average rate there.

Okay, got it. Thanks. Thank you. Thanks, Murr.

And our next question comes from Mr. Ryan Lum from Green Street Advisors.

Thanks. Joe, last quarter you shared the view that we're likely to see a good number of distressed CFO deals or stores in some stage of lease-up coming to market, given the stress in the market. Given what appears to be at least some improvement in demand in recent weeks, do you still anticipate the same volume of distressed assets coming to market maybe this year or next?

Yes, I think there's going to be a number of stores that are not stabilized that the owner or the lender or the equity investor is going to force some type of capital event. So I would say yes.

Okay. And then I think you had mentioned in the past, when the operating environment changed so dramatically in March and April that many of the rules or relationships that govern sort of the revenue management system were either sort of less effective or not applicable to the very new environment. And the approach to revenue management had to sort of temporarily be reworked. I'm just curious, any color would be great. To what extent has the approach to revenue management sort of returned to normal? Or are we still operating sort of a this time is different, just trying new things?

Well, I guess part of my answer is I would say in extra space, we're always trying new things. We're always testing, innovating, trying to make the tools a little sharper and seeing what works. As I said earlier, I think we've learned a lot through this experience. some of which may be the permanent lessons and some may just be temporary. You know, we are seeing more return to normal in terms of customer behavior. So, for example, our walk-in traffic has improved significantly. And that's an important metric that we look at and govern some of our behaviors.

Okay. And ladies and gentlemen, just as a reminder to ask a question that is star and the number one on your telephone keypad. And our next question comes from one of Mr. Mike Mueller and JP Morgan.

Hi. Just a couple questions. And I've had phone issues, so I apologize if this was addressed earlier. First, can you disclose, if you haven't already, what the rate is on the MEZ investment that you made? And then second – if you're looking at CFO deals in the market today, have you seen any meaningful changes to pricing?

So we have not approved a new CFO deal, certainly in 2020, maybe even for 12 months. I'd have to think about that. But we have certainly not approved a new CFO deal in 2020. Pricing doesn't seem to make sense for us now. The rate, the base rate on our note is 5.5% and the yield to maturity is 6.1% on the . Got it.

Okay. That was it. Thank you. Thank you.

And our next question comes from the line of a John Kim with BMO Capital Markets.

Thanks. Good morning. I think, Scott, you mentioned expense pressure on payroll, which I thought was interesting, just given the unemployment rate. But I was wondering if you could comment on that, as well as the potential ability to more permanently alleviate this cost with either touchless leasing or variable employee hours.

Yeah, so the payroll cost comes, the pressure on payroll comes more from a tough comp from last year. Our payroll was actually very low last year in One or two quarters, I believe we were negative. So it's tough comps is the main comment there. In terms of, you know, what we're looking at and, you know, we think our managers are important. We think they're an important part of the sales process. We're always looking for opportunities to go touchless and deliver our customers the product in the manner that they would like to consume it. So the example I would give you is pre-COVID. I think most people enjoyed working with a manager, liked our managers. You know, they were very successful in leasing units. Since this has happened, we've gone to a touchless process where our managers are involved via telephone, and we've expanded that even further where they can do a complete rental online at 3 a.m. with no manager involvement. And that's at, I believe, about 1,200 of our stores as of today. So we continue to evolve that.

Okay. And you also mentioned that you're actively or more actively pursuing acquisitions. I was wondering if you could elaborate on how pricing has moved and if you're seeing more interesting opportunities in newly developed products, stabilized assets, or more potential investment.

So I'll clarify my remarks. I didn't mean to give the impression we are more actively pursuing acquisitions. We're always. pursuing acquisitions. We're always looking for ways to smartly grow this company, and we're lucky to be in a great capital position where we have plenty of capital of all different sorts to pursue any acquisition that we think makes sense. The acquisition market has been somewhat muted in terms of things coming to the market, and particularly things that seem to make sense for us, But we're always trying to find smart ways to present a good risk profile for us to grow the company. So whether that's acquisitions, acquisitions and ventures, reinvesting in our existing properties through expansions, bridge loans, buying the Mez loan that we just bought, we're just going to try to be smart allocators of capital.

And how is pricing moving?

So I don't think pricing has moved for stabilized properties. And there's not a ton of comps out there. But if you have a stabilized self-storage asset, it's going to attract, in a good market, it's going to attract a very low cap rate. Because people understand the stability of cash flow that comes from the self-storage assets. Rates are low, and the alternatives are not as good. So I think... You know, cap rates are still low. What is much more difficult to say is on a lease-up asset, you know, one's view of the cap rate depends on one's view of the timing and rate on which you can lease up that store, and people can have very, very different views of what that is, and I would say pricing is uncertain.

Okay, great. Thank you.

Sure. Thank you.

And our next question comes from a Ronald with Morgan Stanley.

Hey, two quick ones from me. One was just going back to sort of the bad debt. I know the apartment peers reported some variations geographically. Just curious, when I think about states like New York, New Jersey, California, was there any sort of notable differences there versus sort of the average of the portfolio or any other color you could provide?

So some observations we can make, we are seeing higher ARs at stores that are in markets with lower household income. And also at stores, if there's more cash paying customers as opposed to credit cards. But the biggest impact is if you kind of get the trifecta of lower household income, lots of cash paying customers, and you're in a state where we can't auction, that's where we have the highest.

The other question was, we're hearing a lot more about the theme of de-urbanization, i.e. people moving from urban to suburban, and just curious when you think about your portfolio, are you seeing that translating into potentially more traffic or more demand on the margin for your suburban versus the urban part of the portfolio, or is it just too tough to tell?

So I would say we're seeing good demand across our portfolio. And if there is that trend, it is probably too early to tell. But one of the advantages of having a broadly diversified portfolio across a lot of primary and secondary or urban and suburban, however you want to characterize them, growth markets is, you know, we should be in a good balanced position to benefit from that if it occurs.

Got it. And, you know, the last one I made, you mentioned July occupancy. Did you provide July achieved rates as well?

We did not. Let me just kind of give you a little history of the rates through the quarter and how they progressed. Negative 10% in April, negative 20 in May. This is our achieved rates. Negative 16 in June. And then July, our achieved rates were effectively flat. Now, that sounds great if you don't put that in context. And the context I would give you is, one, July was an easy comp. Last year, we actually dropped rates in July to increase our occupancy. And then, two, we've seen a shift in channel in July where we've seen more tenants walking in and renting through our highest channel. It's our highest price channel. So we're encouraged by July and especially the trend of going from being so negative in May to being flat in July, but I think that it probably helps to have a little context there.

Very helpful. That's all for me. Thank you.

Thank you.

And our next question comes from Mr. Rose from Citi.

Hey, it's Michael Bellarmine here with CITES. Joe, you made the SmartStop preferred investment last October, $150 million, which had a $50 million add-on feature. Did you invest that in the quarter, or do you have plans to by October, which I think was the one-year timeline?

So that's a decision SmartStop will make. We can't force them to take that money. They have the option to take that money.

And your discussions with them will make that likely or unlikely. Would you, which way are they going to draw that capital? And do you have any sort of details on how the portfolio is trending?

So, Smart Stop would be the appropriate folks to ask if they want to take the capital or not. I don't want to speak for them. And we do monitor their portfolio. And I think they're – I mean, they're a good manager, and they're performing similar to other good managers in the country.

And how do you – when you look at the competitive landscape, what are you seeing from the larger institutionally owned platforms versus the smaller operators? And what sort of opportunities but also challenges does that present in still a pretty – you know, dispersed set of owners in terms of the competitive landscape?

It's a difficult question to answer, Michael, because there's not a lot of clarity as to how some of the real small folks are behaving. You know, you really don't know what their occupancy rate expenses are until, you know, they want to sell it and you can take a look at their financials. In general, you know, when we see smaller operators, either because they want us to take over management of their stores or because they're putting their store for sale, we can do better than they can. It's just as simple as that. We can run the stores better, we can fill them up more, and we can get higher rates. And I don't think that has changed at all because of COVID. If anything, I think maybe because more customers are now accessing storage through the web, our advantages, you know, may have improved.

And then you said the yield on the MEZ was in the fives with, I think, a 6-1 yield to maturity. Where do you stand within the capital stack? I think you talked a little bit about the per square foot sort of value, but can you talk about the capital structure, the yield? And I recognize rates are low, but the yield for MEZ just seems light. So maybe you can just talk through the dynamics a little bit.

Yeah, so I can't really talk about capital. It's the question I would ask, right? It's a great question. What percentage are you? But I can't really talk about that because I don't want to talk about our valuation of the portfolio. But if you think about self-storage and a $53 a square foot number, it will tell you we're in a pretty secure, very secure part of the capital stack.

Maybe just talk about the capital. Without giving us the equity value, maybe just talk through how much debt is there? Is there other sort of loans that are outstanding? Is there perhaps just to understand the pieces that are in front of you or behind you?

So there is about $100 million first. There's our piece. And then there's a junior meds of about $82 million. and then there's the equity. So our loan-to-value is much lower than a traditional MES where you would expect to see a higher interest rate.

Right, where you have 82 of juniors. So this thing's got to fall pretty dramatically for you to be in the ownership position versus just getting repaid.

Correct.

Or you've got to blow through that 82 million of junior MESs.

That's correct.

And then, you know, is there anything on the valet storage side that you've witnessed sort of during this pandemic? You know, is that increased at all? Are you finding that an increased competitive source at all as people want to maybe just, you know, store their goods and let someone else, you know, grab it from them?

Yeah, I would not say we've seen an increased competition from valet during the pandemic. We've not observed that.

Yeah, I certainly wouldn't want something coming to my home, but I just didn't know whether there was, just given the movement of people, whether that was being used by others.

Okay, great. Thank you so much. Thanks, Michael.

All right. Thanks, Jeff.

And our next question comes from the line of Jonathan Hughes with Raymond James.

Hey, good morning out there. On the external growth front, have you guys looked at any large portfolios lately or just one-offs? I know you mentioned you always look at external growth opportunities. We didn't see a big portfolio transact recently. Curious if you looked at that one or if it's more of a focus on the one-off opportunities.

So we're an active acquirer every year of storage. And because of that, you know, we're brought and we see every opportunity in the market, we underwrite them all, we look hard at them. And where we think that we can acquire it in an accretive fashion, we'll try to execute. And if not, we'll let it go. So we I feel confident saying that we see and analyze everything that's out there.

Okay. And then can you quantify the NOI exposure to those six states that are prohibiting the rate increases? Is that similar or maybe identical to the, I think, 47% of NOI under auction restrictions?

It's much less than the 47%. I'm working at the stage now. I don't have a number for you. We can get that, can't we, Jeff?

Yeah.

We'll get that number to you.

All right. Fair enough. That's it for me. Thanks for the time. Happy birthday, Jeff. Thanks, Charles.

And our next question comes from a Mr. Steve Sokwa with Evercore ISI.

Hi, thanks. Just wanted to ask about new supply and kind of the pipeline. You know, I guess the macro data still shows it being relatively elevated and kind of the future pipeline still high as well. Joe, I'm just curious if you kind of think that that data is accurate or kind of overstates. And, you know, what do you think it really takes to see the pipeline materially come down? Because I know some of the starts and completions got delayed. But, you know, it still seems like there's new projects going in, which sort of seems hard to think that they pencil today. But just curious on your thoughts moving forward.

Yeah, so macro data is always interesting. But it's important to remember that we're in a very, very micro market business. So, you know, the fact it's much more interesting where the stores are going. than how many of them are going. So, you know, if development turns off in a market that has seen oversupply, that market will recover even if the macro data shows development is in other markets. So we see the macro data that's available. It is a little overstated. It is also subject to delays. Even in non-COVID years, there's been substantial delays. I think they don't take projects off their list that get killed as quickly as they could. It's not a criticism. It's hard information to get. But I'm not disagreeing with your point that we're still in a development cycle. There still are going to be projects that are going to be delivered, and it's still something we're going to have to operate through in many markets.

And I guess just maybe as a follow-up, I mean, when would you expect kind of the, I guess, a sharper fall-off of new supply in your sub-markets? Is that more like the back half of 21, or are we really looking more like a 22 at this point?

Yeah, I think it's going to be a gradual decline in deliveries across all markets as opposed to you know, development's going to fall off a cliff and there'll be no more development anymore. So I didn't give you a year on purpose. I'm sorry about that.

Okay. Thanks.

Sure.

And ladies and gentlemen, at this time, we have no further questions. Mr. Joe, would you like to have any last remarks?

Yes, so thank you, everyone, for your interest. As I said earlier, we have some headwinds. We're battling through them. We will control what we can control and focus all our efforts on enhancing shareholder value, regardless of what gets thrown at us. I hope everyone and their families are well. We will get through this, and we will have better times soon. Thank you very much.

Ladies and gentlemen, this does conclude today's conference call. Thank you very much for participating. You may now disconnect.