Public Storage

Ladies and gentlemen, thank you for standing by and welcome to the Public Storage Third Quarter 2020 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you have a question at that time, please press star 1 on your touch-tone phone. If you wish to remove yourself from the queue, please press the pound key. It is now my pleasure to turn the floor over to Ryan Burke, Vice President of Investor Relations. Ryan, you may begin.

Thank you, Christy. Hello, everyone. Thank you for joining us for our third quarter 2020 earnings call. I'm here with Joe Russell and Tom Boyle. Before we begin, we want to remind you that aside from those of historical fact, all statements on this call are forward-looking in nature and are subject to risk and uncertainties that could cause actual results to differ materially from those statements. The risk and other factors could adversely affect our business and future results as described in yesterday's earnings release. and in our reports filed with the SEC. All forward-looking statements speak only as of today, November 5, 2020. We assume no obligation to update or revise any of the statements, whether as a result of new information, future events, or otherwise. 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 earnings release, SEC reports, and an audio replay of this conference call on our website at publicstorage.com. We do ask that you initially limit yourselves to two questions. Of course, feel free to jump back and queue after that. With that, I'll turn the call over to Joe.

Thank you, Ryan, and thanks for joining us today. We had a solid quarter, and now we'd like to open the call for questions.

Thank you. At this time, if you would like to ask a question, press star, then the number one on your telephone keypad. And your first question is from Alua Asbarg of Bank of America.

Good morning over there. Thank you for taking the questions. So just looking at the transactions market, it seems like there was a good amount of activity in 3Q. And you guys alluded to that during your 2Q call. But there was also a surprising amount of portfolio deals. Can you give us some color about what you're seeing in the market currently and any of the opportunities going forward? And then also any color on cap rates and the recent 34 portfolio, property portfolio deal under contract right now?

Okay, sure, Aliyah. The acquisition market clearly has opened up. We've been tracking it through the pandemic and spoke about the early months where a number of sellers paused and were reticent to bring properties into the market. But we've clearly seen any more do the reverse where they looked at this environment as an opportune time to bring assets into the acquisition arena. A number of things are continuing to fuel that. One is it's still a very good time to do a trade. There's very low interest rates, availability of capital. There's a lot of capital sitting on the sidelines that's been anxious to get into the storage sector. Frankly, the storage sector continues to perform well. there's been a window of opportunity that we've seen increase over the last month, particularly in the quarter, that set us up well to have a very active 2020. The things that we continue to do are look for assets that are particularly well position from a location and quality standpoint that meet our requirements relative to location and opportunity to round out presence, whether they're in our prime core markets or other markets that we want to add additional product to. The thing that was unusual and we're encouraged by is we also, as you asked, have a sizable single portfolio under contract that we think is a great set of assets that will be very good for us to bring into the portfolio. In total, it's 36 properties across 15 markets, 13 different states. 24 of the assets are open and operating, but they're relatively new. Average age is two to three years. I would call them Class A properties in very good locations, and we're very excited to bring them into the portfolio, knowing that we're looking for opportunities to lease up properties because we have very good customer demand. They'll be easily integrated and we anticipate closing the first 24 of those assets by the end of the year. With that portfolio, which we're also well poised to capture and look for some, I think, interesting growth and performance opportunities as there's 12 additional properties in various phases of development that will be completed through 2021. Again, Class A, well-located assets, and we're really pleased by the ability to capture that total portfolio. Another interesting part of the portfolio, it is an off-market deal, so it speaks to the level of relationships that we continue to build across the storage sector. This relationship has evolved over a longer period of time and we continue to look for those opportunities where they may play through. Beyond the large portfolio that I just talked about, we're also seeing a number of smaller opportunities which we've been seeing through 2020 and frankly what we saw even in 2019. So with that, we're poised to have a very strong acquisition year this year. I would tell you from a cap rate standpoint, with the amount of capital and the cost of that capital, we're really not seeing any easing of cap rates, and we'll have to continue to monitor that. We clearly have good access to capital ourselves. Our own cost of capital continues to be very attractive. Tom can give you a little color later in the call about what we see relative to funding through either the preferred market or the debt markets. But we're clearly seeing some good opportunities to put that capital to work. And we are continuing to look and hunt for additional acquisitions going forward.

Great. Thank you. And then just a little bit on rent increases to existing customers. I know in the beginning you guys noted that you're not going to be increasing rents as much as you did in prior years. But I guess now cases are kind of going up, but do you have an expectation when you're going to be able to get back to your historical bumps?

Yeah, well, let me give you a little bit of context. This is Tom around what we've been doing through the quarter on existing tenants and then what we think the outlook is. As we noted in the 10-Q, we did resume, and we discussed on the last call, we resumed existing tenant rate increases in the third quarter. We did so initially on a test basis and have since increased the volumes of those rental rate increases that we've sent out as we've grown more confident in the performance of our existing tenants. Since we didn't send any increases in the second quarter, we did have a quote unquote backlog of potential tenants to increase rent on in the third quarter and we did send those catch up rental rate increases. As you noted, those increases went out with a lower magnitude of increase, given overall mindfulness of our customer base in this crisis environment, and as you highlighted, still very dynamic, as well as state and local price regulations in many of our markets. We expect some of that to continue as we move through future quarters. Certainly navigating this dynamic healthcare environment is unpredictable. we would expect that the existing tenant rate increases will continue to be a modest drag on in-place rent growth as we move forward. Stepping back, customer activity has been solid. And I just highlighted the existing tenant performance has been good. That's across the board. So collections are better. Payment patterns have accelerated. Move-outs are down. Length of stays are extending significantly. and new customer demand is solid. So we're seeing good trends there, and overall move-in activity has been good. But existing tenants will continue to be a modest drag going forward.

Great. Thank you. Thank you. Your next question is from Smead Rhodes of Citi.

Hi. Thanks. Hi. Hi. My question is really just about move-out activity. You know, your portfolio has always kind of generally had an upward bias in occupancies, but, you know, you did note that move-outs have slowed. And I'm just kind of wondering, as things kind of normalize, I mean, do you have a sense of how much occupancy might be higher based on the slowdown in move-out activity? I'm just trying to think about how, you know, your occupancy may change over the next, you know, few quarters if things maybe get back to normal. And, you know, what might you do to encourage some of those customers to stay, I guess?

Sure. So I'll provide a little context around the move-out activity because it has been one of the surprises as we move through this pandemic period. You know, as we – Rewind to April and early May, we had move-in volumes and move-out volumes that were lower. But as we moved into May and June, and then into the third quarter, move-in activity has increased, but move-out activity has remained muted. And dissecting the geographies, the customer tenures, the customer segments with which move-outs are lower, it is really across the board and clearly being driven by the current healthcare environment. And you highlighted, and we discussed in the 10Q and the MD&A, the likelihood at some point that that rate of deceleration will moderate. And we talked about in previous calls the fact that in other recessionary environments, we've actually seen the opposite play through with higher move outs given consumer stress. We've not experienced that this time. And in fact, it was pretty consistent through the third quarter to give you a sense, each of the months in the third quarter saw 12 to 15% declines in move-out volumes. And as I mentioned, it's across geographies, across customer tenure bands, and customer segments. So really broad-based decline in move-outs, you know, paired with good collection activity and, you know, accepting the rental rate increases that we've sent to date. So We've been encouraged by the existing tenants. We do have our eyes on what could play out as we move in this dynamic environment, and we'll be watching that very closely. But through October, move-outs continue to be lower.

And, yeah, Smith, you know, so what's playing through right now that, again, month by month we're seeing more sustained and consistent consumer behavior? Work from home? is additive, meaning it's another factor that we're seeing from a survey standpoint relative to customers coming to the portfolio and what's driving that decision. You've got a number of markets, whether you label them as urban or high density and or related to even concentrations of text. I'll use the Bay Area, for instance, where we see system-wide our highest level of occupancies. Thousands of employees have been given the latitude to move out of that market, either temporarily or potentially permanently, and are shifting and amplifying the need for self-storage as either they're dealing with the health crisis and the flexibility that they've got to work either at home or a completely different location, seeing similar impacts right, again, in the heart of our New York set of assets, So that's additive. The housing market is very strong right now. That's always a traditional and very good driver for our business, but housing sales are up over 20% as we speak on a year-over-year basis, and it's a driver. So you've got layers of different consumer patterns that are playing through that are pointing to more sustained and prolonged need for storage space. So We don't know when and to what degree it will shift back to a, quote, unquote, a normal environment, but the amount of sustained activity that we're seeing now into the eighth month of this health crisis continues to be quite good.

Okay, that's great, Keller. And then, you know, I'm just wondering maybe broadly, you've talked before, just kind of what you're seeing on the supply outlook overall, if you've seen any kind of changes on the incremental versus your last update on just overall nationwide supply, dollars in development I think you typically talked about?

Yeah, I wouldn't say anything to point to that's materially different. We do think that 2020 will plus or minus calc out to be about a $4 or so billion set of deliveries across all of our markets here in the United States. The anticipated shift down into deliveries in 2021 was something in the range of 15 or so percent. So we could still see that degradation in deliveries, but frankly, it's still high. And with the continued interest from an investor base to get into the self-storage sector and the performance that the product type itself continues to have even in this challenging environment. As I mentioned earlier, there is still a fair amount of capital that wants to get into the space, whether it's through acquisitions or even development. So it's something that we're keeping a close eye on, but it really hasn't changed that much from our prior outlook.

Great. Okay, thank you, guys.

Thank you. Your next question is from Spencer Alloway of Green Street.

Thank you. Can you guys provide a little bit more color on what drove the material deceleration of marketing spend for the quarter and where you see this trending for the balance of the year?

Sure. So stepping back on marketing spend, that's been a tool that we've utilized along with promotional discounts and move-in rates over the past several years in what was a tough customer acquisition environment, given the impact of new supply in many of our markets. And so we did increase our spend over the last several years and have liked the returns that we've seen utilizing advertising spend. And that really is across paid search, affiliates, social media. We used television in the second quarter, kind of a broad-based advertising approach. to attract new customers. We do have real advantages in using advertising as a tool given our brand name and presence online. And so we like that tool and we will continue to use it as we navigate this dynamic environment. In the second quarter, given lower top of funnel demand, we were more aggressive on marketing spend. And as top of funnel demand improved as we moved into the third quarter, we removed some of that advertising support. But as you note, our advertising spend was up about 8% or 9% in the quarter, and we will continue to use that tool as we play through what's a dynamic environment. But we did not need the level of support we saw in the second quarter given improved top of funnel trends.

Okay. And then maybe just lastly, we recently saw a large storage transaction with Blackstone acquiring the Simply portfolio. Was this a deal you guys looked at? And can you comment on whether the portfolio would have been of interest to you?

So we're active in all markets and have the opportunity to look at most deals. So I'll comment on is we're highly entrenched in most, if not all, the deals that are happening in any variety of different types of transactions, large and small. And we are continuing to track and see the level of activity. I'm not really gonna comment on our view and perception of that particular portfolio, but we're highly entrenched, and our acquisition team is incredibly engaged, whether they're marketed deals, as that particular one was, deals that are not marketed, which points to the portfolio I talked about earlier.

Yeah, I'd maybe just highlight that transaction as emblematic of what Joe highlighted earlier around institutional capital looking to invest in self-storage because of its performance through cycles. And so, you know, interesting to see another institutional player put a significant amount of capital into the sector.

Thank you. Thank you. Your next question is from Todd Thomas of KeyBank Capital Markets.

Hi, thanks. Tom, helpful color on some of the move-out trends. Can you comment on move-in trends throughout the quarter and through October, what the cadence was like? And then the strength in move-in rates was rather significant. You know, rates were higher in the quarter than they've been in several years. Did you push move-in rates above market during the quarter just given where your occupancy is, or was that increase sort of more commensurate with the market rent growth in your view?

Sure, Todd. So kind of stepping back on the move-in trends like I did with move-out trends, we did see move-in activity kind of surge in March. Then we saw it really slow down in April. We moved into a third phase that we – call internally kind of recovery in May and June. And then really since July 1st, we've seen an improvement in top-of-funnel demand. Pair that with reduced move-out activity, as I just highlighted, means that occupancy has moved higher in really all of our markets across the country. And that improved occupancy certainly reduced the inventory levels that we had. And that really persisted through the quarter. We finished the second quarter up about 50 basis points in occupancy. We finished the third quarter up 200 basis points. We're sitting here. We finished October up 230 basis points in occupancy. And so, you know, customer trends being move in and move out have been good. And with lower inventory, you know, that's allowed us to achieve higher move in rates. Move in rates were up 8.2%. in the quarter in October to give you a sense of the strength of top of funnel and the move out trends have continued which has led move in volumes to be up about a percent in October and move in rates up about 10%. So the trends have continued and obviously seeing the benefit of demand for storage both from our existing tenants who want to continue to use storage in this environment as Joe mentioned for many reasons as well as new customers that are seeking new space.

Okay. And, you know, obviously there's, you know, just a lot of, I guess, sort of ins and outs when you think about demand. But, Joe, you know, I'm curious, in a market like New York, you know, you mentioned San Francisco, where a lot of workers have flexibility to work from home and move out of some of these high-cost markets. which the data and headlines suggest is happening. Why is that out-migration activity translating into strong demand in those markets, and do you expect that to moderate or maybe unwind, I guess, to some extent over time? Is that a risk in your view?

Well, it's a spectrum of different drivers, Todd. So part of the flexibility, for instance, if you look at the Bay Area that many tech workers have been given is – When a big employer, many of whom any one of us can point to, gives signals and or time frames where they may not be pulling their employees back, not for one or two months, but for six months to a year, coupled with giving them full flexibility to be somewhere else, that could vary. So some employees will still come back, there's no question about that, but it may be for several months or several quarters, depending again on the unknown timing of the pandemic itself. And then to what degree these become permanent relocations and then some commensurate impact on the need to keep goods or whatever they're keeping in one of our units in that particular market will be a question. Can't predict it, don't know. Fortunately, again, if you look at the Bay Area, for instance, we have an opportunity to stand out there because we've got a very well-placed portfolio. It's very difficult to add new supply there, so the inherent need for that space in that market long-term is quite high. There's no question about it. It's difficult to build there so it's not a market by any means that we're concerned about from an oversupply standpoint, et cetera. This has just been a very unusual environment where this demand has been so elevated where I mentioned we've got system high occupancies of 97, 98% this time of year. We have never seen that before. Well, it's to be determined. It's hard to predict. And the flexibility and the way in which employees, whether they're tech-oriented or other traditional office users, change over time is to be determined. But, you know, Tom mentioned we're seeing, you know, it's just not in these urban or more dense markets. We're seeing, you know, healthy demand across the entire system. We, frankly, don't have a market that's down in occupancy. It continues to percolate. our lease up of our newly built and our acquired assets is very strong. And consumer demand continues to be very, very active, particularly for this time of year.

Yeah, and Todd, maybe just to provide a couple other market anecdotes for you. Markets like Charlotte, for instance, we've seen very good incoming demand and a market that had been suffering from new supply over the last several years. We've seen good new customer demand, improving occupancies, improving rates. Even within the San Francisco Bay Area, while you can clearly make a case for a very urban peninsula and the city of San Francisco, we've seen strength in our lease-ups in San Jose, for instance, and a strong housing market there. So we have a well-placed portfolio around the country, and we're seeing good demand in both markets that may see outflow as well as those that are seeing inflow.

Right, that's interesting. Is the demand for larger units, you know, are you seeing that as, you know, individuals are maybe looking to, you know, rent larger spaces for their apartments or homes for sort of a period of time?

Actually, it's the opposite, which is strength year over year has actually been in smaller spaces versus larger spaces, believe it or not.

Yeah, so theoretically you could. argue that, again, if you just think of the demand that's tied to work from home, it's just not somebody holistically leaving an entire house or an apartment. It may also be a very healthy level of demand tied to just needing that extra closet or that extra bedroom or that area, but not only because it's a work from home, but maybe a family member's come back or whatever. And there are layers and layers of demand factors that we're tracking, but As we've said, it's solid demand.

Okay. All right. Thank you.

Thank you.

Thank you. Your next question is from Keebin Kim of Truist.

Thanks. Good morning, Arthur. Just going back to some of the acquisitions you made in the quarter and fourth quarter, can you just provide some more color or parameters around yields, at least for your stabilized portions?

I'm not going to give you specifics about the actual yield. I would tell you it's similar to the same ranges that we've looked for over time, which on a stabilized basis would be 5% to 6% plus on the cash-on-cash yield or north of that. The thing that I didn't mention about the portfolio that will be closing this quarter is the occupancy is about 35%. We look at that as a very good thing relative to, again, the opportunity to lease up space based on the demand factors that we're seeing, the great locations that these assets are tied to, and the quality of the assets. So it's a very good opportunity for us to stabilize those assets, to put our own marketing and operational tactics and strategies into them, and we feel that we'll have very good returns once we get the assets stabilized. As you well know, that can take anywhere from three to four years on a normalized basis, not only once you get to stabilized occupancy, but more stabilized revenue and pricing metrics. So we'll continue to look for, again, the stabilization of those assets. But as I mentioned, very high quality, good solid assets and ads. In many ways, you could consider it almost like a near term or more recent set of recently delivered developments on our part. So again, very good opportunity to drive good value from them.

Okay, thanks. And when I look at your same store revenue, it improved slightly to negative 2.7% from minus 3% last quarter. But obviously, the underlying drivers are pointing towards a much better place, right? Where street rates are up 8%, better occupancy and things like that. So I was wondering if you could just provide some more details behind you know, the transitory nature of the underlying drivers and how that might benefit seems to revenue going forward. In particular, things like existing customer rate increases, I'm not sure how much normally it contributes, whereas in 3Q, it didn't. And going forward, how do we expect that to even normalize? So just trying to understand that magnitude a little better.

Sure, Keven. It's Tom. You know, I think we spent some time talking last quarter around the cumulative impact of the pandemic, which was likely to continue to impact revenue growth trends as we move forward, and we did see that into the third quarter. Operating metrics have removed more quickly than financial metrics, and let's pick apart the occupancy and rate equation. I commented earlier around how occupancy trends have improved with a combination of better top of funnel activity as well as lower move out volumes. And so that's improved occupancy trends. In many of our markets, we have reached occupancies that are frictional, meaning we are at 97, 98% occupancy in the middle of the month, which is frictional in our industry. So it's a matter of what will play through with rate in some of those markets as we move forward. As you just highlighted and we spoke about earlier, existing tenant rate increases are not going to be a contributing factor to improving rent trends given the magnitude of the increases are likely to be lower as we move forward through the fourth quarter. That said, just looking at in-place rents, From June 30th, at June 30th, in-place rents were down 3.1%, and we finished the quarter September 30 down 1.8%. And with existing tenants not contributing to that improvement, that negative impact was more than offset by improved customer activity and the reduction of rent roll-down. You know, if you look at the third quarter of 2020, 19, rent roll-down was about 15%. And as we moved into the third quarter of 2020, that narrowed down to about 4%. So improved rent roll-down, more than offsetting the degradation from existing tenant rate increase drag in the quarter. Looking forward, aggregate contract rents recovered, so occupancy and rent combined to positive 20 basis points at September 30th. and we've continued to see good customer trends through October, so better rental income trends. Fees, which have been a negative contributor to revenue growth in both the second and third quarters, we anticipate to continue to do so as we move forward, and that's really driven by customers paying their rent, which is a great thing, but is a degradation in revenue growth. So I think we spoke a little bit about that on the last call, keep in. But we continue to see that and we anticipate that through the fourth quarter and into the first quarter of next year.

Okay, thank you.

Thanks. Our next question is from Steve Sakwa of Evercore ISI.

Thanks. Good morning out there. Just a quick question on the balance sheet, Tom. You've got like a billion-two preferreds that I guess are callable throughout 2021. I'm just sort of curious on your thoughts about replacing them with new preferreds. I think your last deal was sub-4%. And, you know, how do you sort of weigh that maybe against, you know, kind of putting some more debt on the balance sheet just given how lowly leveraged you are? And, you know, where do you think the comparable, say, 30-year kind of debt issuance would be for you today versus, you know, a preferred offering?

Sure. So, Steve, you highlighted what is a good opportunity in 2021, which is another year of potential preferred refinancing activity, be it with debt or preferred. You know, looking at our preferred balance, we like having around a $4 billion preferred balance in the capital stack. We think it's good for the business through cycles. and the optionality both to have perpetual capital in the capital stack, but at the same time, if interest rates decrease over time, the ability to call them like we did this year, and you're highlighting the opportunity for next year. So throughout this year, we've redeemed about a billion two of preferred. We haven't issued quite that much yet, and we were active in the bond market in Europe in January. Financing markets, as Joe highlighted earlier, are as attractive as they have ever been. Preferreds are sub-4% for us today, which is a record low, which presents that opportunity, and we have great access to debt capital, too. As we've said in previous settings, we'll look to utilize both preferreds and debt for incremental financing activity as we move through 2021. for both preferred refinancing as well as for potential acquisition opportunities and development funding, which clearly, as Joe highlighted earlier, is accelerating as we move through the fourth quarter. So good access to capital, and we'll utilize both. And we hope that we have the opportunity to refinance in 2021 like we did in 2020 and 2019.

So do you have a sense for where like a 30-year bond offering, if you wanted to go longer out on the sort of curve, you know, how that would compare to a press offering?

Yeah, a 30-year bond is going to be cheaper. A 10-year bond is going to be even cheaper than that. Five-year bond, even cheaper than that. So, you know, we've got lots of tools in the toolkit.

Okay. And then just on the acquisition front, you guys from time to time have obviously looked outside the U.S. and, you know, spent some time in Australia. Yeah. Joe, I'm just curious, you know, sort of where your head is today about looking for international opportunities, you know, outside of the domestic opportunities.

Yeah, Steve, we're going to continue to look both domestically and internationally. So we have clearly the opportunity from a knowledge base. We've learned a lot through our involvement and success through the SureGuard investment, and we feel over time that we can continue to grow both here domestically and internationally. It's always going to be subject to different types of opportunities and the particular market that may be, for whatever sets of reasons, well-timed from an attractive point to either enter or find appropriate opportunities. So we're going to continue to assess opportunities both here domestically and internationally.

Great. Thank you.

Thank you. Your next question is from Ronald Camden of Morgan Stanley.

Hey, thanks for the time. The first one is just circling back on the demand question. Just trying to understand, obviously, looking at the analysis, just looking for sort of more thematic in terms of is there anything that stands out in terms of the demand driver in this period, whether it be college students, small businesses, you know, work from home or just people leaving the city. And, you know, the reason I ask that is, you know, one of the questions we get a lot is presumably once the vaccine is here and it normalizes, really trying to get at which drivers are going to stay and stick around and, you know, which drivers were really just sort of a one-timer. And, you know, maybe what you demand, drivers, we may not be thinking about, again, once we normalize. Thanks.

Yeah, Ron, that's certainly something that we're going to continue to track as these different demand factors play through. It's hard to predict the sustainability or the likelihood that some of them are here permanently or they're going to shift up and down. I already talked a little bit about the work from home demand factor. That's clearly new at this level of magnitude. And whether or not that sustains from a demand standpoint after the pandemic settles down or not is to be determined. Many companies are looking at work from home platforms as a different and new way of enhancing productivity and employee satisfaction, but the theoretical argument against that is there may be the opposite playing through too. So it's a little bit hard to predict. And at the moment, we're just going to continue to survey and understand and see these drivers. The interesting thing is they're all additive, and they're continuing to drive, as we've talked about, very optimized performance. We'll continue to learn from this. And it's brought, frankly, a healthy and new set of customers into the storage sector who've never used a product before. So I think long-term, that's a good thing. The adoption of the product continues to grow statistically, and it once again is proving that the product is highly resilient, it's highly adaptable, and consumers like it. The things that we continue to do also are find ways of making the customer interaction that much more effective, making it a much more easy decision and transaction. So many of the tools that we've been putting into our technological channels and options for customers are serving us well. About 40 plus percent of our move-in volume in the third quarter came from our e-rental platform that frankly was in test mode before the pandemic came about. But statistically, we moved in 115,000 customers directly through that channel. And that transaction takes about five minutes. And consumers love it. And that's not just because of the pandemic, it's just a great and easy way to capture a storage unit. So we've got different things that we're also able to test in a very challenging environment like this that are frankly giving us even new and different tools that could lead to different levels of dealing with customers in a very different way than we were doing before that, again, are very aligned with their ability to think even more positively about needing a storage facility because it's that much easier to capture and it's that much more cost effective.

Great. And then my second question was just digging in deeper a little bit into acquisition, just trying to get sort of harder numbers and quantifying it. You know, clearly you have to call for capital. You talked about sort of the pipeline of, you know, deals that have identified of at least $700 million. You know, the question is, you know, is there, just for PSA, when you sort of take a step back and look at your team, is there, you know, 500, a billion, maybe even more of acquisition opportunities out there for the company a year? Or just trying to understand what's the mitigating factor? Is there not enough sellers? Is it too competitive? But the company decided tomorrow to take acquisitions up. What would be the mitigating factor to getting to a number like that?

Well, I wouldn't say it's as simple as just saying we turned on a switch and said let's just go buy whatever we can get our hands on. We have very disciplined analytics that we use that give us the right guideposts to say these are the relative and I would say better-timed opportunities to deploy capital. This is, at the moment, a good window to do that. Our cost of capital, as Tom reiterated, is very, very good. Our access to capital is very good. We know most of the markets that we operate in much better than others do, so we have different ways for us to step back and understand the relative ultimate capital allocation performance and ability to drive value through not only our acquisition environment, but our development and redevelopment activities. So we have all those tools. We continue to analyze them. And we've got a balance sheet that can clearly accommodate multiple factors of the volume that we were even talking about this quarter. So I don't see that as any way a limiter. And we're going to continue to evaluate the timing and the quality and the fit of any particular acquisition, whether it's one-off whether it's a medium-sized portfolio or a sizable one.

Helpful. Thank you.

Thank you. Your next question is from Jonathan Hughes of Raymond James.

Hey, good morning. This is an extension of Steve's earlier question, but what do you and the board believe is the appropriate amount of leverage? All four legacy self-storage share prices are up low double digits year-to-date on a total return basis, yet balance sheets range from three turns of leverage for PSA, including preferreds, to more than six turns at peers. So during a 100-year pandemic and recession when balance sheets should have mattered most, it hasn't really benefited PSA. I'm just curious if you know, views towards leverage have changed at all over the past eight months?

Yeah, what I would say is that, you know, our perspective around leverage is a long-term held belief that we should have a conservative balance sheet that allows us to invest through cycles. You know, that allowed us access to capital throughout this year, as you highlighted. And I think this year has been somewhat unique. In fact, we're in a deep recession and financing markets have been attractive throughout. You know, I think we've also highlighted that we have capacity to utilize that balance sheet in times like this to fund acquisitions, and we're doing that in the second half of this year. So we definitely have some capacity from here to add incremental leverage, and we're doing that as we move forward. In terms of the appropriate amount of leverage, we think a conservative long-term view and a single A rating is an appropriate place for a read of our size, scale, and capability.

So earlier you said you like having 4 billion of preferreds in the cap stack. I mean, how do you arrive at that exact number? Why not more? I guess you said – you alluded to you can use more preferreds to go consolidate share, but are you talking – upwards of another turn. I think leverage was four turns back in 07.

So that range we could expect. Four billion. I didn't mean that that would be the maximum. I meant it more that I liked having four billion. So I would consider that. And why did I say four billion? It's because about the amount we have currently outstanding, meaning I like the amount we have outstanding and over time would anticipate that to grow and would anticipate our our debt balance to grow as the company continues to grow and our EBITDA grows and the business grows.

Okay. I just want to make sure it wasn't like an arbitrary, you like the number four or something like that. And then one more. I figured as much. I just, you know, the four stuck out to me. What about funding acquisitions, you know, on a leverage neutral basis by raising common equity? I realize that hasn't been done in, I think decades, but plenty of other large REITs still raise common equity to grow on a leveraged neutral basis. And given your trading, you know, at a low four implied cap and above NAV, that would actually be accretive to NAV. Is that a possibility?

Sure. You know, common equity is in the toolkit, and it's something that we could utilize, as you highlight. At the same time, we do have capability to finance REITs you know, with the debt and preferred markets and debt and preferred is cheaper than common equity. So we have the ability to do that over time. But it's certainly in the toolkit. The company over time has used it more for strategic opportunities, but as the company grows, it's certainly an option to finance as well as debt and preferred and the like. So it's in the toolkit, but certainly, Recently, we've been utilizing debt and preferred because we have capacity to do so.

Got it. All right. Thanks for the time. Thanks.

Thank you. As a reminder, to ask a question, press star, then the number one on your telephone keypad. Your next question is from Juan Santabria of BMO Capital Markets.

Hi, good morning. Just hoping we could talk a little bit about move-out, but from a different perspective. I believe you mentioned earlier in the call that you typically see move-outs increase during a normal quote-unquote recession. So could you give us some helpful parameters around what that has been historically through your many cycles and just to think about the downside risk if some of these benefits that are maybe one time in nature do pass at some point, hopefully?

Sure. I mean, obviously, we don't know that when we may find ourselves in a position where move-outs would accelerate. We do think that the current trends are impacted by the health care crisis that we're navigating through. In terms of prior crises, if you look back at the financial crisis, we saw move-outs for several quarters up in the mid-single digits. And so, you know, that's an example. But what we've learned certainly through this experience is that everyone is unique and so our ability to point to that as what will happen when the pandemic eases I think is limited and we're going to be certainly watching very closely in terms of what consumer activity will be like as we move through future quarters and I would say it's unpredictable and it's unpredictable because of the healthcare nature of this crisis as well as the government activities to reduce the spread of the virus. So it's unpredictable. Past recessions would point to something like mid-single digits increase. Will this time be like last time? We don't know.

Fair enough. And just on the length of stay that you brought up as well, where are we at today in your portfolio and kind of how is that trended? And at what point If at all, do you cross kind of a magic number where you can maybe sneak in one more rate increase, assuming kind of the median length of stay?

Sure. So in terms of the benefit of length of stay, you highlighted it, which is, yeah, okay, we get to see those longer-term tenants stay with us. We don't have to replace them, and we have the opportunity to increase their rent over time. And that's already been playing out as we've moved through 2019 and into 2020. The length of stays were extending last year, and we started to get the beneficial impact of sending more rental rate increases last year. And as we moved into the second half of this year, with the decreased move outs, more customers have been eligible for rental rate increases this year. And if this continues, we'd anticipate that in the beginning of next year. And that's been somewhat of an offset to the fact that, as I highlighted earlier, we've been sending lower magnitude rental rate increases. But I would say that's been on the margin at this point, and if the trend continues, it will accelerate.

So what is the average or median length of stay?

It's about 10 months.

Great. And just one last super quick one. Did you say that the average occupancy was 35% for the portfolio you're acquiring, the one that's not in development?

Yeah, there's 24 properties that are operating that are on average two to three years at most in age. So they are in early phases of lease-ups. So that portion of the 36 property portfolio is about 35% occupied. And there are 12 properties that are under construction that will be delivered in 2021 quarter by quarter. So the lease up opportunity on the existing 24 is very good.

Yeah. But not necessarily yielding anything today like the 1%.

No, I mean, they've got to cure and stabilize levels of performance. But we're very confident, as I mentioned, relative to the quality, the location, you know, they're Class A buildings, and we're very confident across the markets that they are positioned and that we'll do quite well with them.

Thank you. Thank you. Your next question is from Rick Skidmore of Goldman Sachs.

Good morning, Joe and Tom. Just a really quick one on cost of operations. It declined from the second to the third quarter, which is kind of atypical for the seasonal. What was happening? Is that just lower personnel cost? And then as you look forward on that line, do you expect lower move-outs to help to bring that line down over time? Or should we expect kind of the normal seasonal pattern?

Yeah, Rick, we're definitely looking for and seeing opportunities from an optimization standpoint to find ways of moderating the pressure tied to payroll as a whole, whether it's property and or supervisory. So you saw some of that in the quarter. We are looking for and finding ways of optimizing operations on a number of fronts. Utilities also in the quarter were down nicely. That's tied to some intentional investments that we've made from an LED standpoint. So we've now got our entire 2600 or so portfolio on exterior LED lights. And we've transitioned maybe about a third so far of the portfolio from an interior standpoint to LED. So we're seeing nice savings relative to the utility costs. Again, utilities were down a little over 9% in the quarter. Repairs and maintenance were down. That can vary quarter to quarter depending on some of the repairs necessary across the portfolio, but we saw a good metric there. Overall, we continue to look for ways of optimizing costs. Tom's been focused on looking at new and different ways of optimizing our marketing spend too. Although it was up, it wasn't up as much as it's been in the last few quarters. So, again, we're looking for different ways of optimizing that spend, too.

Thanks, Joe.

Thank you.

Thank you. Your next question is from Mike Muller of J.P. Morgan.

Yeah, hi. Most questions have been answered, but can you just give us a quick update on third-party management and kind of how that's been trending?

Sure, Mike. So, the program as a whole, we've got 113 properties in the program. We added seven in the quarter. The activity from a backlog standpoint and delivery standpoint is in some ways matching the kind of activity we're seeing on our own direct acquisition front. So we're seeing good percolation of owners that are interested in coming into the system and we are finding high quality assets And like the way that the program continues to build, the dominant factor, as it has been since we came into the business, is tied to new deliveries. So we've got a healthy and growing pipeline of new assets that will also be coming into the portfolio over the next few quarters.

Okay. Thank you.

Thank you.

Thank you. Your next question is from John Peterson of Jefferies.

Thanks. Sorry to hear you said this, but the portfolio you guys are buying, is that from your third-party management business?

Okay.

How are they currently branded? They have the wrong. Okay. And then I guess how should we think about the third-party management business in terms of an acquisition takeout kind of pipeline for you guys going forward?

I think it's a natural adjunct to that business, and we've had a handful of situations that have percolated on that front. We'll see how it plays over time. But it's overall a great opportunity to build relationships with owners, whether they're one-off owners, may only own one or two assets, or other owners that have multiple assets in multiple markets. So it's and will continue to be a healthy way of broadening our tie to a different owner pool out there. So we'll continue to look for and develop those kinds of relationships too as the program builds. But the portfolio, the large portfolio that we're closing on this quarter was not on our platform.

Okay, got it. All right, that's it. Thanks.

Thank you. You have a follow-up from Steve Sakwa of Evercore ISI.

Thanks. I just wanted to circle back on late fees and just try and understand how much of the drop was, you know, sort of an inability to charge customers in light of the pandemic. How much of it is more auto pay and, you know, less cash pay and therefore, you know, fees are just naturally down? How much of it is maybe customers that were normally paying those have left the portfolio? I'm just trying to kind of understand what's driving that.

Yeah, Steve, so I'd provide a little bit more color around customer collections in aggregate because that is the primary reason why fees are down. And so as we look at rent collections, really starting in the second quarter and persisting through the third have been very solid. And some of the things you highlighted are contributing, i.e. auto pay is at a modestly higher percentage. But even away from auto pay tenants, customer payment patterns have accelerated and we're charging less in terms of fees. And so obviously if you don't charge it, you're not gonna collect it. Our receivables have been down around 30% through the quarter, and that's persisted through the delinquency period for tenants, meaning that receivables down about 30%. We wrote off about 30% less rent. We had about 30% fewer auctions in the quarter. So overall customer health and payment patterns have improved, and that has led to lower fees, primarily from late fees, which are charged for customers not paying their rent within a grace period, but also contributed from longer into the delinquency period, lien fees and lien sale fees, but primarily driven by the grace period ending late fee in the first month of customer's delinquency.

So would you look at this as a bigger structural change, or you look at this as just it's kind of a point in time more cyclical, or do you expect these to kind of stay down more permanently?

No, I think early on in the pandemic, we thought that it may have been more transitory, and there was customer – being supported by government stimulus. Certainly, that was the case through April and unemployment benefits and the like. As some of that has been put in the rearview mirror, the trends have continued. It's something we're watching very closely month over month. I will tell you that trends continued through October and payment patterns have been very good through the early part of November as well. So, it feels like at least For the foreseeable future or near to medium term, we're anticipating that will be the case, but we're watching it very closely.

Okay, great. Thanks. That's it. Thanks, Steve. Thanks, Steve.

Thank you. I will now hand the call back over to Ryan Burke for any additional or closing remarks.

Thank you, Christy, and thanks to all of you for joining us today. Have a good day.

Thank you. This does conclude today's conference call. You may now disconnect.