Public Storage
NYSE:PSA
Earnings Call Analysis
Q3-2023 Analysis
Public Storage
The company has shown confidence by raising both the lower and upper ends of its guidance range this quarter. They were transparent in February about the various possible directions the company could take throughout the year.
A new collaboration with a leading industry software provider is set to enhance the company's offering. This venture, launching in November, marks an early stage in leveraging industry relationships to expand its product capabilities.
Moving volumes remained strong, with existing tenants displaying positive behaviors and a moderation in move-outs, leading to an updated and more optimistic outlook. Strategic utilization of marketing, promotions, and rental rates is credited for driving demand and improving move-in activity. These tools have become even more effective with an increase in data utility and operational efficiency.
Contrary to prevailing market information, the company believes the predicted number of asset deliveries is declining annually by at least 10%, which could be favorable for future supply levels and competition.
Length of stay for tenants remains strong, averaging around 35-36 months, even as the number of new tenants increases. While the cost to replace tenants has increased, new tenants moving in are akin to those in previous years, likely to face higher rate increases, supporting revenue growth into 2024 and 2025.
The company is cautious due to a volatile environment, maintaining conservative forecasts. Occupancy started strong in 2023 but has been gradually declining through the year. Same-store revenue growth is expected to trend downwards, with the fourth quarter's midpoint expected to be down by 50 basis points. Despite this, there is an anticipation of stronger revenue growth and decreased expenses due to reduced marketing spending in the following year.
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Greetings, and welcome to the Public Storage Third Quarter 2023 Earnings Call. [Operator Instructions] 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.
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 31, 2023, and we assume no obligation to update, revise or supplement statements to 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, supplemental 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 2. Of course, after that, feel free to jump back in the queue. With that, I'll turn the call over to Joe.
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 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 and expectedly, we saw 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. And 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 1 and we welcomed over 250 new associates and approximately 90,000 customers.
We are also ahead of schedule on reimaging 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 2 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.
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 and 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 and more than 60 million square feet 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 to $16.85 at the high end.
Last but not least, our capital and liquidity position remained 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 Instructions] Our first question comes from Michael Goldsmith with UBS.
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 to this point? And how are you viewing how the last 2 months of the year will play out.
Yes. 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 and 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 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 closed 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 down, call it, 18% in October to date. Obviously, today, we'll wrap up the month. We and others ran some fall in 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. Volume is 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 in existing tenant performance.
That's really helpful. And my follow-up question is on the existing customer. You've talked about in the past with the existing customer, how they respond as a function of price sensitivity? ECRIs are a function of price sensitivity and the replacement cost, given the pressure on move-in rates, 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, 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.
Okay. That's a lot, Michael. 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 continue to be met or exceeded, frankly, as we move 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 magnitude and lower frequencies have increased 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 in February, we were pretty upfront and describe 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 macro economy at that time as well to frame the outlook. And I think we're all somewhat pleasantly surprised by the macro economy and obviously, a strong third quarter GDP print that further reinforces the performance towards the higher end of that original guidance range.
And yes, 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 month by month, 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 tie delinquencies, et cetera. So 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.
Our next question comes from Steve Sakwa with Evercore ISI.
Great. Maybe first, just talking on the transaction market. It sounds like you're maybe starting to see some sellers capitulate. I'm just wondering, Joe, how have you guys changed your underwriting criteria on the revenue NOI growth side, IRR side, cap rate side? And how wide do you think the bid-ask spread is today?
Yes, Steve. So again, a lot of moving parts there. And as you spoke to, we clearly need to be very conscientious of change in cost of capital. One of the things that step by step, as I alluded to, with a very high degree of dialogue we're having with all different types of owners, the realization of a different trading market is starting to play through. Clearly, 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 how to deal with that and/or different pressure points to bring a particular asset or a portfolio to the market.
So we have seen the migration and the realization that the environment has clearly changed. As I mentioned, we're anticipating very low levels of trading volume between today and the end of the year, which is somewhat unusual, particularly for the fourth quarter. But what we've been seeing with the iterative discussions with many entities is the realization that 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 of capital has changed, and we are again seeing a difference in bid to ask, but I will tell you that gap 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.
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 moving rents in Q4 versus moving rents in the year ago period. And if that's true, how -- 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 '24.
Yes. Good question, Steve, and clarification. So yes, I was speaking to a year-over-year metric there. And then 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 as we've talked about in the past, we don't manage 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 were 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 at the local level management is that differential in gap. And again, that gap suggests that we're earning good revenue on the existing 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%, 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.
Our next question comes from Spenser Allaway with Green Street Advisors.
Apologize 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?
So maybe a little perspective on how cap rates are trending, Spenser. And then deal by deal, there's 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, we were in a range of plus 4% or so on a cap rate basis, shifted up to 2022 to 5%. This year, I would say we're at a 6% handle trending potentially to 7%. So again, reflective of the change in cost of capital.
Steve's question about this gap from a seller expectation standpoint, does take a little bit of time from a realization standpoint, but we do see that trend continuing. And we're using that as an opportunity to continue to find appropriately 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 at some point will likely trade, it just takes some period of time depending on the pressure points and the timing of a particular seller.
Okay. That's very helpful. And then are you guys able to provide any update, if there is any, on the integration of your new tenant insurance platform?
Sure. So I think you're speaking to our savvy program.
Exactly. Yes, right.
So we announced that we would be launching that program here in next month in November. And it's an initiative, 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 stand-alone 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. And 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.
Our next question is from Juan Sanabria with BMO Capital Markets.
Just hoping to follow up on a prior point on the ECR 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 '24 at some point if the current environment continues into next year?
Yes. 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 move 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.
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 moving activity we've seen.
And then I was just hoping you could spend a couple minutes on Los Angeles. I know you had some benefit starting last year as the rental restrictions rolled off. Where are we in that? Is that done? And any benefit that is going to wear off as we kind of roll the calendar forward a year?
Yes. Sure, Juan. Yes, just to step back, as you know, Los Angeles is our largest market. We've got 229 properties here in the L.A. Basin, another 26 properties in San Diego, but as a 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 3-year period.
So the level of performance you're seeing now is truly indicative quality of the market and the strength of 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 a very strong portfolio. We've talked about this to some degree, recently, but it's also a portfolio that we've touched holistically from our Property of Tomorrow program.
We've invested $80-plus million in the assets to pull them into 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 is humming along quite well. And we think we'll continue to see good activity and good performance going forward.
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. What's the absolute occupancy percentage, if you don't mind sharing that?
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, we'll be a move out day at many of our facilities. So I guess, I suggest that not too dissimilar to where we were in September. The occupancies are north of 93% today but expect them to be in the 92s as we finish the business day up here.
Our next question is from Jeff Spector with Bank of America.
I just -- I guess I wanted to ask about the market in general, just listening to your comments and thinking about is there an equilibrium like some point where, I don't know if it's national occupancy, something to alleviate the pressure on new rates? Or do you not really care because your volumes are so strong? Like how are you thinking about that as we're trying to forecast and think about the coming months into '24.
Yes, 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, we're 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, has led to a correction. And I think in terms of moving rents, maybe an overcorrection in certain markets where the industry as a whole is reacting to an environment where the larger operators are taking their typical move-in volumes and the overall demand environment is a little softer than where it was maybe 2 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., moving rents have been lower than what we anticipated. The good thing is on the flip side, moving volumes, to your point, have been strong. The existing tenant behavior has been good, move-outs have moderated. So obviously, leading to us increasing our outlook as we move through the year. but I don't want to shy away from the fact that move-in rents have been a particular soft spot as we move through the year.
And yes, on top of that, Jeff, you again, need to be reflective of the 3 tools that 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. 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 3 years or so, most operators have had to rely on those tools very frequently. We're very good at using those tools. And frankly, we've become better even over the near term relative to our own utility of data, the knowledge that we have, and we'll continue to unlock relative to all the operational efficiencies as well. So we feel very encouraged that we're using those tools to not only drive top-of-funnel demand, but conversion to the move-in activity that we're reporting, and we're going to continue to keep them very sharp and active.
Great. Very helpful. And just one question, a 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?
For the month of October. Well, we started the month at down 120 basis points. We're finishing up down 60 basis points. So the average is right about in the midpoint there.
Our next question comes from Todd Thomas with KeyBanc Capital Markets.
First question, I just wanted to follow up on the last question. about move-in rents. Tom, you talked about moving volumes being stronger than expected. And it sounds like 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 without sort of an increase in overall demand, even if occupancy stabilizes in Public Storage's portfolio, which I think the high end of your guidance now assumes at year-end, do you foresee 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 find a bottom?
Yes. I think that there's a number of factors at play. And certainly, as I noted, we were in an environment where moving rents, you pick a market move in rents in Miami, for instance, we're 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 '24 and '25, 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 to 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 is -- has slowed down pretty consistent. So we worked through that decline as we move through 2023. And -- so that's helpful as we think about the setup into '24 and '25 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 are running our space at home, 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 move through this year, longer length of stays for move-ins this year and have been getting good customers, which again supports '24 and '25, supports occupancy, I think, for the industry overall.
So those are all helpful as we move into '24 and '25. 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. And no question, cost of capital in the construction lending environment is going to lead to lower levels of deliveries as we go into '24 and '25. 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 the benefit of what plays through in '24 to the dynamics with moving rental rates heading into March, April and May of next year.
Okay. That's helpful. And 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 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.
So yes, to, 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 ironically or counterintuitively, this is actually even a better environment for us to source and compete for: a, land sites and; b, work certain properties through entitlement and development processes where others are retrenching.
The lending environment particularly tied to construction loans continues to be much more constrained. In fact, with the pressure into regional banks where most of the construction lending goes on, particularly tied to 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 continues to be a good opportunity for us to compete very differently and ideally look for expansion opportunities for the portfolio as a whole.
The slight reduction, Todd, to your point, was just a -- that was just a one-off quarter impact from some deliveries that took place. But the team is working very hard to continue to not only operate in an environment where, yes, some of the hurdles are being adjusted, but development is a long game as well. We're dealing with multiyear processes not only to get a particular asset approved and launch from a construction standpoint, but then 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 is well seated nationally. We continue to find new and different opportunities region by region across the country, and we're going to 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 going to continue to focus on very strongly.
Our next question comes from Smedes Rose with Citi.
I just wanted to follow up, you mentioned expectations of lower deliveries, I think, industry-wide in '24 and '25. Is there -- can you just quantify that a little more in terms of either dollars invested you're seeing in the space or a percent increase in existing supply? And are there any markets where you see outsized growth coming up for one reason or another or anywhere it looks particularly favorable, meaning like very little growth?
Yes. Smedes, a lot of moving parts there, but step by step, and we've been speaking to this for some time. We've been seeing the unusually difficult hurdles you go through to get projects, a, approved and then b, funded. And now again, with the constraints I just spoke to in the lending environment, getting them into production themselves. So statistically, we think most of the information out there is not accurate because it's not reflective of the continued deceleration in annual deliveries. From a step-by-step basis going from this year to '24 and likely into '25, we think that the pool of assets that had been predicted to deliver are probably shrinking by plus or minus at least 10% or more on a per annum basis. We had kind of ratcheted down to a delivery level nationally, plus or minus $3 billion or so of assets in the 2022 to 2023 time frame, and that's going to 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 number of markets that at the moment are overburdened from a delivery standpoint outside of potentially Las Vegas, Phoenix to a degree, Portland starting to work, but a little bit of an outstretched level of new deliveries in that market as well. But 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 into the next couple of years.
Great. And then I just wanted to ask 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?
Yes. 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 that's persisting in an environment we're obviously adding more new tenants, which brings that average down. So continue to see strong trends there. . Customers that have been with us for longer than 2 years continues to punch well above where we were pre-pandemic in the 40s as a percentage of the total tenant base and that continues to be the most stable and important component of the tenant base.
Our next question comes from Eric Luebchow with Wells Fargo.
I wanted to go back to the ECRI discussion from earlier. I think you talked about higher cost of replaces 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?
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 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 '24 and '25.
Okay. Great. And then just one last one. Maybe you could touch on the cost side. You've seen marketing expenses, payroll, utilities continue to increase, especially with an uncertain demand backdrop into next year, how -- maybe 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?
Yes. 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% to 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 continues to be a 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 going to 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 are 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.
Our next question is from Keegan Carl with Wolfe Research.
Yes. 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 various historical levels?
No. As I've noted, 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 going to change. It won't change in the fourth quarter and don't anticipate it to change into '24 barring any significant shock or change. So that continues to be a strong point as it relates to the overall customer base, and I wouldn't point to anything significant there.
I guess just to clarify though, you're comfortable sending increases throughout the entire year. Like the quarter, you're not going to stop around the holidays. I thought that was a trend that's typically present in storage.
No, we send increases throughout the year.
Okay. And then just shifting gears here. So you guys obviously over and 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?
Yes, that's a good question. So as everyone is aware, we announced the Simply transaction on Monday in July, we did the financing associated with that transaction on the same day, which 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 -- we 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 interest and other income line, right, you're 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.
Our next question comes from Ron Kamdem with Morgan Stanley.
Just two quick ones. I think you guys were one of the first this year to talk about the potential of same-store revenue to go negative. And obviously, the guidance in 4Q implies that it does that and 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, 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 say? Like what sort of factors should we be watching to get a sense of the direction of the same-store trend into next year?
Well, Ron, I think there's a few things there that I'll pick out and comment on. One is, certainly, we started 2023 at a point of particular strength and 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. I 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, and 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. And 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 discussed moderation and deceleration are 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 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. Our outlook for the fourth quarter has gotten better as we move through the year. I think the midpoint now is down 50 basis points in same-store revenue. So 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 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.
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.
Yes, that's going to vary on market to market. There's a whole spectrum. As I mentioned, our largest market, being here in Southern California, almost no new supply to speak to other parts of the country that are well known to be the tougher markets to develop into have same and similar dynamics. . I mentioned on the other end of the spectrum, we're keeping a close eye on the amount of deliveries that are playing through in Phoenix and Las Vegas. But frankly, it goes right down to a very submarket impact. And I would say it's less than and continuing to shrink below the lower number you pointed to, i.e., whether it's 20% or lower, it's definitely a factor below that, and I think we'll continue to shrink, which, as I mentioned earlier, is a very good thing for the industry as a whole.
Our next question is from Caitlin Burrows with Goldman Sachs.
Just a couple of quick follow-ups. I think. I was wondering, I know the Simply 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?
Yes, Caitlin. I mentioned in my opening comments that our goal with that portfolio, which is to date, our largest private transaction with 127 assets coming to us. The benefit that we saw in that portfolio is -- it crosses 18 different states. It didn't put any undue burden on our ops team, market to market. And frankly, over the last 3 or 4 years, we've become very good at integration on a whole level of different scale market to market, where we've seen certain portfolios with dozens of assets, whether it was easy storage in the Washington, D.C. market or the portfolio that we bought in Dallas-Fort Worth that 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 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 on to our portfolio overnight. That synergy continues to play quite well now that we're in the seventh week or so of owning those assets. We were able to integrate and train 250-plus 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 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 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 both customers to our platform, the transition from the branding is going very effectively. We'll have that finished no later at 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.
So very pleased by, again, the tools that we've got and the ability to exercise the synergies. Tom spoke 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 2 are different toggles that were 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.
Great. And then maybe another quick one. I know you've talked a number of different ways about the lower expected deliveries in '24 and '25, which is encouraging. So that would suggest that you 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?
Well, it's been year-by-year transitionary. We hit a peak of deliveries back in the 2019 or so time frame with plus or minus, say, $5 billion of assets that were again, added the market, which actually equates to about 5% of additional inventory. As I mentioned, this year, it's down to about $3 billion or about 3%. We think that, that's going to 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 low 2% range of deliveries from an inventory standpoint. And to your point, it's -- 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. And we're able to do 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.
Our next question comes from Ki Bin Kim with Truist Securities.
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 would those come off?
Yes, Ki Bin, sales are something that the company has been doing for years and years. You can go back and look at pre-pandemic activities, the company started doing Memorial Day sales going back probably more than a decade ago and I see good traction from that. And so around holidays, we oftentimes will run sales 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 want to call it a Halloween sale or I think we call it a fall sale on the website, but it will wrap up today. . And we see good customer demand traffic. And others in the industry do, too, 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 we'll continue to use it as we have in the past. We didn't use them in '21, '22 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.
Okay. And 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.
Yes. 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.
And I'm assuming the spreads will be pretty similar? Or should I expect that to change?
It depends on ultimately what tenor we issue and the nature of the interest rates at the time. But it's our 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 will be more around spreads. And we'll update you on financing costs as we get into the first quarter. And 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 '24, we have modest in '25, a little bit more in '26. But overall, a very small percentage of the capital structure is coming due in any given year.
[Operator Instructions] Our next question comes from Mike Mueller with JPMorgan.
Just a real quick one here. Joe, when you're talking about cap rates trending 6% to 7%, is that -- was that meant to be a day 1 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?
Yes. I mean, again, that would be, in our view, a stabilized expectation would be. If you're dealing with a highly stabilized existing asset, that too, I think, would be in that similar zone. There's always going to be a gap or some kind of a risk that you're going to inherit, 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 value and yield hurdle that we're speaking to. So those are the stabilized yields that we're aiming at, Mike, as we're looking at investments in this arena right now.
There are no further questions at this time. I'd like to turn the floor back over to Ryan Burke for closing comments.
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.
This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.