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Extra Space Storage Inc
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Good day, and thank you for standing by. Welcome to the Fourth Quarter 2021 Extra Space Storage Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded [Operator Instructions] I would now like to hand the conference over to your speaker today, Jeff Norman, Senior Vice President, Capital Markets. Please go ahead.
Thank you, Victor. Welcome to Extra Space Storage's fourth quarter 2021 earnings call. In addition to our press release, we have furnished unaudited supplemental financial information on our website. Please remember that management's prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act. Actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the company's business. These forward-looking statements are qualified by the cautionary statements contained in the company's latest filings with the SEC, which we encourage our listeners to review. Forward-looking statements represent management's estimates as of today, February 24, 2022. The company assumes no obligation to revise or update any forward-looking statements because of changing market conditions or other circumstances after the date of this conference call. I'd now like to turn the time over to Joe Margolis, Chief Executive Officer.
Thanks, Jeff, and thank you, everyone, for joining today's call. It is incredibly sad to wake up this morning to news of war in Europe. Without ignoring the human loss and suffering this will entail, we are also thinking of how this tragic event will affect economic growth, oil prices, inflation, interest rates and ultimately our business and our company. Events like this certainly give us some perspective on our business and our lives, and in some ways, makes discussing the performance and outlook of our company [less important]. While we don't know how all of this will play out, we do know that historically self-storage has been a needed product in good and bad economic times, that the cash flow we produce is very stable, much more so than many other types of real estate, and that our company and balance sheet are structured and prepared to prosper in all economic conditions. Now turning to results. We had a remarkable, remarkable fourth quarter to cap off another strong year at Extra Space Storage. Property level performance was exceptional across the board. Same-store revenue growth in the quarter was 18.3%. Revenue growth was primarily driven by 2 factors: first, our same-store occupancy of 95.3%, which was a year-end high for Extra Space for the second year in a row. Secondly, strong new and existing customer rate growth. Expense growth remained in check at 2.5%, resulting in same-store NOI growth of 24.2%. We also had significant external growth in the quarter. We acquired 66 stores on a wholly owned basis or in joint ventures for a total investment from Extra Space of approximately $850 million. Total acquisition investment for the full year was $1.3 billion, primarily in relatively small transactions. We also closed $187 million in bridge loans in the quarter, bringing the annual total to $333 million. We continue to execute on our strategy to sell a significant portion of our lower-yielding first mortgage balances to our debt partners. We also continue to acquire properties originally sourced through our lending platform. To date, we have acquired 15 properties sourced through loans for $181 million. We added 69 stores to our management platform in the quarter for a total of 265 stores for the full year. To give context, including acquisitions, we onboarded 1.3 properties per business day in 2021. We experienced higher dispositions with more stores leaving our platform due to third-party owners selling properties, but we were able to buy 58 of these either wholly owned or with one of our joint venture partners. Our property NOI plus our external growth efforts resulted in core FFO growth of 29.1% in the quarter. I am proud of the Extra Space team. There are many contributions to our growth in 2021, and for how they have positioned us for another strong year in 2022. We are also proud to have been recognized not only for our performance, but the sustainable nature of the company we have built. For the second year in a row, we were named one of NAREIT's leaders in the light for our sustainability efforts, and we are proud to be the only storage company to have received this award. Looking forward, industry fundamentals remain very strong. Occupancy levels remained at historically high levels, resulting in elevated pricing power to new and existing customers. Despite very difficult comparables, the strong market fundamentals and our team's ability to execute give us the confidence to guide to double-digit same-store revenue growth again in 2022, and FFO growth of over 13% at the midpoint. In light of this strength, we raised our dividend to $1.50 per share, a 50% increase year-over-year. We are off to a great start in 2022, and we expect another exceptional year for Extra Space Storage. I would now like to turn the time over to Scott to walk through some of the details of performance in the fourth quarter as well as our 2022 guidance.
Thanks, Joe, and hello, everyone. As Joe mentioned, we had a great fourth quarter and year with our 2021 core FFO coming in $0.06 above the high end of our guidance. Our outperformance relative to our guidance was driven by the property -- by property performance and higher-than-expected interest income partially offset by higher-than-expected interest expense. Our external growth in the quarter was capitalized by $210 million in sales proceeds from the disposition of 17 stores. We also issued $276 million in OP units, and we drew on our revolving lines of credit. Our balance sheet has never been stronger, and we will term out our revolving balances through future unsecured debt issuances. Currently, only 8% of our debt maturities over the next -- mature over the next 2 years. And our focus will be to lengthen our average debt maturity and to further ladder our maturing balances. Our unencumbered pool is now over $12 billion, and our net debt to trailing 12 EBITDA is at 5x. We continue to have access to many types of capital, giving us significant capacity for future growth. Last night, we provided guidance and annual assumptions for 2022. Our new same-store pool includes a total of 870 stores, a relatively small net increase from last year with new additions partially offset by sites removed due to disposition or redevelopment. Same-store revenue is expected to increase 10.5% to 12.5% driven primarily by rate growth. Same-store expense growth is expected to be 6% to 7.5%, primarily driven by higher payroll, marketing expense and property tax expense. Our revenue and expense guidance results in a same-store net NOI range of 11.5% to 14.5%. The acquisition market continues to be competitive, and we will remain disciplined but opportunistic. We plan to continue our strategy of looking for off-market opportunities and plan to capitalize a portion of our acquisition volume with joint venture partners. Our guidance assumes $500 million in Extra Space investment, approximately half of which is already closed or under contract. We also expect to close $400 million of bridge loans and plan to retain $120 million in new balances in 2022. We have plenty of capital to invest if we find additional opportunities that create long-term value for our shareholders, and we will continue to be creative as we deploy capital in the sector. To support our 2021 and 2022 property growth, we made significant investments in our people, our infrastructure and our technology. This resulted in higher G&A expense in the fourth quarter, and we anticipate a higher run rate in 2022. This is primarily driven by payroll and technology R&D, which will advance initiatives that will support our growth for years to come. The return of historical G&A expenses temporarily paused during the pandemic, also contributes to this increase. Our core FFO is estimated to be between $7.70 and $7.95 per share. We anticipate $0.23 of dilution from value-add acquisitions and C of O stores up $0.12 from 2021 due to the significant acquisition volume of non-stabilized properties in the fourth quarter. Interest income will be somewhat weighted to the first quarter due to the timing of note sales and potential modification of our NexPoint investment. 2021 was a great year for Extra Space, and we are already on our way to another strong year in 2022. With that, let's turn it over to Victor to start our Q&A.
[Operator Instructions]. Our first question on the line of Elvis Rodriguez from Bank of America.
Good morning out there and congrats on the quarter and year. Joe, a quick question on strategy from an acquisitions perspective. I think your -- if I recall correctly, you had about $700 million at the -- in your guidance at the end of 3Q, but did $1.3 billion. What type of opportunities are you seeing -- and have already closed on, call it, $250 million year-to-date. What type of opportunities are you seeing and what gives you sort of some comfort or pause on the $500 million that you shared and maybe being able to do more as the year progresses?
Great. Thank you, Elvis. So we saw a good number of kind of year-end tax motivated transactions come in the fourth quarter, and we were able to execute on those. Most of them -- almost all of them were single properties or groupings of a very small number of properties. We also were able to do 1 larger portfolio where we were not the high bidder on the portfolio. But through OP units and shares, we were able to offer the seller some tax deferment, which allowed us to capture that transaction as well. Looking forward, our target of 5 -- or guidance of $500 million is an assumption. We're pretty far along the way to getting there. If there are opportunities to do more deals. We certainly have lots and lots of different capital sources and debt capacity to do it, and we'll do it. But what's in our guidance is $500 million.
Then just as a follow-up, are you able to share a cap rate on your 4Q acquisitions?
So almost all of our fourth quarter acquisitions were unstabilized lease-up deals. And on a wholly owned basis, first year yield -- and this is fully loaded. This includes cost to manage, CapEx, tax reassessment, our expense structure was in the was in the low to mid-3s first year. And we stabilized in the mid-5s and a little over little over a year, maybe 15 to 17 months with average stabilization for those deals. When you do those same deals in a joint venture structure, you can add 200 basis points to 225 basis points to those numbers. So first year in the mid-5s and stabilizing in the high 7s.
Great. And then for my second question, maybe for Scott, can you talk about the floating rate debt in your portfolio? I know you mentioned potentially doing an unsecured deal sometime this year to term out some of the line of credit debt. But can you talk about the overall variable debt as a part of your structure, and how comfortable you are given the rise in rates?
Yes. I mean obviously, you prefer rates to be falling, but they're rising today. So part of our strategy has always been to have some component of variable rate debt. We typically have operated 20% to 30% variable rate debt. It gets a little higher when we have more drawn on our lines of credit, and we are terming some things out. This year, we have about $535 million drawn at the end of the year. So that caused us to be about 25% variable rate debt. As we look forward in ways that we hedge, one of the natural hedges that we do have is we do loan money. We have these bridge loans and different types of investments that are variable rate instruments. So there is somewhat of a natural hedge on a portion of that, but we also will look to term out our draws on our line of credit this year through the bond market.
Our next question will come from the line of Juan Sanabria from BMO Capital Markets.
Just wanted to ask what benefit, if any, is assumed or expected from the lifting of rent [restrictions]? Maybe if you can give us any color on where that represents the most upside?
Sure, Juan. So the short answer is we believe that the lifting of the state of emergencies in California will give us about 50 basis points across the portfolio in lift. And obviously, there's a lot of assumptions to go into this, primarily what's the length of stay, the future length of stay of the tenants that have gotten these increases. So our guidance assumes 50 basis points.
And that 50 is revenues, I'm assuming?
Yes.
Okay. And then just talking on the expense side, you could flush out a little bit about how much ballpark you're expecting kind of the major line items to move for '22 that's embedded into your guidance?
Juan, our guidance assumes close to 7% on the payroll number, and that is not only wage inflation, but that is operating more closer to fully staffed. Last year, you actually had negative payroll and so it's a really tough comp. And then property taxes, we're assuming about 5.5% growth. And then marketing, about 10% growth.
Great.
Our next question will come from the line of Michael Goldsmith from UBS.
You had a very strong 2021, nearly 20% same-store NOI growth, 14% same-store revenue growth -- but wondering how much of the gains from last year is influencing how you guide for the upcoming year? It's been clear from those like you and your peers that have guided, or report at this point that the strength of the performance in 2021 is influencing expectations in 2022. And within that, given your same-store revenue guidance of 10.5% to 12.5%, and the comparisons are considerably harder in the back half, how should we think about the performance in the upcoming year from the first half versus second half?
Yes. So clearly, a strong 2021 influences performance in 2022 for a number of reasons. One is we have very high occupancy, which gives us pricing power, particularly when we still see a strong demand with no diminution in demand. Secondly, as rates go up and we put new tenants in, that takes a while to flow into -- that rent roll takes a while to flow into performance. So as we put tenants in the later half of 2021, that helps gives us a rise throughout 2022. And then we already mentioned ECRI. But you're right that even with the strong performance that we expect throughout the year, our comps are tougher at the back half of the year. So the rate of growth will moderate even though we should have strong performance throughout the year. Are you able to help kind of frame it? Like do we start the year at kind of the high end of the guidance and at the low end of the guidance or the kind of the difference line in? Or will the difference be greater than that?
Yes. So we obviously finished the fourth quarter really strong. So we would expect the first quarter to be our strongest quarter. We would expect our first quarter to be really good. I mean we don't see it moving down significantly, partly because you had easier comps from last year. And then that rate of growth declines throughout the year as we get tougher comps. We don't expect rates necessarily to go backwards, and we expect to have pricing power but the comp to be more difficult, therefore, the rate of growth to decline as we move through the year.
Understood. And as a follow-up, we touched on a little bit on existing customer rent increases. For 2022, is there any change in your approach to them given the environment given the environment, are you looking to push the magnitude of rent increases harder or more frequently or maybe pull some rent increases up prior to the peak leasing season? Just trying to get better understand like the level of confidence surrounding the same-store revenue growth that's driven by the rate piece.
So with respect to ECRI, we're coming off a period where it was really unusual, where we voluntarily stopped where we were restricted by the government for a long time, where we had outsized rent growth, which increased the gap between what people were paying in current street rate. I would imagine in '22, we would get back to a more normalized protocol for ECRI. What was the second half of the question? Do you remember, Scott? Can you repeat the second half of the question? I'm sorry.
Just it was related to the magnitude of rent increases more frequently. Or would you pull some rent increases prior to the peak leasing season to create vacancy to create vacancy when you have like the most -- potential for the most captive audience?
Yes. So -- and I'm sorry, I made you repeat that question. I think we're always trying to maximize revenue and not bread on the shelf. So I don't think we are planning to create vacancy. So we'll have more vacancy in peak leasing season. We have natural churn every month and the ability to raise existing customers’ rate increase. So we're trying to continuously maximize revenue, and not look at particular months of the year.
And our next question will come from the line of Ki Bin Kim from Truist.
So going back to your capital deployment, obviously, you guys had a pretty robust quarter in 4Q. Also just curious, high level, did you just end up seeing more deals fitting your bull's eye? Or did the size of your fully change? And similar question for your C of O deals, I noticed that your C of O pipeline really expanded noticeably, similar question there.
So I think if you look at the pattern of acquisitions in any year, it's back-end loaded. I think there is a season -- normal seasonality. And it was probably more -- it was more pronounced this year. And we just saw more deals that made sense. We didn't change our underwriting or our discipline. We just happen to be able to capture more opportunities. And we do have more C of Os now. We did see more of those opportunities that made sense for us. But again, nowhere near where we were in '16, '17, '18.
Got it. And implicit in your 2022 same-store revenue guidance, what are you thinking for street rate growth compared to what it was in 4Q?
So we'll see in terms of street rate growth for the year. I can tell you a little bit about our assumptions, and what we're seeing in the first quarter. So our achieved rates in the first quarter so far have been very similar to the fourth quarter. Our achieved rates were up 20% in the fourth quarter. We're seeing that into this year. We haven't seen significant degradation in occupancy. Our occupancy is slightly below where we were before. Our rate of growth will slow in terms of street rates. And what I mean by that is we pushed rates as much as 20% to 40% depending on the month, depending on the comp from the prior year. We don't expect that in 2022. So we don't necessarily look -- think that we will decrease rates, but we do not expect that kind of growth in 2022.
If I could pick a little bit more -- try to get a little more out of the answer. Any kind of range you can provide?
They're going to be better in the first quarter than in the back half of the year. I think that's really all we can provide. And part of that has to do with the comp in the front half versus the back half of the year.
Our next question comes from the line of Kevin Stein from Stifel.
I was just wondering, so you sold like $200 million of properties. I was just wondering if the reason for selling them was it just really good pricing. Or was there any strategic reason for that?
I would say both. I mean we always look to optimize our portfolio and either select markets or individual assets where we prefer to have less exposure. And to do so in a period of time where cap rates are at historic lows is very advantageous. We sold about half of our -- the sales we did last year into a venture where we were able to keep management, and some exposure to those assets. And the other rough half we sold out right, but we're able to keep management of 12 of the 14 properties. So I think it's both strategic play and also happen to be good market timing.
Our next question will come from the line of Todd Thomas from KeyBanc Capital Markets.
I was wondering if you could talk about the contribution to FFO that's embedded in the guidance from non-same-store growth in '22? And can you share how much of an NOI yield, the increase that you're anticipating on the non-same-store?
So make sure I understand the question. You're trying to understand where in addition to the property NOI, where the growth is coming from. Is that -- for the contribution outside of non same-store or the property?
Yes. Outside of the -- so outside of the same-store, I think in the prepared remarks, you mentioned sort of a mid-3 initial yield stabilizing in the mid-5s on what was acquired during the full year, plus some other non-same-store assets, C of O deals, et cetera. What's sort of embedded in the guidance for NOI -- for the NOI yield uptick that you're anticipating on the non-same-store in ‘22?
Yes. Maybe the best way to think of it, Todd, is if you take the same-store performance, which we've given and look at your NOI there, you're at the midpoint, your 13 -- and then you look at the FFO growth and our FFO growth is slightly higher than that. So effectively, all of the non-same-store properties are contributing to the level that the G&A is going up, that your interest expense is going up. So it's effectively a wash. So the non-same store is awash in terms of offsetting the other increases. So you have several other increases happening here. You have G&A going up. You have interest expense going up, and then you have an additional amount of dilution from some of the lease-up stores that we bought at the end of last year. We have $0.23 this year versus our dilution from last year.
Okay. And on -- for the management fee and tenant reinsurance income growth, the guidance there. What's that based on in terms of net growth to the third-party management platform? I mean how many ads are you anticipating throughout the year?
So management fees and tenant insurance both increased by the increase in joint ventures from last year as well as an additional 100 stores net is what our guidance assumes for next year.
Okay. So up 100 stores net in '22. Got it. Okay. And then just lastly, I think, Scott, you mentioned when you were talking about where achieved rates were year-to-date and similar to the fourth quarter, I think you mentioned that occupancy slipped just a little bit here to start the year. Can you just tell us where occupancy is today and what that year-over-year spread looks like?
Your spread, it's slightly negative. I'm trying to -- the best way to explain it, we have 2 different numbers. You have a -- you're about negative 40 bps year-over-year, but you're also comparing a new same-store pool. So just want to make sure we're not solving for the exact amount. And again, we're not solving for occupancy. And so we view this as still being in a really good spot. But when we're at 94.6% today, and we're pushing rates as hard as we are -- occupancy is 1 component of this.
Okay. Okay. So 94.6% is for the new same-store that's occupancy as of today?
That's correct.
Our next question comes from the line of Samir Khanal from Evercore.
Scott, just on the occupancy question. I mean, what are you baking in sort of in the second half of the year, sort of that summer peak to end of the year decline?
Yes. So without giving exact occupancy, I can maybe just give you a little bit of input. We're not assuming that we get a benefit from occupancy in 2022. Last year, in 2021, I think we got 250 basis points of benefit from occupancy. And then I believe we're ending the year slightly negative to where we're starting -- where we ended the year this year. But again, no benefit that we experienced in 2021. And so we do see occupancy is still being strong in 2022.
Okay. And then I guess on the guidance for G&A, I mean it did go up. I think it was about $20 million. Just trying to see if there's anything sort of onetime in nature there? I know you talked about payroll and kind of return to normal. But -- and I know you talked about investments in technology as well. So is there anything kind of onetime in nature that we need to think about as we think about sort of '23?
I'm not sure if they're onetime in nature, but we're certainly making longer-term investments that don't have an immediate payoff. So our company is growing very fast. And we're making investments in infrastructure that will facilitate continued growth at the pace that we want. And we're also making certain technology and R&D investments that won't add anything in 2022. It will be long-term beneficial and accretive. The flip side, which I don't think is temporary or -- is the increasing payroll. I think we're just in a new payroll environment, and that's going to be ongoing in my opinion.
Our next question is come from the line of Smedes Rose from Citi.
I just wanted to ask a little more on the acquisitions outlook, and you and others are seeing a pretty -- market slowdown from last year's elevated activity. I'm wondering, is it -- anything you're seeing on the sort of the quality of the assets are there for sale? Is there just less stuff for sale? Is it a purposeful sort of pullback on your part? Or maybe you could just talk just a little bit more about what you're seeing, maybe what's changed since last year?
Smedes, as I said earlier, I think there's a seasonality to this, and there's a natural slowdown early in the year. We are still the market for sale. I don't think quality is very different than it was last year and prior years. There's some stuff of good quality and some stuff of less quality. But I think your overall thesis is right. It's hard to imagine that the volume in 2022 will match 2021. That was just an enormous year in number of transactions. I'm talking about the industry, not necessarily for us.
Right. Right. And then could you just update us on what's been happening with the length of stay? Where is it now? And maybe where was it pre-pandemic as a reminder?
Sure. So length of stay has steadily increased from the beginning of the pandemic to now -- we're now at about 2/3 of our customers have been with than 1 year, and maybe 42% or 43% of our have been with us longer than 2 years, and those are absolute all-time highs. We've never had that level of long-term customers in the portfolio. .
Our next question comes from line of Caitlin Burrows from Goldman Sachs.
Maybe just a question on supply. Wondering if you guys could go through your current expectation for supply in '22 and maybe even '23? And how much visibility you think you have at this point? And what's shaping those views?
So we continue to see a moderation in supply. We look at store -- new deliveries that affect our stores. So we're not national statistics or markets that we're not in. And if you look over the last 3 years and into 2022, it's kind of been a steady moderation. 28% of our stores were affected by new supply in 2019; 23% in 2020; 20% in 2021. And our best projection is about 18% in 2022. So new supply hasn't gone away. Stores are still being delivered. We get the opportunity to manage an awful lot of those, which is a good thing for us. But it is moderating. 2023, I don't have any predictions for, yet. I am concerned that given the tremendous performance in the asset class and the amount of capital seeking exposure to storage that we'll see an uptick in new development. And we know how to manage through that. We've done that before, and will provide opportunities for us, either to manage stores or participate like our C of O deals or make bridge loans. But I would not at all be surprised to see this pattern of moderation of deliveries reverse itself in 2023.
Got it. Okay. And then maybe just following up on some prior points. I know you mentioned you don't expect the same amount of rent growth in '22 as '21. But with such high occupancy and rents, what are you currently seeing in terms of price sensitivity of customers? And maybe how that ends up impacting whether they decide to stay or go?
Well, we certainly track folks who vacate after they get rent increase notices from us, and that has increased over time. So as we have sent out these notices, we see more tenants vacating because of that. But that's not problematic for us because it's not to a number yet that it doesn't make sense to hand out the rate increases. And demand is so strong. We're very easily able to backfill those tenants.
At those higher rates? Or I guess, what ends up being that spread then between the new person and that proposed rent increase?
Yes. At those higher rates.
Our next question will come from the line of David Balaguer from Green Street.
Just wanted to touch on interest rates and cap rates. The market is certainly expecting a number of rate hikes this year. I imagine you haven't seen that bleed in the transaction market just yet. But how quickly would you expect cap rates to rise in a rising rate environment, just given as you mentioned before, there is a lot of new capital that's seeking storage exposure. .
Well, it's the right question, right? And traditionally, as interest rates go up, cap rates go up. But the fact that you mentioned that there's so much capital line to invest in self-storage may cause that to lag, may cause rates to go up and cap rates not to react immediately. But it's an unknown, and a very important question.
And to that extent, if we were to see cap rates rise and perhaps your cost of equity capital mostly unchanged, would that entice you to be a little bit more aggressive on the acquisition front?
Sure. If our cost of capital was the same and cap rates went up, that would spur us to be more active.
Got it. And one last question real quick on migratory patterns and just national mobility is sort of a number of market participants cite that as a demand driver in the last several quarters. There also seems to be some data out there from the residential side that seems to suggest that moving activity really hasn't materially changed since pre-COVID levels. Is there something specifically sensitive was brought on about moving activity that has led to customers being a little bit stickier than they have in the past?
So I would pause it, the stickier customers are not the moving customers. The customers where we've seen length of stay increase the most are the customers that cite lack of space as a reason for storing, not those who cite moving. So kind of a simple example is the individual who turned the extra bedroom into a home office or room for kids to go to school, and tend to be slower to turn that back to what it was. If they do it at all, then someone who's moving and at some point, move and don't need the storage anymore.
And our next question will come from the line of Ronald Kamdem from Morgan Stanley.
Most of my questions have been asked, but I just wanted to go back to the comment on sort of the expiration and the contribution to same-store revenue. I think you talked about 50 basis points. Hoping we can get a little bit more color. Is that mostly L.A.? And maybe what do you think is sort of the mark-to-market on that part of the business with these expirations?
Yes. That was -- I'm sorry if I wasn't clear that, that was -- the 50 basis points was as a result of California, which is mostly L.A. for us, lifting their state of emergencies.
Got it. And then so any sense of what -- that seems a little -- trying to get a sense of the conservatism baked into that. Any idea of what the mark-to-market could be on that portfolio, and how that compares to the rest?
The mark-to-market being the gap between in-place and what we're raising people to?
Exactly.
So we sent out rate increase notices for those tenants. And we obviously know what that all adds up but it's not a number we're revealing this year.
Our next question will come from the line of Mike Mueller from JPMorgan.
Yes. Just a couple of quick ones here. First of all, I know you talked about yields on fourth quarter acquisitions, but what was the average occupancy for what you acquired in the fourth quarter? And then is the focus in '22 to buy assets with a lot of lease-up potential as well?
So I'll answer those in reverse questions. Yes. I think most of our opportunities in 2022 will continue to be stores that have some lease-up, some value-add. Average occupancy -- I'll try to look up real quickly. But I don't think it's going to be a very meaningful number. Because many times, you have stores that are at high occupancies that look like they're close to stabilize, but they're not an economic stabilization, right? You've gotten to that high occupancy by leasing it up below market. So the uplift is in moving rates to market, not necessarily in gaining a lot of occupancy.
Got it. That makes sense. And then, I guess, just one other question. In terms of returns, when you're sitting there and looking at a C of O deal, how different is that target of return versus what may be a typical -- if there is a typical operating property that you would come across that has a decent amount of lease-up potential?
So it kind of depends on time, right? So if you are looking at a C of O property that you think is going to stabilize 3 years out, just to be simplistic, and you compare that to a lease-up property that stabilizes 24 months out or lease-up properties that stabilizes 12 months out. Obviously, for each of those, you want to be compensated a little bit more for the additional time that it takes you to get there. So your yield will be highest on the CO and lowest on the property that stabilizes in 9 months or 6 months. And then the other factor is our view of the risk of achieving those numbers and other maybe strategic factors to buy in the store or not by this.
Our next question is from the line of Keegan Carl from Berenberg.
Just wondering if we could dive in a little bit more of the R&D expense side of things for tech. Can you some more color on the investment, how it's being allocated and maybe how it compares to your historical average?
Could you ask that question again, please?
Yes. So with regards to your tech spending on R&D, just kind of curious if you can give us any color on how it's being allocated and how it relates to your historical average.
So I would say it is higher than it has been historically. And in terms of getting into the details of what we're investing in things like that, we feel like it's probably not something we'd talk about on a public call because we feel like it's something that gives us a potentially competitive advantage.
Got it. I guess just from our seat then, I mean is it fair to assume that maybe some of these investments over the longer term can sort of mitigate and offset some of your future payroll expenses that you're expecting to be permanent?
So I would say that's a part of it. We certainly are looking to become more efficient and have the right amount of staffing at various stores. But in no way are we giving up on store managers or don't value our store managers or understand the importance they have on the revenue line item, and what they add in terms of increased revenue at the store and taking care of the store, et cetera. I would also say that's probably a minority of what we're focused on in terms of kind of innovative ways to participate in this business.
[Operator Instructions] Our next question comes from the line of Elvis Rodriguez from Bank of America.
Scott, just a quick follow-up on the marketing spend. You said plus 10% year-over-year. Can you share how the impact of the privacy changes that are happening with cookies, et cetera, are impacting sort of your online word search spend?
Yes. It's not impacting us as of now.
[Operator Instructions] And I'm not showing any further questions in the queue at this moment. I'd like to turn the call back over to speakers for any closing remarks.
Great. I want to thank everyone for your interest in Extra Space, and for your good questions today. Clearly, we are in a very healthy business. We're set up very well for 2022. And we're excited to talk to you about our performance throughout the year. Thank you very much, and have a great day.
And this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.