Public Storage

NYSE:PSA

Earnings Call Transcript 2022-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Public Storage Third Quarter 2022 Earnings Call. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation. [Operator Instructions]

It is now my pleasure to turn the floor over to Ryan Burke, Vice President of Investor Relations. Ryan, you may begin.

[Ryan Burke, VP, IR]

Thank you, Katie. Hello, everyone. Thank you for joining us for our third quarter 2022 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, November 2, 2022, and we assume no obligation to update, revise or supplement statements that become untrue because of subsequent events.

A reconciliation to GAAP of the non-GAAP financial measures we provide on this call is included in our earnings release. You can find our press release, supplement report, SEC reports and an audio replay of this conference call on our website, publicstorage.com. We do ask that you initially limit yourself to two questions. Of course, after that, feel free to jump in with further questions and follow-ups.

With that, I'll turn the call over to Joe.

[Joe Russell, President and CEO]

Thank you, Ryan. Good morning and thank you for joining us. I will highlight our view of 2022 as we head into the last two months of the year, and then Tom will cover more specifics in the quarter.

At the beginning of this year, our expectation was we were poised for exceptional earnings growth, which has clearly played through. With that, we raised our outlook on strong NOI performance in same-store and non-same-store assets, along with continued improvement in ancillary revenue. In total, core FFO is set to grow by over 20% for the second consecutive year.

Looking back on both 2021 and now 2022, we have been particularly advantaged by a number of enduring demand factors that continue to drive historic performance. Customers are drawn to use self-storage even in an environment where some top line drivers are decelerating, such as home sales and market-to-market migration levels. The appeal and rationale to use storage is still tied to a sensible financial and need-based decision, where the cost of shelter, whether you own a rent, has increased dramatically.

In addition, our customer survey data points to needing more space at home as the second and elevated driver to use storage. Hybrid work environments, for instance, are proving to be sustainable -- to be a sustainable reason for additional need for storage. For our business customers, renting a storage unit is a compelling alternative to taking down more expensive, less flexible industrial space.

As demand has remained very good, existing customers, too, are staying longer, giving us the ability to optimize rate increases and occupancy. On a macro basis, new supply of competitive product has been flat to down from peak deliveries in 2019. Nationally, markets have been able to absorb the more subdued pace of new development. Our view is that new development will also be static for the near term as risk levels tied to development have increased, particularly due to city approval time frames, higher component costs and the dramatic increases in the cost of construction lending.

With this said, it has become harder to predict the economic environment we are heading into with record inflation and consensus that the recession is imminent. We are, however, highly confident we have excellent tools to maneuver changing macro conditions. These include the industry-leading 200 million square foot portfolio of well-located assets in every large scale market nationally, the most recognized brand in the self-storage industry, cost-efficient online marketing prowess to guide new customers to our platform.

A broad and growing base of digital channels to source new customers while improving customer and employee satisfaction, historically high operating margins now above 80% and operational efficiency, a massive non-same-store portfolio which continues to grow through acquisitions and development that is now 50 million square feet with excellent earnings power with over $150 million of additional NOI to come, a well-primed low leverage and low-risk balance sheet with $900 million of cash and no debt expirations through 2023, and finally the most experienced team in the self-storage sector.

Now I'll hand the call over to Tom.

[Tom Boyle, CFO]

Thanks, Joe. We reported core FFO of $4.13 for the quarter, representing 20.8% growth over the third quarter of 2021. Let's look at the contributors for the quarter. In the same-store, our revenue increased 14.7%. And breaking down the components, realized rents per occupied square foot were up a strong 17.2% matching last quarter's performance. Weighted average occupancy declined 2.4%. The moderation in occupancy from June to September represented a return to typical pre-pandemic seasonal occupancy decline of 150 basis points.

The strong 14.7% growth moderated slightly from last quarter's 15.9% growth as expected. That said, Los Angeles was again a particularly strong contributor, accelerating from 17% same-store revenue growth in the second quarter to 20% in the third quarter.

Now on to expenses. Same-store direct cost of operations were up 7.8% in the quarter. We increased our marketing spend in the quarter compared to last year when we were largely quiet in most of our markets, and we saw good returns on those ad dollar spend.

Our strategic initiatives, including operating model transformation resulting from digital investments and LED and solar investments, helped offset a portion of the wage and utility inflation. And I note the recent Inflation Reduction Act added incentives for further solar investments as we ramp our own activity to reach over 1,000 properties with solar on our roots in the coming years. In total, net operating income for the same-store pool was up 17% for the quarter.

In addition to the same store, the lease-up and performance of recently acquired or developed facilities was once again strong, contributing $139 million in NOI for the quarter, up 68%. There is significant growth ahead from this pool of properties, as Joe noted, which is a good segue to our outlook for the remainder of the year.

As Joe mentioned, we raised our core FFO outlook for the year by $0.20 at the midpoint or 1.3% to $15.55 from our most recent outlook. The improved outlook is driven by better-than-expected performance in our same-store pool, continued strong growth from our non-same-store pool as well as our tenant insurance business.

And shifting gears now to our balance sheet. Our capital and liquidity position remains rock solid. We have a well-laddered long-term debt profile with limited floating rate exposure and over $4 billion of preferred stock with perpetual fixed distributions. Our leverage of 3.3x net debt and preferred to EBITDA, combined with $900 million of cash on hand at quarter end, puts us in a very strong position heading into 2023.

It's our strategy to position ourselves for strong access and cost of capital to invest through cycles. Over the past couple of years, we've had the opportunity to use that balance sheet to grow, and we're ready to do it again.

And with that, turn it back to the operator to open it up for questions.

[Operator]

[Operator Instructions] Our first question will come from Michael Goldsmith with UBS. Your line is now open.

[Michael Goldsmith, UBS]

Last year, realized rent growth and same-store rent growth accelerated through the year and then heading into 2022. Perhaps the expectation is that it was going to decelerate similar to the acceleration. Instead, it's remained very strong. So given these moving pieces and what we're seeing is a start to return to normal seasonality, how do we -- how should we think about the cadence or trajectory of rent growth and same-store revenue growth going forward?

[Tom Boyle, CFO]

Sure. Good question, Michael. And I think you highlighted some of the moving pieces there well. As we came into the year, we were expecting continued strong rate momentum and have been pretty consistent around that, and we've seen that through the first part of the year paired with more typical seasonal behavior and the occupancy rises and falls that we in the industry see year in and year out with maybe the exception of the last couple.

On the rate growth side, it's really been driven by two factors. One is really strong move-in rent growth over the last several years. And we've spoken in the past around some of our strongest markets like Miami and, now for us, Los Angeles as well with rent restrictions no longer in place. And that's been a really additive driver. Miami, quarter-to-date move-in rents were up 9%, again, on top of significant growth in prior years.

The other side of that is then the existing tenant base, and Joe spoke earlier to the behavior of our existing tenants in the long length of stays that we've experienced over the last several years, and we're sitting now at record length of stays within the portfolio. And that's allowed us to send more rental rate increases because there's more long-term tenants and at higher magnitude because of the overall rent environment, which has led to increased realized rents.

This quarter matched last quarter. We have been expecting a moderation through the back half of this year and would anticipate that, that plays through in the fourth quarter and is clearly embedded in our guidance, but year-to-date, we've been able to take advantage of that environment and have achieved strong rental rate growth throughout.

[Michael Goldsmith, UBS]

I guess just as a follow-up to that is just given these factors that we have visibility into and combined with street rate growth, which is flattish to down, let's say, like how long do you have visibility into kind of continued elevated realized rent growth just based on these factors and not like some of the other things like with a worsening of or any potential worsening of street rates or any of that? Just like how long do you have visibility into elevated rent growth?

[Tom Boyle, CFO]

I get it. You're asking about 2023 now. So looking at what we're experiencing on moving rent growth, we have seen the moderation in moving rent growth as we move through the year that we've been anticipating and speaking to move-in rent growth. And frankly, move-ins were quite strong in the quarter. We had move-in volumes were up 9%, move-in rates were up 3%, but that 3% is clearly a moderation from where we were earlier in the year and would anticipate that to continue to moderate through the fourth quarter.

But as we look forward from here, our guidance would imply that we will exit the year with revenue growing at, call it, 10%, plus or minus, which sets us up really well heading into 2023, recognizing it could be an uncertain environment into 2023, we'll be starting from a period of strength, and so that's what I'd point you to.

[Michael Goldsmith, UBS]

That's helpful. And just expenses have been elevated. You have several initiatives to offset the pressure, such as technology to reduce store hours or solar, also utility costs. Still, the gap between the same-store revenue growth and same-store expense growth is narrowing. So how should we think about the gap here? And can they converge if revenue growth moderates and expense growth kind of remains elevated or even accelerate?

[Tom Boyle, CFO]

Yes. As revenue growth decelerates, we could see a narrowing of that. I'd say we have tools, and you highlighted some of them from an initiative standpoint that have been frankly underway for a number of years to help mitigate some of the pressures there. And heading into 2023, the team will be acutely focused on managing expenses in what's a tough environment. So I'm not sure I'd have much to add to that.

[Operator]

Our next question will come from Lizzy Doykan with Bank of America. Your line is now open.

[Lizzy Doykan, Bank of America]

I just wanted to ask about how that debt trended through the quarter, if, you could just give any color around the level of delinquent payments kind of if that picked up at all or just anything different from the prior quarter.

[Joe Russell, President and CEO]

Sure. Lizzy, the behavior of our customer base even from a delinquency standpoint, I think, is a can to the elevated and consistent behavior we're seeing from a length of stay. And what I mean by that is the customer base as a whole continues to operate from a delinquency standpoint at nearly historically low levels. It's elevated up somewhat from where we were, say, a year ago, but nowhere close to what we saw pre-pandemic or what you would consider typical environment.

Consumer balance sheets statistically appear to be in decent, if not surprisingly good shape going into 2023. We're seeing this in a number of different reports that we track relative to some of the banking platforms and other tracking mechanisms tied to the overall health of the consumer. And from an unemployment standpoint, we're clearly also seeing very little disruption, in fact, surprisingly good traction relative to overall employment levels.

And then holistically, that still just ties back to one of my opening comments, which from a financial and need-based standpoint, storage continues to be a very necessary source of either relief or needing more space or other reasons that consumers continue to value and pay for on a much more consistent base, their storage storage units. So overall, a very close eye up, but nothing alarming by any means.

[Lizzy Doykan, Bank of America]

Okay. Helpful color. And for my second question, I wanted to get more commentary around market performance. So particularly with new move-in rate increases since we were seeing that growth moderate. Are there specific markets where you've had to back off on rate increases for new move-in more so than others? And if you could comment on why the acceleration we've seen in L.A.'s market and how that's expected to trend going forward, that would be helpful.

[Joe Russell, President and CEO]

Yes, I'll start, and then Tom can give you a little bit more color on some of the specific markets. You mentioned L.A., for instance, very strong growth in that market, and we think that serves us well going into 2023. It's clearly our largest market, and we've been held back now for some period of time, i.e., over three years, but we see very good continued rate growth and momentum in that market as we speak.

Florida as a whole continues to be still quite strong. We're seeing very good inherent drivers and good absorption of not only move-in rates, but existing customer rate increases as well. And then from an overall standpoint, as I mentioned, we're seeing pretty muted new deliveries. So that, too, has not been an overarching pain point literally in any of the markets that we operate in. That's a very good thing.

It's been a good thing for the sector for the last couple of years, and we don't see that changing in any material fashion going into 2023, and frankly, keeping a close eye in 2024, but not an elevated concern there either. Tom, you can give a little bit more color on some of the trends, otherwise that we're seeing in specific markets.

[Tom Boyle, CFO]

Yes. And I'd say, overall, trends we're seeing in move-in rate generally link up to the markets that are performing the best overall from a revenue standpoint. So I already highlighted Miami, which continues to be a strong market. It's not seeing move-in rent growth of 25% or 30% a year, any longer but is up 9% in the quarter, one of our stronger markets. And as you'd anticipate, Los Angeles in a similar ZIP code there.

In terms of markets that that have seen slower rent growth, again, very consistent with overall performance. I'd highlight San Francisco and New York that while positive on a move-in rent growth year-over-year is a more modest level of growth, call it, low single digits.

[Operator]

Our next question will come from Samir Khanal with Evercore. Your line is now open.

[Samir Khanal, Evercore]

Tom, you guys have done a great job on the expense side. Maybe help us understand how you've been able to sort of keep a lid on expense growth or better manage expenses when many companies are raising expense growth guidance probably across the REIT sector. I guess how much of this is sustainable into next year, your ability to sort of control expense or manage expense?

[Joe Russell, President and CEO]

Yes, Samir. I'll give you a couple of general comments. And again, Tom can add more context. But it goes back to a number of very intentional investments that we've made year by year, many of which have been digitally-oriented. It's helped us optimize the amount of labor hours, for instance, our second highest expense costs in the P&L. And it's given us the ability to predict, optimize and rationalize the amount of labor that is necessary, which has been very positively impacted by another digital tool, which is our eRental platform.

Now 55-plus percent of our customer base is choosing that to transact with us. It's a digital experience. Obviously, it doesn't require at-the-counter labor. So we can shift some of that traditional labor to other priorities' property to property. So that's been a very good optimization tool. It hasn't in any way relieved us of some of the pressure we're seeing from a hourly basis, but it's certainly been a very effective tool to minimize that impact.

We're also making strong investments. Tom mentioned some of the things that we've started to do over the last couple of years with solar. Utilities are under a lot of pressure market to market. We've got a great opportunity and an accelerated investment going into our solar platform. We have, as I mentioned, 200 million square feet of assets. That equates to about 150 million square feet or more of rooftops that are wide open for investments.

And then another thing that continues to change in the business that we continue to optimize is the amount of remote operations, property to property that makes sense. We've been testing this for the last three years. We've got a fleet of kiosks, for instance, in our portfolio that today is about 200. We're continuing to evaluate that property by property, and we're just looking for any and all tools to continue to rationalize the pressure you're speaking to. And we've been pleased. And it's certainly playing through in our margins, which this quarter, again, we're over 80%. So Tom, you can add any additional color to that.

[Tom Boyle, CFO]

Joe, I think you covered it well.

[Samir Khanal, Evercore]

Okay. And then I guess on my second question is, clearly, rate growth is still strong here. But tell me if I'm wrong. But when I look at occupancy, it looks like you're at a level, I mean, maybe even 30, 40 basis points above of '19 year when I look at 3Q. I guess how should we think about the trade-off? Or how are you managing between sort of rate growth and occupancy at this time and sort of into next year?

[Tom Boyle, CFO]

Yes. Sure, Samir. Happy to dig into that a little bit. As I highlighted earlier, we did see a typical seasonal decline in occupancy. And as we look at occupancy performance at the end of September, we're about 80, 90 basis points over 2019, also over '18, '17 performance. So this is an area of revenue maximization we're ultimately seeking to achieve and are comfortable in that a 92% to 95% occupancy level, which we spent the entire quarter in and feel like we have the tools to ultimately maximize and optimize revenue in that ZIP code. And so feel good about where occupancy is today and clearly have had the benefit of being able to push rent both for our new customers and existing within that occupancy ZIP Code.

[Operator]

Our next question will come from Smedes Rose with Citi. Your line is now open.

[Smedes Rose, Citi]

I just kind of want to follow up on that last question as you look into 2023. And Joe, you mentioned, I think, a lot of people see recession is imminent at this point. Would you expect promotional and kind of marketing spend next year to get back towards kind of pre-pandemic levels? And just kind of interested in hearing more about your sort of willingness, I guess, to protect occupancy getting more aggressive potentially on the pricing side if the economy shows a significant sort of downshift.

[Tom Boyle, CFO]

Yes. I mean I'd say stepping back, we certainly have good tools to manage different types of operating environments, and I think it's too early to speculate exactly what 2023 will look like. But going back in time, we have used promotional discounts. We've used advertising in a more meaningful way. Throughout the pandemic and getting to 2020 and 2021, we really didn't need to use things like promotional discounts or advertising because demand was so strong.

Clearly, we could be heading into an environment where that won't be the case. And even in the quarter, we used probably more typical levels of advertising and promotional even in a strong environment. So thinking about advertising spend in the quarter, we spend about 1.5% of revenue in the quarter. And that's towards the low end of our historical range of, call it, 1% to 3%, where in 2019, for instance, we were towards the higher end there.

On a promotional basis, similarly, last year, we were hardly offering any promotions. This year, we had very modest promotional discounts in the quarter, about 38% of our customers that moved in, in the quarter, received promotions in a typical year. In the third quarter, that's more like 70%. And so we're still running it at levels that give us a lot of tools heading into next year to navigate what could be a recessionary environment, and we'll certainly use those to our advantage in that environment. And I'm not sure if that answers the question.

[Smedes Rose, Citi]

Yes. No, that's helpful. The other thing I just wanted to ask you is. Did you see a significant uptick in tenant insurance claims in Florida and the aftermath of Hurricane Ian? Or is there something in your numbers that might be worth calling out around that? Or are you -- or does it not really show up in a meaningful way?

[Joe Russell, President and CEO]

Yes, Smedes. First of all, fortunately, we did not see a heavy impact from the hurricane itself. Our team did an admirable job on a number of fronts. We closed plus or minus 100 properties or so for a period of a few days, first and foremost, to keep employees and customers in a very safe environment. We were very fortunate, as I mentioned, we only had 12 to 15 properties that had, I would call, any level of significant impact, mostly flooding-related.

The property claims are roughly $2 million or so, and then the tenant insurance claims are at this point expected to be about $4 million. And statistically, we're dealing with, plus or minus, say, 3,000, 3,500 units. So very small and, as I mentioned, fortunate occurrence for us relative to where properties are located and the impact, we're clearly seeing obviously, a lot of retooling going on to those areas for overall recovery, but fortunately, not a lot of economic impact to us specifically.

[Operator]

Our next question will come from Ki Bin Kim with Truist. Your line is now open.

[Ki Bin Kim, Truist]

Can you help describe what the ECRI program look like in 2022 in terms of level of increases or frequency? And how do you think this program might change moving forward in an environment where we're potentially going to see negative street rates and negative occupancy?

[Tom Boyle, CFO]

So sure, Ki Bin, I'll answer it, and Joe can chime in as well. So the way we think about existing tenant rate increases is really around breaking it into a couple of components. One is, understanding how our customers are behaving. And we have a wealth of information and testing data going back years, and it's a constant dynamic testing environment that we live through kind of month-to-month. And that gives us the ability to predict how customers will behave and how they'll react to different sorts of increases.

And what we've experienced over the last couple of years, and Joe highlighted this earlier, is customers have found a lot of value in our storage units. And that's, frankly, increased through the pandemic. Length of stays are at record highs, and so the number of tenants eligible to receive an increase have moved higher over the last several years, and they've behaved really well. And so, we've experienced now 9 months or 10 months through 2022, that consumer base has remained remarkably consistent, i.e., the models are predicting what it is that the customers are going to react to and we're seeing very consistent performance.

The second component is around when a customer does vacate, what's the cost to replace that tenant. And certainly, over the past couple of years, the cost of -- to replace that tenant has decreased as move-in demand has been strong, moving rates have been higher. And as we move through 2022, as anticipated, some of that is moderating. And I would note move-in demand continues to be very healthy. And as I noted earlier, we had a good move-in quarter with move-in volumes up 9% but moderating from earlier in the year.

And so that component of the existing tenant rate increase program is likely to result in moderating overall activity as we move forward. But that's just one piece of it. And as consumers continue to behave well and length of stays are longer, that gives us incremental tools on the other side of the equation in effect.

[Ki Bin Kim, Truist]

And going to your comments about record lengths of stay, your move-out activity was up 12%. I'm just curious, is the group of customers that are moving out, is that at all different in terms of mix, meaning are customers that have been in there longer over a year moving out to a higher degree than before? Or is it pretty consistent?

[Tom Boyle, CFO]

It's pretty consistent. What we've seen is really across the board depending on you slice and dice the tenants by demographies, psychographics, et cetera, you'd see relatively broad-based increases in vacate levels up from the really lows that we experienced in 2020 and 2021. But move-out volumes remain attractive, frankly, versus pre-pandemic levels. And so again, both the mix of tenants has moved more favorably. And as you slice and dice that tenant base, they continue to perform well versus pre-pandemic levels, although off last year is really record highs or record lows. Thanks, Ki Bin.

[Operator]

Our next question will come from Juan Sanabria with BMO Capital Markets. Your line is now open.

[Juan Sanabria, BMO Capital Markets]

Just hoping to talk about the consumer a little bit. You kind of talked about how occupancy was above pre-COVID levels. So you're in a position of strength. But yet the new street rate growth is kind of low single digits, well below the headline inflation. So just curious on how we should really think about strong demand, limited vacates, higher length of stay, but the street rates being modest, still positive but modest despite having record occupancy. And it's just -- it's a little bit of a -- just why would that be the case that you're not able to extract more from street rates? Is there some sort of counterpoint to their ability to pay or price sensitivity that you guys are seeing in the revenue management that's causing that?

[Tom Boyle, CFO]

Yes. One maybe I'd highlight we have had an ability to increase move-in rents through most of the year, and we've had some moderation as expected as we move through the year. I think as we've moved into the fall and into a more seasonal decline in occupancy, we've seen the industry broadly away from us lowering their rental rates because they have more inventory, and I think that that's to be expected, and we certainly have seen that over the last couple of months, which is leading to a different environment than what we saw last year, right, which we didn't see a seasonal decline in occupancy.

So as you think about the scarcity of inventory different year-over-year, you're going to see a different rental rate behavior across the industry, and we've seen that. And we're not -- we're seeing some moderation, and I think the rest of the industry looking at what streets that many of you report are showing some declines as well.

The flip side is web visits continue to be strong. Our web visits, so you should think about having a little bit more inventory, maybe a little bit more of a seasonal decline in rental rates, the overall demand environment remains healthy. Web visits were flat, basically right on top of what was a record year last year through the third quarter. So speaking to the move-in environment and the move-in volumes certainly performing well through the third quarter is the counterbalance of that rate discussion.

[Juan Sanabria, BMO Capital Markets]

Good. And then just for Los Angeles, how much more growth can you capture from bringing existing customers to street rates? I guess how much more juice do you have left for that to continue to accelerate sequentially? Or have you kind of gotten back to levels where you would have wanted if you had not been to around restrictions?

[Joe Russell, President and CEO]

Yes. Juan, I mentioned Los Angeles, certainly one of our top-performing markets. And we've got more to go there, frankly. I mean you step back and you think about not only the fact that we've been handcuffed for three-plus years, it is a market where there's very little, new product coming into the market, very good dynamics relative to inherent deep-seated demand. We've seen a little bit of move-out volume, but it's come right back on the move-in side. Occupancies are still quite strong, and we think we've got good pricing opportunities even going into 2023. So this has not ended.

[Juan Sanabria, BMO Capital Markets]

So just a quick last one. Can you give us any update on the October data, whether it's occupancy or street rates and how those trended at the end of the end of October?

[Tom Boyle, CFO]

Yes. Occupancy, as we look at the end of October, declined a little bit as we anticipate as we move through the fall. So I think occupancy ended up at or 92.8 rather at the end of October, down from the 93.3 at the end of September, again, generally in line with our expectations.

Move-in rates for the quarter and move-in volumes, move-in volumes, again, quite strong. I mean move-in volumes up 10%-ish. Move-in rate did decline a couple of percent so that moderation in asking rent, given the seasonality has played through October as well. But overall, a good move-in month in October as well.

[Juan Sanabria, BMO Capital Markets]

Great. So was it down 2%, negative 2% year-over-year?

[Tom Boyle, CFO]

Yes, yes, down a couple of questions.

[Operator]

[Operator Instructions] Our next question will come from Spenser Allaway with Green Street. Your line is now open.

[Spenser Allaway, Green Street]

Apologies if I missed this, but could you comment on cap rates and what you're seeing in terms of the breadth or volume of assets being marketed today?

[Joe Russell, President and CEO]

Sure, Spenser. Predictably, this has been a far lighter year as far as sector trading. At the beginning of the year, we saw a little bit of carryover from the volume that played through in 2021, which obviously was historic. But quarter-by-quarter, we've seen the realization set in as interest rates continue to rise and cap rates have adjusted in lockstep, I would tell you that, as always, the more stabilized higher profile or more highly desirable, stabilized assets are likely going to trade at a lower cap rate than otherwise.

But I would tell you, year-over-year, we're probably in a zone where cap rates have adjusted by 100 basis points or so. 2021 was an opportune time to be a seller to command, in many cases, historic valuations with a lot of bidding activity at the table. It's a very different environment today. It doesn't mean that trading has ended because we're still seeing some deals trade.

There hasn't been anything close to $1 billion or more come into the market, and I doubt will between now and the end of the year. And what we've been able to do is find the same type of asset that we've been very successful integrating in our portfolio with what we feel is a more compelling investment opportunity, where we're inheriting or taking on lease-up opportunity.

The $760 million or so that we've transacted on so far this year, average occupancies hovering around 60% or so, that gives us that upside. But the amount of volume needs to continue to grow to really lockstep with what really will basically settle out as a different cap rate environment, but it's -- cap rates are higher.

[Spenser Allaway, Green Street]

Okay. That's really helpful. And just given all the commentary and the current economic landscape, I was just wondering if you could walk us through your capital allocation priority list. I mean you sort of just touched on that. But where do you see the most value creation today as you look across your various growth avenues?

[Joe Russell, President and CEO]

Sure. It always starts with development. So our development pipeline is $1 billion now. And it has been, and we still see, the inherent opportunity to drive the highest level of value through our development activities, whether it's with ground-up or redevelopment assets. The team is working hard, finding very strong opportunities to either take down vacant land sites or retool existing properties, whether we own or go in and do a redevelopment on an existing asset of some form.

So we're still seeing very good returns, and we're keeping the team very busy looking for, even in this environment, an opportunity to do what we can do very differently, which is source deals with fewer competitors at the table. I'll tell you there's been a growing population of owners that are coming to us.

Speaking to the risk, I noted in my opening comments, it is far riskier to be a developer today than it was one, two or three years ago. Part of that's been driven by a very new dynamic, which is much higher construction cost lending and just the availability of it, frankly. And then on top of that, we've got inflation playing through.

So if you don't have the mechanisms to back down some of the very intense component costs increases, you may find yourself in a very different environment relative to the ultimate return you're going to see on an asset. Land can be more or less expensive depending on the particular market, but there could be more competition there, too.

So long story short, more risk of development. But for our own purposes, it's still the highest rate of return that we're seeing from a capital allocation standpoint. And we're very pleased by the deliveries that we put in the market and what we've got going into 2023.

Now as far as acquisitions, again, going right back to my prior comments, we're definitely seeing a different environment relative to the cap rates that are playing through, but we are finding good assets still bringing into the portfolio, where we can more often than not by underperforming assets for a variety of reasons, pulling right in the portfolio and get good upside from that.

So it's been a unique environment for us to go out and find something stabilized that we're just going to pay a top per square foot value for it because, frankly, we can do better things with our own capital by taking other assets that aren't either mature or have some level of additional upside. And that's been a really good investment opportunity for us, not only with the $5.1 billion that we acquired last year, but the $760 million that we acquired this year.

[Operator]

Our next question will come from Mike Mueller with JPMorgan. Your line is now open.

[Mike Mueller, JPMorgan]

I guess kind of as a follow-up to the prior question, what are you underwriting for time frames and returns on developments that you're starting today versus something you would have started a year ago?

[Tom Boyle, CFO]

Sure, Mike. We typically underwrite, and this hasn't changed over the last couple of years despite the fact that lease-up has been quite strong. We typically underwrite three to four years to get to stabilized NOI levels. And obviously, we're in an industry where you start a new property at 0% occupancy, and it takes some time to attract new tenants to that facility and stabilize that tenant base and the ultimate revenue there, so still looking at underwriting three to four years of stabilization.

[Mike Mueller, JPMorgan]

Got it. And I guess on Joe's prior comments about cap rates being up 100 basis points. Is that applicable, too, for, I guess, the value-add acquisitions that you're buying, where you're going in at 60%, 70% leased at low yield? That exit, that ultimate stabilized cap rate, would you say that that's up about 100 as well for what you're looking at?

[Joe Russell, President and CEO]

Yes. I think it applies to the overall spectrum of different assets, whether, again, they're in -- they're fully stabilized and/or they're in lease-up. I mean, frankly, it's just the, I think, pretty obvious impact from much higher interest rate levels.

[Operator]

Our next question will come from Todd Thomas with KeyBanc Capital. Your line is now open.

[Todd Thomas, KeyBanc Capital]

I just wanted to stick with investments. Tom, in your prepared remarks, you mentioned that you're ready to use the balance sheet to grow and that it's well positioned. And so just following up on sort of the line of questioning around investments, where it sounds like cap rates are moving higher. What would you look for in terms of acquisitions to become more aggressive and put the balance sheet to work a bit more? And what's the spread like today with the movement that you're seeing in cap rates between stabilized NOI yields on developments and stabilized acquisitions?

[Joe Russell, President and CEO]

So yes, Todd, I'll talk to the first part of your question, and Tom can give you more color on the spreads. But the playbook that we have, I would say, is similar to what you've seen us do over the last two years or more, which is to find and unlock opportunities relative to -- on the acquisition side, the types of assets that we think we're going to be much more benefited by bringing in underperforming assets, putting them in our platform and getting actually very quick improvement.

And you've seen that with big scale portfolios that we've taken down. Clearly, 2022 has not been an environment where we've seen the bigger legacy portfolios coming to the market, but the smaller opportunities are at the table. It takes a little bit more volume, obviously, to get to that level of investment that we saw in 2021.

But the team is working really hard. We're open for business. We see compelling reasons to go into a variety of different markets where we can additively put assets into the platform, integrate them very quickly and see that upside.

On development, again, it's as broad-based as acquisitions in, meaning that we've got 50-plus properties in our pipeline right now in all parts of the United States. We've got a deep seated team. We're looking for very good well-located sites, and we're going to continue to find good capital allocation opportunities through that platform as well.

So the investment arena tied to acquisitions is far less predictable than -- because development is much more intentional, obviously. But we're ready. We've got the balance sheet well primed. We'll see how things change going into an environment where we may or may not be in this imminent recession. That, too, can present different opportunities that I think we're very well seated to go out and use our balance sheet to grow the portfolio, just as Tom indicated.

[Tom Boyle, CFO]

Yes. And then, Todd, your question around, clearly, the debt markets have been moving. I think taking a step back, we're looking at the real estate itself in underwriting the cash flow profile associated with that real estate. And we have more and more tools each year to do so, thinking about certainly what we think we can stabilize a property app, but then also thinking about what the growth profile is in submarkets.

So it depends asset to asset, submarket to submarket. We use the tools that our data science team has developed around predictive analytics for rent growth, and that all factors into that cash flow profile. So on an unlevered basis, we will also look at replacement costs, and what's the basis that we're achieving with the asset as well. So, all those go into the mix and certainly a range there.

On the cost of capital front, no question, debt costs have moved higher. But we do find ourselves in a place where we have on a relative basis versus the industry attractive, both cost and access to capital. And while the spreads have come down certainly on a levered basis, we're looking at the acquisitions that we're purchasing in the fourth quarter. We feel very good about the unlevered returns we're going to achieve and the FFO accretion that we'll achieve in the coming years.

[Todd Thomas, KeyBanc Capital]

And how do those unlevered returns? Or what's the spread look like between the acquisitions today that you're seeing and what's in the market relative to what you're developing, right? I think your stabilized yield expectations, the NOI, the future NOI that you were discussing that you've outlined for us on developments relative to what market cap rates were -- was pretty wide over the last couple of years. My sense is that, that's narrowing right now, what's that spread look like today?

[Tom Boyle, CFO]

Yes. As you think about development, we do underwrite and seek to achieve a higher return on development because of the risk profile and the lease-up that we just spoke to. We're taking three to four years of lease up there. But ultimately, we're plugging those assets that we've designed the building. We designed the unit mix. We've picked the location and then we're plugging it into the largest and most efficient operating platform in the country.

And so that gives us an ability to achieve strong yields on those development projects. Looking at the yields we've historically targeted, we're looking at 8% plus stabilized yields, and we feel good about those sorts of yields continuing moving forward and the unlevered returns associated with that profile.

[Todd Thomas, KeyBanc Capital]

Okay. And just a quick follow-up on something that you mentioned related to occupancy earlier. I appreciate the color on -- that you provided on October. But can you talk about the range of occupancy loss that you might expect now throughout the balance of the off-peak rental season through the end of the year and really into '23? I think I heard you say 92% to 95% is kind of the right range to think about occupancy. Was that what you were referring to and sort of pointing to and what we should think about sort of trough to peak or peak to trough going forward at this point?

[Tom Boyle, CFO]

Yes. I mean, I think generally speaking, that range that I was speaking to is how the Company has operated and maximized revenue through the years. I would say there's definitely a difference by market.

And so today, Los Angeles demand remains strong. We obviously haven't been able to move rental rate increases for some time. So occupancies are lower year-over-year in Los Angeles. You typically see higher occupancy in the Los Angeles or San Francisco, given the limited new inventory that's added to those markets on a year-over-year basis, year in and year out.

And the flip side is some of the Texas markets where you do see more inventory each year, but at the same time, you're seeing very strong population growth to support that. You typically don't see those same levels of occupancy, and so you're not going to see that level in the Houston per se.

And ultimately, the revenue team is looking to maximize the revenue of each individual unit no matter where it is across the country, and so that's going to lead to a different price volume discussion depending on where you are. So hopefully, that's some context.

In terms of where we'd anticipate heading through the fourth quarter, we've been consistent that we were expecting more seasonal occupancy decline. We've seen that through the third quarter, and we expect that to continue through the fourth quarter, obviously, market by market, which would point you down towards that 92% sort of occupancy towards the end of the year. And again, from a year-over-year standpoint, that would be relatively consistent with where we are now and would track consistent to 2019-type levels.

[Operator]

Our next question will come from Ronald Kamden with Morgan Stanley. Your line is now open.

[Ronald Kamdem]

Sorry, just going back to the marketing, sort of the marketing expenses and so forth. Maybe can you just a little bit more commentary on if its market specific, sort of what drove that year-over-year increases?

[Tom Boyle, CFO]

Sure. And you're commenting on the year-over-year increase. I'd say largely, we didn't spend in most markets last year. And so yes, there's some big increases on a year-over-year basis coming from zero or close to zero in many markets last year. Ultimately, the marketing spend is managed dynamically by the same team that prices our units.

And so that's part of the ingredient on maximizing NOI and maximizing revenue, and so that's managed dynamically in the submarkets. No question. There are some markets that we've supported more than last this year, areas that have more inventory to lease. Typically, we'll receive more marketing support. I'd say Los Angeles is probably still our lowest marketing spend market per property, given the strong demand dynamics we've seen there in our largest market.

But that stepping back, like I said earlier, our overall marketing spend for the quarter was about 1.5% of revenue, which is towards the lower end of historical ranges, which gives us tools heading into next year. But when you don't spend much in the prior year or at all in some markets, the year-over-year comparison can look like a big increase.

[Ronald Kamdem]

Great. That makes sense. And then just my last one would be on -- just on the ECRIs. And when you sort of take a step back and you look at the portfolio, right, record rents, look at the macro environment, inflation and potentially going into a recession, how do you think about sort of the pricing algorithms there? And is there anything that company would consider to think about maybe doing differently? I don't know if it's stress testing or just trying to figure out if the customer or the recommendations may be a little bit different this time versus previous cycles. Like how do you guys sort of square that circle as you go into next year?

[Joe Russell, President and CEO]

That's a great -- It's a great question. And I think that what you just highlighted is core to how we price across for existing tenants as well as for new tenants, which is continuous testing. As I mentioned earlier, we have a wealth of information going back in time as well as in the current time period.

We send over 1 million rental rate increases a year. That allows us the ability to do significant testing and holdouts to understand whether consumers are behaving as we anticipate and how that consumer would behave in a different level of increase, et cetera. So that's kind of core to the process and certainly will be heading into 2023 as well.

[Operator]

It appears we have no further questions at this time. I would now like to turn the program back over to Ryan Burke for any additional or closing remarks.

[Ryan Burke, VP, IR]

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

[Operator]

Thank you. Ladies and gentlemen, this concludes today's event. You may now disconnect.