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Shurgard Self Storage Ltd
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Ladies and gentlemen, thank you for standing by, and welcome to the Public Storage Third Quarter 2020 Earnings Conference Call. [Operator Instructions]It is now my pleasure to turn the floor over to Ryan Burke, Vice President of Investor Relations. Ryan, you may begin.
Thank you, Christy. Hello, everyone. Thank you for joining us for our third quarter 2020 earnings call. I'm here with Joe Russell and Tom Boyle.Before we begin, we want to remind you that aside from those of historical fact, all statements on this call are forward-looking in nature and are subject to risks and uncertainties that could cause actual results to differ materially from those statements. The risks and other factors could adversely affect our business and future results as described in yesterday's earnings release and in our reports filed with the SEC. All forward-looking statements speak only as of today, November 5, 2020. We assume no obligation to update or revise any of the statements, whether as a result of new information, future events or otherwise.A reconciliation to GAAP of the non-GAAP financial measures we provide on this call is included in our earnings release. You can find our earnings release, SEC reports and an audio replay of this conference call on our website at publicstorage.com. [Operator Instructions]With that, I'll turn the call over to Joe.
Thank you, Ryan, and thanks for joining us today. We had a solid quarter, and now we'd like to open the call for questions.
[Operator Instructions] And your first question is from Alua Askarbek of Bank of America.
So just looking at the transactions market, it seems like there was a good amount of activity in 3Q and you guys alluded that to -- alluded to that during your 2Q call. But there was also a surprising amount of portfolio deals. Can you give us some color about what you're seeing in the market currently and any of the opportunities going forward? And then also any color on cap rates and the recent 30 portfolio -- property portfolio deal under contract right now?
Okay. Sure, Alua. The acquisition market clearly has opened up. We've been tracking it through the pandemic and spoke about the early months where a number of sellers paused and were reticent to bring properties into the market. But we've clearly seen many more do the reverse where they've looked at this environment as an opportune time to bring assets into the acquisition arena. The thing -- a number of things are continuing to fuel that. One is it's still a very good time to do a trade. There's very low interest rates, availability of capital, there's a lot of capital sitting on the sidelines that's been anxious to get into the storage sector. And frankly, the storage sector continues to perform well. So there's been a window of opportunity that we've seen increase over the last month, particularly in the quarter that set us up well to have a very active 2020.The things that we continue to do are look for assets that are particularly well positioned from a location and quality standpoint that meet our requirements relative to location, and opportunity to round out presence, whether they're in our prime core markets or other markets that we want to add additional product to. The thing that was unusual, and we're encouraged by, as we also, as you asked, have a sizable single portfolio under contract that we think is a great set of assets that will be very good for us to bring into the portfolio. In total, it's 36 properties across 15 markets, 13 different states. 24 of the assets are open and operating, but they're relatively new. Average age is 2 to 3 years. I would call them Class A properties in very good locations, and we're very excited to bring them into the portfolio, knowing that we're looking for opportunities to lease-up properties because we have very good customer demand.So they'll be easily integrated, and we anticipate closing the first 24 of those assets by the end of the year. With that portfolio, which we're also well poised to capture and look for some, I think, interesting growth and performance opportunities as there's 12 additional properties in various phases of development that will be completed through 2021. Again, Class A, well-located assets, and we're really pleased by the ability to capture that total portfolio. Another interesting part of the portfolio, it was -- it is an off-market deal. So it speaks to the level of relationships that we continue to build across the storage sector. This relationship has evolved over a longer period of time, and we continue to look for those opportunities where they may play through.Beyond the large portfolio that I just talked about, we're also seeing a number of smaller opportunities, which we've been seeing through 2020 and frankly, what we saw even in 2019. So with that, we're poised to have a very strong acquisition year this year. I would tell you from a cap rate standpoint, with the amount of capital and the cost of that capital, we're really not seeing any easing of cap rates, and we'll have to continue to monitor that. We clearly have good access to capital. Ourselves, our own cost of capital continues to be very attractive. Tom can give you a little color later in the call about what we see relative to funding through either the preferred market or the debt markets. But we're clearly seeing some good opportunities to put that capital to work, and we are continuing to look and hunt for additional acquisitions going forward.
Great. And then just a little bit on rent increases to existing customers. I know in the beginning, you guys noted that you're not going to be increasing rents as much as you did in prior years. But with -- I guess now cases are kind of going up, but is there -- do you have an expectation when you're going to be able to get back to your historical bumps?
Yes. Well, let me give you a little bit of context, this is Tom, around what we've been doing through the quarter on existing tenants and then what we think the outlook is. As we noted in the 10-Q, we did resume, and we discussed on the last call, we resumed existing tenant rate increases in the third quarter. We did so initially on a test basis and have since increased the volumes of those rental rate increases that we've sent out as we've grown more confident in the performance of our existing tenants.Since we didn't send any increases in the second quarter, we did have a "backlog" of potential tenants to increase rent on in the third quarter, and we did send those catch-up rental rate increases. As you noted, those increases went out with a lower magnitude of increase, given overall mindfulness of our customer base in this crisis environment, and as you highlighted, still very dynamic, as well as state and local price regulations in many of our markets. We expect some of that to continue as we move through future quarters. Certainly, navigating this dynamic health care environment is unpredictable. We would expect that the existing tenant rate increases will continue to be a modest drag on in-place rent growth as we move forward.Stepping back, customer activity has been solid. And I just highlighted the existing tenant performance has been good. That's across the board. So that collections are better, payment patterns have accelerated, move-outs are down, length of stays are extending and new customer demand is solid. So we're seeing good trends there. And overall, move-in activity has been good. But existing tenants will continue to be a modest drag going forward.
Your next question is from Smedes Rose of Citi.
My question is really just about move-out activity. Your portfolio is always kind of generally at an upward bias in occupancies, that you did note that move-outs have slowed. And I'm just kind of wondering, as things kind of normalize, I mean do you have a sense of how much occupancy might be higher based on the slowdown in move-out activity? I'm just trying to think about how your occupancy may change over the next few quarters if things maybe get back to normal? And what might you do to encourage some of those customers to stay, I guess?
Sure. So I'll provide a little context around the move-out activity because it has been one of the surprises as we move through this pandemic period. As we rewind to April and early May, we had move-in volumes and move out volumes that were lower. But as we moved into May and June and then into the third quarter, move-in activity has increased, but move-out activity has remained muted. And dissecting the geographies, the customer tenures, the customer segments with which move-outs are lower, it is really across the board and clearly being driven by the current health care environment. And you highlighted and we discussed in the 10-Q and the MD&A the likelihood at some point that that rate of deceleration will moderate, and we talked about in previous calls, the fact that in other recessionary environments, we've actually seen the opposite play through with higher move-outs given consumer stress. But we've not experienced that this time. And in fact, it was pretty consistent through the third quarter. To give you a sense, each of the months in the third quarter saw 12% to 15% declines in move-out volumes. And as I mentioned, it's across geographies, across customer tenure bands and customer segments.So really broad-based decline in move-outs, paired with good collection activity, and accepting the rental rate increases that we've sent to date. So we've encouraged by the existing tenants. We do have a -- our eyes on what could play out as we move in this dynamic environment, and we'll be watching that very closely. But through October, move-outs continue to be lower.
And yes, Smedes. So what's playing through right now that, again, month by month, we're seeing more sustained and consistent consumer behavior. Work-from-home is additive, meaning is another factor that we're seeing from a survey standpoint relative to the customers coming to the portfolio and what's driving that decision. You've got a number of markets, whether you label them as urban or high-density and/or related to even concentrations of tax, I'll use the Bay Area, for instance, where we see system-wide, our highest level of occupancies.Thousands of employees have been given the latitude to move out of that market, either temporarily or potentially permanently, and are shifting and amplifying the need for self-storage as either they're dealing with the health crisis and the flexibility that they've got to work at either at home or a completely different location. Seeing similar impacts, right, again, in the heart of our New York set of assets. So that's additive. The housing market is very strong right now. That's always a traditional and very good driver for our business. But housing sales are up over 20% as we speak on a year-over-year basis, and it's a driver.So you've got layers of different consumer patterns that are playing through that are pointing to more sustained and prolonged need for storage space. So we don't know when and to what degree it will shift back to a "normal environment", but the amount of sustained activity that we're seeing now into the 8th month of this health crisis continues to be quite good.
Okay. That's great color. And then I'm just wondering, maybe broadly, you've talked before, just kind of what you're seeing on the supply outlook overall? Or if you're seeing any kind of changes on the increment versus your last update on just overall nationwide supply dollars in development, I think, you typically talked about?
Yes, not -- I wouldn't say anything to point to that's materially different. We do think that 2020 will, plus or minus, calc out to be about a $4-or-so billion set of deliveries across all of our markets here in the United States. The anticipated shift-down into deliveries in 2021 was something in the range of 15-or-so percent. So we could still see that degradation in deliveries, but frankly, it's still high. And with the continued interest from an investor base to get into the self-storage sector and the performance that the product type itself continues to have, even in this challenging environment.As mentioned earlier, there is still a fair amount of capital that wants to get into the space, whether it's through acquisitions or even development. So it's something that we're keeping a close eye on, but it really hasn't changed that much from our prior outlook.
Your next question is from Spenser Allaway of Green Street.
Can you guys provide a little bit more color on what drove the material deceleration of marketing spend for the quarter? And where you see this trending for the balance of the year?
Sure. So stepping back on marketing spend, that's been a tool that we've utilized along with promotional discounts and move-in rates over the past several years and what was a tough customer acquisition environment, given the impact of new supply in many of our markets. And so we did increase our spend over the last several years and have liked the returns that we've seen utilizing advertising spend, and that really is across paid search affiliates, social media, we used television in the second quarter, kind of a broad-based advertising approach to attract new customers.We do have real advantages in using advertising as a tool, given our brand name and presence online. And so we like that tool, and we will continue to use it as we navigate this dynamic environment. In the second quarter, given lower top-of-funnel demand, we were more aggressive on marketing spend. And as top-of-funnel demand improved as we moved into the third quarter, we removed some of that advertising support. But as you note, our advertising spend was up about 8% or 9% in the quarter, and we will continue to use that tool as we play through what's a dynamic environment, but we did not need the level of support we saw in the second quarter given improved top-of-funnel trends.
Okay. And then maybe just lastly, we recently saw a large storage transaction with Blackstone acquiring the Simply portfolio. Was this a deal you guys looked at? And can you comment on whether the portfolio would have been of interest to you?
So we're active in all markets and have the opportunity to look at most deals. So I'll comment on is we're highly entrenched in most, if not all, the deals that are happening in a variety of different types of transactions, large and small. And we are continuing to track and see the level of activity. I'm not really going to comment on our view and perception of that particular portfolio, but we're highly entrenched, and our acquisition team continues to be incredibly engaged whether they're marketed deals as that particular one was or deals that are not marketed, which points to the portfolio I talked about earlier.
Yes. And I'd maybe just highlight, that transaction is emblematic of what Joe earlier around institutional capital looking to invest in self-storage because of its performance through cycles. And so it's interesting to see another institutional player put a significant amount of capital into the sector.
Your next question is from Todd Thomas of KeyBanc Capital Markets.
Tom, helpful color on some of the move-out trends. Can you comment on move-in trends throughout the quarter and through October, what the cadence was like?And then the strength in move-in rates was rather significant. They were -- rates were higher in the quarter than they've been in several years. Did you push move-in rates above market during the quarter, just given where your occupancy is? Or was that increase sort of more commensurate with the market rent growth in your view?
Sure, Todd. So kind of stepping back on the move-in trends, like I did with move-out trends. We did see move-in activity kind of surge in March. Then we saw it really slow down in April. We moved into a third phase that we call internally kind of recovery in May and June. And then really since July 1, we've seen an improvement in top-of-funnel demand. Pair that with reduced move-out activity, as I just highlighted, means that occupancy has moved higher in really all of our markets across the country. And that improved occupancy, certainly, reduced the inventory levels that we had. And that really persisted through the quarter.We finished the second quarter up about 50 basis points in occupancy. We finished the third quarter up 200 basis points. We're sitting here, we finished October up 230 basis points in occupancy. And so customer trends, be in move-in and move-out, have been good. And with lower inventory, that's allowed us to achieve higher move-in rates. In move-in rates, were up 8.2% in the quarter in October. To give you a sense, the strength of top-of-funnel and the move-out trends have continued, which has led move-in volumes to be up about 1% in October and move-in rates up about 10%.So the trends have continued and obviously, seeing the benefit of demand for storage, both from our existing tenants who want to continue to use storage in this environment, as Joe mentioned, for many reasons, as well as new customers that are seeking new space.
Okay. And obviously, there's just a lot of, I guess, sort of ins and outs when you think about demand. But Joe, I'm curious, in a market like New York, you mentioned San Francisco, where a lot of workers have flexibility to work from home and move out of some of these high-cost markets, which the data and headlines suggest is happening. Why is that out-migration activity translating into strong demand in those markets? And do you expect that to moderate or maybe unwind, I guess, to some extent over time? Is that a risk in your view?
Well, it's a spectrum of different drivers, Todd. So part of the flexibility, for instance, if you look at the Bay Area that many tech workers have been given is when a big employer, many of whom you -- anyone of us can point to, gives signals and/or time frames where they may not be pulling their employees back, not for 1 or 2 months, but for 6 months to a year, coupled with giving them full flexibility to be somewhere else. That could vary. So some employees will still come back. There's no question about that, but it may be for several months or several quarters, depending again on the unknown timing of the pandemic itself.And then to what degree these become permanent relocations and then some commensurate impact on the need to keep goods or whatever they're keeping in one of our units in that particular market will be a question. And we can predict it. I don't know. Fortunately, again, if you look at the Bay Area, for instance, we have an opportunity to stand out there because we've got a very well-placed portfolio. It's very difficult to add new supply there. So the inherent need for that space in that market long term is quite high. There's no question about it. And it's difficult to build there. So it's not a market by any means that we're concerned about from an oversupply standpoint, et cetera.This has just been a very unusual environment where this demand has been so elevated, where I mentioned we've got system-high occupancies of 97%, 98% this time of year. I mean we have never seen that before. So it's to be determined. It's hard to predict. And the flexibility and the way in which employees, whether they're tech-oriented or other traditional office users, change over time is to be determined. But Tom mentioned, we're seeing -- it's just not in these urban or more dense markets. We're seeing healthy demand across the entire system. We frankly don't have a market that's down in occupancy. It continues to percolate our lease-up of our newly built and our acquired assets is very strong. And consumer demand continues to be very, very active, particularly for this time a year.
Yes. And Todd, maybe just to provide a couple of other market anecdotes for you. Markets like Charlotte, for instance, we've seen very good incoming demand in a market that had been suffering from new supply over the last several years. We've seen good new customer demand, improving occupancies, improving rates. Even within the San Francisco Bay Area, while you can clearly make a case for a very urban peninsula, and the city of San Francisco, we've seen strength in our lease-ups in San Jose, for instance, and a strong housing market there. So there's -- we have a well-placed portfolio around the country, and we're seeing good demand in both markets that may see outflow as well as those that are seeing inflow.
Right. That's interesting. Is the demand for the larger units -- are you seeing that as individuals are maybe looking to rent larger spaces for their apartments or homes for sort of a period of time?
Actually -- it's actually the opposite, which is strength year-over-year has actually been in smaller spaces versus larger spaces, believe it or not?
Yes. So theoretically, you could argue that, again, if you just think of the demand that's tied to work-from-home, it's just not somebody holistically leaving an entire house or an apartment. It may also be a very healthy level of demand tied to just needing that extra closet or that extra bedroom or that area. It's not only because it's work-from-home, maybe family members come back or whatever. And there are layers and layers of demand factors that we're tracking. But as we've said, it's solid demand.
Your next question is from Ki Bin Kim of Truist.
Just going back to some of the acquisitions you made in the quarter and fourth quarter, can you just provide some more color or parameters around yields, at least for your stabilized portion?
Ki Bin, I'm not going to give you specifics about the actual yield. I would tell you it's similar to the same ranges that we've looked for over time, which on a stabilized basis would be 5% to 6% plus on a cash-on-cash yield or north of that. The thing that I didn't mention about the portfolio that we'll be closing this quarter is the occupancy is about 35%. We look at that as a very good thing relative to, again, the opportunity to lease up space based on the demand factors that we're seeing, the great locations that these assets are tied to and the quality of the assets.So it's a very good opportunity for us to stabilize those assets to put our own marketing and operational tactics and strategies into them. And we feel that we'll have very good returns once we get the assets stabilized. As you well know, that can take anywhere from 3 to 4 years on a normalized basis, not only once you get to stabilized occupancy, but more stabilized revenue and pricing metrics. So we'll continue to look for, again, the stabilization of those assets. But as I mentioned, pretty high-quality, good, solid assets and adds. In many ways, you could consider it almost like a near-term or more recently delivered developments on our part. So again, very good opportunity to drive good value from them.
Okay. And when I look at your same-store revenue, it improved slightly to negative 2.7% from minus 3% last quarter. But obviously, the underlying drivers are pointing towards a much better place, right, where street rates are up 8%, better occupancy and things like that. So I was wondering if you could just provide some more details behind the transitory nature of the underlying drivers and how that might benefit same-store revenue going forward, in particular, things like existing customer rate increases. I'm not sure how much normally it contributes whereas in 3Q it didn't. And going forward, how do we expect that to normalize? So just trying to understand that magnitude a little better.
Sure, Ki Bin, it's Tom. I think we've spent some time talking last quarter around the cumulative impact of the pandemic, which was likely to continue to impact revenue growth trends as we move forward, and we did see that into the third quarter. Operating metrics have removed more quickly than financial metrics, and we -- let's pick a part of the occupancy and rate equation. I commented earlier around how occupancy trends have improved with a combination of better top-of-funnel activity as well as lower move-out volumes. And so that's improved occupancy trends. In many of our markets, we have reached occupancies that are frictional, meaning we are at 97%, 98% occupancy in the middle of the month, which is frictional in our industry. So it's a matter of what play through with rate in some of those markets as we move forward.As you just highlighted and we spoke about earlier, existing tenant rate increases are not going to be a contributing factor to improving rent trends, given the magnitude of the increases are likely to be lower as we move forward through the fourth quarter. That said, just looking at in-place rents from June 30 -- at June 30, in-place rents were down 3.1%, and we finished the quarter September 30, down 1.8%. And with existing tenants not contributing to that improvement, that negative impact was more than offset by improved customer activity and the reduction of rent roll down. If you look at the third quarter of 2019, rent roll down was about 15%. And as we moved into the third quarter of 2020, that narrowed down to about 4%. So improved rent roll down more than offsetting the degradation from existing tenant rate increase drag in the quarter.Looking forward, aggregate contract rents recovered. So occupancy and rent combined to positive 20 basis points at September 30, and we've continued to see good customer trends through October. So better rental income trends. Fees, which have been a negative contributor to revenue growth in both the second and third quarters, we anticipate to continue to do so as we move forward, and that's really driven by customers paying their rent, which is a great thing but is a degradation in revenue and the growth. So I think we spoke a little bit about that on the last call, Ki Bin, but we continue to see that, and we'd anticipate that through the fourth quarter and into the first quarter of next year.
Your next question is from Steve Sakwa of Evercore ISI.
Just a quick question on the balance sheet, Tom. You've got like $1.2 billion of preferreds that, I guess, are callable throughout 2021. I'm just sort of curious on your thoughts about replacing them with new preferreds. I think your last deal was sub-4%. And how do you sort of weigh that maybe against kind of putting some more debt on the balance sheet, just given how lowly leveraged you are? And where do you think the comparable, say, 30-year kind of debt issuance would be for you today versus a preferred offering?
Sure. So Steve, you highlighted what is a good opportunity in 2021, which is another year of potential preferred refinancing activity, be it with debt or preferred. Looking at our preferred balance, we like having around a $4 billion preferred balance in the capital stack. We think it's good for the business through cycles. And the optionality, both to have perpetual capital in the capital stack, but at the same time, if interest rates decrease over time, the ability to call them like we did this year, and you highlighted the opportunity for next year.So throughout this year, we redeemed about $1.2 billion of preferred. We haven't issued quite that much yet, and we were active in the bond market in Europe in January. Financing markets, as Joe highlighted earlier, are as attractive as they have ever been. Preferreds are sub-4% for us today, which is a record low, which presents that opportunity, and we have great access to debt capital, too. As we said in previous settings, we'll look to utilize both preferreds and debt for incremental financing activity as we move through 2021 for both preferred refinancing as well as for potential acquisition opportunities and development funding, which clearly, as Joe highlighted earlier, is accelerating as we move through the fourth quarter. So good access to capital and we'll utilize both, and we hope that we have the opportunity to refinance in 2021 like we did in 2020 and 2019.
So just do you have a sense for where, like, a 30-year bond offering if you wanted to go longer out on the sort of curve, how that would compare to a pref offering?
Yes. A 30-year bond is going to be cheaper. A 10-year bond is going to be even cheaper than that; 5-year bond, even cheaper than that. So we've got lots of tools in the toolkit.
Okay. And then just on the acquisition front, you guys from time to time have obviously looked outside the U.S. and spent some time in Australia. Joe, I'm just curious sort of where your head is today about looking for international opportunities outside of the domestic opportunities.
Yes, Steve, we're going to continue to look both domestic and internationally. So we have clearly the opportunity from a knowledge base. We've learned a lot through our involvement and success through the Shurgard investment. And we feel over time that we can continue to grow both here domestically and internationally. It's always going to be subject to different types of opportunities and the particular market that may be, for whatever sets of reasons, well-timed from an attractive point to either enter or find appropriate opportunities. So we're going to continue to assess opportunities, both here domestically and internationally.
Your next question is from Ronald Kamdem of Morgan Stanley.
The first one is just circling back on the demand question. Just trying to understand, obviously, looking at the analysis, just looking for sort of more thematic in terms of, is there anything that stands out in terms of the demand driver in this period, whether it be college students, small businesses, work-from-home or just people leaving the city. And the reason I asked that is, one of the questions we get a lot is, presumably, once the vaccine is here and it normalizes, really trying to get at which drivers are going to stay and stick around and which drivers were really just sort of a one timer. And maybe what new demand drivers we may not be thinking about, again, once we normalize.
Yes. Ron, that's certainly something that we're going to continue to track as these different demand factors play through. It's hard to predict the sustainability or the likelihood that some of them are here permanently or they're going to shift up and down. I already talked a little bit about the work-from-home demand factor. That's clearly new at this level of magnitude. And whether or not that sustains from a demand standpoint after the pandemic settles down or not is to be determined. Many companies are looking at work-from-home platforms as a different and new way of enhancing productivity and employee satisfaction, but the theoretical argument against that is there may be the opposite playing through, too. So it's a little bit hard to predict. And at the moment, we're just going to continue to survey and understand and see these drivers.But the interesting thing is they're all additive, and they're continuing to drive, as we've talked about, very optimized performance. We'll continue to learn from this, and it's brought, frankly, a healthy and new set of customers into the storage sector who never used the product before. So I think long term, that's a good thing. The adoption of the product continues to grow statistically. And it, once again, is proving that the product is highly resilient, it's highly adaptable and consumers like it. The things that we continue to do also are find ways of making the customer interaction that much more effective, making it a much more easy decision and transaction. So many of the tools that we've been putting into our technological channels and options for customers are serving us well.About 40-plus percent of our move-in volume in the third quarter came from our e-rental platform that, frankly, was in test mode before the pandemic, came about, but statistically, we moved in 115,000 customers directly through that a channel. And that transaction takes about 5 minutes, and consumers love it. And that's not just because of the pandemic. It's just a great and easy way to capture a storage unit. So we've got different things that we're also able to test in a very challenging environment like this that are frankly giving us even new and different tools that could lead to different levels of dealing with customers in a very different way than we were doing before that, again, are very aligned with their ability to think even more positively about needing a storage facility because it's that much easier to capture and it's that much more cost effective.
Great. And then my second question was just digging in deeper a little bit into acquisition. Just trying to get sort of harder numbers and quantifying it. Clearly, you have cost of capital. You talked about sort of the pipeline deals that you've identified of at least $700 million. The question is, is there -- just for PSA, when you sort of take a step back and look at your team, is there $500 million, $1 billion, maybe even more of acquisition opportunities out there for the company a year? Or just trying to understand what's the mitigating factor? Is there not enough sellers? Is it too competitive? But if the company decided tomorrow to take acquisitions up, what would be the mitigating factor to getting to a number like that?
Well, I wouldn't say it's as simple as just saying we turned on the switch and said, "Let's just go buy whatever we can get our hands on." We have very disciplined analytics that we use that give us the right guidepost to say, "These are the relative and I would say, better timed opportunities to deploy capital." This is, at the moment, a good window to do that. Our cost of capital, as Tom reiterated, is very, very good. Our access to capital is very good. We know most of the markets that we operate in much better than others do. So we have different ways for us to step back and understand the relative ultimate capital allocation performance and ability to drive value through, not only our acquisition environment, but our development and redevelopment activities.So we have all those tools, we continue to analyze them. And we've got a balance sheet that can clearly accommodate multiple factors of the volume that we're even talking about this quarter. So I don't see that as any way a limiter, and we're going to continue to evaluate the timing and the quality and the fit of any particular acquisition, whether it's a one-off, whether it's a medium-sized portfolio or a sizable one.
Your next question is from Jonathan Hughes of Raymond James.
This is an extension of Steve's earlier question. But what are you and the Board believe is the appropriate amount of leverage? All 4 legacy self-storage REIT share prices are up low double digits year-to-date on a total return basis. Yet, balance sheets range from 3 turns of leverage for PSA, including preferreds to more than 6 turns at peers. So during a 100-year pandemic and recession when balance sheets should have mattered most, it hasn't really benefited PSA. I'm just curious if views towards leverage have changed at all over the past 8 months?
Yes. What I would say is that our perspective around leverage is the long-term held belief that we should have a conservative balance sheet that allows us to invest through cycles. That allowed us access to capital throughout this year, as you highlighted. And I think this year has been somewhat unique in that we're in a deep recession and financing markets have been attractive throughout.I think we've also highlighted that we have capacity to utilize that balance sheet in times like this to fund acquisitions, and we're doing that in the second half of this year. So we definitely have some capacity from here to add incremental leverage. And we're doing that as we move forward.In terms of the appropriate amount of leverage, we think a conservative long-term view and a single A rating is an appropriate place for a REIT of our size, scale and capability.
So earlier, you said you like having $4 billion of preferreds in the cap stack. I mean how do you arrive at the exact number, why not more? I guess you said -- you alluded to, you can use more preferreds to go consolidate share, but are you talking upwards of another turn? I think leverage was 4 turns back in '07. So is that a range we could expect?
Yes, Jonathan, the range I highlighted is $4 billion. I didn't mean that that would be the maximum. I meant it more that I liked having $4 billion. So I would consider that. And why did I say $4 billion? It's because about the amount we have currently outstanding. Meaning I like the amount we have outstanding and over time, would anticipate that to grow and would anticipate our debt balance to grow as the company continues to grow, and our EBITDA grows and the business grows.
Okay. I just want to make sure it wasn't like an arbitrary you like the number 4 or something like that. And then one more -- I figure it is much. I just -- the 4 stuck out to me. What about funding acquisitions on a leverage-neutral basis by raising common equity. I realize that hasn't been done in, I think, decades. But plenty of other large REITs still raise common equity to grow on a leverage-neutral basis. And given you're trading at a low-4 implied cap and above NAV, that would actually be accretive to NAV. Is that a possibility?
Sure. Common equity is in the toolkit, and it's something that we could utilize, as you highlight. At the same time, we do have capability to finance with the debt and preferred markets. And debt and preferred is cheaper than common equity. So we have the ability to do that over time. But it's certainly in the toolkit. The company, over time, has used it more for strategic opportunities. But as the company grows, it's certainly an option to finance as well as debt and preferred and the like. So it's in the toolkit but certainly, recently, we've been utilizing debt and preferred because we have capacity to do so.
[Operator Instructions] Your next question is from Juan Sanabria of BMO Capital Markets.
Just hoping you could talk a little bit about move-outs but from a different perspective. I believe you mentioned earlier in the call that you typically see move-outs increase during a normal "recession". So could you give us some just helpful parameters around what that has been historically through your many cycles? And just to think about the downside risk if some of these benefits that are maybe onetime in nature to pass at some point, hopefully?
Sure. I mean, obviously, we don't know that when we may find ourselves in a position where move-outs would accelerate. We do think that the current trends are impacted by the health care crisis that we're navigating through. In terms of prior crises, if you look back at the financial crisis, we saw move-outs for several quarters up in the mid-single digits. And so that's an example. But what we've learned certainly through this experience is that everyone is unique.And so our ability to point to that is what will happen when the pandemic eases, I think, is limited, and we're going to be certainly watching very closely in terms of what consumer activity will be like as we move through future quarters. And I would say it's unpredictable. And it's unpredictable because of the health care nature of this crisis as well as the government activities to reduce the spread of the virus. So it's unpredictable. Past recessions would point to something like mid-single digits increase. Will this time be like last time? We don't know.
Fair enough. And just on the length of stay that you brought up as well. Where are we at today in your portfolio? And kind of how has that trended? And at what point, if at all, do you cross kind of a magic number where you may be sneaking 1 more rate increase, assuming kind of the median length of stay?
Sure. So in terms of the benefit of length of stay, you highlighted it, which is, okay, we get to see those longer-term tenants stay with us, we don't have to replace them, and we have the opportunity to increase their rent over time. And that's already been playing out as we move through 2019 and into 2020. The length of stays were extending last year, and we started to get the beneficial impact of sending more rental rate increases last year. And as we moved into the second half of this year, with the decreased move-outs, more customers have been eligible for rental rate increases this year. And if this continues, would anticipate that in the beginning of next year as well. And that's been somewhat of an offset to the fact that, as I highlighted earlier, we've been sending lower magnitude rental rate increases. But I would say that's been on the margin at this point. And if the trend continues, it will accelerate.
So what is the average or median length of stay?
It's about 10 months.
Great. And just one last super quick one. Did you say that the average occupancy was 35% for the portfolio you're acquiring, the one that's not in development? Is that...
Yes. Yes, there's 24 properties that are operating that our on average 2 to 3 years at most an age. So they are in early phases of lease-up. So that portion of the 36 property portfolio is about 35% occupied. And there are 12 properties that are under construction that will be delivered in 2021 quarter-by-quarter. So the lease-up opportunity on the existing 24 is very good.
Yes. But not necessarily yielding anything today like from an NOI perspective?
No, I mean they've got to cure and stabilize levels of performance. But we're very confident, as I mentioned, relative to the quality of the location, they're Class A buildings, and we're very confident across the markets that they are positioned and that we'll do quite well with them.
Your next question is Rick Skidmore of Goldman Sachs.
Just a really quick one on cost of operations, it declined from the second to the third quarter, which is kind of atypical for the seasonal. What was happening? Is that just lower personnel cost? And then as you look forward on that line, do you expect lower move-outs to help to bring that line down over time? Or do we -- should we expect kind of the normal seasonal pattern?
Yes, Rick, we're definitely looking for and seeing opportunity from an optimization standpoint to find ways of moderating the pressure tied to payroll as a whole, whether it's property and/or supervisory. So you saw some of that in the quarter. We are looking for and finding ways of optimizing operations on a number of fronts.Utilities also in the quarter were down nicely. That's tied to some intentional investments that we've made from an LED standpoint. So we've now got our entire 2,600-or-so portfolio on exterior LED lights, and we've transitioned maybe about 1/3 so far of the portfolio from an interior standpoint to LED. So we're seeing nice savings relative to the utility cost. Again, utilities were down a little over 9% in the quarter.Repairs and maintenance were down. That can vary quarter-to-quarter depending on some of the repairs necessary across the portfolio, but we saw a good metric there. And overall, we continue to look for ways of optimizing costs. Tom has been focused on looking at new and different ways of optimizing our marketing spend, too. So although it was up, it wasn't up as much as it's been in the last few quarters. So again, we're looking for different ways of optimizing that spend, too.
Your next question is from Mike Mueller of JPMorgan.
Most questions have been answered. But can you just give us a quick update on third-party management and kind of how that's been trending?
Sure, Mike. So the program as a whole, we've got 113 properties in the program. We added 7 in the quarter. The activity from a backlog standpoint and delivery standpoint is, in some ways, matching the kind of activity we're seeing on our own direct acquisition front.So we're seeing good percolation of owners that are interested in coming into the system. And we are finding high-quality assets and like the way that the program continues to build. The dominant factor as it has been since we came into the business is tied to new deliveries. So we've got a healthy growing pipeline of new assets that will also be coming into the portfolio over the next few quarters.
Your next question is from Jon Petersen of Jefferies.
The portfolio you guys are buying, is that from your third-party management business?
No, no.
Okay. So how are they currently branded?
They have their own.
Okay. And then, I guess, how should we think about the third-party management business in terms of an acquisition takeout kind of pipeline for you guys going forward?
I think it's a natural add, Jon, to that business, and we've had a handful of situations that have percolated on that front. We'll see how it plays over time. But it's overall a great opportunity to build relationships with owners, whether they're one-off owners, they only own 1 or 2 assets, or other owners that have multiple assets in multiple markets.So it's been and will continue to be a healthy way of broadening our tie to a different owner pool out there. So we'll continue to look for and develop those kinds of relationships, too, as the program builds. But the portfolio, the large portfolio that we're closing on this quarter was not in our platform.
You have a follow-up from Steve Sakwa of Evercore ISI.
I just wanted to circle back on late fees and just trying to understand how much of the drop was sort of an inability to charge customers in light of the pandemic. How much of it is more auto pay and less cash pay and therefore, fees are naturally down? How much of it is maybe customers that were normally taking those have left the portfolio? I'm just trying to kind of understand what's driving that.
Yes, Steve. So I'll provide a little bit more color around customer collections in aggregate because that is the primary reason why fees are down. And so as we look at rent collections, really starting in the second quarter and persisting through the third have been very solid. And some of the things you highlighted are contributing, i.e., auto pay is at a modestly higher percentage. But even away from auto pay tenants, customer payment patterns have accelerated, and we're charging less in terms of fees. And so obviously, if you don't charge it, you're not going to collect it.Our receivables have been down around 30% through the quarter, and that's persisted through the delinquency period for tenants, meaning that receivables are down about 30%. We wrote off about 30% less rent. We had about 30% fewer auctions in the quarter. So overall customer health and payment patterns have improved, and that has led to lower fees, primarily from late fees, which are charged for customers not paying their rent within a grace period, but also contributed from longer into the delinquency period, lean fees and lean sale fees, but primarily driven by the grace period ending late fee in the first month of a customer's delinquency.
So would you look at this as a bigger structural change? Or you look at this as just it's kind of a point in time more cyclical? Or do you expect these to kind of stay down more permanently?
No. I think early on in the pandemic, we thought that it may have been more transitory, and there was customer being supported by government stimulus, certainly, that was the case through April, and unemployment benefits and the like. Some of that has been put in the rearview mirror. The trends have continued. It's something we're watching very closely month-over-month. I would tell you that trends continued through October, and payment patterns have been very good through the early part of November as well. So it feels like at least for the foreseeable future or near to medium term, we're anticipating that will be the case, but we're watching it very closely.
I will now hand the call back over to Ryan Burke for any additional or closing remarks.
Thank you, Christy, and thanks to all of you for joining us today. Have a good day.
Thank you. This does conclude today's conference call. You may now disconnect.