Earnings Call Transcript
Extra Space Storage Inc. (EXR)
Earnings Call Transcript - EXR Q4 2022
Operator, Operator
Good day, and thank you for all for standing by. Welcome to the Q4 2022 Extra Space Storage, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Jeff Norman. Please go ahead.
Jeff Norman, President
Thank you, Chris. Welcome to Extra Space Storage's fourth quarter 2022 earnings call. In addition to our press release, we have furnished unaudited supplemental financial information on our website. Please remember that management's prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act. Actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the company's business. These forward-looking statements are qualified by the cautionary statements contained in the company's latest filings with the SEC, which we encourage our listeners to review. Forward-looking statements represent management's estimates as of today, February 23, 2023. The company assumes no obligation to revise or update any forward-looking statements because of changing market conditions or other circumstances after the date of this conference call. I would now like to turn the call over to Joe Margolis, Chief Executive Officer.
Joe Margolis, CEO
Thanks, Jeff. And thank you, everyone, for joining today's call. We had another strong quarter to cap off an exceptional year. Our 2022 same-store revenue growth of 17.4% is the highest in our company's history and for the second consecutive year, core FFO growth was above 20%. I am proud of the Extra Space team for another year of strong performance across all aspects of the business. Now speaking to the fourth quarter, despite difficult comps and the return of seasonality, same-store revenue growth was ahead of our expectations at 11.8%. Vacates continued to normalize during the quarter and demand remained seasonally steady, leading to strong same-store occupancy levels ending the year at 94.2%. Our high occupancy allowed us to maximize revenue and grow customer rates across the portfolio. Despite offering lower rates to new customers, total net rent per square foot increased 12.8% year-over-year. We experienced expense pressure across many line items with same-store expense growth of 6.7%, resulting in same-store NOI growth of 13.4%. We were busy on the external growth front, acquiring 10 stores in the REIT or in joint ventures, adding 46 stores gross to our third-party management platform and closing over $250 million in bridge loans. We were also very focused on integrating our 2022 strategic acquisitions, including the Storage Express portfolio, which is already slightly ahead of our underwriting. We anticipate full integration of the properties onto our platform by the end of the second quarter, which will provide additional digital marketing, revenue management, and operational efficiencies. We have also started to test new operational strategies at both Storage Express and Extra Space stores, and we are beginning to see some early external growth opportunities in new and existing markets for Storage Express. Our strong property NOI, plus our external growth efforts, resulted in core FFO growth of 9.4% in the quarter and 22.1% for the year. This allowed our Board of Directors to increase our first-quarter dividend by 8%, contributing to a total five-year increase of 108%. As we look forward to 2023, we are encouraged by the fundamentals of the business. New supply continues to moderate from 2018 and 2019 peaks, and we expect even lower competition from new supply in our markets in 2023. Customer demand has been steady, occupancy has remained high, and same-store revenue growth remained above 10% through December. Our strong occupancy has allowed us to sequentially increase rates month over month to new customers since November. And we believe elevated occupancy will give us greater pricing power with new and existing customers as we move through the leasing season. We expect to face continued expense pressures but at lower levels than experienced in 2022, resulting in same-store NOI guidance of 3% to 5.5%. While this level of growth represents moderation from 2022 levels, it is in line with historical norms and we believe it will compare well to other asset classes in the current environment. Our investment strategy is long-term focused and we have made strategic decisions we believe will result in solid long-term returns for our shareholders. In the fourth quarter, we modified the term of our $300 million preferred investment in NexPoint, trading yields for longer duration and additional managed properties. We also continued our acquisition strategy which focuses on asset-light structures, non-stabilized stores, or acquisitions with long-term strategic implications, including Storage Express. While some of these initiatives caused short-term dilution, we believe they provide more total value for our shareholders over time and unlock additional growth channels for years to come. Before handing the time over to Scott, I would also like to congratulate the Extra Space team for receiving our third consecutive Leader in the Light Award, NAREIT's highest ESG and sustainability honor for real estate companies. We are proud to be recognized as a REIT that delivers strong financial results and has also created a sustainable portfolio and company that is positioned to continue providing results for the long haul. I'll turn the time over to Scott now.
Scott Stubbs, CFO
Thanks, Joe, and hello, everyone. We had a strong fourth quarter, beating the high end of our FFO range by $0.04, driven by better property net operating income. Total same-store expense growth improved from third-quarter levels due to lower repairs and maintenance expense and success with property tax appeals. Payroll expense growth, while still high, improved quarter over quarter, a trend that we expect to continue into 2023. Turning to the balance sheet. During the quarter, we swapped a total of $400 million of our variable rate debt, reducing our floating interest rate exposure to under 29% of total debt net of variable rate bridge loan receivables. We will continue to take steps to reduce our variable rate debt, and we will be methodical in our approach, recognizing that forward interest rate curves signal lower rates in the future. Subsequent to quarter-end, we completed a $335 million unsecured term loan and used the proceeds to pay down our revolving balances. We have no material maturities in 2023, and we will likely access the investment-grade bond market for growth capital needs, assuming it remains orderly. Last night, we released our 2023 guidance. Like last year, we have provided wider same-store revenue and NOI ranges to capture the different scenarios that we believe are possible, given the unusual 2022 comparable. Our guidance assumes positive same-store revenue growth for the full year. However, the pattern may be a little different than prior periods. Our guidance assumes the growth rate will moderate more quickly in the first half of the year due to the exceptionally difficult first half comps, trough in the summer and modestly reaccelerate late in the year. Same-store expenses have improved from 2022 levels at 5% to 6%, resulting in projected same-store NOI of 3% to 5.5%. Our 2023 core FFO range is $8.30 to $8.60 per share. Much of our NOI growth is offset by the first-year headwind of our investment in non-stabilized properties, which carry approximately $0.25 of dilution, the modification of the NexPoint preferred, and higher interest rates. While each of these headwinds slows our 2023 growth, we believe they will result in stronger long-term growth rates over a multiyear period for our shareholders. Our guidance includes a relatively modest investment in acquisitions of $250 million due to current market conditions. Third-party management increases have been stronger than normal at this time of year, and we believe most of our 2023 growth will be through capital light channels. That said, we have plenty of dry powder, and we will be opportunistic if we identify accretive ways to expand our portfolio and investments to maximize FFO growth. We are off to a great start in 2023, and we are confident in our ability to maintain healthy growth through the year as we see storage fundamentals normalizing to historical levels. We believe storage as an asset class is among the most resilient in both inflationary and recessionary environments and that our highly diversified portfolio is well positioned for another solid year. With that, operator, let's open it up for questions.
Operator, Operator
Our first question comes from Michael Goldsmith of UBS.
Michael Goldsmith, Analyst
Scott, you mentioned that you anticipate the same-store revenue growth rate will moderate in 2023, potentially reaching its lowest point in the summer before modestly picking up towards the end of the year. With that in mind, as we consider the exit rate for the year, does this suggest a mid to high single-digit growth rate in the first half, followed by a low to mid single-digit growth rate in the latter half? Is that the correct interpretation? Additionally, does this expectation for the second half indicate a return to what is typically viewed as a steady state or normal growth rate for the industry?
Scott Stubbs, CFO
So I think it's hard to speak for the industry. I think we're obviously speaking for us. I think that your assumptions are correct based on the comments we've given in our prepared remarks. I think one point I'd maybe make is it does not assume that we go negative versus zero at any point in the year.
Michael Goldsmith, Analyst
And then my follow-up question is just kind of on the components that get you there. Like what are the expectations around occupancy, street rate, and your ability to pass along continued elevated ECRI that's going to allow you to generate this? And then, I guess, does that also imply that kind of some of the benefit from a lot of the elevated street rates and ECRI that you've experienced over the last couple of years is that kind of burning off through the first half of this year?
Scott Stubbs, CFO
We are continually focused on generating revenue. Specifically, if we achieve the higher end of our expectations, it suggests that we possess stronger pricing power. Conversely, the lower end indicates reduced pricing power. This scenario also presumes that we can raise rates for our existing customers. We expect to operate with a slight decline in occupancy throughout the year. Overall, our primary focus remains on revenue generation.
Operator, Operator
Our next question comes from Jeffrey Spector with BofA Securities. So obviously, we're always focused on revenue. More detail on that would suggest that being at the high end of the range indicates we have more pricing power, while the low end implies we might have less. It also assumes we can continue to increase rates for existing customers. We expect to operate throughout the year with a slight negative occupancy delta. Other than that, our focus remains on revenue growth.
Jeffrey Spector, Analyst
First question, I feel like I need to ask. Are you happy with your scale today? And on the acquisition front continuing to hit kind of, let's say, singles and doubles to increase that scale? And Joe, as you talked about, you've really added on some new technology initiatives or new programs that you can use throughout your portfolio at some point.
Joe Margolis, CEO
So scale is important in this business, and we have sufficient scale in almost every market we operate in, and we're happy to gain more scale, but not at any cost. We want to be smart in our growth and we want to make sure that we are making long-term accretive investments. Frequently, we use structure to do so. Our strategic investment, for example, in Storage Express will open up new acquisition channels for us, some new markets, but a lot in our existing markets, and we expect we'll gain some scale through that.
Jeffrey Spector, Analyst
And then is there something else?
Joe Margolis, CEO
No, I was just acknowledging your thank you and saying thank you to you again.
Jeffrey Spector, Analyst
If I can ask a second on operations, just so we can compare to your peer that has already reported, provided guidance, so it's apples-to-apples. And your guidance, the bottom, the lower end of the range, does that specifically reflect, let's say, a recession hard landing versus the upper end of the range of soft landing? And if not, how would you describe your guidance?
Joe Margolis, CEO
I mean, it's hard to say what constitutes a recession, what constitutes a soft landing. Clearly, the lower end of our guidance reflects more economic weakness that gives us less pricing power, as Scott said, and the upper end of the guidance is more reflective of the stronger consumer and the stronger economy.
Jeffrey Spector, Analyst
I'm sorry, can I just ask one follow-up? I don't know if there's a limit.
Joe Margolis, CEO
Sure.
Jeffrey Spector, Analyst
So then I guess my follow-up is, again, I'm just trying to think about how the year ended and what we've heard so far, especially considering your competitor, and we all knew that the first half has tough comparisons. What are we looking for in terms of upside where peak leasing could be stronger than expected, perhaps even surpassing the midpoint? Should we focus more on occupancy or street rate? What are some of the key areas we should be paying attention to?
Joe Margolis, CEO
So again, I'll reference Scott's comments. We're going to focus on revenue and whatever tools we can use, be that occupancy, or discounts, or marketing spend, or all the different tools we can use to maximize revenue. We'll clearly be looking at top of the funnel demand, which is very indicative of what we can eventually charge our conversion rate through different channels. But at the end of the day, we're solving for revenue, and we'll use the various components as best we see fit to maximize long-term revenue.
Operator, Operator
This question comes from Todd Thomas with KeyBanc Capital Markets.
Todd Thomas, Analyst
First question, I guess, just following up on the guidance a little bit. I guess, maybe first, what are you seeing in terms of occupancy trends today, where is occupancy, what does that look like year-over-year? And then, Scott, you mentioned in terms of the guidance that you're expecting occupancy to be lower year-over-year. But consistent with what you said about the sort of cadence of revenue growth, do you expect occupancy to be sort of flat or higher year-over-year in the second half of '23?
Scott Stubbs, CFO
One thing I want to highlight about occupancy is that we faced a really tough comparison early last year. However, we're pleased with our current position at 93.5%. We've managed to narrow our gap slightly since the beginning of the year, which is encouraging. In terms of our guidance and opportunities moving forward, we see potential in rate adjustments. Notably, we've recently increased our rates month over month starting in November, which is unusual for this season as typically rates decrease during November, December, January, and February. This year, though, we have consistently raised them each month since November.
Todd Thomas, Analyst
And then what is the guidance for tenant reinsurance income and management fee income growth? What does that assume in terms of net growth to the third-party management platform during the year?
Scott Stubbs, CFO
So we are continuing to add properties. The one thing that we have is it's a bit of a weird comp with last year where we lost some stores that were stabilized. And so you have the full revenue impact last year, and we're assuming we replace them more with lease-up stores. And so a lease-up store obviously has very low tenant insurance penetration; some of them are actually at our management fee minimums. So that should grow throughout the year. In addition, we bought several properties out of our third-party management, and those properties, if they are wholly owned, we no longer collect management fees on those. I believe we bought 16 properties out of that pool this year.
Joe Margolis, CEO
39.
Scott Stubbs, CFO
39 total, but 16 were wholly owned.
Todd Thomas, Analyst
But does the guidance assume net growth to the third-party management platform during the year or sort of unchanged relative to where you ended the year?
Joe Margolis, CEO
So we have modeled in our guidance pretty modest growth in the third-party management business, and that's because a lot of the growth tends to be from transactions. And the transaction market is muted, at least at the start of the year. Now that being said, for the first two months of the year, we've experienced much better demand and much better action in the third-party management than has modeled, and we'll see if that continues for the rest of the year.
Todd Thomas, Analyst
And then if I could just sneak in one more here also. Just Joe, back to investments. You talked about investments you're making that often are dilutive upfront, but there's really good attractive long-term value creation in the future. Does that strategy change at all today, just given maybe the current outlook, a little bit more uncertainty, perhaps you dial back on investments that aren't stabilized and that are at lower initial yields, or do you sort of keep feeding that pipeline? And is that strategy different for single asset acquisitions versus larger portfolios, larger scale transactions, or do you view them similarly?
Joe Margolis, CEO
I don't think we'll scale back if we see a long-term attractive investment that we want to pursue. We might consider engaging in more joint ventures to reduce or avoid that initial dilution compared to what we've done in the past. Last year, for the REIT, most of our acquisitions were lease-up value add, which increased our dilution from $0.20 to $0.25, presenting a bit of a challenge. Looking at our pipeline and considering the uncertainty for the rest of the year, I believe we may actually improve next year and benefit from that $0.25.
Todd Thomas, Analyst
And then any thought on how you think about that between single asset deals or larger scale transactions, would that be the same response?
Joe Margolis, CEO
The variables when we look at a single asset versus a large transaction include availability of our capital, availability of joint venture capital; how we feel about the deal. Timing, sometimes timing forces you in one direction. So we'll look at every opportunity in and of itself, and the unique characteristics of that opportunity will lead us to what we feel would be the best execution for our shareholders.
Operator, Operator
This question comes from the line of Keegan Carl with Wolfe Research. The variables when we look at a single asset versus a large transaction include availability of our capital, availability of joint venture capital, and our assessment of the deal. Timing can also influence our direction. Therefore, we evaluate each opportunity individually, and the unique characteristics of each will guide us in determining the best execution for our shareholders.
Keegan Carl, Analyst
I know this was kind of touched on first, but maybe just a little bit more information. So your interest expense is obviously going to grow significantly year-over-year. How much of a change in your view long term does this have regarding floating rate debt? I know you obviously said you're looking at the forward curve, but things changed. So just kind of curious here.
Scott Stubbs, CFO
So our guidance reflects a specific moment in time with the interest rate curve, which changes almost daily. It is influenced by the Fed's actions and their commentary during conference calls. This is our best estimate as of today. It also takes into account our current portfolio and applies the rate curve to it.
Keegan Carl, Analyst
But that's not going to change. You're still aiming for a floating rate debt range of 20% to 30%, correct?
Scott Stubbs, CFO
I think we will look to reduce that, but we do have some variable rate debt, and we are currently at a level higher than we would prefer. Therefore, we will seek to convert some of that into a more fixed rate either through the bond market or by using swaps going forward.
Keegan Carl, Analyst
And second one here. Just kind of given what's going on with the broader peer group, and you guys alluding earlier that you're interested in possible scale. Would you guys be interested in getting involved at all at the current potential deal out there?
Joe Margolis, CEO
So we're not going to comment on deals that are in the market.
Operator, Operator
This next question comes from the line of Smedes Rose with Citi.
Smedes Rose, Analyst
I would like to get some more details regarding the expense components, specifically about payroll and benefits, and how you are planning for marketing costs, which were relatively low last year but are anticipated to increase. Could you provide some additional information on those?
Scott Stubbs, CFO
I’d like to provide some insight into our guidance for the upcoming year, which is set at 5% to 6%. To begin, there are a few notable items that are contributing to that figure. Our payroll is projected to grow by 4%, and property taxes are also expected to increase by about 4%. Marketing expenses are anticipated to rise somewhat more, in the 10% range. Additionally, we expect challenges in the property and casualty market, leading to higher costs there as well. We are also seeing increases in electricity and gas costs, which are in the high single digits. However, we've implemented measures to offset some of these expenses with our solar program, as over 50% of our stores utilize solar energy. While this is a significant percentage, the overall impact is still relatively modest.
Smedes Rose, Analyst
I was wondering about the changes made to the NexPoint relationship. Is there a specific reason for that adjustment at this time? It would be helpful if you could provide a bit more detail on this matter.
Joe Margolis, CEO
So pre-modification, there were two instruments, the $100 million preferred and the $200 million preferred. The $100 million was open for prepayment, that's probably a dead way to say it, but whatever the equivalent is in preferred equity and the $200 million would open this year. So we're in a situation where they could have paid off those instruments, and we would have no investment. So we felt it was better to extend the terms, reduce the rate, which is costly to us this year, but long-term we're getting a very accretive rate on those dollars. And we picked up 11 management stores initially, an agreement that we will manage everything for them in the future. The management contracts run three years past the payoff of the preferred. So they're very long-term management contracts. And as you point out, a right of first offer, not a right of first refusal on the assets.
Operator, Operator
This next question comes from Spenser Allaway of Green Street.
Spenser Allaway, Analyst
Maybe just another one on capital deployment. You mentioned the focus on asset light channels. But can you maybe more specifically walk us through your capital allocation priority list, where are you seeing the best return on investment right now as you look across those various asset light avenues of growth?
Joe Margolis, CEO
The redevelopment of existing properties is relatively low risk in terms of the risk-reward profile. We have the assets, we understand the market, and we have been operating the store for some time. This allows us to build on excess land, utilize RV lots, and convert single-story buildings into multi-story ones, which is fairly asset light. We already own the land and much of the necessary infrastructure, expecting returns of 8.5% to 10%. We plan to continue and even increase this activity over the next few years. The demand for our bridge loan program is stronger than we anticipated, and we are pleased with our fourth-quarter numbers. We look forward to a very strong year ahead. The advantages include the economics of managing the stores and the opportunity to acquire many of them, which we have been doing over time, alongside the favorable terms of the loans. We can maintain a capital-light approach since we have the option to sell assets while retaining ownership of some. Our management business, which is expected to perform well this year, is also a very capital-light option and will be prioritized alongside the other two strategies. Our joint ventures have been quieter in the fourth quarter and the first quarter of this year compared to the first two quarters of last year, primarily due to some capital issues faced by our joint venture partners in private equity. However, I anticipate they will return later this year, and we will resume the joint venture program. We are continuously engaging with potential partners regarding innovative and unique structures, and we aim to pursue those opportunities as well.
Spenser Allaway, Analyst
And then as move-out activity has accelerated with the return of seasonality, are there any markets or regions that stand out with greater move-out activity or, to the contrary, have been stickier than others?
Scott Stubbs, CFO
Some of the markets that have been a little softer for us, Sacramento is probably the most difficult one for us, Phoenix has slowed, and Las Vegas are really the three that I would point to that may be really below the average.
Operator, Operator
This question comes from the line of Ronald Kamdem with Morgan Stanley.
Ronald Kamdem, Analyst
Just two quick ones. Going back to the comments on sort of the rent growth. I think you mentioned you've been able to sort of push rents since November, which is unusual for this time of the year and for the past couple of months. Just maybe a little bit more details around that, particularly interested in the ECRI and what the intensity is today versus maybe the peak of COVID and what the guidance assumes?
Joe Margolis, CEO
During the peak of COVID, ECRI was significantly limited by government regulations. As these regulations were lifted state by state, we experienced a kind of catch-up with ECRI, resulting in unusually high rent increases due to a larger-than-normal gap between what customers were paying and the current market rate. Looking ahead to 2023, we anticipate that ECRI will remain a vital resource for us. Customers are responding similarly to ECRI notices as they have in the past. In fact, the additional move-outs related to ECRI have decreased and are trending towards more typical levels, although we haven’t reached that point yet. I don't expect the same extreme levels of ECRI that we saw when the rent restrictions were first lifted, but it will still be important, especially as we are currently offering some discounts to attract customers. This enables us to bring them in at a lower rate with the opportunity to adjust to market rates at the right time.
Ronald Kamdem, Analyst
And then maybe just a bigger picture question about sort of top of the funnel demand. You hear a lot about sort of the economy slowing down, housing activity has slowed, people are presumably moving less than they were during the pandemic. But it sounds like what you're seeing on the ground is that top of the funnel demand, I think you mentioned, just as good as you've seen it. So trying to get a sense of what in your minds and what do you think is driving that, what are you hearing from customers on the top of the funnel?
Joe Margolis, CEO
So I think we have systems and methods to capture the demand that's out there that gives us a competitive advantage. Certainly, a competitive advantage over the smaller operators. And I hope and we certainly strive to have a competitive advantage over our public peers as well. So our ability to capture the demand that's out there and then convert a high percentage of it is really, really crucial and important to driving our success, particularly where demand does soften a little, and demand has softened from the peaks of COVID; it's just back to more historical levels.
Operator, Operator
This question comes from Juan Sanabria of BMO Capital Markets.
Juan Sanabria, Analyst
Just hoping, Joe, maybe you could extend a little bit upon some of the comments you made in your prepared remarks at the outset about testing new strategies and opportunities in both new and existing markets with regards to what you acquired in Storage Express and in your own existing portfolio. What that means and what we could see opened up here going forward?
Joe Margolis, CEO
I can give you an example of that. So we have this year converted two existing Storage Express stores to Extra Space stores, put in a manager, and we'll run them at our typical model. And we're in the process of converting five Extra Space stores to the Storage Express method of operation, and three of those are in our primary markets, Chicago, Seattle, and Vegas. So we're really interested in seeing how these two different operating models work in different markets and learn what type of store market situation characteristic the more remote-managed model works and where we can maximize performance with the manager in the store. And I think this will allow us not only to optimize our current portfolio but to grow in our current markets using two different operating styles.
Juan Sanabria, Analyst
And is the brand the same across both of those or is that kind of a separate point altogether? Just wanted to make sure I understood that piece.
Joe Margolis, CEO
So we are running two brands. We have Extra Space and Storage Express, and that is something we'll learn more about over time, and we'll see where it takes us.
Juan Sanabria, Analyst
And then just curious on the transactions market, where you see the stabilized cap rates that you're searching for today, given the changes in cost of capital and how that's evolved over the last, I guess, 12 months as rates have kind of moved higher. So just curious on what stabilized cap rates are, I guess?
Joe Margolis, CEO
They are higher. It's quite challenging to determine due to the limited number of transactions, and each one is unique with its own features. If I had to give a specific figure, I would estimate that stabilized cap rates are in the low 5s, but it varies significantly based on the particular deal. Given our cost of capital, this scenario doesn't align with us on a wholly owned basis.
Juan Sanabria, Analyst
And then just one more, if you wouldn't mind. What's the street rates that you kind of exited the year end, what are you experiencing in January on a year-over-year basis?
Scott Stubbs, CFO
So today, we are really at the bottom of the year. If you look at our churn, our move-out rates compared to our move-ins show a negative churn of about 23%, which is slightly more than it was in previous years. However, this is the worst time of the year; it should start getting better in March.
Operator, Operator
This question comes from the line of Steve Sakwa with Evercore ISI. Scott Stubbs, CFO: Currently, we are at a low point in the year. Our churn rate, which compares move-outs to move-ins, is at a negative churn of about 23%, which is slightly higher than in previous years. However, this is expected as this is typically the most challenging time of the year, and we anticipate improvements starting in March.
Steve Sakwa, Analyst
Scott, I wanted to revisit the earlier comment and the one Joe made about the first and second halves of the year. I want to ensure I understood correctly. You have tough comparisons in the first half, but are you implying that the Q4 same-store revenue growth will surpass the first-quarter same-store revenue growth and that you'll be accelerating into 2024? I just want to clarify my understanding of the same-store revenue growth throughout the year.
Scott Stubbs, CFO
To provide some context, we finished last year with strong growth, but we are experiencing a decline from that high point. The challenging comparisons are causing us to slow down more significantly. However, we expect that the first quarter will be the strongest. After that, we anticipate reaching a low point in the middle of the year, followed by a modest improvement in the latter half. I wouldn't characterize this improvement as anything more than a slight uptick from that low point in the middle of the year.
Steve Sakwa, Analyst
And then I just wanted to clarify on the kind of the loan book, because I've seen some different numbers. I think on the guidance page, you said that the loan book would have about $650 million of outstanding balance. If I look back at, I guess, the notes receivable page in the supplemental, I'm just trying to square up kind of the notes receivable balances at the end of the year. I guess, things that are slated to close, it sounds like they're above the $650 million. Now maybe you're not keeping all of that and some of those will be sold. But I was just trying to broadly think how much new money is going out, what's getting repaid, what's the net investment in the loan book this year?
Scott Stubbs, CFO
So maybe a little difference in how we were doing guidance this year versus last year. This year, what we guided to was the average balance outstanding. So that's a little different than what we were showing in prior years. I think we were showing more loan closings and it was getting difficult to do with sales and things like that. We ended the year at $490 million or just above $490 million in terms of outstanding balances. So that average of $650 million implies that many of the loans that we're closing in the first half of the year, we carry throughout the year, but we will continue to sell some loans. We'll still continue to sell some of those eight pieces.
Steve Sakwa, Analyst
And just as a quick follow-up. Is that about the level that you think that business will be running at on a go-forward basis, or could you see that number scaling up? I guess, Joe's comment suggests that there's a lot of activity out there, but I didn't know how large you wanted to make that business as a percentage of FFO going forward?
Joe Margolis, CEO
The business has so many benefits to us. I'd be happy to continue to grow it, particularly with our ability to sell A notes and manage the amount of capital we have committed to it. But it is somewhat of a treadmill, right? We are going to get to a point where these loans start to mature. We don't have a lot of maturities this year, but starting next year. And that will kind of naturally constrain the growth, if you know what I mean.
Operator, Operator
This question comes from Ki Bin Kim of Truist. The business has so many benefits to us. I'd be happy to continue to grow it, particularly with our ability to sell A notes and manage the amount of capital we have committed to it. But it is somewhat of a treadmill, right? We are going to get to a point where these loans start to mature. We don't have a lot of maturities this year, but starting next year. And that will kind of naturally constrain the growth, if you know what I mean.
Ki Bin Kim, Analyst
Just going back to the move-in rate question or achieved rates. What was it year-over-year in the fourth quarter and on a year-over-year basis, how has that trended into February? And broadly speaking, what's assumed at the midpoint of guidance for '23?
Scott Stubbs, CFO
Our achieved negative churn rate in the fourth quarter was just over 15%. It reached its lowest point in November and improved through February, where we recorded about negative 11%. It's important to note that these figures come from challenging comparisons to 2021, which had the highest rates we've ever seen. While the numbers are negative, it’s significant to consider the context of the previous year's performance.
Ki Bin Kim, Analyst
Could you comment on what's implicit in the guidance?
Scott Stubbs, CFO
So guidance, we focus more on the growth month-over-month. If you look back to last year, we actually started experiencing negative achieved rate growth in June. And so our rates were negative in June, and the assumption is as they start to move positive and have that pricing power as we move into rental season.
Ki Bin Kim, Analyst
And one of the wildcards is what's happening with the housing market and how that might be impacted in terms of people moving, downsizing or upsizing that might use storage. I guess how are you thinking about that wildcard as we head into 2023, and if you're assuming that is more of a normal type of environment or does the state kind of challenging?
Scott Stubbs, CFO
I think our assumption is that none of us believe the economy is really in great shape right now. Most people would likely agree with that. However, we have not provided any specific guidance, and our expectations suggest a serious recession or significant downturn. We believe a robust housing market benefits self-storage, but the self-storage sector performs reasonably well in both favorable and challenging times. So, while it is affected, the impact may not be as severe as it is on other areas of the economy.
Ki Bin Kim, Analyst
And if I can squeeze a quick third one here. In your guidance, in your share count, you're assuming all the OP is converted to common stock. Can you just touch on that?
Scott Stubbs, CFO
Our share counts have always assumed the as-if converted.
Ki Bin Kim, Analyst
So it's not actual conversion? Okay, got it…
Scott Stubbs, CFO
No. It's no change, correct. It's the as-if converted method.
Operator, Operator
And thank you for your questions. That completes our Q&A segment. At this time, I'll turn it back over to Joe Margolis and team for any closing remarks.
Joe Margolis, CEO
Great. Thank you. Thank you, everyone, for your interest in Extra Space Storage. I hope we've communicated that we are really well positioned to have a solid year in 2023. And we're fortunate to be in an asset class that will succeed in whatever economic climate we face. And I feel lucky to have the best team and operating platform that will set us up for success in 2023 and the years to come. Thank you very much, everyone. Have a great day.
Operator, Operator
And thank you for your participation in today's conference. That does conclude the program. You all may now disconnect.