Ladies and gentlemen. Thank you for standing by and welcome to the Public Storage Third Quarter 2021 Earnings Call. At this time, all participants have been placed in a listen-only mode and the phone will be opened for your questions following the presentation.

Thank you, Emma. Hello, everyone. Thank you for joining us for our Third Quarter 2021 Earnings Call. I'm here with Joe Russell, CEO; Tom Boyle, CFO; and Mike McGowan, Senior Vice President of Acquisitions. 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 2nd, 2021, and we assume no obligation to update or 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. As usual, we do ask that you keep yourself limited to two questions to begin with. Of course, if you have more, feel free to jump back in queue with that, I'll turn the call over to Joe.

Thanks, Ryan. Good morning and thank you for joining us. I'd like to start by highlighting that our overall business performance is excellent. I want to express my gratitude to the entire team at Public Storage for their contributions. Our colleagues, from the properties to the corporate office, are dedicated to achieving this level of success. Across our industry and in our markets, we are seeing more customers than ever benefiting from self-storage. We often mention additive demand due to life events, which we summarize as the 4 Ds: divorce, death, dislocation, and disasters. Recently, a 5th D has come into play: Decluttering. Many customers are seeking more space at home because of changes in their work and living situations. Unfortunately, those who turned to us during the pandemic are now acting like traditional customers, staying put because they've recognized the advantages of self-storage, particularly as both residential and commercial costs rise. Nevertheless, demand remains robust. In the third quarter, we achieved record levels in revenue, NOI, and cash flow per share. As we approach the end of 2021, the outlook for 2022 and later looks promising as well. The self-storage utilization rate continues to increase, now reaching 11% of the U.S. population. Millennials and Gen Z, two significant user demographics, are transitioning into our main customer age group, driven once again by the 5 Ds. Public Storage is at the forefront of evolving the self-storage customer experience, offering both digital and traditional options throughout the customer journey. We are committed to listening to our customers, who are providing valuable feedback that shapes our strategic priorities. This has led to exciting enhancements in our customer offerings. For example, our industry-leading e-rental platform has nearly 50% of our customers renting through it, with almost 500,000 customers opting for the e-rental system this year. It's quick, user-friendly, and allows for self-directed rental processes. Additionally, we launched the PS app in early 2021, which nearly one million customers have downloaded, providing easy management tools for their accounts and access to our properties digitally and hands-free. These initiatives exemplify how our investment in technology is improving our operations while benefiting our customers. However, various economic challenges, such as labor pressures, are impacting numerous industries, including self-storage. We are proactively investing in our workforce with higher wages and creating more specialized roles that offer our skilled property teammates better career advancement opportunities. On the leadership side, we've strengthened our team and yesterday announced that David Lee has joined Public Storage as Chief Operating Officer. David has an extensive background, previously overseeing more than 5,200 retail locations for the UPS Store, and we are thrilled to have him on board. Moving on to our growth initiatives, our external growth strategy focuses on acquisitions, development, redevelopment, and third-party management, all of which are experiencing strong growth. For 2021, we expect about $18 billion or more in assets to be traded in the self-storage industry, providing substantial opportunities. Owners are motivated to divest assets and capitalize on their investments, partly due to anticipated tax changes. So far, we've either acquired or are in contract for $5.1 billion in acquisitions, representing roughly 30% of the industry volume this year. This includes 233 properties totaling 21.1 million square feet with an average occupancy of 56%, creating significant growth potential once these assets are integrated into the Public Storage platform. The transactions span various geographies and types, including both market and off-market opportunities. Our reputation as a preferred buyer is based on our expertise, transaction efficiency, and capacity to fund transactions smoothly. Notably, 65% of this quarter's volume is from the All-Storage Portfolio, which we are acquiring for $1.5 billion. This portfolio includes 56 high-quality properties primarily in Dallas and Fort Worth, which has been one of the strongest self-storage markets over the last 15 years, with population growth nearly double the national average. Our existing portfolio in that region has shown annual NOI growth of 150 basis points above the national average. The All-Storage properties provide us access to new, high-growth submarkets, particularly around Fort Worth. Many of these properties are newly developed and currently at 75% occupancy, offering significant upside potential as we incorporate them into our leading platform. This transaction is initially accretive to FFO, with expected acceleration to stabilization at nearly 6% direct NOI yield. When combined with our proprietary and other assets in contract, we are enhancing our significant presence in this dynamic market by about 64% to approximately 200 assets. The remaining 35% of acquisitions, at $1.1 billion, will also drive substantial growth, as these assets are diverse and include single acquisitions to smaller portfolios, varying in size from $40 million to $200 million, totaling 3.9 million square feet with an average occupancy of 50% at $179 per square foot. Regarding development and redevelopment, our pipeline has increased by $70 million to $731 million this quarter. We are identifying good opportunities for building new properties as well as expanding our current ones. Our development team is actively assessing key land sites as we leverage our position as the largest developer in self-storage. This quarter, we added 28 properties to our third-party management platform, bringing the total under management to 145, aiming for 500 by 2025. We have also acquired 14 assets from our third-party management platform. In summary, since early 2019, we have increased our portfolio square footage by 22%, with a total investment of around $7 billion, equating to 36 million square feet at an average cost of $193 per square foot, which has generated strong growth and value creation that we expect to continue. Now I will turn the call over to Tom.

Thanks, Joe. Our financial performance accelerated into the third quarter. Our same-store revenue increased 14% compared to the third quarter of 2020. That performance represented a sequential improvement in growth of 3.2% from the second quarter, driven by rate. Two factors led to the acceleration in realized rent per foot. 1. Strong demand and limited inventory, which allowed us to achieve move-in rates that were up 24% versus 2020, at 33% versus 2019. 2. Existing tenant rate increases contributed, comparing to a period in 2020 and we were significantly impacted by rental rate regulation in many markets. Now on to expenses. The team did a great job executing in this environment once again. Lower expenses were driven by property payroll, utilities, marketing, and a timing benefit on property taxes. On property payroll, as Joe discussed, on October 1st, we increased Property Manager wages, which will lead to higher expenses going forward, but will be partially offset by efficiencies in labor hours tied to the operating model transformation we discussed at our Investor Day in May. On property tax, we will expense our annual estimate through the year, leading to an approximately $0.13 benefit year-to-date, and reversing to a $0.13 headwind in the fourth quarter. This will lead to a more stable quarter-over-quarter expense experience in the future. In total, net operating income for the same-store pool of stabilized properties was up 21.7% in the quarter. In addition to the same-store, the lease-up and performance of recently acquired and developed facilities, was also a standout in the quarter, adding $53 million in NOI in the quarter, or $0.30 in FFO. As we sit here today, coming off the peak part of the leasing season, existing customer behavior is solid, with move-outs down year-over-year in the quarter, and new customer demand remaining robust. So with that, let's shift to the outlook. We raised our core FFO guidance by $0.55 at the midpoint, or 4.5%. Looking at the drivers, we increased our outlook for same-store revenue, to grow from 9.5% to 10.5% in 2021. That outlook implies a modest deceleration in revenue growth in the fourth quarter, against very tough comps. Our current expectations are for occupancy to moderate from here by about 150 basis points to the end of the year. That would land occupancy at the healthy 2020 levels at the end of the year. But big picture, the baton has clearly been passed to rate growth where we continue to see strength. Our expectations are for zero to 0.5% same-store expense growth. As a reminder, that implies an increase of circa 30% in the fourth quarter driven by the property tax timing I discussed. We also increased our guidance for non-same-store performance given the acceleration of acquisitions and strong lease-up of our own stabilized facilities. Now, on the balance sheet, we have one of the industry's leading balance sheets set up well to finance the transaction volumes we've seen this year. We plan on funding the All-Storage acquisitions with unsecured debt, and we remain poised to grow with capacity to fund the continued activity that Joe has discussed. With that, I'll turn it back to you, Joe.

Thanks, Tom. We are optimistic about our business and for good reason. As always, the commanding capabilities tied to the Public Storage brand, a high-quality, and well-located portfolio, the industry-leading operating platform, and most important of all, our people, have us well-positioned for sustainable growth and value creation. Now we'll open the call up for questions.

At this time, if you would like to ask a question, we will take our first question from Jeff Spector with Bank of America.

Great. Good afternoon. Thank you and congrats on the quarter. I'm not sure if we're allowed two questions, so I guess my first would be on the new hire, David Lee. Very interesting; I guess, if Joe you can provide a little bit more details on David's role and what you see him bringing to Public Storage, please.

Sure Jeff. First, we're excited about David joining the executive leadership team. We've built over a number of decades now a great operations team. Today, the team comprises over 5,000 of our associates, who are committed to delivering exceptional customer service while clearly adapting to the many changes that we've been talking about. So David's joining us at an exciting time. His role will be to continue leading what we call the customer journey, where we're unlocking and delivering new tools to our teams and offering different channels and experiences right at the front lines for our customers. And with that, his engagement with the team as a whole will be very important as we move the entire team forward through a very dynamic time, not only for the Company, but for the industry. Clearly, his skills were attractive, based on his 20 years or so with the UPS organization. The UPS Store platform more particularly, so we're very excited about his fresh perspective as we continue the various changes to our overall operating model. And definitely look forward to the contributions he brings to the entire management team.

Great. That sounds great. And hopefully, if I have a second, Joe, I always consider you to be conservative with your comments, so it's encouraging to hear the outlook for '22 and beyond looks favorable. We're getting a lot of questions on supply in '23, I guess. Can you elaborate? Not looking for guidance, but what makes you feel comfortable to make that statement and then, I guess, in particular, supply?

Yeah, Jeff. The thing that has been a nice window for us over the last year to two is the reduction in national deliveries of new storage products. We've talked about that for some time, where this year there's likely to be about $3.5 billion or so of new deliveries put on the markets nationally, compared to the peak that we saw in 2019 of about $5 billion. We're likely to see that number trend down again in 2022, particularly with some of the hurdles that are out there from a development standpoint that we clearly see day-in and day-out, that includes the time it takes to get a property entitled, many of the cities are clearly understaffed and we're seeing longer processes actually to get something as simple as a permit or a use or an occupancy use for a property come through, to more commanding issues that we're seeing even from the cost and availability of components of construction and then labor itself. So there's some different and I would say commanding issues that any developer today has to go through to operate in this kind of an environment. So that's likely to produce, again, this down-drop draft that we're predicting for 2022. Now, having said all that, our industry, as you well know, is very fragmented. The development industry as a whole tied to self-storage is very fragmented and it's hard to predict what level of activity might resurface in different markets based on, frankly, the continued very strong performance of the sector. So we're keeping a very close eye on that. As we've talked about, we've got a deep team across the entire national set of opportunities that we're working on. And we're also seeing activity that's coming through our third-party management platform as well, that is tied to future development.

Okay, thank you.

We'll go next to Smedes Rose of Citi.

Hi, thanks. I just wanted to ask a little bit more about the decision to load up more in Dallas. And maybe if you could just talk a little bit about the process, how competitive it was to get this portfolio. And then I correct me if I'm wrong, but I guess I think of Dallas as a fairly low barrier to entry market and I'm just wondering are there any risks to meeting these stabilized yields that you're targeting?

Yes, sure. Smedes. First off, I mean, we have a longstanding commitment to Dallas. We've seen, as I mentioned in my opening comments, good growth that's come out of that market. You're right, it has been a market that's been prone to an outside level of development from time-to-time. But frankly, the embedded growth that we see that's tied to a very business-friendly economy, low cost, including taxes, cost of housing, etc., centrally located within the United States, great infrastructure is a huge draw for both business and overall population growth. So what came with this portfolio was an opportunity to leapfrog our position, that was already a top position in that market, where we have had approximately 120 existing assets, as well as a dozen or so third-party management properties and leapfrogging it by another 52 to 53 properties. So a huge opportunity to grow and actually put additional presence in parts of the Dallas, Fort Worth market, particularly Fort Worth, that we were lighter in. And Fort Worth, for instance, like Dallas as a whole or the Dallas Fort Worth Metroplex, is growing dramatically. So we're really encouraged by that population growth. It's very strong, good household income, and we really like the multiple attributes that we will see and continue to see with our industry-leading position in that particular market. Mike McGowan is with us; I'm going to hand the mic over to him. He can give you a little color on what came through with the process we went through to actually capture the portfolio.

Thanks, Joe. So it was a competitive process. It was quietly marketed with more or less a few select people that could take down a transaction of this size. In reference to your question about the location and the new supply coming in, this developer really did a great job of putting a footprint of 50 properties in markets that were so far ahead of his time, out in areas that are having high barriers for new storage to come in. He built large properties in those marketplaces, kept a lot of competitors out at the same time. And really for us, we're starting to see the same type of issues with zoning, of getting new storage in a lot of these newer areas, in these high-growth areas, which are the better areas of the Dallas, Fort Worth market. So for us, it puts us in a great position to be in new markets we want to be in and gives us a very strong presence in all those markets to do it that fills big gaps for us at the same time.

And one other thing, Smedes, from integration and assimilation standpoint, we have, as we did with ezStorage, a great opportunity to bring in the majority of their operations team. We're excited about adding those new members to the Public Storage team there in Dallas, Fort Worth. The opportunity for us to integrate these assets and put them under the Public Storage brand will be very efficient. Clearly, we're very skilled at that coming right off the experience we just had in Washington Metro with ezStorage. So we're very confident that in a very short period of time, we can transfer the 60 plus thousand customers that are coming with this portfolio into our own systems and our own opportunity to drive value based on the way that we're going to be able to run those properties as we do our entire portfolio.

Great. Thank you. Appreciate it.

We'll go next to Juan Sanabria with BMO.

Hi. Good morning. Thank you. I would like you to discuss the acquisition side, specifically the yields for the third quarter transactions and what is upcoming, including All Storage. You mentioned a bit about it on a stabilized basis, but I'm interested in the initial yields from a modeling perspective.

Sure. This is Tom. As Joe mentioned, much of the activity from the third quarter into the fourth quarter is not yet stabilized. If you consider average occupancies around 50%, keep that in mind. Regarding yields, we provided some insight into All Storage, indicating they had a yield of about 2.6% on their operating platform in the third quarter, which can serve as a baseline. I would suggest that other properties might reflect similar yields, even with slightly lower occupancy. This should give you a starting point. We are confident in our ability to lease up these properties. Joe referenced our confidence in our operating platform in Dallas and Fort Worth, and it’s comparable to Washington, DC. For example, we acquired the ez transaction earlier in the year at 86% occupancy and increased it to 94% during the busy season, demonstrating strong growth in a market with low inventory. Some properties we acquired had occupancies around 40% and we managed to raise them to 90% by the end of the busy season, indicating robust leasing activity. In Dallas, we are similarly facing low inventory and have successfully leased what we've built and purchased over recent years, positioning us well to take over the All-Storage properties in the coming months.

Yeah. Juan, I'd add, as again we've talked to, and Mike and his team have been very focused on for the last year-and-a-half, in particular, a lot of great assets have been built over the last 5 or 6 years. And we've really had the opportunity to capture very high-quality assets, mostly recently built in this cycle. And what we feel are good values, with good opportunities to grow performance. That's why we haven't been shy about taking on any level of un-stabilized occupancy in these assets. As Tom mentioned, we're very confident, particularly in this environment relative to our lease-up capabilities, as well as taking on the stabilization in an era where we're seeing some very, very good consumer and business demand, frankly.

Great. And then just hoping you could speak to the latest data points, maybe through October, from an occupancy and a rate perspective. You noted the implied guidance for the fourth quarter is at 150 basis point occupancy moderation. Just curious on how we stand to-date on that?

Yes. Sure. Just to give you a sense as to where October ended, the year-over-year gap and occupancy, we were at 1.2% at the end of September. That has fallen a touch to around positive 75 basis point gap at this point. So we are seeing that modest moderation in occupancy as we move into the fourth quarter here, but continued strength on rate. And so we continue to see good growth there. Some of the markets that we're seeing the most strength, the Southeast Miami, Atlanta, the Sunbelt in aggregate, continuing to see a greater than 50% move in rate growth at this time of year compared to 2019. So, really strong pricing momentum here despite modest declines in year-over-year occupancy.

Thank you.

We'll go next to Michael Goldsmith with UBS.

Hey, Michael. Are you on mute?

We will go next to Todd Thomas with KeyBanc Capital.

Hi, thanks. Good morning out there. First question I wanted to circle back to investments for Joe or Tom. With All Storage, now you've disclosed, you're taking up leverage to 4.3 times on a pro forma basis. And there are a couple of other larger scale portfolios, reportedly on the market, and a lot more product besides those portfolios that you discussed. You still have room to take leverage up obviously, you have a lot of access to capital as well. But your dry powder's decreasing a bit if you're looking to stay in that 4 to 5 times range that you discussed at the Investor Day earlier in the year. So I'm curious what the appetite is like for additional larger scale deals, and then we saw that you're issuing $80 million of units for the deals under contract. Should we assume that PSA is open to issuing more equity today as part of the funding plans going forward?

So, first of all, I'll address the environment holistically, Todd, then Tom can give you a little bit more color around what I would call the tools in our toolkit. But the environment continues to be very vibrant. We're seeing a vast array of different types of sellers coming to market, and we feel well poised with the capacity of our balance sheet to continue to be a very efficient acquirer. And we want to maintain that because we think it's highly advantageous, even in a market like this, where it's quite competitive depending on the type of asset and the location, etc., that might come through. We feel we're very well poised. Our balance sheet has been and will continue to be a great competitive advantage for us, and we'll continue to, as I mentioned, look at many of the tools in our toolkit. Tom can give you a little more color on that, but we're very confident we will continue to be able to embrace this environment with a whole range of different opportunities that may come through.

Yes, thanks, Joe. And as you mentioned, Todd, we do have strong access to capital with our balance sheet position the way it is. And we're confident in our ability to continue to fund acquisition activity with a broad set of tools. So we spoke about using unsecured debt. And we've used unsecured debt really over the last several years to fund activity. That doesn't mean that we're not open to other alternatives, including common equity or JV equity as we discussed at our Investor Day, to the extent that volumes are both high-quality and attractive financial return, we would certainly be open and welcome the opportunity to use a broad variety of tools in the toolkit over time. But for All Storage in particular, we plan to fund it with unsecured debt and we feel good about the leverage level where it is today.

Okay. And then if I could ask one more, just about the existing customer rent increases. And Tom, when you look at the 14% of revenue growth in the quarter, you talked about there was a small portion that was related to occupancy. When you look at the balance of the revenue growth in the period, how should we think about the contribution between the higher move-in rates that you described and the impact from ECRIs?

Yeah, that's a good question. So really on a year-to-date basis, we've seen a pretty balanced contribution between the move-in, move-out dynamics on one side and then the existing tenant rate increases, both contributing meaningfully. I would put them roughly on par with each other in terms of the contribution. I do think going forward, one of the things we disclosed is our move-out activity and the move-out rates. So, move-out rates are starting to catch up with move-in rates. They have not caught up yet, but they're starting to catch up. And that will start to be a headwind on the contribution from the move-in to move-out side, but we will still have existing tenant rent increases as a tailwind from here, given the market rent increases that we've seen across the country.

With the ECRI program, do you anticipate any moderation as move-out rates begin to catch up, or will you need to reduce existing customer rent increases as that occurs, or is that not applicable?

Well, I would say that existing tenant rent increases are something that's managed very dynamically across the country, and really across the tenant base. And I think that the way to think about that is, one of the benefits of the current environment is higher market rents and that lowers the cost to replace that tenant if they elect to leave. That kind of base continues to be quite sticky, which gives us confidence to continue to send increases out to the tenant base. As we think about where we're going forward, in fact, one of the contributors to higher move-out rates is actually the fact that we're being successful in increasing rental rates on that existing tenant base. So I would say almost the reverse, which is as we're successful on existing tenant rate increases, I'd anticipate that that move-out rate will move higher. Move-out rate meaning the rent that the people are paying, that do a lot to leave us.

Okay. Great. Thank you.

Thanks, Todd.

We'll go next to Caitlin Burrows with Goldman Sachs.

Hi there. Maybe one on development. This can definitely be a great opportunity, but one of the hurdles is that ability to continue getting land in attractive areas. Just wondering if you could go through how this process is going now and any difficulties that you're running into to continue it.

Well that goes right down to the knowledge and the focus you have to have relative to what's transpiring in any given submarket, so as I've spoken to, we've got a very deep-seated team across the entire portfolio that we operate today. And in markets that we continue to look for additional growth as well. The opportunity to acquire land over the last year-and-a-half or so has been somewhat elevated because we've seen that tapering down of delivery. So not quite as much as a ground-up development momentum, again, coming from a very fragmented set of developers out there. But land is still very competitive. There's a lot of knowledge you need to have to find and locate the exact right location that's complementary to future growth of the particular asset, the kinds of dynamics that come from competition, as well as population growth, etc. A lot of different factors come into the way that we are able to select land sites very differently than most, because of the amount of data that we have day-in and day-out, relative to our presence already across 39 states, and being a top owner in nearly every one of those submarkets. The business though it's very entrepreneurial from an overall self-storage standpoint. So there's competition that can come through. And as I mentioned, in some cases that may become more elevated than we've seen over the last year and a half. Keeping a very close eye on it, but we feel like we've got very good tools to not only find great land sites to actually execute, even in an environment where it's tough to get either entitlements and/or justify the costs that are tied, particularly from component costs and labor costs that are playing through to actually develop facilities in an environment where we're seeing a high degree of inflation at the moment.

And actually on the inflation point, I was wondering, just given that revenues are up a lot, the business is really strong, can you go through what impact do you think inflation is having or will have on your business both from a revenue or expense side?

One significant advantage of self-storage is our month-to-month lease structure. This creates a great opportunity for us to respond to cost pressures stemming from inflation. The nature of our product allows us to monitor and address these inflationary impacts effectively. We are confident that we can navigate these pressures, but it's essential to stay vigilant. That's why we consistently seek efficiencies across all areas of our business to operate as cost-effectively as possible.

Got it. Thanks.

Thank you.

We'll go next to Ki Bin Kim, Truist.

Thanks, and good morning out there. So a simple question on same-store revenue. If market rents don't increase in 2022, how much built-in upside is there already in same-store revenue?

Looking for 2022 guidance already, Ki Bin?

Not guidance. This is below the low point. So even if market rents don't grow, what do you think the starting point is?

I think there are a few key points to note. First, we continue to see strong market rent growth. While I understand your question, demand for self-storage remains robust nationwide. If we examine the markets experiencing the most significant growth, it's clear that these shifts are largely driven by macroeconomic factors, demographics, and population changes that we anticipate will persist. As a result, market rents are increasing, and we are also seeing existing tenant rates rise alongside this trend. However, over the past year, and for a significant part of this year in certain markets, we have faced pricing regulations due to state emergencies and the healthcare climate, which has been a challenge for adjusting current tenant rates to align with rising market rents. In simpler terms, there is potential for rate growth that's built in, contingent upon the normalization of the healthcare situation and the expiration of state emergencies. Notably, we are still monitoring some conditions in Los Angeles County related to a fire incident from several years ago, which is unrelated to the pandemic.

How significant was that? In other words, how much revenue increased from individuals compared to the overall portfolio? This will help us understand the potential impact.

One of the things we examine is the effect of pricing restrictions on us compared to the increases suggested by our models. I reviewed the numbers from last quarter, and in the first half of the year, there was about a 300 basis point negative impact on same-store revenue growth. I expect this trend has been largely consistent into the third quarter, which gives you an idea of the scale of the impact.

Got it. Alright, thank you.

Sure.

We'll go next to Rob Simone with Hedgeye Risk Management.

Hey guys, thanks for taking the question. Hope all is well. I have a longer-term question on third-party management. You guys are somewhat unique in that unlike some of your peers, and it's a credit to you, you actually attribute expenses to that platform specifically, which is really helpful. Between now and the 500 stores, what is the crossover point for you guys? Or could you talk a little bit about the crossover point when you get firmly into the green in that business? And then from a margin perspective, what do you think that could potentially scale to? And I ask that because we're used to looking at property management fees as a singular line item with a lot of the costs kind of buried in other segments or in G&A. So just trying to pick your brains on how you think about that.

Yeah, sure. So, there's a couple of components in there. One is obviously, we've been ramping the size of that business, and one of the most vibrant areas of demand from our customer base for that business line is from folks that have developed new properties. And so as we take on those properties, the profitability of a new property is less than one of one that has stabilized obviously, given the revenue nature of the fees. And so as we ramp that program, similar to our development business almost, there's a ramping of the profitability of each individual store. So set another way, it's going to take several years before the volumes that we're anticipating really start to produce the P&L impact that you might anticipate. The second piece of your question relates to what are the margins of that business? And there's a couple of factors there. So one is clearly the geographic mix of the properties themselves, what the operating costs are that they're tied to them, but if you just look at them overall and you say, okay, where can we get different margin basis versus the fees we're charging? And I think a reasonable margin is probably in the 20s to 30%. But again, a lot of variability as we add a significant number of properties to that store base over the next several years.

Got it. Would you ever consider a joint venture program with a capital partner? I know you're currently deploying a lot of capital and have some capacity left, but Joe mentioned that many are rethinking their timing for an exit. Are there opportunities for a joint venture program where you also engage in third-party management? It would effectively expand the overall potential.

There will likely be opportunities just like that, Rob. So I would tell you that we're open to a variety of different scenarios as we're engaging in different ownership groups, whether they are currently or anxious to get into self-storage. So that's definitely something that we'll continue to evaluate. And as those opportunities arise, we'll certainly be able to give you more color on those.

Yep. Understood. Okay. Just thinking about the strategic thinking. All right. Thanks, guys. Appreciate it. Be well.

Okay. Thank you.

Thank you.

We'll go next to Jonathan Hughes with Raymond James.

Hey, good morning on the West Coast. Just a continuation from Todd's question earlier on using equity financing for acquisitions. Did those sellers ask for the 80 million of units to avoid triggering tax events or did you offer those as a sweetener to get a deal done? We just haven't seen, I think, shares or units offered since Shurgard 15 years ago.

Yeah. It's a good question. And it really is driven by the fact that there are sellers out there that are interested in accepting our shares as currency, and that's something we're open to. You're right, it’s the first time we've done it in a number of years. But we're open to it, and it can be an attractive way to transact with the sellers that are interested there.

Okay. And as perhaps the share price moves a little higher, cost of equity gets a little more attractive, you would be open to using those shares or units for large portfolio deals, say like another several billion-dollar acquisition, that fair?

Sure. I think the way we think about the return profile of our deals is typically on a non-levered basis. And so we're evaluating what the return profile is, either on a leverage neutral basis or unlevered basis. And so as we look at ultimately the financing of these transactions, we've had the opportunity to continue to use unsecured debt and preferred as the core piece of the capital structure, but as volumes grow, it will make good financial sense to continue to broaden the sources of capital, and the benefits of that growth will continue even with using maybe higher cost equity or JV equity, potentially.

Yeah. Okay. And then I just have one more, if I may. One of your peers said they expect a greater than inflation level of on-site labor cost increases next year. It's fair to say we'll see that maybe even slightly a higher level from your portfolio since you did just increase wages 7.5% a month ago.

So as I mentioned, Jonathan, yeah, the labor market is highly competitive. It's definitely somewhat unpredictable as well. But I'll tell you it's a difficult time to attract and retain personnel at any level of skill across the entire organization. So we're going to continue to look at the benefits of making either changes to wage rates and or balancing that with a variety of different efficiencies we're seeing with the transition of our operating model as well. So we're going to continue to monitor that and likely see, again, a very competitive environment going into next year.

Alright, that's it for me, thanks for the time.

Thank you.

We'll take our final question from Ronald Kamdem with Morgan Stanley.

Thank you for your time. You mentioned the portfolio expansion of 19% since 2020. It's clear that you're in a robust market with strong demand. Looking ahead over the next few years, do you see opportunities to evaluate which markets you want to retain long-term and possibly divest some assets? While that might not be feasible today given the current market strength, how are you approaching the long-term strategy for the portfolio? Thank you.

Yes, Ron, that's definitely something that we have a, I would call it a fluid analytical approach to. Meaning that we're always looking to and understanding the impact in value of assets across multiple markets, evaluating the benefit of either continuing to own and/or at whatever point thinking about recycling any level of capital tied to existing assets. So that's an ongoing process that we'll continue to look to and it's definitely part of the internal process that we use relative to the way that we're seeing value creation from existing assets. And then the opportunity potentially to recycle.

Great. And then my second question was just asking the COO appointment question a different way. I know you mentioned opportunities, maybe introduced new products to the operations team. But should we think about this as incremental change? Or is this a revolutionary new way of doing business and operating? Just trying to get a little bit more color how we should think about the impact of this new COO role.

Well, I'd go back to the things that we described in our Investor Day. We gave a fair amount of detail on the variety of ways that we're enhancing our operating model through investments in technology and then different channels and different opportunities we're giving customers to engage with us across a whole spectrum. As well as the things that we continue to be focused on relative to people development and the types of opportunities internally that we think are very well suited to continue to grow the quality of our workforce. So the role that David's coming into isn't new to the Company in the context of our goals and the strategies that we have. It's just an added level of leadership that we think is prudent as we move the business forward. And we're accelerating the pace of change that ties to the amount of investment that we're making in our people directly, as well as the technological platforms, particularly as it relates to the digitization of the business. So it's one added layer of leadership that we think is well-timed and we really look forward to continuing to optimize the way that we're running the Portfolio as a whole, including the way that we're also engaging and giving a variety of different opportunities to our existing employee base. So a really good time for him to come into the business, and as I mentioned, we're excited about the fresh perspective he's going to have as well.

Helpful. Thank you.

Thank you.

We'll take our final question from Spencer Hallway.

Thank you. With this widespread supply chain issues, we've been seeing an increasing number of companies keeping what's being called just-in-case inventory. Have you guys noted any incremental business-related demand in recent months?

Do you mean from just core customers coming to us differently or trying to use space because of maybe keeping goods at more immediate availability?

Yeah. Exactly.

Yeah, I couldn't point to, Spencer, an exact lift in demand based on that, but it wouldn't surprise me based on the variety of different business customers that do use self-storage in a way that's more spot oriented where they may have an elevated level of demand that they need to cater to, and by virtue of that, storage can fit that need quite easily. So there's likely some benefit that we're seeing from that in many markets.

Okay. And then just on the expense side, where would occupancy need to be for us to begin to see marketing costs creep back up in a material manner?

Spencer, I would say that that's a pretty dynamic and local decision that we manage. And I wouldn't necessarily say it's an occupancy-based item. It relates to what we're seeing in the customer funnels. So advertising has a benefit to increase top of funnel, the number of people that are say, searching for Public Storage or are finding Public Storage when they go to search for self-storage. And so, that is helpful in markets where we're seeing top of funnel demand erode. But we have other tools as we're managing revenue, be it, pricing, promotion, etc. that will impact conversion, within that funnel. And so I would say we're watching the different components of the funnel and what the returns are associated with pulling those different levers. To-date, we continue to see strong top of funnel demand across the board. Web visits, for instance, in the quarter were up North of 20% across the system, calls into our call center were roughly flat. So overall, still very solid, top of funnel demand, which led to the decision-making around marketing in the quarter. As we've demonstrated in the past, if we start to see those dynamics change, we typically do see pretty good returns on our advertising spend and we'll pull that lever as well.

That's very helpful. Thank you.

Thanks.

We'll go next to Mike Mueller with J.P. Morgan.

Hi. Just wondering, for All Storage, what did you assume for rate growth through 2025 to get to your 6% stabilized yield expectations?

Yeah. One of the things that we looked at within the portfolio is obviously there's a pool of properties that have recently been delivered that we have the opportunity to lease up, and then ultimately stabilize on a rate basis until we go through our underwriting process of seeing what our stores in the area and what competition is, and ultimately what we think we can squeeze from a revenue standpoint within our own revenue management platform, and we'll underwrite those there. And then on the stabilized stores, we call them stabilized, but the reality is, they're not in our platform. And like we're seeing in acquisitions to date, really, through last year we have an opportunity to put our operating platform and systems in place and drive further improvements. So you can see for instance, where our overall Dallas portfolio rental rates are. And obviously, these properties have their own submarkets and underwritten rates. But it gives you a sense as to the upside in rental rates that we think we can achieve in the portfolio over time.

Were you embedding additional rate growth beyond current market or just pulling them up to current market and assuming that it's capped out there?

Yes, it's a combination of where we think rates are today, so spot rates. And then ultimately, the runway we see for rental rate activity counterbalanced with one of the questions earlier around rental rate risk due to new development within that market in those submarkets, which is a consideration as we think about forward rents, as well. So, a combination of a number of those things. But I would point you to the presentation where you can see our same-store rents in Dallas punching at $15 per foot versus the in-place rents there in the third quarter at about $11. So there's definitely occupancy and rental rate upside.

Okay. Thank you.

Thanks.

We'll go next to Smedes Rose with Citi.

Hi, it's Michael Bilerman here with Smedes. Joe, I want to revisit the topic of hiring a new COO because the company has tried this in the past, and each time the COO didn't last. I'm interested to know what makes this instance different compared to previous efforts regarding this position.

Well, I don't entirely agree that the COO position has never stuck. Throughout our history, even before my time here, we have had instances of multiple-year COOs, and adjustments have been made based on the business dynamics. We've had senior leaders take sabbaticals to go to Shurgard for one or two years, for example. So while the title may have seen some fluidity, the responsibilities and focus have been consistent. We now see an opportunity to bring in fresh perspectives and enhanced leadership capabilities as our business experiences significant growth and change. Over the last couple of years, we've acquired a substantial number of assets, comparable in size to those of some of our competitors. This presents a great opportunity to rethink our evolving business, the tools we are implementing, and the investments we are making, especially in developing our employees tied to operations. It's an exciting time for us to place greater emphasis on the COO role, and we are enthusiastic about what we can accomplish under David's leadership and our focus on enhancing the overall effectiveness of our operations team.

What are the top three priorities for him in the next call in 90 to 180 days? Can you discuss any restructuring within his team or how you're adapting as the business changes? A few years ago, you didn't have 50% of the business online and contactless. Please share more about the priorities and related matters.

Well, here's a number priorities that's coming in one of the business. I mean, that's the way we've all come into the business. Being as focused on the front lines as possible and that's definitely a top priority and it's not to come in and make massive change or retool something that's broke. It's an opportunity to enhance and optimize many of the great foundational investments that we've made that frankly, are statistically in a whole differently than what you're seeing with other operational platforms. As I mentioned, e-rental, 50% of our customers use e-rental. That's amazing, where plus or minus 40,000 to 50,000 customers a month are using that channel that did not exist less than 8 or more than 18 months ago. So we're confident that we have a foundation that continues to unlock really good opportunities the way we're running the entire operational team. And we're excited about what we can do with David coming on the team as well.

Can you give us some insights on what David did at UPS in terms of the changes that he initiated, at the store level which my local UBS Store it has gotten a lot better over the years, so hopefully you will driver of that, but talk a little bit about, sort of the characteristics and what drew you to him, about what he's been able to accomplish in his prior rule?

Well, there's no question that that platform is very transaction-oriented, it's very customer-centric, it's tied to again, advancement in their own operating model. And we really liked many of the skills and the attributes of that kind of a transactional environment, and how it relates to what we see in self-storage. So a lot of very good things that we can learn from that environment, and then, he'll be learning from our environment as well, and we can create the best of both worlds.

Great. And just one last question on this topic. You only have storefront retail at the Hawaii asset within the self-storage facility. Is that an opportunity you are considering? Someone mentioned the word revolutionary. Are you rethinking the storefront real estate you have? Considering that 60% of customers are using online services, how much differentiation or additional value can you offer through that real estate to generate extra cash flow? Could you potentially serve as an Amazon pickup and delivery service? Is that something your Company is focusing on?

It's a good question, and I will tell you there's all variety of strategic opportunities that we'll be more than happy to share as they evolve. There's a lot of creativity that continues to surround the customer-driven demands that we're seeing as customers continue to shift the way they want to interact with any type of business, particularly ours. And we think they are very vibrant opportunities going forward. And as those arise, we'll be sharing those with you.

Okay. Thanks, Joe.

Thank you.

This concludes today's program. Thank you for your participation. You may disconnect at any time.