Extra Space Storage Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 23, 2023

Key Takeaways

  • Record 2022 performance with same store revenue growth of 17.4% and core FFO up 22.1%, both the highest in company history.
  • Strong Q4 operations: same store revenue +11.8%, occupancy at 94.2%, and net rent per sq ft +12.8% year-over-year.
  • Board raised the Q1 dividend by 8%, extending the five-year increase to 108%, reflecting sustained cash flow growth.
  • 2023 guidance calls for same store NOI growth of 3%–5.5% and core FFO of $8.30–$8.60 per share, indicating moderation from 2022 but above historical norms.
  • Leverage improvements include reducing floating-rate debt exposure to under 29% and closing a $335 million unsecured term loan with no material 2023 maturities.
AI Generated. May Contain Errors.
Earnings Conference Call
Extra Space Storage Q4 2022
00:00 / 00:00

There are 13 speakers on the call.

Operator

Good day, and thank you 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 To ask a question during the session, you will need to press star 11 on your telephone, then you will hear an automated message advising your hand is raised.

Operator

Be advised that today's conference is being recorded. I would now like to hand the conference over to Jeff Dorman. Please go ahead.

Speaker 1

Thank you, Chris.

Speaker 2

Welcome to Extra Space Storage's Q4 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.

Speaker 2

Forward looking statements represent management's estimates as of today, February 23, 2023. The company assumes no obligation to revise or and 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 Morboff, Chief Executive Officer.

Speaker 1

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 2nd 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.

Speaker 1

Now speaking to the Q4, despite difficult comps in 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%.

Speaker 1

We were busy on the external growth front, acquiring 10 stores in the REIT or in joint ventures, adding 46 stores gross to our 3rd party management platform and closing over $250,000,000 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.

Speaker 1

This allowed our Board of Directors to increase our 1st quarter dividend by 8%, contributing to a total 5 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 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.

Speaker 1

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 and solid long term returns for our shareholders. In the Q4, we modified the term of our $300,000,000 preferred investment in NexPoint, trading yields for longer duration and additional managed properties.

Speaker 1

We also continued our acquisition strategy, which focuses on asset light structures, non stabilized stores for acquisitions with long term strategic implications, including Storage Express. While some of these initiatives cause 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 3rd 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.

Speaker 1

I'll turn the time over to Scott now.

Speaker 2

Thanks, Joe, and hello, everyone. We had a strong 4th 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 3rd 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.

Speaker 2

During the quarter, we swapped a total of $400,000,000 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 $335,000,000 unsecured term loan and use 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.

Speaker 2

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, troughed 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%.

Speaker 2

Our 2023 core FFO range is $8.30 to $8.60 per share. Much of our NOI growth is offset by the 1st year headwind of our investment in non stabilized properties, which carry approximately $0.25 of dilution, the modification of the next point 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 relatively modest investment in acquisitions of $250,000,000 due to current market conditions. 3rd party management increase have been stronger than normal at this time of year, and we believe most of our 2023 growth will be through capital light channels.

Speaker 2

That said, we have plenty of dry powder, and we will be opportunistic 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

Thank you. Our first question comes from Michael Goldsmith of UBS. Your line is open. Please go ahead.

Speaker 3

Good morning. Thanks a lot for taking my question. Scott, you talked

Speaker 1

a little bit about the cadence 3.23 percent that you expect

Speaker 3

the same store revenue growth rate will moderate or quickly trough in the summer and then Modestly reaccelerate late in the year. So I guess my question is, As we think about the exit rate for the year, does that I guess that implies kind of like a mid high single digit growth rate in the first half and then kind of in the low mid single digit in the back half. Is that the right way to Think about it and then is that kind of like does that back half implications mean you kind of return to What is considered like a steady state or normal growth

Speaker 2

rate for the industry? 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 Prepared remarks. I think the one point I'd maybe make is it does not assume that we go negative or to 0 at any point in the year.

Speaker 3

Thanks for that. And my follow-up question is just kind of on the components I can't see 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? Thank you.

Speaker 2

Yes. So obviously, we're always solving for revenue. So maybe some of the A little more detail on those. If you're on the high end of the range, it assumes that we have more pricing power. The low end would imply that maybe you have less pricing power.

Speaker 2

It also assumes that we continue to have the ability to raise existing customer rates, And we would assume that we would be operating throughout the year at a slight negative occupancy delta. But other than that, we're solving more for revenue.

Operator

Thank you. And one moment for our next question. Our next question comes from Jeffrey Spector with BofA Securities. Your line is open.

Speaker 4

Great. Thank you. First question, I feel like I need to ask. No. 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.

Speaker 4

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?

Speaker 1

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, right? We want to be smart in our growth and we want to make sure that we're making long term accretive investors investments and 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 as well.

Speaker 4

Thank you. And then, sorry, is there something else?

Speaker 5

No, I

Speaker 1

was just saying, I was acknowledging your thank you and saying thank you to you. Thank

Speaker 3

you. If I can ask a

Speaker 4

second on operations, just so we can compare to your peer that's already reported provided guidance. So it's apples to apples. In your guidance, The bottom, the lower end of the range, does that specifically reflect, let's say, a recession hard landing 1st, the upper end of the range of soft landing? And if not, how would you describe your guidance?

Speaker 1

So 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 And the upper end of the guidance is and I'm talking about same store Guidance now is More reflective of the stronger consumer and the stronger economy.

Speaker 3

Okay. Thank you. I'm sorry. Can I

Speaker 4

just ask one follow-up? I don't know if there's a limit.

Speaker 6

Sure.

Speaker 4

Okay. Thanks. So then I guess my follow-up is, again, I'm just trying Put in think about how the year ended, what we've heard so far, again, even your competitor, And we all knew that the first half is tough comps. I guess, what are we looking for in terms of upside To the where, let's say, peak leasing would be stronger than expected, maybe stronger than midpoint is, are we focusing more on occupancy, street rate, like what are some of the things we can we should be focusing on?

Speaker 1

So again, I'll reference Scott's thing. 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 to 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.

Speaker 4

Great. Thank you and congratulations on 'twenty two.

Speaker 1

Thanks, John.

Operator

One moment for our next question. This question comes from the line of Todd Thomas with KeyBanc Capital Markets. Your line is open.

Speaker 6

Yes. Hi, thanks. 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?

Speaker 6

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 twenty twenty three?

Speaker 2

And so one thing I'd point to on occupancy, we have a really tough comp early on last year. Now that being said, we're happy with where we are today. Today, we're at 93.5%. We've actually closed our gap slightly since we started the year. And so we're happy with where we are.

Speaker 2

I think that when we look at our guidance and The opportunity here is going to be in rate. If you look at how our rates have done more recently, we've actually raised them month over month starting in November, which is odd for this time of year. Normally, you're lowering rates November, December, January, February. February, you bottom out. And this has been odd in that we've raised them each month since November.

Speaker 6

Okay. 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 3rd party management platform during the year?

Speaker 2

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.

Speaker 2

So that should grow throughout the year. In addition, we bought several properties out of our 3rd 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. 39. So, 39 total, but 16 were wholly owned.

Speaker 2

16 into JVs. Yes.

Speaker 6

Okay. But does the guidance assume Net growth to the 3rd party management platform during the year or sort of unchanged relative to where you ended the year?

Speaker 1

So we have modeled in our guidance pretty modest growth in the 3rd 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 in the start of the year. Now that being said, for the 1st 2 months of the year, we've experienced much better demand And much better action in the 3rd party management than his model. And we'll see if that continues for the rest of the year.

Speaker 6

Okay. 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.

Speaker 6

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?

Speaker 1

So, I don't think we dial back in the sense if we see what we believe is a long term attractive investment that we'll want to acquire it. I would think we might do more in joint ventures to mute or avoid that initial dilution than we have in the past. Right? Last year for the REIT, we bought almost everything we bought was lease up value add, and we increased our dilution from $0.20 to $0.25 which is a little bit of a headwind. Given our pipeline, and I don't know what the rest of the year is going to bring, but at least as we stand today, I think we'll likely go in the other direction next year and realize a bunch of that

Speaker 2

$0.25

Speaker 6

Okay. And then any color on how you think about that between single asset deals or larger scale transactions, would that be the same response?

Speaker 1

Yes. 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 will 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.

Speaker 6

All right, great. Thank you.

Speaker 1

Thank you.

Operator

One moment for our next question. This question comes from the line of Kegan Karle with Wolfe Research. Your line is open.

Speaker 7

Hey, guys. Thanks for the questions. I know this is kind of touched on first, but maybe just a little bit more 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 change.

Speaker 7

So just kind of curious here.

Speaker 2

So our guidance, obviously, we took a point in time with that interest rate curve. It moves almost every single day. It depends a little bit on what the Fed does, how they speak on conference calls, things like that. So it's our best guess today. It also It takes our current portfolio as it is today and applies that curve is basically what we're doing, Keegan.

Speaker 8

Okay. But I mean, that's not going

Speaker 7

to change. Like you're still I know in the past you mentioned 20% to 30% is your ideal range for floating rate debt. That's still the case today?

Speaker 2

I think you'll see us look to work that down, but we do believe in some variable rate debt. And I think that we're a little higher today than we would like to be. And so you'll see us look to term some of that out either through the bond market or use swaps to move that to be more fixed going forward.

Speaker 7

Okay. And second one here, just 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 with the current

Speaker 1

So we're not going to comment on deals that are in the market.

Speaker 7

All right. No worries. Thanks for your time, guys.

Operator

Thanks, Keay. One moment for our next question. This next question comes from the line of Smedes Rose with Citi. Your line is open.

Speaker 9

Hi, thank you. I just wanted to maybe get a little more color around the expense components, Maybe just how what are you seeing in terms of payroll and benefits and maybe how you think about marketing costs, which I know pretty Probably relatively low last year, but I assume those are going to go up some, but maybe just a little bit of detail around those.

Speaker 2

I'll probably just give you some color around what our guidance assumes this next year. So our guidance for the year, we gave 5% to 6%. Let's start maybe with a couple of the big items that are below that number. So payroll assumes 4% growth. Our Property taxes are about 4% growth.

Speaker 2

Marketing is slightly higher. It's more in the 10% range. And then the other one is we're expecting it to be a Difficult property and casualty market, and so we're expecting to see that grow more. We also are seeing things grow like Electricity and gas, those are more in the high single digits, but we have done some things to offset that with our solar program. I mean, over 50% of our stores So while it's a high percentage, it's not a huge number.

Speaker 9

Okay, thanks. And then I I was just wondering, you modified the NexPoint relationship. Was there any particular reason to do that now? Just kind of wondering if you could maybe provide a little more detail around that and you got the right, I guess, the right of first refusal?

Speaker 1

Sure. So pre modification, if there were 2 instruments, $100,000,000 preferred and a $200,000,000 preferred. The $100,000,000 was open for prepayment. That's probably A debt way to say it, but whatever the equivalent is in preferred equity and the $200,000,000 would open this year. So we were in the situation where they could have paid off those instruments and we would have no investment.

Speaker 1

So we felt it was better to extend the terms, reduce the rate, which is costly This year, but long term, we're getting a very accretive rate on those dollars. And we picked up 11 management stores initially, in agreement that we will manage everything for them in the future. The management contracts run 3 years past the Payoff of the preferred, so they're very long term management contracts, as you point out, a right of first offer, not a right of first refusal on the asset.

Speaker 9

Okay. Thank you.

Operator

One moment for the next question. This next question comes from Spencer Allaway of Green Street. Please go ahead.

Speaker 10

Thank you. 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?

Speaker 1

So redevelopment of existing properties is very relatively safe on the risk reward profile. We have the asset, we know the market, we've run on this store for some period of time. So building on excess land, building on RV lots, taking single story, turning it into multi story, That is relatively asset light, right? We already own the land. We already have a lot of the infrastructure and as returns 8.5% to 10%, say.

Speaker 1

So we'll continue to do that. In fact, we'll ramp that up over the next few years. That we'll continue to do. The bridge loan program is we're seeing much stronger demand than that than we thought. You saw our numbers for the Q4.

Speaker 1

We're really happy with that. We expect to have a very strong year then. The benefits of that include the economics of managing the stores, the ability, the opportunity to buy many of them. We bought a good number of them over the time. And then of course the economics of the loan itself and we can make that capital light because we retain the option at any time and have been selling 8 pieces.

Speaker 1

Our management business, which we expect another strong year, is a very, very capital light option and we'll absolutely prioritize that with the other 2. Joint ventures were a little quieter in the Q4 and in the Q1 of this year than we were for the 1st 3 quarters of last year as our joint venture partners have some of the capital issues that We know those types of private equity funds we're having now, but I expect them to be back sometime in the year and then we'll pick up on the joint venture program. And we're always in discussions with folks about innovative and unique structures, and we hope to do some of those as well.

Speaker 10

Okay. Thank you. 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?

Speaker 2

Yes, 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 3 that I would point to as maybe really below the average.

Operator

One moment for the next question. This question comes from the line of Ronald Camden with Morgan Stanley. Please go ahead.

Speaker 8

Hey, just two quick ones. Going back to the comments on sort of the rent growth, I 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? Thanks.

Speaker 1

So, ECRI during the peak of COVID was very constrained by governmental regulations. And then as those Regulations dropped off kind of state by state. We had kind of catch up Where we had greater than normal, if you will, rent increases because we had this wider than normal gap between what customers were paying and what was street rate. As we look forward into 2023, we expect ECRI to continue to be an important tool for us. Customers are reacting the same way to ECRI notices as they have in the past.

Speaker 1

In fact, the Incremental move out from ECRI has trended down and is heading towards isn't there yet, but is heading towards More historical norm levels. So I don't think we'll have the same kind of outsized ECRI that we did at the When the rent restrictions were first lifted and the gaps were extra large, our ECRI will be important, particularly as we're giving up some rate now to get customers in. So they're coming in at a discounted rate and we'll have the opportunity to get them to market rate at the appropriate time.

Speaker 8

Great. And then maybe just a bigger picture question about sort of top of the funnel demand. You hear a lot about The economy is slowing down, housing activity has slowed, people are presumably moving less than they were during the pandemic. It sounds like what you're seeing on the ground is that top of the funnel demand. I think you mentioned it is just as good as you've seen it.

Speaker 8

So Trying to get a sense of what in your mind and what do you think is driving that? What are you hearing from customers on the top of the funnel? Thanks.

Speaker 1

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 You know 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.

Speaker 8

Great. That's it for me. Thanks so much.

Operator

Thank you. One moment for our next question. Our next question comes from Juan Sanabria of BMO Capital Markets. Your line is open.

Speaker 5

Hi, good morning. Just hoping, Joe, maybe you could expand 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 Your own existing portfolio of what that means and what we could see be opened up here going forward?

Speaker 1

Sure. I can give you an example of that. So we have, this year, converted 2 existing Storage Express stores to Extra Extra Space Stores, put in a manager and we'll run them in our typical model. And we're in the process of converting 5 Extra Space Stores to the Storage Express method of operation. And 3 of those are in our primary markets, Chicago, Seattle and Vegas.

Speaker 1

So we're really interested in seeing how these 2 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 2 different operating styles.

Speaker 5

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.

Speaker 1

So we are running 2 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.

Speaker 5

Okay, great. 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 since rates have kind of moved higher. So just curious on what stabilized cap rates are, I guess?

Speaker 1

No, they're higher. I mean, I think it's very difficult to say Given the paucity of transactions and each transaction is sort of is not sort of is unique and has its own characteristic. If you put a gun to my head, I would say stabilized cap rates are in the low fives, but it depends a lot on the individual deal. And given our cost of capital, that doesn't work for us on a wholly owned basis.

Speaker 5

And then just one more if you wouldn't mind. What's the street rates that you kind of exited the year end? And what are you experiencing in January on a year over year basis?

Speaker 2

So today, we are it's really that time of year when you're really at the bottom. If you look at our churn where our move out rates compared to our move ins were about a negative churn of about 23%, which is slightly more than it was in prior years, but again, this is the worst time of year. It should start getting better in March.

Speaker 8

Thank you.

Speaker 2

Thanks, Juan.

Operator

One moment for the next question. This question comes from the line of Steve Sakwa with Evercore ISI. Go ahead.

Speaker 11

Yes, thanks. I guess it's still good morning out there. Scott, I just wanted to come back to the comment And maybe the one Joe made about kind of the first half, second half and just to make sure I didn't misunderstand when I know you've got very tough comps Certainly in the first half, but are you suggesting that like the Q4 same store revenue growth will be above the Q1 same store revenue growth and that you'll be accelerating into 'twenty four. I just want to Make sure I think about the cadence of same store revenue growth throughout the year properly.

Speaker 2

Yes. Maybe just help you Get a little bit more of a reference point. We ended last year double digit. So we are coming down from there. And what we're suggesting is with the Difficult comps, it obviously is decelerating more quickly because of those comps.

Speaker 2

But the Q1, The implication is the Q1 will be your best. You then trough in that mid part of the year and then a slight reacceleration in the back half. I wouldn't put it anything other than a slight deceleration from that trough from the midpoint, the mid part of the year.

Speaker 11

Got you. Okay. 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 $650,000,000 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 this year, Almost seemed like they're above the $650,000,000 Now maybe you're not keeping all that and some of those will be sold.

Speaker 11

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?

Speaker 2

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 Standing. 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 $490,000,000 or just above $490,000,000 in terms of outstanding balances.

Speaker 2

So that average of $650,000,000 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 A pieces.

Speaker 11

Okay. 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 and as a percentage of FFO going forward?

Speaker 1

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.

Speaker 1

And that will kind of naturally constrain the growth, if you know what I mean.

Speaker 11

All right. So, you think like $650,000,000 is a reasonable balance to try and keep with things coming in and out going forward?

Speaker 1

I don't want to agree or disagree with that because we may have opportunities to grow it past that or we may buy a bunch of the collateral and bring it below that. So I know you're looking for me to give you a spot

Operator

This question comes from the line of Ki Bin Kim of Truist. Your line is open.

Speaker 12

Thanks. Good morning. Just going back to the move in rate question for street rates, what was it year over year in Q4 and on a year over year basis, how that trended into February? What's assumed at the midpoint of guidance for 2023?

Speaker 9

Yes.

Speaker 2

Hey, Ben. The negative churn so let's just go to our achieved rate. Our achieved rate in the 4th quarter was just over 15% negative. It troughed in November and continued to get better through February, that year over year delta. So in February, we're about negative 11%.

Speaker 2

And also I'd point to the fact that these are really difficult comps in 2021. Those were the highest rates we'd ever experienced. So while they are negative, just I think it's relevant to point out that comp from the prior year.

Speaker 4

And did you want

Speaker 12

to could you comment on what's implicit in guidance?

Speaker 2

So guidance, we focus more on the growth month over month. If you look back to last year, we actually started experiencing negative rate 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.

Speaker 12

Okay. And one of the loud cars 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 this stay kind of challenging?

Speaker 2

So I think our assumption is that none of us feel like the economy is really, really good today. I think that's most people here would tell you that. But the assumption is, as it continues like it is today, we have not guided or anything in our guidance implies a severe recession or a big downturn. Clearly, we think a healthy housing market is better for self storage, but self storage does well in good times as well as bad. So It impacts it, but maybe not as negatively as other parts of the economy.

Speaker 2

Okay.

Speaker 12

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.

Speaker 4

Can you just touch on that?

Speaker 2

Our share counts have always assumed the as if converted.

Speaker 12

Okay. So it's not actual conversion. Okay, got it.

Speaker 2

It's no change, Greg. It's the as if converted method.

Speaker 12

Okay. Thank you.

Speaker 2

Thanks, Stephen.

Operator

And thank you for your questions. That completes our Q and A segment. At this time, I'll turn it back over to Joe Margolis and team for any closing remarks.

Speaker 1

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.

Speaker 1

Thank you very much, everyone. Have a great day.

Operator

And thank you for your participation in today's conference. That does conclude the program. You may now disconnect.

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