Extra Space Storage Q4 2022 Earnings Call Transcript

Participants

Corporate Executives

• Jeffrey Norman, Senior Vice Presidentd of Capital Markets
• Joseph D. Margolis, Chief Executive Officer
• Scott Stubbs, Executive Vice President and Chief Financial Officer

Analysts

• Michael Goldsmith, UBS Group AG
• Jeffrey Spector, BofA Securities
• Todd Thomas, KeyBanc Capital Markets
• Keegan Carl, Wolfe Research
• Smedes Rose, Smith Barney Citigroup
• Spenser Allaway, Green Street
• Ronald Kamdem, Morgan Stanley
• Juan Sanabria, BMO Capital Markets
• Steve Sakwa, Evercore ISI
• Ki Bin Kim, Truist Financial Co.

Presentation

[Operator]

Good day, and thank you for all for standing by. Welcome to the Q4 2022 Extra Space Storage, Inc. Earnings Conference Call. [Operator Instructions] [Operator Instructions]

I would now like to hand the conference over to Jeff Norman. Please go ahead.

[Jeffrey Norman, Senior Vice Presidentd of Capital Markets at Extra Space Storage]

Thank you, Chris. Welcome to Extra Space Storage's Fourth Quarter 2022 Earnings Call. In addition to our press release, we have finished unaudited -- 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 Cities 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.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

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 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%.

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, 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, Executive Vice President and Chief Financial Officer at Extra Space Storage]

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 to 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 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 million due to current market conditions. Third-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. 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.

Questions and Answers

[Operator]

[Operator Instructions] Our first question comes from Michael Goldsmith of UBS. Your line is open. Please go-ahead.

[Michael Goldsmith, Analyst at UBS Group]

Good morning, thanks for taking my question. Scott, you talked a little bit about the cadence through '23 that you expect to 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 rate for the industry?

[Scott Stubbs, Executive Vice President and Chief Financial Officer at Extra Space Storage]

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 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.

[Michael Goldsmith, Analyst at UBS Group]

And 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 ECRIs 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 ECRIs 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, Executive Vice President and Chief Financial Officer at Extra Space Storage]

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 are -- have less pricing power. 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.

[Michael Goldsmith, Analyst at UBS Group]

Thank you very much and good luck in 2023. Thanks, Michael.

[Scott Stubbs, Executive Vice President and Chief Financial Officer at Extra Space Storage]

Thank you.

[Operator]

Our next question comes from Jeffrey Spector with BofA Securities. Your line is open.

[Jeffrey Spector, Analyst at BofA Securities]

Great, thank you. 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.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

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 are making long-term accretive 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.

[Jeffrey Spector, Analyst at BofA Securities]

And then -- sorry. Is there something else?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

No, I was just saying -- I was acknowledging your thank you and saying thank you to you again.

[Jeffrey Spector, Analyst at BofA Securities]

If I can ask a second on operations, just so we can compare to your peer that's 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?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

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 said, 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.

[Jeffrey Spector, Analyst at BofA Securities]

Okay. I'm sorry, can I just ask one follow-up? I don't know if there's a limit.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

Sure.

[Jeffrey Spector, Analyst at BofA Securities]

Okay. So then I guess my follow-up is -- again, I'm just trying to put in -- think about how the year ended, what we've heard so far, again, given 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 say, peak leasing would be stronger than expected, maybe stronger than the midpoint is? Are we focusing more on occupancy, street rate? Like what are some of the things we can -- we should be focusing on?

[Jeffrey Norman, Senior Vice Presidentd of Capital Markets at Extra Space Storage]

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 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.

[Jeffrey Spector, Analyst at BofA Securities]

Great, thank you and congratulations on 2002.

[Jeffrey Norman, Senior Vice Presidentd of Capital Markets at Extra Space Storage]

Thanks.

[Operator]

This question comes from the line of Todd Thomas with KeyBanc Capital Markets. Your line is open.

[Todd Thomas, Analyst at KeyBanc Capital Markets]

Yeah, 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? 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, Executive Vice President and Chief Financial Officer at Extra Space Storage]

Yes. 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 still -- 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. I think that when we look at our guidance and the opportunity here, it's 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.

[Todd Thomas, Analyst at KeyBanc Capital Markets]

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 third-party management platform during the year?

[Scott Stubbs, Executive Vice President and Chief Financial Officer at Extra Space Storage]

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.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

39.

[Scott Stubbs, Executive Vice President and Chief Financial Officer at Extra Space Storage]

So 39 total, but 16 were wholly owned.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

16 into JVs.

[Scott Stubbs, Executive Vice President and Chief Financial Officer at Extra Space Storage]

Yes.

[Todd Thomas, Analyst at KeyBanc Capital Markets]

Okay. 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?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

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 in 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 at KeyBanc Capital Markets]

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, 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?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

So I don't think we dialed back in a sense if we see what we believe is a long-term attractive investment that we 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 $0.25.

[Todd Thomas, Analyst at KeyBanc Capital Markets]

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

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

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'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.

[Todd Thomas, Analyst at KeyBanc Capital Markets]

All right, great. Thank you.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

Thank you.

[Operator]

This question comes from the line of Keegan Carl with Wolfe Research. Your line is open.

[Keegan Carl, Analyst at Wolfe Research]

Hey guys, thanks for the questions. 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 just have regarding floating rates? I know you obviously said you're looking at the forward curve, but things changed. So just kind of curious here.

[Scott Stubbs, Executive Vice President and Chief Financial Officer at Extra Space Storage]

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.

[Keegan Carl, Analyst at Wolfe Research]

Okay. But I mean that's not going 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?

[Scott Stubbs, Executive Vice President and Chief Financial Officer at Extra Space Storage]

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.

[Keegan Carl, Analyst at Wolfe Research]

Okay. 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?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

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

[Keegan Carl, Analyst at Wolfe Research]

All right. No worries. Thanks for time guys.

[Operator]

Thank you again. This next question comes from the line of Smedes Rose with Citi. Your line is open.

[Smedes Rose, Analyst at Smith Barney Citigroup]

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 are you thinking about marketing costs, which I know pretty probably relatively low last year, but I see that they're going to go up some, but maybe just a little bit of detail around those?

[Scott Stubbs, Executive Vice President and Chief Financial Officer at Extra Space Storage]

I 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 big items that are below that number. So payroll assumes 4% growth. Our property taxes are about 4% growth. 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 in 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 have solar. So while it's a high percentage, it's not a huge number.

[Smedes Rose, Analyst at Smith Barney Citigroup]

Okay. And then 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 approach refusal?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

Sure. So pre-modification, there were two instruments, $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.

[Smedes Rose, Analyst at Smith Barney Citigroup]

Perfect, okay.

[Operator]

Thank you. This next question comes from Spenser Allaway of Green Street. Please go-ahead.

[Spenser Allaway, Analyst at Green Street]

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 to growth?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

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 the store for some period of time. So building on excess land, building on RV lots, taking single story, turning it into multistory. 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. So we'll continue to do that. And 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 fourth quarter. 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 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 eight pieces.

Our management business, which we expect another strong year as the -- is a very, very capital-light option and we'll absolutely prioritize that with the other 2. Joint ventures, we're a little quieter in the fourth quarter. And in the first quarter this year than we were for the first two quarters of last year as our joint venture partners have some of the capital issues that we know those types of private equity funds are 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 do some of those as well.

[Spenser Allaway, Analyst at Green Street]

Okay. 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, Executive Vice President and Chief Financial Officer at Extra Space Storage]

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 three that I would point to is maybe really below the average.

[Spenser Allaway, Analyst at Green Street]

Well, thank you.

[Scott Stubbs, Executive Vice President and Chief Financial Officer at Extra Space Storage]

Thanks, Spencer

[Operator]

This question comes from the line of Ronald Kamdem with Morgan Stanley. Please go-ahead.

[Ronald Kamdem, Analyst at Morgan Stanley]

Hey, 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 rent 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?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

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 ECRI, where we had greater than normal, if you will, rent increases, because we have 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. In fact, the incremental move out from ECRI has trended down and is heading towards -- isn't there yet, but it's 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, but 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.

[Ronald Kamdem, Analyst at Morgan Stanley]

Great. And then maybe just a bigger picture question about sort of top-of-the-funnel demand. You hear a lot about sort of economic -- 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?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

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.

[Ronald Kamdem, Analyst at Morgan Stanley]

Great, that's it from me. Thanks so much.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

Thank you.

[Operator]

[Operator Instructions] Our next question comes from Juan Sanabria of BMO Capital Markets. Your line is open.

[Juan Sanabria, Analyst at BMO Capital Markets]

Hi, good morning. 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 of what that means and what we could see be opened up here going forward?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

Sure. 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 at BMO Capital Markets]

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.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

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 at BMO Capital Markets]

Okay. Great. And then just curious on the transactions market, where you see the stabilized cap rate 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?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

So they're higher. I mean, I think it's very difficult to say given the paucity of transactions. And each transaction is sort of -- not sort of, is unique and has its own characteristics. If you put a gun to my head, I would say stabilized cap rates are in the low 5s, 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.

[Juan Sanabria, Analyst at BMO Capital Markets]

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, Executive Vice President and Chief Financial Officer at Extra Space Storage]

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, we're 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 the year, it should start getting better in March.

[Juan Sanabria, Analyst at BMO Capital Markets]

Thank you. It's one.

[Scott Stubbs, Executive Vice President and Chief Financial Officer at Extra Space Storage]

Well, don't know, for the next question.

[Operator]

This question comes from the line of Steve Sakwa with Evercore ISI. Go-ahead.

[Steve Sakwa, Analyst at Evercore ISI]

Yeah, 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 did 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 first quarter same-store revenue growth and that you'll be accelerating into '24? I just want to make sure I think about the cadence of same-store revenue growth throughout the year properly.

[Scott Stubbs, Executive Vice President and Chief Financial Officer at Extra Space Storage]

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. But the first quarter -- the implication is that the first quarter 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 in anything other than a slight acceleration from that trough, from the midpoint, the mid part of the year.

[Steve Sakwa, Analyst at Evercore ISI]

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 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 this year, almost seem 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 thinking how much new money is going out? What's getting repaid, like what's the net investment in the loan book this year?

[Scott Stubbs, Executive Vice President and Chief Financial Officer at Extra Space Storage]

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 at Evercore ISI]

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 suggest 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?

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

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.

[Steve Sakwa, Analyst at Evercore ISI]

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

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

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 number, but I really can't.

[Steve Sakwa, Analyst at Evercore ISI]

That's okay, I tried. Thank you.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

Thank you.

[Operator]

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

[Ki Bin Kim, Analyst at Truist Financial]

Thanks, good morning. Just going back to the move-in rate questions for achieved rates. What was it year-over-year in 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, Executive Vice President and Chief Financial Officer at Extra Space Storage]

Yes, Ki Bin, the negative churn -- so let's just go to our achieved rate. Our achieved rate in the fourth quarter was just over 15% negative. It troughed in November and continue to get better through February, that year-over-year delta. So in February, we're about negative 11% and -- also, I'd point to the fact that these are really difficult comps in 2021. Those were the highest rates we've ever experienced. So while they are negative, just I think it's relevant to point out that comp in the prior year.

[Ki Bin Kim, Analyst at Truist Financial]

And did you want to -- could you comment on what's implicit in guidance?

[Scott Stubbs, Executive Vice President and Chief Financial Officer at Extra Space Storage]

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.

[Ki Bin Kim, Analyst at Truist Financial]

Okay. 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, Executive Vice President and Chief Financial Officer at Extra Space Storage]

So I think our assumption is that we -- 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, 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.

[Ki Bin Kim, Analyst at Truist Financial]

Okay. 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, Executive Vice President and Chief Financial Officer at Extra Space Storage]

Our share counts have always assumed the as-if converted. So...

[Ki Bin Kim, Analyst at Truist Financial]

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

[Scott Stubbs, Executive Vice President and Chief Financial Officer at Extra Space Storage]

No. It's no change, correct. It's the as-if converted method.

[Ki Bin Kim, Analyst at Truist Financial]

Okay, thank you.

[Scott Stubbs, Executive Vice President and Chief Financial Officer at Extra Space Storage]

Excellent.

[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.

[Joseph D. Margolis, Chief Executive Officer at Extra Space Storage]

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 Closing Remarks]