Ladies and gentlemen, thank you for standing by and welcome to the Public Storage Third Quarter 2020 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. And the floor will be open for your questions following the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to Ryan Burke, Vice President of Investor Relations. Ryan, you may begin.

Thank you, Christy. Hello everyone. Thank you for joining us for our third quarter 2020 earnings call. I'm here with Joe Russell and Tom Boyle. Before we begin, we want to remind you that aside from those of historical fact, all statements on this call are forward-looking in nature and are subject to risks and uncertainties that could cause actual results to differ materially from those statements. The risks and other factors could adversely affect our business and future results as described in yesterday's earnings release and in our reports filed with the SEC. All forward-looking statements speak only as of today November 5, 2020. We assume no obligation to update or revise any of the statements whether as a result of new information, future events or otherwise. A reconciliation to GAAP of the non-GAAP financial measures we provide on this call is included in our earnings release. You can find our earnings release, SEC reports and an audio replay of this conference call on our website at publicstorage.com. [Operator Instructions] With that, I'll turn the call over to Joe.

Thank you, Ryan, and thanks for joining us today. We had a solid quarter and now we'd like to open the call for questions.

Thank you. [Operator Instructions] And your first question is from Alua Askarbek of Bank of America.

Good morning everyone. Thank you for taking the questions. So just looking at the transactions market, it seems like there was a good amount of activity in 3Q and you guys alluded that to -- alluded to that during your 2Q call. But there was also a surprising amount of portfolio deals. Can you give us some color about what you're seeing in the market currently and any of the opportunities going forward? And then also any color on cap rates and the recent 30 portfolio -- property portfolio deal under contract right now?

Okay. Sure Alua. The acquisition market clearly has opened up. We've been tracking it through the pandemic and spoke about the early months where a number of sellers paused and were reticent to bring properties into the market. But we've clearly seen many more do the reverse where they've looked at this environment as an opportune time to bring assets into the acquisition arena. The thing -- a number of things are continuing to fuel that. One is it's still a very good time to do a trade. There's very low interest rates availability of capital, there's a lot of capital sitting on the sidelines that's been anxious to get into the storage sector. And frankly, the storage sector continues to perform well. So there's been a window of opportunity that we've seen increase over the last month particularly in the quarter that set us up well to have a very active 2020. The things that we continue to do are look for assets that are particularly well positioned from a location and quality standpoint that meet our requirements relative to location and opportunity to round out presence whether they're in our prime core markets or other markets that we want to add additional product to. The thing that was unusual and we're encouraged by as we also as you asked have a sizable single portfolio under contract that we think is a great set of assets that will be very good for us to bring into the portfolio. In total, it's 36 properties across 15 markets, 13 different states. 24 of the assets are open and operating, but they're relatively new. Average age is two to three years, I would call them Class A properties in very good locations, and we're very excited to bring them into the portfolio…

Great. Thank you. And then just a little bit on rent increases to existing customers, I know in the beginning you guys noted that you're not going to be increasing rents as much as you did in prior years. But with -- I guess now cases are going up, but is there -- do you have an expectation when you're going to be able to get back to your historical bonds?

Yeah. Well, let me give you a little bit of context, this is Tom, around what we've been doing through the quarter on existing tenants and then what we think the outlook is. As we noted in the 10-Q we did resume and we discussed on the last call, we resumed existing tenant rate increases in the third quarter. We did so initially on a test basis and have since increased the volumes of those rental rate increases that we've sent out as we've grown more confident in the performance of our existing tenants. Since we didn't send any increases in the second quarter, we did have a clinical backlog of potential tenants to increase rent on in the third quarter, and we did send those catch up rental rate increases. As you noted those increases went out with a lower magnitude out of increase given overall mindfulness of our customer base in this crisis environment and as you highlighted still very dynamic, as well as state and local price regulations in many of our markets. We expect some of that to continue as we move through future quarters, certainly navigating this dynamic health care environment is unpredictable. We would expect that the existing tenant rate increases will continue to be a modest drag on in-place rent growth as we move forward. Stepping back, customer activity has been solid. And I just highlighted the existing tenant performance has been good. That's across the board. So that collections are better, payment patterns have accelerated, move-outs are down, length of stays are extending and new customer demand is solid. So we're seeing good trends there. And overall move-in activity has been good. But existing tenants will continue to be a modest drag going forward.

Great. Thank you.

Thank you. Your next question is from Smedes Rose of Citi.

Hi, thanks. My question is really just about move out activity. Your portfolio is always kind of generally had an upward bias in occupancies, but you did note that move-outs have slowed. And I'm just wondering as things normalize, I mean, do you have a sense of how much occupancy might be higher based on the slowdown in move-out activity? I'm just trying to think about how your occupancy may change over the next few quarters if things maybe get back to normal? And what might you do to encourage some of those customers to stay I guess?

Sure. So I'll provide a little context around the move-out activity, because it has been one of the surprises as we move through this pandemic period. As we rewind to April and early May, we had move-in volumes and move-out volumes that were lower. But as we moved into May and June and then, into the third quarter move-in activity has increased, but move-out activity has remained muted. And dissecting the geographies, the customer tenures, the customer segments with which move-outs are lower, it is really across the board and clearly being driven by the current health care environment. And you highlighted and we discussed in the 10-Q and the MD&A, the likelihood at point that rate of deceleration will moderate and we talked about in previous calls the fact that in other recessionary environments, we've actually seen the opposite play through, with higher move-outs given consumer stress. We've not experienced at this time. And in fact it was pretty consistent, through the third quarter, to give you a sense each of the months in the third quarter, saw 12% to 15% decline, in move-out volumes. And as I mentioned, it's across geographies, across customers tenure bans and customer segments. So really broad-based decline in move-outs, paired with good collection activity and accepting the rental rate increases that we've sent to-date. So we've encouraged by the existing tenants. We do have our eyes on, what could playout, as we move in this dynamic environment. And we do watching that very closely. But through October, move-outs continue to be lower.

And yeah Smedes, so what's playing through right now that again, month-by-month we're seeing more sustained and consistent consumer behavior. Work from home is additive, meeting is another factor that we're seeing from a survey standpoint, relative to the customers coming to the portfolio. And what's driving that decision. You've got a number of markets, whether you label them as, urban or high-density and/or related to even concentration of tax that use the Bay Area for instance, where we see system-wide our highest level of occupancies. Thousands of employees, have been given allow to move, out of that market, either temporarily or potentially permanently. And are shifting and amplifying the need for self-storage, as either they're dealing with the health crisis and the flexibility that they've got to work at either at home or completely different localization, seeing similar impacts right, again in the heart of New York, set of assets. So that's additive. The housing market is very strong right now. That's always a traditional and very good driver for our business. But housing sales were up over 20%, as we speak, on a year-over-year basis. And it's a driver. So you've got layers of different consumer patterns that are playing through, that are pointing to more sustained and prolonged need for storage space. So we don't know when and to what degree, it will shift back to a "normal environment", but the amount of sustained activity that we're seeing now into the eight month of this health crisis continues to be quite good.

Okay. That's great color. And then, I'm just wondering, maybe broadly, you've talked before just kind of what you're seeing on the supply outlook overall? Or if you're seeing any kind of, changes on the increment versus your last update on, just overall nationwide supply dollars in development, that you typically talked about?

Yeah, not -- I wouldn't say, anything to point to that is materially different. We do think that 2020 will plus or minus calc out to be about a $4-or-so billion set of deliveries across all of our markets here in the United States. The anticipated shift down into deliveries in 2021 was something in the range of 15-or-so percent. So we could still see that, degradation and deliveries. But frankly it's still high. And with the continued interest from an investor base, to get into the self-storage sector and performance that the product type itself continues to have even in this challenging environment. As mentioned earlier, there is still a fair amount of capital that wants to get into the space, whether it's through acquisitions or even development. So, it's to something that we're keeping a close eye on but it really hasn't changed that much from our prior outlook.

Great. Okay. Thank you guys.

You bet.

Thank you. Your next question is from Spenser Allaway of Green Street.

Thank you. Can you guys provide a bit more color on what drove the material deceleration of marketing spend in the quarter? And where you see this trending for the balance of the year?

Sure. So, stepping back on marketing spend that's been a tool that we've utilized along with promotional discounts and move-in rates over the past several years and what was a tough customer acquisition environment. Given the impact of new supply in many of our markets. And so we did increase our spend over the last several years and have liked the returns that we've seen utilizing advertising spend and that really is across paid surge it social media we use television in the second quarter kind of a broad-based advertising approach to attract new customers. We do have real advantages in using advertising as a tool given our brand name and presence online. And so we like that too and we will continue to use it as we navigate this dynamic environment. In the second quarter, given lower top of funnel demand we were more aggressive on marketing spend. And as top of funnel demand improved as we moved into the third quarter we removed some of that advertising support. But as you note our advertising spend was up about 8% or 9% in the quarter and we will continue to use that tool as we play through what's a dynamic environment but we did not need the level of support we saw in the second quarter given improved top of funnel trends.

Okay. And then maybe just lastly, we recently saw a large storage transaction with Blackstone acquiring the simply portfolio. Was this a deal you guys looked at? And can you comment on whether the portfolio would have been of interest to you?

So, we're active in all markets and have the opportunity to look at most deals. So I'll comment on is we're highly entrenched in most if not all the deals that are happening in any variety of different types of transactions large and small. And we are continuing to track and see the level of activity. I'm not really going to comment on our view and perception of that particular portfolio but we're highly entrenched and our acquisition team continues to be incredibly engaged whether they're marketed deals as that particular one was or deals that are not marketed which points to the portfolio I talked about earlier.

Yes. Maybe I like that transaction is emblematic of what Joe highlighted earlier around institutional capital looking to invest in self-stored because of its performance through cycles. And so it's interesting to see another institutional player put a significant amount of capital into the sector.

Thank you.

Thank you. Our next question is from Todd Thomas of KeyBanc Capital Markets.

Hi thanks. Tom helpful color on some of the move-out trends. Can you comment on move-in trends throughout the quarter and through October what the cadence was like? And then the strength in move-in rates was rather significant. They were rates were higher in the quarter than they've been in several years. Did you push move-in rates above market during the quarter just given where your occupancy is? Or was that increase sort of more commensurate with the market rent growth in your view?

Sure Todd. So, kind of stepping back on the move-in trends like I did with move-out trends. We did see move in activity kind of surge in March we saw it really slow down in April. We moved into a third phase that we call internally kind of recovery in May and June. And then really since July first seen an improvement in top of funnel demand pair that with reduced move-out activity as I just highlighted means that occupancy has moved higher in really all of our markets across the country. And that improved occupancy certainly reduced the inventory levels that we had. And that really persisted through the quarter. We finished the second quarter up about 50 basis points in occupancy. We finished the third quarter up 200 basis points proceeding here. We finished October up 230 basis points in occupancy and so customer trends being move-in and move-out have been good and with lower inventory, that's allowed us to achieve higher move-in rates. Our move-in rates were up 8.2% in the quarter, in October, to give you a sense, the strength of top of funnel and the move-out trends have continued, which has led move-in volumes to be up about 1% in October and move-in rates, up about 10%. So, the trends have continued and obviously seeing the benefit of demand for storage, both from our existing tenants who want to continue to use storage in this environment as Joe mentioned for many reasons, as well as new customers seeking new space.

Okay. And obviously, there's just a lot of I guess sort of ins and outs, when you think about demand. But Joe, I'm curious in a market like New York, you mentioned San Francisco, where a lot of workers have flexibility to work from home and move out of some of these high-cost markets, which the data and headlines suggest is happening. Why is that out migration activity translating into strong demand in those markets? And do you expect that to moderate or maybe unwind, I guess to some extent over time? Is that a risk in your view?

Well, it's a spectrum of different drivers, Todd. So, part of the flexibility for instance if you look at the Bay Area that many tech workers have been given is, when a big employer many of whom you -- anyone of us can point to gives signals and/or time frames where they may not be pulling their employees back, not for one or two months, for six months to a year, coupled with giving them full flexibility to be somewhere else. That could vary. So, some employees will still come back. There's no question about that, but it may be for several months or several quarters depending again on the unknown timing of the pandemic itself. And then to what degree these become permanent relocations and then some commensurate impact on the need to keep goods or whatever they're keeping it in one of our units in that particular market will be a question and can predict it, don't know. Fortunately, again, if you look at the Bay Area for instance, we have an opportunity to stand out there because we've got a very well-placed portfolio. It's very difficult to add new supply there. So, the different need for that space in that market long term is quite high. There's no question about it. And it's difficult to build there. So, it's not a market by any means that we’re concerned about from an oversupply standpoint et cetera. This has just been a very unusual environment where this demand has been so elevated where I mentioned we've got system high occupancies of 97%, 98% this time a year. I mean, we have never seen that before. So, it's to be determined. It's hard to predict. And the flexibility and the way in which employees, whether they're tech-oriented or other traditional office users change over time is to be determined. But as Tom mentioned, we're seeing -- it's just in these urban or more dense markets we're seeing healthy demand across the entire system. We frankly don't have a market that's down in occupancy. It continues to percolate our lease-up of our newly built and required assets is very strong. And consumer demand continues to be very, very active, particularly for this time a year.

Yes. And Todd, maybe just to provide a couple of other market anecdotes for you. Markets like Charlotte for instance, we've seen very good incoming demand in a market that had been suffering from new supply over the last several years. We've seen good new customer demand, improving occupancies, improving rates. Even within the San Francisco Bay Area, while you can clearly make a case for a very urban peninsula and the city of San Francisco, we've seen strength in our lease-ups in San Jose for instance and a strong housing market there. So, there's -- we have a well placed portfolio around the country and we're seeing good demand in both markets that may see outflow as well as those that are seeing inflow.

Right. That's interesting. Is the demand for larger units -- are you seeing that as individuals are maybe looking to rent larger spaces for their apartments or homes for a sort of period of time.

Actually it is opposite which is strength year-over-year has actually been in smaller spaces versus larger spaces believe it or not.

Yes. So theoretically you could argue that again if you just think of the demand that's tied to work from home it's just not somebody holistically leaving an entire house or an apartment, it may also be a very healthy level of demand tied to just needing that extra closet or that extra bedroom or that area is not only because it's a work from home maybe family members come back or whatever. And there are layers and layers of demand factors that we're tracking. But as we've said, it's solid demand.

Okay. All right. Thank you.

Thank you.

Thank you. Your next question is from Ki Bin Kim of Truist

Good morning out there. Just going back to some of the acquisitions you made in the quarter and fourth quarter, can you just provide some more color or parameters around yields, at least for your stabilized portion?

Ki Bin, I'm not going to give you specifics about the actual yield. I would tell you it's similar to ranges that we've looked for over time which on a stabilized basis would be 5% to 6% plus on a cash-on-cash yield or north of that. The thing that I didn’t mentioned about the portfolio that we'll be closing this quarter is the occupancies about 35%. We look at that as a very good thing relative to again the opportunity to lease-up space based on the demand factors that we're seeing, the great locations that these assets are tied to and the quality of the assets. So it's a very good opportunity for us to stabilize those assets to put our own marketing and operational tactics and strategies into them. And we feel like we'll have very good returns once we get the assets stabilized. As you well know that can take anywhere from three to four years on a normalized basis, not only once you get to stabilized occupants at more stabilized revenue and pricing metrics. So we'll continue to look for again the stabilization of those assets. But as I mentioned, very high quality, good solid assets and adds in many ways you could consider it almost like a near-term or more recently delivered developments on our part. So again very good opportunity to drive good value from them.

Okay. Thanks. And when I look at your same-store revenue, it improved slightly to negative 2.7% from minus 3% last quarter. Obviously, the underlying drivers are pointing towards a much better place, right where fee-based rates are up 8%, better occupancy and things like that. So I was wondering if you could just provide some more details behind the transitory nature of the underlying drivers and how that might benefit same-store revenue going forward, in particular things like existing customer rate increases. I'm not sure how much normally it contributes whereas in 3Q it didn't? And going forward how do we expect that to normalize? Just to understand that magnitude a little better?

Sure. Ki Bin, it's Tom. I think we spent some time talking last quarter around the cumulative impact of the pandemic, which was likely to continue to impact revenue growth trends as we move forward and we did see that into the third quarter. Operating metrics have removed more quickly than financial metrics and we – let's pick a part of the occupancy and rate equation. I commented earlier around how occupancy trends have improved with a combination of better top of funnel activity as well as lower move-out volumes. And so that's improved occupancy trends. In many of our markets we have reached occupancies that are frictional, meaning we are at 97%, 98% occupancy in the middle of the month, which is friction in our industry. So it's a matter of what play through with rates in some of those markets as we move forward. As you just highlighted and we spoke about earlier, existing tenant rate increases are not going to be a contributing factor to improving rent trends given the magnitude of the increases are likely to be lower as we move forward through the fourth quarter. That said, just looking at in-place rents from June 30 – at June 30 in-place rents were down 3.1% and we finished the quarter September 30, down 1.8%. And with existing tenants not contributing to that improvement that negative impact was more than offset by improved customer activity and the reduction of rent roll down. If you look at the third quarter of 2019, rent roll down was about 15%, and as we moved into the third quarter of 2020 that narrowed down to about 4%. So improved rent roll down more than offsetting the degradation from existing tenant rate increase drag in the quarter. Looking forward, aggregate contract rents recovered. So occupancy and rent combined to positive 20 basis points at September 30 and we've continued to see good customer trends through October so better rental income trends. Fees which have been a negative contributor to revenue growth in both the second and third quarters, we anticipate to continue to do so as we move forward and that's really driven by customers paying their rent, which is a great thing, but is a degradation in revenue and the growth. So I think, we spoke a little bit about that on the last call Ki Bin, but we continue to see that and we'd anticipate that through the fourth quarter and into the first quarter of next year.

Okay. Thank you.

Next?

Your next question is Steve Sakwa of Evercore ISI.

Thanks. Good morning, everyone. Just a quick question on the balance sheet, Tom. You've got like $1.2 billion preferred that, I guess, are callable throughout 2021. I'm just sort of, curious on your thoughts about replacing them with new preferred. I think your last deal was sub 4%. And how do you, sort of, weigh that maybe against kind of putting some more debt on the balance sheet just given how lowly leveraged you are? And where do you think the comparable say 30-year kind of debt issuance would be for you today versus a preferred offering?

So, sure. So Steve, you highlighted what is a good opportunity in 2021, which is another year of potential preferred refinancing activity be it with debt or preferred. Looking at our preferred balance, we like having around a $4 billion preferred balance in the capital stack. We think it's good for the business through cycles. And the optionality both to have perpetual capital in the capital stack, but at the same time if interest rates decrease over time the ability to call them like we did this year, and you're highlighting the opportunity for next year. So throughout this year, we've redeemed about $1.2 billion of preferred. We haven't issued quite that much yet and we were active in the bond market in Europe in January. Financing markets, as Joe highlighted earlier are as attractive as they have ever been. Preferreds are sub-4% for us today, which is a record low, which presents that opportunity and we have great access to debt capital too. As we said in previous settings we'll look to utilize both preferreds and debt for incremental financing activity as we move through 2021 for both preferred refinancing as well as for potential acquisition opportunities and development which clearly, as Joe highlighted earlier is accelerating as we move through the fourth quarter. So good access to capital and we'll utilize both and we hope that we have the opportunity to refinance in 2021 like we did in 2020 and 2019.

So just do you have a sense for where like a 30-year bond offering, if you wanted to go longer out on the, sort of, curve how that would compare to a pref offering?

A 30-year bond is going to be cheaper. A 10-year bond is going to be even cheaper than that 5-year bond even cheaper than that. So we've got lots of tools in the toolkit.

Okay. And then just on the acquisition front you guys from time to time have obviously, looked outside the U.S. and spent some time in Australia. Joe, I'm just curious, sort of, where your head is today about looking for international opportunities outside of the domestic opportunities.

Yes, Steve we're going to continue to look both domestic and internationally. So we have clearly, the opportunity from a knowledge base. We've learned a lot through our involvement and success through the Shurgard investment. And we feel over time that we can continue to grow both here domestically and internationally. It's always going to be subject to different types of opportunities and the particular market that may be for whatever set of reasons well-timed from an attractive point to either enter or find appropriate opportunities. So we're going to continue to assess opportunities both here domestically and internationally.

Great. Thank you.

Thank you.

Thank you. Your next question is from Ronald Kamdem of Morgan Stanley.

Hey. Thanks for the time. The first one is, just circling back on the demand question. Just trying to understand obviously looking at the analysis, just looking for sort of more thematic in terms of -- is there anything that stands out in terms of the demand driver in this period, whether it be college students, small businesses, work from home, or just people leaving the city. And the reason I ask that is, one of the questions we get a lot is, presumably, once the vaccine is here and it normalizes, really trying to get at which drivers are going to stay and pick around and which drivers were really just sort of a one timer? And maybe what new demand drivers we may not be thinking about again once we normalize? Thanks.

Yes. Ron, that's certainly something that we're going to continue to track, as these different demand factors play through. It's hard to predict the sustainability or the likelihood that some of them are here permanently or they’re going to shift up and down. I already talked a little bit about the work-from-home demand factor. That's clearly new at this level of magnitude. And whether or not that sustains from a demand stat standpoint after the pandemic settles down or not, is to be determined. Many companies are looking at work-from-home platforms as different and new way of enhancing productivity and employee satisfaction. But the theoretical argument against that is there may be the opposite going through too. So it's a little bit hard to predict. And at the moment we're just going to continue to survey and understand and see these drivers. The interesting thing is they're all additive and they're continuing to drive as we've talked about, very optimized performance. We'll continue to learn from this and it's brought frankly a healthy and new set of customers into the storage sector, never used the product before. So I think, long term, that's a good thing. The adoption of the product continues to grow statistically. And it once again is proving that the product is highly resilient, it's highly adaptable and consumers like it. The things that we continue to do also are, find ways of making the customer interaction that much more effective, making it a much more easy decision and transaction. So many of the tools that we've been putting into our technological channels and options for customers are serving us well, about 40-plus percent of our move-in volume in the third quarter came from our e-rental platform that frankly was in test mode before the pandemic came about, but statistically we moved in 115,000 customers directly through that a channel and that transaction takes about five minutes and consumers love it. And that's not just because of the pandemic. It's just a great and easy way to capture a storage unit. So we've got different things that we're also able to test in a very challenging environment like this, that are frankly giving us even new and different tools that could lead to different levels of dealing with customers in a very different way than we were doing before that again are very aligned with their ability to think even more positively about needing a storage facility, because it's that much used or easier to capture and is that much more cost effective.

Great. And then my second question was, just digging in deeper a little bit into acquisition. Just trying to get sort of harder numbers and quantifying it. Clearly, at the cost of capital you talked about sort of the pipeline deals that have identified of at least $700 million. The question is, is there -- just for PSA, when you sort of take a step back and look at your team. Is there $500 million $1 billion maybe even more of acquisition opportunities that are for the company a year? Or just trying to understand what's the mitigating factor? Is there not enough sellers? Is it too competitive, but the company decided tomorrow to take acquisitions up, what would be the mitigating factor to getting to a number like that?

Well, I wouldn't say as simple as just saying we turned on and switch and said, let's just go buy whatever we can get our hands on. We have very disciplined analytics that we use that give us the right guidepost to say these are the relative. And I would say better timed opportunities to deploy capital. This is, at the moment, a good window to do that. Our cost of capital, as Tom reiterated, is very, very good. Our access to capital is very good. We know most of the markets that we operate in much better than others do. So we have different ways for us to step back and understand the relative ultimate capital allocation, performance and ability to drive value through not only our acquisition environment but our development and redevelopment activities. So, we have all those tools. We continue to analyze them. And we've got a balance sheet that can clearly accommodate multiple factors of the volume that we were even talking about this quarter. So, I don't see that as anyway a limiter, and we're going to continue to evaluate the timing and the quality and the fit of any particular acquisition, whether it's one-off, whether it's a medium-sized portfolio or a sizable one.

Helpful. Thank you.

Thank you. Your next question is from Jonathan Hughes of Raymond James.

Hey. Good morning. This is an extension of Steve's earlier question. But what are you and the Board believe is the appropriate amount of leverage? All four legacy self-storage REIT share prices are up low-double-digits year-to-date on a total return basis. Yet balance sheets range from three turns of leverage for PSA including preferreds to more than six turns at peers. So during 100-year pandemic and recession when balance sheets should have mattered most -- it hasn't really benefited PSA. I'm just curious if views towards leverage have changed at all over the past eight months?

Yeah. What I would say is that our perspective around leverage is long-term held belief that we should have a conservative balance sheet that allows us to invest through cycles. That allowed us access to capital throughout this year as you highlighted. And I think this year has been somewhat unique. And in fact that we're in a deep recession and financing markets have been attractive throughout. I think we've also highlighted that we have capacity to utilize that balance sheet in times like this to fund acquisitions, and we're doing that in the second half of this year. So we definitely have some capacity from here to add incremental leverage. And we're doing that as we move forward. In terms of the appropriate amount of leverage, we think a conservative long-term view, and a single A rating is an appropriate place for a REIT of our size scale and capability.

So earlier you said you like having $4 billion of preferreds in the cap stack. I mean how do you over the exact number, why not more? I guess you said, you alluded to you can use more preferreds to go consolidate share, but are you talking upwards of another turn? I think leverage was $4 billion turns back in 2007, so do you have any range we could use.

So yes, Jon, the range is highlighted $4 billion. I didn't mean that that would be the maximum. I meant it more that I liked having $4 billion. So I would consider that. And why did I say $4 billion? It's because about the amount we have currently outstanding. Meaning I like the amount we have outstanding and over time would anticipate that to grow, and would anticipate our debt balance to grow as the company continues to grow and our EBITDA grows and the business grows.

Okay. I just want to make sure it wasn't like arbitrary. You like the number four or something like that. And then one more -- I figure it as much. I just -- the four stuck up to me. What about funding acquisitions, on a leverage-neutral basis by raising common equity. I realize that hasn't been done in, I think decade. But plenty of other large REITs still raise common equity to grow on a leverage-neutral basis, and given your trading to low four implied cap and above NAV, that would actually be accretive to NAV. Is that a possibility?

Sure. Common equity is in the toolkit and it's something that we could utilize as you highlight. At the same time we do have capability to finance with the debt in preferred markets and debt and preferred is cheaper than common equity. So we have the ability to do that over time. But it's certainly in the toolkit. The company over time has used it more for strategic opportunities. But as the company grows, it's certainly an option to finance, as well as debt and preferred NAV so it's in the toolkit. But certainly recently, we've been utilizing debt and preferred because we have capacity to do so.

Got it. Thanks for the time.

Thank you. [Operator Instructions] Next question is from Juan Sanabria of BMO Capital Markets.

Hi good morning. Just hoping if you could talk a little bit about move up, but from a different perspective, I believe you mentioned earlier in the call that you typically see move-out increase during a normal "recession". So could you give us help again, what that has been historically through your many cycles? And just to think about the downside of if some of these benefits that are maybe onetime in nature to pass at some point actually?

Sure. And obviously we don't know that when we may find ourselves in a position where move-outs would accelerate. We do think that the current trends are impacted by the healthcare crisis that we're navigating through. In terms of prior crisis, if you look back at the financial crisis, we saw move-outs for several quarters up in the mid-single digits. And so -- that's an example. But what we've learned certainly through this experience is that, everyone is unique. And so, our ability to point to that is, what will happen when the pandemic eases, I think is limited and we're going to be certainly watching very closely in terms of what consumer activities will be like as we move through future quarters. And I would say it's unpredictable. And it's unpredictable because of the healthcare nature of this crisis, as well as the government activities to reduce the spread of the virus. So it's unpredictable past recessions would point to something like mid-single digits increase. Will this time be like last time? We don't know.

Fair enough. And just on the length of stay that you brought up as well. Where are we at today in your portfolio? And kind of how has that trended? And at what point, if at all you cross kind of a magic number where you maybe sneaking one more rate increase, assuming kind of the median length of stay?

Sure. So in terms of the benefit of length of state, you highlighted it which is okay, we get to see those longer-term tenants stay with us. We don't have to replace them and we have the opportunity to increase their rent over time. And that's already been playing out as we move through 2019 and into 2020. The length of stays we’re extending last year and we started to get the beneficial impact of sending more rental rate increases last year. And as we moved into the second half of this year with the decreased move-outs more customers have been eligible for rental rate increases this year. And if this continues would anticipate that in the beginning of next year as well. And that's been somewhat of an offset to the fact that as I highlighted earlier, we've been sending lower magnitude rental rate increases. But I would say that's been on the margin at this point. And if the trend continues, it will accelerate.

So what is the average or medium length of stay?

It's about 10 months.

Great. And just on my super quick one. Did you say that the average occupancy was 35% for the portfolio you're acquiring that’s, the one that's not in development? Is that…

There's 24 -- yes there's 24 properties that are operating that are average two to three years at most an age. So they are in early phases of lease-up. So that portion of the 36 property portfolio is about 35% occupied. And there are 12 properties that are under construction that will be delivered in 2021 quarter-by-quarter. So the lease-up up opportunity on the existing 24 is very good.

Yes. But not necessarily yielding anything today like from an NOI perspective?

No. I mean, they've got to cure and stabilized levels of performance. But we're very confident as I mentioned relative to the quality of the location the Class A buildings and we're very confident across the markets that they are positioned and that we'll do quite well with them.

Thank you.

Thank you. Our next question is Rick Skidmore of Goldman Sachs.

Good morning, Joe and Tom. Just a really quick one. Operations declined from the second to the third quarter, which is kind of atypical for the seasonal. What was happening? Is that just lower personnel cost? And then as you look forward on that line, do you expect lower move-outs to help to bring that line down over time? Or do we -- should we expect kind of the normal seasonal pattern?

Yeah, Rick. We're definitely looking for and seeing opportunity from an optimization standpoint to find ways of moderating the pressure tied to payroll as a whole whether it's property and/or supervisory. So you saw some of that in the quarter. We are looking for and finding ways of optimizing operations on a number of fronts. Utilities also in the quarter were down nicely. That's tied to some intentional investments that we've made from an LED standpoint. So we've now got our entire 2,600-or-so portfolio on exterior LED lights, and we transitioned maybe about a third so far the portfolio from an interior standpoint to LED. So we're seeing nice savings relative to the utility cost. Again, utilities were down a little over 9% in the quarter. Repairs and maintenance were down. That can vary quarter-to-quarter depending on some of the repairs necessary across the portfolio, but we saw a good metric there. And overall, we continue to look for ways of optimizing costs. Tom's have been focused on looking at new and different ways of optimizing our marketing spend too. So, although, it was up -- it wasn't up as much as it's been in the last few quarters. So, again, we're looking for different ways of optimizing that spend too.

Thanks, Joe.

Thank you.

Thank you. Our next question is from Mike Mueller of JPMorgan.

Yeah. Hi. Most questions have been answered, but can you just give us a quick update on third-party management and kind of how that's been trending?

Sure, Mike. So the program as a whole we've got 113 properties in the program we added seven in the quarter. The activity from a backlog standpoint and delivery standpoint is in some ways matching the kind of activity we're seeing on our own direct acquisition front. So we're seeing good percolation of owners that are interested in coming into the system. And we are finding high-quality assets and the program continues to build. The dominant factor as it has been since we came into the business is tied to new deliveries. So we've got a healthy growing pipeline of new assets that will also be coming into the portfolio over the next few quarters.

Okay. Thank you.

Thank you.

Our next question is from Jon Peterson of Jefferies.

Thanks. Sorry for if you had said this first. The portfolio you guys are buying is that from your third-party management business? And how are they currently branded?

Okay. They have their own.

Okay. And then I guess how should we think about the third-party management business in terms of an acquisition takeout kind of pipeline for you guys going forward?

I think it's a natural add junk to that business and we've had a handful of situations that have percolated on that front. We'll see how it plays over time. But it's overall a great opportunity to build relationships with owners whether they're one-off owners, they only own one or two assets or other owners that have multiple assets in multiple markets. So it's been and will continue to be a healthy way of broadening our tie to a different owner pool out there. So, we'll continue to look for and develop those kinds of relationships too, as the program builds. But the portfolio, the large portfolio that we're closing on this quarter is not in our platform.

Okay. Got it. All right. That's it. Thanks.

Thank you.

You have a follow-up from Steve Sakwa of Evercore ISI.

Thanks. I just wanted to circle back on late fees, and just trying to understand how much of the drop was sort of an inability to charge customers in light of the pandemic? How much of it is more auto pay and less cash pay, and therefore fees are naturally down how much of it is maybe customers that were normally paying those have left the portfolio? I'm just trying to kind of understand, what's driving that.

Yeah, Steve. So I'll provide a little bit more color around customer collections in aggregate, because that is the primary reason why fees are down. And so, as we look at rent collections, really starting in the second quarter and persisting through the third have been very solid. And some of the things you highlighted are contributing i.e. AutoPay is at a modestly higher percentage. But even away from AutoPay tenants customer payment patterns have accelerated and we're charging less in terms of fees. And so obviously, if you don't charge it, you're not going to collect it. Our receivable to be down around 30% through the quarter and that's persisted through the delinquency period for tenants meaning that receivables down about 30%. We wrote off about 30% less rent. We have about 30% fewer auctions in the quarter. So overall, customer health and payment patterns have improved, and that has led to lower fees, primarily from late fees which are charged for customers not paying their rent within a grace period, but also contributed from longer into the delinquency period lean fees and lean sale fees, but primarily driven by the grace period ending late fee in the first month of customers delinquency.

So would you look at this as a bigger structural change? Or you look at this as just, it's kind of a point in time more cyclical? Or do you expect us to stay down more permanently?

I think early on in the pandemic, we thought that it may have been more transitory and there was customer being supported by government stimulus certainly that was the case through April and unemployment benefits and the like. And some of that has been put in the rearview mirror, the trends have continued. It's something we're watching very closely month-over-month. I would tell you that, trends continued through October and payment patterns have been very good through the early part of November as well. So it feels like at least, for the foreseeable future or near to medium term, we're anticipating that will be the case, but we're watching it very closely.

Okay. Great. Thanks.

Thanks, Steve.

Thank you. I will now hand the call back over to Ryan Burke for any additional or closing remarks.

Thank you, Christy, and thanks to all of you for joining us today. Have a good day.

Thank you. This does conclude today's conference call. You may now disconnect.