Michael Goldsmith: Got it. And then, on ECRIs this year, pre-pandemic, you were sending increases of 8% to 10%, let’s say, every 12 months. And over the past 1.5-year, you’ve been sending maybe mid-teens, high teens increases every 9 months or so. So for the upcoming year — and included in your guidance, can you help quantify the expected rate and frequency of ECRIs over the year? Obviously, it’s going to change depending on the different scenarios. But maybe if you can talk about what the plan is and just kind of maybe how the top-of-funnel traffic looks right now because this is going to play a role in your ability to pass along the ECRIs this year? Thank you.
Tom Boyle: Sure. Thanks, Michael. So, to talk specifically about the existing tenant rate increase program, and then I’ll hit around the top-of-funnel demand as well. We’ve consistently spoken about our existing tenant rate increase program is really two components. The first is how is the consumer reacting to increases? How are they performing and behaving? And we’ve noted in the past and I would reiterate today that the consumer continues to perform at expectations and the sensitivity is largely in line with expectations. And so, there’s no real change to the thought process around that program on that side. But the second component is the cost to replace that tenant when they leave. And there’s no question that that’s changed quite a bit over the last several years.
You had markets like Miami where rents were up 25%, 30% and there was no cost to replace. There was, in fact, a benefit to replace a potentially in-place tenant. And so that started to shift as we moved through €˜22 and into €˜23. And that impact will result in lower magnitude and lower frequency increases but still to optimize revenue from that pool of existing tenants and new tenants that come in. Then the second part of your question around how is top-of-funnel demand performing, I think, is an important one, because as Joe mentioned, move-in volumes through the fourth quarter were up nearly 12%. Move-in volumes through the part of this year are up double digits as well. And so, we’re seeing good demand from new customers coming into the system.
Now, we’re spending a little bit more on advertising. Our rates are a little bit lower. There’s a little bit more promotional discounts in order to achieve that. But ultimately, the customers are very willing and looking forward to storage spaces to move into. And that’s enabling us to capture those tenants, which I think is where you were going with the question. Those tenants will be good long-term tenants or a portion of them will as they move through 2023 as well.
Michael Goldsmith: Thank you very much. Good luck in 2023.
Tom Boyle: Thanks, Michael.
Operator: Thank you. Our next question will come from Jeff Spector with Bank of America.
Jeff Spector: I guess I’d like to — I’m going to push a little bit on the guidance here. I totally understand, given the macro picture here and lack of clarity, first half, second half. Let’s focus on, I guess, peak leasing season. When does that really start? And what — if we’re through, let’s just say, June, July, like is that the bulk of it? Because again, my understanding is that I think there’s even a lag to any recession where it hits storage. So I’m just trying to get a picture of like how this could shake out, play out through the most important months, your peak leasing season.
Tom Boyle: Yes. I think to answer the question directly, we typically see the peak leasing season really start in April, pick up in May in a really big way and then, then into June and July. So to your point, it’s not very far away. And we’re already seeing some of the seasonal patterns that you would anticipate in some of our markets, right? The more seasonal markets are already starting to see a pickup in our occupancy as we sit here in February compared to the end of the year, for instance. And so that typical seasonal pattern is starting to play out, which is encouraging. And I think where you may be going is, there’s certainly a chance that if there is a recession that comes, it’s later in the year and not earlier in the year.
And that certainly would impact the financial performance of the sector through the year. And obviously, if it’s a good busy season, that has a very positive impact on overall financial performance and operational performance of the business.
Jeff Spector: Thanks Tom. Does that then, I mean, change or alter any strategy during the peak leasing months to grab more customers? Like, how do you operate, given this uncertainty? Again, things seem rock solid right now but preparing potentially for, let’s say, a weaker fall or winter months or potentially into €˜24.
Tom Boyle: Yes. I’d say, we’re constantly looking to dynamically manage the current environment. And as we just noted, it’s hard to know exactly where we’ll be sitting next year at this time. But we’ll be planning week by week and day by day through our operational team to react to what we’re seeing and ultimately maximizing our own performance and serving our customers well through a busy time period in the summer when there’s typically strong demand for our storage space.
Operator: Thank you. Our next question will come from Juan Sanabria with BMO.
Juan Sanabria: Just looking to further the discussions on the same-store revenue guidance. Wondering if you could talk a little bit about what you expect within the range the fourth quarter exit run rate to be. And if I think about last year, you guys really called it like you saw it. You were well ahead of the peers in the initial guidance set. And relative to some of the maybe more tried and true, kind of being a little bit more conservative and planning to be in raise game. Are you guys changing it up, or are you really trying to call it like you see at this time with the full acknowledgment that the uncertainty is much greater this year?
Tom Boyle: Well, there’s a whole host of questions in there, Juan. So, let me try to take a few of them at a time here. So I think the first part of the question is around the second half and talking a little bit more about the second half and maybe even, you’re trying to tease out from me 2024 guidance. But I think the — I do think the characterization…
Juan Sanabria: Just fourth quarter.
Tom Boyle: Yes, just fourth quarter, right. So, I’ll go back to the first half, second half comment, which is the first half and the tougher comps that we’re going to experience is going to lead to some moderation as we face those comps through the first half, which will lower the absolute level of growth as we go through the first half. And then, the second half, to the points I made earlier, really will depend on the busy season performance, like Jeff was just speaking to, and the macroeconomic environment and how the consumer is impacted by what the Fed is likely to do and the excess savings that the consumers have for a period of time and how quickly they burn through that excess savings, et cetera. And I think as we looked at that and modeled different consumer behavior through the year, there’s a number of different moving pieces there, right?
One is new storage demand, the other is existing tenant performance, rate sensitivity, delinquency, all of those things. And if you look at a typical recessionary environment, what you’d find is weakness really across the board in those metrics, which is what’s led to negative year-over-year revenue performance and recessions in the past. So, in that recessionary pathway we’ve spoken to, we would expect that there is negative year-over-year revenue declines, like we’ve seen in prior recessions. But you will have the benefit of easier comps in the second half, which will help offset some of that potential weakness. On the flip side, right, we’re just talking about, well, is the recession, when does it come? How deep is it? All those sorts of things, which we can sit here and prognosticate on, but ultimately, we’re going to find out over the next 6 to 12 months.
If the consumer is stronger, if the labor market holds up more effectively, if the Fed doesn’t push the labor market as tough, there could certainly be a situation where there’s pretty healthy positive growth in the second half because of that strength of the U.S. consumer and the fact that we’ll be having easier comps in the second half. And so, I think that’s our sense of the range of potential outcomes, and I hope that’s responsive to your question. And then, as it relates to exactly how we’ll exit, I think it will depend on how that second half moves forward.
Juan Sanabria: That’s right. And then, just on expenses, curious if you could just give a little bit more color or numbers around the major food group’s property taxes, marketing, et cetera, that I know you called out a little bit in your prepared remarks but hoping to flesh that a little bit more.
Tom Boyle: Yes, sure. So specifically within the same-store operating expenses, our largest operating expense line item is property taxes. We ended the year 2022 with property taxes with a 4-handle percent growth on them. We continue to expect that that’s likely to be a higher growth rate as we move into the coming years, given the NOI growth that we’ve seen in the sector over the past several years. So, we’re expecting something like 5% to 6% growth there, and obviously, we’ll update as we move through the year. That’s certainly the biggest driver of operating expense growth. The others are smaller. The second one I highlighted in my prepared remarks was marketing. So, you saw, in the fourth quarter, we increased marketing expense.
That was to drive further top-of-funnel demand into the system, and we saw very good returns associated with that, really comping against a period in 2021 when there was very little spending in most of our markets. So, the percentage growth looks elevated against really low comps. So marketing expense is likely to be another one, because in the first part of this year, we’re facing those similar really low comps. Some of the other line items that are facing inflationary pressures, again, the strength of the labor market today continues. There’s wage pressure. But you could see even in the fourth quarter, we were able to mitigate some of those wage pressures, given the digital transformation and operating model transformation that we’ve been working through over the past several years, which has led to efficiencies in staffing.
So that will help mitigate. And then utilities is another one that we’ve seen utility rates move higher, but we’re looking to combat that with our investments in energy efficiency, be it our solar programs, which we’re seeking to add about 300 properties with solar by the end of the year to bring our aggregate total to about 500 properties and with more room to go there in future years as well as our LED conversion helping to mitigate that. So, that’s a high-level landscape of a number of the line items. Happy to go into any further detail if helpful.
