Extra Space Storage Inc (EXR) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Extra Space Storage Fourth Quarter Earnings Conference Call. (Operator Instructions) Please note that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Jeff Norman, Vice President of Capital Markets. Thank you. Please go ahead, sir.

Thank you, Cindy. Welcome to Extra Space Storage's Fourth Quarter 2020 Earnings Call. In addition to our press release, we have furnished unaudited supplemental financial information on our website. Please remember that management's prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act. Actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with the company's business. These forward-looking statements are qualified by the cautionary statements contained in the company's latest filings with the SEC, which we encourage our listeners to review.

Forward-looking statements represent management's estimates as of today, February 23, 2021. The company assumes no obligation to revise or update any forward-looking statement 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. And Joe, you may be on mute? Or operator, do we have Joe's line connected?

Jeff. Can you hear me now?

Yes. We hear you now. Thank you.

Sorry, everyone. Thanks, Jeff. And thank you, everyone, for joining today's call. I hope everyone and their families remain healthy and that your 2021 is off to a good start.

In my 35 years in real estate, I can't remember another year with as many positive and negative twists and turns in such a short period of time as we saw in 2020. The range of emotions I felt from March when I was worried about the daily safety of our employees and customers, to April when I wondered when rental demand in our sector would return, to September, when we saw some of the strongest occupancy and rental rate fundamentals in our company's history are hard to describe.

I am proud of our team's resilience and how well they responded to 2020's unprecedented challenges. Our team's efforts, together with our balanced portfolio, sophisticated platform and innovative external growth efforts, yielded a great result in the fourth quarter. We ended the year with same-store occupancy of 94.8%, an all-time year-end high for Extra Space.

Our elevated occupancy has given us significant pricing power, which we have experienced since August and a return to positive same-store revenue growth in the fourth quarter of 2.3%, a 380 basis point acceleration from the third quarter. We also had excellent expense control with a 0.6% decrease in same-store expenses, resulting in 3.4% NOI growth in the quarter.

Our return to positive NOI gains, coupled with strong external investment activity, yielded core FFO growth of 16.5% in the quarter. Despite the challenges of the year, the fourth quarter was full of accomplishments, including completion of 2 preferred equity investments totaling $350 million, $147 million in acquisitions, $168 million in bridge loan closings, the addition of 44 stores to our management platform and receipt of NAREIT's Leader in the Light Award, recognizing Extra Space for its sustainability efforts. This is the first time a storage company has received this award.

While we are excited about the accomplishments of 2020, we are even more optimistic about how our efforts have positioned us for 2021. Rentals continue to be steady and vacates continue to be muted. We are heading into 2021 with the highest occupancy we have ever experienced at this time of year and expect rental rates to remain strong.

We have already added 51 third-party management stores in 2021. And our acquisition, management and bridge loan pipelines are robust. But we are also mindful of the risks we face. We recognize that current or potential government regulations could impede same-store revenue and expense performance. We believe that vacates may eventually return to more normal levels, and we recognize that the challenges related to new supply have not subsided completely and will continue to suppress rate growth in many markets. As in the past, our team is prepared to use all our available tools to optimize performance in the face of any risks which materializes.

In short, despite significant turbulence, we had a very successful 2020 and look forward to an even better 2021. We continue to execute on our strategy to maximize shareholders' long-term value and to deliver the results our shareholders have come to expect from Extra Space Storage.

I would now like to turn the time over to Scott.

Thank you, Joe, and hello, everyone. As Joe mentioned, we had a great fourth quarter with reaccelerating same-store revenue growth, driven by all-time high occupancy and strong rental rate growth to new customers.

Late fees and other income continue to be lower year-over-year and partially offset rental income, but we saw improvement in both line items from levels experienced in the third quarter. We lowered expenses in all controllable expense categories in the quarter. And despite property tax increases of 6.4%, we still delivered a reduction in same-store expenses overall. This resulted in same-store NOI growth of 3.4%.

Core FFO for the quarter was $1.48, a year-over-year increase of 16.5% and well above consensus estimates. Our same-store performance was the primary driver of the outperformance with additional contribution from growth in tenant reinsurance income, management fees and interest and investment income. We continue to evolve our balance sheet to reduce secured debt and increase the size of our unencumbered pool. Our efforts resulted in Moody's issuing Extra Space a BAA2 credit rating on January 28, our second investment-grade credit rating, now providing us access to the public bond market.

We are excited to add another capital option to finance future growth, reduce total cost of debt and further ladder our maturities. At year-end, we had higher-than-normal revolver balances and variable rate debt due to the elevated capital activity that took place in the fourth quarter, including settling our convertible notes, completing preferred equity investments and closing substantial bridge loan and acquisition volume. A significant portion of these transactions were temporarily funded by draws on our revolving lines. We were comfortable doing so knowing we were actively issuing on our ATM, had pending bridge loan sales and are recapitalizing stores into a JV, which bring our revolver balances down to historical levels.

Last night, we provided guidance and annual assumptions for 2021, with ranges that are wider than in previous years to address some of the uncertainty related to COVID-19 and its impact on customer behavior and government regulation.

Our new same-store pool includes a total of 860 stores, which is essentially flat with last year. The number of new stores added to the pool was generally offset by sites removed due to disposition or redevelopment. We anticipate the changes in the same-store pool will benefit our 2021 same-store revenue growth by approximately 20 basis points.

Same-store revenue is expected to increase 4.25% to 5.5%, driven by higher occupancy in the first half of the year and elevated rates in new and existing -- to new and existing customers. Same-store expense growth is expected to be 3.5% to 4.5%, primarily driven by higher property tax expense. Our revenue and expense guidance results in same-store NOI growth range of 4.25% to 6.25%.

The acquisition market continues to be expensive, and we will remain disciplined but opportunistic. We expect to do significant acquisition volume and plan to close a number of transactions with joint venture partners. Our guidance assumes $350 million in Extra Space investment, approximately $180 million of which is closed or under contract. We also expect to close approximately $400 million of bridge loans and plan to retain 20% to 25% of those balances or approximately $100 million in 2021.

We have plenty of capital to invest if we find additional opportunities that create long-term value for shareholders, and we will be creative as we deploy capital in the sector. Our full year core FFO is estimated to be between $5.85 and $6.05 per share. We anticipate $0.16 of dilution from value-add acquisitions or C of O stores, down $0.04 from 2020.

We also added additional guidance related to our expected interest income for 2021 as well as notes clarifying the recognition of our preferred investments in SmartStop and NexPoint, which can be found in the outlook tables of our earnings release.

As Joe mentioned, 2020 has been a memorable year for extra space. We are excited to turn the page and are already on our way to a very strong 2021. And with that, let's turn it over to Cindy to start our Q&A.

(Operator Instructions)

And our first question comes from Alua Askarbek with Bank of America.

Congrats on a great quarter. And it looks like 2021 is going to be great for you guys as well. So I just wanted to start off and ask a little bit more on what you guys are expecting for revenues this year? So how are you thinking about occupancy for the first half versus the second half and a little bit more on the rental rate assumptions?

Yes. Alua, this is Scott. I can give you a little bit more detail in terms of what our guidance assumes. We're assuming that our occupancy stays strong. So in January and into February, our gap has actually expanded to be just over 300 basis points. So what's happened is January and February typically have lower occupancy, declining occupancy. We haven't seen that. So we moved from 240 basis point delta in occupancy to over 300 basis points where we are today. So we're assuming that occupancy holds at this high level through the end of the summer, at which point, we expect occupancy to fall more to historical levels. So last year, in the fourth quarter -- third and fourth quarter, we saw occupancy 200 to 300 basis points higher than normal. This year, we expect that to be a 100 to 200 basis point headwind for us. So we expect it to be lower in the fall back more to historical levels.

We expect the first quarter to be strong in terms of revenue growth continuing to accelerate from the fourth quarter. The second quarter should be the peak, and that is mainly due to some easy comps from last year and then continued good into the third quarter with that, the end of the third quarter and fourth quarter being challenging.

Got it. Okay. Makes sense. And then, I guess, just a little bit more on the third-party management for 2021. You mentioned that you already added 51 new stores. Can we expect a larger acceleration in third-party management compared to 2020 and 2019?

So the -- this is Joe, and thank you for your kind words about our performance. It's not Scott, it's me. It's over 4,000 employees who every day bring their best to work and have really done an outstanding job. With respect to third-party management, our activity in January and February with 51 stores added is a little elevated because we took 37 stores on in connection with the JCAP transaction. So I would expect our 2021 activity to be similar to our 2020 activity in terms of gains.

Your next question comes from Spenser Allaway with Green Street.

Can you guys just provide a little bit of color on how existing customer rate increases have been trending, just relative to your historical norms? And do you suspect that you're going to be able to continue pushing these pretty aggressively in '21?

So we're still subject to restrictions on existing customer rate increase in many markets across the country, and that we abide by all those regulations, and that, of course, is the limit to us. Absent that, our ECRI increases average high single digits, 10%, about the same as always. And interestingly, we continue to monitor move-out rates in response to ECRI, and we have seen no increase in move-out rates. So hopefully, at some point, those regulations, restrictions are lifted, and we can get back to fully normal behavior. But we are limited now. We understood that and took that into account in our guidance. And hopefully, we can get back to normal sooner rather than later.

Okay. Okay. And then just on the external growth front, are you guys currently seeing more opportunity with stabilized assets or with assets in some sort of lease-up right now?

I'm sorry, more opportunities with what type of assets? I couldn't understand you.

Stabilized versus assets from some form of lease up.

Yes. So -- and sorry about that. So what we bought is more lease of assets. Stabilized -- pricing on stabilized assets is very hard for us to make sense of. We will probably be more active on that front in 2021 with joint venture partners, just start to make the pricing make sense to us, but everything we bought in 2020 was lease-up. I think, on average, we were in the mid-3s first year and stabilized on average in 17 months in the mid-6s. So I think that's the best use of our acquisition dollars today.

Your next question comes from Rick Skidmore with Goldman Sachs.

Question on Joe for the -- on the supply growth. How are you seeing supply across your markets? You mentioned kind of flattish. But are there any particular markets where you're seeing outsized supply growth? Or how are you thinking about supply in 2021 and into 2022?

Sure. Thanks. Good question. So supply is still an issue. That's the short answer. We did see a substantial pullback in 2020 due to COVID. We -- I'm going to speak to our same-store pool, not national statistics. I'll speak to what matters to us. We had projected in 2020 that about 30% of our same-store pool would be impacted by new supply. And when you look at the actual numbers, it was only around 21%. So almost 1/3 got pushed or canceled because of COVID.

And in 2022, we project 22% of our same-store pool will be impacted by new stores. And I think that will be like there is every year some number of those stores get delayed or maybe even canceled. So we are seeing an incremental decrease in new supply, and that's good news. But I would caution you on 2 fronts: one is, we still have significant supply delivered in many markets over the last several years, and we're working through that, and that affects our ability to push rate. And secondly, with the performance of storage, particularly in comparison to other asset classes, I would not be surprised if that attracts more capital, more developers to the market. So new supply isn't going away. It's not in every market, but in the markets where it is, it's something we need to deal with.

And then, Joe, just maybe one other follow-up on the bridge loan program. You mentioned, I think, $400 million targeted for 2021. Is that sort of in the pipeline? Or is that an aspirational goal? Maybe help us frame that? And then how you think about the path forward from some of these bridge loan and other investments that you're making to help with the FFO growth?

So we have about $196 million in the pipeline. So we believe $400 million is an achievable goal? And the bridge loan program is very accretive for us because the whole note rates may be in the 5% to 6%, but by the time we sell the A and keep the B, the rate we're getting is 9%, 10%, 11%, plus we're getting management of the stores and the economics there. We also hope to buy a bunch of these. And I think we bought one in F2 that we're targeting to buy and it's an immature program, but as we get deeper into it, I hope it turns into an acquisition pipeline as well.

Your next question comes from Smedes Rose with Citi.

I wanted to ask you so migration has been a big topic over this period of this pandemic. And I was just wondering, are you starting to see that at all across your portfolio? And does it make you sort of change where you're thinking about where you might want to invest in the future as you look at acquisitions?

So we haven't seen differential in performance between the markets that have been called out as people are fleeing San Francisco or people are fleeting New York in the markets that people are supposedly fleeing to. And I don't know if that's because people are storing their stuff in Manhattan before they go out to New Jersey, and at some point, that will unwind. But as of now, we don't see performance differential based on that reported phenomenon.

What we do see is performance different based on new supply. If you go back to the previous question, that's where we have the weakest power. I'll also tell you, there's been a number of articles coming out recently that question whether the urban flight is as widespread has been reported in COVID. I just read an article that most of the people leaving San Francisco are settling in the counties around Francisco. They're not going to Utah or Florida or Texas.

And then lastly, and this is just one man's opinion. I don't believe COVID is the death of New York City. I believe young people like to live in cities. Cities have a lot of advantages. And I don't believe that this is the death of the big cities. So to answer your question, we're much more focused on micro markets as we look to buy things, and we're -- we have not yet trusted our investment strategy based on urban flight.

Okay. I just want to ask you, too, your net adds in the fourth quarter for third-party management were quite a bit lower than the growth additions. I just was wondering what sort of caused that churn? And is that something that you would expect to see going forward, perhaps I guess so far in the first quarter?

Yes. Great question. So we had 38 stores leave our platform in the fourth quarter and 87 leave our platform in 2020, almost all of them were because of sales, very, very few were changing managers. We bought 15 of those 87 stores, not a huge percentage, and the issue is pricing. We try to remain disciplined and not overpay in our view for things. There's also some subside of these stores that are not of a quality we want to own. We're happy to manage to not own. So given where prices is, I would expect that we continue to have sales. I hope we can do a better job through structures that we buy more of them. But our #1 goal is not to do something that's dilutive to our shareholders' value. So if pricing gets beyond what we think is reasonable, we're going to do our best to transition the store to the new buyer.

Your next question comes from Todd Thomas with KeyBanc Capital Markets.

First question, Scott. Apologies if I missed this, but what were move-in rates or move-in rate growth, I guess, in the quarter and in January? And what are you seeing early in February?

Yes. So our achieved rates in the fourth quarter and really for the back half of the year were about 10%, year over -- ahead of where they were the prior year. And in the first quarter of this year, January and February, we're seeing rates be at very similar levels, about 10% ahead of where they were last year.

Okay. And then just following up on rental rate trends. And just given how the industry has tightened up here over the last couple of quarters. And you've seen a lot of rent growth during the off-peak season, which, Joe, I think you noted began in August. As we think about the peak-leasing season ramping up now, is it possible that we see rate increases similar to what Extra Space and the industry has experienced historically during the peak periods from where rates are today? And is that factored into guidance?

So we are assuming that the first quarter, we continue these rates that we've been experiencing. Second quarter, our achieved rates, we would expect to be very strong. Because if you remember in the second quarter, when things really dropped, we dropped rates 20% to 30%. And so when you're looking at a rate that was 20% to 30% lower and then it's already 10% above, you're going to see some significant rate growth for customers that move in at April, May, even into early June, and those are all factored into our guidance.

Okay. How far above -- where are rates today relative to sort of that March, April, May time frame?

So if you -- I'll just give you one point of reference, and that's our achieved -- I mean, our achieved rate compared to our in-place rents, and this isn't necessarily the move-out rate versus the move-in rate. Our in-place rents are actually above our achieved rates today. Now remember, this is the time of year when this is usually the most negative. Meaning you achieved rates in January or February, it's the highest. Your existing customer rates are compared to your achieved rates on an annual basis. So the fact that our rates are up 10% year-over-year in February is good. So our in-place rents are about high single digits above where the achieved rates are today.

Okay. That's helpful. And then just one question. The taxes in the TRS that are forecast to be up to about $19 million to $20 million. I know in the past, you've executed on sort of a variety of different strategies to minimize that tax expenses. Are there any opportunities that you see today as you look ahead?

So we are continuing to take advantage of some solar opportunities. We continue to use it from an ESG perspective and a sustainability perspective as well as some tax benefits. That's the big one that we have today.

Okay. Do you see any potential downside to that -- the tax expense in the TRS going forward?

So I think it will depend a little bit on where rates -- tax rates go and then also what happens with solar credits. I think that you've seen them burning off, I would expect with the change in President, they could initiate additional credits, but those are -- we'll continue to monitor those.

Your next question comes from Ki Bin Kim with Truist.

Great quarter and great guidance. So I'm curious, are the kind of rent increase ceilings like California and other cities might have put in place, what is implicit in your guidance in terms of those policies loosening up? Are you assuming that you can push rates further in the back half in California? Or is that just going to be upside -- potential upside to guidance?

So we don't assume that we get relief from those in the first half of 2021. The back half of 2021, I believe, we still are moderating some of those rates. So there is some upside to that, but there's also downside if something turns in the wrong direction and additional restrictions are put into place.

Got it. And just going back to the supply topic, you talked about the percent impact everything to the pool, but I'm curious about is that's the impact? So not just 30% being impacted or 21% being impacted, but the definite impact is at the end of the day, when all is said and done? If it doesn't impact, that's even better.

Not sure I understood the question. So we've tried to be clear on this call and others that supply is the biggest factor that's impeding our performance in that -- in markets like the Boroughs in Northern New Jersey and Texas markets, Florida markets, et cetera. Our ability to raise rents -- we can fill the stores up. We can keep them at very high occupancy rates. It's our ability to raise rent is impacted by the new supply. Ki Bin, I don't know if that answered your question or not. If not, let me know and I'll try better.

Well, you said, I think, about 21% we're seeing sort of impacted by supply, but that could mean 10% more supply coming to those markets? Or it could mean 2% more spike into those markets? So that's how I was trying to gauge if it's leaning one way or another.

Yes. Listen, this is a micro market business, and that's an astute comment. It varies widely. We've had situations where we've had properties come in very close to the existing property, brand-new development. And because of traffic patterns or barriers, like bridges or rivers or whatever specific reason, we've had absolutely no impact on our property. We also see that it is better for a store to -- new store to come into a market where it's 10 square feet per person than 2 square feet per person. Because the percentage increase on a market that's full and has 10 square feet per person, you only have to capture a marginal part of everyone's demand to fill your store up. Where if it's only 2 square foot per person and you're increasing supply by 50%, that's more difficult, at least in the short term, a more difficult problem. So it is absolutely -- we get the numbers, 21%, 30%, whatever, it is a market-by-market, store-by-store analysis and that's how we do it for our guidance. We create individual budgets based on what we know is going to happen in the markets for each store. We do our best to project performance, and we roll that all up and that becomes our guidance.

Your next question comes from Todd Stender with Wells Fargo.

Just listening to your posture calling for some moderation in occupancy. Certainly, these are historic highs, and it's probably prudent to do so. But what drives that move lower? Are you assuming some housing transaction slowing? Is it frozen consumer behavior that begins to thaw and people naturally start to move out after 13 or 14 months? Maybe what do you kind of point to?

So our...

So Todd, I would tell you -- go ahead, Joe.

Sorry, Scott. So our elevated occupancy, one of the very important factors is moderation in vacates. And at some point, COVID is going to be in the rearview mirror, and we believe customer behavior will return to normal. Now I don't think that means there's going to be an end of COVID day and someone's going to foot the switch and everyone runs to move out of their storages, right?

We know that our customers are -- have a great deal of inertia. That's not high on their list, and it may take them some time. We know that the largest increase in reason for storage, we've seen over COVID is decluttering of the house. And I don't think just because COVID is over, people are going to want to reclutter their house, right? That this may be a more permanent change. But with all that being said, we do believe vacates will eventually get back to more normal levels, and that will cause a reduction in occupancy.

Understood. One more, just in the terms of maybe just sticking with bridge loans. You did sell some of your bridge loans. It looks like you have a little bit more sold already this year. So it gives you a seat at the table when you want to go acquire a property, but now you've sold some, does that now limit your ability to acquire on that deal? And that's one. And then two, how liquid is that market if you guys are trying to lighten up on loans or maybe it's a risk mitigation effort, maybe just some context there?

So there -- once we have sold an 8 piece, and we have sold $76 million of additional 8 pieces in 2021. It does complicate the purchase because we can waive our portion of the prepayment penalty, but the 8-piece holder is not going to do that because they're not getting any benefit from our purchase. So that is a challenge. Obviously, as you get closer to maturity in those burn off, it's less of a challenge.

We -- the second part of the question, when we started this program, we had a co-lending partner that we would co-originate the loans, and at closing, close them with the -- where we only held the P piece. And we found that better execution over time was for us to close and hold both pieces, package up the As into more meaningful chunks and then sell them. So that means we hold the As on our balance sheet for some period of time, and you saw in the fourth quarter how having those sold elevated our debt somewhat. But it gives us better execution, particularly because now we have 2 buyers, OBA notes. So there is some competition and redundancy for that, and that seems to be working really well for us.

Your next question comes from Mike Mueller with JPMorgan.

Scott, I want to go back to -- when you were talking about occupancy being strong, up to 300 through the summer. And then you made a comment about a headwind down to 100. Were you implying that by year-end, the occupancy cost was going to be a negative 100? Or your 300 positive was going to shrink to 100 positive?

So in the back half of 2020, it was 200 to 300 basis point benefit. And we are assuming that in the back half of 2021, it is a 100 to 200 basis point headwind. So it's a negative comp year-over-year in the back half of 2021.

Got it. Okay. That's helpful. And then when you were talking about the portion or the markets where you still run into rental increase restrictions, how significant is that as a percentage of the whole portfolio?

Starting to think how to measure that. Some of the rental rate restrictions are at a level that it's not that meaningful, right? In Alabama, you can't increase your rates more than 25% or Kansas is 25%. Now those aren't biggest states, but it gives you the idea.

In others, like California, where it's 10%, and it's a meaningful state for us, that is much more of a restriction. So we think the opportunity cost, if you will, in 2021 because we're not able to raise the rates, is meaningful. It's likely over $10 million, but it's all included in our guidance.

Your next question comes from [Ronald Camden] with Morgan Stanley.

Congrats on the quarter. Just 2 quick ones for me. One is just on the same-store expense guidance. If you could just -- if you have an ROI just talk about what -- how should we think about sort of the property taxes and the payroll, which are sort of the largest items in terms of their contribution?

Yes. So I can give you our assumptions in our guidance. The -- over -- about 55% of the increase actually relates to payroll, to property tax increases. And we are assuming that they're about 5.5% higher than they were in 2020. Our payroll increase is about 2%, increase year-over-year and that makes up another 10%. And then we are assuming R&M is going up. We've had a couple of years with it down, and we've had some benefit from lower comps with snow removal. So we think that's going to be a tough comp. We've seen some of that in the Northeast already to date. So that's some of the larger assumptions in the 2021 guidance.

Got it. My second question was just on the 4 assets that were sold. Just any color around there? Maybe cap rates or why was it sold? Was it just a great offer? Just curious what situations were there?

I would tell you we thought the pricing was very good. Otherwise, we wouldn't have sold. We retain management of the stores. We retain certain right-of-first refusals to buy them if they ever want to sell them. I would tell you it was a tax-motivated buyer, and we were able to drive what I thought was very attractive terms because they have that motivation.

Your next question comes from Michael Lehman with Evercore ISI.

Just a quick follow-up on supply. How much of your outlook includes the possibility of conversions from retail to storage with the amount of kind of reliance on e-commerce that's been happening?

So when we know about it, it's absolutely included in our projections. Our folks in the field are charged with knowing what's going on in your micro market and what can be converted. That being said, I think that is -- and we've done a bunch of that. We have a number of stores that are old retail centers. There's challenges to that. I don't think that's going to be a giant source of new self-storage. Some of the dark retail is dark retail for a reason. You don't -- we wouldn't want to put a storage site there. Some is dark retail but not zoned properly for storage. And there's a lot of other physical issues with doing that. So there certainly will be some of that, but I don't see a wave, a giant wave, of new supply from retail conversions.

Your next question comes from Ki Bin Kim with Truist.

Didn't really think I'll be back so quick. Just wanted to talk big picture about your bridge loan program. Not just like what's in 2021 guidance, but just longer term, should we view this program as going to be in place for the indefinite future? Or is this more -- there's a market opportunity that you're taking advantage of? So maybe in 3 years, it really winds down? I'm just trying to understand the scope of the program, long term?

So we don't have a perfect crystal ball. Our belief is that there will be a demand for what we're doing now into the future. I also believe that it's incumbent on us to always understand where the capital voids are in the market and how we can make good risk-adjusted returns based on those capital voids. So if our current program gets smaller in the future because that capital need is not as great, I hope that our team and I expect that our team to find the next opportunity.

One thing, I think Extra Space has done well over the years is being innovative with the external growth. And that means not executing the same strategy regardless of where you are in the market cycle. Just trying to understand that market cycle and see where you can make outsized returns at acceptable levels of risk. Right now, that's bridge loans. And I hope it continues forever, but if it doesn't, we'll find something else.

Right. And obviously, I'm assuming there's a pretty wide funnel and what you end up closing is pretty selective. But just curious, can you just describe, like, the deals that you've actually turned down and how big that funnel is at the top?

Sure. So the -- I think the 2 biggest limitations on the funnel at top is we won't make construction loans. We could make lots and lots of loans if we are willing to make construction loans. But the great thing about the bridge loan program is if it goes bad and we have to take the property over, that 75% or 80% of underwritten value, we already operated. We're happy to own it. That's not a bad result as opposed to taking over half-built defaulted construction project, we have no interest in that. So that's one limitation on the top of the funnel.

The second is, we have to manage the store. And that's -- some people are self-managed and want to continue that, and they don't want us to manage the store, and then we won't do it. After that, we get to property quality, location, underwriting. We can't get to the proceeds that the borrower wants. But there's, we have a substantial pipeline, and we feel confident we can hit our guidance for this year.

I'm showing no further questions at this time. I would like to turn the conference back to Mr. Joe Margolis, Chief Executive Officer.

Great. Thanks, everyone, for your interest in Extra Space and your support over the years. We're really looking forward to a strong 2021, strong double-digit core FFO growth and appreciate your interest. I hope everyone and their families are well. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.