Operator:

Greetings and welcome to Public Storage Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ryan Burke. Thank you. You may begin.

Joe Russell:

Thank you, Ryan and thank you all for joining us today. Tom and I will walk you through our recent performance and updated views. Then we'll open it up for Q&A. Our second quarter performance exceeded our expectations regarding existing customer behavior and occupancy levels, but fell short on rents charged to new move-in customers. Move-in rents were down 14% with competitive pricing dynamics in many markets. That compares to down 6% in our original forecast. Accordingly, we have adjusted our guidance ranges to reflect more competitive market move-in rent conditions for the remainder of the year, which Tom will cover in a moment. Overall, we are encouraged by positive momentum in our business, including new customer activity, supported by a healthy consumer with a sustained need for more space at home and the effectiveness of our broad-based customer acquisition strategies. Occupancy trends outpacing expectations with positive net move-ins year-to-date. Our in-place customers are behaving well with good payment patterns, reduced vacate activity on a year-over-year basis, and strong length of stays. Our high-growth non-same-store pool, which comprises 542 properties and 22% of total portfolio square footage is leasing up quickly with NOI growing nearly 50% during the second quarter. Several markets within our portfolio are seeing month-over-month revenue growth improvement. Waning development of new competitive supply, which will be supportive to accelerating operating fundamentals. And the acquisition market, while still quiet, is showing some signs of broader activity. Based on these favorable trends and our strong capital position, we also repurchased $200 million in Public Storage common shares during the quarter. We continue to view 2024 as a year of stabilization across our portfolio. We are excited about our trajectory over the near, medium and long term. Now, Tom will provide additional detail.

Operator:

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Steve Sakwa with Evercore ISI. Please proceed with your question.

Tom Boyle:

Yes. Sure, Steve. So, there's a couple of components there. I'll start with the first piece that you highlighted, which is, what are we seeing in markets? And we are seeing continued positive momentum in many of the markets that we've highlighted to date, the markets like the Mid-Atlantic, Seattle, San Francisco and we can reiterate those if helpful. But we're seeing improvements in move-in rents in those markets as well. So, a market like Seattle, for instance, was nearly flat on move-in rents for the second quarter already with improving trends there. The flip side, and we've spoken about this a good bit is that markets that were maybe more high flyers during the last several years have tougher comps and continue to have move-in rent growth that is more like down in the 20%, even higher than down 20% in many instances. Those markets are still in very good shape versus pre-pandemic in terms of their demand fundamentals, population inflows and the like, but are going to take a little bit longer to stabilize. And I'd say big picture, for move-in rents. We've seen a modest improvement year-to-date, right. If you look at the first quarter, move-in rents for us were down 16%, the second quarter down 14%. As we sit here in July, they're down 12%. So, the improvement is there. It's just more modest in terms of pace than what we had originally outlined in our February call. And as we sit here today, we're still calling for modest improvements here, but we've recalibrated that pace into the second half as well.

Joe Russell:

Okay. Sure. I'll start, Steve. From an acquisition opportunity standpoint, for the last two or three quarters, we pointed to the fact that there was a relatively active amount of inbound calls that we were in dialogue with a whole host of different types of owners, whether individual, small and in some cases, somewhat larger portfolios. That type of activities still at hand. What typically happens on an annual basis, you'll see more activity start to percolate in the second half of the year. We think that there is likely that type of activity ahead of us. There is a number of -- or there are a number of different owners that, for a variety of reasons, are in a position to transact, whether it's capital constraint related or need for recapitalizing either existing assets or pivoting out of any asset for any particular reason. So, we have a fair amount of activity that gives us a level of confidence that we're likely to meet the number that we guided to at the beginning of the year. Clearly, we'll see how that continues to play out. But we're encouraged by the amount of activity that's playing through as we speak. Now, from an alternative standpoint, your question around how do we think about the timing, the size, and the efficacy of actually buying back our own stock, that's typically something that we look at from a capital alternative investment standpoint. We felt for a variety of reasons, we had a good opportunity in the quarter. to buy back shares. Obviously, we've got plenty of capital to deploy. We felt it was a good opportunity for us to extract the value that we see in our shares. And as we go forward, we'll continue to look at that alternative as we always do. And with that, we'll see what plays through as we go forward.

Joe Russell:

Thank you.

Juan Sanabria:

Hi, good morning. Just -- with the revised same-store revenue range, just hoping you could speak a little bit about the cadence or said differently, the exit run rate that you guys are thinking will come out of 2024 at, just to think about early days, I know, but how 2025 at least may start?

Juan Sanabria:

Fair enough. And then just a follow-up to Steve's question. Hoping you could talk a little bit about cap rates, maybe where you're looking to buy assets whether stabilized or still leasing up? And kind of maybe where assets are transacting, recognizing there's not a huge amount of volume changing hands, but just commentary on asset pricing, please?

Juan Sanabria:

Thank you.

Operator:

Our next question comes from Nick Yulico with Scotiabank. Please proceed with your question.

Tom Boyle:

Yes. Sure, Nick. I can provide some commentary there. I did highlight that July move-in rents are down about 12% as we sit here today. So, again, sequential improvement from the first and second quarters there. On occupancy, we're closing the month down circa 40 basis points in occupancy. So, a touch below where we finished June, but in a narrower gap than where we started the year.

Tom Boyle:

Yes. Thanks. So, we continue to be encouraged by behavior from our existing tenants. And if you think about the existing tenant base and storage, right, a lot of the existing tenants we're speaking to today were move-in customers last year and the year before. And we continue to be encouraged by the performance of those tenants as they age with us and find value in our product in their marketplaces. And what we've seen from a trend standpoint is very consistent price sensitivity from that customer base. And at the same time, we've got an environment where we moved a lot more customers in the last year than we had in the prior year. And frankly, we've largely matched that sort of volume in the first half year-to-date, such that the contribution from more recent move-ins has been quite strong. And so we've been pointing to a relatively consistent overall contribution from that program to revenue growth in 2024 compared to 2023. And that, to your point, is unchanged from our original outlook we continue to be encouraged by that customer base.

Tom Boyle:

Thanks.

Jeff Spector:

Great. Thank you. My first question, can you provide more color on the move-ins, given -- you've said a few times that the net move-ins has been better than expected. Can you discuss that a little bit more? I know we all focus on housing as a key driver. But just curious to see if anything has changed on why people are moving in. I don't know if you do surveys?

Jeff Spector:

And then my second question, I think you said in your opening remarks, you talked about waning development and new supply, lower supply. Can you quantify that? Or I guess, elaborate on that comment, please?

Jeff Spector:

Thank you.

Operator:

Our next question is from Ronald Kamdem with Morgan Stanley. Please proceed with your question.

Tom Boyle:

Yes. So the first question around property taxes for the quarter, up 3.9% year-to-date, up 5.6%. I think our outlook is plus or minus 5% for the year in property taxes. So, right around what we're anticipating there. And really that's working through assessments that are still catching up to both NOI as well as property value increases over the last several years based on assessment cycles. What more interesting is your question around property payroll. I highlighted earlier around some of the operating model transformation that we've continued to embark upon over the last several years, and we've talked to in some more specifics around our Investor Day going back several years. Our initial expectations at that time were to utilize one of the elements that you highlighted, which is our digital leasing platform, which we call eRental, which today, about 70% of our new lease transactions are coming to us being signed digitally before a customer arrives at the property, and that's powerful. But that's allowed us to put a digital ecosystem around that. that has enabled us to think differently around both operational roles and staffing levels. And you can see that in the P&L. Initially, we had shared reducing property hours by about 25%. We achieved that at the end of last year. And so you can see here through this year, we've got continued optimization that's taking place. And we're not done talking about this. We think there's opportunity from here. So, we continue to be encouraged by that activity, providing a digital and consistent customer experience. While I've got the mic on. On expenses, I might as well highlight our solar power initiatives as well. And I highlighted in my prepared remarks, you can see utilities down 8% in the quarter also. We're on a path of putting solar on over 1,000 of our properties over the next several years. And you're starting to see that benefit in utilities as well. That obviously benefits both, our utility expenses, also our carbon footprint and the like. So, we continue to be encouraged by that initiative as well.

Tom Boyle:

Yes. That's a good question, Ron. I think there's a couple of components to talk through there. One is what Joe mentioned earlier around our own move-in traffic has been pretty consistent with last year, which was a very strong year. So, we continue to see good traffic on our side. But we're using tools in order to attract those customers, including increased advertising, et cetera. Looking at the industry overall, as we think about the impact to the competitive landscape in our local markets, demand is down year-over-year. One of the metrics that we can share with you is around Google keyword search volumes for storage-related terms. And we've highlighted that in the past as being down year-over-year. We started the year down year-over-year. We continue to be -- now the encouraging thing there is that the year-over-year decline is half today what it was at the start of the year. So, we're continuing to see signs of stabilization there, but I think that's contributed to the competitive move-in dynamic for new customers in many of our markets.

Joe Russell:

Thanks Ron.

Michael Goldsmith:

Good morning. Thanks a lot for taking my question. On the market rent growth, you said it was down 14% in the second quarter and down 12% in July. So, can you just provide context on what happened in June just to see like the most recent sequential improvement? And then, are your expectations for the improvement in the back half of the year, is it the same magnitude of improvement just like with a different starting point? Thanks.

Michael Goldsmith:

Thanks for that. My follow-up question is just like when thing -- this may be a little bit speculative, but when things start to get better, how quickly can things unwind, right? Like it seems that a lot of the independents and the privates kind of took their time re-cutting street rate as street rates move down? Like is there an expectation that when demand starts to come back, the other players and the rest of the industry will kind of more rapidly bring rate up. So, like when does it get better? It should improve a lot quicker than maybe this kind of slow grind down that we've kind of experienced? Thanks.

Michael Goldsmith:

Thank you very much.

Operator:

Our next question comes from Nick Joseph with Citi. Please proceed with your question.

Tom Boyle:

Yes, that's a good question. So -- we did see improvements in occupancy and more of an upward slope to occupancy through the spring here. based on the move-in activity that Joe was highlighting and frankly, really strong performance from the existing tenant base through the first part of the year as well. Heading into the back half we're anticipating if we did last year from an assumption standpoint that as you go up in the spring, you're likely to come down in the fall. And so that's what's underpinning some of that activity. And recall, we're talking about seasonal moves in occupancy that are much less than what we had experienced in the pre-pandemic time period. So, while we're talking about a little bit more decline in occupancy this year versus last year because of the rise in occupancy we saw in the first half, still nowhere near the seasonal decline that we saw in a typical year.

Tom Boyle:

Yes, that's a good clarification. So, that is on the in-place assets. And so as we think about the in-place NOI for 2024, you can add that $110 million to that to get to, in effect, our expectation for stabilization of that in-place pool. No additional capital required there. As we invest capital into the second half of this year, we'll adjust that number. And frankly, that will only be incremental upside from here.

Tom Boyle:

Well, the upside isn't likely to come into the same-store pool, right? As you think about it, we add properties into our same-store pool that are stabilized for both occupancy, rents and operating expenses. And so as we think about upside to stabilization, that will remain in our non-same-store pool but the stabilized properties over time will cycle into the same-store pool. .

Tom Boyle:

Thank you.

Keegan Carl:

Yes, thanks for the time guys. I guess just first, maybe broad commentary on what you're seeing with the consumer? And are you seeing any material softness that sort of impacted your outlook for the rest of the year?

Keegan Carl:

Got it. And then just shifting gears. I'm just curious for how your third-party management platform is trending and if there are any changes in the pipeline versus last quarter?

Keegan Carl:

Super helpful. Thanks for your time guys.

Operator:

Our next question is from Todd Thomas with KeyBanc Capital Markets. Please proceed with your question.

Tom Boyle:

Okay, there's a lot there, Todd. Let me take a step back and talk through how we think about the program because I think that, that will reinforce the drivers as we think about where we're going from here. So, I've consistently spoken about really two components to the existing customer rent increase side. I've already spoken on this call around the customer price sensitivity side of the equation, which has been very consistent. The other side that I think too, is around the cost to replace the tenants. And that component, right, the cost to replace tenant is influenced by the market moving rents, how long the space will remain vacant, marketing expenses, all those sorts of things play into that side. And over the last several years, that has been the component that has been more variable, both on the upside and then on the downside over the past two years. And so there isn't an over focus internally around preserving occupancy or otherwise. But as the cost to replace increases, the frequency and magnitude of increases will moderate. And then I'd add a third component because I've been speaking to it over the past year or so, I might as well add as a third component, which is the volume of tenants that are eligible for the program. And that's the piece that's been additive as we moved into 2024 around more recent tenants that have moved in that have been a positive offset. But there's no overt decisions around protecting or not protecting occupancy. It's more of an optimization around the rents that we can charge from our existing customers who are placing a lot of value on their units.

Tom Boyle:

Yes. yes, and there's more near-term tenants that are in the program.

Joe Russell:

Yes, sure. The Board itself has a very committed and vibrant process relative to board composition skill and the collective amount of knowledge and wisdom that any phase of our Board configuration continues to serve the company as a whole. So, Maria is a great addition to that in many ways, not only based on her experience as a standing CEO of another public REIT, but also her knowledge relative to real estate. She sits on two other public boards as well. She's got very strong financial acumen, coupled with very strong history of delivering great shareholder value, et cetera. So, overall, we feel she's a great addition to the Board and look forward to her contributions with the rest of the board as it stands today.

Joe Russell:

Thank you.

Ki Bin Kim:

Thanks. Good morning. So, when I look at your combined marketing spend and promotions as a percent of the new contract rates you brought into the company. It was a little bit more percentage-wise than last year. When you look at that, how do you digest that? Do you think maybe you could have spent more to optimize revenue? Or are you more of the mindset that -- just the lack of -- just given that maybe slightly weaker demand that wouldn't have had great efficacy to increase it?

Ki Bin Kim:

Okay. And second question, where do you think your rents are today versus, let's say, 2019. Move-in rents?

Ki Bin Kim:

Yes. So, that's the part I'm trying to understand better, right? Since 2019, we've probably had about 20% cumulative inflation, but rental are relatively flat versus that time period. So we've definitely given back more than just the COVID surge in rents. So, I was just curious on your take, I guess, what accounts for the additional weakness? Is it absorbed through additional supply? Or, is there something else by the consumer that's changed over that timeframe? Just trying to understand where that demand has abated?

Ki Bin Kim:

Okay. Thank you.

Operator:

[Operator Instructions] Our next question comes from Eric Luebchow with Wells Fargo. Please proceed with your question.

Tom Boyle:

Yes, sure, Eric. Stepping back and looking at the last several years, we've spoken a lot around how length of stay really extended from 2020 to 2022. And that was a combination of longer length of stay tenants staying for longer as well as the need to replace those tenants with fewer new customers. So, from a mix standpoint, length of stay grew pretty sharply over that time period and was a big contributor to some of the pricing power and financial performance we had over that time period. Really, since then, we've been seeing moderation. And we've been really encouraged at the pace of that moderation, right? I think if I were to go back and listen to myself on these calls probably a couple of years ago, I maybe was anticipating a more rapid return to "pre-pandemic sort of length of stays." And we've been encouraged by the fact that it has been several years of moderation in those numbers. And as we sit here today, length of stays on average continue to be longer than what they were in 2019. So some encouraging trends there. The second component of your question was just around vacate levels. And I'd highlight that our longer-term tenants tend to be stickier. They've gotten comfortable using their space. They have goods in there that have a use case of sitting in the unit for a long time versus maybe an apartment renter that's moving between one apartment and another and is using the space period of time, for instance, as an example, use case. And so the vacate frequency from those tenants is less. And so as you look at our vacate activity, really, in any given quarter, it's more concentrated within those customers that have been more recently joined the public storage customer base.

Tom Boyle:

Yes, I think that last point is probably the operable one, which is we haven't had a "normal year" for a number of years. But clearly, we recognize and have taken into consideration what you highlighted around last year being a very competitive move-in environment where moving rents for the industry did decline on a more accelerated path last fall. And our assumptions, clearly, based on a narrowing in the year-over-year gap is that we don't face that same sort of decline. But we're continuing to expect that it's a competitive moving environment in the second half and that move-in rents are below where they were last year.

Tom Boyle:

Thanks Eric.

Jonathan Hughes:

Hi, good morning out there. The predictive revenue growth metric when I combined contract rent and occupancy for the next quarter has been pretty accurate lately. And when I do that for a third quarter and combine it with a full year guide, it implies revenue growth actually accelerates or gets less negative in the fourth quarter. And the only time in the last decade that revenue growth improved from 3Q to 4Q was 4Q 2020 when we were coming out of COVID lockdowns. So, does that sequential improvement in the fourth quarter sounds like what's embedded in guidance? And if so, what gives you the confidence we'll see that improvement since it is so unique?

Jonathan Hughes:

Okay. My second question. Just looking at L.A., I noticed that the revenue growth premium there, it did slow to, call it, 60 basis points from an average of 500 basis points the prior five quarters. I know comps are tough, but yesterday, Equity Residential kind of talked about some affordability and supply headwinds in L.A. So, maybe there's a broader economic slowdown in that specific market but can expect a more modest revenue growth premium in L.A. going forward? Could that even turn negative as rents and occupancy there are the highest in the portfolio? Thanks.

Jonathan Hughes:

Okay. Thanks for the time.

Operator:

Our next question is from Mike Mueller with JPMorgan. Please proceed with your question.

Tom Boyle:

Well, I guess -- In -- I'm trying to think about the right way to think about this. There's no question that seasonally, we're at the peaks of rental rates. So, as we talk about what's going to play out through the second half and what's assumed in the outlook. The level of rents in the fourth quarter are going to be lower than where they are now, right. But as you think about the year-over-year differential, we did have a pretty significant move-in rent decline as we moved through last year. And just a reminder, last year's fourth quarter move-ins for us were down about 18% year-over-year. And so the comps do ease on a year-over-year basis. And so while we're expecting, as we do every year, that rents decline between here and where they are in December, the level of decline between now and December, we're anticipating to be more modest than what we experienced last year, which was really, frankly, a sharp decline.

Tom Boyle:

I would say it's primarily the comp dynamic, and we're expecting -- to decline as we typically would between a summer and winter [indiscernible].

Operator:

Our next question is from Spenser Allaway with Green Street Advisors. Please proceed with your question.

Tom Boyle:

I'd say overall, leasing activity has been very strong, really, across the board within the non-same-store pool. One of the things I highlighted right, obviously, the lower move-in rents impacts the whole portfolio, not just the same store. But as we think about actual lease-up pace, you can see a strong lease-up pace in our development, redevelopment vintages, which are probably the easiest place to see that lease-up pace. We continue to be encouraged by that. And as Joe mentioned, I think that's being supplemented by the fact that there isn't an overwhelming amount of new supply in these markets that we're delivering into. And because of that, the new activity that we are delivering is being well received in the marketplace, absorbed efficiently. And we think that, that helps both our non-same-store pool, but also the dynamics for the industry and the local marketplace of our same-store assets in those marketplaces as well.

Spenser Allaway:

Okay, great. Thank you both for the color. And Tom, you kind of alluded to this, but how does this time the stabilization for readouts and new developments today compared to historic averages in your portfolio?

Spenser Allaway:

Okay, great. Thank you.

Operator:

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Ryan Burke for closing comments.

Operator:

This concludes today's conference. You may disconnect your lines at this time and we thank you for your participation.

Operator:

Greeting, and welcome to Public Storage First Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

Ryan Burke:

Thank you, Rob. Hello, everyone. Thank you for joining us for our First Quarter 2024 Earnings Call. I'm here with Joe Russell and Tom Boyle. Before we begin, we want to remind you that certain matters discussed during this call may constitute forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to certain economic risks and uncertainties. All forward-looking statements speak only as of today, May 1, 2024, and we assume no obligation to update, revise or supplement statements that become untrue because of subsequent events.

As mentioned on last quarter's call, we were encouraged by month-over-month revenue growth reacceleration in certain markets, including Washington, D.C., Baltimore and Seattle. That momentum has continued. And additionally, we see accelerating trends in markets, including San Francisco, New York, Chicago, Philadelphia, Detroit and Minneapolis. We anticipate more markets will be added to this list across our portfolio over the next few quarters. These bottoming-to-improving trends are particularly important for 2 reasons:

First, they are in stark contrast to 2023 when all markets were decelerating as we normalize from record performance in 2021 and 2022.

Samir Khanal:

I guess, Joe, you talked about 1Q being in line with expectations. Maybe talk around April, kind of what you're seeing on move-in trends sort of general trends you're seeing in April? And I guess, how has April sort of played out versus your expectations?

H. Boyle:

Yes. And Samir, maybe, it's Tom here. Maybe I'll just provide a couple of data points on April as well. Similar trends, as Joe mentioned, on move-in rents into April, we are starting to increase those rents, as Joe highlighted, as we move into May in the peak leasing season. Existing customers performing quite well, something that Joe highlighted in his remarks. Move-outs were again down year-over-year in the month of April, occupancy finished the month down 50 to 60 basis points. So a pretty consistent April. And obviously, we're eager to get into May, June and July here, the peak leasing season of the year.

Joseph Russell:

Yes, Samir, there's likely to be a range of motivations that's going to bring a seller to market. The fluctuation in those motivations has been up and down, obviously, as we've seen over the last few quarters with the volatility with interest rates, et cetera. But having said that, we've been in active dialogue with a number of owners that will likely transact sometime in 2024. I think they're trying to gauge more precise timing based on what may or may not be coming through the discussion. The Fed may be indicating relative to change in interest rates between now and end of the year, et cetera.

Operator:

Our next question is from Keegan Carl with Wolfe Research.

H. Boyle:

Yes. Sure. Keegan, this is Tom. So I wouldn't edit any of the commentary that we had in February around any of the assumptions really heading into the peak leasing season here. We obviously just provided that outlook a little over 60 days ago. And as Joe mentioned and probably not surprisingly, providing that outlook 2/3 of the way through the first quarter. The first quarter played out very similar to our expectations.

Joseph Russell:

And again, just as a reminder, certainly, that demand factor is one, but it's one of a number that, particularly at this time of year can provide momentum and higher level of top-of-funnel demand, our view of a different customer cohort i.e. renters continues to be quite strong. So we're very pleased by the activity that's also coming from that type of customer. And with that, and then as your question alludes to a more subdued housing market at the moment, we still feel that we've got good demand factors that are going to drive the business going into a busy leasing season.

H. Boyle:

Sure. Keegan, I'll preface some NAREIT meetings then. So I would highlight, maybe, 2 elements that we would be pleased to be discussing at NAREIT and I think would give us a positive tone. One of them, going back to Joe's commentary, is adding more markets to that list of markets that are reaccelerating, right? As we think about the bottoms that are occurring in many of these markets and reacceleration, we're a collection of 90 markets around the country, not a one-stop moving portfolio. And so adding more markets to that list gives us more and more confidence in terms of the outlook and the performance of the portfolio as a whole, clearly.

Operator:

Our next question comes from Eric Wolfe with Citibank.

H. Boyle:

Yes. Very good question, Eric, to clarify what we're meaning by that. So specifically, what we're speaking to is month-over-month improvement in year-over-year revenue growth. So if you think about -- pick a market, it's growing 1% in the month of February, in the month of March, it's growing 1.5%. That would be an reaccelerating market. So not a seasonal thing or revenue on an absolute basis going higher because of higher occupancy or things like that, but actual year-over-year growth improvement.

Eric Wolfe:

Got it. That's helpful. And then I just had a question on the sales activity. You talked about the impact on your move-in rents for the quarter. But was just curious what criteria you look at in order to determine why you should increase that sales activity. So if we look at last October or this March, is why did you decide to increase sales versus the other month, especially given some of the recent positive demand indicators that you're just talking about.

Operator:

Our next question is from Jeff Spector with Bank of America.

Joseph Russell:

Yes, Jeff, maybe to start with the second part of the question. Yes, challenging on a year-over-year basis. But sequentially, we're seeing a good trend up. So we hope to continue to see that build as we go into further months into the year, and our confidence grows month-by-month even through the month of April, as we've talked about. So that's 1 powerful component.

Joseph Russell:

Sorry, you cut out. Can you repeat? I'm sorry, you cut out for a second.

Joseph Russell:

Yes, Jeff, if you step back, I mean I appreciate the way that Yardi attempts to track nationally, both development activity. And then more precisely, what I think can be more difficult is the reality of how many of those projects, actually, get -- put into production and then are likely to complete on a year-by-year basis. So we've been very consistent now for the last 2 to 3 years where we in our own development activity have seen the competitive factor of the supply taper down.

Operator:

Our next question is from Todd Thomas with KeyBanc Capital Markets.

H. Boyle:

Yes, Todd. No, I'd point you to all of that commentary that we had on the February call as intact as it relates to the assumptions that underlie the range there. And as you'd anticipate, the next 3 months are going to be important as to which directions we're heading on certain of those metrics. We've been encouraged by performance to date. And we'll have more to talk about ranges and things like that as we move through the year.

H. Boyle:

Sure. There's -- I mean, there's definitely a range of outcomes and assumptions that you can make on the revenue modeling. I think what you're highlighting is, if you have better occupancy performance but worse rate performance. But if you end up in the same spot, could you end up in the same places you otherwise would have anticipated. Absolutely.

H. Boyle:

So I think there's a couple of parts to that question, Todd. I think the first one is around length of stays and what we've seen trend-wise. And we've been really pleasantly surprised over the last several years at how sticky the length of stay has been when we were sitting here on calls in 2021, we were concerned that maybe there'd be a pretty quick return to normal or "pre-pandemic" length of stays, and we're now sitting here in 2024 still talking about longer length of stays compared to pre-pandemic levels.

Joseph Russell:

And then maybe just a third component from a macro health of customer standpoint with plus or minus 85% of our customers being consumers, employment trends continue to validate the economy is in very strong shape. We're not seeing any elevated level of stress play through that even takes us back to the pre-pandemic levels, i.e., they're better. Payment patterns, delinquency patterns, et cetera, are still in a very good zone. We're not seeing any new and undue stress that's coming through on the customer environment as a whole. So we continue to be very pleased and confident about our ability to see that level of stability with our existing customer base.

Eric Luebchow:

Appreciate the time today. Just wanted to touch on same-store expenses a little bit. I saw slightly elevated growth in property taxes. I think you had guided to that being up about 5%. So maybe kind of is there any kind of seasonality to think about throughout the year in property taxes and then also marketing expenses up significantly. How should we think about how those trend throughout the year given the unique dynamics of this year with spring leasing coming up?

Eric Luebchow:

Great. Appreciate it. And just on a -- for a follow-up, you mentioned some of the risks of development right now, you're seeing longer lead times for things like entitlement, higher construction costs, higher interest expense. So it seems like PSA is really leaning in now. A lot of your competitors may be pulling back. But do you have any change in your outlook to get to kind of an 8% NOI yield bogey within 3 to 4 years, which I think was your historic underwriting. Anything you can call out specific where the markets you're developing today, the supply conditions, the competitive intensity, why you're -- what gives you the confidence you can get to those type of returns?

Operator:

Our next question is from Michael Goldsmith with UBS.

H. Boyle:

Yes, certainly. I mean as you see momentum in a market, we've talked consistently about how we think about existing customer rent increases. One of the factors is certainly the cost to replace a tenant and as we see moving rate and demand activity percolating in those markets that will feed into our thinking about, well, should a customer maybe receive a higher magnitude or higher frequency of increase, so. Absolutely. And I think second piece of our existing customer rate increase models around customer performance, and we've been speaking in a couple of previous questions around how we continue to be encouraged by that behavior.

H. Boyle:

Yes, Michael. I'd say across the Board, different pricing, promotion and advertising tactics will lead to drawing more, a little bit different mixes of customers and the like to our stores. And so we pull those different levers throughout the year, looking to try to maximize NOI ultimately. So revenue less the advertising expense associated with it. And so we're toggling those levers, trying to maximize that outcome. And so as you look at a sale, for instance, it will draw more customers and we'll use some different tactics around pricing and promotion and advertising to try to optimize that overall lifetime value of the customer.

Spenser Allaway:

Consumer Health continues to be topical just given the economic backdrop. But I was just wondering specifically about the commercial tenant. Can you comment on the health or appetite of the business consumer? And how has that changed, if at all, in the last year?

Spenser Allaway:

Okay. And then on the marketing front, just curious if the dollars being spent on advertisement are fairly comparable across markets or other regions or particular -- sorry, other regions like a particular focus where you guys are either trying to push occupancy or where you're seeing greater top-of-the funnel demand that might entice you to spend more?

Operator:

Our next question comes from Nick Yulico with Scotiabank.

H. Boyle:

There's a lot embedded in there. I think the first thing, I would say, is as you look at cost to replace, you all can see some of the elements that go into cost to replace pretty clearly based on our move-in and move-out rates. Some of them are different and related to how long we think a unit will be vacant, what the advertising spend may be associated with the unit, what the promotional activity may be around it and that's all managed at the individual unit level.

Daniel Tricarico:

Maybe a less convoluted follow-up. Could you share how you bucket the demand segments for the business, maybe to give us a better understanding of the current picture? Is the general like job and homemover 30% or 40% of demand and then the longer-term business customer 20% and then another cohort the balance? Any color you could share from any of your internal data would be great.

Juan Sanabria:

Just on the acquisition front, can you remind us how much is assumed or baked into guidance for presumably accretion from the acquisition volume highlighted in guidance? And then kind of as a subset of that question, how are you guys thinking about Canada? I know the family -- the Hughes family has some assets there, does that prohibit you from potentially getting involved there? Or is there any time that the family may be looking for one reason or another to monetize their stake?

Juan Sanabria:

Great. And then just a question on labor and FTEs, you guys, in your Investor Day, which is now a couple of years back, hit your targets in cutting down, I think, workforce utilization or cost associated about a quarter from prior levels. I guess where are you in further abilities to reduce FTEs or payroll costs? And could you just give us maybe a sense of kind of how the industry has changed in terms of FTEs per store maybe 5 years ago to where you are now to where you ultimately think you can end up going?

Ronald Kamdem:

Just 2 quick ones. One is just on Southern California. If you could just provide just updated thoughts, it's still one of your best-performing markets. What's sort of the prospect of that starting to reaccelerate as you're sort of going forward and how is fundamentals trending on the ground?

Joseph Russell:

And just again to bolt on a comment, Ron, that we made in other questions. Again, very, very little competitive new supply. It's one of the most difficult markets to either a find land sites and work through entitlement processes, et cetera. Uniquely, though, it's the market at the moment, we have the most development activity nationally in. So we uniquely are finding some interesting opportunities to expand our portfolio right here in Southern California. And to Tom's point, we're still seeing very consistent and good levels of activity.

H. Boyle:

Yes. So a couple of questions, components there. So the first quarter and fourth quarter, we tend to see higher percents of revenue as we think about supporting demand in quarters where we have seasonally more inventory to rent, and we get good returns in those quarters to do that. And then we typically see the second and third quarter marketing spend come down a little bit as a percentage of revenue.

Operator:

Our next question is from Caitlin Burrows with Goldman Sachs.

Joseph Russell:

Yes. Individual sellers, Caitlin, small or deal-by-deal opportunities. As typically, we see there's a range of different seller types that were in dialogue very actively. So these were, again, individual owners. I would tell you, as I mentioned earlier, we continue to have a whole range of different conversations with different owner types, whether family owners, individual owners, institutional owners, but again, the deals that we've got either closed or under contract or just that very one-offs, smaller assets that fit well into certain markets that we're certainly interested in growing scale, et cetera.

H. Boyle:

Yes. We would anticipate, Caitlin, that, that spread does narrow in the second and third quarters seasonally before widening out again in the fourth quarter. So not dissimilar from a seasonal trend standpoint to what I was speaking to related to advertising.

Ki Bin Kim:

So I'm not sure if I missed it or not, but did you give an update on April move-in rate trends?

Ki Bin Kim:

Okay. I'll just go back in the transcript. When you look at the year-to-date changes in sequential rents, how does that compare to what you would consider a normal seasonal pattern, has been better or worse?

Ki Bin Kim:

Okay. And on your CapEx, you have $150 million for the Property of Tomorrow program that's supposed to wind down next year. But just trying to get a better sense of it. I mean does it go to 0? Or is there a certain level that you might have to keep for a longer time?

Operator:

Our next question comes from Tayo Okusanya with Deutsche Bank.

H. Boyle:

Okay. So there's kind of 2 parts to that question. One is the accelerating markets, and those accelerated markets are driven by a whole host of things and not just individually moving rents, right? But as we think about that, we highlighted on the previous call 2 or 3 markets that were accelerating at the time we were sitting there in February, and we added a handful of markets to that. So we're definitely seeing improving trends across that group of markets.

H. Boyle:

Yes, pretty consistent in terms of trends. With the exception of what I highlighted earlier around more newer tenants added to the program, given that strong move-in volumes last year.

Michael Mueller:

Sorry to drag out the call longer here. But what are some of the attributes of the markets where you're seeing the improvement that you flagged? Is it just less supply? Because it seems like that list that you rattled off was dominated by kind of bigger cities. And as a follow-up to that, is the momentum you're talking about? Is it better momentum in move-in rates? Or is it just more traffic-oriented?

Brendan Lynch:

Maybe I could get your thoughts on what's behind the lower delinquency rates that you highlighted in the script. Some macro data suggests that consumers are facing some incremental challenges, but that doesn't seem to be what you're seeing.

H. Boyle:

Yes. We did use a little bit of TV advertising. It's one of the things that we can utilize pretty uniquely in the industry, given our national scale and platform. And so that's something we will use periodically. In this case, we used it to advertise some of our promotional activity, which we saw a good reaction to in the quarter.

Ryan Burke:

Thanks, Rob, and thanks to all of you out there for your continuing interest and time, and we'll talk to you soon. Have a good day.

Operator:

Greetings, and welcome to the Public Storage Fourth Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Ryan Burke, Vice President of Investor Relations and Strategic Partnership, for Public Storage. Thank you. Mr. Burke, you may begin.

Joe Russell:

Thank you, Ryan, and thank you for joining us today. Tom and I will walk you through our fourth quarter and full year 2023 performance, industry views and 2024 outlook. Then we'll open it up for Q&A. 2023 was a year of significant achievement for public storage amidst a competitive industry environment. The team elevated our customer experience and financial profile through digital and operating model transformation. Enhanced existing properties with over 500 solar installations and the Property of Tomorrow program. Advanced complementary business lines, including tenant reinsurance and third-party management and grew the portfolio through acquisitions, development and redevelopment. We did so while maintaining one of the real estate industry's best balance sheets, which is poised to fund growth moving forward in conjunction with significant retained cash flow. Just a few of our collective accomplishments include

Operator:

[Operator Instructions] Our first question comes from Steve Sakwa with Evercore ISI. Please proceed with your question.

Tom Boyle:

Sure. Happy to add that color, Steve. I think as you know, I'd like to speak about existing customer rent increases as a combination of customer price sensitivity as well as the cost to replace that customer if they vacate upon receiving a rental rate increase. And as we look at in 2024, there's a couple of things at play here. One is, as we enter the year, right, demand is a little weaker, we'll give you a January, February update here shortly, where move-in rents are down year-over-year as we start the year, similar to how we finished in 2023, that's going to lead to higher replacement costs through the first part of this year. That's going to be a little bit of a drag to ECRI performance. The flip side is, Joe spoke to the strength in move-in volumes that we experienced through '23. Those new customers are going to be eligible for rental rate increases, which will lead to more contribution from the volume of increases that are sent this year. Such that at the midpoint case, we're looking at contribution overall, pretty consistent with 2023 with those two pieces offsetting each other. In the high-end case and low-end case, a little bit better price sensitivity in the high end and a little bit worse than the low end.

Tom Boyle:

Yes. So as I noted in my prepared remarks that the key drivers of expense growth are property taxes and marketing. So I will note, property tax is our largest expense line item. We do anticipate to be up 4% plus or minus, which is a contributor. And then on marketing expense, taking a step back, we increased marketing spend through the year in 2023 and saw very good returns associated with that. The fourth quarter, our marketing expense as a percentage of revenue was 2.5%. And as you've heard from me in the past, being in that 1% to 3%, 1% back in 2021 when demand was really, really strong and back towards 3% when you go to a more typical operating environment, pre-pandemic, is a comfortable place for us to be. And so the first part of 2024, we're going to be lapping comps that will lead to year-over-year growth levels that are higher, similar to what we experienced in the fourth quarter and then we'll evaluate as we go from there. But we're comfortable in the ZIP Code and continue to see a very strong return on that advertising dollar.

Michael Goldsmith:

You finished the year with 80 basis points of same-store revenue growth in your guidance for the upcoming year ranges from down 1% to up 1%. So presumably same-store revenue growth is going to dip before it kind of rebounds and that goes in line with the -- I think, some of what you've been saying with the -- with your expectations of street rates. So -- how much of -- in the midpoint of your guidance, how much of a dip are you expecting? And when are you expecting trends to kind of inflect better through the year?

Michael Goldsmith:

And my second question, it's a multi-parter, but it shouldn't be too intimidating. You comment in the that softer that -- you say, you expect industry-wide demand from new customers. To stabilize this year due to improving macroeconomic conditions. So one, are you seeing that today? Two, can you kind of provide an update on where the move in rent were in January and to the extent that you're able to provide insight into February? And then three, the -- you've talked about moving rents crossing the zero. How positive, if that momentum has continued -- how positive could move in rents be as we kind of exit the year?

Tom Boyle:

So Michael, I'll just maybe take a step back and talk a little bit about how we thought about the macro environment in our guidance. So last year, on this call, we spent a good bit of time talking about the macro environment. And we did couch the guidance range last year in macro terms and that we viewed it as appropriate given the landscape at the time. At the time, 65% of Bloomberg economists were expecting a recession during the calendar year, for instance, and we thought it would make sense to provide the investment community our assumptions of what that could potentially look like within our guidance range. Clearly, as we move through '23 that recession outcome became less probable. And as such, our financial performance proved out to be towards the higher end of those expectations as we move through the year. This year, we are not capturing the range in terms of macro. And as you think about the midpoint of the range, we're not assuming that the macro environment needs to improve at the midpoint range, but more around the lines of what Joe was speaking to and what we're seeing today. So I hope that's helpful in terms of how we thought about the range. And then I will hit on one of your comments just again because you asked about what move-in rents were doing in January and February. I'll just reiterate that for the group. Move-in rents were down 10%, 11%. So pretty consistent with December performance, which is, what you'd anticipate, right, because we're at kind of the trough of rental rates in the winter season here, and we'll be looking to March, April and May to see some acceleration in moving rents.

Juan Sanabria:

Maybe just piggybacking off of part of Michael's question. I guess what is assumed within the range of when street rates break that year-over-year breakeven point? And if you have any color around changes in -- or difference in occupancy assumptions at the high or low end of the range?

Juan Sanabria:

And then for my follow-up, you're assuming acquisitions in the guidance. So just curious, if you could speak to the investment environment, any color on where you're seeing stabilized cap rates and just the quality and the quantum of opportunities out in the marketplace?

Operator:

Our next question is from Jeff Spector with Bank of America. Please proceed with your question.

Tom Boyle:

Yes, Jeff, I think as we sit here today, we do have more visibility, we think, heading into this year. I mean, I just spoke earlier around how we couched the ranges last year in the macroeconomic environment. Our view is the macroeconomic environment is clearer this year. We're not couching the ranges that way. And as we sit here today, right, is very different than last year. Last year, we knew that demand was weaker, and we were going to see revenue growth decelerate through the year in a pretty meaningful way. This year, that pace of deceleration has really slowed. And as I highlighted earlier, there's actually some markets in our portfolio that are reaccelerating already in the first quarter, which we view as leading as we move through the year. And so from a range of variability less than last year, that's not to diminish the fact that we're still in an uncertain environment. We're still talking about moving rents being down 10%, 11% to start the year. That's not like a typical pre-pandemic year, where we'd be debating our move-in rent is going to be up 3% or are they going to be up 5% in a very tight band. That's not the environment we've been operating through in the last several years. And as such, we think we've couched the ranges appropriately to encapsulate that variability. But we do feel more confident in the range of outcomes this year than we did last year.

Jeff Spector:

Great. And then my follow-up is, can you discuss trends you're seeing in January and February, including move-in, move-outs, and maybe which markets are doing better or worse? Let's say, year-to-date?

Operator:

Our next question comes from Keegan Carl with Wolfe Research. Please proceed with your question.

Tom Boyle:

Yes, Keegan, maybe I'll just talk a little bit about the development environment and then some of the sequencing of our deliveries. So, as we've sat here today, we've been trying to grow our development business from where we were delivering more like $100 million to $200 million in deliveries in '21 and '22. Last year, we delivered $360 million, as I noted in my remarks, we're looking to deliver $450 million in this year. So an acceleration when the industry overall is seeing delivery slowdown. So we're taking some share there in growing that business. We're doing so because we think it's the highest risk-adjusted return on capital. And you can see the returns that we've achieved on our development vintages in the sub. And we have an in-house team that's dedicated to this program, development, construction, design that are all out working on growing that pipeline. This will be a record year. The team is out of figuring out how we're going to backfill that development pipeline from here in a challenging development environment. But as we sit here today, that's a business we want to grow. And we'll be looking to backfill that pipeline and have deliveries next year, hopefully around the same levels that we have this year and go from there.

Keegan Carl:

Got it. That's really helpful. And then shifting gears here, I know Tom mentioned a little bit about demand. I'm just curious, have you seen a material change for storage demand in L.A. on the back of the flooding? And then can you just remind us of what the typical tailwind of a natural disaster is for demand in a given market?

Operator:

Our next question comes from Spenser Allaway with Green Street Advisors. Please proceed with your question.

Tom Boyle:

Sure. Getting into specifics, I'd say -- the -- there's a range of going in yields depending on how stabilized the assets are. So of those 11 assets, some of them were [CofO] properties where the going-in yield is zero or a little bit negative. And then you had some that were more stabilized that going in yields are probably mid 5% to 6%, and we're going to seek to improve the operations on those portfolios and get them to those assets rather, and get them to 6% plus as we think about the return profile of those assets. And that's pretty consistent with what we saw through most of 2023. As Joe mentioned, we'll see how the interest rate and capital environment plays through into '24, but that hopefully gives you a guidepost on yields.

Spenser Allaway:

Okay. Great. And to that point, in regards to the Simply portfolio. Can you provide an update on where the rent and occupancy stands today for those properties relative to the same-store pool?

Operator:

Our next question comes from Todd Thomas with KeyBanc Capital Markets. Please proceed with your question.

Tom Boyle:

Yes. I think part of what you're seeing in that midpoint case is if you take a step back, right, we had really strong demands in occupancies in '21, '22. And as those tenants cycled through and we experienced weaker demand through '23, we're seeking to maximize revenue ultimately in a trade-off between rents and occupancies. And that's managed at a very granular level, at the unit level across our properties based on the demand we're seeing, the customer price sensitivity, et cetera. And so that balance is real at the granular level. And what you see at the output is it made sense to give up in effect some of that 2021 heightened level of occupancy to maximize revenues. And as we sit here today, our occupancies are down about 70, 80 basis points compared to where we started in 2023. Again, that midpoint case doesn't assume that there's a big uplift in seasonal demand. And so you're kind of -- you're not getting a big lift there similar to how we experienced last year. And so as we move through the year, you may see some closing towards the end of the year, but you're going to probably be finished on average through the year about the same as where we're sitting today.

Tom Boyle:

Sure. So, I'll couch seasonality in terms of the peak-to-trough change in occupancy. So last year, we experienced -- taking a step back even further in 2015 to 2019, there was typically about a 280 basis point peak-to-trough change in occupancy, call that from June 30, December 31. In 2022, we experienced about a 240 basis points. So, it was a little bit less seasonal than a typical year. In 2023, that fell all the way down to about 160 basis points peak-to-trough. And in 2024, our midpoint case is a touch over 200. So, a little bit more seasonality, but not as much as we experienced in '22 and a far cry from what we experienced in the pre-pandemic time period.

Eric Wolfe:

You talked about the moving rents crossing over into positive territory in late summer. Just curious where moving rents will be at that time. So what's the annual contract rate that you expect to see in late summer? And how much of that improvement from current levels is just driven by seasonality versus a strengthening of your business?

Eric Wolfe:

Yes. No, that makes sense. And I guess the question then really is, just -- you talked about that extra gap that it needs to sort of close to get them above and beyond seasonality. Can you just put that in context? Like is that an extra gap that it needs to close pretty large relative to history? Is it somewhat normal relative to other recovery period? Just trying to understand sort of whether it's unusual relative to what you've seen in the past?

Operator:

Our next question is from Ki Bin Kim with Truist Securities. Please proceed with your question.

Tom Boyle:

So, Ki Bin, we spoke about this a little earlier. There's a little bit of a give and take this year. We're expecting that on the one side, the consumer remains strong, as Joe highlighted in his remarks, and that we don't see a significant shift in customer price sensitivity, which we've been very encouraged in experiencing through '22 and '23. So that's one side. On the other side, on replacement costs, move-in rents are still down 10%, 11%. So replacement cost is higher at the start of this year than it was at the start of last year on average. And so that's going to have a detriment to overall contribution. But the flip side of that, that I highlighted earlier was the fact that we moved in a lot more new customers. Last year, move-in rents were strong, up about 9%, and that will have a positive impact on the -- not the magnitude, but the number of increases that we send throughout the year. And those things largely will offset such that the contribution of ECRIs as we sit here today in the midpoint case is pretty consistent year-over-year.

Tom Boyle:

Yes. So Joe spoke to a lot of the tools that we were using through last year. advertising, promotions, rental rates and the power of advertising platform online. So we saw better than industry top-of-funnel demand into our system, which ultimately led to good move-ins. But we also saw stronger conversion associated with both pricing and promotion, which are more conversion-related items such that conversion rates both through -- well, through all the channels that we operate in, both website, call center and folks walking in or higher in '23 compared to '22, and we're seeing good trends into '24 as well.

Operator:

Next question comes from Zhan Huang with JPMorgan. Please proceed with your question.

Tom Boyle:

We're assuming less seasonal demand in the low end I agree with that. I think that's something I mentioned earlier. So I agree with that and more seasonal demand in the high end.

Joe Russell:

Yes. That's key component of the growth of the platform itself. It's a very relationship-oriented business. Thus far, we've acquired close to 40 assets out of the program. Over the last few quarters, it's been on the light side. Again, it's, I think, indicative of the environment that we've been seeing in acquisitions in general with many owners not of a mindset that this is the right time necessarily to do a transaction or a trade. But with the growing platform itself, again, we saw very good traction in 2023. We've got good momentum going into this year as well. Those additive relationships, knowledge of the assets their comfort level with our own ability to transact very efficiently. We'll continue to be a good source of not only relationships but acquisition activity over time. So, I noted that now the programs at about 325 assets. And we still see good momentum to continue to grow to our ultimate goal and optimization of the platform. So, we'll likely see that in the next year to two and with that more acquisition opportunities.

Eric Luebchow:

You could talk a little bit about the spread between move-in and move-out rents. I assume that gap should start to narrow by midyear just based on the move-in rent improvement you talked about. But should we expect any change in the average rents of customers moving out based on average length of stay or any other variables that we should consider there?

Eric Luebchow:

And just my follow-up, you touched on this several times, but the newer customers you've loaded at much lower move-in rates the past year. You talked about increasing the frequency and the magnitude of rate increases for that cohort. So have you seen those large rate increases kind of perform within expectations as you've started to push those through kind of toward the end of '23 and early 2024 in terms of either retention or customer receptivity?

Operator:

Our next question is from Ronald Kamdem with Morgan Stanley. Please proceed with your question.

Tom Boyle:

Yes. That's a good question, Ron. I hope that everyone is not embracing. But I would anticipate that we see deceleration through the first part of the year. And yes, that likely involves a negative performance on a year-over-year basis through the first half. And then yes, reacceleration as those -- the lag between operating metric improvement and financial metric performance starts to show in the second half of the year.

Tom Boyle:

Sure. So I guess the way I'd couch it is we did cover a macro series of scenarios for our guidance ranges last year. The range on same-store revenue was about 250 basis points. This year, as we sit here, there's still uncertainty as I highlighted, maybe a little bit less than what we experienced last year -- what we were expecting last year. And so, the range is 200 basis points this year, so not too far different. Our core FFO range was about $0.70 last year. I think the range this year is $0.60. So, we're still talking about similar levels of range. And as a reminder, we operate a month-to-month lease business. And so there is some variability that could play out through the year. I've tried to be very transparent on what the range of potential outcomes are in a number of the key metrics, both at the high and the low end. And we'll look on to executing through our plan this year, and I'll leave judging, conservatism or aggressiveness to the investment community, but we want to try to be transparent around what our assumptions are and how we plan on navigating through the year.

Steve Sakwa:

Just one quick follow-up, Tom. It sounds like your contractual rent for move-ins will still be negative in the first half of the year. I think you said it was running down about 11% in the first quarter. I think you said you expect it to get to about a breakeven in the third quarter. I guess, what is the overall expectation for the year? I mean I presume fourth quarter might be up fourth quarter over fourth quarter, but that still leaves you kind of negative for the year? Is that kind of the right way to think about it?

Operator:

Our next question is from Michael Goldsmith with UBS. Please proceed with your question.

Joe Russell:

Well, I would...

Joe Russell:

And then again, Michael, as we've been speaking to, we're seeing, again, continued validation of, I would say, healthy economy, very consumer-oriented economy where the pressure points of a year ago or beyond relative to whether it was inflation, interest rates, employment, et cetera, are at a better place today with more clarity today than they were certainly at the beginning of 2023. That continues to play through relative to our own month-by-month operating metrics that we're seeing going even into 2024. So something would have to shift pretty materially away from that to give us a different low-end view as well.

Operator:

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Ryan Burke for closing comments.

Operator:

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.

Operator:

Greetings and welcome to the Public Storage Third Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ryan Burke, Vice President of Investor Relations for Public Storage. Thank you. Mr. Burke, you may begin.

Joe Russell:

Thank you, Ryan and thank you all for joining us today. Tom and I will walk you through a few highlights for Q3 and then open up the call for questions. Each team at Public Storage is successfully exercising our platform-wide advantages in a more competitive environment as demonstrated by third quarter performance and our raised outlook for the remainder of 2023. As we entered this year and expectedly, we saw new move-in customer demand for the sector shift lower, particularly with softening existing home sales due to the rapid rise in home mortgage rates. On the flipside, there has been solid and increased demand from new customers that are renters. They have proven to be very good customers as well, particularly from a length of stay perspective. We have the right team, technologies and analytics to determine the appropriate mix of marketing, promotions and rental rates. Drawn by these top-of-funnel tools, along with our leading brand, self-storage users are clearly choosing public storage. Our strong move-in volume, coupled with healthy in-place customer behavior has led to better-than-expected occupancy trends with our same-store occupancy gap narrowing from 250 basis points at the beginning of the year to 120 basis points at the end of September and to 60 basis points as of today. Our digital and operating model transformation continues to be a significant enhancement to customer experience and our financial profile. Customers benefit from having digital options at their fingertips across their entire journey. Our proprietary digital ecosystem is a compelling reason to choose us with over 60% of our customers running through our online leasing platform. And today, we have more than 1.4 million PS app users. And our financial profile benefits as well. We are putting these digital tools in the hands of our customers and employees for convenience combined with in-person on-site customer service when and where it is needed. The result is a better customer experience and enhanced margins, particularly in regard to labor efficiencies. We are also growing our portfolio amidst broader market dislocation. Our industry-leading NOI margins, multifactor in-house operating platform, access and cost of capital and growth-oriented balance sheet put us in a very unique position. So far this year, we have acquired more than $2.6 billion worth of properties, including the $2.2 billion Simply Self Storage portfolio comprising 127 properties. As is our regular practice, every property was fully integrated into the public storage platform on day 1 and we welcomed over 250 new associates and approximately 90,000 customers. We are also ahead of schedule on reimaging the entire portfolio to public storage to ensure the maximum benefit from our industry-leading brand. We will have also delivered $375 million in development by year end and have a pipeline of nearly $1 billion of development to be delivered over the next 2 years. Since we updated you last quarter, the sharp move in interest rates has backed up the acquisition market with fewer deals likely to trade by year end, typically a busy time of year for asset closings. We are actively engaged with a full range of owners that give us confidence that some sellers’ expectations will adjust as the cost of capital has clearly increased. Our advantages enable us to acquire and develop when others can’t. We have a strong appetite to grow our portfolio as seller expectations continue to correct and we have a matching ability to execute. Now, I will turn the call over to Tom.

Operator:

Thank you. [Operator Instructions] Our first question comes from Michael Goldsmith with UBS. Please proceed with your question.

Tom Boyle:

Yes. Thanks, Michael. Good question. So I will provide a little bit of context on the same-store revenue outlook for the remainder of the year and then specifically speak to October. So, as we have spoken to in the prepared remarks the environment for new move-ins continues to be competitive and that’s persisted through the second half as we sit here in October. We and the industry are responding with lower rental rates, promotions as well as advertising. But on the flipside, we are seeing good move-in volume growth. Those tenants are staying longer than last year and our existing tenant base has been strong. When we look at the exit rates for move-in rates and occupancy to give you a sense what’s assumed in our outlook on move-in rates we assume that at the midpoint move-in rents are down circa 18% at the midpoint. The high-end of our outlook assumes 13% decline year-over-year in the low-end, 22%. On the occupancy side, the midpoint assumes that we hold the year-over-year decline from September at about 120 basis points decline year-over-year. At the high-end of the range, we nearly closed the gap to last year by the end of December. And obviously, at the low-end, we go backwards on occupancy towards the end of the year. Speaking specifically to October, we’ve seen, again, good volumes but at lower rates. As we look at the move-in rental rate decline on an apples-to-apples basis, move-in rents down, call it, 18% in October to date. Obviously, today, we’ll wrap up the month. We and others ran some fall in Halloween sales on select units in the back half that will cause a little bit of a decline in that towards the back half of the month. But overall, seeing very good volumes. Volume is up nearly 9% in the month of October. So the tools that Joe highlighted continue to work very well. And I would point again to existing customers performing well. Move-outs were down or actually are down year-over-year this month-to-date. And the occupancy gap, as Joe highlighted, has improved to down about 60 basis points today. So we’re seeing good traffic in existing tenant performance.

Tom Boyle:

Okay. That’s a lot, Michael. Let’s step through that. So on the existing customer rate increases, I would reiterate what we’ve been saying really all year, which is on the first component, which you highlighted, which is customer behavior and our expectations for customer behavior continue to be met or exceeded, frankly, as we move through the year. And so that side of the equation has been quite strong. It’s been one of the drivers that’s led to better performance through the year. And then the second component cost to replace continues to get more challenging. So as we’ve highlighted throughout the year to date that’s led to lower magnitude and lower frequencies have increased to customers. But no real change there in terms of talking points. The second component of your question related to guidance. And so we did lift the lower end as well as the higher end of our guidance range this quarter. And in February, we were pretty upfront and describe the different pathways that we could take through the year. We’ve been encouraged by the pathways that we’ve ultimately executed upon and are towards the high-end of that range and again, lifted the high-end this quarter. And I think I used some guideposts around the macro economy at that time as well to frame the outlook. And I think we’re all somewhat pleasantly surprised by the macro economy and obviously, a strong third quarter GDP print that further reinforces the performance towards the higher end of that original guidance range.

Michael Goldsmith:

Thank you very much.

Steve Sakwa:

Great, thanks. Maybe first, just talking on that the transaction market. It sounds like you’re maybe starting to see some sellers capitulate. I’m just wondering, Joe, how have you guys changed your underwriting criteria on the revenue NOI growth side, IRR side, cap rate side? And how wide do you think the bid-ask spread is today?

Steve Sakwa:

Okay. And maybe just to clarify a few numbers that – that Tom threw out just when you talked about move-in rents down 18%, just to be clear, you’re talking about move-in rents in Q4 versus move-in rents in the year ago period. And if that’s true, how – I guess, I’m just trying to look at what is the spread between the move-in rents and the move-out rents because I think that widened out a bit in Q3. And I’m just curious what your expectations are for Q4 and maybe moving into the first half of ‘24.

Steve Sakwa:

Great. Thanks for the answers.

Joe Russell:

Thank you.

Spenser Allaway:

Thank you. Apologize if I missed this, but are you guys able to provide some color on the cap rates as it relates to the 3Q acquisitions and the acquisitions that you’re under contract or have completed so far in 4Q?

Spenser Allaway:

Okay. That’s very helpful. Thank you. And then are you guys able to provide any update, if there is any, on the integration of your new tenant insurance platform?

Spenser Allaway:

Great. Thank you, guys.

Tom Boyle:

Thank you.

Juan Sanabria:

Hi, good morning. Just hoping to follow-up on a prior point on the ECR commentary. So has the quantum and/or pace of increases that you’re looking to pass through to existing customers moderated throughout this year? And do you expect – and if not, do you expect that to happen in ‘24 at some point if the current environment continues into next year?

Juan Sanabria:

And then I was just hoping you could spend a couple minutes on Los Angeles. I know you had some benefit starting last year as the rental restrictions rolled off. Where are we in that? Is that done? And any benefit that is going to wear off as we kind of roll the calendar forward a year?

Juan Sanabria:

Just one last quick follow-up, if you don’t mind. You mentioned occupancy was down 60 basis points year-over-year at the end of October. What’s the absolute occupancy percentage, if you don’t mind sharing that.

Juan Sanabria:

Thank you.

Operator:

Our next question is from Jeff Spector with Bank of America. Please proceed with your question.

Tom Boyle:

Jeff, there is a lot there. I guess what I’d suggest is – if you think about this year, right, we came into this year expecting that the move-in environment would be more competitive. And that was based on our outlook and what we were seeing, no question housing having a component of that with record last 20-year record high, mortgage rates, as Joe mentioned, that’s led to a slowdown in demand. The flip side is we’ve seen good activity from renters as we’ve highlighted, but the move-in environment has gotten more competitive, right? Our facilities, in particular, if you rewind a couple of years, we’re full. And frankly, we were turning customers away in 2021. Because we were so full and we were pushing rate. And so the combination of that dynamic and where we are now, has led to a correction. And I think in terms of moving rents, maybe an overcorrection in certain markets where the industry as a whole is reacting to an environment where the larger operators are taking their typical move-in volumes and the overall demand environment is a little softer than where it was maybe 2 years ago. But demand continues to be relatively healthy if you go back in time for self-storage, it’s just nowhere near what it was in 2021. And no question that’s led to declining move-in rents. And as we look at how our business has performed through this year, that has been the one notable component of the revenue algorithm that has underpunched expectations, i.e., moving rents have been lower than what we anticipated. The good thing is on the flip side, moving volumes, to your point, have been strong. The existing tenant behavior has been good, move-outs have moderated. So obviously, leading to us increasing our outlook as we move through the year. But I don’t want to shy away from the fact that move-in rents have been a particular soft spot as we move through the year.

Jeff Spector:

Great. Thank you. Very helpful. And just one question, a clarification, please. On the 60 basis points year-over-year for occupancy, was that the end of period or the average, if it was end of period – can you state the average?

Jeff Spector:

Okay, thank you.

Todd Thomas:

Hi, thanks. First question, I just wanted to follow-up on the last question about move-in rents. Tom, you talked about moving volumes being stronger than expected. And it sounds like you’ve taken share from other operators. Joe, you mentioned in your prepared remarks that customers are choosing public storage more and more. In this environment, a more competitive environment, I guess really without sort of an increase in overall demand, even if occupancy stabilizes in Public Storage’s portfolio, which I think the high end of your guidance now assumes at year-end, do you foresee the ability for move-in rents to stabilize or begin to stabilize or will they continue to drift lower until overall industry occupancy really stabilizes and maybe find a bottom?

Todd Thomas:

Okay. That’s helpful. And then my other question is around the development and expansion pipeline, which decreased a little bit in the quarter versus last quarter. I realize it’s just one quarter, not necessarily a trend, but the environment is more challenging today. And I’m just curious if that is intentional at all as you look for either rents to stabilize or greater certainty around lease-up or if it’s just timing related. But really, just wondering if your return requirements maybe to start new projects have really changed at all in the current environment.

Todd Thomas:

Thank you.

Operator:

Our next question comes from Smedes Rose with Citi. Please proceed with your question.

Joe Russell:

Yes. Smedes a lot of moving parts there, but step by step, and we’ve been speaking to this for some time. We’ve been seeing the usually difficult hurdles you go through to get projects a, approved and then b, funded and now again, with the constraints I just spoke to in the lending environment, getting them into production themselves. So statistically, we think most of the information out there is not accurate because it’s not reflective of the continued deceleration in annual deliveries. From a step-by-step basis going from this year to ‘24 and likely into ‘25, we think that the pool of assets that had been predicted to deliver are probably shrinking by plus or minus at least 10% or more on a per annum basis. We had kind of ratcheted down to a delivery level nationally, plus or minus $3 billion or so of assets in the 2022 to 2023 time frame, and that’s going to continue to notch down in our view based on all the constraints that I just spoke to. It’s a very good thing for the industry as a whole, can’t really point to any number of markets that at the moment are overburdened from a delivery standpoint outside of potentially Las Vegas, Phoenix to a degree, Portland starting to work, but a little bit of an outstretched level of new deliveries in that market as well. But frankly, the good news is the amount of deliveries that have come to the market over the last couple of years has been slower, and it’s likely to continue to get slower from a volume standpoint going into the next couple of years.

Tom Boyle:

Yes. In terms of length of stay overall, continues to be quite strong. So we’ve spoken a lot over the last couple of years in terms of how that’s extended from, call it, 32, 33 months on average. If you take a snapshot of all of our tenants in place pre-pandemic to more like 35, 36 and that persists today. And that’s persisting in an environment we’re obviously adding more new tenants, which brings that average down. So continue to see strong trends there. Customers that have been with us for longer than 2 years continues to punch well above where we were pre-pandemic in the 40s as a percentage of the total tenant base and that continues to be the most stable and important component of the tenant base.

Operator:

Our next question comes from Eric Luebchow with Wells Fargo. Please proceed with your question.

Tom Boyle:

That’s spot on, Eric. That’s spot on, Eric. So, as we talk about the tenant base overall, right, the cost to replace has gone higher. But those new tenants that have moved in this year, right, don’t have that same dynamic and are more like customers in prior years with a lower cost to replace and are likely to receive higher magnitude and frequency of increases, which is supportive as we move more customers in through 2023 into ‘24 and ‘25.

Tom Boyle:

Yes. So, I guess starting with marketing, right, marketing is the one that this quarter was up most notably. We continue to get very good returns on the marketing spend that we are utilizing. And that is a process that we manage dynamically at the local level in conjunction with promotions and rental rates, as Joe highlighted earlier. If you look at marketing spend over time, we have historically been in a range of, say, 1% to 3% of revenue spent on marketing. We got all the way down to 1% or so in 2021. And I think this quarter, we sat right around 2%, 2.1%. So, there continues to be a room at least from a historical lens for us to continue to increase that and see good return associated with that and we will do that. I would think about marketing spend on the expense line item certainly will create higher levels of expense growth, but that’s going to be an NOI positive investment given the returns we are seeing. The other line items, utilities as well as property payroll continue to be areas that are strategic initiatives that we outlined at Investor Day continue to bear fruit. So, as we close 2023, we will meet our 25% payroll hour reduction that we highlighted at Investor Day. That’s helped to offset as we have gone through initiatives around technology as well as specialization and centralization of property roles that are leading to career advancement opportunities and as well as good efficiencies and good customer experience. So, that’s one side that will continue through 2024 to benefit us. And the other is our solar power programs, we would like to put solar on over 1,000 rooms. And today, we are sitting with solar. We will finish the year with around 500 of those complete and we think there is more to go there, which will help offset utility pressure. And in addition to that, be good for the environment and our carbon emissions.

Joe Russell:

Thanks Eric.

Keegan Carl:

Yes. So I hate to leave [ph] the point on ECRI, but maybe just on 4Q in particular, when do you guys typically stop sending rates for the year? And does the current operating environment change that plan at all various historical levels?

Keegan Carl:

I guess just to clarify though, you are comfortable sending increases throughout the entire year. Like the quarter, you are not going to stop around the holidays. I thought that was a trend that’s typically present in storage.

Keegan Carl:

Okay. And then just shifting gears here, so you guys obviously over on your interest income in the quarter just given the hold on to cash prior to closing on simply, just curious what a good run rate for this would be going forward.

Keegan Carl:

Got it. Thanks for the time guys and Happy Halloween.

Joe Russell:

Thank you.

Operator:

Our next question comes from Ron Kamdem with Morgan Stanley. Please proceed with your question.

Tom Boyle:

Well, Ron, I think there is a few things there that I will pick out and comment on. One is, certainly, we started 2023 at a point of particular strength and rents were significantly higher. I have commented on some of the positives and negatives that have played through this year. But no question, growth rates have moderated through the year. Commented on move-in rates, in particular, have been softer than expected. And I think that’s certainly the case as we move through the third quarter and the fourth quarter here. Going into 2024, I am not going to speak to specifics, but one of the things that we spent a good bit of time on earlier in the year talking about this year was that comps eased in the second half because the environment started to change last year. And I would suggest that, that’s not just a second half of 2023 thing. It’s also into 2024 as we work through a demand environment that softened through 2023 as well as move-in rents that declined through 2023. And so for the same reasons that we discussed moderation and deceleration are easy comps in the second half of 2023, maybe we haven’t seen that as much as we initially envisioned, but we have also seen the levels of performance of the existing tenants make up some of that rental rate comp dynamic. But we are still, to your point, looking at negative same-store revenue growth at the midpoint in the fourth quarter, to your point, we were highlighting that in February. Our outlook for the fourth quarter has gotten better as we move through the year. I think the midpoint now is down 50 basis points in same-store revenue. So, almost there at flat, which is frankly an improvement from where we were sitting starting the year. And to your point on 2024, I think I probably said as much as I should. And we will be providing a good bit more detail in February on the assumptions and fresh guidance for the year.

Joe Russell:

Yes. That’s going to vary, Ron, market-to-market. There is a whole spectrum. As I mentioned, our largest market, being here in Southern California, almost no new supply to speak to other parts of the country that are well known to be the tougher markets to develop into have same and similar dynamics. I mentioned on the other end of the spectrum, we are keeping a close eye on the amount of deliveries that are playing through in Phoenix and Las Vegas. But frankly, it goes right down to a very submarket impact. And I would say it’s less than and continuing to shrink below the lower number you pointed to, i.e., whether it’s 20% or lower, it’s definitely a factor below that. And I think we will continue to shrink, which as I mentioned earlier, is a very good thing for the industry as a whole.

Joe Russell:

Thank you.

Caitlin Burrows:

Hi. Just a couple of quick follow-ups. I think I was wondering, I know the Simply Storage deal is still pretty fresh. But wondering if you could go through whether you have started to realize any synergies and/or just go through the near-term strategies you are implementing?

Caitlin Burrows:

Great. And then maybe another quick one. I know you have talked a number of different ways about the lower expected deliveries in ‘24 and ‘25, which is encouraging. So, that would suggest, you have started to see development, started slow, I was just wondering if you could talk about the magnitude of that slowdown and/or when it started, like how new is that?

Caitlin Burrows:

Okay. Thanks.

Operator:

Our next question comes from Ki Bin Kim with Truist Securities. Please proceed with your question.

Joe Russell:

Yes. Ki Bin, sales are something that the company has been doing for years and years. You go back and look at pre-pandemic activities, the company started doing Memorial Day sales going back probably more than a decade ago and see good traction from that. And so around holidays, we oftentimes will run sales and get some traction and we offer discounts on select units in our markets that we operate in. And we have seen good traction on that this year. We did a more of a [ph] sale. We did a Labor Day sale. And this one, I don’t know if you want to call it a Halloween sale or I think we call it a fall sale on the website, but it will wrap up today. And we see good customer demand traffic. And others in the industry do, too, the big public REITs generally run these types of sales as well. And so they are good traffic drivers, and they get the team in the field excited as well, and we see good conversion there. So, it’s a part of the business that’s been around for some time, and we will continue to use it as we have in the past. We didn’t use them in ‘21, ‘22 because we, frankly, were too full for it to make a lot of sense, but we are back to an occupancy environment where it makes good sense, and so we are utilizing it again.

Tom Boyle:

Yes. We will plan to refinance those as we get into 2024. The $700 million U.S. note is a floating rate note and we will plan to refinance that as we get into the first part of the year.

Tom Boyle:

It depends on ultimately what tenor we issue and the nature of the interest rates at the time. But it’s our floating rate note, as I have said. So, it’s at market from a benchmark rate standpoint. So, there won’t be a significant headwind associated with refinancing that particular note. It will be more spreads. And we will update you on financing costs as we get into the first quarter. And frankly, that’s. I mean if you look at our balance sheet overall, we obviously have a very long-dated set of financing tools, most notably the over $4 billion of preferred stock that we don’t need to refinance ever, but we can refinance at our election to the extent interest rates change. And we have a very well laddered maturity profile. So, you are highlighting some refinancing we have in ‘24, we have modest in ‘25, a little bit more in ‘26. But overall, a very small percentage of the capital structure is coming due in any given year.

Tom Boyle:

Thanks Ki Bin.

Mike Mueller:

Yes. Hi. Just a real quick one here. Joe, when you are talking about cap rates trending 6% to 7%, is that – was that meant to be a day one cap rate if you are buying a stabilized asset, or is that more the yield that you are looking at if you are buying vacancy and assuming the lease-up risk?

Mike Mueller:

Got it. Okay. Thank you.

Ryan Burke:

Thanks Rob and thanks to all of you out there for joining us today. Have a great Halloween, and we will talk to you soon.

Operator:

Ladies and gentlemen, thank you for standing by and welcome to the Public Storage Second Quarter 2023 Earnings Call. [Operator Instructions]. It is now my pleasure to turn the floor over to Ryan Burke, Vice President of Investor Relations. Ryan, you may begin.

Joseph Russell:

Thank you, Ryan, and thank you all for joining us today. As demonstrated by our second quarter performance and raised outlook for the year, Public Storage continues to maximize its competitive advantages across our platform with several key factors driving positive results, including a better-than-expected macro environment with higher odds of a soft landing; increased rental activity from our needs-oriented customer base; and execution across all aspects of our industry-leading platform. We are built to operate in all macro environments and we are proving just that. Let me highlight three specific areas. First, we are driving record year-over-year growth in customer move-in volumes. Move-in volume growth has accelerated throughout the year, up nearly 14% in the second quarter. We have closed the year-over-year occupancy gap from down 220 basis points at the end of March to down 160 basis points at the end of June. We have the right team technologies and analytics to determine the appropriate mix of marketing, promotions, and rental rates to meet customer expectations in the current environment. Drawn by our leading brand and enhanced digital customer experience, self-storage users are clearly choosing Public Storage. These trends support our raised outlook along with the easing of difficult year-over-year comps as we move through the second half of the year. Second, we are growing our portfolio amidst broader market dislocation. Last Monday, we announced and fully funded the $2.2 billion Simply Self Storage acquisition in a matter of a few hours. This is something that very few companies could do today and separates Public Storage as the acquirer of choice within our industry. We have the strongest balance sheet and the lowest cost of capital, both of which were highlighted by our rapid execution on the Simply Self Storage transaction. With the Simply Self Storage acquisition, we are excited to combine our respective strengths as we integrate their portfolio to ours and achieve significant operational enhancements immediately and into the future. As an example, under our platform, the $1.8 billion ezStorage portfolio acquired in 2021 has seen significant operating margin improvement of 1,100 basis points from 72% to 83%. As we do with all of our acquisitions, the entire Simply Self Storage portfolio will be rebranded to Public Storage in order to maximize the benefits and value of our iconic brand and platform. We expect to stabilize the portfolio at a mid-6% nominal yield by year three. Third, we are well positioned for continued strong execution and growth across the company. From an operating perspective, our digital and operating model transformations are proving to be significant win-win-wins with result to exceeding expectations. Customers benefit from having robust digital options at their fingertips across the entire journey, finding a unit, renting a unit, moving in, managing their account, and navigating the property when on site. Our proprietary digital ecosystem will continue to be a primary reason that customers choose us with more than 2 million PS app downloads and over 60% of customers renting through our online leasing platform today. Additionally, public storage team members benefit from being able to place even more focus on our customers, and for those that excel, the transformation has enabled us to create new pathways for career advancement. And our financial profile benefits as well. We are putting these digital tools in the hands of our customers and employees for convenience, combined with in-person on-site customer service when and where it's needed. The result is a better customer and employee experience and a higher operating margin. From an external growth perspective, our industry-leading NOI margins, multifactor in-house platform, access and cost of capital, and growth-oriented balance sheet put us in a unique position. So far this year, we have secured $2.5 billion worth of properties. We will have also delivered $375 million in development by year-end and have a pipeline of more than $1 billion of development to be delivered over the next two years. Our advantages enable us to acquire and develop when others can't. We have a strong appetite for more with a matching ability to execute. Now I'll turn the call over to Tom.

Operator:

[Operator Instructions]. We'll take our first question from Michael Goldsmith with UBS. Your line is open.

Tom Boyle :

Sure. Thanks, Michael. It's a good question with lots of components. So maybe taking a step back, we've been consistent throughout the year providing investors and analysts with a range of… [Technical Difficulty] in terms of the different components of the outlook, I've been consistent that the upper end of that outlook encapsulates an environment where we experienced a soft landing. And as we move through the year, the probability of that soft landing has increased. As we think about the assumptions that are baked into the lower end, that is more of a tougher macroeconomic environment. And in particular, we're assuming [Technical Difficulty] I think about the midpoint. The same-store growth moderates but starts to stabilize. In that midpoint outcome, it does encapsulate a negative outcome in the fourth quarter for same-store revenue growth. But again, easier comps help and start to stabilize. And from an overall FFO standpoint, the midpoint is certainly aided by continued standout growth from the non-same-store pool of properties there as well. So again, a range of outcomes embedded within our out. [Technical Difficulty]

Ryan Burke :

Hi. Shelby, this is Ryan Burke from Public Storage. Trying to get through to you to resume the call. Are you hearing us?

Ryan Burke :

Thank you, Shelby, and apologies to everybody if you're hearing us. We've had some technical difficulties. We're hoping that we're through those at this point. Shelby, if we could go back to Q&A, we would appreciate it.

Samir Khanal :

Hi, good morning, Jo and Tom. Can you talk about what you're seeing in July, maybe move-in rates and demand trends, and if anything, on the customer side, given some of the price increases? Thanks.

Samir Khanal :

And then just talking about maybe given the LA market is a big market for you, it was still solid. I mean, don't get me wrong but sort of like maybe decelerate a little bit from the first quarter. I know the restrictions have been lifted there. So maybe just talk around kind of the trends you're seeing in that market as we kind of think through maybe the next sort of six months to 12 months.

Tom Boyle :

Yes. And specifically, if you remember, Samir, last year, we talked about 150 basis point to 200 basis points of same-store revenue benefit because of the expiration of those restrictions. This year, it's more like 50 basis points to 100 basis points. And the deceleration that you're seeing through 2023 is really attributable to the fact that this year, we're facing comps where we were playing catch-up on customers last year. And so that market is expected to continue to moderate its growth because of those comps. But overall, as Joe mentioned, fundamentals in the marketplace remain quite strong. And frankly, it's not just an LA phenomenon either, if you look at San Diego, that's one of our top markets as well. Southern California performing well through 2023 for Public Storage today.

Todd Thomas:

Can you hear me okay?

Todd Thomas:

Yes, loud and clear. I wanted to ask about the occupancy build in 2Q and -- which was a little bit more muted than it has been in prior spring and summer seasons, and it sounds like the year-over-year occupancy gaps narrowed a bit further in July, which is positive. And Tom, you mentioned July is a tough comp. But as we think about the seasonality of the business, do you think that the peak rental season, particularly this year has a little bit less weight than it has in prior years and prior cycles in your view? And does the lower seasonality in the spring and summer mean that you might expect to have less seasonality around Labor Day and sort of through fall and winter in the back half of the year?

Joseph Russell :

And just to highlight a couple of other things, Todd, the seasonality predictable components are shifting. And what you have to be in an environment like this is quite nimble and to interpret what effects or counter-affects you may have or be able to deploy as the traditional seasonality theories or events are shifting. And to Tom's point, since 2019, we've learned all kinds of different range of impacts, whether it's tied directly to housing, hybrid work-from-home environments. I can tell you maybe the one consistent predictable driver is just college, and that too got upended during the pandemic. That seems to be back so there's a little bit of movement that we think we can predict there. But the good news is with our platform and our ability to interpret changing demand factors, we're actually able to maneuver through what would be, as Tom pointed out, less predictability around seasonality, but at the same time, we're seeing very good customer demand driven by even new and additional factors, many of which seem to be deep-seated and are likely to be with us for some period of time.

Tom Boyle :

So, first component of your question there, we're adding them up here, is yes. So, the outlook is -- does incorporate what I highlighted earlier. The second component of your question is also a good one to highlight, and that is that customers that have moved in year-to-date are exhibiting longer length of stay attributes because of what you're highlighting and what Joe highlighted around the use cases for storage. So consistently, kind of each month's cohort of move-ins are performing better than prior year, which is encouraging as you think about the tenant base and the durability of revenue heading through '23 and into '24.

Operator:

And we'll take our next question from Jeff Spector with Bank of America. Your line is open.

Tom Boyle :

All right. Jeff, there's a good number of parts to that question, too. Let's take them one by one. So, to your point around good move-in volume, as Joe highlighted earlier, we think the tools that we have are working quite well. We run a very granular and dynamic pricing and advertising process, and our ops team is built to drive move-in volumes, paired with our digital ecosystem that Joe spoke to. We think the customers are reacting quite well to. So, all of that, combined with our brand, I think it's certainly helping drive good move-in volumes. I think your point specifically on move-in rate, there's a couple of components there. One is, no question that the industry overall, as there's been more vacancy through last year and into this year, has lowered rental rates, and it's a very competitive environment for new customers today. We feel like, as I noted, we're getting good customers and a good volume of them, but the rents are lower than what they were in the prior year, down about 14% in the second quarter. To give you context, in the second quarter, our rents were about a couple percent above our competitors within the trade areas. So, we're largely charging what our competitors are charging in the marketplace but seeing very good volume and traction associated with that. It is certainly one of the components that drives the deceleration of revenue growth as we moved through last fall and through the beginning part of this year. And I noted earlier that as we sit here today, the comps do start to ease, and we think the July print could be the trough as we move through the year, and that's embedded in our outlook as we look through the second half of the year. But overall, that's certainly been a drag to revenue growth but should be a stabilizing factor as we move forward. The third component to your question related to its impact on existing tenant rate increases. And that's something we've been very consistent in speaking about. We like to talk about it in two components. One is how is the customer base performing. And as I've noted in prior calls, the existing customer base continues to perform quite well. So, the length of stays of the longer-term tenants, one-year, two-year-plus continue to be strong. Delinquencies are below pre-pandemic levels and they are accepting of our rental rate increases. The thing that has changed over the past two years is what it is to replace those tenants when they move out. And so that's the second component, the replacement cost of those tenants if they move. And that has certainly flipped from -- in certain markets, there was actually a benefit to replace those tenants in certain prior years. And this year, it's certainly a cost to replace, again going back to what you highlighted, which is move-in rental rates lower year-over-year. That's led to lower magnitude and lower frequency of increases through the start of 2023, but no real change there as we sit here in July versus what we would have told you in February on that point.

Tom Boyle :

Yes. Thanks, Jeff. And bummer that you couldn't hear my first response, but I'll go at it for attempt number two. Hopefully, this works. So, the outlook as we move through the year, we've now raised it 2 times. And we highlighted earlier, that's because of better-than-expected performance year-to-date as well as improved outlook for the second half of the year. We've been consistent since February and speaking about the outlook as a relatively wide range of potential outcomes. And that's driven by a combination of an uncertain macro environment, which we're all still living in day-to-day as well as a consumer backdrop that is -- that continues to shift, obviously, impacted by that macro line. At the lower end of our guidance does encapsulate the potential that the Fed doesn't quite stick the landing here in the second half of the year. It doesn't have as much of an impact on 2023 as what it may have on 2024, which is certainly leading to improved outlook at the lower end. But there's certainly that possibility that the consumer weakens, longer-term length of stay customers start to vacate at a higher frequency. Again, something we're not seeing today but could play out as we move through the year and would be typical in a tougher macro environment. And a still competitive move-in environment, which the point earlier, is something that we've seen year-to-date, a very competitive move-in environment. The flip side, though, is also fair, which is we continue to think that there's a good potential for a soft landing and a continued strong performance from the existing tenant base, the easing of comps in the second half, which would lead to the higher end of that range as well. So again, a good performance year-to-date. The outlook's improving as we move through the second half, but we do still encapsulate that broad range of potential outcomes here.

Operator:

And we'll take our next question from Spenser Allaway with Green Street. Your line is open.

Joseph Russell :

We can. Thanks, Spenser, for being patient.

Tom Boyle :

Yes. Thanks, Spenser. So, you noted clearly high year-over-year growth in marketing spend because we didn't really spend last year. I think one way to look at it that we track through time periods is the percentage of marketing spend as a percentage of revenue. And in the second quarter, I believe that was about 1.7% of revenue. And that's a good bit below pre-pandemic averages that were in the 2% to 3% range. If you think about overall customer acquisition costs are frankly attractive, which is one of the reasons why we continue to use that tool, along with the other tools in our toolkit to drive good move-in volume, and we're seeing very good response from that. So, we'll continue to use marketing spend as a component of the customer acquisition toolkit and have an ability to continue to spend there if we get good return.

Joseph Russell :

Yes. Sure, Spenser. Year-to-date, from a sector standpoint, the amount of transaction volume is pretty similar to what we saw in 2022. So, I would tell you, to your point, there are a number of more inbound calls coming to us. Many of the owners coming into the market are looking for a different level of commitment and a surety that a close can take place. Clearly, with the lending environment not only from availability capital, the cost of capital, a number of traditional or otherwise active buyers in past years are not as active or capable as they would be today. So that gives us a leg up. As I mentioned, we are hearing, time and again, we're an acquirer of choice. We've got a very unique opportunity to continue to execute very effectively. Just as we did, obviously, on a very large scale with the Simply deal. We typically know an asset quite well in the market position. It's at -- again, have very efficient discussions with the existing owner, whether it's a one-off transaction or a portfolio. So, we're using that opportunity and we're being contacted more directly by virtue of the fact that there's much more surety of close, and we can be very effective and efficient and it's been a good window for us. So many of the deals, to your question, that came through were along those lines. We're still doing traditional marketed opportunities where the economics and the quality of the asset makes sense. One of the things that's fresh, 10 days now post announcement of the Simply deal, we are getting some additional inbounds knowing, again, the effectiveness that played through on a $2.2 billion acquisition. And that plays through, again, whether it's a one-off deal or a much smaller portfolio, that continues to be good bread-and-butter growth and acquisition opportunity for us, and the team continues to be busy. As typical this time of year, next quarter or so is typically the more active time of year for transaction opportunities, so we're going to continue to stay focused on that, and we feel we're in a very good spot.

Operator:

We'll take our next question from Smedes Rose with Citi.

Joseph Russell :

Well, Smedes, very different processes and M&A opportunities got a whole different level of complexity and moving parts than maybe a traditional private opportunity. Speaking more directly to the Simply transaction, that was a process where it was a market or a deal that was brought to the market through their own advisory. And so, there was a process that Blackstone went through to bring the portfolio to the market. Because of its size and -- the portfolio has been in place for nearly 20 years, we knew it quite well. We had understood and studied the evolution of the portfolio, so we had very good and crisp knowledge of the portfolio going into that process that was set up by Blackstone. So again, very good opportunity for us to look at a portfolio of that size, integrate it very effectively. As I mentioned, we're about 10 days into the process right now, and we expect to close in the middle of September. By all accounts, the integration opportunity looks every bit, if not more, compelling than it was when we announced the deal. So very confident about our ability to integrate the 127 assets and the 25 properties that are in the third-party management platform. So, feel good about the ability to allocate capital of that size. In a private transaction market, this is the largest deal that's been done since roughly the end of 2021 or the beginning of 2022 if you think about the timing of Manhattan Mini. But we're very confident that it's a very strong ability in our to allocate capital, get very strong returns, and integrate those assets very quickly.

Joseph Russell :

Yes, it does.

Smedes Rose :

Okay, thank you.

Operator:

And we'll take our next question from Juan Sanabria with BMO Capital Markets. Your line is open.

Tom Boyle :

Yes. Well, happy to take that. As we looked at underwriting the Simply portfolio, we viewed it as an attractive real estate transaction really across any way that you underwrite it or you think about the cost of capital. As we've spoken about in the past, we view things on an unlevered basis despite the fact, certainly in prior years, we've used leverage in order to acquire assets very quickly. We look at things on an unlevered basis and real estate level returns as well as basis. We view the Simply transaction as an attractive one. Your comment around accretion, we grew the asset base by about 4%, and we're anticipating growing FFO by 1%. That's a pretty good ratio. And our leverage at the time was 3.3 times. We increased it to 3.8 times, which is a good bit below our long-term target of 4 times to 5 times, which gives us still significant capacity to grow for the right sorts of transactions. As Joe highlighted, we're poised to do that. To give you context, I think post-transaction, we have over $5 billion of capacity to continue to grow towards the higher end of that long-term target of ours. So, still have a very good bit of capacity and are actively seeking good real estate opportunities to grow the platform.

Tom Boyle :

Sure, Juan. I mean, we've walked through now the range of potential outcomes, and so, we do think we have a wide range encapsulated in our outlook. My comments around our belief that we don't see as big of an occupancy decline is really driven by the fact that we didn't see the seasonal demand that typically can be a shorter length of stay. And I highlighted earlier that our customers that have moved into date have been longer lengths of stay, which supports less move-out activity through the second half of the year. Ultimately, we'll have to see how the year plays out. And we've given you some guideposts as to what that looks like throughout our outlook range and feel like we're very well-positioned to navigate through the environment in the second half.

Tom Boyle :

Thanks, man.

Michael Goldsmith :

As my second question, kind of on the occupancy and kind of the churn of the portfolio through the quarter. Occupancy at the end of March was 92.8%, end of May was 93.1%, and end of June was 93.2%. But the average occupancy in the second quarter was 93.7%, which is higher than all of that. So, does that mean that there's elevated churn within the portfolio? And how do you think about the potential loss of some of these high-quality, high-rate customers that have been driving the growth of your portfolio in an environment where maybe there's a little bit more elevated churn?

Michael Goldsmith :

Got it. And just from the first quarter to the second quarter, same-store revenue growth stepped down by 350 basis points to 6.3%. As we move through the rest of the year, does the step-downs get smaller? And does that reflect just like the comparisons getting easier? I'm just trying to better understand the cadence of the step-down as you guys see it.

Michael Goldsmith :

Got it. Good luck in the back half.

Operator:

[Operator Instructions]. We'll take our next question from Mike Mueller with JPMorgan. Your line is open. [Operator Instructions] Hearing no response, moving on to the next question. We'll take our next question from Ki Bin Kim with Truist. Your line is open.

Joseph Russell :

Yes.

Ki Bin Kim :

Yes, thank you. So, your move-in rates increased about 5.5% sequentially going into 2Q. I'm just curious like when you look at say, whatever you want to call it, a normal year, how does that 5.5% increase compare?

Ki Bin Kim :

Okay. And in terms of your $450 million CapEx guidance for the year, obviously, when you look back historically, it was under $300 million in 2021, and under $100 million pretty much every year before that. So, I'm just curious like how many more years of this newer and more elevated CapEx should we think about versus returning back to something that's more approaching from a historical level?

Tom Boyle :

Yes. And I think to Joe's point, the Property of Tomorrow spend, when we wrap up that program will go away. The spend on solar, we think, is a very good opportunity. To Joe's point, we're getting mid-teens IRRs on the capital we're investing in that program, and we've got a lot of opportunity there. And at the end of the year, we're targeting having solar on about 500 properties, with the expectation of getting over 1,000 properties over the next several years. So, a lot of opportunity there that will be capital spent but also with a good return associated with it.

Tom Boyle :

Thank you.

Keegan Carl :

Can you guys hear me?

Keegan Carl:

Helpful. All right, cool. So, annual contract rent per square foot in the same-store pool is up 7.1% year-over-year. Just looking for some more color on the ECRI program. What rate increase are you sending out? And what are your plans on it for the back half of the year?

Keegan Carl:

Is that a fair assumption then for the back half of the year that, that continues to moderate?

Keegan Carl:

Okay. And then shifting gears to your third-party management platform. You guys added 16 net stores in the quarter. Just curious, one, what you're seeing out there in the market today. And two, on the back of extra space acquiring Life Storage, are you seeing any new customers from that portfolio come to you?

Keegan Carl:

Thanks for that.

Operator:

Thank you. We'll take our next question from Michael Mueller with JPMorgan. Your line is open.

Joseph Russell :

We can, Mike. Thanks for trying again.

Joseph Russell :

No, that's not been asked. [indiscernible] question, give you some color.

Michael Mueller :

Got it okay great thank you.

Operator:

And we'll take our next question from Juan Sanabria with BMO Capital Markets. Your line is open.

Tom Boyle :

Juan, it's holding steady. There's some seasonal factors which I won't quite get into, but generally speaking, on plan and consistent with expectations.

Tom Boyle :

Yes. So again, the outlook encapsulates the range. The low end of the range is a tougher macro environment. No question, that would likely lead to same-store revenue growth dipping into negative territory at the lower end there. At the higher end, we would anticipate that same-store revenue growth remains positive. Again, those easier comps lead to a stabilization through the second half of the year and exiting in that manner. Obviously, the midpoint is in between there. I think the midpoint does touch negative in the fourth quarter, and certainly positive in the third quarter. But again, we'll update you on performance through that range as we move through the year. We've been encouraged year-to-date on performance, and we'll continue to update you on where we end up through the year.

Tom Boyle :

Thanks, Juan. Thank you for being patient.

Ryan Burke :

Thank you, Shelby, and thanks once again to all of you for your patience today on the technical difficulties. We appreciate it. We hope you have a good rest of the week and into the weekend.

Operator:

Ladies and gentlemen, thank you for standing by, and welcome to the Public Storage First Quarter 2023 Earnings Call. At this time, all participants have been placed in a listen-only mode and the floor will be opened 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.

Joseph Russell:

Thank you, Ryan, and thank you for joining us today. Public Storage had a very good start to 2023. We remain focused on leading the self-storage industry’s digital evolution, transforming our own operating model, and enhancing and growing the portfolio. In the quarter, we achieved new milestones on several of our key initiatives, which included exceeding 60% of customers choosing to move in through our eRental online lease, eclipsing two million downloads of the Public Storage mobile app, reaching 400 properties on our customer demand-driven digital operating platform, installing solar at more than 200 properties putting us on track to complete at least 1,000 property installations within the next three years, completion of over 70% of the property of Tomorrow Enhancement Program, growing NOI by 29% across the 529 acquisition and development properties in our non-same-store pool, and driving the industry’s largest development pipeline to an excess of $1 billion to be delivered over the next 24 months. We had a strong operating performance in the first quarter, particularly with existing customers performing well and same-store move-in volume up nearly 13%. Length of stays are strong and same-store revenues were up nearly 10% year-over-year. Our exceptionally large non-same store acquisition and development pool now nearly 25% of the overall portfolio continues to outperform as well. Fundamentally, self-storage is a needs-based business with demand drivers that are multidimensional and fluid throughout economic cycles. We also continue to benefit from people spending more time at home, which has increasing permanence with remote and hybrid work here to stay. Additionally, with the return to more seasonal patterns of demand, we are currently also seeing an uptick in movement activity that has continued into the second quarter. We also continue to find good opportunity in development and redevelopment as well, with a vibrant pipeline poised to generate growth for years to come. Our unique ability to weather economic cycles serves us well, particularly while other developers have slowed their activity due to higher interest rates, cost pressures, difficult municipal processes and concern over the near macro term landscape. Now I’ll turn the call over to Tom to discuss acquisition market and financial performance.

Joseph Russell:

Thanks, Tom. Our people, technologies, platforms, balance sheet and brand have and will be continually enhanced to create and strengthen the competitive advantages we have across the entire Public Storage enterprise. We see opportunity in the current environment and are poised to execute with focus on delivering growth and value for our shareholders. Let’s go ahead and open the call up for questions.

Juan Sanabria:

Hi. Good morning. Joe or Tom, I was just hoping you could speak to April trends and what you’re seeing in terms of demand and/or price sensitivity from customers out there? Any – some of your peers have talked to some softness in March or April depending on their market exposure. So just curious what you guys are seeing across your platform.

Juan Sanabria:

Thanks. And then just for my second question, just on the Property of Tomorrow spend, you guys have made excellent progress on deploying that capital. Just curious on the types of returns you’re generating as you look at the CapEx that you’ve spent and how that’s augmenting growth either in the same-store or non-same store pool?

Juan Sanabria:

Appreciate the time. Thank you.

Tom Boyle:

Thanks, Juan.

Michael Goldsmith:

Good afternoon. Thanks a lot for taking my question. My first question is on the guidance. You brought up the low end. Is that a reflection of the trends that you’ve already experienced in the first quarter? Or that guided – the low end of your range was based on a full recession scenario? Is the increasing guidance more reflective of that outcome is less likely to occur? And then within this, you’ve included this quote in your supplemental that suggests that the potential of revenue growth rates is wide and including the potential for year-over-year declines in revenue in the second half of the year. Is there anything that you saw in the first quarter that changes your view on that? Thanks.

Michael Goldsmith:

Got it. And my follow-up question is about the strength and the sustainability of the LA market. Same-store NOI growth was up 20% in the quarter to added 300 basis points to the overall number. Presumably, this is reflecting the rate restrictions that were lifted in February of 2022, which you lap during the quarter. But is there kind of like a second – is there a second year of growth coming from the LA market? Or have we kind of – have you kind of used up all the gain there and the gain should be more modest going forward? Thanks.

Michael Goldsmith:

Thank you very much.

Operator:

We’ll take our next question from Smedes Rose with Citi. Your line is open.

Tom Boyle:

That’s a great question, Smedes. So one of the things that took place during the quarter was we did gain occupancy as you anticipate. And so occupancy from the end of the year through March was up 50 basis points. And in April, we gained another 20 basis points. So starting to see that seasonal uplift in occupancy that will really continue here into May. And I’d characterize the trajectories of year-over-year move-in and move-out growth as being favorable, i.e., as we move through the quarter, the move-out volume growth has modestly lowered and the move-in volume growth has modestly increased into April, i.e. So April was actually our best month in terms of gaining occupancy and closing the year-over-year occupancy gap on an incremental basis. So again encouraging trends here as we head into the peak leasing season.

Tom Boyle:

Sure. Yes, there’s two components to that line item. The one is what you’re highlighting, which is that there are more customers that are making late payments this year than last year. But if you frame it over a multiyear time period, we’re coming off of really, really low delinquency time periods over the last several years and remain well below 2019 levels delinquency, but you’re seeing an uptick there in late payments. And then I think more interestingly, the fact that we had significant move-in volume growth also contributed there with our administrative fee that’s charged to new customers when they move-in, leading to a year-over-year increase in that line item as well.

Joseph Russell:

Thanks, Smedes.

Todd Thomas:

Hi, thanks. Good morning out there. First question just related to investments. Tom, the balance sheet is in great shape. I think you commented that you’re seeing an increase in inbound call volume from owners. Are you seeing the pipeline build? And can you speak a little bit to pricing, whether pricing seems to be moving in your favor such that we should expect to see deal flow pick up in the quarters ahead?

Todd Thomas:

Okay.

Todd Thomas:

Okay. And then how would you sort of compare and contrast the U.S. versus non-U.S. opportunity set today? And then also would you – just given the amount of development activity that’s taken place over the last several years and some of the tighter lending environment that we’re seeing today, would you consider building out a structured finance program at all to be a financing solution for borrowers, but also as a way to maybe expand the platform through third-party management and build a future investment pipeline?

Tom Boyle:

But yes, I’d maybe take a step back and comment on your question around the lending environment because if you think stepping back the lending environment, it certainly gotten more challenged for many developers at this point. It could lead to lower new supply heading forward. So we’ll have to see how that plays out. In terms of our participation in other parts of the capital stack, we continue to find very good value in the equity portion of the capital stack and have been deploying capital there consistently over the last several years and have found that to be a good risk adjusted return. And I note in addition to that, we have made some lending investments with some of our partners on a smaller scale. So something that we’re considering as part of our wheelhouse as we move forward.

Tom Boyle:

Thank you.

Operator:

We’ll take our next question from Keegan Carl with Wolfe Research. Your line is open.

Tom Boyle:

Yes, I’d characterize as the performance of those assets to be pretty strong, right? I mean anything we delivered over that time period has benefited from really strong demand drivers. And frankly, they’ve been exceeding our expectations. Your comments around occupancies, I think, some of those vintages are a touch under 90%, but they’ll certainly stabilize above 90%. One of the things that I’d remind you is that occupancy is only one part of the equation of stabilization and rental rates is certainly the other. And we’re seeking to maximize revenue from those pools of assets the same way we do our same-store pool. So occupancy will ultimately get over 90%, but I think more importantly the rate growth there has been exceptionally strong and likely has several more years of strong rate growth compared to the same-store pool from that group of assets. And you can see the yields that we’re achieving there. It continues to reinforce the strong risk-adjusted return of that program and it leads to our increase in desire to continue to build moving forward. So the development pipeline now is sitting over $1 billion as we seek to grow that program.

Tom Boyle:

Yes, I’d say for the most part the increase in credit card fees relates to the increase in revenues and that’s by far and away the contribution. So as revenues increase, you’re going to see those payment processing fees go higher. From an operational standpoint, we do spend time thinking about ways to incentivize our customers to use attractive payment patterns for them, but also one that may be cheaper for us to process. And so that’s an ongoing kind of year in and year out attempt through different operational methods. But to your point, we love to move people in and achieve that auto pay and ultimately it’s much more important to achieve that move-in than it is to focus on the payments process.

Operator:

[Operator Instructions] We'll take our next question from Steve Sakwa with Evercore ISI. Your line is now open.

Joseph Russell:

Yes, Steve. Clearly, we are well positioned to continue to grow in all different shapes and sizes. And we feel every bit, if not more, confident that opportunities will continue to arise going forward. So we're very focused on that. We are looking at many different alternatives going into future opportunity scenarios. But we feel that, again, the reset to whatever degree happens in the sector by virtue of the LSI and ESR combination. At the end of the day, it doesn't change the landscape from a competitive standpoint. One of the things that we've learned over time scales one part of efficiency and optimization, but many other things play through as well, that we continue to invest in that lead to our industry-leading margins, the things that we've done to enhance our own brand, the effectiveness of the presence we have market-to-market, and we feel very confident we're in good shape going forward, and we'll continue to make those investments.

Joseph Russell:

Yes. The – first of all, development is a long game, right? So we're typically looking at scenarios that – well without question, go in and out of all kinds of different ranges of economic cycles, et cetera, when you're thinking about total time periods to actually put a property to a point of not only opening, but stabilization, I mean you can easily be at a five-year plus mark asset to asset. So that I think, is a good headwind, particularly in this environment where, again, many owners are seeing different headwinds around cost of capital, availability of capital, component costs. I mentioned the amount of timing it takes to get approval, city-to-city, and we've been talking about for some time is far more difficult today than it's ever been on that front. And literally almost everywhere. I can't even name a market where it's easier to develop today than it was one, two or three years ago. So you've got to be, again, ready to work through those kinds of demands or those kinds of factors, those kinds of risk components. We feel very well suited to do that. In this environment, where we're actually seeing the opportunity to pull more interesting properties into our own pipeline that potentially have far less competition from a land standpoint or even a repurposing standpoint. So the team is working hard, and we're finding some good opportunities. I'll let Tom talk a little bit about how our underwriting process play through as well. But that's something that always is reflective not only the current environment, but the long-term environment.

Steve Sakwa:

Great. Thanks.

Tom Boyle:

Thanks, Steve.

Ki Bin Kim:

Thanks. Good morning. Did you guys provide an update on April moving rates? Sorry if I missed it.

Ki Bin Kim:

Okay. Great. And how many stores do you have right now that are managed fully remotely without people? And are those – any kind of shared characteristics are those usually just smaller stores in tertiary markets or in different places as well?

Ki Bin Kim:

And so you said 400 properties, you have about 2,900. I guess, can you apply to all? And if you do, like does the FTE go from 2 to 1? Or I am just trying to understand the impact overall?

Tom Boyle:

Yes. The only thing I'd add to that Ki Bin is in our Investor Day presentation, we did highlight our objective to reduce labor hours and get more efficient with labor hours through the specialization and centralization that Joe is speaking to in reacting to customer demand. And the target we set is for a reduction in labor hours of 25%. We'll achieve that this year. In fact, we think that there is more upside from here. So just another component of how we're seeking to get more efficient and drive our industry-leading margins higher.

Joseph Russell:

Great. Thank you.

Michael Mueller:

Yes, hi. I was wondering, are you seeing any signs of like the degradation of length of stay for your lower-term customers that have been there over a year or two?

Michael Mueller:

Got it. Okay. Thank you.

Spenser Allaway:

Thank you. Maybe just another one similar to the development topic. But can you just remind us what percent of the portfolio would you say has true expansion opportunity?

Spenser Allaway:

Okay. That was really helpful color. And I was also just wondering, just given the fact that there has been a lack of larger portfolios in the market, has there been any increase to the personnel dedicated to sourcing or underwriting acquisitions just as I would imagine, the deals are a little bit more granular, excuse me, than normal. But it sounds like from what you just said, your personnel are very dynamic and perhaps can wear multiple hats.

Spenser Allaway:

Thank you.

Operator:

It appears we have no further questions on the line at this time. I will turn the program back over to Ryan Burke for any additional or closing remarks.

Operator:

This does conclude today's program. Thank you for your participation. You may disconnect at any time.

Operator:

Ladies and gentlemen, thank you for standing by, and welcome to the Public Storage Fourth Quarter and Full Year 2022 Earnings Call. At this time, all participants have been placed in a listen-only mode and the floor will be opened 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. Sir, you may begin.

Joe Russell:

Thank you, Ryan, and thank you for joining us. I’m going to begin by providing color on two recent announcements. We’ll then move on to our performance in 2022 and outlook for 2023. First, on February 5th, we announced a 50% increase to our quarterly common dividend, a raise from $8 to $12 per share on an annualized basis. It is a result of a great effort by the team that has produced record performance over the last few years and a validation of our ongoing confidence in the strength of our platform. Second, as announced separately, we made a proposal to acquire Life Storage at a substantial premium after several attempts to engage in negotiations privately. I’d like to highlight a few important reasons why we think this combination is poised to unlock superior growth and value creation for shareholders. First, there is significant opportunity to accelerate growth and profitability as Life Storage’s portfolio benefits from Public Storage’s industry-leading brand. Our platform achieves approximately 80% same-store operating margins compared to Life Storage’s margins at approximately 73%. And we see an opportunity to narrow that gap with their real estate assets as part of our industry-leading platform. Second, we believe there is significant upside to grow revenues and earnings in our respective ancillary business lines, including storage insurance, third-party property management, business customer offerings and lending. Third, we see expanded portfolio growth opportunities as we leverage Public Storage’s fully integrated in-house development team, the only one of its kind in the industry, to capitalize on additional development and redevelopment opportunities to enhance Life Storage’s existing portfolio. And finally, all of this will be supported by an industry-leading balance sheet with low pro forma leverage, an advantaged cost of capital and significant capacity to fund future growth in conjunction with retained cash flow. Since announcing the proposal, we have received overwhelmingly positive feedback from both companies’ shareholders who clearly recognize the significant benefits uniquely achievable through a combination with Public Storage. As you likely saw, on February 16th, Life Storage issued its own press release rejecting our proposal. Nothing in that response changed our thinking. We have a high level of conviction in the strategic and financial merits, and we are committed to pursuing a potential combination. We are encouraged, in that February 16th release, Life Storage indicated openness to opportunities to enhance shareholder value. We look forward to engaging in good faith discussions regarding a mutually agreeable combination. While we appreciate that analysts and shareholders have ongoing questions with respect to our proposal, the purposes of today’s call is to discuss our fourth quarter earnings and our outlook for 2023. As such, we will not be addressing questions related to the proposal at this time. Now, turning to our performance and outlook. 2022 was a year of milestones for Public Storage, including celebrating our 50th anniversary. The team and platform achieved record results in our same-store and non-same-store portfolios, elevating the customer experience through technology and operating model transformation, enhancing our properties through the Property of Tomorrow program and growing the portfolio through acquisitions, development and redevelopment and third-party management. We did all of this while maintaining the industry’s best balance sheet, which is poised to fund growth moving forward in conjunction with significant retained cash flow. To name just a few of our collective accomplishments, we achieved an 80% stabilized direct NOI margin through the combination of revenue generation and expense efficiency that only Public Storage is capable of. We grew beyond 200 million owned square feet and $4 billion in total revenues. We built our property development pipeline to approximately $1 billion. We received the prestigious Great Place to Work award based on feedback provided directly by our employees. And we achieved top-scoring U.S. self-storage REITs across the leading sustainability benchmarks. We are firing on all cylinders while strengthening the already formidable competitive advantages we have across our business. And those competitive advantages are heightened in the type of macro environment we are in today on top of two consecutive years of record 20%-plus core FFO growth. Simply put, we have the people, technologies, platforms and brand which lead us to a position of strength in 2023. Demand for self-storage remains strong, as you see with our move-in volume up more than 11% during the quarter. The aspects of the business that have historically made it resilient are on display. This is a needs-based business with demand drivers that are multidimensional and fluid throughout economic cycles. We also continue to benefit from a newer driver in the form of people spending more time at home, which has increasing permanence with remote and hybrid work here to stay. Our customer lengths of stay are at record levels, a positive trend, given rent increases to existing customers are a key driver to our revenue growth. The outlook for new competitive supply is also in our favor. We are seeing less new property development nationally due to higher interest rates, cost pressures, difficult municipal processes and concern over the macro landscape. With continuing strong demand, less pressure from new supply and our numerous competitive advantages, we are very well positioned in 2023. Now, I’ll turn the call over to Tom.

Operator:

Thank you. [Operator Instructions] And our first question will come from Steve Sakwa with Evercore ISI.

Tom Boyle:

Sure. That’s a good question, Steve. So, I want to make a couple of comments here. One, I’d like to comment a little bit around how the year has started, which is pretty consistent trends with what we saw through the fourth quarter. So move-in, move-out trends pretty consistent. We’ve seen move-in volumes up circa 10%, move-in rates that have been down mid-single digits. So consistent with that, we call it, 5% plus or minus that we saw in the fourth quarter. So, we’re seeing continued good demand for storage through the first part of the year. But I do think in response to your question, I’d like to break the year of 2023 into two halves. The first half, as we think about it, consistent trends as we’ve seen through the fourth quarter into the first but facing really tough comps as we move through the first part of the year. And that’s going to lead to some of the moderation I spoke to. The second -- but ultimately, with higher levels of absolute revenue growth, given we’re starting the year from a position of strength. But if you think about the second part of the year, there’s a couple of things to highlight. One, the comps will be easier in the second half of the year, given we’ll be comping against a more seasonal end of 2021 -- or 2022, rather. But the flip side is the macro uncertainty is significantly higher. And so, as you think about the pathways that I described for the outlook, at the lower end, a recessionary pathway that we highlighted in some of our disclosures, that recessionary pathway likely leads to negative year-over-year revenue growth as you would be typical to see in a recession. But towards the higher end, certainly, that would lead to positive growth and easier comps and could result in better revenue growth performance as we move through the second half. And I’d say, as we think about the year, the second half has much more uncertainty towards it than the first half does.

Joe Russell:

Yes, Steve. There certainly is a continuing trend that played through in 2022 that we think still applies to 2023. First of all, on the acquisition side, likely to be lower volumes of transaction activity. Certainly, we’re seeing that by virtue of how the year started off. It’s not a typical year in and year out where the first quarter or so might be on the light side. That’s definitely the case as we speak. So, we’re looking for and evaluating the trends tied to impacts from higher cost of capital, limited availability of capital, again, how sellers are looking at this environment to transact assets. Typically, more stabilized assets are going to command stronger cap rates. I’d tell you today compared to maybe where we were a year ago, cap rates are still up in that 100, 125 basis-point range where stabilized assets might have a 5 handle on them, whether it’s low, mid or high-5, cap rate’s going to depend on location, quality of the asset, et cetera. And then, depending on this stabilized level of the asset, there’s going to be more flexibility in the cap rate. And you’re going to see different pricing mechanisms tied to those types of assets. Our focus, as it has been to actually look for those kinds of assets because that’s where we see the higher value creation. That certainly played through the acquisition volume that we captured that Tom talked about, in 2022. So we’re still out hunting for good quality assets. Our backlog right now between closed and under contract’s approximately $70 million. But frankly, the market is a little slow right now, so we’ll see. It’s not unusual for though the market to start picking up toward the summer months so we’ll see again how that plays through on that set of opportunities. Now, on the flip side, from a development standpoint, as you mentioned, yes, our pipeline continues to be quite robust. It’s more difficult to do development not any different than what we’ve been talking about for the last year or two. Our team is working hard to extract prime land sites. We’re actually finding some very good opportunities there. But frankly, we’ve got skills and abilities that our competitors in the private world particularly do not have. And with that, we’ve been able to extract prime sites, good opportunities to actually get the types of returns that we’ve been speaking to for the last couple of years, where we’re expecting plus or minus 8% or north cash-on-cash yields on these investments. So, we’re very encouraged by our own pipeline. We’re encouraged, as Tom mentioned, relative to the lease-up and the contribution those types of assets have to our overall revenue and NOI performance. And our non-same-store portfolio continues to be very vibrant. So, we’re very encouraged that we’ve got the right skills and the fortitude and the ability to look long term through what could be still a very challenging development cycle, which frankly, is a good thing. It gives us more ability to actually go out and capture, as I mentioned, those great land sites, put our Gen 5 properties into a variety of different markets. And nationally, we’ve got good opportunities across the spectrum, so we’re going to continue to focus on that as we speak.

Michael Goldsmith:

On the guidance, you said the low end of the range is for a recession scenario while the high end’s a soft landing. Do you see a 50% probability of a soft landing, you end up at the high end, and a 50% probability of a recession, you end up at the low end, or is it more 75-25 or another combination? I’m trying to understand the likelihood of where you see yourself ending up within that range at this time.

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.

Michael Goldsmith:

Thank you very much. Good luck in 2023.

Operator:

Thank you. Our next question will come from Jeff Spector with Bank of America.

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.

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.

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?

Juan Sanabria:

Just fourth quarter.

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.

Operator:

Our next question will come from Todd Thomas with KeyBanc Capital Markets.

Tom Boyle:

Well, let me talk about the first half first and then we can talk about the second half, which obviously, we’ve spoken about, there’s macro uncertainty that will influence that. But as you think about the first half, we’re starting the year with occupancy down about 2.4%. And we do think the occupancy decline that we experienced in the back half of 2022 was a seasonal occupancy decline. In fact, the decline from June to December was a touch better than a typical seasonal decline. But inherent in that is that what we’re seeing today is a pickup in occupancy in some of our seasonal markets. So, I would anticipate there’s certainly the opportunity for that spread to narrow as we get into the busy season as we’ve spoken to, but then would follow a typical seasonal pattern from there in the back half.

Tom Boyle:

Well, they typically tend to be colder weather markets, so your Miamis and your Los Angeles and San Diegos, you don’t see that same seasonal pattern. But if you look at a Minneapolis or Chicago or the Northeast, you start to see that seasonal pattern be more pronounced.

Joe Russell:

Yes, Todd. I mentioned what we’ve been doing strategically now for the last three years or more is looking for opportunities with assets that do have that upside that you’re speaking to. So, whether it’s through some of the larger portfolios, All Storage included, we bought that portfolio at about 74% occupancy, had a nice lift really in a very short period of time relative to continued lease-up and stabilization of the revenue metrics, et cetera. And we’ve done the exact same thing with one-off deals as well. So, that’s something we’re not going to be shy about doing, and it continues to be a very good playbook for us. When we’ve got deep-seated knowledge market to market, which we do on the vast majority of deals that we acquire, we have an elevated level of confidence that once we put these assets into our own platform, you can see that extracted opportunity literally right out of the gate. You see the benefits as we’ve been speaking to relative to our brand, our platform, our efficiencies that assist higher-margin, opportunities, et cetera. So, we’re definitely looking for those kinds of assets and have not backed away from them at all. So, that has and will continue to be a very vibrant part of our capital allocation process.

Spenser Allaway:

Can you provide an update on the rent freeze that was put in place related to the California storms early in the year? Has this been lifted? And if not, is there any type of NOI headwinds contemplated in guidance?