Public Storage Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 31, 2024

There are 18 speakers on the call.

Operator

Greetings, and welcome to Public Storage Second Quarter 20 24 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ryan Burke.

Operator

Thank you. You may begin.

Speaker 1

Thank you, Rob. Hello, everyone. Thank you for joining us for our Q2 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.

Speaker 1

These forward looking statements are subject to certain economic risks and uncertainties. All forward looking statements speak only as of today, July 31, 2024, and we assume no obligation to update, revise or supplement statements that become untrue because of subsequent events. A reconciliation to GAAP of the non GAAP measures we provide on this call is included in our earnings release. You can find our press release, supplement report, SEC reports and an audio replay of this conference call on our website, publicstorage.com. We do ask that you initially limit yourselves to 2 questions.

Speaker 1

Of course, after that, feel free to jump in queue with more. With that, I'll turn the call over to Joe.

Speaker 2

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 and A. Our 2nd 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.

Speaker 2

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 2nd quarter.

Speaker 2

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 $200,000,000 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.

Speaker 2

Now Tom will provide additional detail.

Speaker 3

Thanks, Joe. We reported 2nd quarter core FFO of $4.23 per share, representing a 1.2% decline compared to the same period in 2023 and in line with the same 1.2% experienced during the Q1. Looking at the same store portfolio of stabilized properties, revenues declined 1% compared to the Q2 of 2023. A relatively even mix of lower occupancy and rents drove that decline. The rent decline was primarily driven by lower market move in rents, which were partially offset by better than expected behavior of our in place customers.

Speaker 3

Our occupancy gap compared to 2023 narrowed to down 30 basis points at quarter end, outperforming our expectation on positive net move ins. On expenses, same store cost of operations were up 90 basis points in the Q2 as our operating model transformation and solar power generation strategic initiatives reduced payroll utilities and indirect costs helping offset other line items. In total, net operating income for the same store pool declined 1.6% in the quarter. Our operating margin remained healthy at an industry leading 79%. The strong performance of our non same store pool continues as Joe mentioned.

Speaker 3

With this pool at 83% occupancy and comprising 22% of our total square footage, it will be an engine of growth for remainder of this year and into the future, which is a good segue into our updated outlook for 2024. We revised our same store revenue assumptions and core FFO per share guidance to reflect lower move in rents during our busy season, namely in May, June and into July. We removed the more optimistic scenarios within our revenue growth range, which reflected the possibility of move in rents reaching parity with last year during 2024. The assumptions underpinning the negative 1% growth scenario at our new midpoint are as follows. Move in rents on average down 12% for the full year finishing in December with move in rents down mid single digits.

Speaker 3

Our other assumptions are unchanged. Occupancy averaging down 80 basis points for the year and a consistent contribution from existing customer rent increases compared to last year. We also adjusted our 2024 non same store NOI outlook by $17,000,000 at the midpoint to reflect later timing of acquisition closings and lower move in rents similar to the same store pool. Our outlook for the non same store pool is for a strong 32% growth this year at the midpoint. That strong growth is expected to continue with an additional $110,000,000 of incremental NOI in 2025 and beyond from this pool.

Speaker 3

Based on those assumption changes, we have revised our core FFO guidance to a range of $16.50 to $16.85 per share, an approximate 1% reduction compared to the midpoint of our prior guidance range. Our outlook for capital allocation in 2024 is unchanged. We will deliver $450,000,000 in new development activity this year, a record year for Public Storage. We're seeing signs of activity in the acquisition transaction market and we're both eager and well positioned when pent up activity surfaces there. Our capital and liquidity position remains strong.

Speaker 3

We refinanced our 2024 maturities in April and leverage of 3.9 times net debt and preferred to EBITDA puts us in a very strong position. As Joe highlighted earlier, we are encouraged by positive momentum in many aspects of the business. We're confident in our trajectory as we move through this year of stabilization in 2024. So with that, I'll turn the call back to Rob to open it up for Q and A.

Operator

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

Speaker 4

Thanks. I guess good morning out there. Maybe, Tom, just sort of following up on the sort of the guidance changes and the down 12 percent that you and Joe sort of spoke about. Maybe just talk about either the market mix or how you thought about that? And I guess under what economic conditions or housing scenarios could that possibly get better in the back half of the year?

Speaker 4

And I guess what are the risks that excuse me that down 12% could maybe be worse than you're currently forecasting?

Speaker 3

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 as helpful. But we're seeing improvements in move in rents in those markets as well.

Speaker 3

So a market like Seattle for instance was nearly flat on move in rents for the 2nd 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 moving 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 Q1 move in rents for us were down 16%, the 2nd quarter down 14%.

Speaker 3

As we sit here in July, they're down 12%. So that 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.

Speaker 4

Okay. And maybe just touching on the capital allocation, it was interesting to see that the share buybacks and I assume that that's partly a function of capital activity on the acquisition side just not really being there. I guess what are you seeing on the acquisition front? And I think you mentioned maybe things were picking up a bit, but what are the opportunity sets and how do you sort of measure away the buybacks against either development spend and or acquisitions?

Speaker 2

Okay. Sure. I'll start Steve. From an acquisition opportunity standpoint, for the last 2 or 3 quarters, we pointed to the fact that there was 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 activity is 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.

Speaker 2

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.

Speaker 2

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.

Speaker 2

And with that, we'll see what plays through as we go forward.

Operator

Thanks.

Speaker 5

Thank you.

Operator

Our next question is from Juan Thannabrea with BMO Capital Markets. Please proceed with your question.

Speaker 6

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 24 at just to think about early days I know, but how 25 at least may start?

Speaker 3

Yes, sure, Juan. So obviously implied in the revised outlook is a number for the second half, right? And I think as you look at the first half, our same store revenue growth was down about 50 basis points implied in the second half is down about 1.5 percent. So I wouldn't get any more specific in terms of where exactly we're going to be the month of December or otherwise. And obviously we'll give you 25 outlook as we get into February.

Speaker 3

The one set of points that I would share is that we continue to be positive around the trajectory of both industry fundamentals as well as our own fundamentals as we sit here today. We've spoken about how this year is a year of stability and stabilization for the sector. There's reasons to be optimistic around future demand growth as we get through 2025 to 2017. And at the same time, that's going to be counterbalanced with declining deliveries of new competitive supply given the challenges in new construction today. So we continue to be optimistic around the outlook for the business in future years without getting into any 2025 specifics.

Speaker 6

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?

Speaker 2

Yes. I think first of all, there's no question we need more transaction activity to either stabilize or reinforce where cap rates have trended to. If you look at the progression on cap rate change over the last 2 years or so, say 2 plus years ago, we were probably looking at plus or minus 4% handles and it transitioned to 5%. Today, we're probably looking at 6 handles for again, transaction activity. But to your point, Juan, we need to see and realize a fair amount of trading volume for those to stabilize.

Speaker 2

We clearly see the value from our standpoint based on our cost of capital to transact plus or minus in that 6% range, but we're keeping a very close eye on what's coming to the market and what value creation you can extract, whether it's a stabilized asset or something that's unstabilized that clearly is going to have some lease up activity tied to it as well. But again, we're well positioned relative to our own cost of capital, the size and the magnitude of capital that we can deploy. And we'll confidently go forward with any opportunity that we see that makes sense again based on the value creation that we're seeing.

Speaker 6

Thank you.

Speaker 5

Thank you.

Operator

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

Speaker 7

Thank you. Sorry if I missed it. Did you give any commentary yet or able to on the July occupancy and move in rates?

Speaker 3

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 1st and second quarters there. On occupancy, we're closing the month down circa 40 basis points in occupancy.

Speaker 3

So a touch below where we finished June, but in a narrower gap than where we started the year.

Speaker 7

Okay. Thanks for that, Tom. And then in terms of question on ECRI, what are you seeing in trends with your tenants? I mean, is there any signs of fatigue or pushback that you're ECRI? And I just want to be clear as well on the same store guidance change.

Speaker 7

Was there any assumptions that were changed on ECRI or is it all just moving

Speaker 3

rents? Yes, thanks. So we continue to be encouraged by behavior from our existing tenants. And you think about the existing tenant base in storage, right. A lot of the existing tenants we're speaking to today were moving customers last year and the year before.

Speaker 3

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 got an environment where we moved a lot more customers in 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.

Speaker 3

And that to your point is unchanged from our original outlook. We continue to be encouraged by that customer base.

Operator

All right. Thanks, Tom. Thanks. Our next question comes from Jeff Spector with Bank of America. Please proceed with your question.

Speaker 8

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? And 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?

Speaker 8

I don't know if you do surveys.

Speaker 2

Sure, Jeff. Yes, we definitely keep a very close eye on the variety of demand factors that bring customers to us. Housing in general obviously is an important part of that overall acquisition opportunity. What has continued to be quite strong, I mentioned in my opening comments that need for more space, whether you're an owner or a renter continues to be again a very active rationale or active reason to come to self storage. Clearly it was surfacing through the pandemic.

Speaker 2

We're far past that now. The different dynamic tied to needing more space and needing more space at home is the affordability factor whether you're a renter or an owner. There's clearly less activity going on in existing home sale activity. The counter to that and actually the driver that's 2 plus or times larger than home sale activity is renter activity and those customer types continue to be quite good relative to length of stay, commitment to the space, affordability factors, etcetera. And we're really not seeing any erosion relative to that kind of activity, which has been quite beneficial to the acquisition opportunity that we've been able to keep moving activity quite vibrant.

Speaker 2

So no real change there and actually as Tom and I have spoken to we look at that as again a very key driver relative to the vibrancy of the business overall. We're just in a more competitive environment relative to what those initial move in rates are. But, the stabilization and the behavior of existing customers is quite good.

Speaker 8

Thanks, Joe. 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?

Speaker 2

Yes, sure. Again, I wouldn't say there's any sea change in the consistent view that we've had on national development deliveries meaning on a increase on an existing stock basis we're kind of in that mid-two percent range or so. So the development activity that's hitting any particular market has been, quite positive, meaning it's not the same volume that we've seen certainly in prior cycles. And we don't really see any momentum coming back to the amount of volume that's likely to happen nationally. Like always, we're keeping a close eye on a handful of markets that might be a little too active relative to development activity.

Speaker 2

One example might be for instance the West Coast of Florida. There's quite a bit of activity going on there. Phoenix and Las Vegas on a percentage of existing stock have a little bit more activity than we'd like to see. But frankly beyond that, we're very happy with the lack of new development activity coming into most markets. The headwinds around development activity are very consistent to what we've spoken about over the last several quarters, cost of capital, timing for entitlements, risk around component costs and then again the amount of time and projections that are going into rent levels and stabilization, need to be factored in as well.

Speaker 2

So with all that, we basically have a backdrop of very low development activity.

Speaker 9

On

Speaker 2

the flip side for our own development team it's given us a good opportunity to jump into a number of markets that's fueling the amount of development activity we particularly continue to drive. As Tom mentioned, we're looking at a record level of development activity in 2024 and the team is working hard to look for additional opportunities into 2025, 2026 and 2027.

Speaker 10

Thank you.

Speaker 2

Thanks, Jeff.

Operator

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

Speaker 11

Hey, just two quick ones. One, just starting on with the expenses, maybe just a little bit more commentary on both the property taxes as well as sort of the payroll reductions. And how much has being able to get a lot of tenants moving in digitally sort of help with that and how much more is there to go?

Speaker 3

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 up 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.

Speaker 3

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 you rental, 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 and L. Initially, we had shared of reducing property hours by about 25%.

Speaker 3

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 expenses, I might as well highlight our solar power initiatives as well.

Speaker 3

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.

Speaker 11

Great. And then my second question was just going to be going back to sort of the guidance changes on the new tenants pricing. I think when you think about the environment, whether it's website visits or bad debt, I think the commentary has been that's actually been pretty good. So I guess what we're trying to figure out is, like, what do you think is causing more competition? Is it just a more cost conscious consumer?

Speaker 11

Is it housing? Like what's if the demand sort of indicators still look pretty good, supply presumably is coming down, what's at the heart of the more competitive environment that's driving this? Thanks.

Speaker 3

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, etcetera. 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.

Speaker 3

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.

Speaker 3

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.

Speaker 11

That's it for me. Thanks so much.

Speaker 3

Thanks, Ron.

Operator

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

Speaker 12

Good morning. Thanks a lot for taking my question. On the market rent growth, you said it was down 14% in the 2nd quarter and down 12 percent in July. So can you just provide context on what happened in June just to see 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?

Speaker 12

Thanks.

Speaker 3

Yes. So there are a couple of components there. 1, June was pretty similar down about 12%. And so we saw a pretty good improvement from April May into June July, but nowhere near the pace or the magnitude of improvement that we were anticipating. And as you get into June July, you're at the peak of the rents.

Speaker 3

And so that is in a very important guidepost as you think about the rents through the remainder of the year. And it's also why those several months are so important as it relates to setting market rents for the year. The in terms of the pace of improvement, we are anticipating a moderation in that decline as we move through the second half of the year, but we have recalibrated that based on the June July performance. And so we're starting from a different place than what we had originally assumed, but for modest improvement here.

Speaker 12

Got it. And thanks for that. And then my follow-up question is just like, when thing it's maybe a little bit speculative, but when things start to get better, like how quickly can things unwind, right? Like it seems that a lot of the independents and the privates kind of took their time recutting 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.

Speaker 12

So like when it does get better, it should improve a lot quicker than maybe this kind of slow grind down that we've kind of experienced? Thanks.

Speaker 3

I think that still remain to be seen in terms of ultimate pace, right? We've given you guideposts in terms of what our assumptions are through the remainder of the year. We've highlighted about the fact that this is a variable and competitive dynamic for new customer rates. I'm not going to speculate specifically around private operators and how they'll react.

Speaker 12

Thank you very much.

Speaker 3

Thanks, Michael.

Operator

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

Speaker 13

Thanks. Just wanted to touch on occupancy. You mentioned July being down 40 basis points year over year. It seems like implied in guidance is for that gap to widen in the back half of the year at about 100 basis points. So can you talk about kind of what's underpinning that assumption?

Speaker 3

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 1st part of the year as well. Heading into the back half, we're anticipating like 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.

Speaker 3

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 that seasonal decline that we saw in a typical year.

Speaker 13

Thank you. And then just for the $110,000,000 of incremental non same store NOI, is there any additional capital that needs to be spent for that or is that all basically just dropping to the NOI as it flows through?

Speaker 3

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 $110,000,000 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.

Speaker 3

Thanks.

Speaker 13

And then some of that will become within the same store pool in 2025?

Speaker 3

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.

Speaker 13

Perfect. Thank you very much.

Speaker 3

Thank you.

Operator

Our next question is from Kegan Carl with Wolfe Research. Please proceed with your question.

Speaker 5

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 or impacted your outlook for the rest of the year?

Speaker 2

Yes, Keegan. I wouldn't highlight any particular new or evolving level of stress and or change in the pattern of both behavior from a payment standpoint, length of stay, the amount of activity that we're just seeing relative to even movement that we can assess based on any particular stress playing through on our own customer base. We've been pleasantly surprised that all the tools that we're using to keep again, delinquency in good shape are continuing to serve us well. And we're not seeing any, new and changing risk factor tied to the consumer payment patterns that have been relatively consistent now for a number of quarters.

Speaker 5

Got it. And then just shifting gears, I'm just curious for how your 3rd party management platform is trending and if there are any changes in the pipeline versus last quarter?

Speaker 2

Yes, sure. So, frankly, we've had a pretty good run for the last few quarters with the improved size and complexion of our 3rd party management platform. So today we have approximately 375 assets in that program, 260 of them are open and we have another 115 that are in a variety of different stages relative to development that we'll be opening over the next year or so. This quarter we added 17 That puts us at year to date over 60 additional additions to the program. So again seeing a good amount of activity both small and frankly some larger portfolios where we've got a number of existing clients that are actually expanding the number of assets they're putting into our program.

Speaker 2

So, it's continuing to serve us well relative to additional scale in many markets, different things that can be very advantageous not only to our clients but ourselves. So we're continuing to see good growth in the program and putting a fair amount of resource into it as well with the public storage team that's wholly dedicated to that platform as well. So again, good traction and we see some good activity going into the second half of this year.

Speaker 5

Super helpful. Thanks for the time guys. You bet. Thank you.

Operator

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

Speaker 14

Hi, thanks. I just wanted to follow-up on the ECRIs and pricing a bit. Tom, I understand the contribution to revenue growth has not changed with the revised guidance. But just given the softer demand environment and the lack of pricing power that you experienced during the quarter and into July versus your prior expectations. Is there an effort to preserve occupancy a little bit more ahead of and into the back half of the off peak rental season just to provide a little bit of a better potential setup into 2025 when demand might recover?

Speaker 3

Okay. There's a lot there, Todd. So maybe let me take a step back and talk through how we think about the program. So 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 2 components to the existing customer rent increase side.

Speaker 3

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 speak to is around the cost to how long the space will remain vacant, marketing 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 2 years. And so there isn't an overt 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.

Speaker 3

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.

Speaker 14

Okay, got it. So the percent of tenants eligible for rent increases is higher today than it was last year and the prior year, it sounds?

Speaker 3

Yes. And there's more near term tenants that are in the program.

Speaker 11

Right.

Speaker 14

Okay. That's helpful. And then my second question was just around the latest Board appointment, Maria Hawthorne. I was just curious if you could speak to that announcement and the process the Board went through to make that decision. The PSP transaction closed in 2022.

Speaker 14

So I'm just curious about the timing and the decision to expand the Board today.

Speaker 2

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 2 other public boards as well. She's got very strong financial acumen coupled with very strong history of delivering great shareholder value etcetera.

Speaker 2

So overall we feel she's a great the Board and look forward to her contributions with the rest of the Board as it stands today.

Speaker 14

Okay. All right. Thank you.

Speaker 5

Thank you.

Operator

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

Speaker 10

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. But 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.

Speaker 3

Yes, Ki Bin, you're highlighting both promotions as well as marketing spend. Let me maybe take the 2 independent. Those are 2 of the levers in addition obviously to move in rents that we are toggling back and forth in the competitive move in environment. And we've been very active utilizing frankly both over the last several years. On marketing specifically, we've increased our marketing spend consistently over the last couple of years because we're seeing very good returns We speak regularly around the advantages of our scale and marketplace providing customers a rich inventory set, the power of our brand, the customers are increasingly aware of in our markets and that efficacy continues today.

Speaker 3

And so as we look at the spend increase in the Q2 and year to date, Those have been very good returns associated with those investments in new customer acquisition and we'll continue to use that lever as we move forward given the good returns associated with it and would anticipate that to continue into the second half. On promotional activity, there's a couple of things going on with that particular metric that you're looking at. One is, I'd highlight that about the same number of customers year over year have received promotions, maybe a touch more. But the reason you're seeing a decline in that metric is it's a promotional activity versus our move in rents. And as we've discussed, our move in rents themselves were down 14%.

Speaker 3

And so just nominally the discount dollars and promotional dollars associated with giving for instance, the 1st month for a dollar is less on a nominal basis year over year, but that continues to be a vibrant tool we're using.

Speaker 10

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

Speaker 3

Yes. Our rents today are in similar territory to where they are. We're in 2019 depending on the market, right? We got some markets that are a good bit above 2019 and we have some markets that are below 2019 as well. We've highlighted in the past around some markets that we feel like have over corrected in terms of move in rents and I'd reiterate that as it relates to 2019.

Speaker 10

Yes. So that's the part I'm trying to understand better, right? Since 2019, we've probably had about 20% cumulative inflation, but rents 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?

Speaker 10

Is it absorbed through additional supply or is there something else about the consumer that's changed over that timeframe? Just trying to understand where that demand has abated.

Speaker 3

Yes, I would characterize it and Joe you can chime in here too. I would characterize it as we've had a sharp number of years and movement in demand, right. We had sharp move higher and sharp move lower. And as I said, that metric is pretty variable depending on the marketplace that you're looking at. Some of the markets that Joe highlighted are impacted by new supply and so you have some of that competitive dynamic.

Speaker 3

But overall, I'd say that the shift in demand lower and the tough comps of 2021 2022 have led to pretty competitive pricing activity amongst operators in the sector. And in many cases that may have led to an overcorrection in marketplaces. But I think the positive component that you're highlighting is if you think about the move in rents today that we're charging versus discretionary income or consumer's monthly budget is frankly even more attractive today than what it was in the past. And so as you think about potential opportunity for that number through a cycle to move higher, I think it's more encouraging frankly given it's more affordable today than it was in the past. And we're working through that stabilization of demand and as an industry, we will get to the other side.

Operator

Okay. Thank you.

Speaker 13

Thanks.

Operator

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

Speaker 9

Thanks for taking the question. Could you talk about any changes you've seen year to date and more recently on length of stay of the in place base in terms of the type of customers that are moving out? Are they coming from more of the lower replacement cost customers that are at lower rates versus the longer tenured customers that are materially above current move in rates?

Speaker 3

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?

Speaker 3

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.

Speaker 3

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 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.

Speaker 9

Great. Appreciate that commentary. And just a follow-up, sorry to harp about moving rents. But as we think about what you've assumed in second half of this year, you said the guide assumes we exit the year down about mid single digits. Does that assume a relatively normal amount of seasonality from kind of the peak summer months into the fall and winter?

Speaker 9

Because I know that from a comp perspective, things do get a lot easier in September October given there were some more aggressive pricing actions made last year. So just thinking about how seasonality compares to what would be a normal year and I realize we haven't had a normal year in quite some time.

Speaker 3

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 move in 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 move in environment in the second half and that move in rents are below where they were last year.

Speaker 9

Okay. Thank you. Appreciate it.

Speaker 10

Thanks, Eric.

Operator

Our next question comes from Jonathan Hughes with Raymond James. Please proceed with your question.

Speaker 15

Hi, good morning out there. The predictive revenue growth metric when I combine contract rent and occupancy for the next quarter has been pretty accurate lately. And when I do that for a Q3 and combine it with full year guide, it implies revenue growth actually accelerates or gets less negative in the Q4. 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 into the 4th quarter sound like what's embedded in guidance?

Speaker 15

And if so, what gives you the confidence we'll see that improvement since it is so unique?

Speaker 3

Well, one of the things that I've highlighted over the last couple of years around that forward metric based on period end numbers is that when things are moving around quite a it loses some of its efficacy. And certainly we've started to provide more robust transparency related to our outlook for the year on a financial terms with our guidance. And so I'd point you more towards the implied outlook from guidance than using any particular period end metrics 1 quarter versus the other given how things have been moving around. But specifically, I'm not going to quarter by quarter guidance, right? We're giving you annual outlook.

Speaker 3

And as I noted earlier, the second half is implied to be down 1.5% on same store revenue specifically. And we do have confidence in improving trends in many of our markets that is going to lead to stabilization and then ultimately reacceleration across those markets over time.

Speaker 15

Okay. My second question, just looking at LA, 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 5 quarters. I know comps are tough, but yesterday Equity Residential kind of talked about some affordability and supply headwinds in LA. So maybe there's a broader economic slowdown in that specific market. But can we expect a more modest revenue growth premium in LA going forward?

Speaker 15

Could that even turn negative as rents and occupancy there are the highest in the portfolio? Thanks.

Speaker 2

Yes. First of all, just the overall health of that market continues to be very good, Jonathan. It's a market that we're not going to see any meaningful addition to supply just the trend that you're pointing to relative to the outstripped revenue growth that we saw in that market for a sustained period of time and it's leveling off. We hope that we'll continue to see very good trajectory going into future periods. But we don't see some of the issues certainly in Los Angeles that you might in other markets that have been more impacted by either supply or a material shift in overall demand.

Speaker 2

I would just say it's relatively stable at this point and we'll continue to see how it performs. We're in very good shape relative to the quality of those assets. We see very strong occupancies. As I mentioned, no new and concerning dynamics from new supply. So the other thing that supports LA over time is it is a high cost of living market, which again supports the inherent demand for public for storage relative to our particular portfolio there because again great locations, great scale overall in the market and we see good inherent customer demand playing through.

Operator

All right. Thanks for the time.

Speaker 5

Thank you.

Operator

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

Speaker 16

Yes. Hi. Just a quick follow-up on move in rates. Is the guidance assumption of move in rates improving to down mid single digits by year end? Is that being driven, I guess, by improvement in the spot rates or just the comp issue or some sort of combination of both?

Speaker 3

Well, I guess in 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 Q4 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 4th quarter move ins for us were down about 18% year over year.

Speaker 3

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 December, we're anticipating to be more modest than what we experienced last year, which was really frankly a very sharp decline.

Speaker 16

Got it. So it seems like you're making some improvement in there, just ignoring the comp dynamic?

Speaker 3

I would say it's primarily the comp dynamic and we're expecting revenue to decline as we typically would between a summer and a winter in storage.

Operator

Okay.

Speaker 15

Yes, I was thinking

Speaker 16

a little bit more of outside of seasonality, the overall environment getting better from that front, but okay.

Operator

That was it. Thank you. Our next question is from Spencer Holloway with Green Street Advisors. Please proceed with your question.

Speaker 17

Thank you. Maybe just one more on the non same store pool. You guys have had great success on the lease up front. But are you able to provide additional color on markets where you're seeing either above average lease up trends or maybe conversely where you're seeing some slower activity here on the leasing front?

Speaker 3

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, is 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.

Speaker 3

And because of that, the new activity that we are delivering is being well received in the marketplace, absorbed efficiently, also the dynamics for the industry and the local marketplace of our same store assets in those marketplaces as well.

Speaker 2

Yes. And maybe Spencer, just on a headline portfolio standpoint, if you look at the larger portfolios that we've taken down over the last couple of years, I'd say they are all kind of in a similar range relative to either meeting or exceeding not only our underwriting, but we've seen good traction particularly in markets where we've been able to increase scale. And then most recently the Simply portfolio which touched 18 different states. Again, I wouldn't point out or call out any unusual negative trends. In fact, we're seeing continued outperformance relative to our own underwriting even in that portfolio that was multi market based.

Speaker 2

So just to reinforce what Tom was speaking to, we're continuing to see good traction and stabilization throughout that entire portfolio and definitely look at it as being a continued driver of growth going into future periods.

Speaker 17

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

Speaker 3

Yes, we typically underwrite 3 to 4 years to get to a level of stabilization of the earnings profile of the asset. And then frankly, there's another couple of years of continued strong growth from there depending on the size of the asset, etcetera. There are certainly been time periods where we've seen much faster than that over the last several years in particular. But kind of year in year out that's what we're looking for. And particular asset or otherwise.

Speaker 3

But I'd still point you to that kind of 3 or 4 year particular asset or otherwise, but I'd still point you to that kind of 3 to 4 year time period.

Speaker 17

Okay, great. Thank you.

Speaker 5

Thank you.

Speaker 6

We have reached the

Operator

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

Speaker 1

Thanks, Rob, and thanks to all of you for joining us. Have a great day.

Operator

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

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Earnings Conference Call
Public Storage Q2 2024
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