Public Storage

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 open for your questions following the presentation. If you have a question at that time, please press star 1 on your telephone keypad. If you wish to remove yourself from the queue, please press star 2. It is now my pleasure to turn the floor over to Ryan Burke, Vice President of Investor Relations, Ryan, you may begin.

Thank you, Brittany. Hello, everyone. Thank you for joining us for our first quarter 2023 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 meeting 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 4th, 2023. 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 financial 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 at publicstorage.com. We do ask that you initially keep your questions limited to two. Of course, if you have additional questions, feel free to jump back in queue. With that, I'll turn the call over to Joe.

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 industries digital evolution transforming our own operating model and enhancing and growing the portfolio. In the quarter we achieve new milestones on several of our key initiatives which included. Exceeding 60% of customers choosing to move in through our eRental online lease. Eclipsing 2 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 1000 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 multi-dimensional 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.

Thanks, Joe. The transaction market has been relatively quiet to start the year as potential sellers feel out the macro environment, higher interest rates, and the spread between buyer and seller expectations. That said, we have closed or are under contract to acquire nearly 200 million right on track for our 750 million outlook for the year. The vast majority of our acquisitions this year have been done off market quietly. More recently, we've been encouraged by an increase in inbounds which are primarily small to medium sized portfolios. We're in a great position to acquire today given our cost and access to capital advantages paired with our industry-leading NOI margins. Now on to financial performance. As Joe mentioned, we started the year strong, reporting core FFO of $4.08 for the quarter, representing 16.2% growth over the first quarter of 22, excluding the contribution from PSB. Looking at the components, in the same store, our revenue increased 9.8% compared to the first quarter of 22. We drove strong move in volumes of 13% during the quarter heading into our peak leasing season. And the existing tenant base remained strong with length of stays sitting at records. Same store cost of operations were up 5.6%, leading to total net operating income for the same store pool of stabilized properties growing 11.2% for the quarter. In addition to the same store, the lease up in performance of the recently acquired and developed facilities remained a standout in the quarter growing 29% compared to last year. Shifting to the outlook, we lifted our outlook for the year driven by increasing our same store revenue assumptions. While the macro environment remains uncertain, performance to date has been encouraging. We're set up well heading into the second quarter. Last but not least, our capital and liquidity position remains rock solid. Our net leverage of 3.3 times combined with 700 million of cash on hand at quarter end puts us in a very strong position for capital allocation as we move through the year. Now I'll turn it back to Joe.

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.

At this time, if you would like to ask a question, please press the star and one on your touchtone phone. You may remove yourself from the queue at any time by pressing star and two. Once again, that is star and one if you would like to ask a question. I'm going to take our first question from Juan Siberia with BMO Capital Markets.

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. Some of your peers have talked to some softness in March or April, depending on their market exposures. I'm just curious what you guys are seeing across your platform.

Yeah, thanks for the question, Juan. As we move through the quarter, and you could hear it in the prepared remarks, we saw continued strength in move-in volumes and interest into our system. As we move through March and into April, that trend continued. I wouldn't characterize March as weak, but I would characterize April as strong. We've seen accelerating move-in volume growth as we move through what was a strong March and into a stronger April. one of the things you highlighted there was existing customer sensitivity to price. And I'd also note that we haven't seen anything concerning there. Price sensitivity has been very in line with our expectations. And so against that backdrop, seeing good move-in volumes, which is encouraging in particular as we head into the next several months.

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 augmented growth either in the same store or non-same store pool.

So, yeah, the step back one, you know, the program's been, you know, quite well received by both customers, our employees, and Now that we're at a point where we're actually getting to full market completion in several of our key markets as we finish up and round out the program over the next couple of years, we're actually seeing very good response and an overall lift just to, again, the image and the The power of the brand, particularly where we've got meaningful scale and many, many markets. So we continue to track and see the benefits from that. It's continuing to enhance our presence market to market. And with that, we continue to be very excited about getting the program completed. The team's done a very nice job figuring out any and all ways to optimize the amount of volume. We're actually going to pull it in plus or minus a year earlier than we intended to. And with that, you know, we'll be in a very good position nationally to have elevated the crisp and enhanced brand attributes that play well in many parts of our business.

I appreciate the time. Thank you.

Thank you. Thanks a lot.

We will take our next question from Michael Goldsmith with UBS.

Good afternoon. Thanks a lot for taking my question. My first question is on the guidance aspect. You brought up the low end. Is that a reflection of the trends that you've already experienced in the first quarter? Or the low end of your range was based on a full recession scenario. Is the increasing guidance more reflective of that 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.

Sure. Thanks for that question, Michael. I would characterize the first quarter as a strong quarter, and that is really what's leading to the lift in the low end of that revenue assumption component. And so we've talked to the strength in the first quarter. You're highlighting how we characterized the wide range of potential outcomes embedded within our outlook for the year. There's still certainly macro uncertainty in the back half of the year. That hasn't changed, but performance to date has been quite encouraging, which is leading to the increase in the outlook for the year.

And my follow-up question is about the strength and the sustainability of the L.A. market. Seems to run a lot of growth. It was up 20% in the quarter. added 300 basis points to the overall number. Presumably, this is reflecting the rate restrictions that were lifted in February of 2022, which you lapped during the quarter. But is there kind of like a second year of growth coming from the L.A. market, or have you kind of used up all the game there and the game should be more modest going forward? Thanks.

Yeah, Michael, you know, first of all, LA being our largest market, we've been very pleased by the performance we've been able to achieve over the last year or so to your point where, you know, the owner's restrictions have been lifted. But it is also a market where we have a commanding presence. We've got very good inherent demand. We've got very good occupancies and very little new competitive product coming literally to any of the the submarkets that we're competing in. So the inherent demand in the market is quite good. We think we've got, you know, again, some good traction ahead of us, you know, certainly going into, you know, the rest of 2023. And we'll continue to see where we go from there. But we've been very pleased by the performance of that portfolio. It is one of the markets that we, you know, to go back to my comment about property tomorrow, we, you know, we put about $75 million into that portfolio to lift it from a brand awareness standpoint. finished that a little over a year and a half ago. And again, good timing and tie to that being that much more prominent in the market. And one of the ways we measure the receptivity of that too is net promoter scores. Again, getting very good reaction from customers and the brand itself is playing through quite well. So with that good demand and good continued performance.

Thank you very much.

Thank you.

We'll take our next question from Smead Rose with Citi. Your line is open.

Hi, thank you. You mentioned the almost 13% move-in volume across the first quarter, but move-out volume was lower, but kind of almost kept pace with the move-in volume. I was just wondering if you saw similar trends in April as well.

That's a great question, Smead. So one of the things that took place during the quarter was we did gain occupancy as you'd 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 enclosing the year-over-year occupancy gap on an incremental basis. So, again, encouraging trends here as we head into the peak leasing season.

Thanks. And then I noticed that the late charges, the pace of growth picked up at a faster pace on its rental income. I'm just wondering if there's anything kind of to read into that and have you seen, you know, an uptick in kind of non-payments or anything, you know, that would suggest some customers are under economic duress?

Sure. Yeah, 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 multi-year time period, we're coming off of really, really low delinquency time periods over the last several years and remain well below 2019 levels of 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.

Thank you.

We'll take our next question from Todd Thomas with KeyBank Capital Markets.

Hi, thanks. Good morning out there. First question just related to... investments, Tom, you know, the balance sheet's 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?

Sure. So we have started to see or started to receive more inbounds more recently. And I do think that that's healthy. And as you know, Todd, it's traditional to have a busier second half for storage transaction volumes than the first half. And we're encouraged to start to see that inbound activity. And we suspect it is going to lead to a pickup in volume as we move into the second half this year. And in terms of valuation, as you think about the assets and where things have traded, transaction volumes have been relatively light to start the year. So I wouldn't point to a significant amount of data for us to sit here and say that cap rates are at X or Y with significant precision. We're continuing to find good value in many of the assets and are closing that buyer and seller gap in many instances, but it remains wide in others. And so we're still working through that and anticipate to work through that through the rest of the year, given what's played out with interest rates and the macro environment. To put some numbers on it, I think on the last call, we said the cap rates had moved up about 100 to 125 basis points from the lows. And I would say we haven't seen anything over the last three months that would have us direct you any differently than that.

Yeah, I might add just a little bit more relative to the complexion of the activity so far. So, you know, Tom mentioned that, you know, we've been doing a number of deals off market. So, as always, we are looking for those kinds of opportunities as well. There are still owners out there that are looking for an efficient, clean transaction. The average occupancy of the The $186 million that we've done so far has been about 50%. So thematically, very similar objective on our part where and if we can acquire properties that have upside once we put them on our platform, that's going to make sense relative to the ultimate yields that we're likely to achieve from those assets. So we're confident we're going to continue to see those kind of opportunities going into the rest of the year.

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?

Okay, so, yeah, a couple of questions or more on that, you know, in that statement. So, first of all, from an international standpoint, I would say, you know, consistent with what we've spoken to for some time, which is, you know, we're well equipped to consider and evaluate, you know, outside border opportunities. We continue to do that. Nothing to speak to as we, you know, are here today. Um, but again, that's, you know, part of the, the overall mining that we're doing, uh, both inside and outside borders. But, um, you know, we'll, we'll see how that plays out over time. Clearly there's been far more, um, in, in, um, border opportunities, you know, over the last three or four years. Um, and you know, maybe to a tie to another part of your question is the fact that part of the reason for that is the amount of development that's coming to the cycle. has been done by owners that have no intention of being long-term holders of those assets. So that continues to be a good breeding ground for us to find deals. I'll let Tom talk about thoughts around going into any kind of lending platform, et cetera.

Well, yeah, I'd maybe take a step back and comment on your question around the lending environment, because I do think stepping back, the lending environment has 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'd 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 and is part of our wheelhouse as we move forward.

All right. Thank you.