Public Storage

into the question queue. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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.

Thank you, Rob. Hello, everyone. Thank you for joining us for our second 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, July 31st, 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 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, publicstorage.com. We do ask that you initially limit yourselves to two questions. Of course, after that, feel free to jump in queue with more. With that, I'll turn the call over to Joe.

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.

Thanks, Joe. We reported second 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% experience during the first quarter. Looking at the same store portfolio of stabilized properties, revenues declined 1% compared to the second quarter 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. 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 second quarter 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. With this pool at 83% occupancy and comprising 22% of our total square footage, it will be an engine of growth for a remainder of this year and into the future, which is a good segue into our updated outlook for 24. We've 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. 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 million 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 million of incremental NOI in 2025 and beyond from this pool. 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 million 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. 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&A.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. As a reminder, we ask that you please limit to two questions. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Steve Sakwa with Evercore ISI. Please proceed with your question.

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% that you and Joe sort of spoke about, you know, maybe just talk about, you know, either the market mix or, you know, how you thought about that. And I guess under what economic conditions or housing scenarios, you know, could that possibly get better in the back half of the year? And I guess what are the risks that, excuse me, that down 12% could maybe be worse than you're currently forecasting?

Yeah, sure, Steve. So there's a couple components there. I'll start with the first piece that you highlighted, which is you know, what are we seeing in markets? And, you know, we are seeing continued positive momentum in many of the markets that we've highlighted to date, you know, 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, you know, 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 modest improvement year to date. If you look at the first quarter move-in rents for us, we're 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.

Okay, and maybe just touching on the capital allocation, it was, you know, interesting to see that the share buybacks, and I assume that that's, you know, partly a function of, you know, 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, you know, what are the opportunity sets and, you know, how do you sort of measure away the buybacks against either development spend and or acquisitions?

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 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 a 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.

Thanks.

Thank you. Our next question is from Juan Sanabria with BMO Capital Markets. Please proceed with your question.

Hi, good morning. Just with the revised team 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 at 24 at, just to think about early days and how 25 at least may start.

Yeah, 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, and the second half is down about 1.5%. 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. 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 25 to 27. 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.

Fair enough. And then just to follow up to Steve's question, I'm 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 a commentary on asset pricing, please.

Yeah, I think, first of all, you know, 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 two years or so. Say two plus years ago, we were probably looking at plus or minus 4% handles and it transitioned to five. Today, we're probably looking at six 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. We clearly see the value from our standpoint based on our cost capital to transact, you know, 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, you know, something that's unstabilized that clearly is going to have, you know, 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.

Thank you.

Thank you.

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

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

Yeah, 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.

Okay, thanks for that, Tom. And then in terms of a question on ECRI, what do you see in trends with your tenants? I mean, is there any signs of fatigue or... know pushback that you're you're getting on ecr and i just want to be clear as well on the um the same store guidance change was there any assumptions that were you know changed on ecr or is it all just uh moving rents yeah thanks so we continue to be encouraged by behavior from our existing tenants and 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 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 24 compared to 23. And that, to your point, is unchanged from our original outlook. We continue to be encouraged by that customer base.

All right. Thanks, Tom.

Thanks.

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

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.

Sure, Jeff. Yeah, 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 a very active rationale or active reason to come to self-storage. Clearly, it was surfacing through the pandemic. 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 two 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, et cetera. 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. 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.

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

Yeah, sure. Again, I wouldn't say there's any sea change in the consistent view that we've had on, you know, national development deliveries, meaning, you know, on an increase on an existing stock basis, we're kind of in that mid-2% range or so. So the development activity, that's hitting any particular market's 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. One example might be, for instance, the west coast of Florida. There's quite a bit of activity going on there. You know, 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. So with all that, we basically have a backdrop of very low development activity. On 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's working hard to look for additional opportunities into 25, 26, and 27.

Thank you.

Thanks, Jeff.

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

Hey, just two quick ones. One, just starting off with the expenses, maybe just a little bit more commentary.

both the property taxes as well as sort of the payroll reductions and you know how much has you know being able to get a lot of tenants moving in digitally sort of help with that and how much more is there to go yeah so the first question around property taxes for the quarter about three point nine percent year-to-date up five point six I think our outlook is plus or minus up five percent for the year and 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's 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 a rate of 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 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.

Great. And then my second question was just going to be, you know, going back to sort of the guidance changes on the new tenants pricing. You know, I think when you think about the environment, whether it's, you know, 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? 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.

Yeah, that's a good question, Ron. I think there's a couple 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.

That's it for me. Thanks so much.

Thanks, Ron.

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

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 the most recent sequential improvement and then You know, 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.

Yeah, so a couple components there. June was pretty similar, down about 12%. And so we saw a pretty good improvement from April and May into June and July, but nowhere near the pace or the magnitude of improvement that we were anticipating. And as you get into June and July, you're at the peak of the rents. And so that is 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. In terms of the pace of improvement, we are anticipating moderation in that decline as we move through the second half of the year. But we have recalibrated that based on the June and July performance. And so we're starting from a different place than what we had originally assumed. but for modest improvement here. Got it.

And thanks for that. And then my follow-up question is just like, you know, when things, you know, this might 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, you know, the independents and the privates kind of took their time recutting street rates As street rates move down, like, is there an expectation that, you know, when demand starts to come back, you know, the other players and the rest of the industry will kind of more rapidly bring rate up. 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.

I think that still remained to be seen in terms of the 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.

Thank you very much.

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

Thanks. I just want to touch on occupancy. You mentioned July being down 40 basis points year-over-year. You know, 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?

Yeah, that's a good question. 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 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. 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.

Thank you. And then just for the $110 million 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?

Yeah, that's a good clarification. So that is on the in-place assets. And so as we think about the in-place NOI for 24, you can add that $110 million to 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 thanks and then some of that will become within the same store pool in 2025 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 destabilization, that will remain in our non-same store pool, but the stabilized properties over time will cycle into the same store pool. Perfect. Thank you very much. Thank you.

Our next question is from Keegan Carl with Wolf Research. Please proceed with your question.

Yeah, 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?

Yeah, 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 that's 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 or continue to service 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.

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.

Yeah, sure. So, you know, frankly, we've had a pretty good run for the last few quarters with the improved size and complexion of our third-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 will 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. 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.

Super helpful. Thanks for your time, guys.

You bet. Thank you.

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

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 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 in the 25 when demand might recover?

Okay, there's a lot there, Todd. So maybe 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 speak to is around the cost to replace the tenants. And that component, right, the cost to replace a tenant is influenced by the market move-in 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 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, 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 24 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.

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.

Yeah, and there's more near-term tenants that are in the program. Right, okay.

um that's helpful and then my second question was just around the latest uh board appointment uh maria hawthorne i was just curious um if you could speak to that announcement and the process the board went through to make that decision um you know the psb transaction closed in in 22 so i'm just curious about the timing and the decision to expand the board today yeah sure the um

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's 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 member of the board and look forward to her contributions with the rest of the board as it stands today.

Okay. All right. Thank you.

Thank you.

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

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 given that maybe slightly weaker demand, that wouldn't have had great efficacy to increase it?

Yeah, Keevan, you're highlighting both promotions as well as marketing spend. Let me maybe take the two independent. Those are two of the levers in addition, obviously, to move-in rents. that we are toggling back and forth in a competitive move-in environment. 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 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, that customers are increasingly aware of in our markets, and that efficacy continues today. And so as you look at the spend increase in the second quarter 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 we anticipate that to continue into the second half. On promotional activity, there's a couple 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%. And so just nominally, The discount dollars and promotional dollars associated with giving, for instance, the first month for a dollar is less on a nominal basis year over year, but that continues to be a vibrant tool we're using.

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

Yeah, our rents today are in a similar territory to where they are in 2019, depending on the market. We've 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 overcorrected in terms of move-in rents, and I'd reiterate that as it relates to 2019.

Yeah, 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 first of 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 about the consumer that's changed over that timeframe? Just trying to understand where that demand has abated.

Yeah, 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 in movement in demand, right? We had a sharp move higher and a 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. But overall, I'd say that the shift in demand lower and the tough comps of 21 and 22 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 that 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 a consumer's monthly budget, 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.

Okay, thank you.

Thanks.

As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. One moment, please, while we poll for questions. Our next question comes from Eric Lubchow with Wells Fargo. Please proceed with your question.

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 you know, 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 moving rates?

Yeah, sure, Eric. Stepping back and looking at the last several years, you know, we've spoken a lot around how length of stay is 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 mixed 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 years ago, I maybe was anticipating a more rapid return to quote unquote 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 this 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.

Jake Hamilton, Great appreciate that commentary and just to follow up sorry to harp about moving. Jake Hamilton, 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. Jake Hamilton, Does that assume a relatively normal amount of seasonality from. kind of the peak summer months into the fall and winter. Because I know that from a comp perspective, things do get a lot easier in September and 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.

Yeah, I think that last point is probably the operable one, which is we haven't had a quote unquote 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.

Okay. Thank you. Appreciate it. Thanks, Eric.

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

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 third quarter and combine it with 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 4Q20 when we were coming out of COVID lockdowns. So does that sequential improvement in the the fourth quarter sound like what's embedded in guidance? And if so, what gives you the confidence we'll see that improvement since it is so unique?

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 bit, 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 and metrics, one 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. And as I noted earlier, you know, the second half is implied to be down one and a half percent on same-store revenue specifically. And we do have a confidence in improving trends in many of our markets that is going to lead to stabilization and then ultimately re-acceleration across those markets over time.

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

Yeah, 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 additions of 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. 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, you know, concerning dynamics from new supply. So, you know, the other thing that supports LA over time is it is a high cost of living market, which again supports, you know, the inherent demand for public, you know, 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 all right thanks for the time thank you our next question is from Mike Muller with JP Morgan please proceed with your question yeah hi just a quick follow-up on move-in rates is the guidance an assumption of move-in rates improving to down mid single digits by year end is that being driven um I guess by improvement in the spot rates or just a comp issue or some sort of combination of both?

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 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 very sharp decline.

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

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

Okay. Yeah, I was thinking a little bit more outside of seasonality and the overall environment getting better from that front, but okay.

That was it. Thank you.

Our next question is from Spencer Holloway with Green Street Advisors. Please proceed with your question.

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?

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. 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-seam store pool, but also the dynamics for the industry and the local marketplace of our same-store assets in those marketplaces as well.

Yeah, maybe Spencer, just on a headline portfolio standpoint, if you look at the 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. 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.

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

Yeah, we typically underwrite three to four years to get to a level of stabilization of the earnings profile of the asset. And then, frankly, there's another couple years of continued strong growth from there, depending on the size of the asset, et cetera. There have certainly been time periods where we've seen much faster than that over the last several years in particular. But kind of year in and year out, that's what we're looking for. And obviously three or four years is a long period of time. You're going to have demand and supply drivers within individual markets that are going to shift that for one in particular asset or otherwise. But I'd still point you to that kind of three to four year time period.

Okay, great. Thank you.

Thank you. 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.

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

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