Public Storage — 2024 Q1

Sure, Samir. Yes, I would put April in the same context of sequential improvement that we saw through the first quarter, where again, we've seen overall expected top-of-funnel demand, expected move-in activity. We've been pleased by that. It's matching our expectations as Tom and I have outlined, the way the year is likely to play out. So no surprises. And I would say, a validation of the reacceleration in a number of markets that I pointed to in my opening comments.

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

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

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

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

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

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

Yes. That's a good question, Eric. So we've run these sales consistently over time. And last year, we ran a number of different time periods. And in the month of -- tail end of February and beginning of March, we ran one as well. The primary reason is we had some inventory that we felt like we can move. And so the different points of the year, we'll try different promotional tactics, sales tactics to drive customer activity, pairing that with advertising and the like. We tend to see good traction there. We saw good traction during the winter season here, as we talked about, and we'll likely use -- continue to use promotional activity, sale activity and the like through the year this year, not dissimilar to what we did last year.

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

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

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

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

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

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

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

Yes, that's a great question. So as you highlighted, operating expense for the quarter was above our full year outlook. And so we are anticipating that overall operating expense trends will improve. And so you've hit on a couple of the drivers of that, and I'll elaborate on a couple of others. The first one, property tax, we still are anticipating property tax to be plus or minus 5% year-over-year growth for the year. The first quarter did have some reassessments that were earlier in the year this year that was kind of onetime related.

Yes. I mean we take clearly a multiyear view of that hurdle rate. It hasn't changed even out of some of the pressure points that we've spoken to. So we continue to see the opportunity to find very good land sites, assets that will, from a competitive standpoint, not be burdened relative to any undue risk. That's another thing that we factor in with the amount of data and the knowledge we have submarket to submarket that gives us the level of confidence we can get to that hurdle, if not higher.

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

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

Yes, Spenser. I would say in light fashion, no stress points or any other headwinds that we're seeing from that type of customer. There's obviously a very broad range of user types, different industries, some are product-oriented, some are service-oriented, some are very specific to certain locations. But I wouldn't, in any way, characterize we're seeing any elevated level of stress, actually, still very good, consistent use of storage, particularly, as I mentioned, there may be certain factors that pull a commercial customer configuration into one property at a higher or lower level than another. But again, nothing that we've seen that indicates there's an elevated level of stress or concern. As the economy continues to be quite good, we're seeing actually still good demand factors coming from business users overall.

Yes, Spenser, it's a good question. And maybe a follow-up to Michael's question on how we're managing pricing, promotion, advertising. All 3 are being utilized really at a local level to drive a combination of either traffic in the form of advertising or conversion rates related to pricing and promotion activity. And advertising is something that we can use either nationally or what we typically do is much more locally to support top-of-funnel demand in local markets where we're getting both a combination of good return on that ad spend but also supporting properties that would benefit from incremental top-of-funnel demand. So it varies pretty widely.

It's Daniel Tricarico on for Nick. Following up on some of the earlier questions in your commentary, Tom, and sorry to harp on this. I know you've talked about ECRIs being a combination of price sensitivity and cost to replace, the latter now increasingly elevated today in relation to the discounted pricing strategy you're using. So my question is, how do you think about the magnitude and velocity for which move-in rate needs to improve so that the cost to replace or in theory, the roll-down effect is offset and revenue growth can reaccelerate again? Or is there another way I should be thinking about it?

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

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

Yes, sure. So I anticipate that overall demand contribution this year is pretty similar to last year. And the way we've bucketed the contribution to move-ins last year was about 15%, 1-5 percent of customers that are coming to us because of an existing home sale related move and that was down from about 20% in a more typical year. So a relatively modest contribution. Customers that are moving and they're renters, either single-family or multifamily renters, tend to make up a larger percentage, call it, between 40%, 45% of the tenant base.

Sure. Yes. So to again, point to 2024 guidance on acquisitions, we've pegged $500 million. Obviously, at this point in the year, it's going to be more back ended. But some of the commentary, Juan, earlier in the call relative to what we're likely to see with a range of different motivations from sellers, we've got, I think, good perception into the ways that we can get to that kind of acquisition volume as we sit here today. The Canada question, to your point around the Hughes family and their ownership and platform in that market, it does not impede our ability to go into that market itself. So there are no conflicts on either side for either party to continue to look at a range of investments in that market. So with that, no commentary relative to what the future may play out, but there are no constraints on our part.

Yes, I can speak to that in certainly our own platform. So the goals that we pointed to in our Investor Day presentation or achieved plus or minus a couple of years ago, so we were very pleased with the opportunity that we saw to optimize labor hours with many of the tools that supported that, particularly tied to our digital platform. What has played out from, again, the last 2 years through today and then even going forward, there's actually more to achieve. That comes from the continued improvement in our operating model, the digital tools that we're using not only for one type of day-to-day demand that comes in and out of a property, which is tied to move-in activity, but its overall customer support. We've rolled out a PS app that now we have about 1.5 million customers tied to.

Yes, that's a great question. So Southern California continues to be a strong market for us, both Los Angeles as well as San Diego. During the quarter, we were impacted by some storm activity and state of emergency restrictions that impacted the quarter's financial performance for a couple of months. But those markets continue to see strong customer activity, and we have confidence in those markets heading through the rest of the year.

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

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

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

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

I did, Ki Bin.

I'd say on a year-over-year basis, it's been pretty consistent, touch better than last year, which is what we'd anticipate. And obviously, we're anticipating that likely to continue here through the peak leasing season. We'll update you on that as we move through the next 3 months or so.

No, it's going to go to 0. Probably some of the cash payments on the cash flow statement will continue into the first quarter or so of next year just as we wrap up the program and make our final payments. But ultimately, that will go to 0.

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

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

Sure, Mike. I think there's a number of factors. You rattle off some of them that are contributing to it. We listed a series of markets. Each market is a little bit different. Certainly, supply plays a component in some of those markets, meaning a lack of supply, higher barriers to entry as Joe spoke to on certain of those markets. But I'd also highlight stronger demand trends, better move-in rent trends, better move-out activity. It's really a handful of different drivers that are unique to each market.

Yes. I would say, Brendan, on a macro basis, we still see a very healthy consumer base. We've got plus or minus about 2 million customers. So full spectrum of the economy at large and not really seeing any undue pressure market by market or again, that would indicate that there's some elevated amount of risk that's coming from relative to stress points, et cetera. I think you're hearing a fair amount of commentary even now that we're well into 2024 around consumer balance sheets, employment levels are quite strong. I think this is part of the angst that the Fed is having relative to their timing relative to tapering, et cetera. So the employment and behavior from consumers at large continues to be quite good, and we're very pleased by that, obviously.

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

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