The operator welcomes participants to the Public Storage Third Quarter 2023 Earnings Call and introduces the host, Ryan Burke. Burke reminds listeners that certain matters discussed during the call may constitute forward-looking statements and provides a reconciliation to GAAP of non-GAAP financial measures. Joe Russell and Tom Boyle will discuss highlights for Q3 and open the call for questions. The team at Public Storage is successfully navigating a more competitive environment and has raised their outlook for the remainder of 2023. New move-in customer demand for the sector has decreased due to rising home mortgage rates.

The company has seen an increase in demand from new renters, who have proven to be good customers in terms of length of stay. The company's team, technologies, and analytics help determine the best marketing, promotions, and rental rates. The company's digital and operating model transformation has improved the customer experience and financial profile. They have acquired over $2.6 billion worth of properties this year, including the Simply Self Storage portfolio.

In the third quarter, Public Storage welcomed over 250 new associates and 90,000 customers to their platform. They are ahead of schedule on rebranding their properties and have a pipeline of $1 billion in development. Due to a sharp increase in interest rates, there have been fewer deals in the acquisition market, but Public Storage is confident that seller expectations will adjust. In the third quarter, they reported a core FFO of $4.33 per share, representing a 5.6% growth year-over-year. Same-store revenues increased 2.5% and same-store cost of operations were up 2.8%, leading to a 2.4% stabilized same-store NOI growth with an industry leading operating margin of 80%.

The company's largest market, Los Angeles, has shown steady growth, with a 6% increase in NOI due to high demand and limited supply. Recently acquired and developed properties have also performed well, contributing to FFO growth. The company has raised its core FFO range and has a strong capital and liquidity position. However, the guidance for the fourth quarter suggests a deceleration in same-store revenue and NOI growth, with both expected to turn negative. The company attributes this to a competitive environment for new move-ins, which has continued into October.

The company and the industry are responding to lower rental rates with promotions and advertising, but there has been good move-in volume growth and existing tenants are staying longer. The company's outlook assumes a decline in move-in rents and occupancy, with the high-end of the range nearly closing the gap to last year's rates. In October, move-in rental rates have declined by 18%, but there has been a nearly 9% increase in volume. Existing customers are performing well, with move-outs down and the occupancy gap improving to 60 basis points.

The speaker responds to a question about how customer behavior and cost to replace are affecting their existing customer rate increases. They also discuss their guidance philosophy and how they have been able to hold their guidance flat throughout the year. They lifted the lower and higher end of their guidance range this quarter and have been encouraged by the pathways they have executed upon.

The speaker discusses their use of guideposts to frame their outlook and expresses pleasant surprise at the strong third quarter GDP print. They also mention that existing customers have shown consistent behavior and there is no emerging stress in the economy. In response to a question about the transaction market, the speaker explains that they are being cautious about changes in cost of capital and are having high levels of dialogue with owners. They believe the bid-ask spread is widening.

The speaker discusses how different entities have pressure points that may not be tied to the actual performance of an asset or portfolio, but rather to capital events and the changing environment. They have seen a migration and realization that the environment has changed, leading to low trading volume. However, the speaker's company is well-positioned to transact in this environment due to their available capital and ability to act quickly. The speaker also clarifies that move-in rents have decreased by 18% compared to the same period last year, and the spread between move-in and move-out rents has widened in Q3.

Steve asks Tom Boyle about his expectations for Q4 and the first half of 2024. Tom clarifies that he was speaking about a year-over-year metric and discusses the difference between move-in and move-out rates. He explains that they don't manage that number specifically, but instead use predictive analytics to manage existing tenant rates and dynamically manage rental rates. Tom also mentions that the gap between move-in and move-out rates is currently at 26%, which is within their usual range. He agrees that the gap is likely to increase in the fourth quarter and first quarter based on assumptions about move-in rents. Spenser Allaway then asks a question.

The speaker provides some insight into the cap rates for recent acquisitions and those under contract in the fourth quarter. They mention a shift in the environment, with cap rates trending up to a 6 or 7 handle. They also mention using this trend to find appropriately priced assets for the portfolio. The speaker then gives an update on the integration of their new tenant insurance platform, called Savvy, which will be launched next month. This program is designed to offer tenant insurance to other operators in the industry.

The company has been working to simplify their tenant insurance process and is planning to launch a new digital option in November. They believe this could be a large market opportunity and a way to build relationships with other owners in the industry. The pace of increases in ECR has slowed down throughout the year due to rising costs, but they may continue in the future.

The speaker discusses the current state of the market, noting that there has been a shift from a benefit to replace to a cost to replace. They also mention that new move-in volume has been supportive and will benefit the back half of 2023 and 2024. They then shift to discussing the Los Angeles market, stating that it is the company's largest market and has shown strong performance due to its location and portfolio. They note that the market has moved past the previous rental restrictions and is currently experiencing healthy levels of customer activity.

The speaker discusses the company's portfolio and how they have invested in their assets to improve curb appeal and other features through their Property of Tomorrow program. They believe the market is doing well and will continue to perform well. The occupancy percentage is currently above 93%, but they expect it to be in the 92s by the end of the day. The speaker is then asked about the equilibrium of the market and how it will affect new rates, to which they respond that they are not too concerned as their volumes are strong. They expected the move-in environment to be more competitive this year.

The speaker discusses the current state of the housing market and its impact on the self-storage industry. They mention that record high mortgage rates have led to a slowdown in demand for self-storage, but there is still healthy demand from renters. The speaker also mentions that there has been an overcorrection in moving rents, leading to lower-than-expected revenue. They highlight the importance of marketing, promotions, and rental rates in managing the business.

The speaker discusses the tools and strategies used to optimize property utility and customer demand. They also mention their success in using these tools to drive top-of-funnel demand and conversion rates. They clarify that occupancy is down 60 basis points on average for the month of October. In addition, they mention that they have taken share from other operators due to their strong move-in volumes.

Tom Boyle discusses the factors that may affect the stabilization of move-in rents in the public storage industry. He mentions that although the industry is currently experiencing a decline in moving rents, there are factors such as the housing market and the longer length of stays of renters that may contribute to a stabilization of rents in 2024 and 2025. Additionally, he notes that the current decline in existing home sales is consistent with previous periods of economic downturn and is not likely to decrease further.

The company has seen longer length of stays for move-ins this year, which will benefit them in 2024 and 2025. The development environment continues to be challenging, with construction costs and city processes causing delays and higher costs. This will lead to lower levels of deliveries in 2024 and 2025, which will help stabilize rental rates in some markets. The upcoming busy season in the spring will also be helpful, as there will be more demand and potential for higher rental rates. The development and expansion pipeline decreased in the quarter, which may be due to the challenging environment and the company's return requirements for starting new projects.

Joe Russell discusses the company's focus on development and redevelopment opportunities, which they see as a strong opportunity for return on investment. He notes that the current lending environment for construction loans is more constrained, giving them an advantage in sourcing land sites and competing for properties. While there was a slight reduction in the past quarter due to deliveries, the team is still working hard to continue their development plans. Russell emphasizes the importance of having strong fortitude and leveraging their skills and knowledge in different markets to succeed in the long game of development.

The company is constantly looking for new opportunities for development and redevelopment across the country. They expect lower deliveries in the industry in 2024 and 2025 due to difficulties in getting projects approved and funded. The pool of assets predicted to deliver is likely shrinking by at least 10% annually. The company has adjusted their delivery level estimate to around $3 billion in assets for 2022 to 2023, but this may continue to decrease due to constraints in the lending environment.

The speaker notes that the industry as a whole is not currently burdened by overdeliveries, with the exception of Las Vegas, Phoenix, and Portland. They also mention that renters tend to have longer lengths of stay, with an average of 35-36 months. The stable and long-term tenants continue to be the most important component of the tenant base. The speaker also discusses how higher replacement costs have impacted their ability to push through ECRIs.

Tom Boyle states that the cost to replace new tenants is lower than in-place customers, allowing for higher rent increases. Marketing expenses have increased this quarter, but the company has historically seen good returns on their marketing spend and will continue to manage costs effectively.

The company is expecting higher expenses due to increased marketing spend, but they believe it will result in positive returns. They are also seeing success in their strategic initiatives, such as reducing payroll hours and implementing solar power programs. The current operating environment has not affected their plans to continue their existing customer base program.

The speaker discusses the stability of the company's customer base and clarifies that they send price increases throughout the year, not just during the holiday season. They then discuss the impact of holding onto cash prior to the Simply transaction and how it led to higher interest income and expense for the quarter. They mention that this will not be recurring in the fourth quarter.

During a conference call, Tom Boyle and Joe Russell of a company called Morgan Stanley discuss the potential for same-store revenue to go negative in the future. They mention that the company has already seen a decline in move-in rates and rents this year, and that this trend is likely to continue into 2024. They also note that this decline in demand and rental rates has been ongoing since 2023.

The speaker discusses the reasons for the easy comparisons in the second half of 2023 and how the performance of existing tenants has helped with rental rate comp dynamics. They also mention that the outlook for the fourth quarter has improved and will be providing more detail in February. The speaker also addresses the question about how much of the portfolio is competing with new supply, stating that it varies by market and is less than 20% in most cases.

The speaker discusses the recent acquisition of the Simply Storage portfolio, which was efficiently integrated into the company's existing operations. The portfolio spans 18 different states and the company was able to successfully integrate 90,000 customers and train 250 new employees. The company's strong integration techniques and data integration tools contributed to the success of the acquisition.

The company has been utilizing training synergy and adaptability to drive margins and has seen no shortfalls. The portfolio is holding up well with strong occupancy and the transition to the company's platform and branding is going smoothly. The company is excited about the potential of the portfolio and is using revenue management tools to optimize demand. The expected lower deliveries in 2024 and 2025 indicate a slowdown in development, which has been a gradual transition over the years.

The company has been conducting sales around holidays for years, with good results. They recently ran a Halloween promotion and plan to continue with similar promotions in the future. They have seen good traction from these sales, and have been offering discounts on select units in their markets. They also did a Labor Day sale this year.

The company is currently running a fall sale on their website and it has been successful in driving customer traffic and conversions. They have not used this type of sale in the past two years due to high occupancy levels, but are now utilizing it again. The company plans to refinance their U.S. and euro notes coming due next year, but the impact will depend on market conditions at the time. The company has a well-laddered maturity profile for their financing tools.

During the Q&A portion of the conference call, an analyst asked about the company's refinancing plans and the percentage of the capital structure coming due in the next few years. The CEO responded that there is only a small amount of refinancing needed in the upcoming years and that the company is aiming for a stabilized yield of 6-7% when making investments. Another analyst asked for clarification on the cap rates mentioned, and the CEO explained that they are looking for a stabilized yield and are comfortable taking on some risk in order to achieve their desired yield. The call concluded with the CEO thanking everyone for participating and wishing them a happy Halloween.

This summary was generated with AI and may contain some inaccuracies.