The operator welcomes participants to the Public Storage Second Quarter 2024 Earnings Conference Call. The call will be recorded and a question-and-answer session will follow the presentation. The host, Ryan Burke, introduces himself and the other speakers, Joe Russell and Tom Boyle. He reminds listeners that certain statements may be considered forward-looking and that the company will not update them if they become untrue. The call will also include a reconciliation of non-GAAP financial measures. Joe Russell and Tom Boyle will discuss the company's performance and then open up for Q&A. The company's second quarter performance exceeded expectations for existing customers, but fell short on rents charged to new move-in customers due to competitive pricing dynamics.

The company has adjusted its guidance ranges due to more competitive market conditions. They are encouraged by positive momentum in their business, including new customer activity and strong occupancy trends. The non-same-store pool is performing well and several markets are seeing revenue growth improvement. The development of new competitive supply is slowing down and the acquisition market is showing signs of activity. The company also repurchased $200 million in shares during the quarter. Second quarter core FFO was $4.23 per share, a 1.2% decline from the same period in 2023. Revenues for the same-store portfolio declined by 1% due to a mix of lower occupancy and rents.

The decline in rent was due to lower market move-in rents, but was partially offset by positive net move-ins. Operating costs were up, but were offset by reduced payroll and utility costs. The same-store pool saw a decline in net operating income, but the non-same-store pool continues to perform well. The company has revised their outlook for 2024, with lower move-in rents and occupancy, and adjusted their non-same-store NOI due to timing of acquisitions and lower move-in rents.

The company is expecting strong growth in their non-same-store pool, with an additional $110 million of incremental NOI in 2025 and beyond. This has led to a revision of their core FFO guidance, with a 1% reduction compared to their previous guidance range. They plan to deliver $450 million in new development activity this year and are well-positioned for potential acquisition opportunities. The company's capital and liquidity position remains strong, with a leverage of 3.9 times net debt and preferred to EBITDA. The company is confident in their trajectory for the year and expects stabilization in 2024. During the Q&A session, they discussed the down 12% guidance change and the factors that could potentially improve or worsen this outlook.

The speaker discusses the positive momentum in markets like Mid-Atlantic, Seattle, and San Francisco, with improvements in move-in rents. However, markets that were previously high flyers are experiencing tougher comps and have slower rent growth. Overall, there has been a modest improvement in move-in rents from the first quarter to the second quarter, but the pace has been slower than expected. The company has also recalibrated their expectations for the second half of the year. On the topic of capital allocation, the speaker mentions that share buybacks have increased due to a lack of acquisition opportunities. They then discuss the current state of the acquisition market and how they weigh buybacks against development spending and acquisitions.

The speaker discusses recent acquisition opportunities and potential activity in the second half of the year. They also mention their confidence in meeting their projected numbers. They then address their stock buyback strategy and mention their current capital and potential future plans. The next speaker thanks them and the call moves on to the next question.

Tom Boyle and Juan Sanabria discuss the revised same-store revenue range and potential exit run rate for 2024 and 2025. They are optimistic about the future demand growth and declining new supply, but are unable to give specific numbers for 2025. They also mention the need for more transaction activity to determine where cap rates are trending.

The speaker discusses the progression of cap rate change over the past two years, noting that it has increased from 4% to 6%. They mention the need for stability in trading volume and the value creation they can extract from assets. They feel confident in their ability to deploy capital and will pursue opportunities that make sense based on value creation. The speaker also provides updates on July occupancy and move-in rates, stating that rents are down 12% and occupancy has decreased by 40 basis points. They also mention that there has been a slight decrease in ECRI and inquire about any potential pushback from tenants.

Tom Boyle, CEO of ECRIs, says that the company is encouraged by the behavior of existing tenants and their consistent price sensitivity. They have seen a trend of strong performance from these tenants, who were move-in customers in the past year or two. The company has also seen a high volume of move-ins in the first half of this year, which has contributed to revenue growth. This outlook has not changed from their original forecast, and they are confident in their customer base. In response to a question from Jeff Spector of Bank of America, Joe Russell, CFO of ECRIs, says that they closely monitor the demand factors that bring customers to them, with housing being a key driver. Overall, demand for move-ins has remained strong.

The need for more space, whether as an owner or renter, has remained a top reason for using self-storage. This was especially evident during the pandemic, but even now, with the pandemic behind us, the demand for more space at home remains strong due to affordability factors. While there has been a decrease in home sale activity, there has been an increase in renter activity, which has been beneficial for the self-storage industry. The acquisition opportunity has remained vibrant and the behavior of existing customers has been stable. There has been a decrease in new development and supply, with national development deliveries remaining around 2%. This is lower than previous cycles and there is no indication of a significant increase in development activity in the near future.

The company is closely monitoring certain markets, such as the West Coast of Florida, Phoenix, and Las Vegas, where there is a high level of activity compared to development. However, overall, there is a low level of development activity due to factors such as cost of capital and entitlements. The company's own development team is taking advantage of this and plans to have a record level of development activity in 2024, with potential for more in the following years. During the quarter, property taxes increased by 3.9% and the company expects a 5% increase for the year. The company has also seen cost savings from digital tenant onboarding, but there is still room for improvement.

The company has been working on assessments to catch up with increases in NOI and property values. They have also implemented a digital leasing platform which has resulted in a reduction in property hours and optimization of staffing levels. This has also led to a decrease in utilities expenses due to their solar power initiatives. The company plans to continue this initiative and is seeing positive results in both expenses and environmental impact.

Tom Boyle and Joe Russell from Public Storage are discussing the impact of changes in guidance on pricing for new tenants. They attribute the more competitive environment to a combination of factors, including increased advertising and a decline in demand for storage, as seen through Google keyword search volumes. However, they note that the decline in demand has stabilized in recent months.

The market rent growth has decreased by 14% in the second quarter and 12% in July. There was some improvement in June, but it was not significant. The company expects a moderation in the decline for the rest of the year, but they have recalibrated their expectations based on the performance in June and July. It is uncertain how quickly things will improve once demand starts to come back, as it will depend on how quickly the rest of the industry adjusts their rates.

The company has provided guidance for the remainder of the year, but they cannot predict how private operators will react. They have seen improvements in occupancy, but are anticipating a decline in the fall. The $110 million of incremental non-same-store NOI does not require additional capital.

The speaker discusses the expected in-place NOI for 2024 and mentions that $110 million will be added to it. They also mention that no additional capital will be required and any upside will only be incremental. The questioner asks if this will affect the same-store pool in 2025, to which the speaker clarifies that the upside will likely remain in the non-same-store pool and stabilized properties will eventually cycle into the same-store pool. The next question is about the impact of consumer behavior on the company's outlook, to which the speaker responds that they have not seen any significant changes or risks in payment patterns or delinquency.

During a conference call, Joe Russell discussed the third-party management platform and its growth over the past few quarters. Currently, there are 375 assets in the program, with 260 of them open and 115 in various stages of development. The company has added 17 assets this quarter and over 60 year-to-date. The program has been beneficial for both clients and the company, and they are seeing good traction and activity going into the second half of the year. During a Q&A session, Todd Thomas asked about the impact of the softer demand environment and lack of pricing power on the company's revised revenue guidance, to which Tom responded that the contribution to revenue growth has not changed.

Tom Boyle discusses the two main components of the existing customer rent increase program: customer price sensitivity and the cost to replace tenants. The company is not specifically focused on preserving occupancy, but as the cost to replace tenants increases, the frequency and magnitude of rent increases may moderate. Additionally, there has been an increase in the number of tenants eligible for the program, which has been a positive offset in 2024. There is no deliberate effort to protect occupancy, but rather an optimization of rents for existing customers who value their units.

The speaker, Tom Boyle, is responding to a question about the company's marketing and promotions spending compared to last year. He explains that the company has a process for board composition and has recently appointed Maria Hawthorne as a new board member. When asked about the marketing and promotions spending, he clarifies that it is a combination of promotions and marketing and that they have a strong process for managing both. He also mentions that the company has a good understanding of the demand and the effectiveness of their spending.

The company has been using marketing and promotional activities to attract new customers and maintain their move-in rents. They have seen good returns from their increased marketing spend and will continue to use it in the future. Despite some markets being below 2019 levels, overall the company's rents are in a similar territory to 2019.

The speaker discusses how some markets have overcorrected in terms of move-in rents, and notes that rental prices have remained relatively flat since 2019 despite a 20% cumulative inflation. They suggest that this may be due to a sharp shift in demand and tough comparisons in the coming years, leading to competitive pricing among operators. However, they also mention that current move-in rents are more affordable than in the past, indicating potential for growth in the future.

The speaker, Tom Boyle, discusses changes in length of stay for customers in the company's in-place space. He notes that there has been a moderation in length of stay since 2020 and that it continues to be longer than in 2019. He also mentions that longer-term tenants tend to be stickier and are more comfortable using their space.

Jonathan Hughes from Raymond James asked a question about the frequency of vacate activity among Public Storage customers. Tom Boyle, from Public Storage, responded that the vacate frequency is less among customers who have been with the company for a longer period of time, as they have goods that are stored for a longer time compared to apartment renters who use the space for a shorter period of time. When asked about the assumption for moving rents in the second half of the year, Boyle stated that the company expects a normal amount of seasonality, but acknowledges that the past few years have not been "normal." He also mentioned that last year was a very competitive move-in environment, resulting in a decline in moving rents, but the company's assumptions for the second half of the year do not include the same level of decline.

Tom Boyle, responding to a question from Jonathan Hughes, discussed the predictive revenue growth metric and its efficacy in predicting future revenue growth. He pointed to the company's annual outlook and its implied 1.5% decline in same-store revenue for the second half of the year. He also expressed confidence in improving trends in many markets leading to stabilization and reacceleration. Hughes then asked about the slowing revenue growth premium in Los Angeles, to which Boyle responded by mentioning tough comps and potential affordability and supply challenges in the market.

The speaker, Joe Russell, responds to a question about the economic slowdown and revenue growth in the Los Angeles market. He explains that the market is stable and there is no significant impact from new supply or changes in demand. He also mentions that the high cost of living in the area supports the demand for storage. In terms of move-in rates, Tom Boyle clarifies that the guidance assumes a mid-single digit decline by the end of the year, which could be influenced by improvements in spot rates or other factors.

The speaker discusses rental rates and how they are expected to decline in the fourth quarter compared to the current peak season. They also mention that last year's fourth quarter experienced a significant decline in move-in rents, but this year's decline is expected to be more modest. The decline is primarily due to the comp dynamic and not necessarily an improvement in the overall market. The speaker also mentions that leasing activity has been strong across the non-same-store pool.

The company is seeing a strong lease-up pace in their development and redevelopment projects, which is being helped by the lack of new supply in the market. The larger portfolios they have acquired have also met or exceeded their underwriting expectations. The stabilization for readouts and new developments is in line with their historic averages, which typically takes three to four years.

The speaker discusses continued growth over the next few years, with potential fluctuations due to market factors. They emphasize a three to four-year time period for growth and conclude the call.

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