Public Storage (NYSE:PSA) Q1 2023 Earnings Call Transcript

Public Storage (NYSE:PSA) Q1 2023 Earnings Call Transcript May 4, 2023

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Public Storage First Quarter 2023 Earnings Call. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation. It is now my pleasure to turn the floor over to Ryan Burke, Vice President of Investor Relations. Ryan, you may begin.

Ryan Burke: Thank you, Britney. Hello, everyone. Thank you for joining us for our first quarter 2023 earnings call. I’m here with Joe Russell and Tom Boyle. Before we begin, we want to remind you that certain matters discussed during this call may constitute forward-looking statements within the 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, May 4, 2023, and we assume no obligation to update, revise or supplement statements that become untrue because of subsequent events. A reconciliation to GAAP of the non-GAAP financial measures we provide on this call is included in our earnings release.

You can find our press release, supplemental report, SEC reports and an audio replay of this conference call on our website at publicstorage.com. We do ask that you initially keep your questions limited to two. Of course, if you have additional questions, feel free to jump back in queue. With that, I’ll turn the call over to Joe.

Joseph Russell: Thank you, Ryan, and thank you for joining us today. Public Storage had a very good start to 2023. We remain focused on leading the self-storage industry’s digital evolution, transforming our own operating model, and enhancing and growing the portfolio. In the quarter, we achieved new milestones on several of our key initiatives, which included exceeding 60% of customers choosing to move in through our eRental online lease, eclipsing two million downloads of the Public Storage mobile app, reaching 400 properties on our customer demand-driven digital operating platform, installing solar at more than 200 properties putting us on track to complete at least 1,000 property installations within the next three years, completion of over 70% of the property of Tomorrow Enhancement Program, growing NOI by 29% across the 529 acquisition and development properties in our non-same-store pool, and driving the industry’s largest development pipeline to an excess of $1 billion to be delivered over the next 24 months.

We had a strong operating performance in the first quarter, particularly with existing customers performing well and same-store move-in volume up nearly 13%. Length of stays are strong and same-store revenues were up nearly 10% year-over-year. Our exceptionally large non-same store acquisition and development pool now nearly 25% of the overall portfolio continues to outperform as well. Fundamentally, self-storage is a needs-based business with demand drivers that are multidimensional and fluid throughout economic cycles. We also continue to benefit from people spending more time at home, which has increasing permanence with remote and hybrid work here to stay. Additionally, with the return to more seasonal patterns of demand, we are currently also seeing an uptick in movement activity that has continued into the second quarter.

We also continue to find good opportunity in development and redevelopment as well, with a vibrant pipeline poised to generate growth for years to come. Our unique ability to weather economic cycles serves us well, particularly while other developers have slowed their activity due to higher interest rates, cost pressures, difficult municipal processes and concern over the near macro term landscape. Now I’ll turn the call over to Tom to discuss acquisition market and financial performance.

Tom Boyle: Thanks, Joe. The transaction market has been relatively quiet to start the year as potential sellers feel out the macro environment, higher interest rates and the spread between buyer and seller expectations. That said, we have closed or are under contract to acquire nearly $200 million right on track for our $750 million outlook for the year. The vast majority of our acquisitions this year have been done off-market quietly. More recently, we’ve been encouraged by an increase in inbounds, which are primarily small to medium-sized portfolios. We’re in a great position to acquire today given our cost and access to capital advantages paired with our industry-leading NOI margins. Now on to financial performance. As Joe mentioned, we started the year strong reporting core FFO of $4.08 for the quarter, representing 16.2% growth over the first quarter of 2022, excluding the contribution from PSB.

Looking at the components. In the same-store, our revenue increased 9.8% compared to the first quarter of 2022. We drove strong move-in volumes up 13% during the quarter heading into our peak leasing season and the existing tenant base remained strong with length of stays sitting at records. Same-store cost of operations were up 5.6%, leading to total net operating income for the same-store pool of stabilized properties growing 11.2% for the quarter. In addition to the same-store, the lease-up in performance of the recently acquired and developed facilities remained a standout in the quarter growing 29% compared to last year. Shifting to the outlook. We lifted our outlook for the year, driven by increasing our same-store revenue assumptions.

While the macro environment remains uncertain, performance to date has been encouraging. We’re set up well heading into the second quarter. Last but not least, our capital and liquidity position remains rock solid. Our net leverage of 3.3x, combined with $700 million of cash on hand at quarter-end, puts us in a very strong position for capital allocation as we move through the year. Now I’ll turn it back to Joe.

Joseph Russell: Thanks, Tom. Our people, technologies, platforms, balance sheet and brand have and will be continually enhanced to create and strengthen the competitive advantages we have across the entire Public Storage enterprise. We see opportunity in the current environment and are poised to execute with focus on delivering growth and value for our shareholders. Let’s go ahead and open the call up for questions.

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Q&A Session

Operator: And we will take our first question from Juan Sanabria with BMO Capital Markets.

Juan Sanabria: Hi. Good morning. Joe or Tom, I was just hoping you could speak to April trends and what you’re seeing in terms of demand and/or price sensitivity from customers out there? Any – some of your peers have talked to some softness in March or April depending on their market exposure. So just curious what you guys are seeing across your platform.

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

Juan Sanabria: Thanks. And then just for my second question, just on the Property of Tomorrow spend, you guys have made excellent progress on deploying that capital. Just curious on the types of returns you’re generating as you look at the CapEx that you’ve spent and how that’s augmenting growth either in the same-store or non-same store pool?

Joseph Russell: So, the step back, Juan, the program has been quite well received by both customers, our employees and now that we’re at a point where we’re actually getting to full market completion in several of our key markets as we finish up and round out the program over the next couple of years. We’re actually seeing a very good response and overall lift just to the – again, the image and the power of the brand, particularly where we’ve got meaningful scale in many, many markets. So we continue to track and see the benefits from that. It’s continuing to enhance our presence market-to-market. And with that, we continue to be very excited about getting the program completed. The team has done a very nice job figuring out any and all ways to optimize the amount of volume we’re actually going to pull it in plus or minus a year earlier than we intended to.

And with that, we’ll be in a very good position nationally to have elevated the crisp and enhanced brand attributes that play well in many parts of our business.

Juan Sanabria: Appreciate the time. Thank you.

Joseph Russell: Thank you.

Tom Boyle: Thanks, Juan.

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

Michael Goldsmith: Good afternoon. Thanks a lot for taking my question. My first question is on the guidance. You brought up the low end. Is that a reflection of the trends that you’ve already experienced in the first quarter? Or that guided – the low end of your range was based on a full recession scenario? Is the increasing guidance more reflective of that outcome is less likely to occur? And then within this, you’ve included this quote in your supplemental that suggests that the potential of revenue growth rates is wide and including the potential for year-over-year declines in revenue in the second half of the year. Is there anything that you saw in the first quarter that changes your view on that? Thanks.

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

Michael Goldsmith: Got it. And my follow-up question is about the strength and the sustainability of the LA market. Same-store NOI growth was up 20% in the quarter to added 300 basis points to the overall number. Presumably, this is reflecting the rate restrictions that were lifted in February of 2022, which you lap during the quarter. But is there kind of like a second – is there a second year of growth coming from the LA market? Or have we kind of – have you kind of used up all the gain there and the gain should be more modest going forward? Thanks.

Joseph Russell: Yes, Michael. First of all, LA being our largest market, we’ve been very pleased by the performance we’ve been able to achieve over the last year or so, to your point, where the owner’s restrictions have been lifted, but it is also a market where we have a commanding presence. We’ve got very good inherent demand. We’ve got very good occupancies and very little new competitive product coming literally to any of the submarkets that we’re competing in. So the inherent demand in the market is quite good. We think we’ve got against some good traction ahead of us, certainly going into the rest of 2023 and we’ll continue to see where we go from there. But we’ve been very pleased by the performance of that portfolio.

It is one of the markets that we – to go back to my comment about property tomorrow, we put about $75 million into that portfolio to lift it from a brand awareness standpoint, finished that a little over a year-and-a-half ago and again good timing and tie to that – being that much more prominent in the market. And one of the ways we measure the receptivity of that too is Net Promoter Scores, again getting very good reaction from customers and the brand itself is playing through quite well. So with that good demand and that good continued performance.

Michael Goldsmith: Thank you very much.

Joseph Russell: Thank you.

Operator: We’ll take our next question from Smedes Rose with Citi. Your line is open.