Public Storage (NYSE:PSA) Q3 2023 Earnings Call Transcript

Public Storage (NYSE:PSA) Q3 2023 Earnings Call Transcript October 31, 2023

Operator: Greetings and welcome to the Public Storage Third Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ryan Burke, Vice President of Investor Relations for Public Storage. Thank you. Mr. Burke, you may begin.

Ryan Burke: Thank you, Ron. Hello, everyone. Thank you for joining us for our third quarter 2023 earnings call. I am 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, October 31, 2023 and we assume no obligation to update, revise or supplement statements to 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 to two. Of course, after that, feel free to jump back in the queue. With that, I will turn the call over to Joe.

Joe Russell: Thank you, Ryan and thank you all for joining us today. Tom and I will walk you through a few highlights for Q3 and then open up the call for questions. Each team at Public Storage is successfully exercising our platform-wide advantages in a more competitive environment as demonstrated by third quarter performance and our raised outlook for the remainder of 2023. As we entered this year and expectedly, we saw new move-in customer demand for the sector shift lower, particularly with softening existing home sales due to the rapid rise in home mortgage rates. On the flipside, there has been solid and increased demand from new customers that are renters. They have proven to be very good customers as well, particularly from a length of stay perspective.

We have the right team, technologies and analytics to determine the appropriate mix of marketing, promotions and rental rates. Drawn by these top-of-funnel tools, along with our leading brand, self-storage users are clearly choosing public storage. Our strong move-in volume, coupled with healthy in-place customer behavior has led to better-than-expected occupancy trends with our same-store occupancy gap narrowing from 250 basis points at the beginning of the year to 120 basis points at the end of September and to 60 basis points as of today. Our digital and operating model transformation continues to be a significant enhancement to customer experience and our financial profile. Customers benefit from having digital options at their fingertips across their entire journey.

Our proprietary digital ecosystem is a compelling reason to choose us with over 60% of our customers running through our online leasing platform. And today, we have more than 1.4 million PS app users. And our financial profile benefits as well. We are putting these digital tools in the hands of our customers and employees for convenience combined with in-person on-site customer service when and where it is needed. The result is a better customer experience and enhanced margins, particularly in regard to labor efficiencies. We are also growing our portfolio amidst broader market dislocation. Our industry-leading NOI margins, multifactor in-house operating platform, access and cost of capital and growth-oriented balance sheet put us in a very unique position.

So far this year, we have acquired more than $2.6 billion worth of properties, including the $2.2 billion Simply Self Storage portfolio comprising 127 properties. As is our regular practice, every property was fully integrated into the public storage platform on day 1 and we welcomed over 250 new associates and approximately 90,000 customers. We are also ahead of schedule on reimaging the entire portfolio to public storage to ensure the maximum benefit from our industry-leading brand. We will have also delivered $375 million in development by year end and have a pipeline of nearly $1 billion of development to be delivered over the next 2 years. Since we updated you last quarter, the sharp move in interest rates has backed up the acquisition market with fewer deals likely to trade by year end, typically a busy time of year for asset closings.

We are actively engaged with a full range of owners that give us confidence that some sellers’ expectations will adjust as the cost of capital has clearly increased. Our advantages enable us to acquire and develop when others can’t. We have a strong appetite to grow our portfolio as seller expectations continue to correct and we have a matching ability to execute. Now, I will turn the call over to Tom.

Tom Boyle: Thanks, Joe. We reported core FFO of $4.33 per share for the third quarter, representing 5.6% growth year-over-year, excluding the contribution from PS Business Parks. Looking at the key components for the quarter, same-store revenues increased 2.5%. As Joe mentioned, move-in rental rates continue to be lower for us and the industry, but we are seeing strong move-in volume along with the right mix of marketing spend and promotions. Our existing customer base continues to perform well with move-out volumes further moderating this quarter. These trends largely continued in October with the year-over-year occupancy gap narrowing to 60 basis points as of today, as Joe mentioned. On expenses, same-store cost of operations were up 2.8%, leading to 2.4% stabilized same-store NOI growth at an industry leading operating margin of 80%.

Our largest market, Los Angeles, continues to lead our portfolio. The 214 properties in the same-store pool grew NOI by 6% on steady demand and limited new supply of facilities. In addition to the same-store, the lease-up and performance of recently acquired and developed facilities continues to be a standout, with NOI increasing nearly 20% year-over-year in the quarter. This pool of 685 properties and more than 60 million square feet comprises nearly 30% of our total portfolio today and is the strong contributor to FFO growth today and into the future. Shifting toward the outlook, we sit here in October, raising our core FFO range once again, increasing both the low and high-ends to $16.60 at the low end to $16.85 at the high end. Last but not least, our capital and liquidity position remained rock solid.

We are well positioned with a strong appetite for growth, coupled with the ability to execute in a dynamic capital markets environment. Rob, with that, let’s please open it up to Q&A.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Michael Goldsmith with UBS. Please proceed with your question.

Michael Goldsmith: Good afternoon. Thanks a lot for taking my question. You continue to navigate the environment well, though the guidance implies continued deceleration into the fourth quarter for same-store revenue growth and same-store NOI growth with both turning negative at the midpoint. So what are you seeing in October to this point and how are you viewing how the last 2 months of the year will play out?

Tom Boyle: Yes. Thanks, Michael. Good question. So I will provide a little bit of context on the same-store revenue outlook for the remainder of the year and then specifically speak to October. So, as we have spoken to in the prepared remarks the environment for new move-ins continues to be competitive and that’s persisted through the second half as we sit here in October. We and the industry are responding with lower rental rates, promotions as well as advertising. But on the flipside, we are seeing good move-in volume growth. Those tenants are staying longer than last year and our existing tenant base has been strong. When we look at the exit rates for move-in rates and occupancy to give you a sense what’s assumed in our outlook on move-in rates we assume that at the midpoint move-in rents are down circa 18% at the midpoint.

The high-end of our outlook assumes 13% decline year-over-year in the low-end, 22%. On the occupancy side, the midpoint assumes that we hold the year-over-year decline from September at about 120 basis points decline year-over-year. At the high-end of the range, we nearly closed the gap to last year by the end of December. And obviously, at the low-end, we go backwards on occupancy towards the end of the year. Speaking specifically to October, we’ve seen, again, good volumes but at lower rates. As we look at the move-in rental rate decline on an apples-to-apples basis, move-in rents down, call it, 18% in October to date. Obviously, today, we’ll wrap up the month. We and others ran some fall in Halloween sales on select units in the back half that will cause a little bit of a decline in that towards the back half of the month.

But overall, seeing very good volumes. Volume is up nearly 9% in the month of October. So the tools that Joe highlighted continue to work very well. And I would point again to existing customers performing well. Move-outs were down or actually are down year-over-year this month-to-date. And the occupancy gap, as Joe highlighted, has improved to down about 60 basis points today. So we’re seeing good traffic in existing tenant performance.

Michael Goldsmith: Thanks for that. That’s really helpful. And my follow-up question is on the existing customer. You’ve talked about in the past with the existing customer, how they respond as a function of price sensitivity or you see rise or a function of price sensitivity and the replacement cost, given the pressure on move-in rates, how do you think about your ECRI philosophy heading into the back half of the year or heading into the through the fourth quarter, just given what you’ve seen from the customer? And then separately, as a follow-up to the first part, is there any change in your guidance philosophy you’ve been able to hold your guidance pretty flat through the year, at least the high-end of the guidance hasn’t been raised as the low-end has moved up. And now you finally touched the high-end. So any change in philosophy on the guidance as well? Thanks.

Tom Boyle: Okay. That’s a lot, Michael. Let’s step through that. So on the existing customer rate increases, I would reiterate what we’ve been saying really all year, which is on the first component, which you highlighted, which is customer behavior and our expectations for customer behavior continue to be met or exceeded, frankly, as we move through the year. And so that side of the equation has been quite strong. It’s been one of the drivers that’s led to better performance through the year. And then the second component cost to replace continues to get more challenging. So as we’ve highlighted throughout the year to date that’s led to lower magnitude and lower frequencies have increased to customers. But no real change there in terms of talking points.

The second component of your question related to guidance. And so we did lift the lower end as well as the higher end of our guidance range this quarter. And in February, we were pretty upfront and describe the different pathways that we could take through the year. We’ve been encouraged by the pathways that we’ve ultimately executed upon and are towards the high-end of that range and again, lifted the high-end this quarter. And I think I used some guideposts around the macro economy at that time as well to frame the outlook. And I think we’re all somewhat pleasantly surprised by the macro economy and obviously, a strong third quarter GDP print that further reinforces the performance towards the higher end of that original guidance range.

Joe Russell: And yes, Michael, one thing, just a little bit more context on existing customers. Again, we’re all looking to the prints that Tom just mentioned. But month-by-month, through this year, we’ve been quite and pleasantly surprised by the consistent behavior of existing customers. We’re not seeing any new or emerging stress coming through the economy continues to support our customer base quite well. We’re not seeing, again, any level of additive stress tie delinquencies, etcetera. So continuing to see very, very consistent behavior from existing customers, which is very good for the business. And again, assuming the economy at large continues to do what it’s doing. We think we’re in very good shape, again, going through the rest of this quarter and then setting up for 2024.

Michael Goldsmith: Thank you very much.

Operator: Our next question comes from Steve Sakwa with Evercore ISI. Please proceed with your question

Steve Sakwa: Great, thanks. Maybe first, just talking on that the transaction market. It sounds like you’re maybe starting to see some sellers capitulate. I’m just wondering, Joe, how have you guys changed your underwriting criteria on the revenue NOI growth side, IRR side, cap rate side? And how wide do you think the bid-ask spread is today?

Joe Russell: Yes, Steve. So again, a lot of moving parts there. And as you spoke to, we clearly need to be very conscientious of change in cost of capital. One of the things that step-by-step, as I alluded to, with a very high degree of dialogue we’re having with all different types of owners, the realization of a different trading market is starting to play through. Clearly, some entities may have more pressure points likely not tied to the actual performance of the asset or the portfolio, but maybe more particularly tied to any capital event that may be emerging, again, tied to the very different environment that an owner would go through to reset an existing capital structure and how to deal with that and/or different pressure points to bring a particular asset or portfolio to the market.

So, we have seen the migration and the realization that the environment has clearly changed. As I mentioned, we’re anticipating very low levels of trading volume between today and the end of the year, which is somewhat unusual, particularly for the fourth quarter. But what we’ve been seeing with the iterative discussions with many entities is the realization that things have changed quite a bit. In our own underwriting, we have put different hurdles in place relative to those facts, which we should. So our own cost of capital has changed, and we are again seeing a difference in bid to ask, but I will tell you that gap depending on the situation of a particular owner is shifting, and we hope that too puts us in very good shape to actually transact in a different environment and very uniquely, as I mentioned, we can do this unlike most others.

So the capital that we have available, the balance sheet, our ability to transact very quickly is serving us well, and we’re going to continue to exercise that opportunity as we see fit relative to the types of hurdles we hope to achieve through this very different trading environment.