Tom Boyle: Sure. So I wouldn’t call the rains that we’ve had in the winter here in Southern California a natural disaster. It has been raining this week, frankly. So we don’t see a surge in demand. In fact, what we tend to see is Southern California residents and drivers tend to stay off the roads and you don’t see as much move-in activity or move-out activity, for instance, in periods of time when it’s raining here in SoCal. But overall, I’d say demand remains healthy. here. Occupancies are very healthy in L.A., San Diego, Orange County. So we feel very good about how the portfolio is set up, and we’ll work through the reins here in SoCal.
Operator: Our next question comes from Spenser Allaway with Green Street Advisors. Please proceed with your question.
Spenser Allaway: Maybe just a more pointed question on the transaction market. And I know it’s a small sample set here, but the 11 assets you closed in the fourth quarter. Can you share the going in yield and then where you expect that to stabilize?
Tom Boyle: Sure. Getting into specifics, I’d say — the — there’s a range of going in yields depending on how stabilized the assets are. So of those 11 assets, some of them were [CofO] properties where the going-in yield is zero or a little bit negative. And then you had some that were more stabilized that going in yields are probably mid 5% to 6%, and we’re going to seek to improve the operations on those portfolios and get them to those assets rather, and get them to 6% plus as we think about the return profile of those assets. And that’s pretty consistent with what we saw through most of 2023. As Joe mentioned, we’ll see how the interest rate and capital environment plays through into ’24, but that hopefully gives you a guidepost on yields.
Joe Russell: And Spenser, from a strategy and appetite standpoint, we continue to look for properties that are potentially either lease-up opportunities or stabilization opportunities by putting those assets on our own platform. So not shy at all about taking on lease-up risk. In fact, many times we see an actual pretty sharp improvement once we put those assets onto our own platform. And we’re confident that again, those strategies will play well even going into this year. And continue to look for a whole range of different type of assets even based on age and maturity of the tenant base, et cetera. But clearly, no differentiation relative to the strategy we’ve deployed over the last few years looking for opportunities when properties are far from stabilized, and again, buying the properties at the right price point, location, et cetera, continues to be very advantageous for us.
Spenser Allaway: Okay. Great. And to that point, in regards to the Simply portfolio. Can you provide an update on where the rent and occupancy stands today for those properties relative to the same-store pool?
Tom Boyle: Sure. So the rents of that portfolio have been improving as they’ve been added into our portfolio. So we’ve already seen some of the benefits of adding that portfolio in. The occupancy, as it sits there, I think it’s in the mid-80s, today, seasonally, I think when we took it over in the peak of the summer, it was towards the upper 80s. We’ll obviously look to lease that back up into the spring leasing season and take the occupancy of there, ultimately into the ’90s on stabilization. So seeing good trends as we’ve added that portfolio and those 90,000 customers into our portfolio and on track for a good spring leasing season with that portfolio with properties orange painted and public storage signage, which the customers are reacting well to.
Operator: Our next question comes from Todd Thomas with KeyBanc Capital Markets. Please proceed with your question.
Unidentified Analyst: This is A.J. on for Todd. I appreciate you guys taking the time. Just First one, as you’ve noted, you made good progress on narrowing the occupancy gap year-over-year over the past few quarters. I guess, why would you not expect to call back more occupancy throughout the year, given the easier comps and the broader stabilization that you’re anticipating in your base case around move-in rent and demand?
Tom Boyle: Yes. I think part of what you’re seeing in that midpoint case is if you take a step back, right, we had really strong demands in occupancies in ’21, ’22. And as those tenants cycled through and we experienced weaker demand through ’23, we’re seeking to maximize revenue ultimately in a trade-off between rents and occupancies. And that’s managed at a very granular level, at the unit level across our properties based on the demand we’re seeing, the customer price sensitivity, et cetera. And so that balance is real at the granular level. And what you see at the output is it made sense to give up in effect some of that 2021 heightened level of occupancy to maximize revenues. And as we sit here today, our occupancies are down about 70, 80 basis points compared to where we started in 2023.
Again, that midpoint case doesn’t assume that there’s a big uplift in seasonal demand. And so you’re kind of — you’re not getting a big lift there similar to how we experienced last year. And so as we move through the year, you may see some closing towards the end of the year, but you’re going to probably be finished on average through the year about the same as where we’re sitting today.
Unidentified Analyst: Okay. That’s helpful. And then just on the seasonality, you had softer seasonality last year. What’s embedded in the guidance for 2024? And I guess, really looking at historical data. When do you expect to start seeing the pickup in rental demand for the peak rental season?
Tom Boyle: Sure. So, I’ll couch seasonality in terms of the peak-to-trough change in occupancy. So last year, we experienced — taking a step back even further in 2015 to 2019, there was typically about a 280 basis point peak-to-trough change in occupancy, call that from June 30, December 31. In 2022, we experienced about a 240 basis points. So, it was a little bit less seasonal than a typical year. In 2023, that fell all the way down to about 160 basis points peak-to-trough. And in 2024, our midpoint case is a touch over 200. So, a little bit more seasonality, but not as much as we experienced in ’22 and a far cry from what we experienced in the pre-pandemic time period.
Operator: [Operator Instructions] Our next question comes from Eric Wolfe with Citi. Please proceed with your question.
Eric Wolfe: You talked about the moving rents crossing over into positive territory in late summer. Just curious where moving rents will be at that time. So what’s the annual contract rate that you expect to see in late summer? And how much of that improvement from current levels is just driven by seasonality versus a strengthening of your business?
Tom Boyle: Thanks, Eric. So, I think we’ll have to dig up and we can get to you exactly. I don’t have in front of me what our third quarter move-in rents were, for instance. But at end of summer, we’re expecting it to cross zero. So I’d look at plus or minus our third quarter of ’23 move-in rents. And I think the team is going to dig up third quarter contract rents, so you can have them. In terms of what we need to see to get there, there’s seasonality every year. So as the question earlier, so even in a year last year where I’d call it an atypical year where we didn’t see a lot of seasonal strength through your April, May and June. The housing market has been very well publicized as resetting lower in terms of transaction volumes as being a driver there.
As we think about move-in rents they’re going to rise and they rose last year, they’re going to rise on an absolute basis into the summer. And then, what you’re going to see is a little bit more growth in rental rates this year to close that gap over the time between now and the end of the year last year — or the end of the summer, this upcoming year. Does that make sense?
Eric Wolfe: Yes. No, that makes sense. And I guess the question then really is, just — you talked about that extra gap that it needs to sort of close to get them above and beyond seasonality. Can you just put that in context? Like is that an extra gap that it needs to close pretty large relative to history? Is it somewhat normal relative to other recovery period? Just trying to understand sort of whether it’s unusual relative to what you’ve seen in the past?
Tom Boyle: Yes. I guess the way I’d characterize it is we saw less than what we would typically see last year in terms of a seasonal uplift in rents. And what we’re saying is we’re expecting stabilization in demand through this year, which means that we shouldn’t continue to set new lows seasonally adjusted on moving rents in the midpoint case. And so that’s going to result in closing of that gap. We’re not suggesting that the environment needs to get significantly better, but rather stabilize as we move through this year and not set fresh lows. And to follow up on your question, the team dug it up. We had move-in rents on a contract basis in the third quarter about $16.
Operator: Our next question is from Ki Bin Kim with Truist Securities. Please proceed with your question.
Ki Bin Kim: A quick question on ECRIs. As you look ahead, are you projecting to be a bit more aggressive in terms of magnitude or frequency with your ECRI program compared to 2023?
Tom Boyle: So, Ki Bin, we spoke about this a little earlier. There’s a little bit of a give and take this year. We’re expecting that on the one side, the consumer remains strong, as Joe highlighted in his remarks, and that we don’t see a significant shift in customer price sensitivity, which we’ve been very encouraged in experiencing through ’22 and ’23. So that’s one side. On the other side, on replacement costs, move-in rents are still down 10%, 11%. So replacement cost is higher at the start of this year than it was at the start of last year on average. And so that’s going to have a detriment to overall contribution. But the flip side of that, that I highlighted earlier was the fact that we moved in a lot more new customers.
Last year, move-in rents were strong, up about 9%, and that will have a positive impact on the — not the magnitude, but the number of increases that we send throughout the year. And those things largely will offset such that the contribution of ECRIs as we sit here today in the midpoint case is pretty consistent year-over-year.
Ki Bin Kim: Okay. And I’m not sure how you internally gauged us, but can you provide any color on changes that you noticed on your customer conversion rate or your market share win of customers?
Tom Boyle: Yes. So Joe spoke to a lot of the tools that we were using through last year. advertising, promotions, rental rates and the power of advertising platform online. So we saw better than industry top-of-funnel demand into our system, which ultimately led to good move-ins. But we also saw stronger conversion associated with both pricing and promotion, which are more conversion-related items such that conversion rates both through — well, through all the channels that we operate in, both website, call center and folks walking in or higher in ’23 compared to ’22, and we’re seeing good trends into ’24 as well.
Joe Russell: And on top of that, Ki Bin, as we’ve talked about, our digital platform continues to give customers the ability to again transact with us through not only digital platform, but now even through our care center, et cetera. So, we’re making that conversion activity even that much more effective relative to — again, consumer intent with all the tools that we have to get them to top-of-funnel activity, but then actually to the conversion itself from a speed, efficiency time of day. Frankly, many of our customers transact with us and off business hours now. So all very good tools that continue to lead to a very strong conversion that to Tom’s point, we feel like we’ve got good industry-leading capabilities that we’re going to continue to invest and optimize going forward.
Operator: Next question comes from Zhan Huang with JPMorgan. Please proceed with your question.
Hong Heng: I guess, first off, I’m glad you fare homes better and Shurgard definitely fell a little bit more of Northern California. But I guess my first question is just is it safe to think about the low end of the range, that’s basically there being no return, no seasonal demand? Or are you expecting higher seasonal demand community than last year even at the low end?
Tom Boyle: We’re assuming less seasonal demand in the low end I agree with that. I think that’s something I mentioned earlier. So I agree with that and more seasonal demand in the high end.
Hong Heng: Okay. And then I guess my second question. You’ve grown your management platform pretty well. Have you had any success in sourcing acquisitions from there yet? And how big of a potential source of acquisitions do you think that could represent in the future?
Joe Russell: Yes. That’s key component of the growth of the platform itself. It’s a very relationship-oriented business. Thus far, we’ve acquired close to 40 assets out of the program. Over the last few quarters, it’s been on the light side. Again, it’s, I think, indicative of the environment that we’ve been seeing in acquisitions in general with many owners not of a mindset that this is the right time necessarily to do a transaction or a trade. But with the growing platform itself, again, we saw very good traction in 2023. We’ve got good momentum going into this year as well. Those additive relationships, knowledge of the assets their comfort level with our own ability to transact very efficiently. We’ll continue to be a good source of not only relationships but acquisition activity over time.
So, I noted that now the programs at about 325 assets. And we still see good momentum to continue to grow to our ultimate goal and optimization of the platform. So, we’ll likely see that in the next year to two and with that more acquisition opportunities.
Operator: Our next question is from Eric Luebchow with Wells Fargo. Please proceed with your question.
Eric Luebchow: You could talk a little bit about the spread between move-in and move-out rents. I assume that gap should start to narrow by midyear just based on the move-in rent improvement you talked about. But should we expect any change in the average rents of customers moving out based on average length of stay or any other variables that we should consider there?
Tom Boyle: Eric, it sounds like you have a pretty good handle on that. We’re sitting here in the winter, Q4 and Q1 you’re going to have that differential between the move-ins and move-outs to be higher. That’s going to then narrow as we move into Q2 and Q3 and then rewiden again in the fourth quarter. Obviously, the comments that I made around moving rents getting to a point where they’re not declining on a year-over-year basis through the fourth quarter will be helpful on that, but you’re still probably going to end in a similar territory on gap there between move-in and move-outs in the midpoint case. And we’re very comfortable with that. and managing to achieve those higher revenues from our in-place customers who are placing a lot of value on our space.
Eric Luebchow: And just my follow-up, you touched on this several times, but the newer customers you’ve loaded at much lower move-in rates the past year. You talked about increasing the frequency and the magnitude of rate increases for that cohort. So have you seen those large rate increases kind of perform within expectations as you’ve started to push those through kind of toward the end of ’23 and early 2024 in terms of either retention or customer receptivity?
Tom Boyle: Yes, I’d say to reiterate something that Joe mentioned earlier, which is that the customers continue to behave as expected and with some strength, and we continue to see good momentum within that program, and that includes both newer customer as well as longer-term customers in the program.
Operator: Our next question is from Ronald Kamdem with Morgan Stanley. Please proceed with your question.
Ronald Kamdem: The first is just on the same-store revenue guidance of flat. I guess I’m trying to tie your comments about a first half and second half dynamic where the first half maybe is a little bit slower and you have a pickup in the second half. So should we be bracing for sort of negative same-store as you start the year before you end the year somewhere sort of well above zero to get to the midpoint of the guidance.
Tom Boyle: Yes. That’s a good question, Ron. I hope that everyone is not embracing. But I would anticipate that we see deceleration through the first part of the year. And yes, that likely involves a negative performance on a year-over-year basis through the first half. And then yes, reacceleration as those — the lag between operating metric improvement and financial metric performance starts to show in the second half of the year.
Ronald Kamdem: Great. And then, look, my second question is just, I guess, we’re trying to figure out how aggressive or conservative the guidance is because on the one hand, you talked about last year, there were a lot more macro concerns. So maybe that was a reason to be a little bit more conservative versus this year. But you also sort of mentioned that the move in volumes at 9% was basically 2x what you did in sort of 2022, which should presumably set up well for pricing power. So maybe could you — when you’re putting all that together, maybe, can you talk about how much conservatism or not is built into the guidance this year and how we think about that?
Tom Boyle: Sure. So I guess the way I’d couch it is we did cover a macro series of scenarios for our guidance ranges last year. The range on same-store revenue was about 250 basis points. This year, as we sit here, there’s still uncertainty as I highlighted, maybe a little bit less than what we experienced last year — what we were expecting last year. And so, the range is 200 basis points this year, so not too far different. Our core FFO range was about $0.70 last year. I think the range this year is $0.60. So, we’re still talking about similar levels of range. And as a reminder, we operate a month-to-month lease business. And so there is some variability that could play out through the year. I’ve tried to be very transparent on what the range of potential outcomes are in a number of the key metrics, both at the high and the low end.
And we’ll look on to executing through our plan this year, and I’ll leave judging, conservatism or aggressiveness to the investment community, but we want to try to be transparent around what our assumptions are and how we plan on navigating through the year.
