Public Storage Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2022

Key Takeaways

  • Q1 2022 core FFO was $3.65, a 29.4% increase driven by 15.8% same-store revenue growth, 15% higher move-in rates, and just 3.6% higher operating costs, resulting in a 20.5% rise in same-store NOI.
  • Strong demand continues with vacancy around 5%, move-in rates up 15% in Q1 (12% in April) and occupancies near record levels, supporting the reaffirmation of full-year core FFO guidance of $15.20 (17.5% growth).
  • The non–same store portfolio (515 assets, 50 million sq ft) nearly tripled its NOI in Q1 and is 86% occupied, while the development pipeline grew to $833 million amid expectations of 500–600 new industry deliveries annually through 2023.
  • The eRental platform surpassed 1 million digital move-ins and now handles over half of leases, boosting customer satisfaction and property-level labor efficiency.
  • PSA will receive $2.7 billion in cash and recognize a $2.3 billion tax gain when Blackstone completes its acquisition of PS Business Parks in Q3, and the company maintains a low-leverage balance sheet with $1 billion in cash and $4 billion in preferred stock.
AI Generated. May Contain Errors.
Earnings Conference Call
Public Storage Q1 2022
00:00 / 00:00

There are 15 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Public Storage First Quarter 2022 Earnings Call. At this time, all participants have been placed in a listen only mode and the floor will be open 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.

Speaker 1

Thank you, Katie. Hello, everyone. Thank you for joining us for our Q1 2022 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.

Speaker 1

These forward looking statements are subject to certain economic risks and uncertainties. All forward looking statements speak only as of today, May 4, 2022, 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, supplement report, SEC reports and an audio replay of this conference call on our website at publicstorage.com. We do ask that you initially limit yourself to 2 questions.

Speaker 1

After that, of course, please feel free to jump back in queue. With that, I'll turn the call over to Joe.

Speaker 2

Good morning and thank you for joining us. Before I hand the call over to Tom to discuss specific Q1 metrics, I will highlight 5 areas that are setting the stage for a robust 2022. First, market to market Business remains very strong. Now that we are 4 months into the year, we continue to see elevated demand from new customers across the portfolio. Existing customers are also extending average length of stay.

Speaker 2

We have healthy pricing dynamics and with move in rates up 15% and our existing customer rate increase program performing very well. 2nd, the traditional busy season is taking hold. Inventory is tight with vacancy at about 5%. We see outsized demand for vacant units throughout the markets. Both consumers and business customers are aggressively seeking space along with more traditional drivers for this time of year, which include home sales and college students.

Speaker 2

Home affordability, Hybrid work environments and a tight commercial market are clearly additive to our performance metrics. 3rd, our large Non same store portfolio, now 5 15 assets across 50,000,000 square feet, is growing significantly from a revenue and occupancy standpoint. Non same store NOI nearly tripled during the quarter. These assets are highly complementary to our market presence and continue to deliver exceptional returns with outsized move in activity due to average occupancy of 86%. Of note, the 1 point We acquired a year ago has already achieved the yield we anticipated after year 2.

Speaker 2

The recently acquired 1,500,000,000 all storage portfolio is performing ahead of expectations as well. 4th, as anticipated, Fewer assets have entered the sales market this year. Year to date, we have closed or are under contract for 21 assets totaling approximately $275,000,000 Our industry leading development platform increased to 833,000,000 The forecast of relatively stable national deliveries for 20222023 remains intact As we anticipate approximately 500 to 600 assets will be delivered each of the next 2 years. And 5th, our industry leading digital customer experience continues to be embraced by new tenants. This includes digital leasing, centralized property access as well as our PS app.

Speaker 2

In March, we reached a significant milestone with our 1 millionth e rental move in. Today, more than half of our customers are choosing e rental, giving them a desirable digital option to lease a unit. Our ongoing investments in the Public Storage digital platform are improving both customer experience and employee efficiency, clearly a win win. Now to Tom.

Speaker 3

Thanks, Joe. We reported core FFO of $3.65 for the quarter representing 29.4% growth over the Q1 of 2021. Our first quarter results represent a strong start to the year and an acceleration from the 4th quarter.

Speaker 4

Let's look

Speaker 3

at the contributors for the quarter. In the same store, our revenue increased 15.8% compared to the Q1 of 2021. That performance is an acceleration from the 13% to 14% range in the second half of twenty twenty one. Growth was driven by rate with 2 factors leading to the continued strength. 1st, strong demand and limited inventory, which allowed us to achieve move in rates that were up 15% versus 2021.

Speaker 3

2nd, existing tenant rate increases also contributed with lengthening customer stays as well as comparing to a period in 2021 when we were impacted by rental rate regulation in some of our largest markets. On that note, Los Angeles was a particularly strong contributor accelerating from 8% same store revenue growth in January to 15% same store revenue growth in March. Now on to expenses. We had a good quarter on cost of operations, up 3.6% in the quarter, with savings on marketing expense offsetting expected growth In total, net operating income for the same store pool of stabilized properties was up 20.5% in the quarter. In addition to the same store, the lease up and performance of recently acquired and developed facilities remained a standout in the quarter as Joe mentioned.

Speaker 3

Now shifting to the outlook. We're roughly 70 days on from when we introduced our initial 2022 guidance for the year. We reiterated our strong core FFO outlook yesterday with $15.20 midpoint representing 17.5% growth from 2021. We're anticipating another year of Strong customer demand from self storage. And as Joe mentioned, we are experiencing that through April with a very good setup into our traditional busy leasing months ahead.

Speaker 3

As I've highlighted over the past year, with occupancy near record levels, our outlook for growth is driven by rental rate. Shifting gears, PS Business Parks announced it entered into an agreement where Blackstone will acquire the company. We have agreed to vote our shares for the transaction. Upon closing, which is anticipated in the Q3, we would receive $2,700,000,000 of cash and of that $2,700,000,000 recognize a $2,300,000,000 tax gain that would increase our distribution requirements for the year. As we noted in our filings, PSB contributed 25,500,000 in core FFO in the Q1 or approximately 4% of company wide FFO.

Speaker 3

We have not updated our guidance ranges to reflect the sale, but we'll plan to update you as the transaction progresses and more details are provided by PSB. Last but not least, Our low leverage balance sheet gives us capacity to fund growth and at the same time is well laddered with long term debt and $4,000,000,000 of preferred stock with perpetual fixed distributions against a rising rate environment. Perpetual fixed rate capital is very good capital in today's markets and so is $1,000,000,000 of cash on the balance sheet at March 31. And with that, Katie, I'll turn it to you to open it up for questions.

Operator

Thank Thank you. Our first question will come from Jeff Spector with Bank of America.

Speaker 5

Great. Thank you. And I'm not sure if we're limited to questions. If we are, please let me know. My first question, I guess, if we could talk about April, you commented on seeing continued Demand into April, can you provide any additional comments on what you're seeing so far in April?

Speaker 3

Sure. Yes. Joe mentioned we're seeing good momentum heading into the Q2 and we're seeing that really across the board. Your market strengths are pretty consistent through April. Web visits and sales calls are up in the month or were up in the month.

Speaker 3

We saw good momentum for move in transactions, move in rates, which I know is a topic that I'm sure you're interested in. We're up about a little over 12% in the month. We continue to see that the occupancy and rate Trade off that we saw in the Q1, so occupancy ended April down about 120 basis points year over year, But again, against the backdrop of really strong rate growth.

Speaker 2

And yes, Jeff, maybe to add a little bit more perspective on The comment I made in my opening remarks, the consumer and business customer environment is still very strong. Consumer balance sheets by everything that we're seeing relative to statistical levels of health are quite strong. In fact, consumer balance sheets are better today than they were pre pandemic. We're seeing very good business activity across the spectrum. Top of funnel demand, as Tom mentioned, is quite vibrant.

Speaker 2

And on the back end, length State continues to increase as well. So the 2 bookends of both demand on the front side and then enduring utility of Consumer and business utility of the space is quite strong. Many of the factors that I spoke to continue to play out quite well And we're encouraged by what we've seen through the month of April. To your question on how many questions in the queue, we'll let you ask one more and then we'll move on to the next

Speaker 5

Okay. Thank you. That's great. I guess then the easy follow-up question is just on guidance. That's really been the top incoming to me.

Speaker 5

I know you guys are conservative. It seems like a great or maybe even better start to the year than expected. Can you explain why maintain the guidance right now?

Speaker 3

Sure. I'm happy to take that. And I guess what I'd characterize is the year has started out largely right in line with our plan, I. E. Strong, but the strong start we anticipated.

Speaker 3

And it's only been 70 days since we set our initial range. When we communicated that, we highlighted that we Specifically widened the ranges to try to encapsulate more upside into the ranges compared to maybe last year where we had narrower ranges. And the reason for the width of the range is really the uncertainty as we get into the busy season here and the uncertainty that's inherent in a month to month lease business in the second half of the year. We're going to learn a lot about how that's going to play out over the next 3 months or so. And we'll certainly provide updates And would expect that as we move through the year, we likely will narrow ranges as we go forward like we did last year.

Speaker 3

But at this point, We feel good about our outlook for the year and to date we've seen the strong performance we anticipated.

Speaker 5

Understand. Thank you.

Speaker 4

Thank you.

Operator

Thank you. Our next question will come from Michael Goldsmith with UBS.

Speaker 6

Good morning, good afternoon. Thanks a lot for taking my questions. My first question is on street rates and Yes. How did they progress through the quarter and into April? I think given the comparisons are starting to get more difficult, I think the market is trying to understand just how much rates are kind of growing on these more difficult comparisons?

Speaker 3

Yes. That's clearly a good question and speaks to the uncertainty as we move through the busy season here. To date, we've continued to see good momentum in move in rents and customers willing to accept those higher move in rents Against an environment as Joe mentioned of tight inventory. So while occupancy is off year over year, we're still talking about near record occupancies, which gives us pricing strength when inventory gets tight. We anticipate that inventory will only get tighter from here as we move into the busy season.

Speaker 3

From a month to month standpoint, we saw pretty consistent year over year Call it mid teens growth on move in rents through the Q1. As I noted in April, we're up a touch over 12% on move in rents and we're already starting to face those tougher comps year over year. So as Joe mentioned, we clearly have Momentum here, now the question will be how does that play out over the next several months to kind of reset rents potentially higher or where they will reset.

Speaker 6

Understood. And then I guess the piece that kind of goes along with this is the trajectory of ECRIs. Your occupancy was relatively stable in the Q1 suggesting that Your maintenance day remains strong. Now As the street rates kind of the street rate growth compresses as you face more difficult comparisons, How do you think about applying ECRI to customers, just given that prices Market prices aren't necessarily rising to the same extent that we've seen in the past. Thank you.

Speaker 3

Sure. Thanks, Michael. So Joe mentioned earlier that the existing tenant rate program is going well through the year. And what we mean by that specifically is Consumers are behaving as expected and we continue to run our modeling to derive Expected behavior and optimize increases that will continue through the year. So clearly one of the inputs to that you're highlighting which is move in rents and the cost to Place a tenant if they move out or if we're wrong on our predictive analytics.

Speaker 3

But generally speaking, we're seeing trends in line with what we expected. The one item I'd maybe add to what you asked is we do have some catch up in certain markets. I highlighted Los Angeles for instance And other markets like New York and San Francisco are putting a similar category where we had rental rate restrictions for a good part of the 2020 and into 2021 time period where even as rental rates maybe don't need to grow as much To see outsized growth in those markets because we've got catch up to do versus what we would have otherwise sent to date. And so you see that acceleration in Los Angeles in the quarter and would anticipate that continues.

Speaker 6

Thank you very much. Good luck in the second quarter.

Speaker 3

Thanks, Michael.

Operator

Thank you. Our next question will come from Ki Bin Kim with Truist.

Speaker 5

Thanks. Good morning.

Speaker 4

So just going back to the April trend, thanks for all the details. I was just curious if there has been any change and promotion activity or marketing dollars that might be supporting that 12% increase in moving rates?

Speaker 3

Yes, it's a good question Ki Bin. No changes to strategy there. You saw we had marketing dollars that were lower in the Q1. I'd anticipate that that decline starts to moderate as we move through the year given comps last year, but overall Advertising spends was lower in April than we had in March, for instance. Promotional discounts as we move into this time of the year seasonally adjust lower and we saw that play out through April as well.

Speaker 3

So nothing really to note there out of the ordinary, just overall continued Good demand for consumers as well as businesses to store during the month of April, which is helpful setup as we get into May June.

Speaker 4

Got it. And if I take a step back and look at what's happening in the market in terms of Netflix and Amazon, there's this notion that We're concerned that the days of sitting at home and watching a Squid Game and shopping on Amazon might be winding down And part of that kind of trade, if you want to call it that, the kind of COVID winners may be dissipating. And obviously, self storage is a little bit different to supply and demand dynamic, but work from home and all the changes that happened throughout COVID Definitely did help your portfolio and the demand profile. I'm just curious if you're seeing anything on the margin that might suggest, some of those demand drivers Sorry to wind down.

Speaker 2

Yes Ki Bin, I would say, we've seen a very good balance of If you call it some of the wind down that was purely driven by pandemic intensity or peak periods of the pandemic have been compensated for by other things, which include, as I mentioned, affordability from a living standpoint, whether you're an owner or renter, that's always, an additive driver to the financial benefit of acquiring a storage unit at Financially a lower price point, so that continues to be very supportive of the demand that we're seeing. Statistically, from a hybrid and work environment. We're seeing continued evidence that many companies are continuing to adopt and potentially Maintain the level of flexibility for the workforces. That too continues to be a very, very healthy driver. Even when certain employees are being pulled back to work, they're likely not being pulled back on a full time everyday basis.

Speaker 2

Today, we are seeing what we might see traditionally this time of year more college student activity. There's still good movement relative Home sales even though interest rates are up there's still very active home sale environment this time of year. So Again, many of the more intense drivers through the pandemic, some of those have eased down. We're seeing other additive and Still very compelling reasons why we're seeing good customer demand. Okay.

Speaker 4

Thank you. Thank you.

Operator

Thank Our next question will come from Juan Sanabria with BMO Capital Markets.

Speaker 7

Hi, good morning. Just curious on the The subsetting of rent restrictions, if you could just provide any update or progress in the ability to recapture What was a loss over COVID and maybe prior to that provided a bit of color around the initial guidance 4th quarter results, but just curious if you have an update on expectations for the impact to same store revenues for 2022?

Speaker 3

Sure. I'm going to concentrate my commentary around Los Angeles because it's our largest market. I think the clearest story And big picture, we're seeing strong trends in Los Angeles. The long running rent restrictions expired At the end of the year, we commented on the last call that we anticipated that event would likely add 1.5% to 2% of same store revenue to the company overall outlook. Los Angeles is our largest market and it's accelerating.

Speaker 3

As I noted the same store revenue growth acceleration within the quarter. The team recently completed Capital investments in that market as well through our Property Tomorrow program. So the team was ready for January with good looking properties and poised to accelerate. So we are seeing that and I'd reiterate the commentary around The growth potential coming from that market specifically. And on top

Speaker 2

of that, not only our largest market, but it's also our highest occupied Market nationally, so we're close to 98% occupancy. So again, another very strong stage setter for the kind of Revenue opportunity that Tom is speaking to.

Speaker 7

Okay. So no change to the 1.5% to 2% benefit, I guess from LA, I know there are restrictions coming off just to reiterate.

Speaker 3

No, that's right. We're seeing the strong acceleration we anticipated.

Speaker 7

Okay. And then, I mean, it sounds like you guys are pretty bullish across all geographies, but we've definitely seen some markets kind of lag, whether it's New York In some markets, I. E, if it cuts anything in the Sunbelt, how do you think that dynamic plays out as we go into 'twenty three? Are you a subscriber to the view that the Sunbelt markets, I guess, a product of just tough comps will normalize to the mean and maybe New York Kind of led and is a leading indicator where the other markets will go or just curious on how you think this plays out from a geographic perspective?

Speaker 3

Yes. I think you highlighted a good point, which is there is some variability across our markets. We're seeing really strong Demand and the procyclical demand drivers that Joe mentioned, population growth, home activity, etcetera, Florida continues to Performed incredibly well. And that's to date, meaning we're already starting to face some pretty tough comps in markets like Miami in Tampa, West Palm Beach, but they continue to perform really well year over year. To give you a sense, move in rents in Miami in the Q1 were up 31% and similar trends in April.

Speaker 3

So really good strong trends there. I do think Over time, we are anticipating that there will be supply that comes into the Sunbelt markets to serve that incremental population growth and the home building activity that's taking place in many of those markets. And that's a healthy thing for our industry and for that customer base, which is likely to temper the kinds of rent growth that we're seeing today. But overall, we're still seeing good trends. And as Joe mentioned, industry wide, we're not anticipating a near term elevation in new supply given the challenges related to getting through city processes, the construction process costs, etcetera, today.

Speaker 3

So We're still seeing good strength there. In terms of New York and San Francisco, maybe just on the flip side, we did see acceleration in those markets that was partly attributable Some of the catch up I commented on earlier around rental rate restrictions. So we do have some momentum there. And overall, those markets are still performing really well, But they don't have the same sort of procyclical drivers that a Miami does or an Atlanta does today.

Speaker 7

Thanks, Tom.

Speaker 8

Thank you.

Operator

Thank you. Our next question will come from Samir Khanal with Evercore.

Speaker 9

Hi, good morning. So Tom, maybe to expand on that and kind of talk a little bit about New York. I know it's only about 5% of your portfolio, But curious how you think the sort of second half works out here, right? It's held up well, still lagging the rest of the portfolio. I mean, is it really Supply thing here or are you seeing any sort of move outs sort of pick up as folks return back to the sea?

Speaker 3

Yes, that's a good question. I'm not going to speak specifically to second half outlook for markets in particular, but I would say We aren't seeing anything overtly concerning related to move outs and the specific question you asked around people returning to the city. So that's not a driver that we've seen to date. There is some new supply that continues to be absorbed in Brooklyn and parts of Queens. But overall, I would anticipate that that supply does get absorbed.

Speaker 3

And again, 1st quarter same store revenue growth of North of 9% in the quarter, accelerating from the 4th quarter is a pretty good place to be in a big market like New York.

Speaker 9

Got it. And then just shifting gears to the transaction market a little bit. I know for the year, I think you said it's about $270,000,000 is sort of what you've done so far. Your guidance is still at about $1,000,000,000 of acquisitions. Maybe provide color on kind of what you're seeing out there, sort of what's in the pipeline and sort of pricing as well?

Speaker 2

Sure, Sameer. The comparable to 2021 was likely to be Strong meaning it was unlikely we're going to see the same level of trading activity in 2022 that we saw last year. The thing that drove The volume in 2021 was the number of large $1,000,000,000 plus portfolios that came in the market, plus or minus $18,000,000,000 of Overall transactions took place and almost half of them were tied to those big very unique portfolios that were in the market at various stages of 2021. As we mentioned even in the earnings call last quarter, we don't anticipate the same number of large portfolios In the near term, coming back into the market this year and now 4 months in, we haven't seen that kind of activity emerge. There is still a healthy amount of both individual and smaller portfolios say in the $200,000,000 to $300,000,000 range that Have either come into the market or will likely come into the market in the coming quarter or 2.

Speaker 2

So we'll see how that level of activity matches the kind of Smaller activity that we saw in 2021. Pricing is very competitive. I wouldn't say there's any movement yet in cap rates surprisingly even with Interest rates elevating, but there's a fair amount of pent up capital that still wants to come into the self storage sector. So aggressiveness from buyers remains. We're seeing some good assets in multiple markets.

Speaker 2

We're busy underwriting a number of different transactions, but it's not the same elevated level of deal flow that either we saw in 2021 or likely to see this year. But it's not unusual that a Q1 is a little Quieter. A lot of owners take the 1st or maybe even sometimes the second quarter to figure out their own Playbook relative to bringing assets to market. So we'll see how that trends going into Q2 and Q3. And from there, we'll see what kind of volume plays through.

Speaker 4

Thank you. Thank you.

Operator

Thank you. Our next question will come from Kegan Karl with Berenberg.

Speaker 10

Hey, guys. Thanks for taking the questions. I think first, just given what's going on in the broader macro Have you guys seen any change in your customer demographics and preferences?

Speaker 3

Yes, that's a very good question. And there's a number of dynamics that we're watching very closely as we typically do, but given the dynamic Changes that we saw through the Q1, we're watching particularly closely this year. I'd highlight a few of them. On the demand side, We're watching to see any shifts in demand. And as Joe mentioned earlier, we continue to see a broad group of demand.

Speaker 3

We're not seeing any shifts in, For instance, cohorts by income or demography shifting year over year for new customer demand and that's healthy. But we are watching, as Joe mentioned, home sales is a driver as we move through this part of the year. Interest rates are moving higher. We've seen new home sale And existing home sale activity declined on a month over month basis, but still sitting at activity levels that are well above pre pandemic levels, Which is supportive to demand. So again, watching that closely, but nothing that we've seen to date.

Speaker 3

As it relates to other pressure points On the consumer, we spoke earlier about our existing tenant rate increase activity and the fact that consumers are behaving as There, so no shift there. The other pain point would be payment activity and consumer balance sheets continues to support good payment activity. So we were looking at some data from a money center bank a week or 2 ago highlighting Cash balances are still up meaningfully nearly double what they were pre pandemic for American households. And I think the other component is home equity, Right. There's been a wealth creation event for homeowners that is supporting American consumer balance sheets as well.

Speaker 3

So those are supportive. Now I would say we are seeing delinquency off the lows that we saw during the pandemic, but we're also not in an environment where stimulus checks are going out. And so It's natural to see a little bit of a lift in delinquency, but we remain in a good place and certainly better than where we were pre pandemic to date. So we're watching all of those drivers pretty closely, but to this point continue to see strong trends across the board.

Speaker 10

Got it. And then shifting gears a

Speaker 7

little bit, maybe just a little

Speaker 10

bit more color on your length of stay. Have the reasons for customers leaving changed at all in recent months? For example, Maybe seeing more people mention pricing and therapy things are leaving?

Speaker 3

Yes, no meaningful change The biggest driver that people highlight when they leave is that they no longer need the space, which makes sense, right? You think about the use cases for storage at some point though Many customers no longer need the space either because they've moved or their living situations change etcetera. So that continued to be the biggest driver and no change there. In terms of length of stay, Joe highlighted the lengthening of that metric. And on average, our customers that are in place.

Speaker 3

Their average tenure is about 40 months today and that compares to a pre pandemic average in 2019 of around 33 months. So we continue to see really strong tenure, which is supporting both our pricing strength as well as existing tenant rate increase programs.

Speaker 10

Great. Very helpful. Thanks for your time guys.

Speaker 3

Thank you.

Operator

Thank you. Our next question will come from Ron Kamdem with Morgan Stanley.

Speaker 11

Hey, Just going back to LA, I think the original guidance, I think you'd mentioned sort of 200 basis points of contribution to the same store revenue line item. You gave some really good comments at the opening remarks about just some same store hitting 15%. So the question is anything changed there? And can you give us a sense just of how below market those rents are sort of post this expiration of price accounting? Thanks.

Speaker 3

Sure. I'd just reiterate what I highlighted earlier, which is we I believe the 1.5% to 2% is the right sort of range. We are obviously starting from a period of a standing start in January when those rental rate restrictions expire. And so It will take some time to see that acceleration play through both from new customers coming in at higher rents, older customers leaving us and then the existing tenant rate program. So that will take some quarters to season in.

Speaker 3

But I specifically highlighted that The January to March trend to just speak to the level of acceleration we're seeing out of the gates here in 2022.

Speaker 11

Great. And then sort of my second question was just looking at average occupancy, we have it down sort of 30 basis points Quarter over quarter, I sort of appreciate your comments about this year is all about rates. And when you see occupancy down, which doesn't seem like that much, is the sense that there's potentially more sort of Pricing acceleration to be had during the peak leasing season or just trying to get a sense of how much harder could you push here?

Speaker 3

I think we'll update you on that next quarter.

Speaker 11

Great. Fair enough. Thanks.

Speaker 3

Thank you.

Operator

Thank you. Our next question will come from Rob Simone with Hedge I. Risk.

Speaker 4

Hey guys, good morning. Thanks for taking the question. Hope all is well. I'd like a kind of a higher level strategic question for you. I mean, obviously, the last year has been Fairly transformative for PSA and kind of how you communicate and run the business.

Speaker 4

I guess looking back over the past year and without obviously you can't share things that are discussed at the Board level, but if you had to kind of like think about a scorecard on what you hope to accomplish when you said about these changes versus what you did, kind of what was successful and What's like left? It hasn't had its box checked yet on like what's left to do in affecting all of those changes and kind of getting the company to where you wanted it to be? Thanks.

Speaker 2

Sure, Rob. Yes. The Thing that we were very transparent about and this goes back now almost a year when we did our Investor Day In May of last year was outlining the variety of different strategic initiatives that not only were Pronounced from an impact standpoint, but many had been in formation for some time relative to the investments and the Opportunities that we saw relative to approaching the market through our technology initiatives, the opportunity that we saw with the Quality of assets that we could bring into the portfolio, the expansion of our development program, The way that we're using data analytics, the digitization of the business, so we've Checkmarked a number of different areas that we've intentionally been that much more transparent about. I would tell you that the team at large is working very aggressively to continue the optimization in each of those areas. We're on very good paths relative to continuing to deliver more optimization on the way that we're only running the business, you're seeing that through, for instance, our e rental program, very customer effective and very Effective from an efficiency and employee satisfaction standpoint, an area that we continue to mine opportunities around through investments and that again ties to our development capabilities and the things that we're doing very uniquely in the industry by virtue of the Size of our team and the way that we're delivering Gen 5 properties that also then reverts right back to what we're doing with our Property of Tomorrow program where We're retooling the existing portfolio adding many amenities that we've been putting into these Gen 5 properties, which include solar and efficiencies from that standpoint.

Speaker 2

So that all points to a very strong and ongoing commitment to The growth of the business, the investment that we're making in very different and powerful parts of the business, we're pleased by The traction, we're pleased by the business results. But as always, we are very challenged to do more. With a brand like we have at Public Storage, we can continue to expand that brand. You're seeing that as we Invigorated the effectiveness even of the assets that we've been buying over the last couple of years in particular where average occupancy was in say the 60% to 65% range. We put them right into the Public Storage brand, put many of the tools and the operational efficiencies right into those assets and they do tremendously well.

Speaker 2

So The team at large, we continue to invest in. That's another very prominent strategy that we've got. So we've put a lot of additional Thought and retooling into the teams throughout the company, particularly through our operating teams And we're seeing very good results from that too. So great environment to continue to drive the business and we're pleased by many of the things that are taking hold.

Speaker 4

Great. Thanks, Joe. Appreciate the color. Yes. Thank you, Rob.

Operator

Thank you. Our next question comes from Smedes Rose with Citigroup.

Speaker 7

Hi, thank you. I I just wanted to circle back a little bit on the acquisitions outlook. And I know that you mentioned you haven't seen any changes in pricing so far that remains very competitive. But Just from your perspective, are you maybe holding back more than you otherwise might have on the expectation that pricing will change? Or Just kind of how do you see that playing out just because I mean, we know that interest rates are going up, right?

Speaker 7

I mean, that's been very clear. I'm just wondering, It seems at some point that has to start being reflected in seller expectations.

Speaker 2

Yes, Smedes. I mean, I wouldn't say that we've Holistically pivoted or taken a different approach to the way that we've been investing, We continue to look for opportunities just as I outlined relative to the quality of the assets that we're Bringing into the portfolio the opportunity that we can say from drive that we can see from driving returns based on their Prior performance and then putting them into our own platform, what kind of success factors we'll see from there, the additive scale that we're going to get in any particular market. So Because of some of the shifting that we're seeing, we haven't stepped back and said we're going to be out of the market or we're going to shift down relative to our approach to Approach to vetting and looking at assets that make sense to come into the portfolio. There's A fair amount of competitive activity, but believe me the team is working hard. We're very busy underwriting assets and There's a lot of competitive activity playing through.

Speaker 2

There's always a tipping point that we're very cognizant of where we feel an asset may or may not bring forth the relative returns based on the price that it may trade for. So we're going to be very reflective of that too. But overall, we're Still seeing opportunities and we're very optimistic about what can continue to play through. As Tom mentioned, Our balance sheet continues to be in very strong shape. We're sitting on $1,000,000,000 of cash.

Speaker 2

This year, we're likely to generate another $600,000,000 to $700,000,000 in free cash flow. So very well positioned to continue to grow the portfolio. I'm seeing very good asset opportunities and we'll continue to vet them.

Speaker 7

Okay. Thank you.

Operator

Our next question will come from Todd Thomas with KeyBanc Capital.

Speaker 8

Hi, thanks. I just wanted to go back to occupancy for a second. The decrease in occupancy at quarter end compared to the average appeared a little bit atypical for a Q1. I know you're at sort of very high Occupancy rates in general, but and I know the goal is to maximize revenue, but are you seeing occupancy build up further from here at this point during the peak rental season? Or are you seeing the occupancy side of the formula just a little bit more challenging to maintain?

Speaker 3

Sure. I think I'd Make a couple of points. I think one of the comments you made there was an important one, which is that we're seeking to maximize revenue from the available inventory that we have. And so Occupancy is a component, rental rate is a component. I'll tell you occupancy down 80 basis points is a relatively small component of the overall revenue outlook As we think about the year.

Speaker 3

That said, clearly, we're managing our inventory. And I guess maybe reading into your question, are you asking is occupancy lower because of weaker consumer trends? And I think to reiterate comments we've made already on the call, We're not seeing weakening consumer trends. We're seeing good customer demand for space and then seeking to maximize the revenue that we can from The available inventory and that demand. So I wouldn't highlight anything there.

Speaker 3

I would say it's unusual to start the year with the level of That we had this year. And so I think your point is a fair one, which is it's a bit of a unique year, But that doesn't change our strategies as we head through the year.

Speaker 8

Okay. That's helpful. And then, Are there any indicators that give you a sense for maybe the level of vacates that you might anticipate if economic activity slows down from where it's at here in the quarters ahead, is there any way to sort of gauge Potential vacate activity across the portfolio?

Speaker 3

Yes. I mean, vacate activity is something that our teams watch very closely. So you heard from Richard Craig and Philip Kim on our team on Investor Day around the analytics and pricing methodologies, part of those Methodologies drive on available inventory. And to understand available inventory, you need to understand anticipated vacates and the level of inventory you have to market. So that's a metric that I have teams internally looking at daily.

Speaker 3

And what I'd say is, We have pretty good visibility into vacate levels. And if things start to shift in an unexpected manner, it's certainly something we'd Communicate, but to everything we've highlighted to date, we're not seeing anything that is unusual as it related to the predicted vacate activity through the year. I would say the only time we saw really big shifts In anticipated vacates versus what the actuals were, was the onset of the pandemic. And that was, I would say, a pretty unique time period. But really since then, Behavior has been pretty predictable.

Speaker 8

Okay, that's helpful. All right, thank you.

Operator

Thank you. Our next question will come from Spenser Allaway with Green Street.

Speaker 12

Thank you. Most of my

Operator

questions have been asked. So I

Speaker 12

just had 2 maybe on the Ancillary revenue side,

Operator

there's been a lot of churn across

Speaker 12

the sector in terms of the 3rd party management pool.

Operator

Can you guys maybe just speak to who is buying these assets. Is it mainly REIT peers or is the buyer pool changed recently?

Speaker 2

Yes, Spencer. It's any and all of the typical buyers that are out in the market. So that's A pretty commonplace component of the 3rd party platforms whether they're the platforms you See through the public operators and there's a fair amount of private third party management platforms as well. So the trading activity that can take place within those platforms can come from either a public operator, Private Equity, private investor, so it's pretty typical of just the overall range of buying activity that takes place. We've typically even before we got into the 3rd party management business, typically bought a fair amount of Assets out of different third party platforms.

Speaker 2

Last year, we also bought a number of assets out of our own third party management platform. In the Q1, we bought 1, but there's a fair amount of trading that goes on in these platforms, some of which is tied to Structurally, the reasons many of these assets are on these platforms is they're being teed up to do just that. The owners may not look at their own Ownership for long periods of time, they're looking for certain levels of optimization. They'll get the asset to that point and they'll take it back right out to the market to trade. So very typical of The kind of the overall dynamics of what happens at 3rd party management.

Speaker 12

Okay, great. Thank you. And then can you give us a sense of the penetration rate for tenant insurance just maybe on the same store pool as compared to

Operator

your non same store pool?

Speaker 3

Sure. I'm going to speak to coverage overall. Coverage in the same store pool is in the upper 60s and that's been pretty stable. It's maybe been increasing a little bit over the past couple of years. And in the non same store, it's lower than that.

Speaker 3

And that's intuitive. For development properties, it actually tends to punch a little bit higher than our same store pool as we see a lot New customers who find the value in our tenant insurance offering. And then for acquired properties, it takes a little bit longer to have that coverage reach a more stable basis as many tenants are coming in that are in place that maybe don't choose to utilize The offering. So overall, it tends to be lower. I think for the quarter, off top of my head, it was in the 50s for coverage in the non same store pool versus that upper 60s in the same store pool.

Speaker 3

And obviously part of the strategy over the coming years will Not only be it to lease up that non same store pool, but also offer that product to that tenant base.

Speaker 12

Okay. Thank you for the color.

Speaker 4

Sure.

Operator

Thank you. Our next question will come from Caitlin Burrows with Goldman Sachs.

Speaker 13

Hi there. Good morning. I was just wondering if you could talk maybe a little bit more on supply. Supply is often brought on when demand is strong and it seems like it is. And I think you've previously said you didn't think it would be a real headwind in 2022 or 2023.

Speaker 13

So just wondering if you could give your current view on supply this year and next and what macro factors may be impacting that, for example, construction costs versus storage specific drivers like good demand?

Speaker 2

Sure, Caitlin. Yes, and I would tell you that as we've spoken to the last several quarters, some of the headwinds that Seem to be containing the amount of volume of new development, we feel is a good thing in one way, meaning there's Elevated risk going into any development opportunity. And I can't name a city, for instance, Nationally, that is easier to deal with today than it was pre pandemic. City staffs are constrained from a staffing From a timing standpoint, the complexity to get through both entitlement and then construction processes are very elevated. And with that, there's more risk at hand at a time when we're seeing component costs increase in some cases pretty dramatically, whether it's steel, Labor, concrete.

Speaker 2

And then with that, interest rates are still far from stable. In fact, They're accelerating, so very different risk factors that create some pretty meaningful headwinds. So the development business is still active, however. I mean, still 500 to 600 properties likely to come into the market this year and next. To your point, Obviously, some of that's being driven by the overall success of the sector and the amount of demand that we're seeing for self storage, but There's a healthier level of discipline that's playing through for many of the factors that I spoke to.

Speaker 2

It's been a good window for our development team to Continue to do what you're seeing us do, which is to grow our own pipeline. We're seeing less competitive activity for certain land sites in certain markets. We're able to capture opportunities because we've got the scale, the efficiency and the opportunity Deflect to some degree some of the pressure points that I just spoke to. But if you're a first time developer or a developer that doesn't have the wherewithal to Potentially deal with these risk factors, you're probably going to be a lot more conservative. And we think that overall, as I mentioned, that's a good thing for the industry.

Speaker 13

Got it. And then maybe also on the erental platform, I know you talked earlier that it's continuing to grow. So sorry if I missed the stat. Could you just go through what portion of your portfolio or incremental leasing this makes up, where you See it going, but also what kind of impact that shift has on the bottom line? Like are there any less employees or other expenses as a result of that?

Speaker 2

Yes. So we've seen continued adoption of eRental. Now over 50% of our customers are using That channel from an election standpoint, we're not pushing them to it, but they're actually electing to choose a self directed digital leasing process. By virtue of that at our own front lines and the amount of time that our property managers in particular Historically, we would have spent on that specific move in process. When you're seeing the effects of potentially 50 plus percent of that coming out of the Labor demand, property to property, it's pretty powerful.

Speaker 2

It gives us the opportunity to redirect priorities relative to The utility of the property management team, the things that they're focused on, the efficiencies that can play through when Half or more of their customer activity is actually being self directed and done on a digital basis. So it's A pretty powerful tool. You're seeing some of that through the cost efficiency in Our labor, even though labor costs are up, but there's continued benefit that we see from Increasing the amount of digital options that we're giving customers and frankly we're getting very good feedback from customers who use that tool as well. It's A growing and preferred alternative to actually transact. It's a much more consistent experience and it can Give the customer even that much more flexibility when they choose to move in to a specific property.

Speaker 2

So all things considered, it's been a very powerful tool and Continuing to look at different ways of utilizing it and expanding its use, again depending on customer choices.

Speaker 13

Got it. Thanks.

Speaker 4

Thank you.

Operator

Thank you. Our next question will come from Juan Sanabria with BMO Capital Markets.

Speaker 7

Thanks for letting me get back in the queue. Just one question kind of tying back to a couple of previous ones. At the Investor Day last year, you talked about The longer term goal of cutting 25% of payroll costs, so just curious if you have an update on that. Clearly, inflation is a lot higher. This quarter we saw R and M and centralized management costs on the same store pull up in the high teens.

Speaker 7

Just If you can give us an update on how we should be thinking about that previous commentary in light of what's changed obviously?

Speaker 3

Yes. So just to put some financial guardrails around what Joe just highlighted from a strategy standpoint, we did highlight that we would anticipate to reduce hours by about 25% from 2019 levels at the Investor Day. And I'd say we're a good bit along that journey, about a little over halfway and continuing to find opportunities to drive that further. So we're on track there and anticipate to get through to that 25% in the coming year or 2.

Speaker 4

Sounds good. Thank you. Thank you.

Operator

Thank you. Our next question will come from Michael Mueller with JPMorgan.

Speaker 14

Yes. Hi. Curious, as you're ramping up your development spend, can you talk a little bit about your land positions and how many years worth of Starts that that could support?

Speaker 2

Yes, Mike. What's typical in the way that we approach Land is we're looking primarily for opportunities where we're not directly putting Land inventory right under our balance sheet. It's pretty typical or the types of opportunities that we're sourcing give us the flexibility as a buyer To actually take the site through layers or stages of entitlements that happen on their ownership Time, it's the obligation they give us or the time we take to actually take the property through re entitlement without Owning the site. So contractually, that's a pretty typical approach. It's not each and every time, but more often than not, we're Taking a land site through certain layers of entitlements before we actually take ownership to not only reduce risk, but to contain costs as well.

Speaker 2

And with the amount of knowledge, efficiency and resources that we put into these Processes, by far the majority of the landowners that we're doing business with are agreeable to that kind of approach. So with that, we're not holding large land positions. And More frequently, we're going to acquire a site when it's much more closer to the ability or the timing to actually start construction.

Speaker 14

Got it. So I mean if we're just thinking about those agreements in the same way that you would think about owning land, I guess how many are In the works or how many do you have and what sort of lead time frame does I give you in terms of we have what's Under our control, 2 years worth of development spend or 3 years or 1 year or something. I mean, how

Speaker 4

do you size that up?

Speaker 2

Yes, Mike. I would say aligns exactly to the timing you're talking about. So market to market, you've got some processes that might Take you a year or 2. You've got others that could take 3 or 4, and believe it or not, some that could even be longer than that. So we're Matching that up and contractually we have control of the sites before we're starting to invest and deploy resources and time into those sites.

Speaker 2

So we've got control Of the land sites themselves. So and it matches to exactly what you're speaking to. So if you think about the pipeline that we have Today, there are components of that pipeline that those land sites are going through the exact same sets of processes that I spoke to. So We may not have actually acquired the land site itself in certain of those cases, but we have full contractual ability to control the site. And once we get through the entitlement process, we'll take ownership.

Speaker 14

Got it. Okay. Thank you.

Speaker 4

Okay. Thank you.

Operator

Thank you. It appears we have no further questions at this time. I would now like to turn the program back over to Ryan Burke for any additional or closing remarks.

Speaker 1

Thanks, Katie, and thanks to all of you for joining us. Have a good day.

Operator

Thank you. Ladies and gentlemen, this concludes today's program. You may now

Powered by Quartr