Public Storage Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2021

There are 18 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Public Storage Third Quarter 2021 Earnings Call. 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, Emma. Hello, everyone. Thank you for joining us for our Q3 2021 earnings call. I'm here with Joe Russell, CEO Tom Boyle, CFO and Mike McGowan, Senior Vice President of Acquisitions. 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 These forward looking statements are subject to certain economic risks and uncertainties.

Speaker 1

All forward looking statements speak only as of today, on November 2, 2021, 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, in the press release and an audio replay of this conference call on our website, publicstorage.com. As usual, we do ask that you keep yourself limited to 2 questions to begin with. Of course, if you have more, feel free to jump back in queue.

Speaker 1

With that, I'll turn the call over to Joe.

Speaker 2

Thanks, Ryan. Good morning and thank you for joining us. I'd like to begin with the obvious. Overall business is excellent. I do want to thank the entire team at Public Storage for their efforts.

Speaker 2

Our team members from our properties to the corporate office and back are focused on driving this level of performance. Across our industry and consistently throughout our markets, More customers than ever before have been drawn to the benefits of using self storage. We have often characterized additive demand coming from life events, for the last several quarters, a 5th D has emerged, decluttering. Customers need more space at home due to the shifts in working and living environments across all markets. Unfortunately, the customers that have come to us during the pandemic are now behaving more like traditional customers, meaning they are staying in place as they have come to appreciate the convenience and cost benefit of using self storage, particularly as residential and commercial spaces become more expensive.

Speaker 2

With that said, demand remains historically strong. In the Q3, our revenue, NOI and cash flow per share foot reached record levels once again. As we wrap up 2021, the outlook for 2022 and beyond are in the range of $1,000,000,000 The utilization rate of self storage continues to climb as it has for decades, participating in the U. S. And the U.

Speaker 2

S. Population. Millennials and Gen Zs, And Public Storage is leading the self storage industry's transformation towards a customer experience that provides digital as well as traditional participants across the entire customer journey. We have a deep seated commitment to listen to what our customers want And they are giving us vibrant input that directs our priorities. This has led to some exciting changes in our customer offerings.

Speaker 2

One example we have spoken to is our industry leading e rental platform. Today, nearly 50% of our customers are renting with us are in the range of $1,000,000 through the e rental online lease. Year to date, nearly 500,000 customers have chosen e rental to secure a unit. It's fast, intuitive and self directed, taking just a few minutes to complete An option many customers have been anxious to use and the quality of this customer has been impressive. In early 2021, we also introduced the PS app, which nearly 1,000,000 customers have now downloaded, allowing easy tools to manage your account and navigate our properties digitally and hands free.

Speaker 2

These are two great examples of how our investment in technology is transforming our operating model and it's a win win participating in the call for both

Speaker 3

customers and our operating efficiencies.

Speaker 2

Daily headlines across multiple industries, however, remind us there are challenging consequences impacting the economy in terms of labor pressure and self storage is not immune. Are actively investing in our team through increased wages and new more specialized positions that are providing even greater upward mobility ready for our skilled property teammates. On the leadership front, we have also strengthened our ranks and announced yesterday that David Lee has joined Public Storage as Chief Operating Officer. David previously served as Senior Vice President of Operations for the UPS Store, with responsibility for more than 5,200 retail locations in the U. S.

Speaker 2

And Canada. We are excited to have him on board. Now to another area I'm pleased to share with you, our external growth initiatives. And third party management. All areas are seeing strong growth.

Speaker 2

Starting with acquisitions, in 2021, The self storage industry will likely see approximately $18,000,000,000 or more of assets trade. This is a tremendous amount of volume and opportunity. Owners have been motivated to bring assets to market to monetize their investments, While some also plan for potential tax changes. Year to date, we have acquired or under are subject to contract on $5,100,000,000 of acquisitions or about 30% of the industry volume this year. This is comprised of 233 properties across 21,100,000 Square Feet with average occupancy of 56%, which is providing a significant embedded growth opportunity once we place these assets on to the Public Storage platform.

Speaker 2

The transactions span a wide spectrum of geographies, portfolios and one off purchases with both market and off market deals. We continue to be looked at as a preferred buyer based on our knowledge, in the range of $1,000,000,000 to $1,000,000,000 Of note, 65% of this quarter's volume is tied to the All Storage portfolio, which we are acquiring for $1,500,000,000 all participants are in the range of $1,000,000 All Storage is a high quality portfolio of 56 properties, primarily located in Dallas Fort Worth. Dallas Fort Worth has been one of the best storage self storage markets over the past 15 years, with population growth nearly 2 times that of the national average. Our own portfolio in Dallas Fort Worth produced annual NOI growth of 150 basis points higher than our national average. The all storage properties also give us additional exposure to new higher growth submarkets, particularly in and around Fort Worth.

Speaker 2

Many of the properties were recently developed, resulting in the current 75% occupancy level, participating in the call to provide significant upside as we move them on to our industry leading platform. The transaction is immediately accretive to FFO And combined with owned and other assets under contract, we are expanding our already significant platform in this vibrant market expected to be in the range of approximately 200 assets or by 64%. The remaining 35 participants are in the range of $1,100,000,000 of the acquisitions closed or under contract will provide significant growth as well. These assets are geographically diversified across the country, comprised of single acquisitions to smaller portfolios ranging in size from $40,000,000 to $200,000,000 totaling 3,900,000 Square Feet with average occupancy of 50% at $179 per square foot. Now to development and redevelopment, where our pipeline has grown by $70,000,000 to $731,000,000 this quarter.

Speaker 2

We are seeing good opportunity to build new properties from the ground up in addition to expanding our existing assets. Nationally, our development team is underwriting well located land sites as we continue to leverage our expertise as the largest developer in the self storage industry. This quarter, we also added 28 properties to our 3rd party management platform, increasing properties under management to 145. We plan to reach 500 assets by 2025. Of note, we have also acquired 14 assets from our 3rd party management platform as well.

Speaker 2

In summary, since the beginning of 2019, we have expanded our portfolio square footage by 22% with a total investment of approximately $7,000,000,000 equaling 36,000,000 square feet for an average $193 per square foot, now will turn the call over to Tom.

Speaker 4

Thanks, Joe. Our financial performance accelerated into the 3rd quarter. Our same store revenue increased 14% compared to the Q3 of 2020. That performance represented a sequential improvement in growth of 3.2 are in the 2nd quarter driven by rate. 2 factors led to the acceleration in realized rent per foot.

Speaker 4

1st, strong demand and limited inventory, which allowed us to achieve move in rates that were up 24% versus 2020 and 33% versus 2019. Secondly, existing tenant rate increases contributed comparing to a period in 2020 and we were significantly impacted by rental rate regulation in many markets. Now on to expenses. The team did a great job executing in this environment once again. Lower expenses were driven by property payroll, utilities, marketing and a timing benefit on property taxes.

Speaker 4

On property payroll, as Joe discussed, on October 1, we increased property manager wages, which will lead to higher expenses going forward, will be partially offset by efficiencies in labor hours tied to the operating model transformation we discussed at our Investor Day in May. On property tax, we will expense our annual estimate ratably through the year, leading to an approximately $0.13 benefit year to date and reversing to a had a significant headwind in the 4th quarter. This will lead to more stable quarter over quarter expenses in the future. In total, net operating income for the same store pool of stabilized properties was up 21.7% in the quarter. In addition to the same store, the lease up and performance of recently acquired and developed facilities was also a standout in the quarter, adding $53,000,000 in NOI in the quarter or $0.30 in FFO.

Speaker 4

As we sit here today, coming off in the peak part of the leasing season. Existing customer behavior is solid with move outs down year over year in the quarter and new customer demand remaining robust. So with that, let's shift to the outlook. We raised our core FFO guidance by $0.55 at the midpoint were 4.5%. Looking at the drivers, we increased our outlook for same store revenue to grow from 9.5% to 10.5% in 2020 one.

Speaker 4

That outlook implies a modest deceleration in revenue growth in the 4th quarter against very tough comps. Our current expectations are for occupancy to moderate from here by about 150 basis points to the end of the year. That would land occupancy at the healthy 2020 levels at the end of the year. But big picture, the baton has clearly been passed to rate growth where we continue to see strength. Our expectations are for 0% to 0.5% same store expense growth.

Speaker 4

As a reminder, that implies an increase of circa 30% in the 4th quarter driven by the property tax timing I discussed. Also increased our guidance for non same store performance given the acceleration of acquisitions and strong lease up of our own stabilized facilities. Now on the balance sheet, we have one of the industry's leading balance sheet set up well to finance the transaction volumes we've seen this year. We plan on funding the All Storage acquisitions with unsecured debt and we remain poised to grow with capacity to fund the continued activity that Joe has discussed. With that, I'll turn it back to you, Joe.

Speaker 2

Thanks, Tom. We are optimistic about our business and for good reason. As always, the KamanDi capabilities tied to the Public Storage brand, a high quality and well located portfolio, The industry leading operating platform and most important of all, our people have us well positioned for sustainable growth and value creation. Now, I'll open the call up for questions.

Operator

Participants will take our first question from Jeff Spector with Bank of America.

Speaker 5

Great. Good afternoon. Thank you and congrats on the quarter. I'm not sure if there's if we're allowed 2 questions. So I guess my first would be on the new hire, David Lee, Very interesting.

Speaker 5

I guess if Joe you can provide a little bit more details on David's role and What you see him bringing to Public Storage, please?

Speaker 2

Sure, Jeff. First, we're excited about David joining the in the range of $1,000,000 We've built over a number of decades now a great operations team. Today the teams comprise of over 5,000 of our associates who are committed to deliver exceptional customer service while are clearly adapting to the many changes that we've been talking about. So Dave is joining us at an exciting time. His role will be to continue leading what we call the customer journey, where we're unlocking and delivering new tools to our teams and offering different channels and experiences right at the front lines for our customers.

Speaker 2

And with that, his engagement with the team as a whole will be very important as we move the entire team forward through a very dynamic time not only for the company but for the industry. Clearly, his skills were attractive based on his 20 years or so with the UPS are participating in our organization, the UPS Store platform more particularly. So we're very excited about his fresh perspective as we continue are very pleased with the various changes to our overall operating model and definitely look forward to the contributions he brings to the entire management team.

Speaker 5

Great. That sounds great. And hopefully, if I have a second, Joe, I always consider you to be conservative with your comments. So it's encouraging to hear the outlook for 'twenty two and beyond looks favorable. We're getting a lot of questions on supply in are in the range of 23, I guess.

Speaker 5

Can you elaborate? Not looking for guidance, but what makes you feel comfortable to make that statement and then I guess in particular supply.

Speaker 2

Yes, Jeff. The thing that has been a nice window for us over the last are in the range of $3,500,000,000 or so of new deliveries put into the markets nationally compared to the peak that we saw in 2019 of about $5,000,000,000 We're likely to see that number trend down again in 2022, particularly with some of the hurdles that are out there from a development standpoint that we clearly see day in and day out. That includes the time it takes ready to get a property entitled. Many of the cities are clearly understaffed and we're seeing longer processes actually to get something as simple as are seeing even from the cost and availability of components of construction and then labor itself. So there's some different And I would say commanding issues that any developer today has to go through to operate in this kind of an environment.

Speaker 2

So that's likely to produce again this downdraft that we're predicting for 2022. Now having said all that, our industry as you well know is very fragmented. The development industry as a whole tied to self storage predict is too very fragmented and it's hard to predict what level of activity might resurface are in different markets based on frankly the continued very strong performance of the sector. So we're keeping a very close eye on that. As we've talked about, we've got a deep team across the entire national set of opportunities that we're working on and we're also seeing activity that's that's coming through our 3rd party management platform as well that is tied to future development.

Speaker 2

So it will be with us. The question is How much more momentum comes out of the environment we're dealing with as we speak, which are in the range of $1,000,000,000 of cash flow. So we'll see and monitor the impact that's likely to have, but we feel at this point we continue to have a very good run rate to go out and capture good land sites with the deep development team and the knowledge we've got across all of our markets.

Speaker 6

Okay. Thank you.

Speaker 2

Thank you.

Operator

We'll go next to Smedes with Citi.

Speaker 7

Participants. Hi, thanks. I just wanted to ask a little bit more about the decision to load up more in Dallas And maybe you could just talk a little bit about the process, how competitive it was to get this portfolio. And then Correct me if I'm wrong, but I guess I think of Dallas as a fairly low barrier to entry market. And I'm just wondering, are there any risks to meeting these stabilized yields that you're targeting.

Speaker 2

Yes, sure Smedes. First off, I mean we have a long standing commitment to Dallas. We've seen as I mentioned in my opening comments good Growth has come out of that market. You're right it has been a market that's been prone to in the right level and outsized level of development from time to time, but frankly the embedded growth that we see that's tied are in a very business friendly economy, low cost including taxes, are in the range of $1,000,000,000,000,000,000,000,000,000,000,000,000, which is a huge draw for both business and overall population growth. So what came with this portfolio was an opportunity are ready to leapfrog our position that was already a top position in that market where we have had approximately 120 participants are in the range of $1,000,000,000 or so third party management properties and leapfrog in by another 52 to 53 properties.

Speaker 2

Have a huge opportunity to grow and actually put additional presence in parts of the Dallas Fort Worth market, particularly Fort Worth participants that we were lighter in. And Fort Worth for instance like Dallas as a whole or the Dallas Fort Worth Metroplex is growing dramatically. So we're really encouraged by that population growth. It's very strong, good household income and we really like the multiple attributes that we will see and continue to see with our industry leading position in that particular market. Are in the line with us.

Speaker 2

I'm going to hand the mic over to him. He can give you a little color on what came through with the process we went through to actually capture the portfolio.

Speaker 8

Thanks, Joe. So it was a competitive process. It was quietly marketed with more or less a few select people that could take down a transaction of this size. In reference to your question about the location, the new supply coming in, this developer really did a great job of putting a footprint of 50 properties in markets that were so far ahead of his time are out in areas that are having high barriers for new storage to come in. He built large properties in those marketplaces.

Speaker 8

He kept a lot of competitors out at the same time. And really for us, we're starting to see the same type of issues with zoning of getting new storage in a lot of these newer areas and these high growth areas which are the better areas of the Dallas Fort Worth market. So for us, it puts us in a great position to be in new markets we want to be in and gives us a very strong presence in all those markets to do it that fills big gaps for us at the

Speaker 2

same time. And one other thing Smedes from an integration and assimilation standpoint, we have as we did with EZ Storage a great opportunity to bring in the majority of their operations team. We're excited about adding those new members to the Public Storage team there in Dallas Fort Worth, the opportunity for us to integrate these assets and put them under the Public Storage will be very efficient. Clearly, we're very skilled at that coming right off the experience we just had in Washington Metro with Easy Storage. So we're very confident that in a very short period of time we can transfer the 60,000 plus customers that are coming with this portfolio into our own systems and Our own opportunity to drive value based on the way that we're going to be able to run those properties as we do our entire portfolio.

Operator

We'll go next to

Speaker 9

participants are in the position side, the yields going in and targets stabilize for the Q3 transactions as well as are on the dock, including all storage. You talked about

Speaker 7

a little bit about it

Speaker 9

on a stabilized basis, but curious on the ongoing any else just from a modeling perspective?

Speaker 4

Sure. So, this is Tom. So, as Joe mentioned, a lot of the activity in the Q3 and into the Q4 are on stabilized activity. And so what if you think about average occupancies in the 50%, I would have that In your mindset and then from a yield standpoint, we obviously gave you a sense for all storage, what those yields are, call it 2.6% on their operating platform in the are in the 3rd quarter, so that gives you a starting point. And I would say across the other properties, probably similar type yields participants are in the range of $1,000,000 even with a little bit lower occupancy.

Speaker 4

So I think that gives you a starting point. Clearly, we have confidence in our ability to lease these properties up. One of the things that Joe mentioned earlier around our confidence in our operating platform in Dallas Fort Worth, similar to Washington D. C, if you look at our Eazy transaction from earlier in the year where we acquired that at 86% occupied, we got it to 94 through the busy season and really strong growth in a market where we're out of inventory. So are in the range of $1,000,000,000.

Speaker 4

So to give you a sense, a few of those properties we took over in the 40% occupancies and got them up to 90% by the end of the busy season, which is clearly strong leasing activity. In Dallas, similarly, we're out of inventory. We've successfully leased up our activity that we've built and bought over the last several years and are poised to take over these all storage properties here over the next several months.

Speaker 2

Participants Yes. And Juan, I'd add, as again we've talked to and Mike and his team have been very focused on for the last year and a half, in particular a lot of great assets have been built over the last 5 or 6 years. And we've really have the opportunity to capture very high quality assets, mostly recently built in this cycle are at what we feel are good values, but good opportunities to grow performance. That's why we haven't been shy about taking on any level as well as taking them to stabilization in an era where we're seeing very, very good consumer and business demand frankly.

Speaker 3

Are ready.

Speaker 9

Great. And then just hoping you could speak to the latest data points maybe through October from an occupancy and a rate perspective. Noted the implied guidance for the 4th quarter's 150 basis point occupancy moderation. Are curious on kind of how we stand to date on that.

Speaker 4

Yes, sure. Sumit, just to give you a sense as to where October ended, The year over year GAAP in occupancy, we were at 1.2% at the end of September. That has fallen a touch to around the positive 75 basis point GAAP at this point. So we are seeing that participants are in the range of $1,000,000 in occupancy as we move into the Q4 here, but continued strength on rate. So we continue to see good growth there.

Speaker 4

Some of the markets that we're seeing the most strength, the Southeast, Miami, Atlanta, in aggregate continuing to see greater than 50% move in rate growth at this time of year compared to 2019. Ready to take questions. So really strong pricing momentum here despite modest declines in year over year occupancy.

Speaker 3

Take questions.

Operator

We'll go next to Michael Goldsmith with UBS.

Speaker 3

Call.

Operator

We will go next to Todd Thomas with KeyBanc Capital.

Speaker 10

Hi, thanks. Good morning out there. First question, I wanted to circle back to investments participants For Joe or Tom, with All Storage now, you've disclosed you're taking up leverage to 4.3 times on a are

Speaker 3

in a pro form a

Speaker 10

basis and there are a couple of other larger scale portfolios reportedly on the market and a lot more product besides those portfolios that you discussed. You still have room to take leverage up. Obviously, you have a lot of access to capital as well, but your dry powder Decreasing a bit if you're looking to stay in that 4 to 5 times range that you discussed at the Investor Day earlier in the year. So I'm curious what the appetite is like for additional larger scale deals and then we saw that you're issuing $80,000,000 of units for the deals under contract. Should we assume that PSA is open to issuing More equity or equity today as part of the funding plans going forward?

Speaker 2

So first of all, I'll address The environment holistically, Todd and Tom can give you a little bit more color around what I would call the tools in our toolkit. Participants are in the range of 2nd quarters. But the environment continues to be very vibrant. We're seeing a vast array of different types of sellers coming to market and we feel well poised with the capacity of our balance sheet to continue to be a very efficient participants are in the range of $1,000,000 and we want to maintain that because we think it's highly advantageous even in a market like this where it's are quite competitive depending on the type of asset and the location etcetera that might come through. So We feel very well poised.

Speaker 2

Our balance sheet has been and will continue to be a great competitive advantage for us will continue to, as I mentioned, look at many of the tools in our toolkit. So Tom can give you a little bit more color on that, but we're very confident we will continue to be able to embrace this environment with a whole range of different opportunities that may come through.

Speaker 4

Yes. Thanks, Joe. And as you mentioned, Todd, we do have strong access to capital with our balance sheet position the way it is. Are in the range of $1,000,000 and we're confident in our ability to continue to fund acquisition activity with a broad set of tools. So we spoke are about using unsecured debt and we've used unsecured debt really over the last several years to fund activity.

Speaker 4

That doesn't mean that we're not open to other alternatives

Speaker 3

call to questions. Including common equity or JV Equity as

Speaker 4

we discussed at our Investor Day to the extent that volumes are both high quality attractive financial return. We would certainly be open and welcome the opportunity to use a broad variety of tools in the get over time. But for all storage in particular, we plan to fund it with unsecured debt and we feel good about the leverage level where it is today.

Speaker 10

Okay. And then if I could ask one more, just about the existing customer rent increases. Participants. And Tom, when you look at the 14% of revenue growth in the quarter, you talked about there was a small portion that was related to occupancy. When you look at the balance of the revenue growth in the period, how should we think about the contribution Between the higher move in rates that you described and the impact from ECRIs?

Speaker 4

Yes, that's a good question. So really on a year to date basis, we've seen a pretty balanced contribution between the move in, move out dynamics on one side and then the existing tenant rate increases both contributing meaningfully. I would put them roughly on par with each other in terms of participating in the future. I do think going forward, one of the things we disclosed is our move out activity and the move out rates. So move out rates are starting to catch up with move in rates.

Speaker 4

They have not caught up yet, but they're starting to catch up. And that will start to be a headwind on the contribution from the move in and move outside. But we will still have existing tenant rate increases as a tailwind from here given the market rent increases that we've seen across the country.

Speaker 10

Okay. And with the ECRI program, would you expect to see that moderate at all participants As move out rates catch up a bit there or you have to take your foot off to gas a little bit as that happens on the existing customer rent increases or is that not the case?

Speaker 4

Well, I would say that existing tenant rate increase is something that's managed very dynamically across the country and really across the tenant base. And I think the way to think about that is one of the benefits of the current environment is higher market rents and that lowers the cost will be able to replace that tenant if they elect to leave. The tenant base continues to be quite sticky, which gives us confidence to continue to send increases are now participating in the market. As we think about where we're going forward, in fact, one of the contributors to higher move out rates is actually are in the range of the 2nd quarter. The fact that we're being successful in increasing rental rates on that existing tenant base.

Speaker 4

So I would say almost the reverse, which is as we're successful on existing tenant rate increases, I'd anticipate that that move out rate will move higher. Move out rate means the rent that people are paying that

Operator

will go next to Caitlin Burrows with Goldman Sachs.

Speaker 11

Hi, there. Maybe one on development. I get that this can definitely be a great opportunity, are in the range of the 2nd quarter. So one of the hurdles is that ability to continue getting land in attractive areas. Just wondering if you could go through kind of how this process is going now and Any, I don't know, difficulties that you're running into to continue it?

Speaker 2

Well, that goes right down to the knowledge and the focus you have to have relative to what's transpiring in any given submarket. So as I've participants have spoken to we've got a very deep seated team across the entire portfolio that we operate today and in markets that we continue to look for additional growth as well. The Opportunity to acquire land over the last year and a half or so has been somewhat elevated because we've seen that tapering down of are not quite as much as ground up development momentum again coming from a very fragmented set of developers out there. But Land is still very competitive. There's a lot of knowledge you need to have to find and locate The exact right location that's complementary to future growth of the particular asset, the kind of dynamics that come from Competition as well as population growth etcetera.

Speaker 2

So a lot of different factors come into the way that we're able to select land sites are very differently than most because of the amount of data that we have day in and day out relative to our presence already across 39 states are being a top owner in nearly every one of those submarkets. The business though is very entrepreneurial from an over all self storage standpoint. So there's competition that can come through. And as I mentioned, in some cases that may become more elevated than we've seen over the last year and a half. So keeping a very close eye on it, but we feel like we've got are very good tools to not only find great land sites but to actually execute even in an environment where it's tough to get either entitlements and or justify the costs that are tied particularly from component costs and labor costs that are playing through to actually develop facilities in an environment where we're seeing a high degree of inflation at the moment.

Speaker 11

And actually on the are in the range of $1,000,000,000. I was wondering just given, obviously revenues are up a lot, the business is really strong or down. Can you go through would impact you think inflation is having or will have on your business both from like a revenue or expense side?

Speaker 2

Well, one thing that's advantageous to self storage in general is the fact we have a month to month lease business. So it's a huge opportunity to actually react to the kind of cost pressures that may play through from inflationary pressures. So that's an advantage. The product itself affords us are in the range of $1,000,000 to $1,000,000,000 to $1,000,000,000 to $1,000,000,000 to $1,000,000,000 are in the range of $1,000,000,000. We're confident that we can maneuver through those pressures, but it's something we have to keep very close to and that's why we in every part of our business we constantly look for efficiencies

Speaker 3

ready to

Operator

participate. We'll go next to Ki Bin Kim with Tuohyst.

Speaker 12

Thanks, and good morning out there. So a simple question on same store revenue. If Market rents don't increase in 2022, how much built in upside is there already in same store revenue?

Speaker 4

Participants Looking for 2022 guidance already, keep it?

Speaker 12

Not guidance, this is probably are below the low point. So even if market rents don't grow, like how much is like the starting point you think?

Speaker 4

Yes. Well, I think There's a few things there. One is we continue to see strength in market rents. And so, I understand the question you're suggesting, but I think will continue to see strong demand for self storage across the country, but if you look at the markets with the strongest growth really driven by macroeconomic demographic and population shifts that we think are poised to continue here, which is helpful. So clearly, there's been a move in market rents higher and existing tenant rate increases have been moving the current tenant base higher alongside that.

Speaker 4

Now over the course of last year and really are in

Speaker 3

a position to be in a position to

Speaker 4

be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position to be in a position

Speaker 3

to be in a position to be in a position to be in a position

Speaker 4

to be in a position are in the range of the state of emergencies and the impact of the healthcare environment, and that's definitely been a headwind as it relates to the existing tenant are moving them in the same manner that market rents are going. So I think that another way to say that is there is some embedded rate growth That's available to the extent that we continue to see normalization from a healthcare standpoint and state of emergencies continue to expire, the most notable of which is in Los Angeles County, not related to pandemic, but related to fire several years ago that we continue to monitor.

Speaker 12

And how impactful was that? I guess said in earlier, how much money was left on the table as it compares to the portfolio? Just for us to get a sense of how Meaningful that could be.

Speaker 4

Yes. So one of the things that we've that we look at is are in the range of what the impact of those pricing restrictions have been on us versus what our models would have otherwise suggested that we send the increases I ran these numbers for last quarter, so I'll give you precisely what it was for last quarter. I don't have it for this quarter, but through the first part of the year, first half of the year, it was about a 300 basis point negative impact to same store revenue growth in the first half of the year. So anticipate that that's largely remained pretty consistent through the Q3, but that gives you a sense of the magnitude.

Speaker 12

Got it. All right. Thank you.

Speaker 3

Sure.

Operator

We'll go next to Rob Simon with Hedge U. S. Management.

Speaker 6

Participants. Hey, guys. Thanks for taking

Speaker 13

the question. Hope all is well. I have a longer term question on 3rd party management. So I guess you guys are somewhat unique in that unlike some of your peers and it's a credit to you actually attribute participants are very pleased with the platform specifically, which is really helpful. I guess between now and the 500 stores, what is kind of like The crossover point for you guys or could you talk a little bit about the crossover point when you kind of get firmly into the green in that business?

Speaker 13

And then like From a margin perspective, what do you think that could potentially scale to? And I ask that because we're kind of used to looking at property management fees are in the same store

Speaker 12

as a singular line

Speaker 13

item with a lot of the costs kind of buried in other segments or in G and A. So just kind of trying to pick your brains on how you think about that?

Speaker 4

Yes, sure. So there's a couple components there. One is, obviously, we've been ramping the size of that business and one of the most vibrant areas of demand from our customer base for that business line is from folks that have developed new properties. And so As we take on those properties, the profitability of a new property is less than one of one that is stabilized, obviously given the revenue nature of the fees. And so as we ramp that program similar to our development business almost, there is a ramping of the profitability of each individual store.

Speaker 4

So said another way, it's going to take several years before The volumes that we're anticipating really start to produce the P and L impact that you might anticipate. The second piece of your question relates to what are the margins of that business. And there's a couple of factors there. So one is clearly the geographic mix of the properties themselves, the fees we're charging. I think a reasonable margin is probably in the 20s to 30%.

Speaker 4

But again, a lot of variability as we add a have a significant number of properties to that store base over the next several years.

Speaker 13

Got it. And would you guys ever consider, I mean, I know obviously you're deploying a lot of capital right now and there's still some capacity. But would you ever consider kind of like A JV program with maybe a capital partner. I know Joe mentioned in his remarks that a lot of folks out there are kind of rethinking about their timing to an exit. Participants Are there opportunities to be like a JV program where you also participate in a 3rd party management and it just kind of like it grows the pie so to speak?

Speaker 2

There will likely be opportunities just like that Rob. So I would tell you that we're open to a

Speaker 3

are in a variety of different

Speaker 2

scenarios as we're engaging in different ownership groups whether they're currently or anxious to get into self are in

Speaker 3

the range of $1,000,000,000

Speaker 2

So that's definitely something that we'll continue to evaluate. And as those opportunities arise we'll certainly be able to give you more color on those.

Speaker 13

Yes, understood. Okay. Just kind of thinking about the strategic thinking. All right. Thanks, guys.

Speaker 13

Appreciate it. Be well.

Speaker 6

Okay. Thank you. Thank you.

Operator

Will go next to Jonathan Hughes with Raymond James.

Speaker 10

Hey, good morning on the West Coast. Participants This is kind

Speaker 14

of a continuation from Todd's question earlier on using equity financing for acquisitions. Did those sellers ask participants are in the range of $80,000,000 of units to avoid triggering tax events or did you offer those as a sweetener to get a deal done? We just haven't seen, I think shares or units offered since Shergar like 15 years ago.

Speaker 4

Yes, it's a good question. It really is driven by the fact that there are sellers out there that are interested in accepting our shares as currency and that's something we're open to. You are right. It's the first time we have done it in a number of years, but we are open to it and it can be an attractive way to transact with the sellers that are interested there.

Speaker 10

Okay. And I mean, participants

Speaker 14

Perhaps the share price moves a little higher, the cost of equity gets a little more attractive. I mean, you would be open to using the shares or units for Large portfolio deals, say like another several $1,000,000,000 acquisition, is that fair?

Speaker 4

Sure. I think The way we think about the return profile of our deals is typically on an unlevered basis. And so we're evaluating what the return profile is Either on a leverage neutral basis or unlevered basis. And so, as we look at ultimately the financing of these transactions, we've had the opportunity to continue to use unsecured debt and preferred as the core piece of the have a good financial sense to continue to broaden the sources of capital and participants The benefits of that growth will continue even with using maybe higher cost equity or JV equity potentially.

Speaker 10

Okay. And then I just have one more, if

Speaker 14

I may. 1 of your peers said they expect a greater than have a great day. Labor cost increases next year. Fair to say we'll see that maybe even Slightly higher level from your portfolio since you did just bump wages 7.5% a month ago?

Speaker 2

So as I mentioned, Jonathan, yes, the labor market is highly competitive. It's definitely somewhat unpredictable as well. But I'll tell you it's a difficult time to attract and retain personnel at in any level of skill across the entire organization. So we're going to continue to look at the benefits of making either changes to wage rates and or balancing that with a variety of different efficiencies we're seeing with the transition of our operating model as well. So we're going to continue to monitor that and likely see again a very competitive environment going into next year.

Speaker 6

All right.

Speaker 15

That's it for me. Thanks for

Speaker 3

the time.

Speaker 12

Thank you. Thanks.

Operator

And we'll take the next question from Ronald Kamdem with Morgan Stanley.

Speaker 15

Hey, thanks so much for the time. When you talk about, I think you made a comment about the expansion of the portfolio, are in a very strong market, strong demand and so forth. But over the next 2 to 3 to 4 years, does that lend itself to opportunities to think about what markets you really want to own long term and potentially sell some assets. Participants are Rodney McMullen:] Not today given how strong the markets are, but just how you're thinking about sort of the portfolio long term? Thanks.

Speaker 2

Yes Ron that's definitely something that we have a I would call it a fluid analytical approach to meaning that we're always are looking to and understanding the impact and value of thinking about recycling any level of capital tied to existing assets. So that's an ongoing process that we'll continue to will be in the range of $1,000,000 to $1,000,000,000 to $1,000,000,000 to $1,000,000,000 to $1,000,000,000 to $1,000,000,000 to $1,000,000,000 are seeing value creation from existing assets and then the opportunity potentially to recycle.

Speaker 15

Are ready. Great. And then my second question was just asking the COO appointment question in a different way. I know you mentioned Opportunities may be introduced new products to the operations team. But should we think about this as sort of incremental change or is this a revolutionary sort of new ways of sort of doing business and operating?

Speaker 15

Just trying to get a little bit more color how we should think about the impact of this new

Speaker 2

Well, I go back to the things that we described in our Investor Day where we gave A fair amount of detail on the variety of ways that we're enhancing our operating model through investments in technology and then different channels and different opportunities we're giving customers to engage with us across the whole are in the spectrum as well as the things that we continue to be focused on relative to people development and the types of opportunities internally that we think are very well suited to continue to grow the quality of our workforce. So The role that David's coming into isn't new to the company in the context of our goals and the strategies that we have. It's just an added level of leadership that we think is prudent as we move the business forward And we're accelerating the pace of change that ties to the amount of investment that we're making in our people directly as well as the in the range of 10% to 15% of the business. So it's are in the range of 1 added layer of leadership that we think is well timed and we really look forward to continuing to optimize the way that we're running the portfolio as a whole, including the way that we're also engaging and are giving a variety of different opportunities

Speaker 3

to our

Speaker 2

existing employee base. So really good time for him to come into the business. And as I mentioned, we're excited about

Operator

will go next to Spenser Allaway with Green Street.

Speaker 16

Thank you. With the widespread supply chain issues we've been seeing in an increasing number of companies keeping what's being called just in case inventory. Have you guys noted any incremental business related demand in recent months?

Speaker 2

You mean from just core customers coming to us that differently are trying to use space because of Maybe keeping goods at more immediate availability.

Speaker 16

Yes, exactly.

Speaker 2

I couldn't point to Spencer an exact lift in demand based on that, but it wouldn't surprise me based on have a variety of different business customers that do use self storage in a way that's are more spot oriented where they may have an elevated level of demand that they need to cater to and by virtue of that storage can fit need quite easily. So there's likely some benefit that we're seeing from that in many, many markets.

Speaker 16

Okay. And then just on the expense side, where would occupancy need to slip to for us to begin to see marketing costs creep back up in a material manner.

Speaker 4

Spencer, I would say that that's a pretty dynamic and local decision that we manage and I wouldn't necessarily say it's an occupancy based item. It relates to what we're seeing in the customer funnel. So Advertising has a benefit to increase top of funnel, right? The number of people that are, say, searching for public storage are finding public storage when they go to search for self storage. And so that is helpful in markets where we're seeing top of funnel demand erode, but we have other tools as we're managing revenue, be it pricing, promotion, etcetera, that will impact conversion within that funnel.

Speaker 4

And so I would say, we're watching the different components of the funnel and what the returns are associated with pulling those different levers. Are participating in the market. To date, we continue to see strong top of funnel demand across the board. Web visits, for instance, in the quarter were up north of 20% across the system. Calls into our call center were roughly flat.

Speaker 4

So overall, still very are in the range of solid top of funnel demand, which led to the decision making around marketing in the quarter. As we've demonstrated in the past, if we start to see those dynamics change. We typically do see pretty good returns on our advertising spend and we'll pull that lever as well.

Speaker 16

That's very helpful. Thank you.

Speaker 4

Thanks.

Operator

We'll go next to Mike Mueller with JPMorgan.

Speaker 6

Hi. I was wondering for All Storage, what did you assume for rate growth through 2025 to get to your 6% stabilized yield expectation?

Speaker 4

Yes. So one of the things that we looked at within the portfolio is obviously there's a pool of properties that have recently been delivered that we have the opportunity to lease up and then ultimately stabilize on a rate basis. And so we go through our underwriting process of seeing what our stores in the area and what competition is and ultimately what we think we can squeeze from a revenue standpoint within our own revenue management in the marketplace and we'll underwrite those there. And then on the stabilized stores, we call them stabilized, but the reality is they're not in our platform. And like we're seeing in acquisitions to date really through last year we have an opportunity to put our operating platform and systems in place and drive further improvement.

Speaker 4

So you can see for instance where our overall Dallas portfolio rental rates are And obviously, these properties have their own submarkets and underwritten rates, but gives you a sense as to The upside in rental rates that we think we can achieve in the portfolio over time.

Speaker 6

Were you embedding additional rate growth Beyond current market or just kind of pulling them up to current market and assuming that it's capped out there?

Speaker 4

Yes, it's a combination of where we think rates are today, so spot rates and then ultimately the runway we see for rental rate participants are in the market. Counterbalance with one of the questions earlier around rental rate risk due to new development within that participants are in the submarkets, which is a consideration as we think about forward rents as well. So a combination of a number of those things. But I would point you to the presentation where you can see our same store rents in Dallas punching at $15 per foot versus the in place rents there in the Q3 at about $11 So There's definitely occupancy and rental rate upside.

Speaker 6

Okay. That was it. Thank you.

Speaker 12

Thanks.

Operator

Will go next to Smedes Rose with Citi.

Speaker 6

Hey, it's Michael Bilerman here with Smedes. Joe, I just wanted to go back to the hiring of are in the same store. I think you've gone down, not you, the company has gone down this path previously and every time that CEO came on, it never stuck. And so I'm just curious at the start, As you've now rehired for the COO position, what's different this go around versus other initiatives in the past

Speaker 2

Well, yes, part of the history, Michael, I don't know if I agree, it never stuck. I mean we've had in our history obviously predating my tenure here, periods of time where you had multiple year positions in place and then by virtue of the dynamics of the business, we made different changes. For instance, taking some senior leaders for instance on sabbatical to go over to SureGuard for 1 or 2 years at a time etcetera. Participants have been somewhat of a I would agree somewhat of a fluid position by name, but by responsibility and focus, it's been with us consistently. One of the things that is are very different relative to the opportunity that we see at this point to bring in as I characterize even more fresh perspective and more additive leadership capability to that overall role is the dramatic growth and change in our business.

Speaker 2

Participants noted we've acquired a sizable amount of assets over the last couple of years literally the size of some of our competitors and it's been a great opportunity for us to continue to think about how the are in the range of the skills and development of our employee base tied to operations. So it's a great time for us to put even that much more emphasis on the role and we're excited about what we can continue to do with David's leadership coming in and are very, very focused on relative to the overall effectiveness of our operations team as a whole.

Speaker 6

What are the sort of top three priorities for him in the next sort of call it are in the range of 90 days to 180 days. And can you talk about any restructuring underneath him in terms of the team or how you're going about sort of participants As you've talked about, the business is changing, right? You didn't have 50% doing online contactless a few years ago. So Can you just talk a little bit about what the priorities are and things like that?

Speaker 2

Well his number of priorities is to come in and learn the business. I mean that's the way we've all come into the business being as participants are focused on the front lines as possible and that's definitely a top priority and it's not to come in and Make massive change or retool something that's broke. It's an opportunity to enhance and optimize many of the great foundational investments that we've made Frankly are statistically in a whole different league than what you're seeing with other operational platforms. As I mentioned, eRental, 50% of our customers use eRentful. That's amazing where plus or minus 40,000 to 50,000 customers a month are using that channel that did not exist less than 8 or more than 18 months ago.

Speaker 2

So we're confident that we have a foundation that continues to unlock really good opportunities the way we're running the entire operational team ready to take questions.

Speaker 12

Can you give us

Speaker 3

some insights on what

Speaker 12

David did at UPS

Speaker 6

in terms of the on what David did at UPS in terms of the changes that he initiated either at the store level, which My local UPS store has gotten a lot better over the years, so hopefully he was a driver of that. But talk a little bit about sort of the characteristics and what are asking about what he's been able to accomplish in his prior rule?

Speaker 2

Well, there's no question that that platform is very transaction oriented, it's very customer centric, it's tied to again advancement in their own operating model and we really liked many of the skills and the attributes of That kind of a transactional environment and how it relates to what we see in self storage. So a lot of very good things that we can learn from that environment and then he'll be learning from our environment as well and we can create the best of both worlds.

Speaker 6

And just last question on this topic. You don't have a lot of I think it's only in the Hawaii asset in terms of having storefront retail at the self Storage facility, is that an opportunity that you're thinking about and I think someone mentioned revolutionary. Are you thinking differently about the storefront real estate that you have? And given the fact you mentioned 50% of people are doing it online, How much is that store differentiation or additive things that you can bring into that real estate to drive incremental Cash flow, could you be an Amazon pickup and delivery service type of things? Like is that part of The focus at all for the company?

Speaker 2

It's a good question and I will tell you there's a will be more than happy to share as they evolve. There's A lot of creativity that continues to surround the customer driven demanding the demands that we're seeing as customers continue to shift the way they want to interact with any type of business particularly ours and we think there are very vibrant opportunities going forward and as those arise we'll be sharing those with you.

Speaker 6

Okay. Thanks, Joe.

Speaker 12

Thank you.

Operator

And we will take our final question from Michael Gold

Speaker 17

How do you think about the risks associated with doing several large acquisitions at a time when yields are as low as they've been? And can you talk about how Public Storage can maximize the growth of these acquisitions on your platforms.

Speaker 2

Yes, sure, Michael. I mentioned participants We've had obviously a fair amount of volume over the last couple of years, but it ties to the scale and the ability on our part to integrate assets whether on a one off basis, small or even large portfolio. So Even when it's highly concentrated as what you saw with Easy Storage and now again with participants are in the All Storage portfolio in 2 big metropolitan markets, but it points to the ability that we have from a structure and a scale and operating prowess standpoint. So we're deep in these markets. We've got have very strong teams that run these assets day in and day out.

Speaker 2

Our systems allow very efficient integration in the range of $1,000,000 and we've been doing this for many, many years. And with the investment we've made with our technological platform, we certainly can do it in higher degrees of volume and higher degrees of concentration. The yields that we will likely see from this integration or as we've mentioned compelling. Again, it ties to the fact that we have will be able to provide a clear path to the market. So our capital structure is well suited to continue to fund the kind of growth that we've seen.

Speaker 2

And There's no question the team as a whole, as I mentioned in my opening comments, has continued to do a great job with the integration and the ability for us to actually improve pretty dramatically the performance of most of the assets we continue to buy.

Speaker 17

That's helpful. And now this is the 2nd year in a row where teams the occupancy moderation from the peak in the summer to the end of the year participants are in the last couple of years and we should return to a more seasonal decline In future years, how are you thinking about that?

Speaker 4

Yes. So last year was certainly a unique year where we saw different seasonal patterns because of the nature of healthcare environment last year and we didn't see much if any of an occupancy decline as we move through the year. This year, we did see a more seasonal pattern and frankly had the benefit of some of the seasonal demand drivers, things like home sales and projects over the summer, for instance, college students, etcetera, that will add to demand in the summer, but then will then move out as we move into the fall. So there was that additive demand this year, but we are seeing a little bit more moderation. Now one of the reasons why We're seeing that moderation as the continued stickiness of the tenant base.

Speaker 4

And so we've had fewer move ins this year. And so recent move ins are the most likely to move out. And so we've had a contribution have a little bit more seasonality this year. I do think that the seasonal demand drivers that have been driving self storage demand for years will continue to play out over the next several years. And so we operate a seasonal business and it will be going forward.

Speaker 4

The degree of it, will need to see year in and year out, but we are seeing a little bit more this year, but still really encouraging overall customer behavior.

Speaker 17

And just one last one for me. You mentioned the change in tax flows as a, I guess, a catalyst Next year or kind of continue on an elevated pace? Thanks.

Speaker 2

Well, the amount of Motivation seems to be strong, just put it that way, relative to existing owners wanting to bring more product to market. Are in the line with us. So Mike and his team continue to be very busy as we transition into things we're working on going into 2022. So

Operator

will now hand the call back over to Ryan Burke for any additional or closing remarks.

Speaker 1

Thanks, Emma. On behalf of the entire team on our side, I want to thank everybody for joining us today. I look forward to speaking with many of you next week and in the coming weeks.

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Earnings Conference Call
Public Storage Q3 2021
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