Public Storage Q4 2021 Earnings Call Transcript

Participants

Corporate Executives

• Ryan Burke, Vice President, Investor Relations
• Joseph D. Russell, President and Chief Executive Officer
• Tom Boyle, Senior Vice President and Chief Financial Officer

Analysts

• Elvis Rodriguez, Bank of America Co.
• Michael Goldsmith, UBS Group AG
• Jonathan Hughes, Raymond James
• Todd Thomas, KeyBanc Capital Markets
• Spenser Allaway, Green Street
• Caitlin Burrows, The Goldman Sachs Group, Inc.
• Smedes Rose, Smith Barney Citigroup
• Samir Khanal, Evercore ISI
• Michael Mueller, J.P. Morgan
• Ronald Kamdem, Morgan Stanley
• Keegan Carl, Berenberg Bank
• Ki Bin Kim, Truist Financial Co.
• Juan Sanabria, BMO Capital Markets

Presentation

[Operator]

Ladies and gentlemen, thank you for standing by and welcome to the Public Storage Fourth Quarter 2021 Earnings Call. [Operator Instructions] It is now my pleasure to turn the floor over to Ryan Burke, Vice President of Investor Relations. Ryan, you may begin.

[Ryan Burke, Vice President, Investor Relations at Public Storage]

Thank you, Catherine. Hello, everyone. Thank you for joining us for our fourth quarter 2021 earnings call. I am here with Joe Russell and Tom Boyle.

Before we begin, we want to remind you that certain matters discussed during this call may constitute forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to certain economic risks and uncertainties. All forward-looking statements speak only as of today, February 23, 2022, and we assume no obligation to update, revise or supplement statements that could become untrue because of subsequent events.

A reconciliation to GAAP of the non-GAAP financial measures we provide on this call is included in our earnings release. You can find our press release supplemental report, SEC reports, and an audio replay of this conference call on our website at publicstorage.com.

We do ask that you initially limit yourself to two questions. Of course, feel free to jump back in queue, with anything additional.

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

[Joseph D. Russell, President and Chief Executive Officer at Public Storage]

Thanks, Ryan. Good morning and thank you for joining us. I would like to begin the call by reviewing a few of the significant highlights from 2021 and then discuss our outlook for 2022.

Last year, the Public Storage team unlocked opportunities in one of the most historically vibrant areas for the self-storage industry. Our priorities have included capturing excellent customer demand, enhancing operations through the digitalization of our platform, acquiring individual assets and portfolios that provide outsized growth, and our ongoing investment in our people. On top of this, we have funded growth through a combination of exceptionally low-cost debt and preferred issuances, giving us significant firepower to expand the business going forward.

There are four areas that were critical to our success in 2021 which have also set the stage for an equally, if not more powerful 2022. First, listening to our customers. We found innovative ways to solve what many new customers told us they wanted, a fast and efficient way to lease a storage space on their own time frame. Through our eRental offering, approximately 50% of our new customers now self select their space digitally. No operator in the industry comes close to this level of adoption. Our existing customers told us they wanted more tools to interface with Public Storage. This led to the full rollout of the PS app, which now has over 1 million downloads, offering an array of self-directed service options including digital property access and account management.

Second. Driving our industry leading four factor growth platform. We acquired 232 assets totaling 22 million square feet for approximately $5.1 billion, adding quality and scale to our market presence nationally. This included two $1.5 billion plus portfolios, which were additive to our operating platform in the desirable markets of Washington DC and Dallas-Fort Worth. Through development, the Public Storage, real estate, and construction teams grew our pipeline to approximately $800 million as we delivered Generation 5 properties to markets from coast to coast, and we added 79 assets across 22 states to our management platform with easy integration of both existing and newly built assets.

Third. An ongoing commitment to invest in our people. In 2021, we increased hourly wages by 14%. We enhanced training to facilitate career progression with new positions and field operations and recently we were named by Forbes as one of America's best large employers.

Then 4th. The effective utilization of our powerful balance sheet. We issued $5 billion of new debt instruments, refinanced $1.2 billion of preferred equity, and took the overall blended cost of debt and preferred from 3.9% to 2.7%. As we entered 2022, the balance sheet is primed to fund growth. We have approximately $1 billion in cash and will likely generate another $700 million in free cash.

Now turning to this year. We have launched 2022 with a high degree of confidence that Public Storage is poised for another strong year. The components of our outlook are anchored by three areas. One, customer behavior has set the stage for another good busy season. Through our own data, we see demand from both traditional and newer factors including the 5th D, decluttering. Also, the high cost of housing, a strong economy, generational adoption of self-storage, and business users continue to create a vibrant customer acquisition and retention opportunity.

Two. Limited growth in new supply nationally. Our view is, we are in a 3-year holding pattern of new supply deliveries, which began in 2021. We are likely to see a range of 500 to 600 property deliveries take place annually through 2023 due to elevated risk tied to city approvals, higher component, labor, and land costs.

And three, our commanding non-same-store portfolio, which is now 25% of our total portfolio. With the investment activity in 2021, our non-same-store portfolio has grown significantly and is now comprised of 513 assets, approximately 50 million square feet and has current occupancy of approximately 84%. The earnings power tied to the sizable asset base is significant and will likely continue. The portfolio is suited for outsized growth due to the quality of the assets, exceptional locations, and the lease-up activity we see as self-storage demand continues particularly under the Public Storage brand.

Now I'll turn the call over to Tom.

[Tom Boyle, Senior Vice President and Chief Financial Officer at Public Storage]

Thanks, Joe. We finished the year with strong financial performance. The reported core FFO of $3.54 for the quarter and $12.93 for the year, ahead of the upper end of our guidance range and representing 21.9% growth over 2020.

Now let's look at the contributors for this quarter. In the same-store, our revenue increased 13.7% compared to the fourth quarter of 2020. That performance was consistent with the last quarter, despite tough comps and a modest return of seasonality through the fall. Growth was driven by rate with two factors leading to the continued strength. First, strong demand and limited inventory allowed us to achieve move-in rates that were up 19% versus 2020. We're comparing to pre-pandemic levels 33% versus 2019. Secondly, existing tenant rate increases also contributed with lengthening customer stays in comparing to a period in 2020 when we were impacted by rental rate regulation in many markets.

Now, onto operating expenses. As we have discussed on prior calls, we had higher expense growth in the fourth quarter driven by property tax timing. But if you look at the full year operating expenses, we reported same-store operating expense growth, down 2%, representing record company performance. In total, net operating income for the same-store pool of stabilized properties was up 12.2% 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, adding 61 million in NOI or roughly half of the full portfolio NOI growth.

Now, I'm going to shift gears to the outlook. We introduced 2022 core FFO guidance with a $15.20 midpoint, representing 17.5% growth from 2021. We're anticipating another year of strong customer demand for self-storage as Joe highlighted earlier, leading to same-store revenue growth of 13.5% at the midpoint, roughly in line with second half '21 growth levels. As we look at the components of revenue, occupancy is likely to fall as we move through the year, but remain above 2019 levels. Rate will be the strongest driver of performance going forward, continued strength from move-in rents and existing tenant increased contribution. Notably, the long-running rent restrictions expired in Los Angeles, adding circa 1.5% to 2% on the full company same-store revenue outlook. Los Angeles is our largest market poised to accelerate with our industry-leading portfolio and team as well as our recently completed capital investments in this market through our Property of Tomorrow program.

On expenses, our expectations are for 6% to 8% expense growth, driven primarily by property tax and payroll growth. That leads to NOI growth at the midpoint of 15.7%, roughly in line with 2021 strong performance. Our non-same-store acquisition and development properties are poised to be a strong contributor again in 2022, growing from $281 million of NOI contribution in '21 to $450 million at the midpoint for 2022. Included in that is our plan to add $1 billion in acquisitions and $250 million of development deliveries this year.

Looking ahead, past 2022 for the non-same-store, we added one element to our guidance for the year compared to last year. The incremental non-same-store NOI to stabilization from the acquisitions and developments completed ahead of year-end '21. It represents the annual incremental NOI to be gained at stabilization in addition to our 2022 NOI expectations for those properties. It equates to approximately 5% yields on recent acquisitions and 10% yields on development, and we anticipate capturing roughly half of that embedded growth in '23 and the rest over '24 and '25. This pool of lease-up assets will be a powerful growth engine over the next several years.

And 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 billion of preferred stock with perpetual, fixed distributions against a rising interest rate environment. In addition to external financing, we expect to retain approximately $700 million of cash flow to reinvest into our growth for the year.

With that, I'll turn it back to Joe.

[Joseph D. Russell, President and Chief Executive Officer at Public Storage]

Thanks, Tom. In summary, we look at 2022 as another milestone year for Public Storage. We are also reflecting on our past as we look to the future by officially marking our 50th year as the largest owner and operator of self-storage in the United States. I want to thank you for your support and on behalf of our 5500 associates of Public Storage, thank you for your confidence in our abilities to lead this industry into the next 50 years.

And with that, we'll open the call for questions.

Questions and Answers

[Operator]

[Operator Instructions] We'll take our first question today from Elvis Rodriguez with Bank of America. Your line is open.

[Elvis Rodriguez, Analyst at Bank of America]

Good morning out there, and congrats on the quarter and year. Quick question on the same-store pool. I know there has been discussion of potentially the conservatism in your pool versus peers. Tom, are you able to share how much more you think same-store NOI would have been, the outlook would have been if you follow your peers' definition?

[Tom Boyle, Senior Vice President and Chief Financial Officer at Public Storage]

Well, I think, stepping back, the way we approach same-store reporting is to report in our same-store the properties that have been stabilized for several years for comparable purposes. So we look at both how the occupancy is set up versus the market as well as how rents are versus the local submarkets, and because of that, our same-store represents truly stabilized operating performance year-in and year-out. That said, we just spent some time talking about the power of our non-same-store and the growth that's embedded there and you can see in our supplement, the yields that we're achieving there in the growth that's embedded, as I just spoke to. So we're also achieving that non-same-store growth. As it relates to what our peers report, I won't get into their reporting versus ours or otherwise, but would highlight the growth potential in our non-same-store pool of unstabilized assets as well as our core reporting for our same-store.

[Elvis Rodriguez, Analyst at Bank of America]

Great. And just to follow up on the LA moratoriums expiring. I know you mentioned 1.5% to 2% on the revenue side, are you able to share what the contribution is on the NOI side?

[Tom Boyle, Senior Vice President and Chief Financial Officer at Public Storage]

I'd have to do some quick math there. It's going to be a little bit north of that getting operating leverage, but we can get back to you on what exactly that number is, but 1.5% to 2% on the revenue side and as we highlighted, 6.8% operating expense growth. So that's the difference.

[Elvis Rodriguez, Analyst at Bank of America]

Great. Thank you.

[Tom Boyle, Senior Vice President and Chief Financial Officer at Public Storage]

Thanks.

[Operator]

The next question comes from Michael Goldsmith with UBS. Yeah. Your line is open.

[Michael Goldsmith, Analyst at UBS Group]

Good morning. Thanks, all, for taking my question. Can you break down the components that give you comfort driving to the same-store revenue guidance, 12% to 15%, and that's coming on the tougher comparison, so we understand that the removal of all the restrictions in LA County add 150 to 200 basis points, but can you help us understand kind of what is rising? Is there a change in existing customer rent increases or what your expectation is for street rates for the upcoming year that gives you comfort to get to that higher level?

[Tom Boyle, Senior Vice President and Chief Financial Officer at Public Storage]

Sure. So let me take a stab at that. And Joe, you can chime in as well. As Joe mentioned, we're continuing to see strong customer momentum as we begin the year and we're starting the year frankly with the best rent growth and record occupancies heading into 2022. So that certainly is encouraging. As we move through the year, what we're already experiencing is continued strong move in rent trends and we'd anticipate that to continue through the first half of the year as we compare against early 2021 and then we expect moving rent trends to moderate as we move to the back half of the year. We're already seeing that in certain markets. If you look at a market like New York that was stronger out of the gates in 2020 per se, but has moderated in growth since, still at pretty healthy growth rates for the quarter is experiencing move-in rate growth in the fourth quarter in the 7% range. So we've seen that growth start to moderate in certain earlier recovering markets. So we anticipate that to play through in the system.

At the same time as we sit here today, we're seeing really strong contribution from markets like Miami and Atlanta, who experienced north of 30% move-in rent growth in the fourth quarter. So we've got some room to moderate from here. The second component with that as it relates to new customer demand is seasonality. We talked in the past about how we expected some return to modest seasonality in 2021 and we saw that. If you looked at occupancy trends from peak to troughs in 2020, which was an unusual year given the pandemic, we saw about a 40 basis point occupancy decline from peak to trough. Last year in 2021, we saw about 170 basis point decline from peak to trough, and in 2022, our expectations are for a more normal year, again easing into more seasonal patterns with about 250 basis points peak to trough decline.

The third piece, which is really important is the existing tenant rate increase contribution which I highlighted, which will further add to the move-in rent momentum on rate. And you highlighted is there something different there, and there certainly is. We just highlighted that in LA County, for instance, we've been subject to rent restrictions for a number of years that haven't allowed us to utilize our existing tenant rate increase program as we typically would. So that's certainly the case in Los Angeles. But it was the case in other markets as well through the back half of 2020 and into the beginning of 2021. So we have tailwinds on existing tenant rate increases because of that, as well as the lengthening customer stays which give us the ability to send more increases on a year-over-year basis that we've done in the past.

So -- and Joe, anything you'd like to add to that?

[Joseph D. Russell, President and Chief Executive Officer at Public Storage]

Yeah. And just with all that said, Michael, another area that I touched on my opening comments is the environment from a supply standpoint is materially different than it has been over the last several years. Even though we're likely to see continued deliveries, you know that we're the only public developer of self-storage assets on a national basis. We've got the biggest team out there looking and sourcing both land sites and taking assets through various stages of development. And I'll tell you, the amount of hurdles that are in today's environment are much tougher and it's giving us a nice window to point to the number of levels of metrics and a level of confidence that Tom just talked about why this year is likely to be every bit as vibrant as what we saw in 2021, and we don't really see any looming evidence of a surge of new development coming into play outside of what we're going to see in 2022 and likely 2023. So overall, it's a continued good window for us to operate with good pricing power, low levels of supply and very good customer demand, both new and then existing customer behavior.

[Michael Goldsmith, Analyst at UBS Group]

Thank you so much for the thorough answer. And as a quick follow-up since you touched on New York and Miami's market. Can you just talk a little bit about New York as an example of, is that going to near leading the way I guess in terms of the maturation as we kind of enter this post-pandemic phase and should the rest of your market sort of follow this similar curve where you're starting to see a little bit of a moderation in the rent? Thanks.

[Tom Boyle, Senior Vice President and Chief Financial Officer at Public Storage]

I do think that there is an element of that that I think resonates. I think if you look at our strongest markets in the summer of 2020, they were San Francisco and New York and we saw some dislocation-related demand, as well as moving activity and the like. And those markets have remained strong, but they haven't continued their acceleration like you've seen in the Miami or in Atlanta where really pro-cyclical demand drivers that we talked through last year, employment growth, population growth, housing activity really driving strong demand where we see that continue to accelerate through 2021. I do think that we look at those markets as -- meaning New York and San Francisco as markets where we may be past the peak levels of demand, but remain very, very healthy. You look at San Francisco for the fourth quarter, for instance, occupancy was down 130 basis points, but the 96.4% occupied and continued momentum in that market and so I do think that that's a case of what could be a medium term stabilization for some of these markets as the growth matures, but want to see how that plays out. But as we sit here today, Miami's fourth quarter growth was at 23%. It was up 100 basis points in occupancy and move-in rents were up 31% in the quarter. So continued really strong momentum in Miami, which is one of our largest markets as well.

[Michael Goldsmith, Analyst at UBS Group]

Thank you very much. Good luck in 2022.

[Tom Boyle, Senior Vice President and Chief Financial Officer at Public Storage]

Thanks, Michael.

[Operator]

Our next question is from Jonathan Hughes with Raymond James, your line is open.

[Jonathan Hughes, Analyst at Raymond James]

Hey, good morning out there. I'm going to try to speak slowly, since I'm hearing a pretty big echo, but revenue growth has been incredibly strong in your Sunbelt market in a, I think it's just safe to say, as a more free market, not subject to pricing restrictions like LA. So as you look ahead to 2022, obviously comps are difficult, but how do you expect the occupancy and rate to trend in the Sunbelt markets? Do you see more occupancy loss versus the overall portfolio as maybe strong in migration to those markets kind of unwind? And then on the rate side, do you think more like high-single-digit rate growth versus what appears to be low double-digit embedded in the overall revenue growth guidance?

[Tom Boyle, Senior Vice President and Chief Financial Officer at Public Storage]

Sure. So let me take the second part of that question first, which is what do we anticipate in some of the Sunbelt markets, we're seeing real strength. And I'd say, certainly as you look at occupancy growth, we're at 97.2% occupancy in Miami in the quarter. There is not a lot of room for that to move higher. It really is a rate story. And we are achieving strong rental rate growth as you highlighted there and I think that there is continuation of that as we get in through the year, but no question we're going to have much tougher comps in the second half in places like Miami and Atlanta. So we're likely to see that rate of growth moderate, but at those higher rents. We're not expecting to see significant deceleration or going backwards in operating fundamentals given the, what we think is the durability of demand in those markets. So hopefully that --

[Jonathan Hughes, Analyst at Raymond James]

Yeah that's definitely answers the question. And my last one. So looking at NOI growth guidance in the flow through to earnings, same-store NOI growth guidance is say 16% of this year. How is FFO growth guidance not significantly more than that? You've done a great job utilizing the balance sheet to fund last year's acquisitions of low fixed-rate debt and preferreds, but why aren't we seeing the leverage impact flow through to earnings in a more meaningful way?

[Tom Boyle, Senior Vice President and Chief Financial Officer at Public Storage]

Sure. That's a good question. So if you take a look at the contributions of growth in 2022 and compare them to 2021, clearly one of the big drivers of growth outside of the same-store pool is going to be our acquisition activity. And if you look at the two chunky quarters of acquisition volumes, last year we had the easy storage transaction in a number of others take place in the second quarter of last year, which really were contributors to 2021 growth. And in addition to that, that portfolio, in particular, was a more stabilized portfolio. It came in at 86% occupied and we were able to achieve improved operations there pretty quickly through the year such that we recognized a good bit of the growth there.

If you think about the fourth quarter activity, and a lot of the other activity in acquisitions last year, much of it was unstabilized. So we spent some time talking about the all storage portfolio and the stabilization to come there on our last call. And so what that means is, it's coming in at lower yields given lower occupancies and rental rates and we're going to seek to stabilize those portfolios over the next several years, which leads to the embedded growth that I spoke to in '23, '24, '25, but also means there's going to be less of a big bang impact per se in 2022. But ultimately we'll see how the path of that lease-up takes place over this year and the coming years, and we'll update you on that in coming calls.

[Operator]

We'll go now to Todd Thomas with KeyBanc Capital Markets. Your line is open.

[Todd Thomas, Analyst at KeyBanc Capital Markets]

Hi, thanks. First question. I just wanted to touch on the uplift at the same-store revenue growth that you're anticipating in LA and in California in general. Can you just talk about the expected cadence of that incremental contribution to the topline? I'm curious if growth is going to accelerate throughout the year somewhat radically or -- and also whether you would expect more upside in 2023 or do you anticipate the full benefit to be largely realized in '22?

[Tom Boyle, Senior Vice President and Chief Financial Officer at Public Storage]

It's a great question, Todd. So I think if you look at the different markets and in the growth profiles, you highlighted LA and so I'll spend some time on that, but I want to talk about the portfolio as a whole. So we went through a period last year, where we saw acceleration really across the board in all of our markets and we're sitting here in early 2022 talking about the tailwinds that we have in LA, which is our largest market. No question it's poised to accelerate from here. And, as you'd expect, we're starting from place where the rent restrictions expired at the end of the year. It will take us some time to see that acceleration play through in the coming quarters, but a good chunk of the rate component of that will be achieved through the busy season this year. So we'll have more to talk about as we get through the first half.

So as LA is accelerating and maybe some of the other markets that have been subject to rent restrictions accelerating, we would anticipate that there are others that see a rate of revenue growth start to decline and go the other direction, and that's kind of inherent in our -- the midpoint of our range being somewhat consistent with what we reported through the second half of 2021. We're going to have some markets that are accelerating and we're going to have some markets that are decelerating. The rate of growth in a market, say like Miami and Atlanta is unlikely to maintain at these levels, but are likely to still grow at very healthy rates through 2022. So we are likely heading into a year where we see some acceleration, some deceleration, which we view as healthy into 2022.

[Todd Thomas, Analyst at KeyBanc Capital Markets]

Okay. And then, Joe, your comments about new supply being in a little bit of a holding pattern at about 500 to 600 facilities per year through '23? I guess a couple of questions. First, can you elaborate on why you're not expecting to see an increase in new supply and what's holding back development activity from ramping up a bit? And then 500 to 600 facilities is still relatively elevated. How do you see the delivery of new projects cycling throughout the country? Are there certain markets where you would expect to see some pressure on operations in 2022 from new development deliveries?

[Joseph D. Russell, President and Chief Executive Officer at Public Storage]

So the first part of the question, Todd, there are a lot of headwinds that we see in particular. As you know, we're an active developer and we're in variety of different stages, so you've got constraints around city processes. Many cities have not even come close to normal levels of operations for approvals. You've got supply chain and component availability issues that are not easing in any material way as we're entering into 2022, and there is elevated cost that goes with that and labor availability. So there are a lot of different factors that are creating not only I would say material delays in some cases, but it gives many developers a lot of pause to jump into an environment right here where there's a lot of unknown consequences about timing and cost.

So I don't disagree that 500 to 600 you may step back and go. There is still a level of volume there, and both with our own statistics and the data that we derive from other sources, we think that's a reasonable amount of development activity that's still at hand. The development business in our sector is highly fragmented and you're going to see it continue to play through by more often that small developers that may be going through a process on one side at a time or in some cases for the first time.

So there is a lot of different crosscurrents that are creating the delays that I'm speaking to and what we see in our own portfolio is more and more around committed deliveries. The vendors that you're dealing with whether tied to concrete or steel or labor availability, there's just a lot of different factors that are creating what I would say headwinds around elevated levels of deliveries. So we're pretty confident that we're going to be in this holding pattern both this year and likely in the next year. I wouldn't tell you that any particular market is getting over-supplied. So that's a positive thing where in past cycles, particularly when we were seeing many more properties being delivered nationally, you could see and measure the impacts in certain markets because of the abundance of new supply that was literally hitting the ground and coming up very quickly.

So it's a very different development dynamic as we speak and it continues to be a good window for us to go out and compete for land sites. We're seeing fewer levels of competition, as I've talked about for the last several quarters, but to again go into the sector right now as a first-timer or a small developer, you're going to have a far level and a higher degree of risk and that's creating some level of discipline or pull back.

[Todd Thomas, Analyst at KeyBanc Capital Markets]

Okay, all right. Thank you.

[Operator]

And to all lines on hold, we are aware of the echo issue. We are working on this on the back-end. The moderators wanted to assure you that they are able to hear your questions just fine. We'll go now to Spenser Allaway with Green Street. Your line is open. Thank you.

[Spenser Allaway, Analyst at Green Street]

Can you just talk about your appetite today for expanding internationally, and especially given many of the larger portfolios yields in the US have dried up? just specifically thinking about your former interest in the Australian market or expanding further in Europe.

[Joseph D. Russell, President and Chief Executive Officer at Public Storage]

So yes, Spencer. We've certainly got the capability to think broader than just domestic opportunities. Clearly, we've seen a very vibrant ability to grow and capture well-placed and good opportunities right here in the U.S. We will keep and have the ability to think outside U.S. borders. I'm not going to point to any particular part of the global opportunity. One of the things that come through with international expansion is the depth of any particular market, the maturity of any particular market and with that, what kind of opportunity and timing could play forth compared to the opportunities that we see right here in the U.S. So again, from a knowledge and capability standpoint, we're very confident when the right opportunities surface. We are going to be very, I would say, surgical on those kinds of opportunities. But at the moment, we continue to stay very focused on a very good opportunity set right here in the United States.

[Spenser Allaway, Analyst at Green Street]

Okay. And can you provide a little color on how storage fundamentals have been trending in Europe or the Australian market, if you have those details?

[Joseph D. Russell, President and Chief Executive Officer at Public Storage]

Yeah, I would point you to our associates the Shurgard. They can give you very good color because they're very deep into the Western European markets, and I would rely on their commentary and perspective on what they're seeing there. And to Australia, I could only basically just talk to the fact that it is a market that continues to embrace self-storage. There is good demand factors at play through in the Australian economy and again I look to the operators that are in that market to give you more specific color on what's going on there.

[Spenser Allaway, Analyst at Green Street]

Thank you.

[Operator]

We'll take the next question is from Caitlin Burrows with Goldman Sachs. Your line is open.

[Caitlin Burrows, Analyst at The Goldman Sachs Group]

Hi, good morning. Maybe just starting with the fact that I think storage has benefited from the uncertainty of the past few years and the return to normal has taken longer than expected. So as behavior normalizes, what's your view on how much of the strength of storage demand is permanent versus thinking that post-COVID normalization is a negative for PSA?

[Tom Boyle, Senior Vice President and Chief Financial Officer at Public Storage]

Yeah, I mean it's definitely a good question and theoretically, how quickly or will we ever revert back to what things were like pre-pandemic coupled with the fact the impact of the pandemic are now a solid two years plus into the overall economy behaviors, the way companies have reset, again workforces, the way people are living their lives. There is a whole different host of different drivers that are at hand beyond just the more obvious factors that might have been tied to the directly to the impacts of the pandemic itself. Certainly, at the beginning of the pandemic, the very quick reversion to pure work from home environment has created some outsized demand from that alone, but you could argue today the hybrid situation or the way people have reverted to living lives differently, whether it's through their own work environments, home environments, the way people are moving, and then on top of that some of the other things I mentioned in my opening comments toed to generational demand, a very strong housing market, there is population shifts that are going on and there is certainly strong relativity why no surprise, Florida and Texas are two of our very strongest markets because of population migration in. So there are many other factors that continue to drive both adoption and the need for self-storage. Financially, if you think about the cost of housing whether you're an owner or a renter, continues to escalate at a very strong level and storage can be a very sensible and financial alternative to diffusing some of that cost. So we're very confident that the inherent benefits of storage will continue to play through and the things that we've learned through the pandemic, many of which could be long standing and deep-seeded will continue to serve both us and the sector very well.

[Caitlin Burrows, Analyst at The Goldman Sachs Group]

Okay, got it. And then -- just sorry, trying to talk with the echo. You did mention business customers as one of your positive drivers earlier in the call. Could you just talk about these business unit -- business users and maybe last mile delivery in particular? Are you seeing increased demand for this and if so how significant do you think it could become?

[Joseph D. Russell, President and Chief Executive Officer at Public Storage]

A little bit harder to peg on a -- at a specific number, but there is no question, we do see elevated level of business-oriented customers. If you think about how tight and expensive again, the industrial market continues to be and with changes in distribution, you mentioned last mile or different distribution patterns or different types of smaller companies needing spot space. What I mean by that is something that they may think they only need for a month or two without having to sign a long-term lease, storage is a great fit. We've seen this historically, but with the economy coming back and smaller businesses resuscitated, we're seeing good levels of business demand come into the portfolio as well.

[Caitlin Burrows, Analyst at The Goldman Sachs Group]

Okay, thank you.

[Operator]

[Operator Instructions] We'll go now to Smedes Rose with Citi. That. Your line is open.

[Smedes Rose, Analyst at Smith Barney Citigroup]

Hi, thanks. I just wanted to ask a little bit about your development pipeline. I think you said you were still targeting 10% of stabilized return, and we've heard for a while, not just storage, but across our multiple asset classes of higher construction cost, higher supply costs, longer lead times, and I was just wondering has your yield moved out where you think you could stabilize? Has it come down from maybe where might have been had we not seen an increase in construction costs? And if not, like how do you manage that maybe sort of avoid some of those issues?

[Tom Boyle, Senior Vice President and Chief Financial Officer at Public Storage]

Sure. So let me clarify what I had mentioned about 10% yields. So the 10% yield that I was speaking to is where we expect the previously delivered developments to achieve stabilization and you can see in the supplement that for instance the 2017 or 2018 development vintages are already north of 8% here in the fourth quarter on an annualized basis. And so I wanted to provide some road map to where the vintages through 2021 are set to stabilize. But that's not meant to suggest that a 10% yield is our target. What we've historically highlighted is plus or minus 8% property level yield upon stabilization, call it three or four years out, is a target range, obviously modulates by market and asset type and sub-market. But -- so we are moving target yields to 10%. But we do expect to achieve circa 10% on those that have been delivered.

And then the second point is on as it relates to construction costs and the challenges associated with development today, I'll let Joe chime in on this.

[Joseph D. Russell, President and Chief Executive Officer at Public Storage]

Yes, Smedes, as I mentioned earlier, there is no question there is elevated not only timing and execution, but cost pressure that's playing through. We'll see how that continues with hopefully some easing of some of the supply chain issues that are out there, but there is no question labor in and of itself is a very commanding factor. Market to market that can be quite pronounced. And then there has been a high degree of volatility. For instance in steel over the last few months. We're a bit keeping a very close eye on that. But if you're a smaller developer and you're either not by experience and/or knowledge or even scale and size, able to deal with some of these, pretty wide-ranging cost impacts as I mentioned, I think there's going to be more disciplined playing through. We're keeping a very close eye on it. That's the benefit of having the size and the capability of our own development and construction teams. So they're working very hard to see and understand and contain the elevated level of costs that are playing through on asset development right now.

[Smedes Rose, Analyst at Smith Barney Citigroup]

Okay, thanks. And as you mentioned that length of stay continues to extend, I was just wondering, could you update us on where that is now and maybe as a reminder, what was it kind of pre-pandemic?

[Joseph D. Russell, President and Chief Executive Officer at Public Storage]

Sure. I think one of the metrics that I'd highlight that with is the average length of stay of our customers that are in-house today and pre-pandemic that average length of stay was about 33 or 34 months. So approaching three years, but just a touch under. Today, that average length of stay of the in-house tenants is just about 40 months. So we've moved a meaningful way past that three-year threshold and continue to see that play through the beginning part of this year as well.

[Smedes Rose, Analyst at Smith Barney Citigroup]

Thank you, guys.

[Operator]

Next question comes from Samir Khanal with Evercore. Your line is open.

[Samir Khanal, Analyst at Evercore ISI]

Hey, Tom. I know you mentioned the were restrictions being lifted in LA. But I mean is there any potential benefits that could come from other markets this year that we haven't thought about just as a driver for growth?

[Tom Boyle, Senior Vice President and Chief Financial Officer at Public Storage]

Sure. There are certainly other markets that experienced rental rate restrictions and have a similar benefit, but not anywhere to the same degree as Los Angeles and so we've specifically called out Los Angeles. But as you would anticipate there were a number of other markets including New York, New Jersey, San Francisco, the rest of California, and really many of our markets that at some point over the past two years had rental rate restrictions and there are modest benefits in those markets as well, but nothing like Los Angeles County, given the duration of those rental restrictions and the size of the Los Angeles market for us. But there is some other tailwinds playing through with existing tenant rate increases because of that through 2022 in other markets also, but always embedded in the outlook that we provided for '22.

[Samir Khanal, Analyst at Evercore ISI]

Got it. That's it from me. Thanks.

[Tom Boyle, Senior Vice President and Chief Financial Officer at Public Storage]

Thank you.

[Operator]

We have a follow-up question from Elvis Rodriguez with Bank of America. Your line is open.

[Elvis Rodriguez, Analyst at Bank of America]

Sorry, if I missed this, are you able to share where occupancy is year-to-date?

[Tom Boyle, Senior Vice President and Chief Financial Officer at Public Storage]

Yeah. On a year-on-year basis, we've seen occupancy that ended the year, call it 50, 60 basis points above prior year at record levels. We are starting to see some of that moderation through January and into February. We're just right around flat at this point year-over-year, but again at record occupancies for this time of year as we sit here at the end of February.

[Elvis Rodriguez, Analyst at Bank of America]

Great, thank you.

[Operator]

And we'll go now to Ronald Kamdem with Morgan Stanley. Your line is open. Ronald, your line is open. Please check mute function on your phone. We'll go to Mike Mueller with J.P. Morgan. Your line is open.

[Michael Mueller, Analyst at J.P. Morgan]

Yeah, hi. Tom, this guidance -- does guidance assume additional street rate growth in 2022, or is it a little bit more of taking what's in place today, plus the rate increases?

[Tom Boyle, Senior Vice President and Chief Financial Officer at Public Storage]

Yeah, if you look at the move-in rents, I think is the term we would like to use, which is what we actually achieved in rents for customers to sign contracts through the first part of the year. There is a benefit, certainly, as we look at where we ended the fourth quarter in move-in rents compared to the first quarter of 2021, for instance. And so some of the growth that we're going to experience is certainly associated with the fact that just maintaining rents from the fourth quarter will be positive year-over-year growth into the first quarter. That is probably the biggest chunk of rental rate growth for move-ins through the first two months of the year and then we do anticipate -- first, I'm sorry two quarters of the year, and then we do anticipate modest rental rate growth for move-ins thereafter as well, but certainly moderating from the rate of growth that we've seen through the fourth quarter and third quarter of last year.

[Michael Mueller, Analyst at J.P. Morgan]

Got it. And then I apologize if I missed this, but on the acquisitions that are under contract or closed for 2022, what's an average occupancy on it?

[Tom Boyle, Senior Vice President and Chief Financial Officer at Public Storage]

Pretty close to what we saw in 2021 at averages in the high 50%, low 60%. We've got a combination of assets that are in various stages of stabilization in the pipeline and tactically, or strategically, we're going to continue to look for those assets going forward as well. They've been well suited to many of our investment strategies and that's what we're seeing right out the gate here at the beginning of the year.

[Michael Mueller, Analyst at J.P. Morgan]

Got it. Thank you.

[Operator]

We'll go to Ronald Kamdem with Morgan Stanley. Your line is open.

[Ronald Kamdem, Analyst at Morgan Stanley]

Hey, can you hear me now?

[Operator]

Yes, we sure can.

[Ronald Kamdem, Analyst at Morgan Stanley]

Great. I can hear myself actually. Just really quickly on the same-store revenue guidance, just wanted a little bit more color on sort of the upper and the lower end of the range. How are you guys thinking about that? Is it just a sensitivity on L.A. 50 on pushing rate? Is there anything else that goes into hitting the top of our guidance versus the bottom? Thanks.

[Tom Boyle, Senior Vice President and Chief Financial Officer at Public Storage]

Sure. So we did widen the same-store revenue range from, call it 1.5% range to 3% for this year in trying to capture more of those potential outcomes compared to what we did last year. But in terms of elements that would drive the top end versus the bottom, I think you can probably anticipate what they are, i.e. stronger customer demand, more rental rate strength for move-ins, even longer length of stays in the higher end case, in the flip side, true for the lower end case. Nothing in particular that I'd highlight that would be unique about the range there.

[Ronald Kamdem, Analyst at Morgan Stanley]

Great. And then just asking the seasonality question differently. So just to understand, your guidance assumes just normal seasonality where peak leasing season you see the acceleration and then going down in the later-back of the year, is that how we should think about it?

[Tom Boyle, Senior Vice President and Chief Financial Officer at Public Storage]

Yeah.

[Ronald Kamdem, Analyst at Morgan Stanley]

Okay, great. Thanks so much.

[Tom Boyle, Senior Vice President and Chief Financial Officer at Public Storage]

Thank you.

[Operator]

We'll go now to Keegan Carl with Berenberg. Your line is open.

[Keegan Carl, Analyst at Berenberg Bank]

Hey, guys. Thanks for taking the question. Just curious if you could take a stab at quantifying how many of your customers are [Technical Issues]. Is there any sort of visible shift in demographics that you're seeing with your new customer pool?

[Tom Boyle, Senior Vice President and Chief Financial Officer at Public Storage]

So one of the things, we do a vibrant amount of customer surveys with both new and existing customers. So there has been some natural gravitation to new generational users that have come into the portfolio through the pandemic needing more space for a variety of different reasons was a more pronounced driver. It hasn't gone away by any means. It's moderated a small amount, but it's still a sizable component of the kind of demand that's playing through as we're surveying customer needs as they come into the portfolio and then it goes to the whole host of other drivers that we've been talking to as well. Whether it's the amount of activity tied to home sales, movement from market to market, and then our classic definitions of other four Ds, which are very deep-seated drivers of self-storage in and of itself.

The cluttering or decluttering factor, I do think it's got some long-lasting effects, not only because there is still a strong hybrid work environment that's playing through many economies. But it's also tied to the cost of either being an owner or a renter. So that too is going to create more need for more space at home.

[Keegan Carl, Analyst at Berenberg Bank]

Got it. Thanks, guys.

[Operator]

We'll go now to Ki Bin Kim with Truist. Your line is open.

[Ki Bin Kim, Analyst at Truist Financial]

Thanks. Good morning out there. Just a couple of balance sheet questions. You have $580 million of preferred debt for an equity by coming due. How should we think about that holistically, just refinance as preferred equity or combination that? And secondly, I think you have about $500 million of floating rate? I'm not sure if that's hedge not but any additional color on how you're thinking about that in a rising rate environment.

[Tom Boyle, Senior Vice President and Chief Financial Officer at Public Storage]

Sure, great question, Ki Bin. So we have had the opportunity to refinance a significant amount of preferred stock over the last several years, call it $2.5 billion of preferred stock has been refinanced at lower rates and that contributed to the decrease in cost of in place capital that Joe highlighted earlier. As we move through the year, certainly we would look to refinance those to the extent that we can lock in attractive permanent like for like capital as well and keep that cornerstone of the capital structure, which is incredibly attractive in a rising interest rate environment given we'll never have to refinance the preferred stock and take advantage of opportunities where we can ratchet lower that cost of financing. So we have, as you mentioned, $580 million that we could potentially address this year but we'll have to see where the market is at that time.

And then as it relates to the floating rate question, we did issue floating rate notes as part of the financing package for easy storage last year. Those are callable notes that we'll look to refinance here in the coming years. We have not fixed those. So we have an ability to prepay those and manage the interest rate risk as we go.

[Ki Bin Kim, Analyst at Truist Financial]

And I know this next topic has been brought on from time-to-times like just holistically speaking, how do you guys think about your investment in entity Shurgard or how do you basically whoever holds or is reasonable to expect if you see some acquisition opportunity that could be possible sources of capital?

[Tom Boyle, Senior Vice President and Chief Financial Officer at Public Storage]

Yeah, Ki Bin. We at a Board level continue to evaluate the both benefit of our investments in either entity and the commitment that we continue to have in either entity. So that's ongoing Board review process that's in place and when and if we make a change in our commitment to entity. We would certainly communicate that where you've been very pleased with the returns that each set of investments of garnered for us and we continue to be committed to each entity and are pleased by their performance.

[Ki Bin Kim, Analyst at Truist Financial]

Okay, thank you.

[Tom Boyle, Senior Vice President and Chief Financial Officer at Public Storage]

Thank you.

[Operator]

Our next question comes from Juan Sanabria with BMO Capital Markets. Your line is open.

[Juan Sanabria, Analyst at BMO Capital Markets]

Thanks for the time. Curious on [Technical Issues] and is the main upside [Technical Issues].

[Tom Boyle, Senior Vice President and Chief Financial Officer at Public Storage]

Great. That's a very good question. So we did experience through 2021 a situation where move in rents and in-place rents were very consistent in Los Angeles. And in fact, move-in rents in some instances move higher in some of the properties here in Los Angeles, because of the dynamics of the rental rate restrictions. That said, the contribution going forward of rental rate growth with the regulations no longer in place are both moving rents as well as existing tenant rate increases. So in other words, we had an inability to increase move-in rents above the rental rate restrictions, the same way it was for existing tenants. So I would say it's both parts, both moving existing tenants higher as well as continuing to cycle through new tenants into our portfolio and Los Angeles at higher rents than we've done in previous years. So both sides.

[Juan Sanabria, Analyst at BMO Capital Markets]

Great, thanks. And then David Lee is on the call. Curious if he has any insights that he wants to share and/or if not, does not the [Technical Issues] is that bringing you guys a bulk market shift in strategy there or is it just kind of a market's market in the way [Technical Issues] hourly workers?

[Joseph D. Russell, President and Chief Executive Officer at Public Storage]

Yeah. There's a number of different components that went into the range of wage increases coupled with, as I mentioned, us putting even more focus on employee development, additional positions within operations. What we continue to do is compete for and reward very strong capabilities within our property management ranks. It's a tough environment from a competitive standpoint with the rate wage pressures and just availability of hourly employees. But we think we've got very strong and compelling reasons to attract and retain employees and we continue to use a lot of very vibrant strategies to not only bring very talented property management level employees into the business, but to reward them and give them longer-term career opportunities with us as well. So it's part of the business, we continue to focus on very aggressively and we're pleased by a number of things that we've not only done relative to just pure wage rates, but also career and growth opportunities with an operations as well.

[Juan Sanabria, Analyst at BMO Capital Markets]

Thank you.

[Operator]

We have no further questions in queue at this time, I'd like to hand the call back to Ryan Burke for closing remarks.

[Ryan Burke, Vice President, Investor Relations at Public Storage]

Thanks to all of you for joining us today. We apologize for the echo that we understand you were hearing during the question sessions. We'll certainly get that remedied moving forward. We'll talk to you all soon. Have a great day. And take care.

[Operator]

[Operator Closing Remarks].