Public Storage Q1 2022 Earnings Call Transcript

Participants

Corporate Executives

• Ryan Burke, Vice President of Investor Relations
• Joe Russell, President & Chief Executive Officer
• Tom Boyle, Senior Vice President & Chief Financial Officer

Analysts

• Jeff Spector, Bank of America Co.
• Michael Goldsmith, UBS Group AG
• Ki Bin Kim, Truist Financial Co.
• Juan Sanabria, BMO Capital Markets
• Samir Khanal, Evercore ISI
• Keegan Carl, Berenberg Bank
• Ron Kamdem, Morgan Stanley
• Rob Simone, Hedgeye Risk
• Smedes Rose, Smith Barney Citigroup
• Todd Thomas, KeyBanc Capital
• Spenser Allaway, Green Street
• Caitlin Burrows, The Goldman Sachs Group, Inc.
• Michael Mueller, JP Morgan Cazenove

Presentation

[Operator]

Ladies and gentlemen, thank you for standing by and welcome to the Public Storage First Quarter 2022 Earnings Call. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation. [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 of Investor Relations at Public Storage]

Thank you, Katie. Hello, everyone. Thank you for joining us for our first quarter 2022 earnings call. I'm here with Joe Russell and Tom Boyle.

Before we begin, we want to remind you that certain matters discussed during this call may constitute forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to certain economic risks and uncertainties. All forward-looking statements speak only as of today, May 4, 2022 and we assume no obligation to update, revise or supplement statements that become untrue because of subsequent events. A reconciliation to GAAP of the non-GAAP financial measures we provide on this call is included in our earnings release. You can find our press release, supplement report, SEC reports and an audio replay of this conference call on our website at publicstorage.com. We do ask that you initially limit yourself to two questions. After that, of course, please feel free to jump back in queue.

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

[Joe Russell, President & Chief Executive Officer at Public Storage]

Good morning and thank you for joining us. Before I hand the call over to Tom to discuss specific Q1 metrics, I will highlight five areas that are setting the stage for a robust 2022.

First, market-to-market business remains very strong. Now that we are four months into the year, we continue to see elevated demand from new customers across the portfolio. Existing customers are also extending average length of stay. We have healthy pricing dynamics and with move-in rates up 15% and our existing customer rate increase program performing very well. Second, the traditional busy season is taking hold. Inventory is tight with vacancy at about 5%. We see outsized demand for vacant units throughout the markets. Both, consumers and business customers are aggressively seeking space along with more traditional drivers for this time of year which include home sales and college students. Home affordability, hybrid work environment and a tight commercial market are clearly additive to our performance metrics. Third, our large non-same-store portfolio, now 515 assets across 50 million square feet is growing significantly from a revenue and occupancy standpoint. Non-same-store NOI nearly tripled during the quarter. These assets are highly complementary to our market presence and continue to deliver exceptional returns with outsized move-in activity due to average occupancy of 86%. Of note, the $1.8 billion ezStorage portfolio we acquired a year ago has already achieved the yield we anticipated after year two. The recently acquired $1.5 billion All Storage portfolio is performing ahead of expectations as well. Fourth, as anticipated, fewer assets have entered the sales market this year. Year-to-date, we have closed or are under contract for 21 assets, totaling approximately $275 million. Our industry-leading development platform increased to $833 million. The forecast of relatively stable national deliveries for 2022 and 2023 remains intact as we anticipate approximately 500 to 600 assets will be delivered each of the next two years. And fifth, our industry-leading digital customer experience continues to be embraced by new tenants. This includes digital leasing, centralized property access as well as our PS app. In March, we reached a significant milestone with our 1 millionth eRental move-in. Today, more than half of our customers are choosing eRental, giving them a desirable digital option to lease a unit. Our ongoing investments in the public storage digital platform are improving both, customer experience and employee efficiency. Clearly, a win-win.

Now to Tom.

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

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

Let's look at the contributors for the quarter. In the same-store, our revenue increased 15.8% compared to the first quarter of 2021. That performance is an acceleration from the 13% to 14% range in the second half of 2021. Growth was driven by rate with two factors leading to the continued strength: First, strong demand and limited inventory which allowed us to achieve move-in rates that were up 15% versus 2021; second, existing tenant rate increases also contributed with lengthening customer stays as well as comparing to a period in 2021 when we were impacted by rental rate regulation in some of our largest markets. On that note, Los Angeles was a particularly strong contributor accelerating from 8% same-store revenue growth in January to 15% same-store revenue growth in March.

Now on to expenses; we had a good quarter on cost of operations, up 3.6% in the quarter, with savings on marketing expense offsetting expected growth in other line items. In total, net operating income for the same-store pool of stabilized properties was up 20.5% in the quarter. In addition to the same-store, the lease-up and performance of recently acquired and developed facilities remained a standout in the quarter, as Joe mentioned.

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

As I've highlighted over the past year, with occupancy near record levels, our outlook for growth is driven by rental rate. Shifting gears, PS Business Parks announced it entered into an agreement where Blackstone will acquire the company. We have agreed to vote our shares for the transaction. Upon closing which is anticipated in the third quarter, we would receive $2.7 billion of cash. And of that $2.7 billion, recognize a $2.3 billion tax gain that would increase our distribution requirements for the year.

As we noted in our filings, PSB contributed $25.5 million in core FFO in the first quarter or approximately 4% of company-wide FFO. We have not updated our guidance ranges to reflect this sale but we'll plan to update you as the transaction progresses and more details are provided by PSB.

Last but not least, our low leverage balance sheet gives us capacity to fund growth and at the same time, is well laddered with long-term debt and $4 billion of preferred stock with perpetual fixed distributions against a rising rate environment. Perpetual fixed rate capital is very good capital in today's markets and so is $1 billion of cash on the balance sheet at March 31st.

And with that, Katie, I'll turn it to you to open it up for questions.

Questions and Answers

[Operator]

Thank you. [Operator Instructions] Our first question will come from Jeff Spector with Bank of America.

[Jeff Spector, Analyst at Bank of America]

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

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

Sure. Yes. Joe mentioned, we're seeing good momentum heading into the second quarter. And we're seeing that really across the board. Market strengths are pretty consistent through April. Web visits and sales calls are up in the month or were up in the month. We saw good momentum from move-in transactions, move-in rates which I know is a topic that I'm sure you're interested in, were up about a little over 12% in the month. We continued to see the occupancy and rate trade off that we saw in the first quarter. So, occupancy ended April down about 120 basis points year-over-year but again, against the backdrop of really strong rate growth.

[Joe Russell, President & Chief Executive Officer at Public Storage]

And, yes, Jeff, maybe to add a little bit more perspective on the comment I made in my opening remarks. The consumer and business customer environment is still very strong. Consumer balance sheets, by everything that we're seeing relative to statistical levels of health are quite strong. In fact, consumer balance sheets are better today than they were pre-pandemic. We're seeing very good business activity across the spectrum. Top of funnel demand, as Tom mentioned, is quite vibrant. And on the back end, length of stay continues to increase as well. So, the two bookends of both demand on the front side and then enduring utility of consumer and business utility of the space is quite strong. Many of the factors that I spoke to continue to play out quite well and we're encouraged by what we've seen through the month of April.

To your question on how many questions in the queue, we'll let you ask one more and then we'll move on to the next question.

[Jeff Spector, Analyst at Bank of America]

Okay. Thank you. That's great. I guess, then the easy follow-up question is just on guidance. That's really been the top incoming to me. I know you guys are conservative. It seems like a great or maybe even better start to the year than expected. Can you explain why maintain the guidance right now?

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

Sure. I'm happy to take that. And I guess, what I'd characterize is the year has started out largely right in line with our plan, i.e., strong but the strong start we anticipated. And, it's only been 70 days since we set our initial range. When we communicated that, we highlighted that we specifically widened the ranges to try to encapsulate more upside into the ranges compared to maybe last year where we had narrow ranges. And the reason for the width of the range is really the uncertainty as we get into the busy season here and the uncertainty that's inherent in a month-to-month lease business in the second half of the year. We're going to learn a lot about how that's going to play out over the next three months or so and we'll certainly provide updates and would expect that as we move through the year, we likely will narrow ranges as we go forward, like we did last year. But, at this point, we feel good about our outlook for the year. And to date, we've seen the strong performance we anticipated.

[Operator]

Our next question will come from Michael Goldsmith with UBS.

[Michael Goldsmith, Analyst at UBS Group]

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

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

Yes. That's clearly a good question and speaks to the uncertainty as we move through the busy season here. To date, we've continued to see good momentum in move-in rents and customers willing to accept those higher move-in rents against an environment, as Joe mentioned of tight inventory. So, while occupancy is off year-over-year, we're still talking about near-record occupancies which gives us pricing strength when inventory gets tight. We anticipate that inventory will only get tighter from here as we move into the busy season. From a month-to-month standpoint, we saw pretty consistent year-over-year, call it, mid-teens growth on move-in rents through the first quarter. As I noted in April, we're up a touch over 12% on move-in rents. And we're already starting to face those tougher comps year-over-year. So, as Joe mentioned, we clearly have momentum here. Now the question will be how does that play out over the next several months to kind of reset rents potentially higher or where they will reset?

[Michael Goldsmith, Analyst at UBS Group]

Understood. And then, I guess, the piece that kind of goes along with this is the trajectory of ECRIs. Your occupancy was relatively stable in the first quarter, suggesting that length of stay remains strong. And now, as the street rates kind of -- the street rate growth compresses as you face more difficult comparisons, how do you think about applying ECRIs to customers, just given that prices -- market prices are necessarily rising to the same extent that we've seen in the past? Thank you.

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

Sure. Thanks, Michael. So, Joe mentioned earlier that the existing tenant rate program is going well through the year. And what we mean by that specifically is consumers are behaving as expected. And we continue to run our modeling to derive expected behavior and optimize increases, that will continue through the year. So clearly, one of the inputs to that you're highlighting which is moving rents and the cost to replace a tenant if they move out or if we're wrong on our predictive analytics. But generally speaking, we're seeing trends in line with what we expected. The one item I'd maybe add to what you asked is we do have some catch-up in certain markets. I highlighted Los Angeles, for instance and other markets like New York and San Francisco are put in a similar category where we had rental rate restrictions for a good part of the 2020 and into 2021 time period where even as rental rates maybe don't need to grow as much to see outsized growth in those markets because we've got "catch-up" to do versus what we would have otherwise sent to date. And so you see that acceleration in Los Angeles in the quarter and would anticipate that continues.

[Michael Goldsmith, Analyst at UBS Group]

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

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

Thanks, Michael.

[Operator]

Our next question will come from Ki Bin Kim with Truist

[Ki Bin Kim, Analyst at Truist Financial]

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

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

Yes. It's a good question, Ki Bin. No changes to strategy there. You saw we had marketing dollars that were lower in the first quarter. I'd anticipate that that decline starts to moderate as we move through the year, given comps last year. But overall, advertising spend was lower in April than we had in March, for instance, promotional discounts as we move into this time of the year seasonally adjust lower and we saw that play out through April as well. So, nothing really to note there out of the ordinary, just overall continued good demand for consumers as well as businesses to store during the month of April which is helpful set up as we get into May and June.

[Ki Bin Kim, Analyst at Truist Financial]

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

[Joe Russell, President & Chief Executive Officer at Public Storage]

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

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

[Ki Bin Kim, Analyst at Truist Financial]

Okay. Thank you.

[Operator]

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

[Juan Sanabria, Analyst at BMO Capital Markets]

Hi, good morning. Just curious on the sunsetting of rent restrictions. If you could just provide any update or progress in the ability to recapture what was a loss over COVID and maybe prior to that? You provided a bit of color around the initial guidance with fourth quarter results but just curious if you have an update on expectations for the impact to same-store revenues for '22?

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

Sure. I'm going to concentrate my commentary around Los Angeles because it's our largest market, I think the clearer story. And big picture, we're seeing strong trends in Los Angeles. The long-running rent restrictions expired at the end of the year. We commented on the last call that we anticipated that event would likely add 1.5% to 2% of same-store revenue to the Company overall outlook. Los Angeles is our largest market and it's accelerating. As I noted, the same-store revenue growth acceleration within the quarter. The team recently completed capital investments in that market as well through our Property of Tomorrow program. So, the team was ready for January 1st with good-looking properties and poised to accelerate. So, we are seeing that. And I'd reiterate the commentary around the growth potential coming from that market specifically.

[Joe Russell, President & Chief Executive Officer at Public Storage]

And on top of that, not only our largest market but it's also our highest occupied market, nationally. So, we're close to 98% occupancy. So again, another very strong states that are for the kind of revenue opportunity that Tom is speaking to.

[Juan Sanabria, Analyst at BMO Capital Markets]

Okay. So, no change to the 1.5% to 2% benefit, I guess, from L.A. and other rent restrictions coming off, just to...

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

That's right. We're seeing the strong acceleration we anticipated.

[Juan Sanabria, Analyst at BMO Capital Markets]

Okay. And then, I mean, it sounds like you guys are pretty bullish across all geographies but we've definitely seen some markets kind of lag, whether it's New York, in some markets, i.e., anything in the Sunbelt. How do you think that dynamic plays out as we go into '23? Are you a subscriber to the view that the Sunbelt markets, I guess, the product of just tough comps will normalize to the mean and maybe New York kind of led and is a leading indicator of where the other markets will go, or just curious on how you think this plays out from a geographic perspective?

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

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

I do think, over time, we are anticipating that there will be supply that comes into the Sunbelt markets to serve that incremental population growth and the home building activity that's taking place in many of those markets. And that's a healthy thing for our industry and for that customer base which is likely to temper the kinds of rent growth that we're seeing today. But overall, we're still seeing good trends. And as Joe mentioned, industry-wide, we're not anticipating a near-term elevation in new supply, given the challenges related to getting through city processes, the construction process, costs, et cetera, today. So, we're still seeing good strength there. In terms of New York and San Francisco, maybe just on the flip side, we did see acceleration in those markets that was partly attributable to some of the catch-up I commented on earlier around rental rate restrictions.

So, we do have some momentum there. And overall, those markets are still performing really well but they don't have the same sort of procyclical drivers that a Miami does or an Atlanta does today.

[Juan Sanabria, Analyst at BMO Capital Markets]

Thanks, Tom.

[Operator]

Our next question will come from Samir Khanal with Evercore.

[Samir Khanal, Analyst at Evercore ISI]

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

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

Yes, that's a good question. I'm not going to speak specifically to second half outlook for markets in particular. But I would say, we aren't seeing anything overly concerning related to move-outs and the specific question you asked around people returning to the city. So, that's not a driver that we've seen to date. There is some new supply that continues to be absorbed in Brooklyn and parts of Queens. But overall, I would anticipate that that supply does get absorbed. And again, first quarter same-store revenue growth of north of 9% in the quarter accelerating from the fourth quarter is a pretty good place to be in a big market like New York.

[Samir Khanal, Analyst at Evercore ISI]

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

[Joe Russell, President & Chief Executive Officer at Public Storage]

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

Pricing is very competitive. I wouldn't say there's any movement yet in cap rates, surprisingly even with interest rates elevating but there's a fair amount of pent-up capital that still wants to come into the self-storage sector. So, aggressiveness from buyers remains. We're seeing some good assets in multiple markets. We're busy underwriting a number of different transactions but it's not the same elevated level of deal flow that either we saw in 2021 or likely to see this year. But, it's not annual that first quarter is a little quieter. A lot of owners take the first or maybe even sometimes the second quarter to figure out their own playbook relative to bringing assets to market. So, we'll see how that trends going into Q2 and Q3. And from there, we'll see what kind of volume plays through.

[Samir Khanal, Analyst at Evercore ISI]

Thank you.

[Operator]

Our next question will come from Keegan Carl with Berenberg.

[Keegan Carl, Analyst at Berenberg Bank]

I think first, just given what's going on in the broader macro economy of inflationary concerns. Have you guys seen any change in your customer demographics and preferences?

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

Yes. That is a very good question and there's a number of dynamics that we're watching very closely as we typically do but given the dynamic changes that we saw through the first quarter, we're watching particularly closely this year. I'd highlight a few of them. On the demand side, we're watching to see any shifts in demand. And as Joe mentioned earlier, we continue to see a broad group of demand. We're not seeing shifts in for instance, cohorts by income or demography shifting year-over-year for new customer demand and that's healthy. But, we are watching. As Joe mentioned, home sales is a driver as we move through this part of the year. Interest rates are moving higher. We've seen new home sale and existing home sale activity decline on a month-over-month basis but still sitting at activity levels that are well above pre-pandemic levels which are supportive to demand. So, again, watching that closely but nothing that we've seen to date.

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

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

[Keegan Carl, Analyst at Berenberg Bank]

Got it. And then, shifting gears a little bit and maybe just a little bit more color on your length of stay. Have the reasons for customers leaving changed at all in recent months? For example, are you maybe seeing more people mention pricing in their reasoning for leaving?

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

Yes, no meaningful change there. The biggest driver that people highlight when they leave is that they no longer need the space which makes sense, right? You think about the use cases for storage at some point, many customers no longer need the space, either because they move or their living situations change, et cetera. So, that continues to be the biggest driver and no change there. In terms of length of stay, Joe highlighted the lengthening of that metric. And on average, our customers that are in place, their average tenure is about 40 months today and that compares to a pre-pandemic average in 2019 of around 33 months. So, we continue to see really strong tenure which is supporting both, our pricing strength as well as existing tenant rate increase programs.

[Keegan Carl, Analyst at Berenberg Bank]

Great. Very helpful. Thanks for the time, guys.

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

Thank you.

[Operator]

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

[Ron Kamdem, Analyst at Morgan Stanley]

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

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

Sure. I'd just reiterate what I highlighted earlier which is we still believe that 1.5% to 2% is the right sort of range. We were obviously starting from a period of a standing start in January when those rental rate restrictions expired. And so, it will take some time to see that acceleration play through, both from new customers coming in at higher rents, older customers leaving us and then the existing tenant rate program. So, that will take some quarters to season in. But, I specifically highlighted that the January to March trend to just speak to the level of acceleration we're seeing out of the gates here in 2022.

[Ron Kamdem, Analyst at Morgan Stanley]

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

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

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

[Ron Kamdem, Analyst at Morgan Stanley]

All right, fair enough. Thanks.

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

Thank you.

[Operator]

Our next question will come from Rob Simone with Hedgeye Risk.

[Rob Simone, Analyst at Hedgeye Risk]

Hey guys, thanks for taking the question. Hope all as well. I had like kind of a higher-level strategic question for you. I mean, obviously, the last year has been fairly transformative for PSA and kind of how you communicate and run the business. I guess, looking back over the past year and without -- obviously, you can't share things that are discussed at the Board level. But if you had to kind of like think about a scorecard on what you hope to accomplish when -- you said about these changes versus what you did, kind of what was successful and what's like left hasn't had it's box checked yet, unlike what's left to do in affecting all of those changes and kind of getting the company to where you wanted it to be? Thanks.

[Joe Russell, President & Chief Executive Officer at Public Storage]

Sure, Rob. Yes, the thing that we were very transparent about and this goes back now almost a year when we did our Investor Day in May of last year was outlining the variety of different strategic initiatives that not only were pronounced from an impact standpoint but many had been in formation for some time relative to the investments and the opportunities that we saw relative to approaching the market through our technology initiatives. The opportunity that we saw with the quality of assets that we could bring into the portfolio, the expansion of our development program, the way that we're using data analytics, the digitization of the business. So, we've checkmarked a number of different areas that we've intentionally been that much more transparent about.

I would tell you that the team at large is working very aggressively to continue the optimization in each of those areas. We're on very good path relative to continuing to deliver more optimization on the way that we're not only running the business. You're seeing that through, for instance, our eRental program, very customer effective and very effective from an efficiency and employee satisfaction standpoint, an area that we continue to mine opportunities around through investments and that, again, ties to our development capabilities and the things that we're doing very uniquely in the industry by virtue of the size of our team and the way that we're delivering Gen 5 properties, that also then reverts right back to what we're doing with our Property of Tomorrow program, where we're retooling the existing portfolio, adding many amenities that we've been putting into these Gen 5 properties which include solar and efficiencies from that standpoint. So, that all points to a very strong and ongoing commitment to the growth of the business, the investment that we're making in very different and powerful parts of the business.

We're pleased by the traction. We're pleased by the business results. But as always, we are very challenged to do more. With a brand like we have at Public Storage, we can continue to expand that brand. You're seeing that as we invigorated the effectiveness even of the assets that we've been buying over the last couple of years in particular, where average occupancy was in, say, the 60% to 65% range. We put them right into the public storage brand, put many of the tools and the operational efficiencies right into those assets and they do tremendously well. So, the team at large, we continue to invest in. That's another very prominent strategy that we've got. So, we've put a lot of additional thought and retooling into the teams throughout the Company, particularly through our operating teams and we're seeing very good results from that, too. So, great environment to continue to drive the business and we're pleased by many of the things that are taking hold.

[Rob Simone, Analyst at Hedgeye Risk]

Thanks, Joe. I appreciate the color.

[Joe Russell, President & Chief Executive Officer at Public Storage]

Yes. Thank you, Rob.

[Operator]

Our next question comes from Smedes Rose with Citigroup.

[Smedes Rose, Analyst at Smith Barney Citigroup]

Thank you. I just wanted to circle back a little bit on the acquisitions outlook. And I know that you mentioned you haven't seen any changes in pricing so far that remains very competitive. But, just from your perspective, are you maybe holding back more than you otherwise might have on the expectation that pricing will change, or just kind of how do you see that playing out just because -- I mean, we know that interest rates are going up, right? I mean, that's been very clear. I'm just wondering, it seems at some point, that has to start being reflected in what -- in seller expectations?

[Joe Russell, President & Chief Executive Officer at Public Storage]

Yes. Smedes, I mean, I wouldn't say that we've holistically pivoted or taken a different approach to the way that we've been investing. We continue to look for opportunities, just as I outlined relative to the quality of the assets that we're bringing to the portfolio, the opportunity that we can say from -- that we can see from driving returns, based on our performance and then putting them into our own platform, what kind of success factors we'll see from there, the additive scale that we're going to get in any particular market. So, because of some of the shifting that we're seeing, we haven't stepped back and said where we're going to be out of the market or we're going to shift down relative to our approach to betting and looking at assets that make sense to come into the portfolio. There's a fair amount of competitive activity. But believe me, the team is working hard. We're very busy underwriting assets. And there's a lot of competitive activity playing through. There's always a tipping point that we're very cognizant of where we feel an asset may or may not bring forth the relative returns best on a price that it may trade for us. So, we're going to be very reflective of that, too. But overall, we're still seeing opportunities. And we're very optimistic about what can continue to play through.

As Tom mentioned, our balance sheet continues to be in very strong shape. We're sitting on $1 billion of cash. This year, we're likely to generate another $600 million to $700 million in free cash flow. So, very well positioned to continue to grow the portfolio and seeing very good asset opportunities and we'll continue to vet them.

[Operator]

[Operator Instructions] Our next question will come from Todd Thomas with KeyBanc Capital.

[Todd Thomas, Analyst at KeyBanc Capital]

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

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

Sure. Well, I think, I'd make a couple of points. I think one of the comments you made there was an important one which is that we're seeking to maximize revenue from the available inventory that we have. And so, occupancy is a component, rental rate is a component. I'll tell you, occupancy down 80 basis points is a relatively small component of the overall revenue outlook as we think about the year. That said, clearly, we're managing our inventory. And I guess, maybe reading into your question, are you asking is occupancy lower because of weaker consumer trends. And I think to reiterate comments we've made already on the call, we're not seeing weakening consumer trends. We're seeing good customer demand for space and then seeking to maximize the revenue that we can from the available inventory and that demand.

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

[Todd Thomas, Analyst at KeyBanc Capital]

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

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

Yes. I mean, vacate activity is something that our teams watch very closely. So, you heard from Richard Craig and Philip Kim, on our team on Investor Day around the analytics and pricing methodologies. Part of those methodologies drive on available inventory. And to understand available inventory, you need to understand anticipated vacates and the level of inventory you have to market. So, that's a metric that I have teams internally looking at daily. And what I'd say is, we have pretty good visibility into vacate levels. And if things start to shift in an unexpected manner, it's certainly something we'd communicate. But to everything we've highlighted to date, we're not seeing anything that is unusual as it's related to the predicted vacate activity through the year.

I would say the only time we saw really big shifts in anticipated vacates versus what the actuals were was the onset of the pandemic. And that was obviously a pretty unique time period. But really since then, behavior has been pretty predictable.

[Operator]

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

[Spenser Allaway, Analyst at Green Street]

Thank you Most of my questions have been asked. I just had two maybe on the ancillary revenue side. There's been a lot of churn across the sector in terms of the third-party management pools. Can you guys maybe just speak to who is buying these assets? Is it any REIT peers, or is the buyer pool changed recently?

[Joe Russell, President & Chief Executive Officer at Public Storage]

Yes. Spencer, it's any and all of the typical buyers that are out in the market. So, that's a pretty commonplace component of the third-party platforms, whether they're the platforms you see through the public operators and there's a fair amount of private third-party management platforms as well. So, the trading activity that can take place within those platforms can come from either a public operator, private equity, private investors. So, it's pretty typical of just the overall range of buying activity that takes place. We've -- typically, even before we got in the third-party management business, typically bought a fair amount of assets out of different third-party platforms. Last year that -- we also bought a number of assets out of our own third-party management platform. In the first quarter, we bought one. But, there is a fair amount of trading that goes on in these platforms, some of which is tied to structurally, the reasons many of these assets are on these platforms as they're being teed up to do just that.

The owners may not look at their own ownership for long periods of time. They're looking for certain levels of optimization. They'll get the asset to that point and they'll take back right out of the market to trade. So, very typical kind of the overall dynamics of what happens with third-party management.

[Spenser Allaway, Analyst at Green Street]

Okay, great. Thank you. And then, can you give a sense of the penetration rates for tenant insurance, just maybe on the same-store pool as compared to your non-same-store pool?

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

Sure. I'm going to speak to coverage overall. Coverage in the same-store pool is in the upper 60s and that's been pretty stable. It's maybe been increasing a little bit over the past couple of years. And in the non-same store, it's lower than that. And that's intuitive for development properties. It actually tends to punch a little bit higher than our same-store pool as we see a lot of new customers who find the value in our tenant insurance offering. And then for acquired properties, it takes a little bit longer to have that coverage reach a more stable basis as many tenants are coming in that are in place that maybe don't choose to utilize the offering. So overall, it tends to be lower. I think for the quarter, off the top of my head, it was in the 50s for coverage in the non-same-store pool versus that upper-60s in the same-store pool. And obviously, part of the strategy over the coming years will not only be to lease up that non-same-store pool but also offer that product to that tenant base.

[Operator]

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

[Caitlin Burrows, Analyst at The Goldman Sachs Group]

Hi, there. Good morning. I was just wondering if you could talk maybe a little bit more on supply. Supply is often brought on demand is strong and it seems like it is. And I think you've previously said you didn't think it would be a real wind to '22 or '23. So, just wondering if you could give your current view on supply this year and next and what macro factors may be impacting that, for example, construction costs versus storage-specific drivers, like good demand.

[Joe Russell, President & Chief Executive Officer at Public Storage]

Sure, Caitlin. Yes. And I would tell you that as we've spoken to over the last several quarters, some of the headwinds that seem to be containing the amount of volume of new development, we feel, is a good thing in one way, meaning there's elevated risk going in any development opportunity. And I can't name a city, for instance, nationally that is easier to deal with today than it was pre-pandemic. City staffs are constrained from a staffing standpoint, from a timing standpoint, the complexity to get through both entitlement and then construction processes are very elevated. And with that, there's more risk at hand, at a time when we're seeing component costs increase, in some cases, pretty dramatically, whether it's steel, labor, concrete. And then, with that interest rates are still far from stable. In fact, they're accelerating. So, very different risk factors that create some pretty meaningful headwinds.

So, the development business is still active, however, I mean, still 500 to 600 properties likely to come into the market this year and next. To your point, obviously, some of that's being driven by the overall success of the sector and the amount of demand that we're seeing for self-storage but there's a healthier level of discipline that's playing through for many of the factors that I spoke to. It's been a good window for our development team to continue to do what you're seeing us do which is to grow our own pipeline. We're seeing less competitive activity for certain land sites in certain markets. We're able to capture opportunities because we've got the scale, the efficiency and the opportunity deflect to some degree, some of the pressure points that I just spoke to.

But if you're a first-time developer or a developer that doesn't have the wherewithal to potentially deal with these risk factors, you're probably going to be a lot more conservative and -- we think that overall, as I mentioned, that's a good thing for the industry.

[Caitlin Burrows, Analyst at The Goldman Sachs Group]

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

[Joe Russell, President & Chief Executive Officer at Public Storage]

Yes. So, we've seen continued adoption of eRental. Now, over 50% of our customers are using that channel from an election standpoint. We're not pushing them to it but they're actually electing to choose self-directed digital leasing process. By virtue of that, at our own frontlines and the amount of time that our property managers, in particular, historically would have spent on that specific move-in process when you're seeing the effects of potentially 50-plus-percent of that coming out of the labor demand property to property, it's pretty powerful. It gives us the opportunity to redirect priorities relative to the utility of the property management team, the things that they're focused on, the efficiencies that can play through when half or more of their customer activity is actually being self-directed and done on a digital basis. So, it's a pretty powerful tool. You're seeing some of that through the cost efficiency and our labor, even though labor costs are up but there's continued benefit that we see from increasing the amount of digital options that we're giving customers.

And frankly, we're getting very good feedback from customers who use that tool as well. It's a growing and preferred alternative to actually transact. It's a much more consistent experience and it can give the customer even that much more flexibility when they choose to move in to a specific property. So, all things considered, it's been a very powerful tool and we're continuing to look at different ways of utilizing it and expanding it's use, again, depending on customer choices.

[Operator]

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

[Juan Sanabria, Analyst at BMO Capital Markets]

Thanks for letting me get back in the queue. Just one question kind of tying back to a couple of previous ones. At the Investor Day last year, you talked about the longer-term goal of cutting 25% in payroll costs. So, just curious if you have an update on that. Clearly, inflation is a lot higher. This quarter, we saw R&M and centralized management costs on the same-store pull up in the high-teens. So, just if you can give us an update on how we should be thinking about that previous commentary in light of what's changed, obviously?

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

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

[Operator]

Our next question will come from Michael Mueller with JP Morgan.

[Michael Mueller, Analyst at JP Morgan Cazenove]

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

[Joe Russell, President & Chief Executive Officer at Public Storage]

Yes, Mike. What's typical in the way that we approach land is we're looking primarily for opportunities where we're not directly putting land inventory right onto our balance sheet. It's pretty typical or the types of opportunities that we're sourcing give us the flexibility as a buyer to actually take the site through layers or stages of entitlements that happen on their ownership time. It's the obligation they give us or the time we take to actually take the property through re-entitlement without actually owning the site. So, contractually, that's a pretty typical approach. It's not each and every time but more often than not, we're taking a land site through certain layers of entitlements before we actually take ownership to not only reduce risk but to contain costs as well. And with the amount of knowledge, efficiency and resources that we put into these processes, by far, the majority of the landowners that we're doing business with are agreeable to that kind of approach.

So, with that, we're not holding large land positions. And with -- and more frequently, we're going to acquire a site when it's much more closer to the ability or the timing to actually start construction.

[Michael Mueller, Analyst at JP Morgan Cazenove]

Got it. So, I mean, if we're just thinking about those agreements in the same way that you would think about owning land, I guess, how many you're in the works -- or how many do you have? And what sort of lead time frame does that give you in terms of we have with what's under our control, two years' worth of development three years or one year or something? I mean, how do you size that up?

[Joe Russell, President & Chief Executive Officer at Public Storage]

Yes. Mike, I would say, it aligns exactly to the timing you're talking about. So, market-to-market, you've got some processes that might take you a year or two. You've got others that could take three or four. And believe it or not, some that could even be longer than that. So, we're matching that up. And contractually, we have control of the sites before we're starting to invest and deploy resources and time into those sites. So, we've got control of the land sites themselves. So -- and it matches to exactly what you're speaking to. So, if you think about the pipeline that we have today, there are components of that pipeline that those land sites are going through the exact same sets of processes that I spoke to. So, we may not have actually acquired the land site itself in certain of those cases but we have full contractual ability to control the site. And once we get through the entitlement process, we'll take ownership.

[Operator]

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

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

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

[Operator]

[Operator Closing Instructions]