Public Storage Q1 2023 Earnings Report

Public Storage EPS Results

• Actual EPS: N/A
• Consensus EPS: $4.07
• Beat/Miss: N/A
• One Year Ago EPS: $3.65

Public Storage Revenue Results

• Actual Revenue: N/A
• Expected Revenue: $1.09 billion
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Public Storage Announcement Details

• Quarter: Q1 2023
• Date: 5/3/2023
• Time: After Market Closes
• Conference Call Date: Thursday, May 4, 2023
• Conference Call Time: 12:00PM ET

Public Storage (NYSE:PSA) (NYSE: PSA) is a real estate investment trust (REIT) that specializes in self-storage services. Headquartered in Glendale, California, the company was founded in the early 1970s and has grown through development and acquisitions to become one of the largest owner-operators of self-storage facilities in the United States. It is publicly traded on the New York Stock Exchange under the ticker PSA.

The company’s core business is the ownership, operation and management of self-storage properties that serve both residential and commercial customers. Public Storage offers a range of unit sizes and amenities designed to meet varied storage needs, including drive-up access, climate-controlled units and vehicle storage at many locations. In addition to rental space, the company typically provides ancillary services such as tenant insurance, packing and moving supplies, and online reservation and account management tools to support customer convenience and retention.

Primarily focused on the U.S. market, Public Storage manages a large portfolio of facilities located in metropolitan and suburban areas where demand for flexible storage is high. Its customer base spans individuals storing household goods during life transitions as well as small and medium-sized businesses requiring off-site inventory and document storage. As a REIT, the company’s operating model emphasizes property-level management, occupancy optimization and incremental development or acquisition to drive long-term portfolio value.

Public Storage Q1 2023 Earnings Call Transcript

Key Takeaways

• Public Storage accelerated its digital transformation, achieving over 60% eRental adoption, surpassing 2 million mobile app downloads, placing 400 properties on its digital operating platform, installing solar at 200+ sites, and completing 70% of its Property of Tomorrow enhancements.
• The portfolio’s non-same store assets delivered a 29% NOI growth across 529 acquisitions and developments, supported by an industry-leading development pipeline exceeding $1 billion slated for delivery over the next 24 months.
• Same-store operations remained robust with move-in volume up nearly 13%, same-store revenue up 9.8% year-over-year, and NOI growth of 11.2%, while occupancy gains continued into April.
• Management raised its full-year outlook after reporting core FFO of $4.08 for Q1 (up 16.2% excluding PSB), underpinned by a net leverage ratio of 3.3x and $700 million in cash on hand.
• Transaction activity has been relatively quiet, with nearly $200 million closed or under contract toward its $750 million acquisition target, driven largely by off-market and small-to-medium portfolio deals.

Presentation

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the Public Storage First Quarter 2023 Earnings Call. At this time, all participants have been placed in a listen-only mode. The floor will be open for your questions following the presentation. If you have any question at that time, please press star one on your telephone keypad. If you wish to remove yourself from the queue, please press star two. 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 and Strategic Partnerships at Public Storage]

Thank you, Brittany. Hello, everyone. Thank you for joining us for our first quarter 2023 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 4th, 2023, 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 keep your questions limited to two.

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

Of course, if you have additional questions, feel free to jump back in queue. With that, I'll turn the call over to Joe.

[Joe Russell, President and CEO at Public Storage]

Thank you, Ryan, thank you for joining us today. Public Storage had a very good start to 2023. We remain focused on leading the self-storage industry's digital evolution, transforming our own operating model and enhancing and growing the portfolio.

[Joe Russell, President and CEO at Public Storage]

In the quarter, we achieved new milestones on several of our key initiatives, which included exceeding 60% of customers choosing to move in through our eRental online lease, eclipsing two million downloads of the Public Storage mobile app, reaching 400 properties on our customer demand-driven digital operating platform, installing solar at more than 200 properties, putting us on track to complete at least 1,000 property installations within the next three years, completion of over 70% of the Property of Tomorrow enhancement program, growing NOI by 29% across the 529 Acquisition and Development properties in our non-same store pool, and driving the industry's largest Development pipeline to an excess of $1 billion to be delivered over the next 24 months.

[Joe Russell, President and CEO at Public Storage]

We had a strong operating performance in the first quarter, particularly with existing customers performing well and same-store move-in volume up nearly 13%. Length of stays are strong and same-store revenues were up nearly 10% year-over-year. Our exceptionally large non-same store Acquisition and Development pool, now nearly 25% of the overall portfolio, continues to outperform as well. Fundamentally, self-storage is a needs-based business with demand drivers that are multidimensional and fluid throughout economic cycles. We also continue to benefit from people spending more time at home, which has increasing permanence with remote and hybrid work here to stay. Additionally, with the return to more seasonal patterns of demand, we are currently also seeing an uptick in movement activity that has continued into the second quarter.

[Joe Russell, President and CEO at Public Storage]

We also continue to find good opportunity in development and redevelopment as well, with a vibrant pipeline poised to generate growth for years to come. Our unique ability to weather economic cycles serves us well, particularly while other developers have slowed their activity due to higher interest rates, cost pressures, difficult municipal processes, and concern over the near macro term landscape. I'll turn the call over to Tom to discuss Acquisition market and financial performance.

[Tom Boyle, CFO and Chief Investment Officer at Public Storage]

Thanks, Joe. The transaction market has been relatively quiet to start the year as potential sellers feel out the macro environment, higher interest rates, and the spread between buyer and seller expectations. That said, we have closed or are under contract to acquire nearly $200 million, right on track for our $750 million outlook for the year. The vast majority of our Acquisitions this year have been done off-market quietly. More recently, we've been encouraged by an increase in inbounds, which are primarily small to medium-sized portfolios. We're in a great position to acquire today, given our cost and access to capital advantages paired with our industry-leading NOI margins. Now on to financial performance.

[Tom Boyle, CFO and Chief Investment Officer at Public Storage]

As Joe mentioned, we started the year strong, reporting Core FFO of $4.08 for the quarter, representing 16.2% growth over the first quarter of 2022, excluding the contribution from PSB. Looking at the components, in the same store, our revenue increased 9.8% compared to the first quarter of 2022. We drove strong move-in volumes up 13% during the quarter, heading into our peak leasing season, and the existing tenant base remains strong with length of stays sitting at records. Same-store cost of operations were up 5.6%, leading to total net operating income for the same-store pool of stabilized properties growing 11.2% for the quarter.

[Tom Boyle, CFO and Chief Investment Officer at Public Storage]

In addition to the same store, the lease-up and performance of the recently acquired and developed facilities remained a standout in the quarter, growing 29% compared to last year. Shifting to the outlook, we lifted our outlook for the year, driven by increasing our same-store revenue assumptions. While the macro environment remains uncertain, performance to date has been encouraging. We're set up well heading into the second quarter. Last but not least, our capital and liquidity position remains rock solid. Our net leverage of 3.3 times, combined with $700 million of cash on hand at quarter end, puts us in a very strong position for capital allocation as we move through the year. Now I'll turn it back to Joe.

[Joe Russell, President and CEO at Public Storage]

Thanks, Tom. Our people, technologies, platforms, balance sheet, and brand have and will be continually enhanced to create and strengthen the competitive advantages we have across the entire Public Storage enterprise. We see opportunity in the current environment and are poised to execute with focus on delivering growth and value for our shareholders. Let's go ahead and open the call up for questions.

[Operator]

At this time, if you would like to ask a question, please press the star and one on your touch-tone phone. You may remove yourself from the queue at any time by pressing star and two. Once again, that is star and one if you would like to ask a question, we will take our first question from Juan Sanabria with BMO Capital Markets.

[Juan Sanabria, Managing Director at BMO Capital Markets]

Hi. Good morning. Joe or Tom, I was just hoping you could speak to April trends and what you're seeing in terms of demand and/or price sensitivity from customers out there. Some of your peers have talked to some softness in March or April, depending on their market exposure. Just curious what you guys are seeing across your platform.

[Tom Boyle, CFO and Chief Investment Officer at Public Storage]

Yeah. Thanks, thanks for the question, Juan. You know, as we moved through the quarter, and you could hear it in the prepared remarks, we saw continued strength in move-in volumes and interest into our system. As we moved through March and into April, that trend continued. I wouldn't characterize March as weak, but I would characterize April as strong. We've seen accelerating move-in volume growth as we moved through what was a strong March and into a stronger April. One of the things you highlighted there was existing customer sensitivity to price, and I'd also note that we haven't seen anything concerning there. Price sensitivity has been very in line with our expectations.

[Tom Boyle, CFO and Chief Investment Officer at Public Storage]

Against that backdrop, seeing good move-in volumes, which is encouraging, in particular, as we head into the next several months.

[Juan Sanabria, Managing Director at BMO Capital Markets]

Thanks. Just for my second question, just on the Property of Tomorrow spend, you guys have made excellent progress on deploying that capital. Just curious on the types of returns you're generating as you look at the CapEx that you've spent, and how that's augmenting growth either in the same-store or non-same-store pool?

[Joe Russell, President and CEO at Public Storage]

Yeah, to step back, Juan, you know, the program's been, you know, quite well received by both customers, our employees, and now that we're at a point where we're actually getting to full market completion in several of our, you know, key markets as we, you know, finish up and round out the program over the next couple of years, we're actually seeing, you know, very good response and, you know, an overall lift just to the again, the image and the power of the brand, particularly where we've got meaningful scale in, you know, many, many markets. We continue to track and see, you know, the benefits from that. It's continuing to enhance our presence market to market, and with that, you know, we continue to be very excited about getting the program completed.

[Joe Russell, President and CEO at Public Storage]

The team's done a very nice job figuring out, you know, any and all ways to optimize the amount of volume. We're actually going to pull it in ±1 year earlier than we intended to. With that, you know, we'll be in a very good position nationally to have elevated the crisp and enhanced brand attributes that play well in many parts of our business.

[Juan Sanabria, Managing Director at BMO Capital Markets]

I appreciate the time. Thank you.

[Joe Russell, President and CEO at Public Storage]

Thank you. Thanks, Juan.

[Operator]

We will take our next question from Michael Goldsmith with UBS.

[Michael Goldsmith, Analyst at UBS]

Good afternoon. Thanks a lot for taking my question. My first question's on the guidance. You brought up the low end. Is that a reflection of the trends that you've already experienced in the first quarter? You know, the low end of your range was based on a full recession scenario. Is the increase in guidance more reflective of that outcome is less likely to occur? Within this, you've included this quote in your supplemental that suggests that the potential of revenue growth rates is wide and including the potential for year-over-year declines in revenue in the second half of the year. Is there anything that you saw in the first quarter that changes your view on that? Thanks.

[Tom Boyle, CFO and Chief Investment Officer at Public Storage]

Sure. Thanks for that question, Michael. I would characterize the first quarter as a strong quarter, and that is really what's leading to the lift in the low end of that revenue assumption component. So we've talked to the strength in the first quarter. You're highlighting how we've we characterized the wide range of potential outcomes embedded within our outlook for the year. There's still certainly macro uncertainty in the back half of the year. That hasn't changed, but performance to date has been quite encouraging, which is leading to the increase in the outlook for the year.

[Michael Goldsmith, Analyst at UBS]

All right. My follow-up question is about the strength and the sustainability of the L.A. market. Same store NOI growth was up 20% in the quarter, which added 300 basis points to the overall number. Presumably, this is reflecting the rate restrictions that were lifted in February of 2022, which you lapped during the quarter. Is there kind of like a second year of growth coming from the L.A. market, or have you kind of used up all the gain there and the gain should be more modest going forward? Thanks.

[Joe Russell, President and CEO at Public Storage]

Yeah, Michael. The, you know, first of all, L.A. being our largest market, we've been very pleased by the performance we've been able to achieve over the last year or so, to your point, where, you know, the owners restrictions have been lifted. It is also a market where we have a commanding presence. We've got very good inherent demand. We've got very good occupancies, and very little new competitive product coming literally to any of the sub-markets that we're competing in. The inherent demand in the market's quite good. We think we've got, you know, again, some good traction ahead of us, you know, certainly going into, you know, the rest of 2023, and we'll continue to see where we go from there. We've been very pleased by the performance of that portfolio.

[Joe Russell, President and CEO at Public Storage]

It is one of the markets that we, you know, to go back to my comment about Property Tomorrow, we, you know, we put about $75 million into that portfolio to lift it from a brand awareness standpoint. Finished that, you know, a little over a year and a half ago. Again, good timing and tie to that being that much more prominent in the market. You know, one of the ways we measure the receptivity of that too is Net Promoter Scores. Again, getting very good reaction from customers and, you know, the brand itself is playing through quite well. With that, good demand and good continued performance.

[Michael Goldsmith, Analyst at UBS]

Thank you very much.

[Joe Russell, President and CEO at Public Storage]

Thank you.

[Operator]

We'll take our next question from Smedes Rose with Citi. Your line is open.

[Smedes Rose, Analyst at Citi]

Hi. Thank you. You mentioned the almost 13% move-in volume across the first quarter, but move-out volume was lower, but kind of almost kept pace with the move-in volume. I was just wondering if you saw similar trends in April as well?

[Joe Russell, President and CEO at Public Storage]

That's a great question, Smedes. One of the things that took place during the quarter was, we did gain occupancy, as you'd anticipate. Occupancy from the end of the year through March was up 50 basis points. In April, we gained another 20 basis points. Starting to see that seasonal uplift in occupancy that will really continue here into May. I'd characterize the trajectories of year-over-year move-in and move-out growth as being favorable, i.e., as we move through the quarter, the move-out volume growth has modestly lowered, and the move-in volume growth has modestly increased into April, i.e., so April was actually our best month in terms of gaining occupancy and in closing the year-over-year occupancy gap on an incremental basis.

[Joe Russell, President and CEO at Public Storage]

Again, encouraging trends here as we head into the peak leasing season.

[Smedes Rose, Analyst at Citi]

Thanks. I noticed that the late charges, the pace of growth picked up at a faster pace on its rental income. I'm just wondering if there's anything kind of to read into that and if you've seen, you know, an uptick in kind of non-payments or anything, you know, that would suggest some customers are under economic duress?

[Joe Russell, President and CEO at Public Storage]

Sure. Yeah. There's two components to that line item. The one is what you're highlighting, which is that there are more customers that are making late payments this year than last year. If you frame it over a multi-year time period, we're coming off of really, really low delinquency time periods over the last several years and remain well below 2019 levels of delinquency. You're seeing an uptick there in late payments. Then I think more interestingly, the fact that we had significant move-in volume growth also contributed there with our administrative fee that's charged to new customers when they move in, leading to a year-over-year increase in that line item as well.

[Smedes Rose, Analyst at Citi]

Great. Thank you.

[Joe Russell, President and CEO at Public Storage]

Thanks, Smedes.

[Operator]

We'll take our next question from Todd Thomas with KeyBanc Capital Markets.

[Todd Thomas, Managing Director and Equity Research Analyst at KeyBanc Capital Markets]

Hi. Thanks. Good morning out there. First question, just related to investments, Tom. You know, the balance sheet's in great shape. I think you commented that you're seeing an increase in inbound call volume from owners. Are you seeing the pipeline build, and can you speak a little bit to pricing, whether pricing seems to be moving in your favor such that we should expect to see deal flow pick up in the quarters ahead?

[Joe Russell, President and CEO at Public Storage]

Sure. We have started to see or started to receive more inbounds more recently, and I do think that that's healthy. As you know, Todd, it's traditional to have a busier second half for storage transaction volumes than the first half, and we're encouraged to start to see that inbound activity. We suspect it is going to lead to a pickup in volume as we move into the second half this year. In terms of the valuation

[Tom Boyle, CFO and Chief Investment Officer at Public Storage]

You know, as you think about the assets and where things have traded, transaction volumes have been relatively light to start the year. I wouldn't point to a significant amount of data for us to sit here and say that cap rates are, you know, at X or Y with significant precision. We're continuing to find good value in many of the assets and are closing that buyer and seller gap in many instances, but it remains wide in others. We're still working through that and anticipate to work through that through the rest of the year, given what's played out with interest rates and the macro environment.

[Tom Boyle, CFO and Chief Investment Officer at Public Storage]

to put some numbers on it, I think on the last call, we said the cap rates had moved up, about 100 to 125 basis points, from the lows. I would say we haven't seen anything over the last three months that would have us direct you, any differently than that.

[Joe Russell, President and CEO at Public Storage]

Yeah. I might add-

[Todd Thomas, Managing Director and Equity Research Analyst at KeyBanc Capital Markets]

Okay.

[Joe Russell, President and CEO at Public Storage]

-to Todd-

[Todd Thomas, Managing Director and Equity Research Analyst at KeyBanc Capital Markets]

Yes.

[Joe Russell, President and CEO at Public Storage]

Just a little bit more relative to the complexion of the activity so far. You know, Tom mentioned that, you know, we've been doing a number of deals off market. As always, we are looking for those kinds of opportunities as well. There are still owners out there that are looking for an efficient, clean transaction. The average occupancy of the $186 million that we've done so far has been about 50%. Thematically, very similar objective on our part, where and if we can acquire properties that have upside once we put them in our platform, that's gonna make sense relative to the ultimate yields that we're likely to achieve from those assets. We're confident we're gonna continue to see those kind of opportunities going into the rest of the year.

[Todd Thomas, Managing Director and Equity Research Analyst at KeyBanc Capital Markets]

Okay. Then, how would you know, sort of compare and contrast the US first, non-US opportunity set today? Then, also would you know, just given the amount of development activity that's taken place over the last several years and, you know, some of the, you know, tighter, the tighter lending environment that we're seeing today, would you consider, you know, building out a structured finance program at all to be a financing solution for borrowers, but, you know, also as a way to maybe e-expand the platform through third-party management or, and build a future investment pipeline?

[Joe Russell, President and CEO at Public Storage]

Okay. yeah, a couple of questions or more on that, you know, in that statement. first of all, from an international standpoint, I would say, you know, consistent with what we've spoken to for some time, which is, you know, we're well equipped to consider and evaluate, you know, outside border opportunities. We continue to do that. Nothing to speak to as we, you know, are here today. again, that's, you know, part of the overall mining that we're doing, both inside and outside borders. you know, we'll see how that plays out over time. Clearly, there's been far more, in border opportunities, you know, over the last three or four years.

[Joe Russell, President and CEO at Public Storage]

You know, maybe to another part of your question is the fact that part of the reason for that is the amount of development that's come into the cycle has been done by owners that have no intention of being long-term, you know, holders of those assets. That continues to be a good breeding ground for us to find deals. I'll let Tom talk about thoughts around, you know, going into any kind of lending platform, et cetera.

[Tom Boyle, CFO and Chief Investment Officer at Public Storage]

Well, yeah, I'd maybe take a step back and comment on your question around the lending environment, because I do think stepping back, the lending environment has certainly gotten more challenged for many developers at this point and could lead to lower new supply heading forward. We'll have to see how that plays out. In terms of, you know, our participation in other parts of the capital stack, we continue to find very good value in the equity portion of the capital stack and have been deploying capital there consistently over the last several years and have found that to be a good risk-adjusted return. I'd note, in addition to that, we have made some lending investments with some of our partners on a smaller scale.

[Tom Boyle, CFO and Chief Investment Officer at Public Storage]

Something that, you know, we're considering and is part of our wheelhouse as we move forward.

[Todd Thomas, Managing Director and Equity Research Analyst at KeyBanc Capital Markets]

All right. Thank you.

[Joe Russell, President and CEO at Public Storage]

Thank you.

[Tom Boyle, CFO and Chief Investment Officer at Public Storage]

Thanks.

[Operator]

We'll take our next question from Keegan Carl with Wolfe Research. Your line is open.

[Keegan Carl, SVP of Equity Research at Wolfe Research]

Hey, guys. Thanks for the time. Maybe first here, you know, just any more color in your Development pipeline, particularly those assets that are completed from 2018 to 2020. It seems as if occupancy levels are below your portfolio average by a decent margin, but yet they should have stabilized by this point based on your press release commentary. Just any sort of color on what's driving it, if it's maybe market-specific would be helpful.

[Joe Russell, President and CEO at Public Storage]

Yeah. I'd characterize the performance of those assets to be pretty strong, right? I mean, anything we delivered over that time period has benefited from really strong demand drivers. Frankly, they've been exceeding our expectations. Your comments around occupancies, I think some of those vintages are a touch under 90%, but they'll certainly stabilize above 90%. One of the things that I'd remind you is that occupancy is only one part of the equation of stabilization, and rental rates is certainly the other. We're seeking to maximize revenue from those pools of assets the same way we do our same-store pool. Occupancy will ultimately get over 90%.

[Joe Russell, President and CEO at Public Storage]

I think more importantly, the rate growth there has been exceptionally strong, and likely has several more years of strong rate growth compared to the same-store pool, from that group of assets. You can see the yields that we're achieving there, continues to reinforce the strong risk-adjusted return of that program, and it leads to our increase in desire to continue to build moving forward.

[Joe Russell, President and CEO at Public Storage]

The, you know, the Development pipeline now sitting over $1 billion as we seek to grow that program.

[Keegan Carl, SVP of Equity Research at Wolfe Research]

That's helpful. One thing I noticed in this supplement, just your commentary on credit card fees stood out. I'm just kind of curious, is there a way for you guys to charge a higher rate on those using credit cards to offset that? Or do you just not want to take the risk of them balking, given, you know, those people on Autopay tend to be better customers?

[Joe Russell, President and CEO at Public Storage]

Yeah. I'd say for the most part, the increase in credit card fees relates to the increase in revenues. That's by far and away the contribution. As revenues increase, you're gonna see those payment processing fees go higher. From an operational standpoint, we do spend time thinking about ways to incentivize our customers to use attractive payment patterns for them, but also ones that may be cheaper for us to process. That's an ongoing kind of year in and year out attempt through different operational methods. To your point, we love to move people in and achieve that Autopay. Ultimately, it's much more important to achieve that move in than it is to focus on the payments process.

[Keegan Carl, SVP of Equity Research at Wolfe Research]

Got it. Super helpful. Thanks for the time, guys.

[Operator]

Once again, that is star one if you would like to ask a question. We'll take our next question from Steve Sakwa with Evercore ISI. Your line is now open.

[Steve Sakwa, Senior Managing Director and Senior Equity Research Analyst at Evercore ISI]

Great. Thanks. Good morning. I'm sure you guys are disappointed in the outcome with, you know, with Life Storage. Does that sort of change kind of your view at all about kind of large scale M&A, or do you feel like this kind of puts pressure for you to find other transactions of size to, you know, kind of keep your lead in the industry?

[Joe Russell, President and CEO at Public Storage]

Yeah. Steve, you know, clearly, you know, we are well positioned to continue to grow in all different shapes and sizes. You know, we feel every bit, if not more confident that, you know, opportunities will continue to arise going forward. We're very focused on that. You know, we are, you know, looking at, you know, many different alternatives, you know, going, you know, into, you know, future opportunity scenarios. We feel that, you know, again, the reset to whatever degree happens in the sector by virtue of the LSI and EXR combination at the end of the day, doesn't change the landscape from a competitive standpoint.

[Joe Russell, President and CEO at Public Storage]

One of the things that we've learned over time, scale's one part of efficiency and optimization, but many other things play through as well, that, you know, we continue to invest in, you know, that lead to our industry-leading margins, the things that we've done to enhance our own brand, the effectiveness of the presence we have market to market, and we feel very confident we're in good shape going forward, and we'll continue to make those investments.

[Steve Sakwa, Senior Managing Director and Senior Equity Research Analyst at Evercore ISI]

Great. I guess secondly, on Development, you know, we continue to hear that Development should be coming down given all the challenges in the lending environment. You guys have remained, you know, I think active. I'm just curious, are you sort of changing kind of how you guys underwrite development today? Have you changed your hurdles? You know, are you changing anything in the, I guess, the framework in the way you evaluate new Development projects?

[Joe Russell, President and CEO at Public Storage]

Yeah. You know, first of all, you know, Development's a long game, right? You know, we're typically looking at scenarios that, you know, will, you know, without question, go in and out of all kinds of different ranges of economic cycles, et cetera, when you're thinking about, you know, total time periods to actually put a property to a point of, you know, not only opening but stabilization. I mean, you can easily be, you know, at a five-year-plus mark, asset to asset. That, I think is, you know, a good headwind, particularly in this environment where, you know, again, many owners are seeing different headwinds around cost of capital, availability of capital, component costs. I mentioned the amount of timing it takes to get approval city to city. You know, we've been talking about this for some time.

[Joe Russell, President and CEO at Public Storage]

It's far more difficult today than it's ever been on that front, and literally almost everywhere. I can't even name a market where it's easier to develop today than it was one, two, or three years ago. You've got to be, again, ready to work through those kinds of demands or those kinds of factors, those kinds of risk components. We feel very well suited to do that. In this environment, we're actually seeing the opportunity to pull more interesting properties into our own pipeline that potentially have far less competition from a land standpoint or even a repurposing standpoint. The team's working hard, and we're finding some good opportunities. I'll let Tom talk a little bit about how our underwriting process plays through as well.

[Joe Russell, President and CEO at Public Storage]

You know, that's something that always is reflective, not only the current environment, but the long-term environment.

[Tom Boyle, CFO and Chief Investment Officer at Public Storage]

Yeah. Just to piggyback on that, I think we're consistently looking to try to improve our underwriting processes year in and year out. If you recall at Investor Day, our Data Science leader talked about some of the tools that team has helped develop with for use with our Development and Acquisitions team, that those processes continue to be underway. We try to use our wealth of data internally to give us advantages on picking those sites and adding in new development. The underwriting process is consistently evolving in a positive way.

[Tom Boyle, CFO and Chief Investment Officer at Public Storage]

In terms of hurdles and the like, you know, obviously we do with Acquisitions as well as Development, think about what our cost of capital is and evaluate that in the context of the returns that we expect on new capital allocation. I'd point you to a relatively consistent trend, which we've said that we're seeking to build new sites that will generate a yield on cost of circa 8% plus at delivery. That's not significantly changed over the last several years.

[Steve Sakwa, Senior Managing Director and Senior Equity Research Analyst at Evercore ISI]

Great. Thanks.

[Joe Russell, President and CEO at Public Storage]

Thanks, Steve.

[Operator]

We will take our next question from Ki Bin Kim with Truist. Your line is open.

[Ki Bin Kim, Managing Director of US REIT Equity Research at Truist Securities]

Thanks. Good morning. Did you guys provide an update on April move-in rates? Sorry if I missed it.

[Joe Russell, President and CEO at Public Storage]

No, we didn't. We, you know, the way I'd characterize move-in rents, I think this is the first question on move-in rents on the call, which may be a record in terms of depth before we get that question. Move-in rates across the sector have been lower, and I think that's been pretty well documented. Move-in rents in the first half of the year, we anticipate to be down more significantly than maybe the back half of the year, given the comp scenario that we've been discussing with the first half, really tough comps versus last year and the second half, easier comps.

[Joe Russell, President and CEO at Public Storage]

As we move into the second quarter, we anticipate move-in rents, and we're seeing that in April, to be down, you know, in that kind of upper single digits to low double-digit type zip code.

[Ki Bin Kim, Managing Director of US REIT Equity Research at Truist Securities]

Okay, great. How many stores do you have right now that are managed fully remotely without people? Are those any kind of shared characteristics? Are those usually just smaller stores in tertiary markets or in different places as well?

[Joe Russell, President and CEO at Public Storage]

Yeah, Ki Bin. There, I would tell you there's a broader context the way we're approaching the whole concept of, quote-unquote, remote. One of the things, you know, I mentioned in my opening comments is we've now got 400 properties on what we call Customer-Driven Technological platforms, which includes a piece of what you might consider a property to be remotely managed. A misnomer on remote is remote also requires, and every property still requires some level of on-site personnel.

[Joe Russell, President and CEO at Public Storage]

What we have done on a broader context is, continue to test and now deploy, pretty effective technological, predictive, and data sources that, we have to put people in the right places based on property activity, the amount of demand that's likely to come through, the patterns, both on a weekly, daily, and monthly, and even quarterly basis. With that, we can really take, you know, even that baseline concept of remote to a far different level, which can work in suburban or remote areas. It can work in more dense areas. It can help us optimize the amount of necessary on-site labor. This is all built around something that's first and foremost, which is actually, maintaining or improving customer service.

[Joe Russell, President and CEO at Public Storage]

There's, you know, a whole range of different components to that platform, some of which include kiosks, for instance, some of which include the way that we interact with customers, you know, through our Customer Care Center. Then, you know, another leg of, you know, that whole puzzle is, you know, our very effective time and presence from a face-to-face Public Storage employee. All of those things are being optimized piece by piece, and we've done some very interesting things, and we have a lot more to come. Very excited about that part of the business.

[Ki Bin Kim, Managing Director of US REIT Equity Research at Truist Securities]

You said 400 properties. You have about 2,900. I guess, can you apply it to all? If you do, like, tdoes the FTE go from two to one or... I'm just trying to understand the impact overall.

[Joe Russell, President and CEO at Public Storage]

Yeah, yeah. It, you know, it's the roadmap we're on. I wouldn't say it's pure enough to say each and every one of the 2,900 properties have the same impact from the platform. The great part about our overall strategy is there are components to this. You can optimize FTE based on, again, what size of property you're dealing with, what historic level of either staffing or presence you have from an employee standpoint. Then, you know, Tom, you can talk a little bit about some of the economic benefits that we're likely to continue to see. The great thing about this, it's far like I said, far deeper than just remote because it can apply to many different types of assets, and we're excited about deploying in that many more parts of the business.

[Tom Boyle, CFO and Chief Investment Officer at Public Storage]

Yeah. The only thing I'd add to that, Ki Bin, is in our Investor Day presentation, we did highlight our objective to reduce labor hours and get more efficient with labor hours through the specialization and centralization that Joe's speaking to in reacting to customer demand. The target we set was for a reduction in labor hours of 25%. We'll achieve that this year. Frankly, we think that there is more upside from here. Just another component of how we're seeking to get more efficient and drive our industry-leading margins higher.

[Ki Bin Kim, Managing Director of US REIT Equity Research at Truist Securities]

Thank you.

[Joe Russell, President and CEO at Public Storage]

Great. Thank you.

[Operator]

We will take our next question from Mike Mueller with JPMorgan. Your line is open.

[Michael Mueller, Senior Equity Research Analyst at JPMorgan]

Yeah. Hi. I was wondering, are you seeing any signs of, like, degradation of length of stay for your longer-term customers that have been there over a year or two?

[Joe Russell, President and CEO at Public Storage]

Yeah. I mean, we characterized the length of stay as sitting at records in our prepared remarks earlier. Generally speaking, while we have seen move-outs increase and trend back towards 2019 levels, the length of stay of the overall platform continues to be really strong. The portfolio now, the average length of stay of the tenant base today is over 36 months and has been sitting around that sort of zip code for the last several quarters. In terms of the longer length of stay customers themselves and how they're behaving, they continue to behave quite well. On a year-over-year basis, the percentage of customers greater than two years is actually higher than where it was last year. Continuing to demonstrate the strength of that component of the tenant base.

[Michael Mueller, Senior Equity Research Analyst at JPMorgan]

Got it. Okay. Thank you.

[Operator]

Well, I'll take our next question from Spenser Allaway with Green Street. Your line is open.

[Spenser Allaway, Senior Analyst at Green Street Advisors]

Thank you. Maybe just another one similar to the Development topic, but can you just remind us what % of the portfolio would you say has true expansion opportunity?

[Joe Russell, President and CEO at Public Storage]

Well, yeah, Spenser, I don't think we've ever characterized that as a specific number. What leads to those kinds of expansion opportunities are several factors. You know, we have, you know, hundreds of properties that have been developed say 30, 40, or 50 years ago that in those periods of time, you know, a traditional property might have a much larger amount of acreage and would typically have, you know, what we would call, you know, a Gen One product, simple single-story drive up product. There are many opportunities within the portfolio to potentially acquire different and higher levels of FAR to magnify the size of those properties.

[Joe Russell, President and CEO at Public Storage]

Frankly, many of them are in great locations, some of which, you know, we get far, you know, better customer demand once we actually even make the property that much bigger. You know, there's a sizable set of those types of assets. The time and the effort that goes into that can be quite complex. Many cities won't allow us to do certain expansions of that magnitude. Some that may open the door to that, actually, they'll put you through a multi-year process, that again, you've got to work through very diligently. We've got, you know, a number of those efforts in play as we speak.

[Joe Russell, President and CEO at Public Storage]

Another thing that, you know, we have at hand, in many assets, for instance, is either some additional excess land or parking area that too can be developed or expanded into, you know, again, a more modern facility as an extension of what's already on the property. There's, you know, there's a whole range of things that we're continuing to evaluate on that front. The good news, is, you know, by virtue of our very consistent investment processes now for several decades, we've got amazing sites. With that, in many areas, you know, properties that have far different demand and better demand dynamics when they were originally built, that could fit very well to, you know, again, the opportunity going forward.

[Joe Russell, President and CEO at Public Storage]

Today in, you know, the billion-dollar Development pipeline, ± 50% of that is actually tied to the kinds of sites I'm speaking to. The team's gonna continue to work, you know, to monetize and, you know, unlock those opportunities as we go forward. One of the great things about our Development team is, they, you know, they can wear both hats. They can, you know, work on ground up development as well as expansion development. We're doing that like for like, clearly in many of the markets that we're looking for expansion.

[Spenser Allaway, Senior Analyst at Green Street Advisors]

Okay. That was really helpful color. I was also just wondering, so just given the fact that there has been a lack of larger portfolios on the market, has there been any increase to the personnel dedicated to sourcing or underwriting acquisitions? Just as I would imagine, the deals are a little bit more granular, excuse me, than normal. It sounds like from what you just said, you know, your personnel are very dynamic and perhaps, you know, can wear multiple hats.

[Joe Russell, President and CEO at Public Storage]

Yeah. To that point, maybe just to give you a little context, 2021, to your point, we had. It was an unusual year where we did a couple of very large, unusual transactions. Again, the flip side of that, though, is that was only half of our volume of the $5.1 billion that we did. The other half was dedicated to what's very traditional, either single asset acquisitions or much smaller portfolios. We've got a deep-seated team, very knowledgeable, very well placed relative to knowledge of markets, knowledge of owners, and the kind of dialogue that comes with that from a relationship standpoint has been and will continue to be very important for our efforts to grow the portfolio.

[Joe Russell, President and CEO at Public Storage]

As you know, Tom mentioned, you know, about, you know, half or more than half, excuse me, a lion's share of the Acquisition volume that we've done in 2023 has come from off-market transactions. Part of that's just, again, as I think you're alluding to, we've got the right team in place to go out and gauge. We've got a great reputation as a preferred buyer. We're gonna continue to leverage that.

[Spenser Allaway, Senior Analyst at Green Street Advisors]

Thank you.

[Joe Russell, President and CEO at Public Storage]

Great. Thank you.

[Operator]

It appears we have no further questions on the line at this time. I will turn the program back over to Ryan Burke for any additional or closing remarks.

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

Thanks, Brittany, and thanks to all of you for joining us. Have a great day.

[Operator]

This does conclude today's program. Thank you for your participation. You may disconnect at any time.

Participants

Executives

• Joe Russell, President and CEO
• Ryan Burke, Vice President of Investor Relations and Strategic Partnerships
• Tom Boyle, CFO and Chief Investment Officer

Analysts

• Juan Sanabria, Managing Director at BMO Capital Markets
• Keegan Carl, SVP of Equity Research at Wolfe Research
• Ki Bin Kim, Managing Director of US REIT Equity Research at Truist Securities
• Michael Goldsmith, Analyst at UBS
• Michael Mueller, Senior Equity Research Analyst at JPMorgan
• Smedes Rose, Analyst at Citi
• Spenser Allaway, Senior Analyst at Green Street Advisors
• Steve Sakwa, Senior Managing Director and Senior Equity Research Analyst at Evercore ISI
• Todd Thomas, Managing Director and Equity Research Analyst at KeyBanc Capital Markets