Public Storage (PSA) 2024 Q2 Earnings Call Summary

Optimistic Highlights

• Strong Occupancy Trends: Occupancy trends exceeded expectations with positive net move-ins year-to-date, showcasing robust customer activity.

• High-Growth Non-Same-Store Pool: The non-same-store pool, comprising 542 properties, is leasing up quickly, with NOI growing nearly 50% during the second quarter.

• Revenue Growth in Several Markets: Several markets within the portfolio are experiencing month-over-month revenue growth improvement.

• Decreasing Development of New Competitive Supply: The waning development of new competitive supply is expected to support accelerating operating fundamentals.

• Healthy Consumer Demand: Supported by a healthy consumer with a sustained need for more space at home, indicating strong demand for storage solutions.

Pessimistic Highlights

• Lower Rents for New Move-Ins: Move-in rents were down 14%, indicating competitive pricing dynamics in many markets.

• Adjusted Guidance Ranges: Guidance ranges have been adjusted to reflect more competitive market move-in rent conditions for the remainder of the year.

• Decline in Core FFO Per Share: Reported a 1.2% decline in core FFO per share compared to the same period in 2023.

Company Outlook

• Revised 2024 Outlook: The company revised its same-store revenue assumptions and core FFO per share guidance due to lower move-in rents during the busy season.

• Strong Growth Expected from Non-Same-Store Pool: Anticipates strong 32% growth this year at the midpoint for the non-same-store pool, with an additional $110 million of incremental NOI in 2025 and beyond.

• Capital Allocation Unchanged for 2024: Plans to deliver $450 million in new development activity, maintaining a strong capital and liquidity position.

Q & A Highlights

• Q: Can you discuss the guidance changes and economic or housing scenarios that could affect move-in rents in the back half of the year? (Steve Sakwa, from Evercore ISI)

  A: We're seeing improvements in move-in rents in many markets, with a modest improvement year-to-date. The pace of improvement is more modest than originally outlined, with move-in rents down 12% in July. The second half's outlook has been recalibrated based on June and July's performance. (Tom Boyle)

• Q: What are you seeing on the acquisition front, and how do you measure buybacks against development spend and acquisitions? (Steve Sakwa, from Evercore ISI)

  A: There's a fair amount of activity indicating we're likely to meet our guided numbers for acquisitions. We view share buybacks as an alternative based on the value we see in our shares. (Joe Russell)

• Q: Can you provide more color on the cadence of same-store revenue growth and the exit run rate for 2024? (Juan Sanabria, from BMO Capital Markets)

  A: Implied in the revised outlook is a number for the second half, with same-store revenue growth down about 1.5%. We're optimistic about future demand growth and declining deliveries of new competitive supply. (Tom Boyle)

• Q: Can you talk about cap rates for acquisitions and where assets are transacting? (Juan Sanabria, from BMO Capital Markets)

  A: Cap rates have trended to around 6% handles for transactions. We need more transaction activity to stabilize or reinforce where cap rates have trended. We see value in transacting around this range. (Joe Russell)

• Q: Can you provide any commentary on July occupancy and move-in rates? (Nick Yulico, from Scotiabank)

  A: July move-in rents are down about 12%, with occupancy closing the month down circa 40 basis points. (Tom Boyle)

• Q: What are you seeing in trends with tenants regarding ECRI, and has there been any change in assumptions for ECRIs in the guidance? (Nick Yulico, from Scotiabank)

  A: We continue to be encouraged by the behavior of our existing tenants. The contribution from existing customer rent increases is unchanged from our original outlook. (Tom Boyle)

• Q: Can you provide more color on the move-ins and why people are moving in? (Jeff Spector, from Bank of America)

  A: The need for more space, whether as an owner or renter, continues to be a key driver for customer acquisition. We're not seeing any erosion in activity or change in consumer behavior. (Joe Russell)

• Q: Can you quantify the waning development and new supply mentioned? (Jeff Spector, from Bank of America)

  A: National development deliveries are in the mid-2% range on an increase on existing stock basis. We're seeing less volume than in prior cycles, with a few markets being more active than we'd like. (Joe Russell)

• Q: Can you discuss expenses, particularly property taxes and payroll reductions? (Ronald Kamdem, from Morgan Stanley)

  A: Property taxes are up 5.6% year-to-date, in line with our outlook. Our operating model transformation and solar power initiatives have helped reduce payroll and utilities, contributing to expense management. (Tom Boyle)

• Q: What's causing more competition in move-in rates, and under what conditions could this improve? (Ronald Kamdem, from Morgan Stanley)

  A: Demand is down year-over-year, with Google keyword search volumes for storage-related terms also down. We're using increased advertising and other tools to attract customers. (Tom Boyle)

• Q: Can you discuss the July performance and expectations for move-in rents in the back half of the year? (Michael Goldsmith, from UBS)

  A: July move-in rents are down 12%, with a modest improvement expected in the second half. The pace of improvement has been recalibrated based on June and July's performance. (Tom Boyle)

• Q: When things start to get better, how quickly can things unwind in terms of move-in rates? (Michael Goldsmith, from UBS)

  A: The pace of improvement remains to be seen, and we're expecting move-in rents to decline seasonally but at a more modest pace than last year. (Tom Boyle)

• Q: Can you discuss occupancy trends and expectations for the back half of the year? (Nick Joseph, from Citi)

  A: We're anticipating a seasonal decline in occupancy in the fall, similar to last year but narrower than pre-pandemic seasonal declines. (Tom Boyle)

• Q: For the $110 million of incremental non-same-store NOI, is any additional capital required? (Nick Joseph, from Citi)

  A: No additional capital is required for the $110 million of incremental NOI. This is based on the in-place assets, and any investment in the second half will only be incremental upside. (Tom Boyle)

• Q: Can you provide more color on the consumer and if there's any material softness impacting your outlook? (Keegan Carl, from Wolfe Research)

  A: We're not seeing any new or evolving level of stress or change in the pattern of customer behavior. Delinquency and payment patterns have been relatively consistent. (Joe Russell)

• Q: How is your third-party management platform trending, and are there any changes in the pipeline? (Keegan Carl, from Wolfe Research)

  A: The third-party management platform continues to see good growth, with approximately 375 assets in the program. We added 17 this quarter, bringing the year-to-date additions to over 60. (Joe Russell)

• Q: Given the softer demand environment, is there an effort to preserve occupancy more ahead of the off-peak rental season? (Todd Thomas, from KeyBanc Capital Markets)

  A: There's no overt decision around protecting occupancy. It's more about optimization around the rents we can charge from our existing customers. The percent of tenants eligible for rent increases is higher today than last year. (Tom Boyle)

• Q: Can you speak to the latest Board appointment of Maria Hawthorne and the process the Board went through to make that decision? (Todd Thomas, from KeyBanc Capital Markets)

  A: Maria Hawthorne is a great addition to the Board, bringing a wealth of experience as a standing CEO of another public REIT, strong financial acumen, and a history of delivering shareholder value. (Joe Russell)

• Q: How does the stabilization for readouts and new developments today compare to historic averages? (Spenser Allaway, from Green Street Advisors)

  A: We typically underwrite three to four years to get to a level of stabilization, with continued strong growth for another couple of years. The pace of lease-up has been strong across the board within the non-same-store pool. (Tom Boyle)