Q1 2022 Public Storage Earnings Call
Your conference for today, Please press Star zero.
[music].
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 open for your questions. Following the presentation.
You have a question at any time, please press star one on your telephone keypad if.
If you wish to remove yourself from the queue. Please press the pound key it is now my pleasure to turn the floor over to Ryan Burke, Vice President of Investor Relations Ryan you may begin.
Thank you Katie however, everyone. Thank you for joining us for our first quarter 2022 earnings call I'm here with Joe Russell and Tom Boyle before.
Before we began and 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 four 2022, and we assume no obligation to update revise our supplements.
<unk> become untrue because of subsequent events a.
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 public storage Dot 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.
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 moving 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 environments, 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 one $8 billion easy storage portfolio, we acquired a year ago has already achieved the yield we anticipated after a year or 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 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.
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 Rps app.
In March we reached a significant milestone with our one millionth E rental move in.
Today more than half of our customers are choosing E rental 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.
Thanks, Joe we reported core <unk> 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 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 customers days as well as comparing to a period in 2021, when we were impacted by rental rate regulation and some of our largest markets.
On that note Los Angeles was a particularly strong contributor accelerating from 8% same store revenue growth in January 215% same store revenue growth in March.
Now on to expenses, we had a good quarter on cost of operations.
Three 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 25% 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 them, we introduced our initial 2022 guidance for the year.
We reiterated our strong core <unk> 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 recognized a $2 3 billion tax gain that would increase our distribution requirements for the year.
As we noted in our filings PSB contributed 25, and a half million in core <unk> in the first quarter or approximately 4% of company wide <unk>.
We have not updated our guidance ranges to reflect the sale, but we'll plan to update you as the transaction progresses and more details are provided by PSP.
Last but not least our low leverage balance sheet gives us capacity to fund growth at the same time is well lathered with long term debt and $4 billion of preferred stock with perpetual fixed distributions against a rising rate environment.
Actual fixed rate capital is very good capital in today's markets.
And so as a $1 billion of cash on the balance sheet at March 31.
And with that Katie I'll turn it to you to open it up for questions.
Thank you at this time, if you would like to ask a question. Please press star one on your Touchtone phone you may remove yourself from the queue at any time by pressing the pound key once again that is star one to ask a question.
We will pause for a moment to allow questions to queue.
Thank you our first question will come from Jeff Spector with Bank of America.
Great. Thank you and I'm not sure if were limited to questions. If we are please.
Let me now.
My first question.
I guess, if we could talk about.
April you commented on seeing.
<unk> seen continued demand into April can you provide any additional comments on what you're seeing so far in April .
Sure, Yes, Joe mentioned, we're seeing good momentum heading into the second quarter.
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.
We're up in the months.
We saw good momentum for 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 months.
We continued to see that 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.
Yes, Jeff maybe to add a little bit more perspective on the comment I made my opening remarks, the consumer and business customer environments 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 backend 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 this 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 onto the next.
Question Okay.
Thank you that's great I guess, then and the easy follow up question is just on guidance you know 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.
<unk> maintained the guidance right now.
Sure I'm happy to take that and I guess, what I'd characterize as the year has started out.
Largely right in line with our plan I E strong, but the strong start we anticipated.
<unk>.
Yes, it's only been 70 days since we set our initial range when we communicated that we highlighted that we specifically widen the range is to try to encapsulate more upside into the range as compared to maybe last year, where we had narrower 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 is 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 will 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 a strong performance we anticipated.
Understand thank you.
Thank you.
Thank you. Our next question will come from Michael Goldsmith with UBS.
Okay.
Good morning, good afternoon, and thanks for taking my questions. My first question is on street rates and.
Yeah, how did they progressed 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 how much rates are kind of growing in these more difficult comparisons.
Yeah, No. That's clearly a good question and speaks to the uncertainty as we move through the busy season here today, we've continued to see good momentum.
In move in rents and customers willing to accept those this higher move in rents against an environment as Joe mentioned of tight inventory, so while occupancies 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 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 were 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 and 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.
Understood and then I guess the piece that kind of goes along with this is the trajectory of ECR eyes.
Your occupancy was relatively stable in the first quarter, suggesting.
Is that length of stay remains strong.
It is.
And as the as the as the street rates kind of on the street rate growth compresses as you face more difficult comparisons how do you think about applying <unk> to customers.
Just given that prices.
You know market prices are necessarily rising to the same extent that that we've seen in the past. Thank you.
Sure. Thanks, Michael.
You 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 move in 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.
And 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 I would 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 is rental rates may.
We don't need to grow as much to see outsized growth in those markets because we've got quote unquote 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 we would anticipate that continues.
Thank you very much good luck in the second quarter.
Thanks, Michael.
Thank you. Our next question will come from tight then Kim with chewy.
Thanks good.
Good morning.
So just going back to the April trends.
Thanks for all the details I was just curious if theres been any change in promotional activity or marketing dollars.
That might be.
Supporting that 12% increase in move in rates.
Yes, it's a good question keeping it no changes to strategy. There you saw we had marketing dollars that were lower in the first quarter I would anticipate that 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.
The thing really to note there out of the ordinary just overall continued good demand for our consumers as well as businesses to store.
The month of April which is helpful setup as we get into May and June .
Yes.
Got it and if I take a step back and looked at look at what's happening in the market in terms of.
Netflix and Amazon. There's this notion that are concerned that the days of.
I was sitting at home and Washington Square game and shopping on Amazon might be.
Winding down.
And part of that.
Kind of trade if you want call it that the kind of Covid winners maybe dissipating.
And obviously, it's all storage is a little bit different it's supply and demand dynamic, but work from home and all the changes that happened throughout Covid definitely did help your portfolio in the demand profile I'm just curious if you're seeing anything on the margin that may suggest.
Some of those demand drivers starting to wind down.
Yes keep in 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. Our peak periods of the pandemic have been compensated for by other things which include as I mentioned.
Affordability from a living standpoint, whether you are an owner of renter, that's always an additive driver to the financial benefit of acquiring a storage unit at <unk>.
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 their workforces that too continues very very healthy driver even win.
Certain employees are being pulled back to work they are likely not being pulled back on a full time everyday basis.
Today, we are seeing what we might see traditionally this time of year more college students.
Activity Theres still good movement relative to.
Home sales, even though interest rates are up they are still 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, why we're seeing good customer demand.
Okay. Thank you.
Thank you.
Thank you. Our next question will come from one Santa Maria with BMO capital markets.
Hi, good morning, just.
Just curious on the sunsetting of rent restrictions if you could just provide any update.
Progress in.
The ability to recapture.
What was lost.
Great and maybe prior to that.
It provided a bit of color around.
Our guidance for the fourth quarter results, but just curious if you have an update on expectations for the impact to same store revenues for 'twenty two.
Sure.
Concentrate my commentary around Los Angeles, because it's our largest market I think the clearest story and Big picture, we're seeing strong trends in Los Angeles, and 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 one and a half to two person.
<unk> 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.
Team recently completed capital investments in that market as well through our property of Tomorrow program.
So the team was ready for January one with good looking properties and poised to accelerate so we are seeing that.
And I would reiterate the commentary around the growth potential coming from that market specifically.
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 state center for the kind of.
Revenue opportunity that Tom's speaking to.
Okay. So no change to that wanted to have a 2% benefit I guess from L. A and Atlanta.
Restrictions coming off.
No that's right, we're seeing the strong acceleration we anticipated.
Okay, and then I mean, it sounds like you guys are pretty bullish across all geographies that we've definitely seen some markets.
Whether it's New York.
Sub markets.
Anything in the Sunbelt.
How do you think that dynamic plays out as we go into 'twenty three.
U S subscriber to their view that the Sun belt markets I guess the product it just tough comps will well.
Normalized to the mean in and May be in New York.
Aladdin 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.
Yeah, I think you highlighted a good point, which is there is some variability across our markets. We're seeing really strong demand in the pro cyclical 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 in 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 are 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 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 pro cyclical drivers that in Miami does or in Atlanta does today.
Thanks, Tom.
Thank you.
Thank you. Our next question will come from Samir Khanal with Evercore.
Yes, hi, good morning, So Tom maybe to expand on that and kind of talk a little bit about New York I know its only about 5% of your portfolio.
But curious how you think the sort of second half works out here, it's held up well.
Still lagging the rest of the portfolio I mean is it really supply thing here or.
Are you seeing any sort of move outs sort of pick up as folks return back to let's see.
Yeah. That's a good question, yes, im not going to speak specifically to second half outlook for markets in particular, but I would say we aren't seeing anything overtly.
Overtly 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 as it continues to be absorbed in Brooklyn in parts of Queens.
But overall, we'd anticipate that that supply does get absorbed and.
First quarter same store revenue growth of north of 9% in the quarter.
Accelerating from from the fourth quarter is a pretty good place to be.
And a big market like New York.
Got it and then this shifting gears to the transaction market a little bit I know for the year. I think you said, it's about 270 million is kind of what you've done so far on your guidance is still at about 1 billion of acquisitions, maybe provide color on kind of what youre seeing out there.
Sort of what's in the pipeline and sort of pricing as well.
Sure Sameer the.
Comparable to 2021 was likely to be strong, meaning it was unlikely youre 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 in the market plus or minus $18 billion of overall transactions took place in.
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 four months and we haven't seen that kind of activity emerge. There is still a healthy amount of both individual and smaller portfolio is saying.
The $2 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 theres 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.
Z underwriting a number of different transactions, but it's not the same elevated level of deal flow that either we saw in 2021 are likely to see this year, but it's not unusual that our first quarter is a little quieter.
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 three and from there we'll see what kind of volume plays through.
Thank you.
Thank you.
Thank you. Our next question will come from Keegan, Carl with Baron Berg.
Hey, guys. Thanks for taking the questions I think first just given what's going on in the broader macro economy is inflationary concerns have you guys seen any change in your customer demographics and preferences.
Okay.
Yes.
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.
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 any shifts in for instance at cohorts by income or demography shifting year over year for new customer demand and that is healthy, but we are watching as Joe mentioned home sales as 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 declined 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 the 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.
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.
I think the other component is home equity right Theres been a wealth creation event for homeowners that is supporting Amira.
American consumer balance sheets as well so those are supportive.
No I would say we are seeing delinquency off the lows that we saw during the pandemic, but we're also not an environment, where stimulus checks or 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.
Closely but.
But to this point continued to see strong trends across the board.
Got it and then shifting gears, a little bit and maybe just a little more color on your length of stay.
The reasons for customers, leaving changed at all in recent months for example may be seen more people pension pricing.
Yeah, no no meaningful change there the biggest driver that people highlight when they leave is that they no longer need the space, which makes sense you think about the use cases for storage at some point the many customers no longer need the space, either because they've moved or theyre living situations change et cetera. So that continued.
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.
See really strong tenure, which is supporting.
Both our pricing strength as well as existing tenant rate increase programs.
Great very helpful. Thanks for your time guys.
Thank you.
Thank you. Our next question will come from Ron Camden with Morgan Stanley .
Hey, just going back to la.
The original guidance.
And sort of 200 basis points.
Of contribution to the same store revenue line item.
You gave some really good comment.
Opening remarks about just sort of same store hitting 15%. So the question has anything changed there.
Can you give us a sense of.
How below market those rents are.
Sort of hostess exploration of price gouging.
Sure I'll, just reiterate what I highlighted earlier, which is we still believe that one 5% to 2% is the right sort of range. We're obviously starting from US a period of a standing start in January when those rental rate restrictions expire 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.
Great and then my second question was just just looking at average occupancy.
We have it down sort of 30 basis points.
Over quarter I sort of appreciate your comments about this year is all about it's all about rates.
And when you see occupancy Dallas, which doesn't seem like that much.
That there is potentially more sort of.
Pricing acceleration to be to be had during the peak leasing season or.
Just trying to get a sense of how much harder could you plus here.
I think we will update you on that next quarter.
Alright fair enough. Thanks.
Thank you.
Thank you. Our next question will come from Rob Simone.
With hedge I risk.
Hey, guys. Good morning, Thanks for taking the question hope all is well.
I'd like a kind of a higher level strategic question for you I mean, obviously the law.
Last year has been.
Fairly transformative for for PSA in and kind of how you communicate and run the business.
I guess looking back over the past year.
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 one.
He said I said about the exchanges versus what you did kind of kind of what was successful and what's what's like left.
Haven't had its box checked yet what's left to do and.
Factoring all of those changes and kind of getting the company to where you wanted it to be.
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 information for some time relative to the investments and the opportunities that we saw relative to approaching the market through our technology initiatives.
The opportunity 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.
Check marked 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.
<unk> in each of those areas we're on very good.
Pass relative to continuing to deliver more optimization on the way that we're not only running the business youre seeing that through for instance, or E rental program very customer effective and very effective from an efficient 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. Five properties that also then reverts right back to what we're doing with our property of Tomorrow program, where we are.
Retooling the existing portfolio, adding.
Many amenities that we've been putting into these gen five properties, which includes solar.
And efficiencies from that standpoint, so that all points to 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 our port with a brand like we have at public storage. We can continue to expand that brand youre 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 when they do tremendously well so the team at <unk>.
Large we continue to invest and 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.
Great. Thanks, John I appreciate the color.
Yes, Thank you Rob.
Thank you. Our next question comes from Smedes Rose with Citigroup.
Alright, thank you.
Just wanted to circle back a little bit on the acquisition outlook and I know.
You mentioned you haven't seen any.
Pricing, so far that it's very competitive.
Just from your perspective are you may be 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 narrowed that interest rates are going up right I mean, that's.
Very clear just wondering if you think at some point that has to start being reflected.
And seller expectations.
Yes, I mean, I wouldn't say that we've.
Holistically.
<unk> 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 were.
Bring into the portfolio or the opportunity that we can say from drive that we can see from driving returns based on their prior performance and then putting them into our own platform what kind of success factors, we'll see from there with the added scale that we're going to get in any particular market. So.
Because of some of the shifting that we're saying we haven't stepped back and said we're going to be.
Out of the market or we're going to shift down relative to our approach to.
Bedding and.
Looking at assets that make sense to come into the portfolio, There's a fair amount of.
<unk>.
Competitive activity, but believe me the team's working hard we're very busy underwriting assets and there's a lot of competitive activity playing through there is always a tipping point that we're very cognizant of where we feel an asset may or may not.
Bring forth a relative returns based 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 were very.
Optimistic about what can continue to play through as Tom mentioned, our balance sheet continues to be in very strong shape for sitting on $1 billion of cash this year, we're likely to generate another $6 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 will continue to vet them.
Okay. Thank you.
Okay.
Thank you once again, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question will come from Todd Thomas with Keybanc capital.
Hi, Thanks.
I just wanted to go back to to occupancy for a second.
The decrease in occupancy at quarter end compared to the average.
A little bit atypical for first quarter. I know you are you are 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.
Sure well I think I.
<unk>.
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 rates a component I'll tell you occupancy down 80 basis points as a relatively small component of the overall revenue outlook as we think about the year.
<unk>.
That said clearly we are managing our inventory and.
I guess, maybe reading into your question are you asking as 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's a fair one which is it's a bit of a unique year, but that doesn't change our strategies as we head through through the year.
Yeah.
Okay. That's helpful and then.
Are there are there any indicators.
That gives you a sense for maybe the level of <unk>.
Vacates that you might anticipate.
If economic activity slows down from from where it's at here and there.
In the quarters ahead is there any way to sort of gauge.
Potential vacate activity.
Across the portfolio.
Yeah, 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.
Pricing methodologies part of those.
<unk> 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.
Unexpected manner, it's certainly something we communicated but to everything we've highlighted to date, we're not seeing anything there.
That is unusual as it 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.
Okay. That's helpful. All right. Thank you.
Thank you. Our next question will come from Spenser alloy with Green Street.
Thank you.
Most of my questions have been asked but I just had two maybe on the ancillary like ancillary revenue side.
There's been a lot of churn across the sector in terms of the third party management pool can you maybe just speak to who is buying these assets and is it mainly REIT peers.
Our pork changed recently.
Yes Spenser its.
It's any and all of the typical buyers that are out in the market. So.
That's a pretty commonplace component of third party platforms, whether they're the platforms you see through the public operators and there is a fair amount of private third party management.
That forms as well so the trading activity that can take place within those platforms can come from either.
A public operator private equity.
Private investor So it's pretty typical of just the overall range of buying activity that takes place.
Typically even before we got into 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's 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 are being teed up to do just that the owners may not look at their own ownership for long periods of time. They are looking for certain levels of optimization they'll get the assets at that point now take about right out to the market to trade so very typical.
Kind of the overall dynamics of what happens with third party management.
Okay, great. Thank you and then can you give us a sense of the penetration rate.
For tenant insurance, just maybe on the same store pool as compared to your non same store pool.
Sure I'm.
I'm going to speak to to coverage overall cut.
Coverage in the same store pool is in the upper <unk> and Thats 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 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 tends to be lower I think.
For the quarter.
Off top my head it was in the fifties for coverage in the non same store pool versus that upper <unk> in the same store pool, and obviously part of the strategy over the coming years.
Not only be to lease up that non same store pool, but also.
Offer that product to that tenant base.
Sure.
Okay. Thank you for the color.
Sure.
Thank you. Our next question will come from Caitlin Burrows with Goldman Sachs.
Hi, there. Good morning, I was just wondering if you could talk maybe a little bit more on supply supply is often brought on when demand is strong and it seems like it is.
I think you've previously said you didn't think it would be a real headwind in 'twenty two 'twenty three so just wondering if you could give your current view on supply this year and next and what macro factors maybe impacting that for example, construction cost versus storage specific jive very slight good demand.
Sure Caitlin.
I would tell you that as we've spoken to over the last several quarters some of the headwinds that <unk>.
Seem to be containing the amount of volume of new development.
Feel is a good thing and one way, meaning there is elevated risk going into any development opportunity and I can't name.
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 construction processes are very elevated and with that theres more risk at hand at it.
Time, when we're seeing component cost 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 are accelerating so very different risk factors that crew.
Create some pretty meaningful headwinds so the development business is still active however, I mean, it's still 5% to 600 properties likely to come into the market. This year and next to your point, obviously some of Thats being driven by the overall success of the sector and the amount of demand that we're seeing for self storage, but.
There is 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 are 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 are probably going to be a lot more conservative and we think that overall as I mentioned thats a good thing for the industry.
Got it.
And then maybe also on the rental platform I know you talked earlier that it's continuing to grow so sorry, if I missed this could you just go through what portion of your portfolio or incremental leasing this makes up.
Going but also what kind of impact that shift has on the bottom line. Mike are there any less employees or other expenses as a result of that.
Yes. So we've seen continued adoption of E rental now over 50% of our customers are using that channel from an election standpoint, we're not pushing them to it but there are actually electing to choose a self directed digital leasing process by virtue.
You have that at our own.
Frontline's and the amount of time.
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 youre seeing some of that through the cost.
Efficiency in our labor, even though labor costs are up but there is <unk>.
<unk> benefit that we see from <unk>.
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 as.
Our 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.
Two specific properties. 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 its use again, depending on customer choices.
Got it thanks.
Thank you.
Thank you. Our next question will come from Juan <unk> with 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% of 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 in the same store pull up in the high teens.
If you can give us an update on how we should be thinking about that that previous commentary in light of what's changed obviously.
Yes, so just to put some financial.
Rails or on 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 were.
We're a good bit along that journey by little over halfway and continuing to find opportunities to drive that further so we're on track there and anticipate to get through through to that 25% in the coming year or two.
Sounds good thank you.
Thank you.
Thank you. Our next question will come from Michael Mueller with Jpmorgan.
Yes, Hi, I'm, just curious as you're ramping up your development spend can you talk a little bit about your land positions and how many years' worth of starts that could support.
Yes, Mike Whats typical and the way that we approach land as we're.
Looking primarily for opportunities where we're not.
Not directly putting land inventory right under 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 layer.
Layers or stages of entitlements that happen on their ownership.
Time.
The obligation they.
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 were 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.
Got it so.
Just thinking about those agreements in the same way that you would think about owning land I guess, how many are in the works or how many do you have what sort of tight lead lead timeframe does that give you in terms of.
We have with what's under our control.
Two years worth of development spend or three years or one year, something I mean, how do you size that up.
Yes, Mike It is I would say aligns exactly to the timing youre talking about so market to market <unk> got some processes that might take you a year or two you've got others that could take three or four.
I'll leave 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 exactly what Youre speaking to so if you think about the.
The pipeline that we have.
Today, there are components of that pipeline that with 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 will take ownership.
Got it okay. Thank you.
Okay. Thank you.
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.
Thanks, Katie and thanks to all of you for joining us have a good day.
Thank you ladies and gentlemen. This concludes today's program you may now disconnect.
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