Q4 2022 Public Storage Earnings Call
Yeah.
Ladies and gentlemen, thank you for standing by and welcome to the public storage fourth quarter and full year 2022 earnings call.
At this time, all participants have been placed in a listen only mode and the floor will be opened for your questions. Following the presentation.
If you have a question at that time, Please press star one on your telephone keypad.
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It is now my pleasure to turn the floor over to Ryan Burke, Vice President of Investor Relations.
Sir you may begin.
Thank you Chelsey Hello, everyone and thank you for joining us for our fourth quarter 2022 earnings call I'm here with Joe Russell and Tom Boyle before we begin we want to remind you that certain matters discussed during this call may constitute forward looking statements within the meaning of the federal Securities laws. These forward looking statements are subject to certain economic risks and uncertain.
Ts.
All forward looking statements speak only as of today February 22022, and we assume no obligation to update revise our supplement statements that may become untrue because of subsequent events.
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 reports <unk> SEC reports and an audio replay of this conference call on our website public storage Dot com. We do ask that you initially limit yourself to two questions of course after that feel free to jump back in queue with additional questions.
With that I'll turn the call over to Joe.
Thank you Ryan and thank you for joining us.
I'm going to begin by providing color on two recent announcements, we'll then move to onto our performance in 2022 and outlook for 2023.
First on February 5th we announced a 50% increase to our quarterly common dividend are raised from $8 to $12 per share on an annualized basis.
It is a result of a great effort by the team that has produced record performance over the last few years and a validation of our ongoing confidence in the strength of our platform.
Second as announced separately, we made a proposal to acquire life storage at a substantial premium.
After several attempts to engage in negotiations privately.
I'd like to highlight a few important reasons why we why we think this combination is poised to unlock superior growth and value creation for shareholders.
First there is significant opportunity to accelerate growth and profitability as life storage is portfolio benefits from public storage has industry leading brand.
Our platform achieves approximately 80% same store operating margins compared to life storage is margins at approximately 73%.
And we see an opportunity to narrow that gap with their real estate assets as part of our industry leading platform.
Second we believe there is significant upside to grow revenues and earnings in our respective ancillary business lines.
<unk> storage insurance third party property management business customer offerings and lending.
Third we see expanded portfolio of growth opportunities as we leverage public storage is fully integrated in house development team.
The only one of its kind in the industry.
To capitalize on additional development and redevelopment opportunities to enhance life storage is existing portfolio.
And finally, all of this will be supported by an industry, leading balance sheet with low pro forma leverage and advantaged cost of capital and significant capacity to fund future growth in conjunction with retained cash flow.
Since announcing the proposal we have received overwhelmingly positive feedback from both companies' shareholders, who clearly recognize the significant benefits uniquely achievable through a combination with public storage.
As you likely saw on February 16th life storage issued its own press release rejected our proposal.
Nothing in that response changed our thinking.
We have a high level of conviction in the strategic and financial merits and we are committed to pursuing a potential combination.
We are encouraged in that February 16th release life storage indicated openness to opportunities to enhance shareholder value.
We look forward to engaging in good faith discussions regarding a mutually agreeable combination.
While we appreciate that analysts and shareholders have ongoing questions with respect to our proposal the purposes of today's call is to discuss our fourth quarter earnings and our outlook for 2023.
As such we will not be addressing questions related to the proposal at this time.
Now turning to our performance and outlook.
2022 was a year of milestones for public storage, including celebrating our 15th anniversary.
The team and platform achieved record results in our same store and non same store portfolios.
Elevating the customer experience through technology and operating model transformation.
Enhancing our properties through the property of Tomorrow program.
And growing the portfolio through acquisitions development and redevelopment and third party management.
We did all of this while maintaining the industry's best balance sheet, which is poised to fund growth moving forward in conjunction with significant retained cash flow.
To name just a few of our collective accomplishments.
We achieved an 80% stabilized direct NOI margin through the combination of revenue generation and expense efficiency that only public storage is capable of.
We grew beyond $200 million owned square feet and $4 billion in total revenues.
We built our property development pipeline to approximately $1 billion.
We received the prestigious great place to work award based on feedback provided directly by our employees.
And we achieved top scoring U S self storage Reits across the leading sustainable sustainability benchmarks.
We are firing in all cylinders, while strengthening the already formidable competitive advantages we have across our business.
And those competitive advantages are heightened in the type of macro environment. We are in today on.
On top of two consecutive years of record, 20% plus core <unk> growth.
Simply put we have the people technologies platforms and brand, which lead the lead us to a position of strength in 2023.
Demand for self storage remains strong as you see with our move in volume up more than 11% during the quarter.
The aspects of the business that have historically made it resilient are on display.
This is a needs based business with demand drivers that are multi dimensional and fluid throughout economic cycles.
We also.
Continued to benefit from a newer driver in the form of people spending more time at home.
Which has increasing permanence with remote and hybrid work here to stay.
Our customer length of stay are at record levels of positive trend given rent increases to existing customers are a key driver to our revenue growth.
The outlook for new competitive supply is also in our favor.
We are seeing less new property development nationally due to higher interest rates.
Cost pressures.
Difficult municipal processes and concern over the macro landscape.
With continuing strong demand less pressure from new supply and our numerous competitive advantages we are very well positioned in 2023.
Now I'll call, but now I'll turn the call over to Tom.
Thanks, Joe.
I'll start with a review of capital allocation for the year we.
We invested $1 billion between acquisitions and developments in 2022, including the $190 million neighborhood, Florida portfolio in the fourth quarter.
That portfolio added to our over 400 properties that were operating with a remote property management platforms.
Overall, the 2022 acquisition environment was impacted by a shift of cost of capital with transaction volumes down and driven by smaller deals compared to 2021.
We expect that trend to continue this year with our forecast for $750 million of transaction volume for public storage consistent with last year.
We are well positioned as an acquirer today, given our industry, leading balance sheet and cost of capital.
And adding to acquisitions, our development pipeline stands at approximately $1 billion as we seek to expand the portfolio with our in house team.
The development environment is challenging today across the industry as Joe highlighted.
Against that backdrop public storage is planning on delivering $375 million of new generation five properties in 2023 and more in 2024, as we lean under development competitive advantages.
And we look forward to putting these new properties on a national platform to drive outperformance.
Now on the financial performance.
We finished the year strong reporting core <unk> of $4 16 for the quarter and $15 92 for the year ahead of the upper end of our guidance range and representing 22, 4% growth over the fourth quarter of 2021.
Excluding the contribution of PS business parks.
Look at the contributors for the quarter.
In the same store revenue increased 13% compared to the fourth quarter of 'twenty one.
That performance represents a moderation from last quarters, $14, 7% growth and a return to seasonality and tough comps comparing to 2021.
Now on expenses same store direct cost of operations were up five 3%.
In total net operating income for the same store pool of stabilized properties was up 15, 8% in the quarter.
In addition to the same store the lease up and performance of recently acquired and developed facilities remained a standout growing 51% compared to last year.
Now I'll shift to the outlook, we introduced 2023 core <unk> guidance with a $16 45 midpoint, representing five 5% growth from 2022 again, excluding the contribution of PS business parks.
As we enter the year Theres no question Theres, a wide range of potential macroeconomic pathways that will influence customer demand and behavior. The consumer has held up well to this point in the year, but the fed has certainly signaling they're not finished if.
If we look at the same store revenue outlook I'd characterize the low end of the range of the outlook as a recessionary pathway and the higher end as a softer landing for the economy.
We anticipate occupancy will be lower throughout the year and follow a typical seasonal pattern.
<unk> will be the driver of revenue growth with the moderation through the year based on lower move in rents and tougher existing tenant rate increase comps.
That moderation results in trending towards longer term averages of growth.
Our.
<unk> are for five and three quarter percent same.
Same store expense growth, driven primarily by property tax and marketing expense.
That leads to same store NOI growth at the midpoint of three 2%.
Our non same store acquisition and development properties are again poised to be a strong contributor growing from $448 million of NOI contribution in 2000 $22 million to $520 million at the midpoint.
And looking ahead to 2024 and beyond the incremental non same store NOI to stabilization.
From those properties acquired or completed at December 31 is an additional $80 million of NOI.
This pool of lease up assets will continue to be a powerful growth engine over the next several years.
Last but not least our capital and liquidity position remain rock solid we have a well ladder long term debt profile with limited floating rate exposure and over $4 billion of preferred stock with perpetual fixed distributions.
Our leverage of three four times net debt and preferred to EBITDA combined with nearly $800 million of cash on hand at quarter end puts us in a very strong position heading into 2023.
So with that I'd like to open the call up for questions.
Thank you.
At this time, if you would like to ask a question. Please press the star and <unk> on your Touchtone phone.
Is that any time you find your question has been addressed you may remove yourself from the queue by pressing star Q.
Once again that is star one to ask a question.
And our first question will come from Steve Sochua with Evercore ISI. Your line is open.
Thanks, Good morning out there.
I guess, maybe Tom for you as you thought about setting guidance for this year I can appreciate a number of the different components that you laid out.
And there's kind of a wide range, there, but I guess, which which components do you feel like have the most potential upside and downside risk I guess, both on the revenue side and on the expense side, where you could come back and be positively surprised or negatively surprised.
Sure. That's a good question, Steve So I want to.
Make a couple of comments here one.
To comment a little bit around how the year has started which is pretty consistent trends with what we saw through the fourth quarter. So move in move out trends pretty consistent we've seen move in volumes.
Circa 10% move in rates that have been down mid single digits, so consistent with agile call it 5% plus or minus.
That we saw in the fourth quarter. So we're seeing continued good demand for storage through the first part of the year, but I do think and in response to your question I'd like to break the year of 2023 into two halves. The first half as we think about it consistent trends as we've seen through the fourth quarter into the first.
But facing really tough comps as we move through the first part of the year and that's going to lead to some of the moderation I spoke to.
The second, but ultimately with higher levels of absolute revenue growth given we're starting the year from a position of strength.
But if you think about the second part of the year.
There's a couple of things to highlight one the comps will be easier in the second half of the year given will be comping against a more seasonal end of 2021.
Our 2022 rather.
But the flip side is the macro uncertainty is significantly higher.
So as you think about the pathways that I described for the outlook at the lower end.
Recessionary pathway that we highlighted in some of our disclosures that recessionary pathway likely leads to negative year over year revenue growth as you would be typical to see in a recession.
But towards the higher end, certainly that that would lead to positive growth and easier comps and could result in better revenue growth performance as we move through the second half and I would say.
As we think about the year the second half is much more uncertainty towards it than the first half to us.
Okay, and then second question I don't know if it's for you or for Joe, but just as you think about capital deployment, you still have a $1 billion of development, but you mentioned that doing new deals is challenging just help us understand kind of where you think acquisition yields are in.
And to new development yields kind of where does that spread stand today and.
How do you think that might trend over the next kind of one to two years.
Yes, Steve.
There certainly is a continuing trend.
Played through in 2022 that we think still applies to 2023 first of all on the acquisition side.
Likely to be lower volumes of transaction activity, certainly we're seeing that by virtue of how the year started off its not untypical here and youre out where the first quarter. So it might be on the light side, that's definitely the case as we speak.
So we're looking for and evaluating the trends tied to impacts from.
Higher cost of capital limited availability of capital.
Again, how sellers are looking at this environment to transact assets typically more stabilized assets are going to command.
Stronger cap rates I would tell you today compared to maybe where we were a year ago cap rates are still up into that 100, 125 basis point range, where stabilized assets might have a five handle on them, whether it's low mid or high five cap rate is going to depend on location quality of the asset et cetera, and then depending on the.
Level of the asset that theres going to be more flexibility in the cap rate.
And youre going to see different pricing mechanisms tied to those types of assets our focus as it has been to actually look for those kinds of assets, because that's where we see the higher value creation that certainly played through the acquisition volume that we capture that Tom talked about in 2022, So we're still out hunting.
For good quality assets, our backlog right now between close and under contracts approximately $70 million, but frankly the markets a little slow right now so we'll see.
It's not unusual for though the market to start picking up.
Toward the.
The summer months, so we will see again, how that plays through.
On that set of opportunities now on the flip side.
From a development standpoint, as you mentioned, yes, our pipeline continues to be quite robust.
It's more difficult to do development.
Not any different than what we've been talking about for the last year or two our team is working hard to extract prime land sites were actually finding some very good opportunities there, but frankly, we've got skills and abilities that our competitors.
In the private world, particularly do not have.
And with that we've been able to extract prime sites good opportunities to actually get the types of returns that we've been speaking to for the last couple of years, where we're expecting plus or minus 8% or north north cash on cash yields on these investments. So we're very encouraged by our own pipeline, we're encouraged as Tom mentioned.
<unk>.
Relative to the lease up and the contribution those types of assets have to our overall revenue and NOI performance and our non same store portfolio continues to be very vibrant. So we're very encouraged that we've got the right skills and the fortitude and the ability to look long term through.
What could be still a very challenging development cycle, which frankly is a good thing it gives us more <unk>.
<unk> to actually go out and capture as I mentioned those great land sites put our gen five properties into a variety of different markets and nationally we've got good opportunities across the spectrum. So we're going to continue to focus on that as we speak.
Great. Thank you.
Thank you.
Next question will come from Michael Goldsmith with UBS. Your line is open.
Good afternoon. Thanks, a lot for taking my question on the guidance you said the low end of the range is for a recession scenario, while the high ends of soft landing do you see a 50% probability of a soft landing new end up at the high end and a 50% probability of a recession you end up at the low end or is it more 70 525 or another under another comp.
I'm trying to understand the likelihood of where where do you see yourself ending up within that range at this time.
Sure. Good question, Michael So I think there's a couple of things there. The first is we wanted to provide a range that encapsulated multiple pathways. Because we know everyone. On this call probably has their own point of view as to what percentage probability of recessionary pathway is or a soft landing is.
And so we thought it was appropriate to provide that that wider range and obviously investors can make their own perspective, as we look at it.
We look at the potential outcomes is relatively balanced within that range, but we don't obviously know what the fed's going to do and how the consumer is going to react.
Three or four weeks ago interest rates were lower there was talk of a no landing.
Over those three weeks, we have gone back to the fact that maybe that no landing is off the table. So I think that's going to ebb and flow as we go through the year and our objective was to provide investors and analysts a framework to understand what could play out through the year. According to those macro pathways.
Got it and then.
On <unk>. This year pre pandemic, you were sending increases of 8% to 10%, let's say every 12 months and over the past year and a half you had been trending and maybe mid teens high teens increases every nine months or so so for the upcoming year.
And included in your guidance, but can you help quantify the expected rate and frequency of ECR is over the year, obviously, it's going to change depending on the different scenarios, but maybe.
If you can talk about what the plan is and just kind of maybe how the.
Top of funnel traffic looks right now because that's going to play a role in your ability to pass along the ECL rise this year. Thank you.
Sure. Thanks, Michael So.
To talk specifically about the existing tenant rate increase program and then I'll hit around the top of funnel demand as well.
Consistently spoken about our existing tenant rate increase program is really two components. The first is how is the consumer reacting to increases how are they performing and behaving and we've noted in the past and I would reiterate today that the consumer continues to to perform at expectations.
And the sensitivity is largely in line with expectations and so theres no real change to the thought process around that program on that side, but the second component is the cost to replace that tenant when they leave.
And there's no question that that's changed quite a bit over the last several years, you had markets like Miami, where rents were up 25%, 30% and there was no cost to replace there was in fact, a benefit to replace potentially in place tenants and so that's started to shift as we move through 'twenty, two and into 'twenty, three and that impact will resolve.
<unk> and lower magnitude and lower frequency increases.
But still to optimize revenue from that pool of existing tenants and new tenants that come in.
Then the second part of your question around how is top of funnel demand performing I think is an important one because as Joe mentioned move in volumes through the fourth quarter were up nearly 12% move in volumes through the first part of this year are up double digits as well and so we're seeing good demand from.
New customers coming into the system now, we're spending a little bit more on advertising rates are a little bit lower there is a little bit more promotional discounts in order to achieve that.
But ultimately the customers are very willing and looking forward to.
Storage space to move into.
Thank you very much good luck in 2023.
Thanks, Michael.
Thank you.
Next question will come from Jeff Spector with Bank of America. Your line is open.
Great. Thank you good afternoon.
I guess I'd like to I'm going to push you a little bit on the guidance here.
Totally understand.
Given the macro.
Picture here and lack of clarity first half second half lets focus on I guess peak leasing season.
When does that really start and.
If we're through let's just say June July like is that the bulk of it because again my understanding is that I think there is even a lag to any recession, where it hit storage. So I'm just trying to get a picture of like how this could shake out play out through the most important months your peak leasing season.
Yes.
To answer the question directly we typically see the peak leasing season really start in April pickup in May and a really big way and then into June and July so to your point, it's not very far away.
And we're already seeing some of the seasonal patterns that you would anticipate in some of our markets right. The more seasonal markets are you already starting to see a pickup in occupancy as we sit here in February compared to the end of the year for instance, and so that typical seasonal pattern. It is starting to play out which is encouraging and I think where you may be going is theirs.
Certainly a chance that if there is a recession that comes it's later in the year and not earlier in the year and that certainly would impact the financial performance of the sector.
Through the year and obviously, if it's a good busy busy season that has a very positive impact on overall financial performance.
And in operational performance of the business.
Thanks, Tom does that then change or alter any strategy during the peak leasing months to grab more customers like.
How do you operate given this uncertainty again things seeing rock solid right now, but preparing potentially for let's say, a weaker fall or winter months or potentially into 'twenty four.
Yeah, I'd say, we're constantly looking to dynamically manage the current environment.
As we just noted it is hard to know exactly where we'll be sitting next year at this time, but we'll be planning week by week day by day through our operational team to react to what we're seeing and ultimately maximizing our own performance and serving our customers well through a busy time period in the summer when there is <unk>.
Typically strong demand for our storage space.
Great. Thank you.
Thanks, Jeff.
Thank you.
Our next question will come from Juan Sanabria with BMO. Your line is open.
Hi, Good morning, just looking too.
Further the discussions on the same store revenue guidance.
I'm wondering if you could talk a little bit about what you expect.
Within the range.
The fourth quarter or exit run rate to be in.
If I think about last year, you guys really called out like you saw you're well ahead. It appears.
And the initial guidance set and.
Relative to some of the maybe more tried and true.
And I'm being a little bit more conservative and plan to raise game are you guys changing it up are you really trying to call. It like you see at this time.
With a full acknowledgment that the uncertainty is much greater this year.
There's a whole host of questions in there one so let me try to take take a few of them at a time here. So I think the first part of the question is around the second half and talking a little bit more about the second half and maybe even you.
Youre trying to tease out from a 2020 for guidance, but I think the.
I do think the characterization, yeah, just fourth quarter right. So.
I'll go back to the first half second half comment, which is the first half and the tougher comps that we're going to experience is going to lead to some moderation as we face those comps through the first half, which will lower the absolute level of growth as we go through the first half and then the second half to the points I made earlier.
Really will depend on the busy season performance like Jeff was just speaking to and the macroeconomic environment and how the consumers impacted.
Bye.
That is likely to do and the excess savings that consumers have for a period of time and how quickly they they burn through that excess savings et cetera, and I think as we looked at that.
And model different.
Consumer behavior.
Through the year, there's a number of different moving pieces. There right. One is new storage demand and the other is existing tenant performance rate sensitivity delinquency all of those things.
And if you look at a typical recessionary environment, which you would find is weakness really across the board in those metrics, which is whats led to negative year over year revenue performance in recessions in the past.
So in that recessionary pathway, we spoken to we would expect that there is negative year over year revenue declines that we've seen in prior recessions.
But you will have the benefit of easier comps in the second half.
Which.
We will help offset some of that potential weakness.
On the flip side right. We're just talking about is the recession when does it come how deep is it all those sorts of things, which we can sit here and prognosticate on but ultimately we're going to find out over the next six to 12 months.
Yeah.
If the consumer is stronger.
Yeah.
The labor market holds up more effectively if the fed doesn't push the labor market is tough there could certainly be.
Situation, where.
And so I think.
That's our sense of the range of potential outcomes and I hope that that's responsive to your question and then as it relates to exactly how we'll exit I think it will depend on how that second half.
Moves forward.
I tried.
And then just on the expenses.
Curious if you could just give a little bit more color or numbers around that the major food groups operating taxes marketing.
Et cetera.
And then you called out a little bit your prepared remarks.
Hoping to flush that out a little bit more.
Yes, sure so specifically within the same store operating expenses, our largest operating expense line item is property taxes.
We ended the year of 2022 with property taxes with a four handle percent growth on them.
We continue to expect that that's likely to be a higher growth rate as we move into the coming years, given the NOI growth that we've seen in the sector over the past several years. So we're expecting something like 5% to 6% growth there and obviously, we will update as we move through the year. That's certainly the biggest driver of operating expense growth the other.
Others are smaller the second one I highlighted in my prepared remarks was marketing so you saw in.
In the fourth quarter, we increased marketing expense that was to drive further top of funnel demand into the system and we saw very good returns associated with that really comping against the period in 2021, when there was very little spending in most of our markets. So.
<unk> growth looks elevated against really low comps.
So marketing expense is likely to be another one because in the first part of this year were facing those similar really low comps.
Some of the other line items.
That are facing inflationary pressures again, the strength of the labor market. Today continues there is wage pressure, but you could see even in the fourth quarter, we were able to mitigate some of those wage pressures given the digital transformation and operating model transformation that we've been.
Working through over the past several years, which has led to efficiencies and in staffing.
So that will help mitigate and then utilities is another one that we've seen.
<unk> rates move higher, but we're looking to combat that with our investments in energy efficiency be it our solar programs, which we're seeking to to add about 300 properties with solar by the end of the year to bring our aggregate total to about 500 properties and with more room to go there in future years as well as our.
Lead conversion, helping to mitigate that so that's.
High level landscape of a number of the line items happy to go.
Any further detail is helpful.
Thank you Tim.
Thanks, a lot.
Yes.
Thank you.
Our next question will come from Todd Thomas with Keybanc capital markets. Your line is open.
Hi, Thanks, good afternoon.
Tom first question I guess back to the guidance.
Mentioned that occupancy will likely be lower throughout the year I was wondering if you can maybe provide a little bit more detail there around what you might expect at sort of the low and high end of the range relative to where you ended the year. So call. It down 250 basis points do you see that year over year spread.
Widening or narrowing as you move throughout the year.
Well, let me talk about the first half first and then we can talk about the second half, which obviously we've spoken about there's there's macro uncertainty that will influence that but as you think about the first half we're starting the year with occupancy down about two 4%.
We do think that the occupancy decline that we experienced in the back half of 2022 was a seasonal occupancy decline in fact, the decline from June to December was a touch better than a typical seasonal decline, but inherent in that is that what we're seeing today is a pickup in occupancy.
Seeing some of our seasonal markets. So we would anticipate there's certainly the opportunity for that spread to narrow as we get into the busy season as we spoken to.
But then would follow its typical seasonal pattern from there in the back half.
Okay, and when you talk about the seasonal markets, where youre already starting to see some occupancy build which markets are those.
Well, they typically tend to be colder weather markets, So you're you're Miami's and Youre, Los Angeles, and San Diego's you don't see that same seasonal pattern, but if you look at our Minneapolis or a chicago or the northeast you start to see that that seasonal pattern would be more a more pronounced.
Okay got it and then and then just circling back to.
Capital deployment and some of the comments that you made earlier.
Around investments when making acquisitions and some larger deals like you did in 2021, you've talked about upside to the initial yields through through margin improvements the company scale and so forth and I think sort of an extreme example, maybe not extreme but I think one example enduring 2021.
The $1 $5 billion, all storage deal, which I think was sort of a 2% mid 2% cap rate going in with an expectation to substantially increase added stabilization I realize the environments different today and all.
There is all deals have different characteristics, but as you look at the current landscape and think about acquisitions would you still be willing to tolerate initial dilution relative to your cost of capital early on like like you have in 'twenty, one or in prior cycles or does the greater uncertainty today give you a little bit of pause around how you think about future growth in the spread to your cost.
The capital that you would be willing to invest that.
Yes, Todd I mentioned, you know what.
We've been doing strategically now for the last three years or more is looking for.
Opportunities with assets that do have that upside that you are speaking to so whether it's through some of the larger portfolios. All storage included we bought that portfolio at about 74% occupancy.
<unk> had a nice lift really in a very short period of time relative to continued lease up and stabilization of the revenue.
Metrics et cetera.
We've done the exact same thing with one off deals as well. So that's something we're not going to be shy about doing.
It continues to be very good playbook for us when we've got deep seated knowledge market to market, which we do.
Due on the vast majority of deals that we acquire we have an elevated level of confidence that once we put these assets into our own platform.
You can see that extracted opportunity literally right out of the gate.
See the benefits as we've been speaking to relative to our brand our platform.
Our efficiencies that assists higher margin.
Opportunities et cetera, So we're definitely looking for those kinds of assets and have not backed away from them at all so that has and will continue to be a very vibrant part of our capital allocation process.
Okay. Thank you.
Thank you next time thank you.
Our next question will come from Spenser <unk> with Green Street. Your line is open.
Thank you can you provide an update on the rent freeze that was put in place related to the California storms early in the year.
And if not.
Is there any type of NOI headwind contemplated in guidance.
Sure. So I think Spencer Youre speaking to the storms that took place in early January .
Out here in California, There was a state of emergency that was put in place.
Is expiring here in February so I think as.
There is going to continue to be kind of one off events like storms and rain in California, I believe it or not that can lead to state of emergency in pricing restrictions.
And we will navigate those as it relates to whats embedded into our guidance expectations theres things like that that come in and come out of different markets.
And so we will try to take a reasonable estimate as to what those could be through the year.
But we're not underwriting any significant rental rate restrictions as we move through the year embedded in our outlook.
Okay. Thank you and then you got Oh.
No go ahead.
No go ahead.
And you guys have provided a lot of great commentary on guidance in general and specifically on move in rates and volumes and how those are trending thus far in 'twenty three but when you think about the comment on the recent magnitude of ECR activity and then without providing specific line item guidance is there any color you can provide on what's being contemplated.
In terms of ETR is at both the high and low end of guidance.
Yeah.
Sure.
Go back to my response around existing tenant rate increases earlier, which is that.
There's no question that in certain markets, we have a moderation in the magnitude and frequency that we sent them and I highlighted Miami is as an example, where rents in Miami for new customers were up 25% to 30% each year for the past several years and that's started to slow down as we anticipated that.
That market and others can't grow like that in perpetuity.
But because of that the magnitude and frequency of rental rate increases to existing customers is likely to moderate this year and we've already seen that to start the year in terms of a band I'm not going to get into specifics around the numbers are averages or whatnot, but there's a wide range of increases that we send to the tenant based on what we understand their sense.
<unk> and the value they place in the unit as well as the cost to replace that tenant if they do choose to move out.
And as we move through the year that cost to replace that tenant could could take different pathways.
Along with the rest of the outlook and so in the stronger outlook, it's going to result in a stronger existing tenant rate increase magnitude and frequency and the weaker outlook for new tenants is going to have the opposite effect.
Okay. Thank you.
Thanks.
Thank you. Our next question will come from Keybanc, Ken with <unk>. Your line is open.
Thanks, a quick one first.
In your 2023 guidance what are you thinking for moving rate.
Yes, good question Keith so.
Certainly we started the year as I've highlighted with movement in rents that are below prior year and we finished the fourth quarter in a similar territory. We are anticipating that we see rents lift as we move through.
The busy season months as you'd anticipated as customer demand increases inventory gets tighter as you get to that point in the year and that will lead to higher absolute rents.
But as I noted.
Earlier around the comments around the second half there's a lot of variability on what could play out obviously, if we're in a recessionary environment would anticipate then moving rental rates are lower as we're looking to capture demand in an environment, where consumer demand remained strong that's going to result in higher rental rates as we move through the year and as I noted earlier.
The story in the second half compared to the first is comps the comps are definitely tougher in the first half than they are in a second.
So maybe I should have rephrased it.
So you're moving rates are down 5% as of <unk>.
On a year over year basis.
Thats the way Im trying to understand the trend thats, what they are right now to Kevin that's what they are right now as well.
Okay.
And on your Capex guidance of $450 million. Obviously does this line item has grown over the past three years.
And you do a great job of breaking out between maintenance Capex property of tomorrow and the solar led.
I'm just curious.
If some components of this capex might have a return.
A return associated with it and if you can provide some color around that.
The energy efficiency investment definitely leads to good returns and as Tom mentioned, we're combing the portfolio as we speak for solar opportunities in particular, we've basically re lit the entire portfolio to lead we had good.
Again returns from that investment and.
As the additional stimulus has come through with recent legislation.
Theres, even more motivation on our part to continue to look at multiple markets likely will get into a very sizable percentage of the entire portfolio that will help solar I think over the next say three to five years, but at the onset here as Tom mentioned, we've got $3 to 400 properties that are near term.
Term.
Likely very good candidates for good strong returns.
Property of Tomorrow, we're lifting the aesthetics.
And the curb appeal and.
Some of the functionality of the properties, it's a little harder to measure specific.
Returns on that type of investment, we do see higher elevated level of customer satisfaction employee satisfaction et cetera, and then clearly the enhancement market to market. We are seeing from just the brand awareness now that we're at a point of over <unk>.
55% to 60% of the portfolio has been rebranded to the property of Tomorrow standard market by market and we're seeing very good receptivity to that as well so a little harder to measure just on a pure economic basis, but.
Continue to see good results from that investment as well.
Okay. Thank you.
Thank you.
Thank you. Our next question will come from Ronald Camden with Morgan Stanley . Your line is open.
Hey, just going back to the guidance, maybe any more color on sort of the bad debt assumption.
For the same store revenue.
NOI.
Alright. Thanks.
Ron you're coming through kind of quiet, but I think what I heard was bad debt expectations that are embedded in the guidance outlook is that okay. Good so the I'd.
Bad debt overall is being continued to be a good performance through the first part of this year in the back half of last year, we spoke a lot at the onset of the pandemic around how delinquency and bad debt really declined pretty dramatically we're off of those lows, but consumers continue to pay their bills and our.
Delinquency remains a good bit below pre pandemic levels.
So to speak to specifically the question on guidance and the ranges.
In the recessionary pathway that we've spent a good bit of time talking about this morning.
We did increase the bad debt assumption associated with that as we would anticipate that we'll likely to see bad debt.
Increase through that pathway and the reversal towards towards the higher end.
Great and then my second one you talked about sort of the macro assumptions in the guidance, which was super helpful. Just wondering you guys are operating the business are there sort of any leading indicators that you would see it.
First maybe before sort of the macro turns whether it's you know as <unk>.
Volumes or whatever are there sort of leading indicators that that you guys are tracking to sort of get a handle on this from the ground.
Yes, I mean, obviously, we're running a month to month lease business, we move in 80 plus thousand customers.
On a monthly basis, and we have a healthy amount of move outs as well so with that.
Continuous flow of activity, we're constantly monitoring.
Things like payment patterns.
To the degree.
Of either change or what might be happening market to market relative to other macro events et cetera, but.
One of the more.
Obvious metrics that we look at relative to just the stress and maybe the evolving nature of the economy at large is payment patterns and as Tom just mentioned those continue to be actually quite good.
There's some elevated level of stress, but it's on a relative basis still below what we saw pre.
Pre pandemic, we're keeping a very close eye on it and we've got.
New and different ways to actually.
Track. This now that so much of our business is tied to the digital interaction with customers et cetera. So.
We've got good tools to stay ahead of that and to guide us relative to whatever stress points might be evolving.
Thank you.
Thank you.
As a reminder, that is star one to ask a question.
And our next question will come from Smedes Rose with Citi. Your line is open.
Hi, Thanks, I just wanted to ask you if you have it.
<unk> seen any changes kind of in the supply outlook and maybe if you have any insight into kind of developers.
The details to access capital.
Yes, Smedes I mentioned that in my opening remarks.
<unk> had the benefit.
Nationally where deliveries have been.
Somewhat static for the last two years and we're looking at 2023 and very similar.
Fashion relative to likely not an elevated.
Uptick in overall deliveries of ties to the amount of complication.
From a cost standpoint, theres more risk with many of the unknowns coming into the economy and the complications tied to just getting approvals as you go through step by step development processes. So the overall supply picture is actually very good meaning we're not seeing.
Rush to new development are lens through our third party development platform gives us a little bit more validation of that as well where the majority of those are.
<unk> are tied to development and we're keeping even a closer eye on that beyond what our day to day development team and our real estate team is seeing as we're out either acquiring or looking for development opportunities. So.
Hopefully fingers crossed we're going to continue to see that.
Mount of deliveries through 2023, and going forward again, either in the same range or could actually be a slightly downtick, but we'll we'll continue to track that.
Okay. Thanks, and then I'm, just wondering sort of big picture. When you just look back over your long history at other periods of economic weakness in recessions.
So maybe I agree potentially head into one now are they're kind of two or three things.
You would.
Might do differently from a strategic perspective of what you have.
John in prior recessions like either on the occupancy or the pricing pronged or are there maybe more people on auto clean now than we were then which I would think it kind of helps but just kind of interested in any kind of color you have given.
The company has been around 50 years now.
Well again cycle the cycle, we continue to takeaway best practices different strategies different ways to buffer and.
Built upon not only our strengths, but it goes to the core of our platform and the resiliency that we see relative to that.
Types of ebbs and flows of overall.
Economic stress et cetera. So.
The things that we're constantly doing is.
Running the business on a very fluid basis, we've got more data now than clearly we've ever had I mentioned, our move in and move out volume for instance, and then the.
Amount of.
Again testing that we do relative to pricing.
Whether it's marketing whether it's promotions all the tools that we have that are far more tied to analytical.
The processes that can again guide us to optimization. So we've got great tools, we've got great reconnaissance and we think that we've got even deeper technologies that we continue to make very strong investments intuitive has served us well we've actually.
In a whole variety of different ways been able to test those in and out of again economic.
Cycles. So we're going to continue to do just that.
Okay. Thank you.
Thank you. Our next question will come from Keegan Carl with Wolfe Research. Your line is open.
Yes, so maybe starting off with a bigger picture question here, but if you think back to your May 2021, Investor Day, you guys forecasted a long term growth range of $6 seven to nine 2% on SSO just kind of curious is that still in play going forward or do you anticipate growth to continue to moderate.
Yes, so looking back at that Investor presentation, we broke out the different engines of growth as I recall and Theres a number of them.
I'll talk through here and its worth.
And I appreciate the question.
The first one around longer term storage growth rates and the building blocks certainly we've had a couple of years of really incredible strong growth. We're talking about a year now where we're getting back towards trending towards those longer term averages.
But one of the components of that that engines of growth formula was the operational improvements and enhancements that we walked through so I spoke earlier around the operating model transformation in the energy efficiency things that we're doing today that are benefiting our same store NOI growth.
Yes.
The Investor community got to hear from our revenue management and data science team, which to Joe's point, just a moment ago, we continue to test and implement new systems and new approaches and we have over 1 million move ins and over $1 million rental rate increases a year that is our ability to continue to fine tune those processes.
So we think Thats certainly intact I think going through the other ones the portfolio growth. There's no question that cost of capital has changed from the time, when we walk through that deck and so I think that there is certainly some some components of that that are going to change from one year to another certainly we.
Allocated a significant amount of capital over the last several years.
Last year was more in line with our expectations that were set out at Investor day.
Complementary growth and leverage and other what are the other components that led to that <unk> growth outlook and I think those are there.
So absolutely intact as we continue to grow our tenant reinsurance platform that third party management business that that Joe spoke to.
Our investment in Shurgard and.
And the benefit that we received from that on down the list. So in summary, many of those factors are very much still in play and continue to push on our competitive advantages to drive that growth I think the portfolio growth is the one that's going to ebb and flow more from one year to another.
Got it and I'll throw another tough one out here, but if we just think through the pandemic.
Subsequent demand tailwind how many first time users you think utilize self storage and how sticky do you guys expect these customers ultimately to be.
I'm trying to sit here and reconcile where demand could level out given your prior commentary, we don't necessarily anticipate any meaningful occupancy gain.
Yes, so the first part of the question around New first time users no question there was a significant.
Influx of new storage users through the pandemic and we've spoken a lot around different use cases as well right the combination of.
Surgeon home sale activity during a part of the.
Several years now a decline in home sale activity a change to hybrid work in a big pick up in home improvement activity that drove new first time users of storage and frankly, the fact that people are spending a lot more time in their homes and we do think thats a tie.
And as we move forward over time, and so as you think about the.
Adoption of storage has continued to grow from a smaller base than the 19 seventies to where it is today and we're encouraged by those first time users. The younger users that continue to seek storage is a good value to store their goods and do think that that is a tailwind for the industry moving forward.
Thanks, guys.
Thank you.
Our next question will come from Michael Mueller with Jpmorgan. Your line is open.
Yes, Hi, I think you mentioned the record length of stay and I was wondering first can you just throw out the stats in terms of the percentage of customers there over a year and over two years.
Sure.
First though I mentioned the metric that we like to communicate which is.
The average tenure of the in place tenants and Thats sitting right around 37 months today and we've spoken in the past around how thats up from call. It 32 33 months.
Going back several years and so no question a continued.
Benefit of the longer length of stay as we sit here today.
And Joe highlighted that in his prepared remarks, and then specifically to your question around <unk>.
Segmenting the different tenure bands, we still today have over 60% I think it's 61, 62% of the customers are over.
I have been with us for longer than a year and longer than two years is a very healthy call it $43 44%.
As we sit here today, so continue to see pretty healthy trends there from the sticky existing tenant customer base and that's something we're obviously watching closely and continue to be encouraged by.
Got it Okay, and then I guess going to.
Not drilling down on the same store guidance, but you talked about the recession scenario versus soft landing if you head down that recession scenario would you envision taking the foot off the gas.
Gas on development starts at all or probably not.
Yes, Mike.
The development cycle is long.
I mentioned <unk> got to have the afforded to particularly.
<unk>.
Environments or macro economic cycles that.
Wood and are actually persuading others to not pursue development, we still think that that's a very good opportunity for us as I mentioned to go out capture even better land sites in some cases or with our own view and financial capabilities and.
Basically.
View of the longer term value creation, we can see through cycles like this and in many cases it actually can.
Lead us to opportunities, we might not otherwise see so that's the benefit of again, having our deep seeded knowledge are very entrenched development and real estate teams nationally out looking for sites and then getting into all of the complications of getting into.
<unk> approvals et cetera, and then going through construction processes now.
<unk> been and we don't see.
Any immediate relief to the amount of inflationary pressures that have come through just component costs, whether it's steel or lumber or.
Anything tied to oil et cetera, So there's a lot of risk that continues to.
Evolve into the development business, but we think that we have uniquely the ability to see through cycles, and we look and make sure that we've got enough.
Bandwidth and even in our own underwriting to give us very good capabilities of not only hitting our expected returns, but hopefully exceeding them, particularly if market corrections happen through it through again these ebbs and flows of market cycles. So.
And.
We're always looking and trying to assess what the near and longer term.
<unk> dynamics are but we've got the fortitude to do that.
Got it thanks.
Thank you.
Sure.
Thank you.
This concludes the question and answer a question of our call and I would like now like to turn the call back to Ryan Burke for any additional or closing remarks.
Thank you Chelsea and thanks to all of you for joining us have a great day.
Okay.
Yes.
Thank you ladies and gentlemen, this does conclude the public storage fourth quarter and full year 2022 earnings call.
Your participation and you may disconnect at any time.
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Yes.
Thank you.
Okay.
Thanks.
Okay.
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