Q4 2024 Public Storage Earnings Call
Speaker Change: Greetings and welcome to Public Storage fourth quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If you'd like to enter the queue, please press star 1 on your telephone keypad.
Speaker Change: If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Ryan Burke. Thank you. You may begin.
Ryan Burke: Thank you, Rob. Hello, everyone. Thank you for joining us for our fourth quarter 2024 earnings call. I'm here with Joe Russell and Tom Boyle.
Ryan Burke: Before we begin, we want to remind you that certain matters discussed during this call may constitute forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to certain economic risks and uncertainties.
Ryan Burke: All forward-looking statements speak only as of today, February 25th, 2025, and we assume no obligation to update, revise, or supplement statements that become untrue because of subsequent events.
Ryan Burke: A reconciliation to GAAP of the non-GAAP financial measures we provide in this call is included in our earnings release.
Ryan Burke: You can find our press release, supplement report, SEC reports, and an audio replay of this conference call on our website, publicstorage.com. We do ask that you initially limit yourselves to two questions. After that, if you have more, of course, please jump back in queue. With that, I'll turn the call over to Joe.
Joe Russell: Thank you, Ryan, and thank you all for joining us today. Tom and I will walk you through our performance, industry views, and outlook. Then we'll open it up for Q&A.
I will focus on three key themes.
Joe Russell: First, we ended 2024 on a positive note with results that reflected the stabilization we are driving across our business.
Joe Russell: We began 2024 by pointing out that a handful of markets were improving sequentially and that we expected more would follow suit.
Joe Russell: They did, and we ended the year with nearly all markets having inflected, and we are seeing broad operational stabilization.
Joe Russell: As a result, our quarterly same-store revenue growth improved sequentially for the first time in more than two years.
Joe Russell: This, coupled with strong performance in our sizable non-same-store pool and ancillary businesses, help drive core FFO per share growth positive.
Joe Russell: Similar to same-store revenues, this is the first sequential improvement in more than two years.
Joe Russell: Simply put, industry and portfolio fundamentals are steadily heading in the right direction.
Joe Russell: We have a long-standing and deep connection here and we empathize with those that have been affected.
Joe Russell: I am very proud of the team for keeping our properties secure and open to serve our customers.
Joe Russell: We welcome our new customers and thank them for choosing us in their time of need.
Joe Russell: We are deeply experienced in navigating states of emergency and look forward to Los Angeles re-emerging as a long-term outperformer among self-storage markets.
Joe Russell: In the meantime, we are driving operational stabilization across the rest of our portfolio, and we expect sequential improvement to continue outside of Los Angeles in 2025.
Joe Russell: Third, through portfolio enhancement, industry-leading innovation, and company-wide competitive advantages, we have positioned ourselves for opportunity as the industry environment improves.
Joe Russell: We recently completed the Property of Tomorrow program, a multi-year and more than $600 million investment into holistically rebranding our entire portfolio nationwide.
This has further enhanced our brand positioning within local markets.
Joe Russell: As a result of completing the program, we expect our annual retained cash flow to increase from $400 million in 2024 to approximately $600 million in 2025, providing additional liquidity to grow our portfolio.
Joe Russell: Our digital transformation is advancing and further connecting all aspects of our business.
Joe Russell: Adoption by customers has been particularly swift with self-selected digital options now comprising 85% of our customer interactions and transactions.
A significant increase from around 30% in 2019.
Joe Russell: The platform digitalization has helped drive our implementation of a new and more efficient operating model.
Joe Russell: One of the many ways we are flexing the platform and using AI is to staff properties more appropriately.
Joe Russell: We are now meeting customers when and where they need us, instead of always having someone on site for nine hours every day.
Joe Russell: As a result, we've reduced on-property labor hours by nearly 30%, and there's more to go.
Joe Russell: Importantly, we are doing so while also driving satisfaction hire among our customers and the 6,000 member property operations team.
Joe Russell: We are also actively rolling out our solar program, reaching nearly 900 properties and with more growth ahead.
Joe Russell: Our strong progress so far has resulted in a 30% reduction in utility use which benefits our financial profile and the environment.
Joe Russell: These are just a few of our many active initiatives and we are excited about further operational enhancement to come this year and beyond.
Joe Russell: With that said, we are mindful of the challenges that the industry still faces, including competitive customer move-in dynamics.
Joe Russell: Our team and strategies are calibrated appropriately as we are driving improvement across our portfolio.
Now I'll turn the call over to Tom.
Tom Boyle: Acquisition activity has picked up, with 26 properties acquired or under contract for $361 million in the fourth quarter through to today.
Tom Boyle: We expect greater acquisition activity in 2025 than we had in 2024.
Tom Boyle: With fundamentals improving and a multi-year period of declining competitive new supply, we are poised to increase activity.
Tom Boyle: As always, our capital and liquidity positions are strong. Industry-leading leverage, balance sheet capacity, and cost of capital have us positioned to execute across our growth channels.
Now shifting to our financial performance.
Tom Boyle: This was strong sequential improvement from the 300 bases point decline experienced during the third quarter.
Tom Boyle: Same store revenues declined 60 basis points year-over-year in the fourth quarter, also improving sequentially from the 130 basis point decline experienced in the prior quarter.
Tom Boyle: Move-in trends are improving, existing customers are behaving well, and occupancy is at a level that puts us in a good position as fundamentals inflect.
Tom Boyle: As Joe mentioned, we expect the sequential improvement to continue across the portfolio outside of Los Angeles.
Tom Boyle: Same-store expenses increased 90 basis points year-over-year with growth in property taxes offset by staffing optimization and additional expense controls.
Now turning to The Outlook for 2025.
Tom Boyle: We introduced core FFO per share guidance of $16.35 to $17 with a midpoint that is consistent with 2024.
Tom Boyle: This includes an estimated 23 cents per share impact from pricing restrictions resulting from a state of emergency declared by the Governor of California in response to the fires.
Tom Boyle: Excluding the impact, the midpoint would have called for a 140 basis point increase in core FFO per share year over year.
Tom Boyle: Looking at the same store, the midpoint calls for revenues to be down slightly year over year. This includes an estimated 100 basis point impact from the restrictions in Los Angeles.
Tom Boyle: At the midpoint, we are assuming that move-in rents are down 5% year-over-year on average.
Tom Boyle: We are also assuming that occupancy is down 10 basis points on average, an improvement from where we finished 2024.
Tom Boyle: and as we've consistently seen, we believe existing customer behavior will remain steady.
Tom Boyle: We expect 3.25% same-store expense growth at the midpoint, primarily driven by property taxes and offset by the initiatives that Joe spoke to.
Tom Boyle: This leads us to same store NOI declining 1.4% at the midpoint.
Tom Boyle: As I noted earlier, we anticipate higher acquisition volumes in 2025. We've included the identified $140 million of closed and under contract volume, but we did not include any unidentified acquisition volumes in the range.
Tom Boyle: Our outsized, non-same-store portfolio of over 500 properties is poised to be a strong contributor again in 2025.
with 454 million of NOI assumed at the midpoint.
Tom Boyle: They will continue to be an engine of growth with additional NOI upside of $80 million beyond 2025 through stabilization.
Tom Boyle: As we enter 2025, public storage is on solid footing following two years of demand and growth normalization.
Tom Boyle: Our completed Property of Tomorrow enhancement program, industry-leading transformation initiatives, sizable and high-growth non-same-store pool properties, and growth-oriented balance sheet will have us positioned for improving fundamentals and increased transaction market activity moving forward.
Rob, let's open it up for Q&A.
Rob, this is Ryan. Are you there with us?
Yes, I'm here
Speaker Change: Let's go ahead and open it up for Q&A please. At this time we'll be conducting a question-and-answer session. If you'd like to ask a question please press star 1 on your telephone keypad. As a reminder please limit to one question and one follow-up.
Tom Boyle: A confirmation tone will indicate your line is in the question queue.
Tom Boyle: You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions.
Speaker Change: Our first question comes from Jeff Spector with Bank of America. Please proceed with your question.
Jeff Spector: Great, thank you. Thanks for the additional information and your opening remarks.
Jeff Spector: and occupancy down on average slightly, I think you said 10 bips, but most specifically the street rate assumption. How do you derive that? Thank you.
Jeff Spector: Yeah, sure, thanks Jeff. So why don't I start with an update on year-to-date performance and speak to you know what we've seen to start the year.
Jeff Spector: and we've seen continued levels of activity demand stabilization that we talked through 2024 play out to that the start of 2025 as well giving some snapshot stats
Jeff Spector: The move-in volumes are up a strong 5% to start the year. Move-in rates down about 8%, so on a net basis, you know, continued improvement through move-in activity.
Jeff Spector: move-outs are flat leading occupancy to be down about 40 basis points year over year as we sit here today comparing to where we finished the year down 80 basis points but we did start the year with move-in rents down 8 percent or so
Speaker Change: As we think about the full year, I highlighted a couple of the operational metrics to note. UC's done one of them, moving rents down 5%, so that's obviously an improvement from where we're starting the year today.
Speaker Change: We expect a continued competitive dynamics for new customer move-in rents through the year at the midpoint.
Speaker Change: We are anticipating that with demand stabilizing that we do see occupancy At a down ten basis points level on average so improvement in occupancy through the year We're already seeing some of that year to date
Speaker Change: Obviously, the high and low end of the range capture better or worse trends on those metrics as well, but we thought that was an appropriate midpoint for our outlook for the year.
Speaker Change: Great, thank you. And then my second question is on your comments around stabilization. Joe, you started saying that
Speaker Change: What's driving that? Is it simply less supply? I mean, are you actually starting to see an improvement in demand top of the funnel? Can you talk about that more? Thank you.
Sure. Yeah, the...
Speaker Change: Market-to-market demand factor is a positive trend. We spoke to that quarter-by-quarter through 2024, and as Tom noted, that's carrying us into 2025 as we start.
Speaker Change: So, we have seen, as I noted in my opening comments, a number of markets that continue to inflect positive. That's a good trend. It's not a jump dramatically forward, but it's clearly not reversing.
Speaker Change: and we're seeing top-of-funnel demand by more Google search, for instance, industry-wide.
Speaker Change: We are seeing, again, moderate levels of improved activity, again, top of funnel.
Speaker Change: self-source space, but our conversion techniques are continuing to be highly optimized and very competitive. So with all those factors, Jeff, we're encouraged by this moderate, but improving market by market growth.
Speaker Change: We're obviously pointing out some of the challenges as I noted here in Los Angeles but holistically the portfolio at large we're still seeing the level of improvement I spoke to and we're going to continue to diligently capture as much as our fair share of market activities we can.
Todd Thomas: Our next question is from Todd Thomas with KeyBank Capital Markets.
Please proceed with your question.
Yeah, hi, thanks.
I wanted to ask about Los Angeles specifically.
Speaker Change: the impact that you're estimating there amounts to the 100 basis point negative impact on the same store on same store revenue. Can you just discuss the underlying assumptions there around occupancy and rate growth and
Speaker Change: Are you assuming that impact is fairly consistent throughout the year or is the impact, you know, expected to be, you know, maybe a little bit greater earlier in the year than you would expect it to be as the year progresses?
Yeah, Todd, that's a good question. So we did.
Speaker Change: provide an estimate for the impact to same-store revenue that clearly flows directly down to core FFO of 100 basis points.
as we think about the impact there.
Speaker Change: primary driver of the impact is going to be rate. Occupancy remains healthy, Los Angeles continues to be a strong market for us really in and out of cycles given the demand and supply dynamics within Los Angeles.
Speaker Change: And so the 100 basis points that we're speaking to is really a rent restriction and pricing restriction impact.
Speaker Change: and that will have less of an impact in the first quarter, obviously as we're starting here, than it will as we move through the year.
Speaker Change: and so that 100 basis point impact will accumulate as we move through 2025. But you can think about that 100 basis points as the right guidepost for modeling purposes.
Speaker Change: Okay, and then just stepping back and thinking about the portfolio more broadly, can you just discuss within the context of your remarks around
Speaker Change: continued stabilization and recovery in terms of fundamentals. Can you discuss trends across the Sun Belt?
Speaker Change: and compare and contrast that to some of the coastal and more urban markets. Clearly, the Sun Belt normalized more or experienced a greater deceleration from a higher peak growth rate.
Speaker Change: looked like some of those markets stabilized a bit more this quarter and led the way. As you look to 25, does the Sun Belt recover more quickly, or do you see, you know, some continued volatility there in the near term?
Yeah, I can start, Todd, and then...
Speaker Change: You know, extraordinary demand that we saw through the pandemic, etc. We are encouraged by that continuing to progress in the right direction off of, again, those pretty dramatic
events and the demand that we saw.
Speaker Change: The other factor, you know, is supply itself, so in markets nationally
We continue to see declines.
Speaker Change: More often than not in supply and deliveries of new product there are still two or three markets We're keeping a particularly close eye on that would include Phoenix you know Las Vegas
at the studio.
Speaker Change: We've been talking about it now for the last couple of years, but we continue to see the holistic benefit of fewer and fewer deliveries taking place.
Speaker Change: Market Developers, so that too has been a positive trend that we continue to see that we're going to see through 2025 and frankly into 2026.
Tom Boyle: And then Tom, you can add any other comments on top of that. The only thing I'd add, Joe, is some specific market commentary. Last year, at this time, we were highlighting Seattle, San Francisco, and D.C. as markets that were starting to see some improvement. That played out through the fourth quarter.
Tom Boyle: continue to see good trends there. But as you're highlighting and Joe just noted related to the Sun Belt, some encouraging trends in some of the Florida markets for instance, Miami and Orlando.
Tom Boyle: both inflecting into positive second derivative territory in the fourth quarter. So we are starting to see some improvements further into the Sun Belt which is encouraging.
All right. Thank you.
Speaker Change: Our next question comes from Michael Goldsmith with UBS. Please proceed with your question.
Michael Goldsmith: Good morning. Thanks a lot for taking my questions. First, on the transaction market, sounds like you have greater visibility into more activity in 2025 than last year. So what's driving a more liquid market and where are acquisition cap rates settling in right now?
Michael Goldsmith: Yeah, Michael, a couple things there. So 2024 as a stage setter ended up being a multi-year low sector transaction year.
Michael Goldsmith: very few large portfolios traded hands and you know the bulk of the activity was one-off transactions but all told there was plus or minus about four billion dollars of transaction activity in the sector at large.
Michael Goldsmith: Going into the fourth quarter of 2024, we did see a bit of an uptick.
Michael Goldsmith: on the latter half of that activity level, meaning the one-off, smaller transactions. So, we were able to capture a number of attractive opportunities in the fourth quarter that carried into, so far, the activity we've seen early into 2025.
Michael Goldsmith: activity again highly leaning toward these one-off transactions no different than q4 but between q4 and q1 now we've taken down about 400 million dollars worth of acquisition activity
Michael Goldsmith: It's hard to tell if in 2025 we're going to see a different level of bigger portfolios coming to the market.
Through last year we talked
Michael Goldsmith: from time to time some of the inbound activity we were getting on some of these larger portfolios. Frankly, almost none of them ended up trading hands. Very few of them did, in fact. And we'll see how different 2025 plays out. There's still a level of activity that could come through.
Michael Goldsmith: on these larger portfolios, but very hard to predict at this point.
And just to clarify, where are cap rates right now?
Speaker Change: Yeah, sure on cap rates. I point you to a similar zip code that we've been indicating really for the last
Michael Goldsmith: year-and-a-half or so, and obviously cost of capital, interest rates, they've moved around a little bit.
Michael Goldsmith: you know through the year but I'd still be pointing to kind of in fives cap rates getting into sixes as as the right guideposts for for cap rates and obviously lease up assets are going to be a little bit different than that I'm speaking more to stabilize properties
Speaker Change: Thanks for that. And then as a follow-up here, it sounds like demand is stabilizing, moving volumes are up slightly, but it's not necessarily translating to pricing power for new customers.
Speaker Change: Is the missing ingredient just for demand to pick up, for pricing power to return, or is there something else that can help generate the move in rents, the move higher? Thanks.
Speaker Change: Sure, thanks Michael. So I think stepping back, the level of demand that the industry is seeing has come off the highs of several years ago, but last year we were specific in highlighting that we viewed it as the year of stabilization. And if you look at Google search activity for storage-related keywords or other metrics...
Speaker Change: we did experience that stabilization through last year and we're starting the year in a similar place.
Speaker Change: to where we started last year. So that's encouraging that demand is not falling. So that's the first step in the ingredients that you're speaking to.
Speaker Change: In terms of the year this year, we are not anticipating that we see a significant uptick in demand through this year. So pretty similar trends as we think about our demand drivers.
Speaker Change: in 25 compared to 24, so we're not expecting a big seasonal uptick for instance or a sharp return in housing transaction volumes. It feels like 25 is going to feel pretty similar to 24 across many of those demand dynamics.
Speaker Change: and so we're not anticipating that there are big shifts there. Obviously, to the extent that...
Speaker Change: Demand does pick up for any number of reasons which we can speak to.
Speaker Change: that should lead to better pricing power across the industry and better financial performance that would flow through thereafter.
Thank you very much. Good luck in 2025.
Thanks, Michael.
Speaker Change: Our next question comes from Juan Sanabria with BMO Capital Markets. Please proceed with your question.
Speaker Change: Hi, good morning. Thanks for the time. Just hoping you could talk a little bit about expenses and some of the assumptions behind some of the individual line items. And as part of that, if you wouldn't mind talking about your views on any potential risks to changes in immigration policy impacting labor costs.
or less...
Speaker Change: Environmentally Friendly Administration may be removing some of the benefits of solar initiatives you put past or through.
Speaker Change: Alright, that's a lot Juan, so let me tick through those. So in terms of expenses for 25, ticking through some of them, the biggest driver of expenses will once again likely be property taxes.
Speaker Change: Another increase is likely to be indirect cost of operations. Some of the investments we're making on the team there will lead to increases. Those will be offset by payroll efficiencies that Joe spoke to earlier and continued improvements in our digital platform that will enable that.
and so that will be a mitigant and then solar
Speaker Change: properties that we added in 24 will get full year benefit of those that reduce utility usage in 25.
Speaker Change: And then we're going to have another active year of additions this year. In terms of, you know, policies towards solar and what not, we'll obviously navigate those as we go. But the investments that we've made in solar to date have been very strong returns. Call it...
Speaker Change: 10-15% on levered IRRs on those investments, so we view those as attractive investments and we're seeing that utility savings as we sit here today.
Speaker Change: and we think that that has a big opportunity for us over the longer term given the the sizable nature of our roof presence across the country.
Speaker Change: and the likelihood that utility rates continue to rise and solar panel prices come down. So more opportunity there, kind of regardless of policies over the medium to longer term.
Speaker Change: Thanks Tom and then just hoping you could speak a little bit about the pricing dynamics for new customers and any sort of impacts.
Speaker Change: the Achieved Rates going up a bit to start the year. I think you said fourth quarter was five and a year to date is down eight. And then kind of weaving in what you're doing on the promotion side, which increased a bit in the fourth quarter and just how we should think about the interplay there between promotions and Achieved Rates, et cetera.
Yeah, sure. Happy to go into some of those dynamics.
Speaker Change: I always like to highlight that we really have three tools that we're pulling at, really, at local level markets.
Speaker Change: opportunities with both promotions, advertising, and move-in rents. They each drive different performance amongst customers. Some are helping top of funnel, some conversion, etc.
Speaker Change: and and so you did see some variability year-over-year in some of those metrics but I would point you to the fact that those are relatively modest changes over time if you look at our
Speaker Change: marketing spend as a percentage of revenue as a guidepost for instance 2.4 percent of revenue in the fourth quarter and roughly consistent with prior year. We continue to see very strong returns on our advertising spend given our strong brand presence.
Speaker Change: and our digital platform investments that we've made over the last several years.
Speaker Change: On promotions, we utilized some of the more near-term, call it first-month promotions.
Speaker Change: through the fourth quarter, but again those promotions as a percentage of revenue at about 1.7 percent of revenue.
Speaker Change: remain below historical averages and frankly is a tool that we'll consider using into 2025 as well.
Speaker Change: And then move-in rates, as you highlight, has been a notable area of competition amongst storage operators over the last several years. It continues to be a very competitive move-in environment today, and we'll use that lever also.
Thank you.
Thanks Juan.
Speaker Change: Our next question comes from Nick Joseph with Citi. Please proceed with your question
Nick Joseph: Thanks. I just want to go back to LA and just understand the moving parts. I think if I look here, rent off is about $36 right now, so where's market rent in LA for the purpose of the emergency restrictions, and then how does that impact kind of new move-in as well as ECRIs?
Nick Joseph: And overall, we've estimated and rolled that through our models that results in about a 100 basis point impact for same-store revenue in 2025. So I would point you to that 100 basis points of same-store revenue impact from Los Angeles.
Speaker Change: Right, I mean I guess the question is how is market rent defined, right? So if you're at $36 right now, you know, what does that do to ECRIs and what does that do as kind of new people move in?
Speaker Change: Yeah it has an impact to both and so we'll take that into consideration and we obviously did that in terms of forecasting the impact on same-store revenue to arrive at that about a hundred basis point impact to same-store revenue Eric.
Speaker Change: All right, thank you. And just on capital allocation, I think last year you were repurchasing some shares, this year you more recently issued, so just curious on the framework you're using for kind of the decisions of buybacks versus equity issuance.
Yeah, sure. So,
As we've consistently noted
Speaker Change: The stock is one of the things that we evaluate as we think through capital allocation.
Speaker Change: as we evaluate development, acquisition activity, as well. And as we move through the second quarter of last year,
Speaker Change: acquisition volumes were were quite low and seller dialogue was lower as Joe mentioned.
Speaker Change: one of the lowest transaction volume years that we've seen over the last six or seven years.
Speaker Change: and at the same time, our stock was at a place that we viewed value and we didn't think it was reflective of.
Speaker Change: the improving fundamentals that we were seeing on the ground and so we did repurchase $200 million in stock in the second quarter.
Speaker Change: for Acquisition Activity and we're hopeful that more ultimately comes to market and we're poised to participate in that. And we thought it was prudent to add an ATM program to our toolkit, which is consistently include retained cash flow, unsecured debt preferreds.
Speaker Change: to fund acquisition activity. And so we took that for a test drive in the fourth quarter.
Thank you very much.
Thanks.
Speaker Change: Our next question comes from Spencer Glipsher with Green Street. Please proceed with your question.
Spencer Glipsher: Thank you. I just have one more on the LA rent restrictions, and I apologize as I realize it's a very sensitive topic, but how much transparency do you guys see from the state in terms of the duration of these restrictions? And do you have any sense of when you'd get an update on a potential extension of the rent cap?
Spencer Glipsher: Yeah Spencer, it can vary depending on A, circumstances and then B, the latitude that either the governor or frankly even going down to certain municipalities ultimately decide when and where to issue a state of emergency.
Spencer Glipsher: Clearly, the impact from the L.A. fires was significant directly into L.A., maybe, in our view, less so in Ventura County, but the governor took that.
Spencer Glipsher: opportunity to actually extend the state of emergency for a full year. That's somewhat unusual, meaning that, you know, out of the gate he would use the statute to do something for that duration.
Spencer Glipsher: But it is in place now, technically, through January of 2026. And, you know, from that point forward we'll have to see what transpires.
Speaker Change: Okay, thank you. And you provided some helpful comments earlier on your robust development.
Spencer Glipsher: Yeah, it's too soon to tell, Spencer, if in fact market-to-market we're going to see immediate or some transition to either labor pressure, whether it's availability and or cost.
Spencer Glipsher: We're keeping a very close eye on that, but with the multi-state development activity that we've got going on, nothing yet has surfaced that would indicate that
Spencer Glipsher: immigration policy in and of itself may change that very directly in the near term.
Spencer Glipsher: But again, we're keeping a very close eye on that across the board. Same thing for anything that may or may not be impacted by tariffs, etc. I think it overall just points to the fact that development continues to be a business.
Spencer Glipsher: that you need to know very well right down to a local area, the dynamics to play through, the cost structure, the risks, etc.
Spencer Glipsher: In a reverse way, that's actually something that I think is going to create additional discipline relative to the volume of development activity that will likely play through in the coming year or two. So we, as we have had in the past,
Spencer Glipsher: can maneuver around some of these very differently than most other developers because of our national scale, the buying power that we have for component costs.
Spencer Glipsher: the skills that we've got in the ways that we're trying to
Spencer Glipsher: effectively manage around those risk factors. So it's again a changing environment likely but too soon to tell to what degree.
Okay, thank you so much.
Thank you.
Speaker Change: Our next question comes from Samir Kanel with Evercore ISI. Please proceed with your question.
Samir Kanel: Thank you. I guess my question is around ECRIs this year and and how are you broadly thinking about?
Speaker Change: That dynamic, as you thought about guidance, especially with headwinds on the consumer, you've got potentially a slower job growth market. Do you expect DCRIs to hold at this point this year? So it's kind of more of a broad comment.
Speaker Change: for various markets. I know we've talked about LA but just broadly how are you thinking about that?
Yeah, sure.
Speaker Change: As I noted earlier, we continue to see really good performance from our existing customer base, and really looking at any metric, be it delinquency or move-outs, we continue to see really strong performance there. And, you know, our testing and modeling...
Speaker Change: indicates, you know, very consistent price sensitivity as well, and so a big picture.
Speaker Change: The midpoint of the guidance range assumes for same-store revenue that we see pretty consistent
performances last year and contribution.
from existing customer rent increases.
Speaker Change: away from Los Angeles. And obviously in Los Angeles, for everything we just we highlighted, we'll have a lower contribution. So in aggregate across the country, a lower contribution year over year, but really pretty consistent performance in other markets.
Speaker Change: Thank you, Tom. And then just as a follow-up, I'm sorry if I missed this, but you talked about moving rents.
Speaker Change: to be down 5% at the midpoint of guidance. What are you assuming at the high end of guidance? Thanks.
Speaker Change: Yeah, at the high end of the range embedded in those assumptions is about a three percent decline in move-in rents on average. So, you know, steady improvement through the year there.
Okay, thank you.
Thanks.
Speaker Change: Our next question comes from Keebin Kim with Truist Securities, please proceed with your question
Speaker Change: Thank you. Can you just remind us what were the ECRI increases in LA last year, just trying to calibrate, you know, how much that 1% reserve accounts for a potential limit on ECRIs? Thank you.
Speaker Change: Yeah, I think in LA, like every market, there's a wide variety of different increases, both frequency and magnitude, that we'll utilize. LA was no different than a typical market last year.
Speaker Change: And again would point you to that 100 basis point same store revenue impact from Los Angeles in 2025
Speaker Change: Okay, and this might be a little bit early, but are you seeing any signs of increased housing turnover in the DC area?
Speaker Change: perhaps related to Doge and we're keeping a close eye on that too obviously a lot of headlines coming out of DC with Doge and the you know different ways that employment levels in that market could change but far too soon to tell couldn't couldn't guide you to anything that we've seen on the front lines yet
Okay, thank you. Thank you
Thank you.
Speaker Change: As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad.
One moment please while we poll for questions.
Speaker Change: Our next question comes from Caitlin Burroughs with Goldman Sachs. Please proceed with your question.
Thank you for your time. Thank you.
Speaker Change: Hi everyone. I guess maybe just going back to the capital allocation question, it sounds like you're constructive on the acquisition outlook and equity is one of the tools that you could use.
Speaker Change: So just wondering if you could comment on kind of target leverage levels where you are today. Would you look to keep leverage where it is or what would make you maybe want to go lower or higher?
Speaker Change: Yeah, sure. On acquisitions, as Joe highlighted, we are optimistic that there will be more activity this year.
Speaker Change: We are going to be reliant on interest rates and things like that that will skew.
Speaker Change: The levels of seller dialogue and activity this year, the way we have the last several years where we've seen, you know, certain quarters where dialogue picks up and then slows down, but we're overall quite optimistic as to how we're starting this year compared to last year.
Speaker Change: In terms of leverage, specifically, we finished the year with net leverage at 3.9 times net debt and preferred to EBITDA. Our long-term target is 4 to 5 times.
Speaker Change: So we continue to have, you know, a leverage level that's a touch below our long-term average and so certainly capacity to add leverage through unsecured debt and and preferreds.
At the same time, Joe highlighted that
Speaker Change: Our retained cash flow is increasing from $400 million to $600 million this year, and we would look to deploy that into the acquisition market as well. And then, as you noted, we did add an ATM program in place as well as an additional tool. But I really feel like we have...
Speaker Change: a lot of great tools to finance the business and activity into 2025 and are hopeful that there will be good opportunities to utilize those tools.
Speaker Change: Okay and then I know you talked a little bit about development earlier wondering if you could give any more detail on like how much the PSA portfolio was impacted by other supply headwinds in 2024 and how that factors into your or I guess what you're expecting for 2025 supply headwinds and how that factors into guidance.
Speaker Change: Yeah, sure. The overall industry-wide, you know, our data that we're looking at would indicate that new supply as a percentage of existing stock around the country was right around 3%.
Speaker Change: last year we are anticipating that that will decline down to circa two and a half percent plus or minus in 25 so some modest improvements there as part of really what has been a multi-year decline in overall deliveries over the last several years so anticipate a benefit there.
Thanks
Thanks.
Speaker Change: Our next question comes from Ronald Camden with Morgan Stanley. Please proceed with your question.
Speaker Change: Hey, just two quick ones from me. I think you talked earlier about sort of the benefit of the mobile app and being able to reduce
Speaker Change: sort of labor hours. I guess I'm just curious, does AI sort of proliferate? Are there any sort of obvious low-hanging fruit whether it's leasing accounting that you guys are looking at where, you know, AI could have an impact?
Speaker Change: Yeah, sure. Ronald, there's a lot of areas, as I mentioned, that tie to AI relative to the whole digitalization that we've actually been working on now for multiple years.
Speaker Change: combined benefit, whether it is through the app, which now we've got a million and a half customers using that tool.
whether it's through the way
Speaker Change: We're interfacing with customers, there's new and different tools there, either through our care center.
Speaker Change: The things that we're doing on our website, etc. So the penetration and optimization from an AI skill.
Speaker Change: skill and impact versus, you know, the investment that we're making into those tools.
Speaker Change: satisfaction, customer processes. Again, we're seeing very strong conversion opportunities. A lot of that ties to, again, the way that we're putting different tools into each and every channel that we interface with customers.
Speaker Change: So a lot more to come there, but we're very encouraged by the investment and the impact that that continues to have on not only customer interaction, but also margins, efficiency, employee satisfaction, employee skill, etc. So a lot of good things to come there.
Speaker Change: Great. And then my second question is just going back to the CapEx commentary on the property enhancements being over. Is that something that happens every every couple years and so forth? And then the energy efficiency spending, is that something we should expect to also sort of go away at some point?
Speaker Change: So there's some deep areas there that, you know, with a, you know, 250 million square foot portfolio, we've got a lot of great things to do with efficiencies relative to the infrastructure of our properties, whether it's HVAC related, whether it's solar related, whether we can continue to invest in the right long-term
Speaker Change: tools that whether again we see cost savings and or optimizations from an energy efficiency standpoint.
The Property of Tomorrow Program was...
Speaker Change: changed the entire branding of the portfolio, which we hadn't done in the last 15 or 20 years in one fell swoop. So that's not anything that we do every couple of years. We hope to get a very good long-term usage out of that investment. On top of that though, the day-to-day environment of
Speaker Change: Either optimization, whether it's lighting, whether it's energy efficiency, new tools around solar, as we've continued to talk about, and other ways that we'll make investments in the properties that make them that much more optimized, or things that we take on a case-by-case basis. And I think we continue to see good returns where and when we make those investment decisions.
Great, thanks so much.
Thank you.
Speaker Change: Our next question comes from Mike Muller with JP Morgan. Please proceed with your question
Speaker Change: Yeah, hi. Sorry, two more LA questions. I guess first, are the headwinds in the forecast coming only from lower ECRI potential or are you not able to have a kind of a normal seasonal lift in move-in rates as you move into the spring?
Speaker Change: And then the second question was, can you give us a sense as to how different your year-over-year move-in rate assumption of down five would be if you strip LA out?
Speaker Change: the primary drivers of the 100 basis points and I would point you to existing customer rent increases as being the primary driver of that impact and that goes then to the second...
Speaker Change: question around, you know, what would a move-in runs look like. I would say
move-in rents.
Speaker Change: in L.A. are a little bit better than the company average was before the state of emergency and continues to be, and that speaks to the strength of overall fundamentals in Los Angeles kind of in and out of cycles through last year and anticipated improvements over time there.
Speaker Change: And so, on net, the rest of the country was probably a little bit worse than L.A. going into the state of emergency, and the state of emergency pricing restrictions aren't likely to have a significant impact on move-in rents.
Speaker Change: and more the impact being felt on existing customer rent increases.
Got it. Okay, thank you.
Thanks.
Thank you.
Speaker Change: Our next question comes from Brandon Lynch with Barclays. Please proceed with your question.
Brandon Lynch: Great, thanks for taking my question. I wanted to ask about acquisitions and any particular markets that you might be targeting or an urban versus suburban SKU or any other property characteristics that you're aiming for.
Yeah, Brendan, I wouldn't say one...
Brandon Lynch: focus puts us in a different priority whether it's urban, suburban, or geographic, you know, it comes right down to the quality of the individual asset and how we see value creation.
Brandon Lynch: benefited we might be from multiple assets going into multiple markets so it's a combination of all of those things but our underwriting process goes right down to an individual asset and the value that we see
Brandon Lynch: from that asset, the contribution it makes to the scale and the effectiveness we may have in the market, so we aren't limiting ourselves to either specific geographies and or urban versus suburban characteristics.
and we'll continue to see opportunities across the whole spectrum.
Speaker Change: Great, thanks. That's helpful. You're also guiding to lower street rates year over year, but maybe not giving up so much on occupancy or don't anticipate doing so. Can you just walk us through your thought process on these components and where you're planning to be more stern versus more flexible?
Speaker Change: Sure, so we've already spoken a good bit about the move-in rent assumptions as it relates to the occupancy
assumptions. It relates to the
expectation that
Speaker Change: We are experiencing stabilization and demand, and we'll continue to navigate through that. And so we've seen over the last several years...
Speaker Change: declines in occupancy, but less so each year, and anticipate that that's the case this year. Ultimately, we're looking to maximize revenues overall, not looking specifically to occupancy or rental rates.
Speaker Change: and that's how we think about, you know, day-to-day the pricing algorithms and optimization processes that take place day in and day out. In terms of...
Speaker Change: The range there, right, occupancy is expected to be better on the higher end and a little softer on the lower end as you'd anticipate.
Speaker Change: but generally speaking a relatively flat occupancy year against the demand backdrop that we're expecting to be relatively consistent.
Great, thank you.
Thanks.
Speaker Change: Our next question comes from Theo Akasanya with Deutsche Bank. Please proceed with your question.
Speaker Change: A lot of retailers this week have kind of been talking about kind of a softer consumer. Curious, again, how you guys are kind of thinking about that in the context of demand and pricing, if not for all of 2025, at least on a near-term basis in the first half of 2025.
Sure, you know I think
Speaker Change: Over the last several years, retailers have consistently pointed to a softer consumer, softer activity.
Speaker Change: and one of the benefits of storage that we've experienced is some of those customers, or really the customer cohorts that have moved in over the last several years have been some of our stronger cohorts over time in terms of delinquency, move out trends, and the like.
Speaker Change: While the retailers are certainly seeing one thing, I think the storage customers continue to be resilient over the last several years.
Speaker Change: and we're experiencing that as we speak starting 2025 as well. No question that's something we watch very, very closely.
Speaker Change: but not something that we've seen the way maybe some of the other retailers have highlighted.
Speaker Change: In terms of overall demand though, no question we've seen overall demand for storage.
Speaker Change: come down from the highs of 2021 and we've spoken a good bit around some of the mixed shift between housing transaction volumes and people that ran out of space at home, but overall we're viewing this year as a year pretty similar to last year across those metrics.
Speaker Change: and so are encouraged by customer behavior through 24 and to start 25.
Thank you.
Thanks.
Speaker Change: Our next question comes from Caitlin Burroughs with Goldman Sachs. Please proceed with your question.
Speaker Change: Okay, I just had a follow-up on maybe development yields. You guys give some nice kind of disclosure on previous.
Speaker Change: years of development and how those are, I guess, leasing up and the yields they're producing. But as you guys think about the more recent developments and then projects in process, could you give a little color on how you're expecting those to kind of lease up and the pace at which they reach stabilization and whether that's changed in recent years?
Sure, yeah, we continue to underwrite and target 8%.
Speaker Change: plus or minus target yields and as you noted we continue to meet or exceed those in prior vintages. In terms of lease up pace
Speaker Change: We consistently are underwriting circa three to four years to reach that level of stabilization. No question we saw...
Speaker Change: faster lease up and stabilization in some of the the vintages that delivered During the really strong demand periods in 21 for instance in 2020 but consistently where we're expecting that it will take three to four years as we obviously open the property and and Start from a zero occupancy spot
Speaker Change: Got it and so it doesn't sound like there's been any change to that like again 8% target over three to four years.
Speaker Change: No, that's right. We think that's a very strong risk-adjusted return and one that we'll continue to target.
Thanks.
Speaker Change: We have reached the end of the question and answer session. I'd now like to turn the call back over to Ryan Burke for closing comments.
Thanks Rob, and as always thanks to all
Speaker Change: This concludes today's conference. You may disconnect your lines at this time and we thank you for your participation.