Public Storage (NYSE:PSA) Q1 2024 Earnings Call Transcript

Public Storage (NYSE:PSA) Q1 2024 Earnings Call Transcript May 1, 2024

Public Storage isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greeting, and welcome to Public Storage First Quarter 2024 Earnings Conference Call [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ryan Burke, Vice President of Investor Relations and Strategic Partnerships. Thank you. You may begin.

Ryan Burke: Thank you, Rob. Hello, everyone. Thank you for joining us for our first quarter 2024 earnings call. I’m here with Joe Russell and Tom Boyle. Before we begin, we want to remind you that certain matters discussed during this call may constitute forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to certain economic risks and uncertainties. All forward-looking statements speak only as of today, May 1, 2024, and we assume no obligation to update, revise or supplement statements that become untrue because of subsequent events. A reconciliation to GAAP of the non-GAAP financial measures we provide on this call is included in our earnings release. You can find our press release, supplemental report, SEC reports and an audio replay of this conference call on our Web site at publicstorage.com.

We do ask that you initially limit yourself to two questions. Of course, if you have additional questions after those two, feel free to jump back in queue. With that, I’ll turn it over to Joe.

Joe Russell: Thank you, Ryan, and thank you all for joining us today. Tom and I will walk you through our recent performance and updated industry views. Then we’ll open it up for Q&A. Our first quarter performance was in line with our expectations. As we anticipated, the new move-in customer environment remains challenging. However, we are encouraged by positive trends across our business, which include industry wide customer demand improved sequentially through the quarter; the ability to raise our move-in rates as we enter the peak leasing season; strong in-place customer behavior, including longer than normal length of stay and lower delinquency rates; moderating move-out volume; improving occupancy; and waning development of new competitive supply, a trend we expect will continue.

As mentioned on last quarter’s call, we were encouraged by month-over-month revenue growth reacceleration in certain markets, including Washington, D.C., Baltimore and Seattle. That momentum has continued. And additionally, we see accelerating trends in markets, including San Francisco, New York, Chicago, Philadelphia, Detroit and Minneapolis. We anticipate more markets will be added to this list across our portfolio over the next few quarters. These bottoming to improving trends are particularly important for two reasons: first, they are in stark contrast to 2023 when all markets were decelerating as we normalize from record performance in 2021 and 2022; and second, they put us on track for improving company wide financial performance in the back half of this year as embedded in our guidance.

Additionally, our high growth non-same store pool assets comprises 538 properties and 22% of our overall portfolio square footage. With NOI growth approaching nearly 50% during the first quarter, these properties remain a strong engine of growth. Overall, we are encouraged by what we are seeing on the ground. The team is very focused on capturing new customer activity as we approach the busy season, which will help drive our performance for the remainder of 2024 and into 2025. With that, I’ll turn the call over to Tom to provide additional detail.

Tom Boyle: Thanks, Joe. Shifting to financial performance. We reported first quarter core FFO of $4.03, representing a 1.2% decline compared to the first quarter of 2023. Looking at the same store portfolio, revenue increased 0.1% compared to the first quarter of ’23. That was driven by rent growth, offset by modest occupancy declines. Move-in rates, adjusting out our winter promotional sale activity were down 11% in the quarter. Positive net move-in volumes led to modest closing of the occupancy gap at quarter end to down 60 basis points. On expenses, same store cost of operations were up 4.8% for the first quarter, largely driven by increases in property tax and marketing spend to drive move-in activity. In total, net operating income for the same store pool of stabilized properties declined 1.5% in the quarter.

Our performance in the stabilized same store pool was supplemented by very strong growth in our non-same store pool, as Joe highlighted. With the non-same store assets at 81% occupancy in the quarter, we have confidence in outsized growth from that pool to come this year and into the future, which is a segue to our outlook for ’24. We reaffirmed our core FFO guidance for the year with a $16.90 midpoint on par with 2023. The first quarter was in line with our internal expectations. And as we discussed on our last quarterly call, we anticipate deceleration of financial performance into the second quarter and with improvement in the second half. Outlook for capital allocation remains intact with $450 million of development deliveries anticipated, which will be a record year for Public Storage and $500 million of acquisitions in the second half.

The transaction market for acquisitions remains subdued with limited volumes given a volatile cost of capital environment year-to-date. We’re optimistic that there’s a pent-up level of transaction activity likely to come, and we’re eager to participate when that does occur. Finally, our capital and liquidity position remains strong. We refinanced our 2024 maturities in April with a combination of a three year floating rate note, a 15 year euro note and a 30 year reopening. Our leverage of 3.9 times net debt and preferred to EBITDA puts us in a very strong position heading through the year. So with that, I’ll turn the call back to Rob to open it up for a Q&A session.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Samir Khanal with Evercore ISI.

Samir Khanal: I guess, Joe, you talked about 1Q being in line with expectations. Maybe talk around April, kind of what you’re seeing on move-in trends sort of general trends you’re seeing in April and I guess, how has April sort of played out versus your expectations?

Joe Russell: Yes, I would put April in the same context of sequential improvement that we saw through the first quarter, where again, we’ve seen overall expected top of funnel demand, expected move-in activity. We’ve been pleased by that. It’s matching our expectations, as Tom and I have outlined, the way the year is likely to play out. So no surprises. And I would say, a validation of the reacceleration in a number of markets that I pointed to in my opening comments.

Tom Boyle: And Samir, maybe — it’s Tom here, maybe I’ll just provide a couple of data points on April as well. Similar trends, as Joe mentioned, on moving rents into April, we are starting to increase those rents, as Joe highlighted, as we move into May in the peak leasing season. Existing customers performing quite well, something that Joe highlighted in his remarks. Move-outs were again down year-over-year in the month of April, occupancy finished the month down 50 to 60 basis points. So a pretty consistent April. And obviously, we’re eager to get into May, June and July here, the peak leasing season of the year.

Samir Khanal: And I guess just shifting over to the transaction market, I know you mentioned it was subdued kind of possibly with rates spiking here in March and April. I guess what gives you the confidence that you’ll start to see sort of more transaction or opportunities in the second half?

Joe Russell: Samir, there’s likely to be a range of motivations that’s going to bring a seller to market. The fluctuation in those motivations has been up and down, obviously, as we’ve seen over the last few quarters with the volatility with interest rates, et cetera. But having said that, we’ve been in active dialog with a number of owners that will likely transact sometime in 2024. I think they’re trying to gauge more precise timing based on what may or may not be coming through the discussion. The Fed may be indicating relative to change in interest rates between now and end of the year, et cetera. But on one end of the spectrum, there are a number of situations that will require an owner to bring an asset to market, whether individually or in some level of a portfolio.

So we do still anticipate some activity beginning to percolate. As Tom mentioned, it’s been a pretty quiet couple of quarters, but the conversations that we’ve been having with a number of owners are giving us confidence that there’s likely some pending trading activity that we may be able to capture, thus not changing our outlook for 2024 relative to the amount of acquisition activity we’re likely to capture.

Operator: Our next question is from Keegan Carl with Wolfe Research.

Keegan Carl: Maybe first, just curious for your expectations in the housing market that you currently have embedded in your guidance, and if this has changed at all since your initial guidan and commentary a few months ago?

Tom Boyle: So I wouldn’t edit any of the commentary that we had in February around any of the assumptions really heading into the peak leasing season here. We obviously just provided that outlook a little over 60 days ago. And as Joe mentioned and probably not surprisingly, providing that outlook two thirds of the way through the first quarter, the first quarter played out very similar to our expectations. And I think that the range of outcomes very much intact there as well. And specifically to the housing market, we are not anticipating in any of the ranges a robust housing market. And based on where interest rates have moved, I think that’s the right place to be as we sit here today as well.

Joe Russell: And again, just as a reminder, certainly, that demand factor is one, but it’s one of a number that, particularly at this time of year can provide momentum and higher level of top-of-funnel demand, our view of a different customer cohort i.e. renters continues to be quite strong. So we’re very pleased by the activity that’s also coming from that type of customer. And with that and then as your question alludes to a more subdued housing market at the moment, we still feel that we’ve got good demand factors that are going to drive the business going into a busy leasing season.

Keegan Carl: And then shifting gears, maybe just a big picture question. I guess I’m just trying to figure out what it would take in the broader environment? If we think about our upcoming NAREIT meetings in a handful of weeks here, like what will it take for you guys to be more positive or optimistic tone? In other words, I’m just trying to figure out what can go right in storage, given it feels like everyone is just focused on where weakness is going to persist?

Tom Boyle: I’ll preface some NAREIT meetings then. So I would highlight maybe two elements that we would be pleased to be discussing at NAREIT, and I think would give us a positive tone. One of them, going back to Joe’s commentary, is adding more markets to that list of markets that are reaccelerating, right? As we think about the bottoms that are occurring in many of these markets and reacceleration, we’re a collection of 90 markets around the country, not a one-stop moving portfolio. And so adding more markets to that list gives us more and more confidence in terms of the outlook and the performance of the portfolio as a whole clearly. The second thing, I’d maybe highlight would be more dialog, I think to the questions we were just discussing around capital allocation, more dialog with sellers, and not necessarily more transactions over the next 30 days, but more dialog, more underwriting activity as we set up for what is traditionally a busier time period for self storage transactions in the second half of the year.

We’ll start to have some of that dialog here over the next 30 to 60 days. And Joe, I don’t know if there’s anything you’d add.

Operator: Our next question comes from Eric Wolfe with Citibank.

Eric Wolfe: Maybe just a follow-up on your last answer. You mentioned that you’re seeing a reacceleration in revenue growth in increasing number of markets, you talked about those markets, but just wanted a clarification on that. I mean does that mean that your year-over-year revenue growth is accelerating in those markets or does that mean that your — as your occupancy kind of goes up due to normal seasonal patterns, you’re seeing sequential month-over-month growth in revenue, which I think you would probably expect just given normal seasonal patterns?