Operator: Our next question will come from Todd Thomas with KeyBanc Capital Markets.
Todd Thomas: Tom, first question, I guess, back to the guidance. You mentioned that occupancy will likely be lower throughout the year. 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?
Tom Boyle: 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 macro uncertainty that will influence that. But as you think about the first half, we’re starting the year with occupancy down about 2.4%. And we do think 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 in some of our seasonal markets. So, I would anticipate there’s certainly the opportunity for that spread to narrow as we get into the busy season as we’ve spoken to, but then would follow a typical seasonal pattern from there in the back half.
Todd Thomas: Okay. And when you talk about the seasonal markets where you’re already starting to see some occupancy build, which markets are those?
Tom Boyle: Well, they typically tend to be colder weather markets, so your Miamis and your Los Angeles and San Diegos, you don’t see that same seasonal pattern. But if you look at a Minneapolis or Chicago or the Northeast, you start to see that seasonal pattern be more pronounced.
Todd Thomas: Okay, got it. 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 margin improvements, the Company’s scale and so forth. And I think sort of an extreme example, maybe not extreme, but I think one example during 2021 was 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 that at stabilization. I realize the environment is different today and 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 you have in €˜21 or in prior cycles, or does the greater uncertainty today give you a little bit of pause around how you think about future growth and the spread to your cost of capital that you would be willing to invest at?
Joe Russell: Yes, Todd. I mentioned 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’re speaking to. So, whether it’s through some of the larger portfolios, All Storage included, we bought that portfolio at about 74% occupancy, 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. And 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, and it continues to be a very good playbook for us. When we’ve got deep-seated knowledge market to market, which we do 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.
You see the benefits as we’ve been speaking to relative to our brand, our platform, our efficiencies that assist 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.
Operator: Our next question will come from Spenser Allaway with Green Street.
Spenser Allaway: Can you provide an update on the rent freeze that was put in place related to the California storms early in the year? Has this been lifted? And if not, is there any type of NOI headwinds contemplated in guidance?
Tom Boyle: Sure. So I think, Spenser, you’re 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 that is expiring here in February. So, I think, as anticipated, there’s going to continue to be one-off events like storms and rain in California, believe it or not that can lead to state of emergency and pricing restrictions. And we’ll navigate those. As it relates to what’s embedded into our guidance expectations, there’s things like that that come in and come out of different markets. And so, we’ll 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.
Spenser Allaway: Okay. And then you — go ahead.
Tom Boyle: No, go ahead.
Spenser Allaway: I was going to say, 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 €˜23. But, are you guys able to comment on the recent magnitude of ECRI activity? And then, without providing specific line item guidance, is there any color you can provide on what’s being contemplated in terms of ECRIs at both, the high and low end of guidance?
Tom Boyle: Sure. So, I’d 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’ve sent them. And I highlighted Miami as an example where rents in Miami for new customers were up 25%, 30% each year for the past several years, and that’s started to slow down as we anticipated. 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 at the start of the year. In terms of a band, I’m not going to get into specifics around numbers or averages or whatnot, but there’s a wide range of increases that we send to the tenant based on what we understand their sensitivity 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 a tenant 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 the tenants is going to have the opposite effect.
Operator: Our next question will come from Ki Bin Kim with Truist.
Ki Bin Kim: Thanks. A quick one first. Implicit in your 2023 guidance, what are you thinking for move-in rates?
Tom Boyle: Yes. Good question, Ki Bin. So certainly, we started the year, as I’ve highlighted, with move-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 anticipate, 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, we’d anticipate that move-in rental rates are lower as we’re looking to capture demand. In an environment where consumer demand remains strong, that’s going to result in higher rental rates as we move through the year.
And as I noted earlier, part of the story in the second half compared to the first is comps. Right? The comps are definitely tougher in the first half than they are in the second.
Ki Bin Kim: So maybe I should have rephrased it. So your move-in rents are down 5% as of 4Q. So, on a year-over-year basis, that’s the way I’m trying to understand the trend…
Tom Boyle: And that’s what they are right now, too, Ki Bin. That’s what they are right now as well.
Ki Bin Kim: Okay. And on your CapEx guidance of $450 million, obviously, 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 associated with it and if you can provide some color around that.
Joe Russell: 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 LED. We had good, again, returns from that investment. And as the additional stimulus has come through with recent legislation, there’s even more motivation on our part to continue to look at multiple markets. Likely, we’ll 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 300 to 400 properties that are near 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 a higher elevated level of customer satisfaction, employee satisfaction, et cetera. And then clearly, the enhancement market to market we’re seeing from just the brand awareness, now that we’re at a point of over 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.
Operator: Thank you. Our next question will come from Ronald Kamdem with Morgan Stanley.
Ronald Kamdem: Hey. Just going back to the guidance. Maybe any more color on sort of the bad debt assumption for the same-store revenue at the middle and at the upper and lower end of the range? Thanks.
Tom Boyle: 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, I’d characterize bad debt overall as being — continue to be a good performance through the first part of this year and 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 those lows, but consumers continue to pay their bills and our delinquency remains a good bit below pre-pandemic levels. And 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’re likely to see bad debt increase through that pathway and the reversal towards the higher end.
