Public Storage. (PSA) — Q1 2022 Earnings Call Transcript

Thank you, Katie. Hello, everyone. Thank you for joining us for our first 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 uncertainties. All forward-looking statements speak only as of today, May 4, 2022, 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, supplement report, SEC reports and an audio replay of this conference call on our website at publicstorage.com. We do ask that you initially limit yourself to two questions. After that, of course, please feel free to jump back in queue. With that, I’ll turn the call over to Joe.

Good morning, and thank you for joining us. Before I hand the call over to Tom to discuss specific Q1 metrics, I will highlight five areas that are setting the stage for a robust 2022. First, market-to-market business remains very strong. Now that we are four months into the year, we continue to see elevated demand from new customers across the portfolio. Existing customers are also extending their average length of stay. We have healthy pricing dynamics, with move-in rates up 15% and our existing customer rate increase program performing very well. Second, the traditional busy season is taking hold. Inventory is tight, with vacancy at about 5%. We see outsized demand for vacant units throughout the markets. Both consumers and business customers are aggressively seeking space along with more traditional drivers for this time of year, which include home sales and college students. Home affordability, a hybrid work environment, and a tight commercial market are clearly additive to our performance metrics. Third, our large non-same-store portfolio, now 515 assets across 50 million square feet, is growing significantly from a revenue and occupancy standpoint. Non-same-store NOI nearly tripled during the quarter. These assets are highly complementary to our market presence and continue to deliver exceptional returns with outsized move-in activity due to an average occupancy of 86%. Of note, the $1.8 billion ezStorage portfolio we acquired a year ago has already achieved the yield we anticipated after year two. The recently acquired $1.5 billion All Storage portfolio is performing ahead of expectations as well. Fourth, as anticipated, fewer assets have entered the sales market this year. Year-to-date, we have closed or are under contract for 21 assets, totaling approximately $275 million. Our industry-leading development platform increased to $833 million. The forecast of relatively stable national deliveries for 2022 and 2023 remains intact as we anticipate approximately 500 to 600 assets will be delivered each of the next two years. And fifth, our industry-leading digital customer experience continues to be embraced by new tenants. This includes digital leasing, centralized property access, as well as our PS app. In March, we reached a significant milestone with our 1 millionth eRental move-in. Today, more than half of our customers are choosing eRental, giving them a desirable digital option to lease a unit. Our ongoing investments in the public storage digital platform are improving both customer experience and employee efficiency. Clearly, a win-win. Now to Tom.

Thanks, Joe. We reported core FFO of $3.65 for the quarter, representing 29.4% growth over the first quarter of 2021. Our first quarter results represent a strong start to the year and an acceleration from the fourth quarter. Let’s look at the contributors for the quarter. In the same-store, our revenue increased 15.8% compared to the first quarter of 2021. That performance is an acceleration from the 13% to 14% range in the second half of 2021. Growth was driven by rate with two factors leading to the continued strength: First, strong demand and limited inventory, which allowed us to achieve move-in rates that were up 15% versus 2021; second, existing tenant rate increases also contributed with lengthening customer stays as well as comparing to a period in 2021 when we were impacted by rental rate regulation in some of our largest markets. On that note, Los Angeles was a particularly strong contributor, accelerating from 8% same-store revenue growth in January to 15% same-store revenue growth in March. Now on to expenses. We had a good quarter on cost of operations, which were up 3.6% in the quarter, with savings on marketing expense offsetting expected growth in other line items. In total, net operating income for the same-store pool of stabilized properties was up 20.5% in the quarter. In addition to the same-store, the lease-up and performance of recently acquired and developed facilities remained a standout in the quarter, as Joe mentioned. Now shifting to the outlook. We’re roughly 70 days on from when we introduced our initial 2022 guidance for the year. We reiterated our strong core FFO outlook yesterday with a $15.20 midpoint, representing 17.5% growth from 2021. We’re anticipating another year of strong customer demand from self-storage, and as Joe mentioned, we are experiencing that through April with a very good setup into our traditional busy leasing months ahead. As I’ve highlighted over the past year, with occupancy near record levels, our outlook for growth is driven by rental rates. Shifting gears, PS Business Parks announced it entered into an agreement where Blackstone will acquire the company. We have agreed to vote our shares for the transaction. Upon closing, which is anticipated in the third quarter, we would receive $2.7 billion of cash. And of that $2.7 billion, we would recognize a $2.3 billion tax gain that would increase our distribution requirements for the year. As we noted in our filings, PSB contributed $25.5 million in core FFO in the first quarter, or approximately 4% of company-wide FFO. We have not updated our guidance ranges to reflect this sale, but we’ll plan to update you as the transaction progresses and more details are provided by PSB. Last but not least, our low leverage balance sheet gives us capacity to fund growth and at the same time, is well laddered with long-term debt and $4 billion of preferred stock with perpetual fixed distributions against a rising rate environment. Perpetual fixed-rate capital is very good capital in today’s markets, and so is $1 billion of cash on the balance sheet as of March 31st. And with that, I’ll turn it back over to Katie to open it up for questions.

Great. Thank you. And I’m not sure if we’re limited to questions. If we are, please let me know. My first question, I guess, if we could talk about April. You commented on seeing continued demand into April. Can you provide any additional comments on what you’re seeing so far in April?

Sure. Yes. Joe mentioned we’re seeing good momentum heading into the second quarter. And we’re seeing that really across the board. Market strengths are pretty consistent through April. Web visits and sales calls were up during the month. We saw good momentum from move-in transactions; move-in rates, which I know is a topic that I’m sure you’re interested in, were up about a little over 12% in the month. We continued to see the occupancy and rate trade-off that we saw in the first quarter. So, occupancy ended April down about 120 basis points year-over-year, but again, against the backdrop of really strong rate growth.

And, yes, Jeff, maybe to add a little bit more perspective on the comment I made in my opening remarks. The consumer and business customer environment is still very strong. Consumer balance sheets, by everything that we’re seeing relative to statistical levels of health, are quite strong. In fact, consumer balance sheets are better today than they were pre-pandemic. We’re seeing very good business activity across the spectrum. Top-of-funnel demand, as Tom mentioned, is quite vibrant. And on the backend, length of stay continues to increase as well. So, the two bookends of both demand on the front side and then enduring utility of consumer and business utility of the space is quite strong. Many of the factors that I spoke to continue to play out quite well, and we’re encouraged by what we’ve seen through the month of April. To your question on how many questions in the queue, we’ll let you ask one more, and then we’ll move on to the next question.

Okay. Thank you. That’s great. I guess, then the easy follow-up question is just on guidance. That’s really been the top incoming to me. I know you guys are conservative. It seems like a great or maybe even better start to the year than expected. Can you explain why you maintain the guidance right now?

Sure. I’m happy to take that. And I guess, what I’d characterize is the year has started out largely right in line with our plan, i.e., strong, but the strong start we anticipated. And, it’s only been 70 days since we set our initial range. When we communicated that, we highlighted that we specifically widened the ranges to try to encapsulate more upside into the ranges compared to maybe last year where we had narrow ranges. And the reason for the width of the range is really the uncertainty as we get into the busy season here and the uncertainty that’s inherent in a month-to-month lease business in the second half of the year. We’re going to learn a lot about how that’s going to play out over the next three months or so, and we’ll certainly provide updates and would expect that as we move through the year, we likely will narrow ranges as we go forward, like we did last year. But at this point, we feel good about our outlook for the year. And to date, we’ve seen the strong performance we anticipated.

My first question is on street rates and how do they progress through the quarter and into April? I think given the comparisons are starting to get more difficult; I think the market is trying to understand just how much rates are kind of growing on these more difficult comparisons?

Yes. That’s clearly a good question and speaks to the uncertainty as we move through the busy season here. To date, we’ve continued to see good momentum in move-in rents and customers willing to accept those higher move-in rents against a tight inventory environment, as Joe mentioned. So, while occupancy is off year-over-year, we’re still talking about near-record occupancies, which gives us pricing strength when inventory gets tight. We anticipate that inventory will only get tighter from here as we move into the busy season. From a month-to-month standpoint, we saw pretty consistent year-over-year mid-teens growth on move-in rents through the first quarter. As I noted in April, we’re up a touch over 12% on move-in rents. And we’re already starting to face those tougher comps year-over-year. So, as Joe mentioned, we clearly have momentum here. Now the question will be how does that play out over the next several months to kind of reset rents potentially higher or where they will reset?

Understood. I would like to ask about the trajectory of ECRIs. Your occupancy remained stable in the first quarter, indicating that the length of stay is strong. As street rate growth slows down due to tougher comparisons, how do you approach applying ECRIs to customers, considering that market prices may not be rising as they have in the past? Thank you.

Sure. Thanks, Michael. So, Joe mentioned earlier that the existing tenant rate program is going well through the year. And what we mean by that specifically is consumers are behaving as expected. We continue to run our modeling to derive expected behavior and optimize increases, that will continue through the year. So clearly, one of the inputs to that you’re highlighting is moving rents and the cost to replace a tenant if they move out or if we’re wrong on our predictive analytics. But generally speaking, we’re seeing trends in line with what we expected. One item I would maybe add to what you asked is we do have some catch-up in certain markets. I highlighted Los Angeles, for instance, and other markets like New York and San Francisco are in a similar category where we had rental rate restrictions for a good part of the 2020 and into 2021 time period where even as rental rates maybe don’t need to grow as much to see outsized growth in those markets because we’ve got 'catch-up' to do versus what we would have otherwise sent to date. And so, you see that acceleration in Los Angeles in the quarter and would anticipate that continues.

So, just going back to the April trend, thanks for all the details. I was just curious if there’s been any change in promotion activity or marketing dollars that might be supporting that 12% increase in move-in rates?

Yes. It’s a good question, Ki Bin. No changes to strategy there. You saw we had marketing dollars that were lower in the first quarter. I’d anticipate that that decline starts to moderate as we move through the year, given comps last year. But overall, advertising spend was lower in April than we had in March, for instance; promotional discounts as we move into this time of the year seasonally adjust lower, and we saw that play out through April as well. So, nothing really to note there out of the ordinary, just overall continued good demand for consumers as well as businesses to store during the month of April, which is a helpful setup as we get into May and June.

Got it. And if I take a step back and look at what’s happening in the market in terms of Netflix and Amazon, there’s this notion that – or concern that the days of sitting at home and watching a series and shopping online might be winding down, and part of that kind of trade, if you want to call it that, the kind of COVID winners may be dissipating. And obviously, self-storage is a little bit different in its supply and demand dynamic, but work from home and all the changes that happened throughout COVID definitely did help your portfolio and the demand profile. I’m just curious if you’re seeing anything on the margins that might suggest some of those demand drivers starting to wind down?

Yes. Ki Bin, I would say we’ve seen a very good balance of, if you call it, some of the wind-down that was purely driven by pandemic intensity or peak periods of the pandemic, have been compensated for by other factors, which include, as I mentioned, affordability from a living standpoint, whether you’re an owner or a renter. That’s always an additive driver to the financial benefit of acquiring a storage unit, financially a lower price point. So, that continues to be very supportive of the demand that we’re seeing. Statistically, from a hybrid work environment, we’re seeing continued evidence that many companies are adopting and potentially maintaining the level of flexibility for the workforces. That too continues to be a very healthy driver. Even when certain employees are being pulled back to work, they’re likely not being pulled back on a full-time, everyday basis. Today, we are witnessing what we might see traditionally at this time of year, more college student activity. There’s still good movement relative to home sales, even though interest rates are up; there’s still a very active home sale environment this time of year. So again, many of the more intense drivers through the pandemic, some of those have eased down, and we’re seeing other additive compelling reasons, so we’re seeing good customer demand.

Just curious on the sunsetting of rent restrictions. If you could just provide any update or progress in the ability to recapture what was lost over COVID and maybe prior to that? You provided a bit of color around the initial guidance with fourth quarter results, but just curious if you have an update on expectations for the impact to same-store revenues for ‘22?

Sure. I’m going to concentrate my commentary around Los Angeles because it’s our largest market and offers a clearer story. Big picture, we’re seeing strong trends in Los Angeles. The long-running rent restrictions expired at the end of the year. We commented on the last call that we anticipated this event would likely add 1.5% to 2% of same-store revenue to the company's overall outlook. Los Angeles is our largest market, and it’s accelerating. As I noted, the same-store revenue growth acceleration within the quarter. The team recently completed capital investments in that market as well through our Property of Tomorrow program. So, the team was ready for January 1st with good-looking properties and poised to accelerate. So, we are seeing that. And I’d reiterate the commentary around the growth potential coming from that market specifically.

And on top of that, not only is it our largest market, but it’s also our highest occupied market nationally. So, we’re close to 98% occupancy. So again, another very strong state for the kind of revenue opportunity that Tom is speaking to.

Okay. So, no change to the 1.5% to 2% benefit, I guess, from L.A. and other rent restrictions coming off?

That’s right. We’re seeing the strong acceleration we anticipated.

Okay. And then, I mean, it sounds like you guys are pretty bullish across all geographies, but we’ve definitely seen some markets lag, whether it’s New York, in some markets, i.e., anything in the Sunbelt. How do you think that dynamic plays out as we go into ‘23? Do you believe that the Sunbelt markets, due to tough comps, will normalize to the mean and maybe New York kind of led and is a leading indicator of where the other markets will go, or just curious on how you think this plays out from a geographic perspective?

Yes. I think you highlighted a good point, which is there is some variability across our markets. We’re seeing really strong demand in the procyclical demand drivers that Joe mentioned: population growth, home activity, etc. Florida continues to perform incredibly well. And that’s to date, meaning we’re already starting to face some pretty tough comps in markets like Miami and Tampa, but they continue to perform well year-over-year. To give you a sense, move-in rents in Miami in the first quarter were up 31%. And similar trends in April. So, really good strong trends there. I do think, over time, we are anticipating that there will be supply that comes into the Sunbelt markets to serve that incremental population growth and the home building activity that’s taking place in many of those markets. And that’s a healthy thing for our industry and for that customer base, which is likely to temper the kinds of rent growth that we’re seeing today. But overall, we’re still seeing good trends. Industry-wide, we’re not anticipating a near-term elevation in new supply, given the challenges related to getting through city processes, the construction process, costs, etc. today. So, we’re still seeing good strength there. In terms of New York and San Francisco, maybe just on the flip side, we did see acceleration in those markets that was partly attributable to some catch-up I commented on earlier around rental rate restrictions. So, we do have some momentum there. Overall, those markets are still performing well, but they don’t have the same sort of procyclical drivers that a Miami does or an Atlanta does today.

So, Tom, maybe to expand on that and kind of talk a little bit about New York. I know it’s only about 5% of your portfolio. Curious how do you think the sort of second half works out here? It’s held up well, still lagging behind the rest of the portfolio. I mean, is it really a supply thing here, or are you seeing any sort of move-out pick up as folks return back to the city?

Yes. That’s a good question. I’m not going to speak specifically to the second half outlook for markets in particular. But I would say we aren’t seeing anything overly concerning related to move-outs and the specific question you asked around people returning to the city. So, that’s not a driver that we’ve seen to date. There is some new supply that continues to be absorbed in Brooklyn and parts of Queens. But overall, I would anticipate that supply does get absorbed. And again, first quarter same-store revenue growth of north of 9% in the quarter, accelerating from the fourth quarter, is a pretty good place to be in a big market like New York.

Got it. And then, just shifting gears to the transaction market a little bit. I know for the year, I think you said it’s about $270 million is sort of what you’ve done so far. Your guidance is still at about $1 billion of acquisitions. Maybe provide color on kind of what you’re seeing out there, sort of what’s in the pipeline and sort of pricing as well?

Sure, Samir. The comparable to 2021 was likely to be strong, meaning it was unlikely we’re going to see the same level of trading activity in 2022 that we saw last year. The thing that drove the volume in 2021 was the number of large billion-plus portfolios that came into the market: plus or minus $18 billion of overall transactions took place and almost half of them were tied to those big, very unique portfolios that were in the market at various stages of 2021. As we mentioned even in the earnings call last quarter, we don’t anticipate the same number of large portfolios in the near term coming back into the market this year, and now four months in, we haven’t seen that kind of activity emerge. There is still a healthy amount of both individual and smaller portfolios, say in the $200 million to $300 million range that have either come into the market or will likely come into the market in the coming quarter or two. So, we’ll see how that level of activity matches the kind of smaller activity that we saw in 2021. Pricing is very competitive. I wouldn’t say there’s any movement yet in cap rates, surprisingly even with interest rates elevating, but there’s a fair amount of pent-up capital that still wants to come into the self-storage sector. So, aggressiveness from buyers remains. We’re seeing some good assets in multiple markets. We’re busy underwriting several different transactions, but it’s not the same elevated level of deal flow that either we saw in 2021 or are likely to see this year. But, it’s not unusual that first quarter is a little quieter. A lot of owners take the first or maybe even sometimes the second quarter to figure out their own playbook relative to bringing assets to market. So, we’ll see how that trends going into Q2 and Q3. And from there, we’ll see what kind of volume plays through.

I think first, just given what’s going on in the broader macro economy of inflationary concerns. Have you guys seen any change in your customer demographics and preferences?

Yes. That is a very good question, and there are a number of dynamics that we’re watching very closely, as we typically do, but given the dynamic changes that we saw through the first quarter, we’re watching particularly closely this year. I’d highlight a few of them. On the demand side, we’re watching to see any shifts in demand. As Joe mentioned earlier, we continue to see a broad group of demand. We’re not seeing shifts in, for instance, cohorts by income or demography shifting year-over-year for new customer demand, and that’s healthy. But we are watching. As Joe mentioned, home sales are a driver as we move through this part of the year. Interest rates are moving higher. We’ve seen new home sales and existing home sale activity decline on a month-over-month basis, but still sitting at activity levels that are well above pre-pandemic levels, which are supportive of demand. So, again, watching that closely, but nothing that we’ve seen to date. As it relates to other pressure points on the consumer, we spoke earlier about our existing tenant rate increase activity and the fact that consumers are behaving as expected there. So, no shift there. The other pain point would be payment activity. Consumer balance sheets continue to support good payment activity. So, we were looking at some data from a money center bank a week or two ago, highlighting that cash balances are still up meaningfully, nearly double what they were pre-pandemic for American households. And I think the other component is home equity, right? There’s been a wealth creation event for homeowners that is supporting American consumer balance sheets as well. So, those are supportive. Now, I would say we are seeing delinquency off the lows that we saw during the pandemic, but we’re also not in an environment where stimulus checks are going out. It’s natural to see a little bit of a lift in delinquency, but we remain in a good place and certainly better than where we were pre-pandemic, to date. So, we’re watching all of those drivers pretty closely, but to this point, continue to see strong trends across the board.

Got it. And then, shifting gears a little bit and maybe just a little bit more color on your length of stay. Have the reasons for customers leaving changed at all in recent months? For example, are you maybe seeing more people mention pricing in their reasoning for leaving?

Yes, no meaningful change there. The biggest driver that people highlight when they leave is that they no longer need the space, which makes sense. You think about the use cases for storage: at some point, many customers no longer need the space, either because they move or their living situations change, etc. So, that continues to be the biggest driver and no change there. In terms of length of stay, Joe highlighted the lengthening of that metric. On average, our customers that are in place have an average tenure of about 40 months today, compared to a pre-pandemic average in 2019 of around 33 months. So, we continue to see really strong tenure, which is supporting both our pricing strength as well as existing tenant rate increase programs.

Hey. Just going back to L.A., I think the original guidance, I think you’d mentioned sort of 200 basis points of contribution to the same-store revenue line item. You gave some really good comments at the opening remarks about just same-store hitting 15%. So, the question is, anything changed there? And can you give a sense just of how below market those rents are sort of post this expiration or price changing? Thanks.

Sure. I’d just reiterate what I highlighted earlier, which is we still believe that 1.5% to 2% is the right sort of range. We were obviously starting from a period of a standing start in January when those rental rate restrictions expired. It will take some time to see that acceleration play through, both from new customers coming in at higher rents, older customers leaving us, and then the existing tenant rate program. So, that will take some quarters to season in. But, I specifically highlighted the January to March trend to just speak to the level of acceleration we’re seeing out of the gates here in 2022.

Great. And then, sort of my second question was just looking at average occupancy. We have it down sort of 30 basis points quarter-over-quarter. I sort of appreciate your comments about this year being all about rates. When you see occupancy down, which doesn’t seem like that much, is the sense that there’s potentially more pricing acceleration to be had during the peak leasing season, or just trying to get a sense of how much harder could you push here?

I think we’ll update you on that next quarter.

I have a higher-level strategic question for you. The past year has been quite transformative for PSA in terms of communication and business operations. Reflecting on the last year, without discussing confidential Board matters, could you provide an assessment of what you aimed to achieve with the announced changes compared to what was accomplished? What were the successes, and what objectives remain unmet? What still needs to be done to implement those changes and align the Company with your goals? Thank you.

Sure, Rob. Yes, the thing that we were very transparent about and this goes back now almost a year when we did our Investor Day in May of last year was outlining the variety of different strategic initiatives that not only were pronounced from an impact standpoint but many had been in formation for some time relative to the investments and the opportunities that we saw relative to approaching the market through our technology initiatives. The opportunity that we saw with the quality of assets that we could bring into the portfolio, the expansion of our development program, the way that we’re using data analytics, and the digitization of the business. So, we’ve checkmarked a number of different areas that we’ve intentionally been that much more transparent about. I would tell you that the team at large is working very aggressively to continue the optimization in each of those areas. We’re on a very good path relative to continuing to deliver more optimization on the way that we’re not only running the business. You’re seeing that through, for instance, our eRental program; very customer-effective and very effective from an efficiency and employee satisfaction standpoint. An area that we continue to mine opportunities around through investments, and that ties back to our development capabilities, and the things that we’re doing uniquely in the industry by virtue of the size of our team and the way we’re delivering Gen 5 properties, which revert right back to what we’re doing with our Property of Tomorrow program, where we’re retooling the existing portfolio, adding many amenities that we’ve been putting into these Gen 5 properties, which include solar and efficiencies from that standpoint. So, that all points to a very strong and ongoing commitment to the growth of the business, the investment that we’re making in different and powerful parts of the business. We’re pleased by the traction. We’re pleased by the business results. But as always, we are challenged to do more. With a brand like we have at Public Storage, we can continue to expand that brand. You’re seeing that as we invigorated the effectiveness of the assets that we’ve been buying over the last couple of years in particular, where average occupancy was in the 60% to 65% range. We put them right into the Public Storage brand, applied many of the tools and operational efficiencies into those assets and they do tremendously well. So, the team at large, we continue to invest in. That’s another very prominent strategy that we’ve got. We’ve put a lot of additional thought and retooling into the teams throughout the Company, particularly through our operating teams, and we’re seeing very good results from that too. So, great environment to continue to drive the business, and we’re pleased by many of the things that are taking hold.

I wanted to revisit the outlook on acquisitions. You mentioned there haven't been any changes in pricing, which remains very competitive. From your perspective, are you perhaps being more cautious than you might otherwise be, anticipating that pricing will change? How do you see this unfolding, especially given the clear indication that interest rates are rising? At some point, it seems this has to affect seller expectations.

Yes. Smedes, I mean, I wouldn’t say that we’ve holistically pivoted or taken a different approach to the way that we’ve been investing. We continue to look for opportunities, just as I outlined relative to the quality of the assets that we’re bringing to the portfolio, the opportunity we can see from driving returns based on our performance and then putting them into our own platform. What kind of success factors we’ll see from there, and the additive scale that we’re going to get in any particular market? So, because of some of the shifting we’re seeing, we haven’t stepped back and said, 'We’re going to be out of the market or we’re going to shift down relative to our approach to bidding and looking at assets that make sense to come into the portfolio.' There’s a fair amount of competitive activity. But believe me, the team is working hard. We’re very busy underwriting assets. There’s a lot of competitive activity playing through. There’s always a tipping point that we’re very cognizant of where we feel an asset may or may not bring forth relative returns based on the price that it may trade for us. So, we’re going to be very reflective of that, too. Overall, we’re still seeing opportunities. We’re very optimistic about what can continue to play through. As Tom mentioned, our balance sheet continues to be in very strong shape. We’re sitting on $1 billion of cash. This year, we’re likely to generate another $600 million to $700 million in free cash flow. So, we’re well-positioned to continue to grow the portfolio and see very good asset opportunities, and we’ll continue to vet them.

I wanted to revisit the occupancy situation for a moment. The decline in occupancy at the end of the quarter compared to the average seems somewhat unusual for the first quarter. I understand that your overall occupancy rates are very high, and the aim is to maximize revenue. Are you experiencing further increases in occupancy during this peak rental season, or are you finding it more challenging to maintain occupancy levels?

Sure. Well, I think I’d make a couple of points. I think one of the comments you made there was an important one, which is that we’re seeking to maximize revenue from the available inventory that we have. So, occupancy is a component, rental rate is a component. I’ll tell you, occupancy down 80 basis points is a relatively small component of the overall revenue outlook as we think about the year. That said, clearly, we’re managing our inventory. I guess maybe reading into your question: Is occupancy lower because of weaker consumer trends? To reiterate comments we’ve made already on the call, we’re not seeing weakening consumer trends. We’re seeing good customer demand for space and then seeking to maximize the revenue we can get from the available inventory and that demand. So, I wouldn’t highlight anything there. I would say it’s unusual to start the year with the level of occupancy we had this year. So, your point is a fair one, which is it’s a bit of a unique year, but that doesn’t change our strategies as we head through the year.

Okay. That’s helpful. And then, are there any indicators that give you a sense for maybe the level of vacates that you might anticipate if economic activity slows down from where it’s at here in the quarters ahead? Is there any way to sort of gauge potential vacate activity across the portfolio?

Yes. I mean, vacate activity is something that our teams watch very closely. You heard from Richard Craig and Philip Kim about our team on Investor Day around analytics and pricing methodologies. Part of those methodologies drive available inventory. To understand available inventory, you need to understand anticipated vacates and the level of inventory you have to market. So, that’s a metric that I have teams internally looking at daily. What I’d say is, we have pretty good visibility into vacate levels, and if things start to shift unexpectedly, it’s certainly something we’d communicate. To everything we’ve highlighted date, we’re not seeing anything unusual related to predicted vacate activity through the year. I would say the only time we saw really big shifts in anticipated vacates versus what the actuals were was at the onset of the pandemic, which was obviously a unique time period. But since then, behavior has been pretty predictable.

Thank you. Most of my questions have been asked. I just had two, maybe on the ancillary revenue side. There’s been a lot of churn across the sector in terms of the third-party management pools. Can you guys maybe just speak to who is buying these assets? Is it any REIT peers, or has the buyer pool changed recently?

Yes, Spencer, the typical buyers in the market include a wide range of players. This is a common aspect of the third-party platforms, which involve both public operators and a significant number of private management platforms as well. The trading activities within these platforms can involve public operators, private equity firms, or private investors. This reflects the usual buying activity that occurs in the market. We have generally acquired a considerable number of assets from various third-party platforms even prior to our entry into the third-party management sector. Last year, we also purchased several assets from our own third-party management platform. In the first quarter, we bought one asset. There is substantial trading in these platforms, often linked to the fact that many assets are positioned on these platforms to prepare for trading. Owners may not intend to hold onto their assets for extended periods; they seek specific levels of optimization, and once achieved, they may remove the asset from the market to trade it. This illustrates the overall dynamics of third-party management.

Okay, great. Thank you. And then, can you give a sense of the penetration rates for tenant insurance, just maybe on the same-store pool as compared to your non-same-store pool?

Sure. I’m going to speak to coverage overall. Coverage in the same-store pool is in the upper 60s, and that’s been pretty stable. It’s maybe been increasing a little bit over the past couple of years. In the non-same store, it’s lower than that. That’s intuitive for development properties. It actually tends to punch a little bit higher than our same-store pool as we see a lot of new customers who find the value in our tenant insurance offering. Then for acquired properties, it takes a little bit longer to have that coverage reach a more stable basis, as many tenants are coming in that are in place that maybe don’t choose to utilize the offering. Overall, it tends to be lower. I think for the quarter, off the top of my head, it was in the 50s for coverage in the non-same-store pool versus that upper-60s in the same-store pool. Obviously, part of the strategy over the coming years will not only be to lease up that non-same-store pool but also to offer that product to that tenant base.

I was just wondering if you could talk maybe a little bit more on supply. Supply is often brought on demand is strong, and it seems like it is. I think you’ve previously said you didn’t think it would be a real wind to ‘22 or ‘23. So, just wondering if you could give your current view on supply this year and next, and what macro factors may be impacting that, for example, construction costs versus storage-specific drivers, like good demand.

Sure, Caitlin. Yes. As we’ve spoken to over the last several quarters, some of the headwinds that seem to be containing the volume of new development, we feel, is a good thing in one way, meaning there’s elevated risk going into any development opportunity. I can’t name a city, for instance, nationally that is easier to deal with today than it was pre-pandemic. City staffs are constrained from a staffing standpoint, from a timing standpoint; the complexity to get through both entitlement and then construction processes are very elevated. With that, there are more risk factors at hand, at a time when we’re seeing component costs increase, in some cases, dramatically, whether it’s steel, labor, concrete. With interest rates still far from stable and accelerating, these are very different risk factors that create some meaningful headwinds. The development business is still active. However, I mean, still 500 to 600 properties likely to come into the market this year and next. To your point, some of that’s being driven by the overall success of the sector and the amount of demand we’re seeing for self-storage, but there’s a healthier level of discipline that’s playing through for many of the factors that I spoke to. It’s been a good window for our development team to continue to do what you’re seeing us do, which is to grow our own pipeline. We’re seeing less competitive activity for certain land sites in certain markets. We’re able to capture opportunities because we’ve got the scale, the efficiency, and the opportunity to deflect to some degree, some of the pressure points that I just spoke to. If you’re a first-time developer or a developer that doesn’t have the wherewithal to potentially deal with these risk factors, you’re probably going to be a lot more conservative. We think that overall, as I mentioned, that’s a good thing for the industry.

Got it. And then maybe also on the eRental platform. I know you talked earlier that it’s continuing to grow. So, sorry if I missed the stat. Could you just go through what portion of your portfolio or incremental leasing this makes up, where you see it going, but also what kind of impact that shift has on the bottom line? Like, are there any fewer employees or other expenses as a result of that?

Yes. So, we’ve seen continued adoption of eRental. Now, over 50% of our customers are using that channel for transactions. We’re not pushing them to it, but they’re actually electing to choose a self-directed digital leasing process. By virtue of that, at our own frontlines and the amount of time our property managers, in particular, historically would have spent on that specific move-in process is being directed by customers themselves. When you’re seeing the effects of potentially 50-plus percent of that coming out of the labor demand property to property, it’s powerful. It gives us the opportunity to redirect priorities for the property management team, focusing on efficiencies as well. You’re seeing some of that through cost efficiency and our labor, even though labor costs are up, but there’s continued benefit we see from increasing the amount of digital options we’re giving customers. Frankly, we’re getting very good feedback from customers who use that tool as well. It’s a growing and preferred alternative for them to transact. It’s a much more consistent experience and can give the customer that much more flexibility when they choose to move into a specific property. All things considered, it’s been a very powerful tool, and we’re continuing to look at different ways of utilizing it and expanding its use, depending on customer choices.

Thanks for letting me get back in the queue. Just one question kind of tying back to a couple of previous ones. At the Investor Day last year, you talked about the longer-term goal of cutting 25% in payroll costs. So, just curious if you have an update on that. Clearly, inflation is a lot higher. This quarter, we saw R&M and centralized management costs on the same-store pool up in the high teens. So, just if you can give us an update on how we should be thinking about that previous commentary in light of what’s changed, obviously?

Yes. So, just to put some financial guardrails around what Joe just highlighted from a strategy standpoint. We did highlight that we would anticipate reducing hours by about 25% from 2019 levels at the Investor Day. I’d say we’re a good bit along that journey, but a little over halfway, and we’re continuing to find opportunities to drive that further. We’re on track there and anticipate to reach that 25% in the coming year or two.

Yes. Hi. Curious, as you’re ramping up your development spend, can you talk a little bit about your land positions and how many years’ worth of starts that could support?

Yes, Mike. What’s typical in the way that we approach land is we’re looking primarily for opportunities where we’re not directly putting land inventory right onto our balance sheet. It’s pretty typical or the types of opportunities we’re sourcing give us the flexibility as a buyer to actually take the site through layers or stages of entitlements that happen on their ownership schedules. It’s the obligation they give us or the time we take to actually take the property through reentitlement without actually owning the site. Contractually, that’s a pretty typical approach. It’s not each and every time, but more often than not, we’re taking a land site through certain layers of entitlements before we acquire to reduce risk and contain costs as well. With the amount of knowledge, efficiency, and resources we put into these processes, the majority of the landowners we’re doing business with are agreeable to that approach. We’re not holding large land positions. More frequently, we’re going to acquire a site when it’s much closer to the ability or the timing to actually start construction.

Got it. So, if we think about those agreements similarly to owning land, how many are currently in progress or how many do you have? What kind of lead time does this provide us with what we can control? Do we have two years, three years, or just one year of development? How do you evaluate that?

Yes, Mike, I would say it aligns exactly to the timing you’re mentioning. Market-to-market, you’ve got some processes that might take you a year or two; you’ve got others that could take three or four. Believe it or not, some that could even be longer than that. We’re matching that up. We’ve contractually control the sites before we start to invest and deploy resources and time into those sites. We have control of the land sites themselves. It matches what you’re speaking to. So, if you think about the pipeline we have today, some components of that pipeline are going through the same sets of processes I spoke to. We may not have actually acquired the land site itself in certain of those cases, but we have full contractual ability to control the site.

Thanks, Katie, and thanks to all of you for joining us. Have a good day.