Public Storage. (PSA) — Q1 2024 Earnings Call Transcript

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 website at publicstorage.com. We do ask that you initially limit yourself to 2 questions. Of course, if you have additional questions after those 2, feel free to jump back in the queue. With that, I'll turn it over to Joe.

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 improving 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 lengths of stay and lower delinquency rates; moderating move-out volume; improving occupancy and waning developments 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. 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 comprise 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.

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 a 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 segues 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. As we discussed on our last quarterly call, we anticipate deceleration of financial performance into the second quarter and improvement in the second half. The 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 3-year floating rate note, a 15-year euro note, and a 30-year reopening. Our leverage of 3.9x net debt and preferred to EBITDA puts us in a very strong position heading through the year.

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?

Sure, Samir. 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.

Yes. 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 move-in 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.

Got it. 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 transaction opportunities in the second half?

Yes, 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 dialogue 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 discussions the Fed may be indicating relative to change in interest rates between now and the 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.

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 guidance commentary a few months ago.

Yes. Sure. Keegan, this is Tom. 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 is very much intact there as well. Specifically to the housing market, we are not anticipating in any of the ranges a robust housing market. Based on where interest rates have moved, I think that's the right place to be as we sit here today as well.

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 levels 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, 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.

Got it. 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 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?

Sure. Keegan, 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. 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. 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 dialogue, I think to the questions we were just discussing around capital allocation, more dialogue with sellers, not necessarily more transactions over the next 30 days, but more dialogue, 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 dialogue here over the next 30 to 60 days. And Joe, I don't know if there's anything you'd add. No? Good.

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.

Yes. Very good question, Eric, to clarify what we're meaning by that. Specifically, what we're speaking to is month-over-month improvement in year-over-year revenue growth. So if you think about – pick a market that's growing 1% in the month of February, in the month of March, it's growing 1.5%. That would be a reaccelerating market. So not a seasonal thing or revenue on an absolute basis going higher because of higher occupancy or things like that, but actual year-over-year growth improvement. And contextually, it's part of the opportunity that continues to play through in many, many markets. We mentioned waning supply. We're also going into an environment where the competition factor in the vast majority of our markets continues to decrease. Again, as we're starting to see this reacceleration that's also, for the most part, in many markets with very little new supply coming in. That's too an additive factor relative to the amount of demand that we continue to see an opportunity to drive more customers into the portfolio.

Got it. That's helpful. And then I just had a question on the sales activity. You talked about the impact on your move-in rents for the quarter. But was just curious what criteria you look at in order to determine why you should increase that sales activity. So if we look at last October or this March, why did you decide to increase sales versus the other month, especially given some of the recent positive demand indicators that you're just talking about?

Yes. That's a good question, Eric. So we've run these sales consistently over time. Last year, we ran a number of different time periods. The primary reason is we had some inventory that we felt like we can move. Throughout the year, we try different promotional tactics and sales tactics to drive customer activity, pairing that with advertising and the like. We tend to see good traction there. We saw good traction during the winter season here, as we talked about, and we'll likely use – continue to use promotional activity, sales activity, and the like throughout the year this year, not dissimilar to what we did last year.

Great. In the markets that you talked about where you're seeing these accelerating trends, I guess, can you talk about that a little bit more, like what's driving that from your view and tie that into the comments that you did say, Joe, that the new move-ins do remain challenging? So I'm just trying to tie those two together?

Yes, Jeff, maybe to start with the second part of the question. Yes, challenging on a year-over-year basis. But sequentially, we're seeing a good trend up. We hope to continue to see that build as we go into further months into the year, and our confidence grows month-by-month even through the month of April, as we've talked about. So that's one powerful component. Thematically, many of the markets where we're starting to see this reacceleration on the early side were typically markets that were not the high flyers and the peaks of the pandemic era, so they haven't had to reset relative to the more dramatic rate increases and overall demand increases that we saw through the pandemic. So on the flip side of that, you're not hearing us talk about Florida, for instance. Florida has got a ways to go before I think we'd add them into that reaccelerating bucket. On a more active level and more dominant level across the portfolio as we've listed out market by market, we're starting to see that improvement, particularly where we've got markets that weren't those high flyers but seeing more consistent performance, and we're starting to see that reacceleration as we speak. So there's more to come. As we've also talked to, so we're confident as the year plays out, we're likely to add to this list of reaccelerating markets. And again, as I just mentioned, with many of these markets not dealing with an abundance of new supply as well.

My follow-up then is on supply. I was saying that we subscribed to Yardi, and I think they've updated that now a couple of times where this year is higher than last year, but expecting a decrease into next year. I guess, can you provide a little bit more on your supply forecast? Like are you seeing something different or the same for this year, let's say, and then for 2025 at this point?

Yes, Jeff, if you step back, I appreciate the way that Yardi attempts to track nationally, both development activity and then more precisely what I think can be more difficult is the reality of how many of those projects actually get put into production and then are likely to be completed on a year-by-year basis. We've been very consistent now for the last two to three years where we in our own development activity have seen the competitive factor of the supply taper down. It's tapering down in 2024. I think I would say we have a bit of a different opinion if they're pointing some type of an uptick this year. What we see and have been very commanding on a day-to-day basis, and if you're actually doing development as we're doing on a national basis, the amount of headwinds, the amount of timing delays, and the amount of complications market to market has not eased at all. We've been very consistent about that. And then you layer on the cost of capital that Tom and I've been talking to as well as the unpredictability in certain markets relative to demand, et cetera, there's more headwinds than any developer on an individual basis is facing. And by virtue of that, you're seeing a downdraft in the amount of deliveries, which we think are going to continue going into next year and the year after. We're frankly looking at development if you're starting fresh in any given market that could take anywhere from 2 to 3 years just to get through an entitlement process right now. So just think about that from a calendar standpoint, that puts you out into 2026 and 2027, and there's really not an easy way to combat that. So the risk factors tied to development continue to increase for all the factors I just mentioned. We're pretty confident that our lens into that activity is far more accurate than others.

Tom, I just wanted to go back to the guidance, which you affirmed, and it sounds like the quarter was relatively in line overall. I'm wondering, are you still anticipating move-in rents to cross the 0 threshold later in the summer and occupancy to remain down about 80 basis points in the year or has the mix shifted around a little bit following this quarter's and the April performance that you discussed?

Yes, Todd. No, I'd point you to all of that commentary that we had on the February call is intact as it relates to the assumptions that underlie the range there. As you'd anticipate, the next three months are going to be important as to which directions we're heading on certain of those metrics. We've been encouraged by performance to date. We'll have more to talk about ranges and things like that as we move through the year.

Okay. And then following up on that, is there a scenario in which move-in rents remain a little bit weaker than you anticipated down double digits or high-single digits, but occupancy continues to improve and you end up closing that gap entirely? If so, what would that look like? What would the sensitivity around the model look like for guidance purposes, if there was an outcome in that sort of direction?

Sure. There's definitely a range of outcomes and assumptions that you can make on the revenue modeling. I think what you're highlighting is, if you have better occupancy performance but worse rate performance. But if you end up in the same spot, could you end up in the same places you otherwise would have anticipated? Absolutely.

Okay. And just last question then. One of your peers saw a slight uptick in vacate activity. It sounded like there was an expectation that there'd be some sort of continued normalization around vacates and in the length of tenant's days. Your vacate activity was lower in the quarter versus last year. I'm just wondering if you expect that to continue? Or do you see potential for vacate activity and the length of stay trends to normalize a bit more going forward?

So I think there's a couple of parts to that question, Todd. I think the first one is around length of stays and what we've seen trend-wise. We've been really pleasantly surprised over the last several years at how sticky the length of stay has been. When we were here on calls in 2021, we were concerned that maybe there'd be a pretty quick return to normal or 'pre-pandemic' length of stays, and we're now sitting here in 2024 still talking about longer lengths of stay compared to pre-pandemic levels. But we're certainly off of those 2021 and 2022 peaks. There has been a normalization. Some of the factors that have led to longer lengths of stay are durable. We've talked about customers that are using storage because they ran out of space in their homes; less housing turnover likely leads to longer lengths of stay. All these things can be a positive as it relates to length of stay. While we're off the peak, we still remain encouraged by customer behavior and the lengths of stays that we're seeing in the portfolio today. So that may be the first part. The second part is, how are we thinking about move-out activity? In the midpoint case, move-out activity is for basically flat year-over-year move-out activity, so we're not anticipating a spike in that midpoint case.

And maybe just a third component from a macro health of customer standpoint with plus or minus 85% of our customers being consumers, employment trends continue to validate the economy is in very strong shape. We're not seeing any elevated level of stress play through that even takes us back to the pre-pandemic levels, i.e., they're better. Payment patterns, delinquency patterns, et cetera, are still in a very good zone. We're not seeing any new and undue stress that's coming through on the customer environment as a whole. So we continue to be very pleased and confident about our ability to see that level of stability with our existing customer base.

Appreciate the time today. Just wanted to touch on same-store expenses a little bit. I saw slightly elevated growth in property taxes. I think you had guided to that being up about 5%. Is there any kind of seasonality to think about throughout the year in property taxes and then also marketing expenses up significantly? How should we think about how those trend throughout the year given the unique dynamics of this year with spring leasing coming up?

Yes, that's a great question. As you highlighted, operating expense for the quarter was above our full-year outlook. We are anticipating that overall operating expense trends will improve. You've hit on a couple of the drivers of that, and I'll elaborate on a couple of others. The first one, property tax, we're still anticipating property tax to be plus or minus 5% year-over-year growth for the year. The first quarter did have some reassessments that were earlier in the year this year that were kind of one-time related. On the marketing topic, similarly, if you look at marketing spend in the first quarter, it was pretty consistent with the fourth quarter, which is a little bit higher seasonally. We'd anticipate marketing spend both on an absolute basis and also on a year-over-year basis to moderate a little bit as we move through the year, obviously, depending on customer demand activity and the like. But that's another driver. I would also add two others: One is our capital investments that we're making in solar power on our rooftops, which has myriad benefits for us, obviously, the environment and our customer base. One of the factors there will be lowering utility expenses. We had that in the first quarter, but that's going to continue as we move through the next couple of quarters. The technology investments that we've made around our customer interactions now over two-thirds of our customers are coming to us and renting digitally before they ever show up in a property. That number continues to grow, and we've been very clear around some of the opportunities to utilize that for specialization and centralization of roles and lower payroll expenses as we move through the year, and we'll see more of that heading through 2024 as well.

Thank you. Following up on your earlier remarks regarding the current development risks, you mentioned extended lead times for entitlements, increased construction costs, and higher interest expenses. It appears that PSA is making a significant push while many competitors are retreating. Are there any adjustments to your expectation of achieving an 8% NOI yield within the next 3 to 4 years, which aligns with your historical underwriting? Can you highlight specific aspects of the markets where you are currently developing, such as supply conditions and competitive landscape, that provide you with the assurance of reaching those returns?

Yes. I mean we take a multiyear view of that hurdle rate. It hasn't changed even out of some of the pressure points that we've spoken to. We continue to see the opportunity to find very good land sites, assets that will, from a competitive standpoint, not be burdened relative to any undue risk. That's another thing that we factor in with the amount of data and the knowledge we have sub-market to sub-market that gives us the level of confidence we can get to that hurdle, if not higher. So we really haven't changed any of our hurdle expectations and/or the risk that that might convey relative to what could play out on a market-by-market basis. To your point, yes, there are definitely more things that we're evaluating relative to the cost, timing, rent level achievements, et cetera, that go into underwriting, but we're still confident that we're adding to and finding very good sites to continue to grow our scale in many, many markets nationally. The development team is working very hard to uncover those opportunities. Frankly, maybe another point to your question, we have a different and more advantageous competitive advantage. We're seeing more land sites that might be further into entitlement processes that we are interested relative to potentially accelerating some of those delivery hurdles that I talked about. So many factors in this environment actually played our platform quite well, and we continue to tackle those one by one.

Given what you've started to see in some of the markets turning, bouncing off the bottom and starting to reaccelerate, does that mean that ECRIs in this market could also start to pick up?

Yes, certainly. I mean as you see momentum in a market, we've talked consistently about how we think about existing customer rent increases. One of the factors is certainly the cost to replace a tenant, and as we see moving rate and demand activity percolating in those markets, that will feed into our thinking about whether a customer maybe should receive a higher magnitude or higher frequency of increase, so absolutely. I think the second piece of our existing customer rate increase models around customer performance, and we've been speaking in a couple of previous questions around how we continue to be encouraged by that behavior.

My second question is about the type of customer acquired through your sales process. Does the sale create additional demand, or does it allow you to capture market share? Does this customer have a different demographic profile than a typical long-term customer? I'm trying to understand if there is potentially a higher customer acquisition cost associated with this customer and what the customer lifetime value looks like.

Yes, Michael. I'd say across the board, different pricing, promotion, and advertising tactics will lead to drawing more, a little bit different mixes of customers and the like to our stores. We pull those different levers throughout the year, looking to try to maximize NOI ultimately, so revenue less the advertising expense associated with it. So we're toggling those levers, trying to maximize that outcome. As you look at a sale, for instance, it will draw more customers, and we'll use some different tactics around pricing, promotion, and advertising to try to optimize that overall lifetime value of the customer.

Consumer health continues to be topical just given the economic backdrop. But I was just wondering specifically about the commercial tenant. Can you comment on the health or appetite of the business consumer? And how has that changed, if at all, in the last year?

Yes, Spenser. I would say in light fashion, no stress points or any other headwinds that we're seeing from that type of customer. There's obviously a very broad range of user types, different industries. Some are product-oriented, some are service-oriented, and some are very specific to certain locations. But I wouldn't, in any way, characterize we're seeing any elevated level of stress, actually, still very good consistent use of storage, particularly, as I mentioned, there may be certain factors that pull a commercial customer configuration into one property at a higher or lower level than another. But again, nothing that we've seen that indicates there's an elevated level of stress or concern. As the economy continues to be quite good, we're seeing actually still good demand factors coming from business users overall.

Okay. I'm curious if the marketing budget for advertisements is fairly similar across different markets or if there are specific regions where you're focusing on increasing occupancy or experiencing higher initial demand that would lead you to invest more.

Yes, Spenser, it's a good question. And maybe a follow-up to Michael's question on how we're managing pricing, promotion, and advertising. All three are being utilized really at a local level to drive a combination of either traffic in the form of advertising or conversion rates related to pricing and promotion activity. Advertising is something that we can use either nationally or what we typically do is much more locally to support top-of-funnel demand in local markets where we're getting both a combination of good return on that ad spend but also supporting properties that would benefit from incremental top-of-funnel demand. So it varies pretty widely.

It's Daniel Tricarico on for Nick. Following up on some of the earlier questions in your commentary, Tom, and sorry to harp on this. I know you've talked about ECRIs being a combination of price sensitivity and cost to replace, the latter now increasingly elevated today in relation to the discounted pricing strategy you're using. So my question is, how do you think about the magnitude and velocity for which move-in rates need to improve so that the cost to replace or in theory, the roll-down effect is offset and revenue growth can reaccelerate again? Or is there another way I should be thinking about it?

There's a lot embedded in there. I think the first thing I would say is as you look at cost to replace, you all can see some of the elements that go into cost to replace pretty clearly based on our move-in and move-out rates. Some of them are different and related to how long we think a unit will be vacant, what the advertising spend may be associated with the unit, what the promotional activity may be around it, and that's all managed at the individual unit level. Big picture, one of the things we've highlighted this year is that we think overall contribution from existing customer rate increases will be pretty consistent with last year. You said, well, how can that be if you think cost to replace maybe a little bit higher? I'd say, well, there's another element that I add to what I just highlighted, which is the mix of the tenant base. We had success in moving in a meaningful number of new customers last year above and beyond the prior year. Those customers tend to get a higher frequency of increase earlier on in their tenancy and that's contributing to performance this year of our ECRI program. I think there's a multitude of different components there. Cost to replace is certainly an important one. But as we look at the year, we think overall contribution will be relatively consistent.

Maybe a less convoluted follow-up. Could you share how you bucket the demand segments for the business, maybe to give us a better understanding of the current picture? Is the general like job and homeowner 30% or 40% of demand and then the longer-term business customer 20% and then another cohort the balance? Any color you could share from any of your internal data would be great.

Yes, sure. I anticipate that overall demand contribution this year is pretty similar to last year. The way we've bucketed the contribution to move-ins last year was about 15%, 1-5 percent of customers that are coming to us because of an existing home sale-related move, and that was down from about 20% in a more typical year. So a relatively modest contribution. Customers that are moving and they're renters, either single-family or multifamily renters, tend to make up a larger percentage, call it, between 40% and 45% of the tenant base. You've got another group that we've consistently spoken of that's been elevated post-2020, and that's customers that have run out of space at home. That's been a consistently high performer relative to pre-pandemic levels and is likely to be more like 15% to 20%. As you go beyond that, I'd call it other. There's a whole host of interesting use cases as well as commercial tenants that will make up the rest. We continue to see good, obviously, move-in activity at our stores. As Joe mentioned, we've been encouraged by that activity year-to-date.

Just on the acquisition front, can you remind us how much is assumed or baked into guidance for presumably accretion from the acquisition volume highlighted in guidance? And then kind of as a subset of that question, how are you guys thinking about Canada? I know the Hughes family has some assets there; does that prohibit you from potentially getting involved there? Or is there any time that the family may be looking for one reason or another to monetize their stake?

Sure. Yes. To again, point to 2024 guidance on acquisitions, we've pegged $500 million. Obviously, at this point in the year, it's going to be more back-ended. But some of the commentary, Juan, earlier in the call relative to what we're likely to see with a range of different motivations from sellers, we've got, I think, good perception into the ways that we can get to that kind of acquisition volume as we sit here today. The Canada question, to your point around the Hughes family and their ownership and platform in that market, it does not impede our ability to go into that market itself. There are no conflicts on either side for either party to continue to look at a range of investments in that market. So with that, no commentary relative to what the future may play out, but there are no constraints on our part.

Great. And then just a question on labor and FTEs. You guys, in your Investor Day, which is now a couple of years back, hit your targets in cutting down, I think, workforce utilization or cost associated about a quarter from prior levels. Where are you in further abilities to reduce FTEs or payroll costs? And could you just give us maybe a sense of kind of how the industry has changed in terms of FTEs per store maybe five years ago to where you are now to where you ultimately think you can end up going?

Yes, I can speak to that in certainly our own platform. The goals that we pointed to in our Investor Day presentation were achieved plus or minus a couple of years ago, so we were very pleased with the opportunity that we saw to optimize labor hours with many of the tools that supported that, particularly tied to our digital platform. What has played out from, again, the last two years through today and then even going forward, there's actually more to achieve. That comes from the continued improvement in our operating model and the digital tools that we're using not only for one type of day-to-day demand that comes in and out of a property, which is tied to move-in activity but its overall customer support. We've rolled out a PS app that now we have about 1.5 million customers tied to. That's direct account management that takes the burden off property labor hours, very efficient for the customer as well. It's a win-win in terms of not only time savings on our end of the spectrum but efficiency and consistency from a customer standpoint. We continue to look at various different and robust digital tools and optimization tools that give us the amount of clarity and trajectory that we're likely to see with continued reduction in FTE hours. We're doing that in a very different way than the industry has done. You can look at some metrics that benchmark our performance to others. Tom already mentioned that about two-thirds of our customers now transact with us digitally. That's far in excess of not only what the industry is achieving, but what level of accelerated performance we're getting from that channel and that level of interaction with customers directly. So a lot of good things that we're continuing to tackle on that front.

Just two quick ones. One is just on Southern California. If you could just provide just updated thoughts, it's still one of your best-performing markets. What's sort of the prospect of that starting to reaccelerate as you're sort of going forward and how are fundamentals trending on the ground?

Yes, that's a great question. Southern California continues to be a strong market for us, both Los Angeles and San Diego. During the quarter, we were impacted by some storm activity and state emergency restrictions that impacted the quarter's financial performance for a couple of months. But those markets continue to see strong customer activity, and we have confidence in those markets heading through the rest of the year.

And just again to add a comment, Ron, that we made in other questions. Again, very, very little competitive new supply. It’s one of the most difficult markets to find land and work through entitlement processes, etc. Uniquely, though, it's the market at the moment, we have the most development activity nationally in. We are uniquely finding some interesting opportunities to expand our portfolio right here in Southern California. To Tom's point, we're still seeing very consistent and good levels of activity.

Great. And then my second one was just a follow-up on the marketing spend question. Is it fair to say it's at the highest level in 5 years as a percentage of revenue as number one. Can you talk about the breakout of that marketing spend inflation between just cost per click going up versus just more marketing being done if that makes sense?

Yes, a couple of questions, components there. So the first quarter and fourth quarter, we tend to see higher percentages of revenue as we think about supporting demand in quarters where we have seasonally more inventory to rent, and we get good returns in those quarters to do that. We typically see the second and third quarter marketing spend come down a little bit as a percentage of revenue. As you look at the quarter, yes, it was probably pretty consistent with some quarters we had back in 2018, 2019, maybe a touch under what some of them were. But a comfortable range as we think about the level of marketing support that we're providing the stores. As I mentioned on a previous question, that's dynamically managed around local demand trends and supporting the business. But I would anticipate from an absolute percentage of revenue that's likely to decline in the next couple of quarters like it did last year before coming up again in the fourth quarter to support higher inventory levels at the lower levels of occupancy we experienced in the fourth quarter.

Maybe just on acquisitions. It looks like subsequent to the quarter-end, you had $34.6 million in acquisitions. So just wondering if you could talk about how these properties came about? Were they four separate deals? What type of seller?

Yes. Individual sellers, Caitlin; small or deal-by-deal opportunities. As typically, we see there's a range of different seller types that were in dialogue very actively. These were, again, individual owners. I would tell you, as I mentioned earlier, we continue to have a whole range of different conversations with different owner types, whether family owners, individual owners, institutional owners; but again, the deals that we've got either closed or under contract are just very one-offs, smaller assets that fit well into certain markets that we're certainly interested in growing scale, etc.

Got it. Okay. And then maybe just one on the move-in, move-out spread, it looks like it's flattened a bit. Do you have a view on whether we've hit the trough of that spread given where the move-out rates and move-in rates are at this point, and I guess, expectations going forward?

Yes. We would anticipate, Caitlin, that that spread does narrow in the second and third quarters seasonally before widening out again in the fourth quarter. So not dissimilar from a seasonal trend standpoint to what I was speaking to related to advertising.

So I'm not sure if I missed it or not, but did you give an update on April move-in rate trends?

I did, Ki Bin.

Okay. I'll just go back in the transcript. When you look at the year-to-date changes in sequential rents, how does that compare to what you would consider a normal seasonal pattern? Has it been better or worse?

I'd say on a year-over-year basis, it's been pretty consistent, a touch better than last year, which is what we'd anticipate. Obviously, we're anticipating that likely to continue here through the peak leasing season. We'll update you on that as we move through the next three months or so.

Okay. And on your CapEx, you have $150 million for the Property of Tomorrow program that's supposed to wind down next year. Just trying to get a better sense of it. I mean does it go to zero? Or is there a certain level that you might have to keep for a longer time?

No, it's going to go to zero. Probably some of the cash payments on the cash flow statement will continue into the first quarter or so of next year just as we wrap up the program and make our final payments. But ultimately, that will go to zero.

Yes. Just given some of your comments around improving trends in more markets. Could you talk a little bit kind of January, February, March, specifically around street rates kind of on a year-over-year basis? How that was improving throughout the quarter. Like do we kind of sort of like we're negative 15 and now we're like a negative 10 and heading towards zero that's kind of embedded in some of your guidance going forward?

Okay. There's kind of two parts to that question. One is the accelerating markets, and those accelerated markets are driven by a whole host of things and not just individually moving rents. As we think about that, we highlighted on the previous call two or three markets that were accelerating at the time we were sitting there in February, and we added a handful of markets to that. We're definitely seeing improving trends across that group of markets. I think your next question was just sequentially as we think about year-over-year declines in move-in rents, and on the February call, I had highlighted that January and February move-in rates were down in the 10% or 11% neighborhood. We finished the quarter and had April right around that same sort of level. Obviously, there's periods of time where it's a little bit better than that, periods of time where we're lowering rates to drive move-in volume. It's been relatively consistent, which is what you'd anticipate really through the first part of the year because you're at the trough point of rents. As I noted, we're at the point of the year now where we are raising rents now, and that's when we're likely to see some changing activity as it relates to those trends, as we've discussed in our outlook.

That's helpful. And then for ECRI increases, are they also kind of consistent versus what we've been seeing in recent quarters?

Yes, pretty consistent in terms of trends. With the exception of what I highlighted earlier around more newer tenants being added to the program, given that strong move-in volumes last year.

Sorry to drag out the call longer here. But what are some of the attributes of the markets where you're seeing the improvement that you flagged? Is it just less supply? Because it seems like that list that you rattled off was dominated by kind of bigger cities. As a follow-up to that, is the momentum you're talking about? Is it better momentum in move-in rates? Or is it just more traffic-oriented?

Sure, Mike. I think there's a number of factors. You rattled off some of them that are contributing to it. We listed a series of markets. Each market is a little bit different. Certainly, supply plays a component in some of those markets, meaning a lack of supply, higher barriers to entry as Joe spoke to on certain of those markets. But I'd also highlight stronger demand trends, better move-in rent trends, better move-out activity. It's really a handful of different drivers that are unique to each market. But as you characterize them all, I would categorize them into markets that didn't have the same, really strong levels of growth in 2021 and 2022 and so don't have the same level of really difficult comps to come off of. As Joe mentioned earlier, you can put Florida, for instance, as a big winner over the last couple of years as likely to take a little bit longer to normalize but still has been a really strong performer over the last several years for us.

Maybe I could get your thoughts on what's behind the lower delinquency rates that you highlighted in the script. Some macro data suggests that consumers are facing some incremental challenges, but that doesn't seem to be what you're seeing.

Yes. I would say, Brendan, on a macro basis, we still see a very healthy consumer base. We have approximately 2 million customers, so a full spectrum of the economy at large and not really seeing any undue pressure market by market or again, that would indicate that there's some elevated amount of risk that's coming from relative to stress points, etc. I think you're hearing a fair amount of commentary even now that we're well into 2024 around consumer balance sheets, employment levels are quite strong. I think this is part of the angst that the Fed is having relative to their timing relative to tapering, etc. The employment and behavior from consumers at large continue to be quite good, and we're very pleased by that, obviously. On a day-to-day basis, we're not seeing the type of range when you see a customer go into some level of delinquency, etc., the pace and nature of that pattern isn't as elevated as it was pre-pandemic. We're keeping a very close eye on, but no material shift continues to give us an outlook that the consumer environment is going to be quite healthy.

Great. That's helpful. And maybe just one more. You rent some TV ads in the quarter. Can you just talk about your thought process around when and where to use TV advertisement versus other types of advertising?

Yes. We did use a little bit of TV advertising. It's one of the things that we can utilize pretty uniquely in the industry, given our national scale and platform. That's something we will use periodically. In this case, we used it to advertise some of our promotional activity, which we saw a good reaction to in the quarter.

Thanks, Rob, and thanks to all of you out there for your continuing interest and time, and we'll talk to you soon. Have a good day.