Public Storage (PSA) Earnings Call Transcript & Summary

All right. Thanks, Jeff. Thank you, everybody, for joining us. Good afternoon. So yes, Tom and I will go through some updates and give you some context relative to how the summer is playing through and our perspective on the business as we speak. But for those of you who may not be as familiar, a couple of highlights on the company itself today. We own now more than 2,800 properties here in the United States across 40 states, approximately 200 million square feet. One of the things that has been very advantageous to the business as a whole, not only through the pandemic, but now that we're on the backside of it, business remains very strong. We have had yet again another active summer of business activity. We'll give you some highlights of that as well. But one of the things that continues to be additive to the amount of demand that we're seeing is the vibrancy of both new business, new customer activity as well as existing customer activity. We'll give you some context around those 2 components that are very powerful drivers of the business as a whole. In particular, one area of demand that played through with a fair amount of intensity to the pandemic, but now continues to be a residual demand factor too is the hybrid work environment. We're seeing a lot of users coming into the portfolio that do need more space because of demands at home. And frankly, that relates to our business customers as well. We're seeing a lot of additive business activity. They too are seeing more need for additional storage capacity one way or another and coming to self-storage that can be very financially sensible alternative. So that too continues to be a very strong demand driver for us. A few other highlights for the company too. Based on the investment activity that we saw in 2021, in particular, where we added from an acquisition standpoint, $5.1 billion of new assets, our non-same-store portfolio today, now as a company within a company, approximately 525 properties, 15 million square feet with very good growth ahead of it. Occupancy in that portfolio today is roughly 87% compared to the approximate 93% occupancy level that we have in our same-store portfolio. But with a lot of revenue and optimization growth ahead as those properties mature. As I mentioned, a fair amount of that activity came from the investment that we put into 2021 of $5.1 billion. But another thing that's very unique to the company is we are the largest developer of self-storage here in the United States and, frankly, across the world. We have a $1 billion development pipeline today, which continues to be a very powerful capital allocation tool for us as well. Another thing that we put very intentional investment into over the last several years is our technology platform. An example of that is the amount of digital experiences that customers have options to use when they're actually securing and/or managing their self-storage facility. Pre-pandemic, basically, none of our customers were coming to us through a digital experience. Today now over 50% of our customers use that channel. To put that in context, we move in approximately 80,000-plus customers a month. And so now we have 40,000-plus customers each and every month choosing on their own account to use a digital experience. It's created a lot of efficiencies for the way we operate the business as well as a very efficient customer experience as well, and we continue to grow that platform as well as many others from a digital standpoint as we continue to develop the business. Finally one last thing I'll mention is from a human capital standpoint, we continue to make substantial investments into our own management team, our frontline property managers. We put a lot of additional emphasis into a very wide variety of roles and support relative to career development, et cetera, into the human capital side of the business. Today we have about 5,500 employees nationally, and we continue to see very good growth and good responsibility, a career achievement, et cetera, in the very deep tools that we put in their hands, and we're frankly very pleased by the quality and the growth of our own human capital inside the company. With that, I'm going to have Tom go through some more specific numbers, not only based on what we see in the business today, but how we're looking for the remainder of 2022. Tom?

Great. Thank, Joe. I do want to really highlight a couple of facts [indiscernible] a little bit more front end [indiscernible] summer was very good, so it still characterize business, not only the demand for some stores [indiscernible] the web business and sales calls into our system were [indiscernible] last year [indiscernible] that led to pricing strength [indiscernible] today at 5.5%, and we've been [indiscernible] which was helpful. Yes. As you look at the August 31 snapshot that we provided, we saw a seasonal change in occupancy or anticipated frankly in a much better side by side with really strong [indiscernible]. So again, a very good sign. The second point I want to highlight is the balance sheet sitting on a billion dollars [indiscernible] leverage has come down [indiscernible] and then long-term, which gives us firepower as we head into [indiscernible]. So to summarize, we're in a position where business fundamental [indiscernible] strong at the same time for the macro environment is not so heading into 2023 position of strength, which is really a good position in supply with demand, operating platform, as Joe mentioned, and platform. So with that [indiscernible] and, again, I was just at this [indiscernible] conference in Vegas last weekend [indiscernible]. So I feel like this is a good opportunity to kind of [indiscernible] the markets, business grew strong, we've seen [indiscernible] but seasonality [indiscernible] last week. And again, maybe just characterize that as these comments on seasonality to talk a little bit more about seasonality first, let's say that something [indiscernible]. But your comment about the conference last week is a very well attended conference -- specifically talk about the operating -- it's seasonality we've been expecting for some time, frankly, in the past that our customers [indiscernible] after the pandemic slowed, so since 2021 [indiscernible] worldwide. So we've been anticipating that there are seasonal -- in our guidance and our commentary about the trend throughout the year. And so that implies some acceleration in the occupancy in the summer and some change [indiscernible] occupancy in that quarter will change after the [indiscernible], so why is that? We have [indiscernible] so that's a [indiscernible] comparing the change in this year, the other news, August 30, the best year this year, a previously a reception of last year [indiscernible] so very helpful. We feel very good about [indiscernible].

Yes, I think, Jeff, to your point, I don't think this was anything; A, surprising; b, we're benchmarking off a very unusual period last year in particular. But the tenant behavior and the range of move-in and move-out volume that played through, through the summer months was actually still quite healthy. And we still feel very good about the outlook that we see through the remainder of this year. Top of funnel demand is still quite good. We haven't seen any material degradation in average length of stay, which is another very compelling part of the way revenue management works in the storage industry. So all things considered, as we know that we still feel the business environment is quite good. One of the things that's very different about this environment compared to pre-pandemic as we're not dealing with elevated levels of supply that year-by-year we're building through the 2015 to 2019 time period, where year-by-year 1 or 2 additional $1 billion of assets were being developed and delivered to the market each and every year iteratively. That amount of volume has tapered down. As I mentioned, we have a very deep development pipeline, and we develop assets nationally. I'll tell you today's development environment is probably one of the most difficult we've seen in many, many years for a few factors. One is city processes continue to become or continue to be very slow, staffing levels and step-by-step approval processes are taking longer. Then on top of that, you've got component cost inflation that adds risk to development, increasing interest rates, another risk factor, supply chain issues and then also just labor market to market. So the development activity has actually subsided and likely isn't going to perk up in any near term or even midterm time period. So we're very confident that the playing field that we're competing against is actually better than it was even pre-pandemic. So it's another reason to be encouraged by the overall business activity that we're seeing.

Just looking for anything -- anything you've learned [indiscernible].

Well, if -- I don't know if I would characterize it as a pure risk. It's going to depend to what degree it's pure. And what I mean by that is, even as companies pull employees back, in many cases, it's not full time. And that inherent demand is still coming from users that need space at home because even though they may be part time back at the office, they're not full time. So there's -- again, it seems to be a residual and long-lasting effect from a very different workforce environment. So we're continuing to track that. On a national basis, we're really not seeing even the early markets that went back to "The office first," whether if you look at Florida or Texas markets, for instance, we're still seeing adherent and good demand from those customer surveys where customers are telling us one of the core reasons why they're looking for some more space is they need more space at home because, again, they have the need and the ability to work from home. So with that, they have more need for storage. So that continues to be a very compelling reason for them to come to us.

Yes. As you think about the consumer balance sheets [indiscernible] what we're seeing is continued strength in consumer balance sheets [indiscernible] but are still well-developed [indiscernible] booking across customer cohorts without saying simple income, for instance, we were probably seeing first, we're seeing broad trends and [indiscernible] but still [indiscernible] I think in August the [indiscernible].

How difficult is -- development environment. Things that this impacts your [indiscernible].

Well, one of the things that we're -- it's a plus/minus relative to the opportunity set that comes from that difficult development environment. So in one hand, if we're competing with fewer developers that could actually help us find more ideal land sites with less competition. Frankly that's been one of the ways that we so far built our pipeline to $1 billion of a backlog. The goal, as you said, is to continue to increase that further. One of the things that we continue to leverage is the scale and the knowledge that we have market to market, and the fact that we can weather these cycles. And with that, use our own scale, our own knowledge and our opportunity to find ideal land sites and leverage that to drive additional volume. The self-storage industry from a development standpoint is highly fragmented. So we're typically seeing developers who may never have developed a product before. They don't have the inherent knowledge. They may be far more risk averse. So with that, we may see actually a different opportunity set that that too will leverage. Now on the flip side, we're going to continue to be very conscientious about costs and complexity and the things that come with that as well. But the overarching goal remains to continue to build our development pipeline is by far the best capital allocation tool that we have from a return standpoint. So we're highly motivated, and we've got a national team out betting and taking multiple properties through different entitlement processes so that we can continue to build the pipeline.

[indiscernible].

Is land itself. Again that depends market to market, and it depends on the density and the coverage that you're getting on a particular land site. So it could be 20%, it could be 30% in some cases. It depends on the actual location and the amount, as I mentioned amount of density, they're going to get on a particular site.

[indiscernible] negative is a portfolio for price and both [indiscernible] red flag seen in [indiscernible]. There's a couple of [indiscernible] last year was a home sales should solve to your home sales. That's a big driver in self-storage. Flip side is [indiscernible] flip side of that was [indiscernible] the home sale market slowed down. And those that are renting [indiscernible] smaller, that's helpful to [indiscernible] searching for [indiscernible] revenue growth for a number of ports [indiscernible]. What are the other [indiscernible] but is that the right comparison which we focused on, again, the 18% and the launch again [indiscernible] perspective. I mean there is some [indiscernible]. So we provide [indiscernible]. Take a step back, you're looking to manage the web. The customers are coming [indiscernible] but there's a way for those customers [indiscernible] so what you're seeing is that you obviously y go and buy, you're going have customers -- that's okay. That's helped [indiscernible] period of time before [indiscernible] so we're seeing levels of branding with that. [Indiscernible]. [indiscernible] talk about that [indiscernible] do you think -- do we wanted to [indiscernible] so there are questions there. Yes, that's where you start the following. But with a month-to-month big business, we're not going to sit there and [indiscernible].

[indiscernible] could you talk about storage [indiscernible] but what is the [indiscernible]?

Well, in one hand, of course, we're going to see the impact, it's a month-to-month business, right? So on the flip side, it's still a de-space business. So our customers don't react each and every month to macroeconomic events. I think it will depend on the overall economic circumstances of this recession compared to others. I mean one of the most blunt recessions we went through was the great financial crisis. Now Tom and I worked in our seats at that point, but the business had a couple of quarters of rough sledding, but then it recovered very quickly. So by history, the self-storage business has been known to not only be quite resilient, but to even recover quite quickly. So we'll have to see how these set of events play through. The signals that we continue to use are some of the things that Tom has already talked about. We're going to look at behavior on customers that have been with us for longer periods of time. We're going to look at top of funnel demand. We're going to look at the supply environment. And with that, each and every day, we're repricing the portfolio. We're repricing our existing customer rate increases. I mean, those are things that are very fluid in our business and we can react very quickly. On the flip side, that's a very strong benefit of having a month-to-month lease platform. In an inflationary environment, which, frankly, we haven't been in for decades, it too can be in some ways a very powerful tool because we can reprice very quickly based on events that play through. So from a nimbleness standpoint, we have a portfolio that can react very quickly and that we can control in different ways. And if we had a much more long-term or longer duration customer lifecycle based on just the lease itself. Behaviorally our customers will continue to use and particularly those that stay with us a year or longer, continue to use our space for multiple periods of time beyond that. And that's been a very consistent and predictable way for us to manage our revenue even in and out of these economic cycles depending on their severity.

[indiscernible].

Well, I think from an endorsement standpoint, I think over time self-storage has become a more compelling opportunity for a broader set of users nationally, whether that's just by generation, meaning we have more generational users that are coming to storage for the first time, just by virtue of life events, which, in many cases, are the exact same life events that were happening 10 or 20 years ago. Again as you're maturing and you have a family, you have different things that are creating need for move from market to market, whether it's a job change or another life event. Those are very consistent things that have historically driven self-storage and continue to do and frankly, just with a broader pool of users now. On top of that, we've seen through this pandemic, even different drivers that I talked about initially even work-from-home demands and the other drivers that continue to make storage a very sensible alternative to just using that space at home or at work.

[indiscernible].

So without question, the industrial market continues to be very active, low vacancies. And at the same time, for many of the same reasons, business customers will come to storage for some of those reasons. It's flexible. You can take additional space on a month-to-month basis. It could help with spot inventory control. So the amount of customer users that we've seen continue to grow for those kinds of reasons. And again, we see good growth from that standpoint. I'd say today, statistically, probably 10% to 15% of our customer base has some relativity to a business. They may not identify as a pure business, but they have some business context and use of their space based on their own business activity. So that too is very additive to the business. It can ebb and flow market to market or actually location to location depending on the different drivers in any particular submarket. But that too continues to be very additive, the amount of demand that we're seeing.

[indiscernible] yes, so as we talked about [indiscernible].

First of all before we had a $1 billion [indiscernible] dollar sitting in very strong level of [indiscernible] on some opportunity [indiscernible].

Yes, [ Dominic ], I think one of the things that we'll continue to be able to look at with some of our inherent knowledge from international markets are the [indiscernible] teams here as well. We've definitely benefited by the knowledge that we've learned from their experience in Western Europe, for instance. So we've got a good tool kit to rely on when and if any international opportunities present themselves. Frankly the opportunity set that we've seen right here in the United States has been quite compelling, and we continue to be very focused within the U.S. border, obviously. But 3 years ago or so, we were looking at an international opportunity. When and if certain circumstances arise, we think that's a compelling opportunity in addition to what we're seeing here. We've got the right toolkit to do that in our experience and knowledge. And the overall financial capability that we've got to think outside U.S. borders is good. So that's within our toolkit, and we'll see when and if those opportunities arise and then compel us to go beyond where we are today.

[indiscernible]. Yes, we do have some online inventory. Think about sub-storage [indiscernible].

Yes, Jeff, predictably, we saw 2022 being a year that wouldn't produce the amount of volume that we saw in 2021, which frankly was a very unusual year. We saw not only a traditional amount of small transaction volume take place. But in 2021, a handful of very large, unusually large portfolios came to the market as well. So in total, about $18 billion of transactions traded last year. This year, we won't come from a sector, anything flows to that. And part of that relates to the fact, frankly, no big portfolios have entered the market. One of the motivations in 2021 included some of the tax legislation that was being proposed. So a number of legacy owners were thinking it was the right time to transact based on that and based on valuations that were playing through. What our strategy was in 2021 and even it predated that going back to 2020 and 2019 as well as to look for assets that may not be stabilized, where we can buy them at a much more compelling price point and then pull it in our own portfolio and see the upside. And we did that both on individual and many of the larger transactions that we completed last year. Now this year, we've guided to about $1 billion transaction level. We're confident as we stand here today that that's likely. One of the themes that is consistent from last year, this year is the same investment thesis, meaning we're looking for properties, more often than that that are not stabilized. We see that as an opportunity to get that upside to not compete against the types of buyers that are out there that are willing to pay even today, aggressive cap rates for more stabilized assets. With that said, we're likely to see some elevated level of cap rates. We, like others, are predicting that it's probably in the 50 basis point or more range at this point, but we've just got to see more transaction volume play through over time and see the consequences of a higher interest rate environment and sell our aptitude to transact in an environment where they may not get as many bids, they may not get the same kind of valuation they got in 2020 or 2021. And with that, we'll see what plays through on cap rates going forward.

[indiscernible] what does that mean in terms of [indiscernible] which of the following [indiscernible] A, risk of [indiscernible], B, risk of recession or C, [indiscernible]?

Let's say B, Recession.

Which would involve [indiscernible] specific risk [indiscernible] for self-storage, number one [indiscernible]. Last, have you seen any [indiscernible] have you seen any signposted [indiscernible]. Great. Thank you very much.

Great. Thank you.