Public Storage (PSA) Earnings Call Transcript & Summary

Greetings, and welcome to Public Storage Fourth Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Ryan Burke. Thank you. You may begin.

Thank you, Rob. Hello, everyone. Thank you for joining us for our fourth 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, February 25, 2025, 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, publicstorage.com. We do ask that you initially limit yourselves to 2 questions. After that, if you have, of course, please jump back in queue. With that, I'll turn the call over to Joe.

Thank you, Ryan, and thank you all for joining us today. Tom and I will walk you through our performance, industry views and outlook. Then we'll open it up for Q&A. I will focus on 3 key themes. First, we ended 2024 on a positive note with results that reflected the stabilization we are driving across our business. We began 2024 by pointing out that a handful of markets were improving sequentially and that we expected more would follow [ suit. ] They did, and we ended the year with nearly all markets having inflected, and we are seeing broad operational stabilization. As a result, our quarterly same-store revenue growth improved sequentially for the first time in more than 2 years. This, coupled with strong performance in our sizable non-same-store pool and ancillary businesses helped drive core FFO per share growth positive. Similar to same-store revenues, this is the first sequential improvement in more than 2 years. Simply put, industry and portfolio fundamentals are steadily heading in the right direction. Second, we are inspired by the strength and perseverance of the Los Angeles community following the tragic fires nearly 2 months ago. We have a long-standing and deep connection here, and we empathize with those that have been affected. I am very proud of the team for keeping our properties secure and open to serve our customers. We welcome our new customers and thank them for choosing us in their time of need. We are deeply experienced in navigating states of emergency and look forward to Los Angeles reemerging as a long-term outperformer among self-storage markets. In the meantime, we are driving operational stabilization across the rest of our portfolio, and we expect sequential improvement to continue outside of Los Angeles in 2025. Third, through portfolio enhancement, industry-leading innovation and company-wide competitive advantages, we have positioned ourselves for opportunity as the industry environment improves. We recently completed the Property of Tomorrow program, a multiyear and more than $600 million investment into holistically rebranding our entire portfolio nationwide. This has further enhanced our brand positioning within local markets. As a result of completing the program, we expect our annual retained cash flow to increase from $400 million in 2024 to approximately $600 million in 2025, providing additional liquidity to grow our portfolio. Our digital transformation is advancing and further connecting all aspects of our business. Adoption by customers has been particularly swift with self-selected digital options now comprising 85% of our customer interactions and transactions, a significant increase from around 30% in 2019. The platform digitalization has helped drive our implementation of a new and more efficient operating model. One of the many ways we are flexing the platform and using AI is to staff properties more appropriately. We are now meeting customers when and where they need us instead of always having someone on site for 9 hours every day. As a result, we've reduced on-property labor hours by nearly 30%, and there's more to go. Importantly, we are doing so while also driving satisfaction higher among our customers and the 6,000-member property operations team. We are also actively rolling out our solar program, reaching nearly 900 properties and with more growth ahead. Our strong progress so far has resulted in a 30% reduction in utility use, which benefits our financial profile and the environment. These are just a few of our many active initiatives, and we are excited about further operational enhancement to come this year and beyond. With that said, we are mindful of the challenges that the industry still faces, including competitive customer move-in dynamics. Our team and strategies are calibrated appropriately as we are driving improvement across our portfolio. Now I'll turn the call over to Tom.

Thanks, Joe. On the capital allocation front, we have a $740 million development pipeline to be delivered over the next 2 years through our in-house team as we continue to invest while industry volumes decline. Acquisition activity has picked up with 26 properties acquired or under contract for $361 million in the fourth quarter through to today. We expect greater acquisition activity in 2025 than we had in 2024. With fundamentals improving and a multiyear period of declining competitive new supply, we are poised to increase activity. As always, our capital and liquidity positions are strong. Industry-leading leverage, balance sheet capacity and cost of capital have us positioned to execute across our growth channels. Now shifting to our financial performance. We achieved core FFO of $4.21 per share in the fourth quarter, a 20 basis point increase year-over-year. This was strong sequential improvement from the 300 basis point decline experienced during the third quarter. Same-store revenues declined 60 basis points year-over-year in the fourth quarter, also improving sequentially from the 130 basis point decline experienced in the prior quarter. Move-in trends are improving, existing customers are behaving well and occupancy is at a level that puts us in a good position as fundamentals inflect. As Joe mentioned, we expect the sequential improvement to continue across the portfolio outside of Los Angeles. Same-store expenses increased 90 basis points year-over-year with growth in property taxes offset by staffing optimization and additional expense controls. Now turning to the outlook for 2025. We introduced core FFO per share guidance of $16.35 to $17 with a midpoint that is consistent with 2024. This includes an estimated $0.23 per share impact from pricing restrictions, resulting from a state of emergency declared by the Governor of California in response to the fires. Excluding the impact, the midpoint would have called for a 140 basis point increase in core FFO per share year-over-year. Looking at the same-store, the midpoint calls for revenues to be down slightly year-over-year. This includes an estimated 100 basis point impact from the restrictions in Los Angeles. At the midpoint, we are assuming that move-in rents are down 5% year-over-year on average. We are also assuming that occupancy is down 10 basis points on average, an improvement from where we finished 2024. And as we've consistently seen, we believe existing customer behavior will remain steady. We expect 3.25% same-store expense growth at the midpoint, primarily driven by property taxes and offset by the initiatives that Joe spoke to. This leads us to same-store NOI declining 1.4% at the midpoint. As I noted earlier, we anticipate higher acquisition volumes in 2025. We've included the identified $140 million of closed and under contract volume, but we did not include any unidentified acquisition volumes in the range. Our outsized non-same-store portfolio of over 500 properties is poised to be a strong contributor again in 2025 with $454 million of NOI assumed at the midpoint. They will continue to be an engine of growth with additional NOI upside of $80 million beyond 2025 through stabilization. As we enter 2025, Public Storage is on solid footing following 2 years of demand and growth normalization. Our completed Property of Tomorrow enhancement program, industry-leading transformation initiatives, sizable and high-growth non-same-store pool properties and growth-oriented balance sheet will have us positioned for improving fundamentals and increased transaction market activity moving forward. Rob, let's open it up for Q&A.

Rob, this is Ryan. Are you there with us?

Yes, I'm here.

Let's go ahead and open it up for Q&A, please.

[Operator Instructions] Our first question comes from Jeff Spector with Bank of America.

Great. Thanks for the additional information in your opening remarks. Tom, can you talk a little bit more about the assumptions on street rate? I think you said you're assuming on average during '25, down 5% and occupancy down on average slightly -- I think you said 10 bps, but most specifically the street rate assumption, how do you derive that?

Yes, sure. Thanks, Jeff. So why don't I start with an update on year-to-date performance and speak to what we've seen to start the year. And we've seen continued levels of activity, demand stabilization that we talked through 2024 play out at the start of 2025 as well, giving some snapshot stats. The move-in volumes are up a strong 5% to start the year, move-in rates down about 8%. So on a net basis, continued improvement through move-in activity. Move-outs are flat, leading occupancy to be down about 40 basis points year-over-year as we sit here today, comparing to where we finished the year down 80 basis points. But we did start the year with moving rents down 8% or so. As we think about the full year, I highlighted a couple of the operational metrics to note. You seized on one of them, move-in rents down 5%. So that's obviously an improvement from where we're starting the year today. And we expect a continued competitive dynamics for new customer move-in rents through the year at the midpoint. We are anticipating that with demand stabilizing that we do see occupancy at a down 10 basis points level on average, so improvement in occupancy through the year. We're already seeing some of that year-to-date. Obviously, the high and low end of the range capture better or worse trends on those metrics as well. But we thought that was an appropriate midpoint for our outlook for the year.

Great. And then my second question is on your comments around stabilization. Joe, you started saying that the -- almost all markets inflected, broader stabilization, what's driving that? Is it simply less supply? I mean, are you actually starting to see an improvement in demand top of the funnel? Can you talk about that more?

Sure. Yes. The moderate but improving market-to-market demand factor is a positive trend. We spoke to that quarter-by-quarter through 2024. And as Tom noted, that's carrying us into 2025 as we start. So we have seen, as I noted in my opening comments, a number of markets that continue to inflect positive, that's a good trend. It's not a jump dramatically forward, but it's clearly not reversing. And we're seeing top-of-funnel demand by more Google search, for instance, industry-wide. We are seeing, again, moderate levels of improved activity, again, top of funnel. And then the thing that we continue to be very encouraged by are all the things we're doing from a conversion standpoint where customers are coming to us with a degree of higher interest in retaining or attaining self-storage space, but our conversion techniques are continuing to be highly optimized and very competitive. So with all those factors, Jeff, we're encouraged by this moderate but improving market-by-market growth. We're obviously pointing out some of the challenges, as I noted here in Los Angeles. But holistically, the portfolio at large, we're still seeing the level of improvement I spoke to, and we're going to continue to diligently capture as much as our fair share of market activities we can.

Our next question is from Todd Thomas with KeyBanc Capital Markets.

I wanted to ask about Los Angeles, specifically, the impact that you're estimating there amounts to the 100 basis point negative impact on the same-store revenue. Can you just discuss the underlying assumptions there around occupancy and rate growth? And are you assuming that impact is fairly consistent throughout the year? Or is the impact expected to be maybe a little bit greater earlier in the year than you would expect it to be as the year progresses?

Yes, Todd, that's a good question. So we did provide an estimate for the impact to same-store revenue that clearly flows directly down to core FFO of 100 basis points. As we think about the impact there, the primary driver of the impact is going to be rate. Occupancy remains healthy. Los Angeles continues to be a strong market for us really in and out of cycles given the demand and supply dynamics within Los Angeles. And so the 100 basis points that we're speaking to is really a rent restriction and pricing restriction impact. And that will have less of an impact in the first quarter, obviously, as we're starting here that it will as we move through the year. And so that 100 basis point impact will accumulate as we move through 2025. But you can think about that 100 basis points as the right guidepost for modeling purposes.

Okay. And then just stepping back and thinking about the portfolio more broadly, can you just discuss within the context of your remarks around continued stabilization and recovery in terms of fundamentals? Can you discuss trends across the Sunbelt and compare and contrast that to some of the coastal and more urban markets? Clearly, the Sunbelt normalized more or experienced a greater deceleration from a higher peak growth rate, looks like some of those markets stabilized a bit more this quarter and led the way. As you look to '25, does the Sunbelt recover more quickly? Or do you see some continued volatility there in the near term?

Yes, I can start, Todd, and then Tom can add additional commentary. One of the things that you pointed to is, yes, we still are dealing with some of the high flying markets through the extraordinary demand that we saw through the pandemic, et cetera. We are encouraged by that continuing to progress in the right direction off of, again, those pretty dramatic events and the demand that we saw. The other factor is supply itself. So in markets nationally, we continue to see declines more often than not in supply and deliveries of new product. There are still 2 or 3 markets we're keeping a particularly close eye on that would include Phoenix, Las Vegas, parts of Florida that we're continuing to monitor. Atlanta is another one. But those are the markets that still are not adjusting as effectively as the Nationwide portfolio as a whole. We've been talking about it now for the last couple of years, but we continue to see the holistic benefit of fewer and fewer deliveries taking place. The development business continues to be very challenging from an entitlement, timing and cost standpoint, coupled with the fact that pro formas often are not matching investment hurdles by many market developers. So that too has been a positive trend that we continue to see that we're going to see through 2025 and frankly, into 2026. And then Tom, you can add any other comment on top of that.

Yes. The only thing I'd add, Joe, is some specific market commentary. In the last year, at this time, we were highlighting Seattle, San Francisco and D.C. as markets that we're starting to see some improvement. That played out through the fourth quarter, continue to see good trends there. But as you're highlighting and Joe just noted related to the Sunbelt, some encouraging trends in some of the Florida markets, for instance, Miami and Orlando, both inflecting into positive second derivative territory in the fourth quarter. So we are starting to see some improvements further into the Sunbelt, which is encouraging.

Our next question comes from Michael Goldsmith with UBS.

First, on the transaction market, it sounds like you have great visibility into more activity in 2025 than last year. So what's driving a more liquid market? And where are acquisition cap rates settling in right now?

Yes, Michael, a couple of things there. So 2024 is a stage setter ended up being a multiyear low sector transaction year. Very few large portfolios trade at hands. And the bulk of the activity was one-off transactions. But all told, there was plus or minus about $4 billion of transaction activity in the sector at large. Going into the fourth quarter of 2024, we did see a bit of an uptick on the latter half of that activity level, meaning the one-off smaller transactions. So we were able to capture a number of attractive opportunities in the fourth quarter that carried into so far, the activity we've seen early into 2025. Tom mentioned, we've either closed or have under contract approximately $140 million of activity. Again, highly leaning toward these one-off transactions, no different than Q4. But between Q4 and Q1 now, we've taken down about $400 million worth of acquisition activity. It's hard to tell if in 2025, we're going to see a different level of bigger portfolios coming to the market. Through last year, we talked to, from time to time, some of the inbound activity we were getting on some of these larger portfolios. Frankly, almost none of them ended up trading hands. Very few of them did, in fact, and we'll see how different 2025 plays out. There's still a level of activity that could come through on these larger portfolios, but very hard to predict at this point.

And just to clarify, where are cap rates right now?

Yes, sure. On cap rates, I'd point you to a similar ZIP code that we've been indicating really for the last 1.5 years or so. And obviously, cost of capital, interest rates, they've moved around a little bit through the year, but I'd still be pointing to kind of 5s cap rates getting into 6s as the right guidepost for cap rates. And obviously, lease-up assets are going to be a little bit different than that. I'm speaking more to stabilized properties.

And then as a follow-up here, it sounds like demand is stabilizing, moving volumes are up slightly, but it's not necessarily translating to pricing power for new customers. So is the missing ingredient just for demand to pick up for pricing power to return? Or is there something else that can help generate the move-in rents to move higher?

Sure. Thanks, Michael. So I think stepping back, the level of demand that the industry is seeing has come off the highs of several years ago. But last year, we were specific in highlighting that we viewed it as the year of stabilization. And if you look at Google search activity for storage-related keywords or other metrics, we did experience that stabilization through last year, and we're starting the year in a similar place to where we've started last year. So that's encouraging. The demand is not falling. So that's the first step in the ingredients that you're speaking to. In terms of the year this year, we are not anticipating that we see a significant uptick in demand through this year. So pretty similar trends as we think about our demand drivers in '25 compared to '24. So we're not expecting a big seasonal uptick, for instance, or a sharp return in housing transaction volumes. It feels like 25% is going to feel pretty similar to 24% across many of those demand dynamics. And so we're not anticipating that, that there are big shifts there. And obviously, to the extent that demand does pick up for any number of reasons, which we can speak to, that should lead to better pricing power across the industry and better financial performance that would flow through thereafter.

Our next question comes from Juan Sanabria with BMO Capital Markets.

Just hoping you could talk a little bit about expenses and some of the assumptions behind some of the individual line items. And as part of that, if you wouldn't mind talking about your views on any potential risks to changes in immigration policy impacting labor costs or less environmentally friendly administration, maybe removing some of the benefits of solar initiatives you put pass through?

All right. That's a lot, Juan. So let me take through those. So in terms of expenses for '25, taking through some of them, the biggest driver of expenses will once again likely be property taxes. Another increase is likely to be indirect cost of operations, some of the investments we're making on the team there will lead to increases. Those will be offset by payroll efficiencies that Joe spoke to earlier and continued improvements in our digital platform that will enable that. And so that will be a mitigant. And then solar, properties that we added in '24, we'll get full year benefit of those that reduced utility usage in '25. And then we're going to have another active year of additions this year. In terms of policies towards solar and whatnot, we'll obviously navigate those as we go. But the investments that we've made in solar to date have been very strong returns, call it, 10% to 15% unlevered IRRs on those investments. So we view those as attractive investments, and we're seeing that utility savings as we sit here today. And we think that, that has a big opportunity for us over the longer term given the sizable nature of our roof presence across the country and the likelihood that utility rates continue to rise and solar panel prices come down. So more opportunity there kind of regardless of policies over the medium to longer term.

And then, just hoping you could speak a little bit about the pricing dynamics for new customers and any sort of impact from the comp period of last year with the achieved rates going up a bit to start the year. I think you said fourth quarter was 5% and year-to-date is down 8%. And then kind of weaving in what you're doing on the promotion side, which increased a bit in the fourth quarter and just how we should think about the interplay there between promotions and achieved rates, et cetera?

Yes, sure. Happy to go into some of those dynamics. I always like to highlight that we really have 3 tools that we're pulling really at local level markets opportunities with both promotions, advertising and moving rents. They each drive different performance amongst customers. Some are helping top of funnel, some conversion, et cetera. And so you did see some variability year-over-year in some of those metrics, but I would point you to the fact that those are relatively modest changes over time. If you look at our marketing spend as a percentage of revenue as a guidepost, for instance, 2.4% of revenue in the fourth quarter and roughly consistent with prior year. We continue to see very strong returns on our advertising spend given our strong brand presence and our digital platform investments that we've made over the last several years. On promotions, we utilized some of the more near term, call it, first month promotions through the fourth quarter. But again, those promotions as a percentage of revenue at about 1.7% of revenue remain below historical averages and frankly, is a tool that we'll consider using into 2025 as well. And then moving rates, as you highlight, has been a notable area of competition amongst storage operators over the last several years. It continues to be a very competitive move-in environment today, and we'll use that lever also.

Our next question comes from Nick Joseph with Citi.

I was just going to go back to L.A. and just understand the moving parts. I think if I look your RevPAR, it's about $36 right now. So where is market rent in L.A. for the purpose of the emergency restrictions? And then how does that impact kind of new move-ins as far ECRIs?

Yes, sure. So the state of emergency triggers price restrictions within Los Angeles and Ventura counties. That results in a 10% pricing restriction. And overall, we've estimated and rolled that through our models that results in about a 100 basis point impact for same-store revenue in 2025. So I would point you to that 100 basis points of same-store revenue impact from Los Angeles.

Right. I mean, I guess the question is, how is market rent defined, right? So if you're at $36 right now, what does that do to ECRIs? And what does that do as kind of new people move in?

Yes, it has an impact to both. And so we'll take that into consideration. And we obviously did that in terms of forecasting the impact on same-store revenue to arrive at that about 100 basis point impact to same-store revenue, [ Eric. ]

All right. And then just on capital allocation. I think last year, you were repurchasing some shares. This year, you've more recently issued. So just curious on the framework you're using for kind of the decisions, the buybacks versus equity issuance.

Yes, sure. So as we've consistently noted, the stock is one of the things that we evaluate as we think through capital allocation as we evaluate development, acquisition activity as well. And as we move through the second quarter of last year, acquisition volumes were quite low and seller dialogue was lower, as Joe mentioned, one of the lowest transaction volume years that we've seen over the last 6 or 7 years. And at the same time, our stock was at a place that we viewed value, and we didn't think it was reflective of the improving fundamentals that we were seeing on the ground. And so we did repurchase $200 million in stock in the second quarter. At the same time, we are anticipating and expecting that 2025 will be a busier year for acquisition activity, and we're hopeful that more ultimately comes to market, and we're poised to participate in that. And we thought it was prudent to add an ATM program to our toolkit, which has consistently included retained cash flow, unsecured debt preferreds to fund acquisition activity. And so we did introduce our first ATM program in the fall. We took that for a test drive in the fourth quarter.

Our next question comes from [ Spencer Glipscher ] with Green Street.

I just have one more on the L.A. rent restrictions, and I apologize as I realize it's a very sensitive topic. But how much transparency you guys the state in terms of the duration of these restrictions? And do you have any sense of when you'd get an update on a potential extension of the rent cap?

Yes, [ Spencer, ] it can vary depending on, a, circumstances; and then b, the latitude that either the governor or frankly, even going down to certain municipalities, ultimately decide when and where to issue a state of emergency. Clearly, the impact from the L.A. fires was significant directly into L.A., maybe in our view, less so in the Ventura County, but the governor took that opportunity to actually extend the state of emergency for a full year. That's somewhat unusual, meaning that out of the gate, he would use the statute to do something for that duration. But it is in place now technically through January of 2026. And from that point forward, we'll have to see what transpires.

Okay. And you provided some helpful comments earlier on your robust development pipeline. I know you've slightly touched on labor and immigration policy. But anything you can share as it relates to the development pipeline in terms of how input and/or labor prices have changed in recent months? And how confident you feel about hitting development yields just in light of these fluctuating like input prices?

Yes, it's too soon to tell, [ Spencer, ] if, in fact, market to market, we're going to see immediate or some transition to either labor pressure, whether it's availability and/or costs. We're keeping a very close eye on that. But with the multistate development activity that we've got going on, nothing yet has surfaced that would indicate that immigration policy in and of itself may change that very directly in the near term. But again, we're keeping a very close eye on that across the board. Same thing for anything that may or may not be impacted by tariffs, et cetera. I think it overall just points to the fact that development continues to be a business that you need to know very well right down to a local area, the dynamics that play through, the cost structure, the risks, et cetera. In a reverse way, that's actually something that I think is going to create additional discipline relative to the volume of development activity that will likely play through in the coming year or 2. So we -- as we have had in the past, can maneuver around some of these very differently than most other developers because of our national scale, the buying power that we have for component costs, the skills that we've got and the ways that we're trying to effectively manage around those risk factors. So it's, again, a changing environment likely, but too soon to tell to what degree.

Our next question comes from Samir Khanal with Evercore ISI.

I guess my question is around ECRIs this year and how are you broadly thinking about that dynamic as you thought about guidance, especially with headwinds on the consumer, you've got potentially a slower job growth market. Do you expect ECRIs to hold at this point this year? So it's kind of a sort of more of a broad comment for various markets. I know we've talked about L.A., but just broadly, how are you thinking about that?

Yes, sure. So, as I noted earlier, we continue to see really good performance from our existing customer base. And really looking at any metric, be it delinquency or move-outs, we continue to see really strong performance there. And our testing and modeling indicates very consistent price sensitivity as well. And so big picture, the midpoint of the guidance range assumes for same-store revenue that we see pretty consistent performance as last year and contribution from existing customer rent increases away from Los Angeles. And obviously, in Los Angeles for everything we just -- we highlighted, we'll have a lower contribution. So in aggregate across the country, a lower contribution year-over-year, but really pretty consistent performance in other markets.

And then just as a follow-up, I'm sorry if I missed this, but you talked about moving rents to be down 5% at the midpoint of guidance. What are you assuming at the high end of the guidance?

Yes. At the high end of the range embedded in those assumptions is about a 3% decline in moving rents on average. So steady improvement through the year there.

Our next question comes from Ki Bin Kim with Truist Securities.

Can you just remind us what were the ECRI increases in L.A. last year? Just trying to calibrate how much that 1% reserve accounts for a potential limit on ECRIs.

Yes. No, I think in L.A., like every market, we take -- there's a wide variety of different increases, both frequency and magnitude that we'll utilize. L.A. was no different than a typical market last year. And again, I would point you to that 100 basis point same-store revenue impact from Los Angeles in 2025.

Okay. And this might be a little bit early, but are you seeing any signs of increased housing turnover in the D.C. area? Perhaps related to DOGE...

Ki Bin, we're keeping a close eye on that, too. Obviously, a lot of headlines coming out of D.C. with DOGE and the different ways that employment levels in that market could change, but far too soon to tell. I couldn't guide you to anything that we've seen on the front lines yet.

[Operator Instructions] Our next question comes from Caitlin Burrows with Goldman Sachs.

I guess maybe just going back to the capital allocation question. It sounds like you're constructive on the acquisition outlook and equity is one of the tools that you could use. So just wondering if you could comment on kind of target leverage levels where you are today. Would you look to keep leverage where it is? Or what would make you maybe want to go lower or higher?

Yes, sure. On acquisitions, as Joe highlighted, we are optimistic that there will be more activity this year. We are going to be relying on interest rates and things like that, that will skew the levels of seller dialogue and activity this year the way we have the last several years, where we've seen certain quarters where dialogue picks up and then slows down, but we're overall quite optimistic is how we're starting this year compared to last year. In terms of leverage, specifically, we finished the year with net leverage at 3.9x net debt and preferred to EBITDA. Our long-term target is 4x to 5x. So we continue to have a leverage level that's a touch below our long-term average. And so certainly, capacity to add leverage through unsecured debt and preferreds. At the same time, Joe highlighted that our retained cash flow is increasing from $400 million to $600 million this year, and we would look to deploy that into the acquisition market as well. And then as you noted, we did add an ATM program in place as well as an additional tool. But I really feel like we have a lot of great tools to finance the business and activity into 2025 and are hopeful that there will be good opportunities to utilize those tools.

Okay. And then I know you talked a little bit about development earlier. Wondering if you could give any more detail on like how much the PSA portfolio was impacted by other supply headwinds in 2024. And how that factors into your -- or I guess, what you're expecting for 2025 supply headwinds and how that factors into guidance?

Yes, sure. The overall industry-wide, our data that we're looking at would indicate that new supply as a percentage of existing stock around the country was right around 3% last year. We are anticipating that, that will decline down to circa 2.5%, plus or minus in '25. So some modest improvements there as part of really what has been a multiyear decline in overall deliveries over the last several years. So we anticipate a benefit there.

Our next question comes from Ronald Kamdem with Morgan Stanley.

Just 2 quick ones from me. I think you talked earlier about sort of the benefit of the mobile app and being able to reduce sort of labor hours. I guess I'm just curious as AI sort of proliferates, are there any sort of obvious low-hanging fruits, whether it's leasing accounting that you guys are looking at where AI could have an impact?

Yes, sure, Ronald. There's a lot of areas, as I mentioned, that tie to AI relative to the whole digitalization that we've actually been working on now for multiple years. The combined benefit, whether it is through the app, which now we've got now 1.5 million customers using that tool whether it's through the way we're interfacing with customers, there's new and different tools there, either through our care center, the things that we're doing on our website, et cetera. So the penetration and optimization from an AI skill and impact standpoint continues to grow. We continue to be very cautious relative to how far we take that step by step, but we're seeing very good balance of skill and impact versus the investment that we're making into those tools. Very uniquely, the overall investment we've made into our entire digital platform is highly additive, not only to optimizing efficiency from our standpoint, but it's customer satisfaction, customer processes. Again, we're seeing very strong conversion opportunities. A lot of that ties to, again, the way that we're putting different tools into each and every channel that we interface with customers. So a lot more to come there, but we're very encouraged by the investment and the impact that, that continues to have not only customer interaction but also margins, efficiency, employee satisfaction, employee skills, et cetera. So a lot of good things to come there.

Great. And then my second question is just going back to the CapEx commentary on the property enhancements being over. Is that something that happens every couple of years and so forth. And then the energy efficiency spending, is that something we should expect to also sort of go away at some point?

So there are some deep areas there that with a 250 million square foot portfolio, we've got a lot of great things to do with efficiencies relative to the infrastructure of our properties, whether it's HVAC related, whether it's solar related, whether we can continue to invest in the right long-term tools that whether -- again, we see cost savings and/or optimizations from an energy efficiency standpoint. The Property of Tomorrow program was, frankly, that was about a 20-year cycle where we stepped back 5-plus years ago and made the commitment to holistically change the entire branding of the portfolio, which we hadn't done in the last 15 or 20 years in one fell swoop. So that's not anything that we do every couple of years. We hope to get a very good long-term usage out of that investment. On top of that, though, the day-to-day environment of either optimization, whether it's lighting, whether it's energy efficiency, new tools around solar as we've continued to talk about and other ways that we'll make investments in the properties to make them that much more optimized are things that we take on a case-by-case basis. And I think we continue to see good returns where and when we make those investment decisions.

Our next question comes from Mike Mueller with JPMorgan.

Sorry, 2 more L.A. questions. I guess, first, are the headwinds in the forecast coming only from lower ECRI potential? Or are you not able to have a kind of a normal seasonal lift in move-in rates as you move into the spring? And then the second question was, can you give us a sense as to how different your year-over-year move-in rate assumption of down 5% would be if you strip L.A. out?

Sure. So 2 components there. One is the first one around what are the primary drivers of the 100 basis points, and I would point you to existing customer rent increases as being the primary driver of that impact. And that goes then to the second question around what the move-in rents look like. I would say move-in rents in L.A. are a little bit better than the company average was before the state of emergency and continues to be, and that speaks to the strength of overall fundamentals in Los Angeles kind of in out of cycles through last year and anticipated improvements over time there. And so on that, the rest of the country was probably a little bit worse than L.A. going into the state of emergency. And the state of emergency pricing restrictions aren't likely to have a significant impact on move-in rents and more of the impact being felt on existing customer rent increases.

Our next question comes from Brendan Lynch with Barclays.

Great. Wanted to ask about acquisitions and any particular markets that you might be targeting or an urban versus suburban SKU or any other property characteristics that you're aiming for?

Yes, Brendan, I wouldn't say one focus puts us in a different priority, whether it's urban, suburban or geographic. It comes right down to the quality of the individual asset and how we see value creation relative to the position we may already have in the market and/or with larger portfolios, how benefited we might be from multiple assets going into multiple markets. So it's a combination of all of those things, but our underwriting process goes right down to an individual asset and the value that we see from that asset, the contribution it makes to the scale and the effect of this we may have in the market. So we aren't limiting ourselves to either specific geographies and/or urban versus suburban characteristics, and we'll continue to see opportunities across the whole spectrum.

Great. That's helpful. You're also guiding to lower street rates year-over-year, but maybe not giving up so much on occupancy or don't anticipate doing so. Can you just walk us through your thought process on these components and where you're planning to be more stern versus more flexible?

Sure. So we've already spoken a good bit about the move-in rent assumptions. As it relates to the occupancy assumptions, it relates to the expectation that we are experiencing stabilization in demand, and we'll continue to navigate through that. And so we've seen over the last several years, declines in occupancy, but less so each year and anticipate that, that's the case this year. Ultimately, we're looking to maximize revenues overall, not looking specifically to occupancy or rental rates, and that's how we think about day-to-day the pricing algorithms and optimization processes that take place day in and day out. In terms of the range there, right, occupancy is expected to be better on the higher end and a little softer on the lower end as you'd anticipate. But generally speaking, a relatively flat occupancy year against the demand backdrop that we're expecting to be relatively consistent.

Our next question comes from Tayo Okusanya with Deutsche Bank.

Just a quick question around consumer sentiment data came out today pretty weak. A lot of retailers this week have kind of been talking about kind of a softer consumer. Curious again how you guys are kind of thinking about that in the context of demand and pricing, if not for all of 2025, at least on a near-term basis in the first half of '25.

Sure. I think over the last several years, retailers have consistently pointed to a softer consumer, softer activity. And one of the benefits of storage that we've experienced is some of those customers or really the customer cohorts that have moved in over the last several years have been some of our stronger cohorts over time in terms of delinquency, move-out trends and the like. And so while the retailers are certainly seeing one thing, I think the storage customers continued to be resilient over the last several years. And we're experiencing that as we speak, starting 2025 as well. No question, that's something we watch very, very closely. But not something that we've seen the way maybe some of the other retailers have highlighted. In terms of overall demand, though, no question we've seen overall demand for storage come down from the highs of 2021. And we've spoken a good bit around some of the mix shift between housing transaction volumes and people that ran our space at home. But overall, we're viewing this year as a year pretty similar to last year across those metrics. And so we are encouraged by customer behavior through '24 and to start '25.

Our next question comes from Caitlin Burrows with Goldman Sachs.

I just had a follow-up on maybe development yields. You guys gave some nice kind of square on previous years of development and how those are, I guess, leasing up in the yields they're producing. But as you guys think about the more recent developments and then projects in process, could you give a little color on how you're expecting those to kind of lease up and the pace at which they reach stabilization and whether that's changed in recent years?

Sure. Yes, we continue to underwrite and target 8% plus or minus target yields. And as you noted, we continue to meet or exceed those in prior vintages. In terms of lease-up pace, we consistently are underwriting circa 3 to 4 years to reach that level of stabilization. No question, we saw faster lease-up and stabilization in some of the vintages that delivered during the really strong demand periods in '21, for instance, in 2020. But consistently, we're expecting that it will take 3 to 4 years as we obviously open the property and start from a 0 occupancy spot.

Got it. And so it doesn't sound like there's been any change to that, like, again, 8% target over 3 to 4 years?

No, that's right. We think that's a very strong risk-adjusted return and one that we'll continue to target.

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Ryan Burke for closing comments.

Thanks, Rob. And as always, thanks to all of you for joining us. Have a great day.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.