Public Storage (NYSE:PSA) Q4 2023 Earnings Call Transcript February 21, 2024

Public Storage isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the Public Storage Fourth Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Ryan Burke, Vice President of Investor Relations and Strategic Partnership, for Public Storage. Thank you. Mr. Burke, you may begin.

Ryan Burke: Thanks, Rob. Hi, everyone. Thank you for joining us for our fourth quarter 2023 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 21, 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, supplement report, SEC reports and an audio replay of this conference call on our website, publicstorage.com.

We do ask that you initially limit yourself to two questions. Of course, if you have more, please feel free to jump back in queue. With that, I'll turn it over to Joe.

Joe Russell: Thank you, Ryan, and thank you for joining us today. Tom and I will walk you through our fourth quarter and full year 2023 performance, industry views and 2024 outlook. Then we'll open it up for Q&A. 2023 was a year of significant achievement for public storage amidst a competitive industry environment. The team elevated our customer experience and financial profile through digital and operating model transformation. Enhanced existing properties with over 500 solar installations and the Property of Tomorrow program. Advanced complementary business lines, including tenant reinsurance and third-party management and grew the portfolio through acquisitions, development and redevelopment. We did so while maintaining one of the real estate industry's best balance sheets, which is poised to fund growth moving forward in conjunction with significant retained cash flow.

Just a few of our collective accomplishments include: exceeding 3,000 owned properties and serving nearly 2 million in-place customers. Achieving an approximately 80% stabilized direct NOI margin through revenue generation and expense efficiency that only Public Storage is capable of. Acquiring and quickly integrating the $2.2 billion Simply Self Storage portfolio with approximately 90,000 customers across nearly 130 properties. This was the largest private acquisition in company history. Increasing the size of our high-growth non-same-store pool to 705 properties and 63 million square feet now comprising nearly 30% of our overall portfolio. Generating record revenues, net operating income and core funds from operations. Accelerating growth in third-party property management, adding 132 properties and reaching 324 properties in total.

And receiving several accolades tied to sustainability including NAREIT's Leader in the Light Award, a second consecutive great Place to Work award and achieving top scoring benchmarks among U.S. self-storage REITs. The strength of our team, platform and brand was evident with move-in volumes up an impressive 9% in 2023, despite a backdrop of weaker customer demand during the year. The new customer environment remains challenging, but we have seen a degree of improvement in move-in rent trends recently. And our in-place customer base continues to perform well with average length of stay that are longer than the historic norm. We expect demand from new customers to stabilize during 2024 and the behavior of existing customers including our recent move-ins to remain strong due to clear macro conditions, including the potential for a soft landing, the potential for easing interest rates, resilient consumers, leveling home sales and strong home renter behavior.

We also anticipate fewer completions of new self-storage facilities nationally reducing the competitive impact of new supply in our local markets. All in, the industry is in better position entering 2024 than it was entering 2023. The full Public Storage team is focused on exercising our competitive advantages, which include advancing our digital and operating model transformation, expanding complementary businesses and creating partnerships across the broader industry, growing the portfolio through acquisitions, development, redevelopment and third-party management, and funding innovation and growth today and into the future with the industry's best balance sheet. All of this adds to the growth of our business over the near, medium and long term.

And it comes at a time with the potential for further stabilization in the move-in environment, existing customers exhibiting strong behavior and an outlook for new competitive supply that is clearly in our favor. With good trends in customer demand, less pressure from new supply and our numerous competitive advantages, we are well positioned for 2024 and beyond. Now, I'll turn the call over to Tom.

Tom Boyle: Thanks, Joe. On to financial performance, we finished the year reporting core FFO of $4.20 for the quarter and $16.89 for the year, ahead of the upper end of our guidance range representing 1% growth over the fourth quarter of '22, and 8.3% growth for 2023 overall, excluding the impact of PSB. Looking at the same-store portfolio, revenue increased 80 basis points compared to the fourth quarter of '22, at the higher end of our expectation. That was driven by better move-in volume and move-in rate performance. On expenses, same-store cost of operations were up 5.1% for the fourth quarter, largely driven by increases in marketing spend to support that move-in activity. In total, net operating income for the same-store pool of stabilized properties declined 50 basis points in the quarter.

Meanwhile, the non-same-store NOI grew 31% and 25% for the fourth quarter and '23, respectively, demonstrating the continued strength of our lease-up and non-stabilized assets. Now turning to the outlook for '24. We introduced 2024 core FFO guidance with a $16.90 midpoint on par with 2023. As Joe mentioned, we entered the year more encouraged than we were last year at this time. We've seen the industry work through the declines in new customer demand from the peaks of 2021. We're anticipating that new customer demand stabilizes in 2024 as the macroeconomic picture becomes clearer. That paired with a consistently strong consumer and lower new competitive new supply. If we look at the same-store outlook for '24 specifically, the midpoint calls for revenue on par with '23.

Similar to last year, move-in rates continue to be the biggest variable in the forecast heading through 2024 as well. We're anticipating at the midpoint case that move-in rents lap easier comps through the year, and crossed zero on a year-over-year basis towards the end of the summer. And occupancy results down 80 basis points, which is roughly on top of 2019 occupancies as we sit here today. Our expectations are for 2.75% same-store expense growth driven primarily by property tax and marketing expense. That leads to same-store NOI growth at the midpoint of a decline of 90 basis points. Our non-same-store acquisition and development properties are poised to be a strong contributor again in 2024, growing from $370 million of NOI contribution in '23 to $505 million at the midpoint and will grow from there in future years.

In addition, embedded in the outlook is incremental acquisition and development activity, $500 million of acquisitions, and we plan to deliver a record $450 million of development in '24. Finally, our capital and liquidity position remains solid. Our leverage of 3.9x net debt and preferred to EBITDA combined with nearly $400 million of cash on hand at quarter end puts us in a very strong position heading into 2024. With that, I'll turn it back to you, Rob.

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