Ladies and gentlemen, thank you for joining us for the Public Storage Second Quarter 2022 Earnings Call. All participants are currently in listen-only mode, and we will open the floor for questions after the presentation. It is now my pleasure to hand it over to Ryan Burke, Vice President of Investor Relations. Ryan, you may begin.

Thank you, Chelsea. Hello, everyone. Thank you for joining us for our second quarter 2022 earnings call. I’m here with Joe Russell and Tom Boyle. Before we begin, we want to remind you that certain matters discussed during this call may constitute forward-looking statements within the meaning of the federal securities laws. These forward-looking statements speak only as of today, August 5, 2022, and we assume no obligation to update, revise or supplement statements if they become untrue because of subsequent events. A reconciliation to GAAP of the non-GAAP financial measures we provide on this call is included in our earnings release. You can find our press release, supplement report, SEC reports, and an audio replay of this conference call on our website at publicstorage.com. We do ask that you initially limit yourselves to two questions. Of course, if you have an additional question, feel free to jump back in the queue. With that, I’ll turn the call over to Joe.

Thank you, Ryan. Good morning, and thank you for joining us. Tom and I will cover second quarter highlights as we achieved a number of record performance metrics and milestones. Now that we are past the midpoint of the year, we are happy to share our view of the next six months, which has resulted in our guidance raise. Before I go to those details, I would like to take a brief moment and acknowledge a significant milestone for Public Storage that takes place this month. On August 14, 1972, Public Storage was launched by two creative and determined entrepreneurs, Wayne Hughes and Ken Volk, opening the first Public Storage facility in El Cajon, California. The concept of paying to store items was new. But the simple name, a great location, and roll-up doors painted the color of orange created a powerful formula to grow the Company, so much so that our brand quickly became synonymous with the self-storage industry. Now, five decades later, the Public Storage team and I are inspired to stay just as focused on entrepreneurial pursuits, expanding the iconic Public Storage brand, and empowering the 5,500-plus dedicated employees that cater to our 1.7 million customers on a daily basis. We appreciate our shareholders, particularly those that have continued their commitment to Public Storage over our history, while knowing we have the right culture to ensure an equally bright future. Now to Q2 results. Business year-to-date remains quite good, with robust performance in both our same-store and non-same-store portfolios. New customer demand through the typical summer leasing season has been exceptional, as well as the growing length of stay with existing customers. This is against the backdrop of muted new property deliveries in most markets. We have good pricing dynamics on both move-ins and with existing customer rate increases, leading to the highest rent levels we have seen historically. Arguably, a number of the pandemic-related drivers to our business are receding, but we are pleased to see elevated levels of demand, new customer adoption, and longevity of use. Customers, consumers, and businesses alike are still in need of more space for a variety of reasons that include decreasing affordability of renting or owning a home, tight inventories of commercial space, hybrid work environments, and the typical movement that takes place nationally this time of year. I would like to highlight a handful of particularly significant milestones or firsts in the quarter. We achieved $1 billion in revenue, our average length of stay is now 39 months, operating margins exceeded 80%, our development pipeline has reached $1 billion, and we have been named by Forbes as Best Place to Work by our employees. Now to acquisitions. By all accounts, 2021 was a historic year, and we were pleased to capture approximately 30% of the total sector volume. These 230 assets are performing well, in fact, above expectations, with more growth ahead for the entire 525 properties in the non-same-store portfolio that is now over 50 million square feet. As we anticipated, 2022’s acquisition volume has shifted down with fewer large portfolios entering the market. We are also getting more last calls from sellers and brokers with fewer buyers in the market. Cap rates have adjusted up and could move further. It’s a different playing field, and we anticipate some interesting opportunities with over $1 billion in cash, a balance sheet prime for growth, and a reputation as a preferred buyer. The self-storage sector and our own history point to resilience in times of economic change, including recessions of varying degrees. We too are looking for all ways to interpret any shift in customer demand and behavior. We are well positioned to compete for customers across all of our markets with the exceptional scale and product offerings in the 39 states we operate in. Our same-store and non-same-store assets are poised to deliver strong results through the second half of 2022, positioning us well for whatever may play through as we enter 2023. Our leadership team is well equipped to grow and deliver exceptional shareholder returns. Now, Tom will share some financial highlights with you as well.

Thanks, Joe. We reported core FFO of $3.99 for the quarter, representing 26.7% growth over the second quarter of 2021. Our first half results represent a strong start to the year and an acceleration from 2021. Let’s look at the contributors for the quarter. In the same-store, our revenue increased 15.9% compared to the second quarter of 2021. Growth was driven by rates, once again, with two factors leading to the continued strength: first, strong move-in rates that were up 12% versus 2021; and secondly, existing tenant rate increases contributing with a lengthening customer stay. Los Angeles was a particularly strong contributor, accelerating from 12% same-store revenue growth in the first quarter to 17% in the second quarter and will continue to accelerate into the third. Moving down the P&L, same-store cost of operations were up 7.6%, driven by growth in property payroll, utilities, and marketing. Our strategic initiatives, including operating model efficiencies and LED and solar investments helped offset a portion of the wage and utility inflation. In total, net operating income with the same-store pool of stabilized properties was up 18.7% in the quarter. In addition to the same-store, the lease-up and performance of recently acquired and developed facilities remained a standout in the quarter. There is significant growth ahead from this pool of properties as well, which is a good segue to our outlook for the remainder of the year. As Joe mentioned, we raised our outlook for the second half. In April, we provided our core FFO outlook with a $15.20 midpoint. The PSA business outlook improved by $0.37 or 2.4%. The improved outlook is driven by strong performance from our non-same-store pool of assets and, to a lesser extent, ancillary growth and a reduction in interest expense. On net, our year-to-date performance has been in line with our expectations, but our outlook for the second half is improving. We did reflect the impact of the sale of PS Business Parks and a corresponding $0.22 impact resulting in a new midpoint of $15.35 per share of core FFO. And associated with the PSB sale, yesterday, we paid a $13.15 special dividend, returning capital to our shareholders. Overall, our capital and liquidity position remain strong, as Joe mentioned. We have a well-laddered long-term debt profile and $4 billion of preferred stock with perpetual fixed distributions. With $1 billion of cash on hand at quarter-end and 3.7 times net debt and preferred to EBITDA, we’re well positioned to finance the growth initiatives ahead. With that, we’d like to open it up for questions.

Thank you. And our first question will come from Jeff Spector with Bank of America.

Great. Thank you. Good morning. My first question is about the outlook for the second half. Could you elaborate on your comments regarding its improvement? How do you think this will affect the setup heading into 2023?

Yes. Jeff, good morning. As Tom and I highlighted, we continue to be encouraged by the health of the business. You start with customer demand. Quite good. We’re seeing top of the funnel demand that continues to encourage us that the adoption of self-storage is quite robust across our markets. The existing customer behavior has been consistent, and if anything, continues to encourage us relative to customers needing and using their space for longer periods of time. Our average length of stay now is 39 months. Compare that to about a year ago, and it was around 34 months, very encouraging. The things that I spoke to relative to muted deliveries across, again, the national market as a whole are also quite healthy, meaning that we’re not seeing any particular market getting burdened by an unusual or heavy level of new supply. That’s always a good thing for the business. And we’re, again, measuring the changing dynamics that go with the 1.7 million customer base that we have. And we’re really not seeing from a cohort standpoint any change in behavior or elevated levels of stress by cohort. So that too is very encouraging. So, with all that said, coupled with the fact our same-store continues to perform quite well. And on an exceptional basis, our non-same-store, as I mentioned, is very well poised to continue to deliver good results, not only through this second half of the year, but going into 2023. With all that said, Tom can give you a little bit of perspective on what we’re thinking through the end of the year and what that positions us to do going into 2023?

Sure. Thanks, Joe. So, in particular, I’ll highlight two elements as we think about where we’ll play out through the second half and then go into 2023. I’ll hit on both the same-store as well as the non-same-store because I think they’re both important. So, as we look at the same store, as you recall, we initiated a strong outlook for same-store illustrating or demonstrating acceleration from 2021 at the start of the year. Frankly, we’re executing right along that path. The assumptions as we move into the second half on the same-store are pretty consistent and quite strong with modest deceleration into the second half given the tough comps that we have, particularly on rates, but also the typical seasonal occupancy pattern that we’re expecting this year more than we’ve seen in the last couple. So, call it a 250 basis-point occupancy decline. So strong trends within the same store. If you just look at what the first half performance is and the implied outlook for the second half, it implies an outlook or an exit level of revenue growth with low double digits on it, which is frankly not too dissimilar to where we started this year. So, a good outlook through the same-store in the second half and then I’m expecting your question is leading to the 2023, which is also a good setup for 2023. On the non-same-store, as we’ve highlighted now a number of times in our prepared remarks, continues to exceed our expectations. So we did lift our outlook for the year in the non-same-store by $40 million. But importantly, that wasn’t just a pull forward of stabilization activity. We actually raised our outlook of what those assets will stabilize with. There continues to be a strong outlook for growth in 2023 and beyond from that level of capital that we deployed to date. So, all encouraging trends as we look forward to 2023.

Great. Thanks. That was very helpful. I have a follow-up. Joe, you mentioned that cap rates are increasing, and we saw you at NAREIT. While there seems to be limited information, I believe this earnings season is a significant discussion point across all sectors. Can you elaborate on your comments regarding cap rates? More importantly, what are your thoughts on asset values? Where do you think storage asset values stand today compared to six months ago?

Yes, there are several factors to consider. Trading volumes year-to-date are significantly different compared to 2021. We’ve seen far fewer, if any, large portfolios around $1 billion or more being available or trading in the market. The information we’re tracking related to cap rate impact pertains to a smaller segment of the market, whether it’s individual assets or smaller portfolios, and it varies based on asset quality and stability. With interest rates increasing, the Fed's future actions will further influence the impact of these rates. The level of bidding activity also reflects how aggressively buyers are pursuing certain types of assets. We expect cap rates to have elevated by about 50 basis points and may trend slightly higher, depending on the ongoing interest from capital entering the sector. Our team is noticing more final calls from sellers, which we view positively, as the intense buying seen in 2021 has decreased. This creates opportunities for us to engage with sellers who may need to transact. We are recognized as a preferred buyer and often have a better understanding of the asset than the current owner. Various factors affect cap rates, and we believe this situation can be beneficial for informed buyers like us to engage with owners. We will continue to monitor developments, but changes in interest rates will likely lead to some movement in cap rates.

Our next questions will come from Michael Goldsmith with UBS.

I wanted to dig into a comment that was made earlier about some of the properties in the non-same-store pool that are expecting to stabilize at a higher level. Can you provide a little bit more information on that? And then, I guess, related to that, how does that change your process of underwriting or acquiring your portfolio as your properties start to move higher, stabilize and stabilize at a higher level?

Yes. Mike, I’ll start with a few things. First, if you think about the strategy that we’ve deployed now for the last two years plus, we’ve entered transactions with a priority around finding additional upside in any asset acquisition that we’re either entertaining or bringing into the portfolio. So, of the $5.1 billion of asset acquisitions that we did in 2021, average occupancy hovered around 60% to 65%. So, by design, we’ve been very focused on finding and taking assets that may be either at a state of fill-up or a state of optimization that clearly hasn’t met either the owner’s expectations or an optimization level that we feel that we can clearly achieve once we own the asset. This has given us a very compelling opportunity to drive the types of returns that Tom spoke about that, in many cases, are even more elevated than we expected when we bought the assets. A couple of very simple examples, that’s definitely playing through with the two bigger portfolios that we bought in 2021, the easy storage portfolio that we took down in April of last year, a $1.8 billion transaction, seeing very good lift relative to not only the results we expected in the first year, but we’re even doing better than expectation. The same thing is playing through with All Storage, the transaction that we did in the fourth quarter, again, another large portfolio. But the same type of trajectory is honestly playing through with the one-off and the much smaller portfolios as well. And part of that, again, by strategy and design, we’ve been very focused on identifying assets that we can bring into the portfolio and drive much further optimization through not only fill-up of maturation of the existing revenue base, the customer base, etc. Tom, you can give a little bit of color if you’d like to relative to some specifics.

Yes. Thanks, Joe. So Michael, I’ll give you some of the financial components that we included in guidance that we’re providing to be able to model this a little bit easier. For the year, as part of our core FFO outlook, we’re providing a non-same-store NOI contribution number. In addition to that, there’s a line item below core FFO that is the non-same-store NOI to stabilization, which will occur after 2022. You can think about adding those two numbers together to reach our view of stabilized NOI of that pool. If you look back in April, our non-same-store NOI contribution for 2022 in our guidance was a midpoint of $450 million, and we included at the bottom of the page $180 million of incremental NOI to stabilization. So, if you add those two numbers together, you’re going to get your $630 million of stabilized NOI. If you compare that to this quarter, we lifted our non-same-store outlook by $40 million at the midpoint. So, you’re looking at a $490 million NOI contribution from the non-same-store pool in the calendar year 2022. But then we also retained that line item below at $172 million of incremental NOI to stabilization. So, if you add those two numbers together, the $490 million and the $172 million, you get to $662 million. So, in effect, we raised our outlook for ultimate stabilization by $32 million to $662 million. So, again, an improving outlook. The performance we’re seeing this year is not just a pull forward of stabilization. It’s also outperformance and outperformance versus expectations.

And Mike, one other thing I’d add, we haven’t spoken to the performance of our development assets. And those two not only continue to drive very good returns, but are beating expectations relative to the level of lease-up and the performance of the asset. We clearly have a unique advantage being the only public developer of the product in the space and by far, the largest developer in the sector. The team is doing a very nice job identifying prime land sites, using many of the data elements that we uniquely have to find pockets of opportunities, whether they’re markets that are more mature and/or growing markets, and those assets continue to drive very good returns. As I noted, our development pipeline for the first time hit $1 billion. We’re encouraged that we’ve got a nice window to continue to find compelling opportunities, and we’ll continue to allocate capital in that arena as well, which has been very fruitful.

That’s very helpful. As a follow-up, the non-same-store pool exceeded expectations, while the same-store pool met them. Looking ahead, how much of the non-same-store portfolio is connected to the same-store pool in 2023 as we consider the maturation of these stabilized assets?

Yes. Thanks, Michael. So, the first thing I’d highlight is, as we think about adding properties to our same-store pool, we’re focused on adding them when they’re stabilized. So, as I just walked through, there’s meaningful NOI contribution to come from those assets before they reach stabilization in the coming years. We won’t add those into the same-store pool until they’ve reached that stabilized level. So, there will be some properties added. But as we just demonstrated, there’s significant growth ahead that will sit in the non-same-store versus the same-store pool as we move into 2023. We’ll continue to provide the level of disclosure that we do today by acquisition and development vintage, so that you can see and track that performance over time.

Our next questions will come from Ki Bin Kim with Truist.

Just going back to your comments about any kind of consumer trends that you might be seeing. Are there any discernible trends between maybe weaker demographic types of customers when they get a rent increase letter versus higher income customers, or are they all kind of responding in a similar fashion?

Sure. Specifically around rent increases, I’ll hit that and then maybe I’ll take a step back as well and talk about overall customer trends as I think that may be instructive. The existing tenant rate increase program is something that obviously has been running for a very long time, but it’s an area we continue to make investments in, and it’s really driven by extensive testing. Joe mentioned we have over 1.7 million customers today. We send over 1 million rent increases a year, and that gives us the ability to dynamically manage that program and frankly, use data science today in a way that we couldn’t use in years past. That program continues to improve, and ultimately, we continue to see the benefit of that program in our realized rents. In terms of customer reaction, that’s a really important part of the program is to understand what we predict the customer behavior to be, and we’re constantly tuning and understanding if there are any shifts in ultimate behavior. Year-to-date is, in fact, customers are behaving as good or better, frankly, than what our models have been predicting for them as we move through the year. So, continue to see good behavior from our customers. As Joe mentioned, the length of stay continues to extend, which is a really favorable trend for that program, as there are more customers to send increases to. So that all played out well. I think your second question around demographics asks if we’re seeing any shifts in customer behavior by demographics, even away from that data-driven existing tenant approach? The short answer is, we’re not really seeing anything across the customer base and continue to see broad-based strength. There are a few operating metrics that if you look at them versus last year, they’re deteriorating. Things like move-outs are higher for us and I think across the sector, but they’re off incredibly low bases and still well below pre-pandemic levels. You could say the same thing around delinquency, etc. But as you slice and dice that by demography or other customer segments, nothing there that’s percolating that we’d highlight as being concerning, frankly, overall continued broad-based strength around the customer base.

And on the same topic on ECRI, can you just describe high level what types of increases you’re pushing out there? And maybe the frequency?

Sure. What we’ve highlighted in the past is the magnitude and frequency of our increases are really driven by two components. One is what do we anticipate the reaction to be to the increase. As I just spoke to, that performance has been as good or better than our expectations and frankly, better than history. The second component is an optimization based on if the customer moves out, what’s the cost to replace that tenant. In both instances versus pre-pandemic levels, they’re both pointing to higher magnitude and frequency of increase. If, in the past, we were sending 8% to 10% increases to our long-term tenants, we’re sending higher increases today and at a higher frequency.

Our next question will come from Ronald Kamdem with Morgan Stanley. Ronald, your line is now open.

Ronald, are you by chance muted?

Why don’t we go to the next question, and we can let Ron jump back in queue.

All right. Next, we’ll take Steve Sakwa with Evercore ISI.

I guess I just wanted to circle up. Your first half results were obviously very strong, up 19.5%. I know you didn’t change guidance, but I guess to hit the low end of the range on NOI, you need to be like at 7% in the back half of the year. And just given the commentary that you’ve talked about, it seems highly unlikely even with tough comps. So I guess, what are we missing at the low end or is it just pretty clear that you’re sort of at the midpoint, the high end at this point, but you’re still sort of in that range? And just sort of the low end just seems very unfavorable.

Thanks, Steve. I appreciate the question. I guess, what I’d characterize is obviously, we’re not going to change the outlook here on the call. But what I’d say is when we set the outlook at the beginning of the year and we continue to reaffirm it, we wanted to set a wider range to encapsulate a broader range of outcomes. That’s both on the high end as well as the low end, given the uncertainty of a month-to-month lease business and frankly, how dynamic the industry has performed over the last several years. We did set a broad range. As we move through the second half, there’s still a reasonable range of outcomes that could play out in the environment. We didn’t touch the range. But to your point, the first half has been strong and frankly, right on our expectations. To all the points around customer demand trends and the like, things are set up well as we head into the second half, but we do face some pretty tough comps, both on rents as well as occupancies moving into the second half. I’d say similarly on expenses, we saw expense growth accelerate into the second quarter. We left our same-store expense positioned at the same level as the start of the year. We are seeing inflationary pressures. We have multiple initiatives to mitigate the impact of some of the inflationary pressure. But there’s no question that the labor market is tight, and you don’t have to look any further than the jobs number that came out this morning to indicate how tight the labor market is in this environment. We want to make sure we’re encapsulating the outcomes there on expenses as well.

Great. Joe, your acquisition guidance remains at $1 billion. With around $0.5 billion already closed or near closing by the end of the quarter, can you share more about the pipeline? It seems there are more opportunities. Considering your strong balance sheet and ability to buy with cash, do you anticipate that deal volumes will increase even if there are fewer products available in the market?

Yes. That’s going to be subject, Steve, on a number of factors. As far as the $1 billion target or guidance for 2022, to your point, we’re tracking well to that level of volume. What’s typical is this time of year, you’re going to see an unpredictable amount of potential volume coming to the market, knowing that the market is different from a predictability standpoint this year than last year because of the range of big portfolio opportunities being quite limited, if in fact at all. Very, very different outlook, as I mentioned. We’re going to continue to look for a whole range of opportunities. As I mentioned, we’re very confident. We’re very well set to engage and unlock anything that would be particularly compelling. It will depend on, again, what’s going to play through, particularly in the next few months. With that, we’ll see what kind of opportunities arise. The things that we continue to look for, as I mentioned, are assets that we are clearly seeing upside opportunities from a value creation standpoint. That’s part of the set of asset acquisitions that have been completed or that are pending, as we guided to, and we’ll continue to look for those and other types of opportunities as well. So, as Tom mentioned, there are some shifting things out there relative to different pressure points that could play through with different owners, and that could be an interesting opportunity for us as well. So, very excited about that. The team is working hard. We’re highly engaged across multiple markets, and we’ll continue to see what additional volumes play through as a result of that.

We’ll go back now to Ronald Kamdem with Morgan Stanley.

Hey. Hopefully, you can hear me. Third time’s a charm.

Yes. Third time’s a charm.

Quick one. It’s definitely user error. So, two quick ones on my end. One is just when you’re taking a step back sort of big picture, the portfolio is at record rents, sort of record pricing power, just this cycle operationally, is there anything you sort of try to do differently to measure the customer’s pricing power, whether it’s looking at rent-to-income ratios or other than just move-out activity, which you monitor, is there any sort of different way to leverage all the data that you have to get at sort of the pricing power at these unprecedented levels?

Sure. I think there’s a couple of things here. One is, as you think about rent-to-income levels or otherwise, those are kind of macro trends that we do look at periodically. We look and see what housing affordability is by different markets as we look forward. But frankly, that’s not how we manage the business on a day-to-day basis. The way we manage it day-to-day is much more driven by testing. We have the ability to segment our customers and conduct continuous price testing, both for new customers as well as existing customers in terms of what we expect that elasticity to be. Overall, we’re just speaking about with Keegan that price elasticity is more acute for new tenants than it is for existing tenants, which is ultimately why existing tenants will pay a higher price than new tenants moving in. That’s continuous testing across the platform for both sets of tenants to understand that elasticity by market, by unit type, and that’s managed dynamically. In terms of what we’re seeing today compared to what we’ve seen in the past, it is a continuation of that, which is, yes, there’s no question there’s price sensitivity for new customers today, and that’s built into how we price our units on a day-to-day basis. That said, our move-in rents in the quarter were up 12%, and so we continue to have an ability to increase rent in the face of that elasticity. In July, move-in rents were up 8%. We are seeing moderation but continued strength in move-in rents. So, nothing that I’d highlight that is overly concerning from the micro. From the macro standpoint, one of the key elements in self-storage is it’s a nominal spend versus a consumer’s income. I think that continues to benefit the sector as we see rents resetting at all-time highs.

Great. Following up on the questions about growth in the second half, the implied guidance for same-store revenue is 11.1%. If we view that as a solid run rate for the end of this year into next year, is there anything we should consider regarding potential deceleration? What should we take into account regarding comparable performance and customer behavior as we approach next year?

Yes. I think we’ll give you a view on how 2023 is going to play out as we move into next year. But I think you hit it right, which is a strong second half setting us up well for 2023. But in terms of the cadence of 2023, we’ll maybe save that in terms of when we have more visibility.

Thanks, Chelsea, and thanks to all of you for joining us today. Have a great weekend.

Thank you, ladies and gentlemen. This does conclude today’s conference. And we appreciate your participation. You may disconnect at any time.