Ladies and gentlemen, thank you for joining us for the Public Storage Fourth Quarter and Full Year 2022 Earnings Call. At this point, all participants are in listen-only mode and we will open the floor for your questions after the presentation. I am now pleased to introduce Ryan Burke, Vice President of Investor Relations. Ryan, please go ahead.

Thank you, Chelsea. Hello, everyone. Thank you for joining us for our fourth 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 are subject to certain economic risks and uncertainties. All forward-looking statements speak only as of today, February 22, 2023, and we assume no obligation to update, revise or supplement statements that may 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, subsequent reports, 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, after that, feel free to jump back in queue with additional questions. With that, I’ll turn the call over to Joe.

Thank you, Ryan, and thank you for joining us. I’m going to begin by providing color on two recent announcements. We’ll then move on to our performance in 2022 and outlook for 2023. First, on February 5th, we announced a 50% increase to our quarterly common dividend, a raise from $8 to $12 per share on an annualized basis. It is a result of a great effort by the team that has produced record performance over the last few years and a validation of our ongoing confidence in the strength of our platform. Second, as announced separately, we made a proposal to acquire Life Storage at a substantial premium after several attempts to engage in negotiations privately. I’d like to highlight a few important reasons why we think this combination is poised to unlock superior growth and value creation for shareholders. First, there is significant opportunity to accelerate growth and profitability as Life Storage’s portfolio benefits from Public Storage’s industry-leading brand. Our platform achieves approximately 80% same-store operating margins compared to Life Storage’s margins at approximately 73%. And we see an opportunity to narrow that gap with their real estate assets as part of our industry-leading platform. Second, we believe there is significant upside to grow revenues and earnings in our respective ancillary business lines, including storage insurance, third-party property management, business customer offerings and lending. Third, we see expanded portfolio growth opportunities as we leverage Public Storage’s fully integrated in-house development team, the only one of its kind in the industry, to capitalize on additional development and redevelopment opportunities to enhance Life Storage’s existing portfolio. And finally, all of this will be supported by an industry-leading balance sheet with low pro forma leverage, an advantaged cost of capital and significant capacity to fund future growth in conjunction with retained cash flow. Since announcing the proposal, we have received overwhelmingly positive feedback from both companies’ shareholders who clearly recognize the significant benefits uniquely achievable through a combination with Public Storage. As you likely saw, on February 16th, Life Storage issued its own press release rejecting our proposal. Nothing in that response changed our thinking. We have a high level of conviction in the strategic and financial merits, and we are committed to pursuing a potential combination. We are encouraged, in that February 16th release, Life Storage indicated openness to opportunities to enhance shareholder value. We look forward to engaging in good faith discussions regarding a mutually agreeable combination. While we appreciate that analysts and shareholders have ongoing questions with respect to our proposal, the purpose of today’s call is to discuss our fourth quarter earnings and our outlook for 2023. As such, we will not be addressing questions related to the proposal at this time. Now, turning to our performance and outlook. 2022 was a year of milestones for Public Storage, including celebrating our 50th anniversary. The team and platform achieved record results in our same-store and non-same-store portfolios, elevating the customer experience through technology and operating model transformation, enhancing our properties through the Property of Tomorrow program and growing the portfolio through acquisitions, development and redevelopment and third-party management. We did all of this while maintaining the industry’s best balance sheet, which is poised to fund growth moving forward in conjunction with significant retained cash flow. To name just a few of our collective accomplishments, we achieved an 80% stabilized direct NOI margin through the combination of revenue generation and expense efficiency that only Public Storage is capable of. We grew beyond 200 million owned square feet and $4 billion in total revenues. We built our property development pipeline to approximately $1 billion. We received the prestigious Great Place to Work award based on feedback provided directly by our employees. And we achieved top-scoring U.S. self-storage REITs across the leading sustainability benchmarks. We are firing on all cylinders while strengthening the already formidable competitive advantages we have across our business. And those competitive advantages are heightened in the type of macro environment we are in today on top of two consecutive years of record 20%-plus core FFO growth. Simply put, we have the people, technologies, platforms and brand which lead us to a position of strength in 2023. Demand for self-storage remains strong, as you see with our move-in volume up more than 11% during the quarter. The aspects of the business that have historically made it resilient are on display. This is a needs-based business with demand drivers that are multidimensional and fluid throughout economic cycles. We also continue to benefit from a newer driver in the form of people spending more time at home, which has increasing permanence with remote and hybrid work here to stay. Our customer lengths of stay are at record levels, a positive trend, given rent increases to existing customers are a key driver to our revenue growth. The outlook for new competitive supply is also in our favor. We are seeing less new property development nationally due to higher interest rates, cost pressures, difficult municipal processes and concern over the macro landscape. With continuing strong demand, less pressure from new supply and our numerous competitive advantages, we are very well positioned in 2023.

Thanks, Joe. I’ll start with a review of capital allocation for the year. We invested $1 billion between acquisitions and developments in 2022, including the $190 million Neighborhood Florida portfolio in the fourth quarter. That portfolio added to our over 400 properties that we’re operating with our remote property management platforms. Overall, the 2022 acquisition environment was impacted by a shift of cost of capital with transaction volumes down and driven by smaller deals compared to 2021. We expect that trend to continue this year with our forecast for $750 million of transaction volume for Public Storage consistent with last year. We are well positioned as an acquirer today, given our industry-leading balance sheet and cost of capital. And adding to acquisitions, our development pipeline stands at approximately $1 billion as we seek to expand the portfolio with our in-house team. The development environment is challenging today across the industry, as Joe highlighted. Against that backdrop, Public Storage is planning on delivering $375 million of new generation 5 properties in 2023 and more in 2024, as we lean on our development competitive advantages. And we look forward to putting these new properties on our national platform to drive outperformance. Now, on the financial performance. We finished the year strong, reporting core FFO of $4.16 for the quarter and $15.92 for the year, ahead of the upper end of our guidance range and representing 22.4% growth over the fourth quarter of 2021, excluding the contribution of PS Business Parks. Let’s look at the contributors for the quarter. In the same-store, our revenue increased 13% compared to the fourth quarter of ‘21. That performance represents a moderation from last quarter’s 14.7% growth and a return to seasonality and tough comps comparing to 2021. Now on expenses, same-store direct costs of operations were up 5.3%. In total, net operating income for the same-store pool of stabilized properties was up 15.8% in the quarter. In addition to the same-store, the lease-up and performance of recently acquired and developed facilities remained a standout, growing 51% compared to last year. Now, I’ll shift to the outlook. We introduced 2023 core FFO guidance with a $16.45 midpoint, representing 5.5% growth from 2022, again excluding the contribution of PS Business Parks. As we enter the year, there’s no question there’s a wide range of potential macroeconomic pathways that will influence customer demand and behavior. The consumer has held up well to this point in the year, but the Fed is certainly signaling they’re not finished. If we look at the same-store revenue outlook, I’d characterize the low end of the range of the outlook as a recessionary pathway and the higher end as a softer landing for the economy. We anticipate occupancy will be lower throughout the year and follow a typical seasonal pattern. Rate will be the driver of revenue growth with the moderation through the year based on lower move-in rents and tougher existing tenant rate increase comps. That moderation results in a trending towards longer-term averages of growth. Our expectations are for 5.75% same-store expense growth, driven primarily by property tax and marketing expense. That leads to same-store NOI growth at the midpoint of 3.2%. Our non-same-store acquisition and development properties are again poised to be a strong contributor, growing from $448 million of NOI contribution in 2022 to $520 million at the midpoint. Looking ahead to 2024 and beyond, the incremental non-same-store NOI to stabilization from those properties acquired or completed at December 31st is an additional $80 million of NOI. This pool of lease-up assets will continue to be a powerful growth engine over the next several years. Last but not least, our capital and liquidity position remain rock solid. We have a well-laddered long-term debt profile with limited floating rate exposure and over $4 billion of preferred stock with perpetual fixed distributions. Our leverage of 3.4 times net debt and preferred to EBITDA combined with nearly $800 million of cash on hand at quarter end puts us in a very strong position, heading into 2023.

Thank you. Our first question will come from Steve Sakwa with Evercore ISI.

Thanks. Good morning, out there. I guess maybe, Tom, for you, as you thought about setting guidance for this year, I can appreciate a number of the different components that you laid out, and there’s kind of a wide range there. But I guess which components do you feel like have the most potential upside and downside risk, I guess, both on the revenue side and on the expense side where you could come back and be positively surprised or negatively surprised?

Sure, that's a good question, Steve. I want to share a few comments here. First, I’d like to discuss how the year has begun, which aligns with the trends we observed in the fourth quarter. The move-in and move-out trends have remained consistent, with move-in volumes up about 10% and move-in rates declining in the mid-single digits. This is in line with the roughly 5% change we noted in the fourth quarter. We’re seeing strong demand for storage as we start the year. However, in response to your question, I’d like to divide the year 2023 into two halves. The first half will reflect trends similar to what we've seen through the fourth quarter, but we will be facing challenging comparisons at the start of the year, which will contribute to some moderation. Yet, we anticipate higher absolute revenue growth since we’re starting from a solid position. In the second half of the year, there are a few points to consider. The comparisons will be easier because we’ll be referencing a more seasonal end of 2021 or 2022. However, there is also a significant increase in macro uncertainty. As we consider the outlook, at the lower end, a recessionary scenario that we’ve mentioned in our disclosures would likely result in negative year-over-year revenue growth, as is typical during a recession. On the other hand, the higher end could yield positive growth and easier comparisons, potentially leading to improved revenue growth in the latter part of the year. Overall, the second half of the year presents much more uncertainty compared to the first half.

Okay. And then, second question, I don’t know if it’s for you or for Joe, but just as you think about capital deployment, you still have $1 billion of development but you mentioned that doing new deals is challenging. Just help us understand kind of where you think acquisition yields are in relation to new development yields. Kind of where does that spread stand today? And how do you think that might trend over the next kind of one to two years?

Yes, Steve. There certainly is a continuing trend that played through in 2022 that we think still applies to 2023. First of all, on the acquisition side, likely to be lower volumes of transaction activity. Certainly, we’re seeing that by virtue of how the year started off. It’s not a typical year in and year out where the first quarter or so might be on the light side. That’s definitely the case as we speak. So, we’re looking for and evaluating the trends tied to impacts from higher cost of capital, limited availability of capital, again, how sellers are looking at this environment to transact assets. Typically, more stabilized assets are going to command stronger cap rates. I’d tell you today compared to maybe where we were a year ago, cap rates are still up in that 100 to 125 basis-point range where stabilized assets might have a 5 handle on them, whether it’s low, mid or high-5. The cap rate will depend on location, quality of the asset, et cetera. And then, depending on this stabilized level of the asset, there’s going to be more flexibility in the cap rate, and you’re going to see different pricing mechanisms tied to those types of assets. Our focus, as it has been to actually look for those kinds of assets because that’s where we see the higher value creation. That certainly played through the acquisition volume that we captured that Tom talked about in 2022. So we’re still out hunting for good quality assets. Our backlog right now between closed and under contract is approximately $70 million. But frankly, the market is a little slow right now, so we’ll see. It’s not unusual for though the market to start picking up towards the summer months, so we’ll see again how that plays through on that set of opportunities. Now, on the flip side, from a development standpoint, as you mentioned, yes, our pipeline continues to be quite robust. It’s more difficult to do development not any different than what we’ve been talking about for the last year or two. Our team is working hard to extract prime land sites. We’re actually finding some very good opportunities there. But frankly, we’ve got skills and abilities that our competitors in the private world particularly do not have. And with that, we’ve been able to extract prime sites, good opportunities to actually get the types of returns that we’ve been speaking to for the last couple of years, where we’re expecting plus or minus 8% or more cash-on-cash yields on these investments. So, we’re very encouraged by our own pipeline. We’re encouraged, as Tom mentioned, relative to the lease-up and the contribution those types of assets have to our overall revenue and NOI performance. Our non-same-store portfolio continues to be very vibrant. So, we’re very encouraged that we’ve got the right skills and the fortitude and the ability to look long term through what could be still a very challenging development cycle, which frankly is a good thing. It gives us more ability to actually go out and capture, as I mentioned, those great land sites, put our Gen 5 properties into a variety of different markets. And nationally, we’ve got good opportunities across the spectrum, so we’re going to continue to focus on that as we speak.

Our next question will come from Michael Goldsmith with UBS.

On the guidance, you said the low end of the range is for a recession scenario while the high end’s a soft landing. Do you see a 50% probability of a soft landing, you end up at the high end, and a 50% probability of a recession, you end up at the low end, or is it more 75-25 or another combination? I’m trying to understand the likelihood of where you see yourself ending up within that range at this time.

Sure. Good question, Michael. So, I think there’s a couple of things there. The first is we wanted to provide a range that encapsulated multiple pathways because we know everyone on this call probably has their own point of view as to what percentage probability a recessionary pathway is or a soft landing is. And so, we thought it was appropriate to provide that wide range, and obviously, investors can make their own perspective. As we look at it, we look at the potential outcomes as relatively balanced within that range, but we don’t obviously know what the Fed is going to do and how the consumer is going to react. 3 or 4 weeks ago, interest rates were lower. There was talk of a no landing over those 3 weeks. We’ve gone back to the fact that maybe that no landing is off the table. So, I think that’s going to ebb and flow as we go through the year. Our objective was to provide investors and analysts a framework to understand what could play out through the year according to those macro pathways.

Got it. Regarding ECRIs this year, before the pandemic, you were implementing increases of 8% to 10% approximately every 12 months. In the past 1.5 years, the increases have been in the mid-teens to high teens every 9 months. For the upcoming year, as part of your guidance, could you quantify the anticipated rate and frequency of ECRIs? It's clear this will vary based on different scenarios. Additionally, could you discuss your plans and the current state of top-of-funnel traffic, as this will influence your ability to implement ECRIs this year? Thank you.

Sure. Thanks, Michael. So, to talk specifically about the existing tenant rate increase program, I’ll hit around the top-of-funnel demand as well. We’ve consistently spoken about our existing tenant rate increase program as really two components. The first is how the consumer is reacting to increases. How are they performing and behaving? And we’ve noted in the past and I would reiterate today that the consumer continues to perform at expectations and the sensitivity is largely in line with expectations. There’s no real change to the thought process around that program on that side. The second component is the cost to replace that tenant when they leave. And there’s no question that that’s changed quite a bit over the last several years. You had markets like Miami where rents were up 25%, 30% and there was no cost to replace. There was, in fact, a benefit to replace a potentially in-place tenant. That started to shift as we moved through ‘22 and into ‘23. That impact will result in lower magnitude and lower frequency increases but still to optimize revenue from that pool of existing tenants and new tenants that come in. The second part of your question around top-of-funnel demand performing is important because, as Joe mentioned, move-in volumes through the fourth quarter were up nearly 12%. Move-in volumes through the part of this year are up double digits as well. We’re seeing good demand from new customers coming into the system. Now, we’re spending a little bit more on advertising. Our rates are a little bit lower. There are a little bit more promotional discounts in order to achieve that. Ultimately, the customers are very willing and looking forward to storage spaces to move into. That’s enabling us to capture those tenants, which I think is where you were going with the question. Those tenants will be good long-term tenants or a portion of them will as they move through 2023 as well.

Thank you very much. Good luck in 2023.

Thanks, Michael.

Thank you. Our next question will come from Jeff Spector with Bank of America.

I would like to ask about the guidance. I understand the current macroeconomic situation and the uncertainty regarding the first and second halves of the year. Can we focus on the peak leasing season? When does it officially start? If we consider June and July, is that the main period for it? My understanding is that there might be a lag in how a recession impacts storage, so I'm trying to understand how this could unfold during the crucial months of your peak leasing season.

Yes. I think to answer the question directly, we typically see the peak leasing season really start in April, pick up in May in a really big way and then, then into June and July. So to your point, it’s not very far away. We’re already seeing some of the seasonal patterns that you would anticipate in some of our markets, right? The more seasonal markets are already starting to see a pickup in our occupancy as we sit here in February compared to the end of the year, for instance. That typical seasonal pattern is starting to play out, which is encouraging. I think where you may be going is, there’s certainly a chance that if there is a recession that comes, it’s later in the year and not earlier in the year. That would obviously impact the financial performance of the sector through the year. If it’s a good busy season, that has a very positive impact on overall financial performance and operational performance of the business.

Thank you. Our next question will come from Juan Sanabria with BMO.

Just looking to further the discussions on the same-store revenue guidance. Wondering if you could talk a little bit about what you expect within the range the fourth quarter exit run rate to be. And if I think about last year, you guys really called it like you saw it. You were well ahead of the peers in the initial guidance set. And relative to some of the maybe more tried and true, kind of being a little bit more conservative and planning to be in raise game. Are you guys changing it up, or are you really trying to call it like you see at this time with the full acknowledgment that the uncertainty is much greater this year?

Well, there’s a whole host of questions in there, Juan. So, let me try to take a few of them at a time here. So I think the first part of the question is around the second half and talking a little bit more about the second half and maybe even, you’re trying to tease out from me 2024 guidance. But I do think the characterization... Yes, just fourth quarter, right? So, I’ll go back to the first half, second half comment, which is the first half and the tougher comps that we’re going to experience is going to lead to some moderation as we face those comps through the first half, which will lower the absolute level of growth as we go through the first half. The second half, to the points I made earlier, really will depend on the busy season performance, like Jeff was just speaking to, and the macroeconomic environment and how the consumer is impacted by what the Fed is likely to do and the excess savings that the consumers have for a period of time and how quickly they burn through that excess savings, et cetera. There are a number of different moving pieces there, right? One is new storage demand, the other is existing tenant performance, rate sensitivity, delinquency, etc. A typical recessionary environment would show weakness across those metrics, and that’s what’s led to negative year-over-year revenue performance and recessions in the past. In that recessionary pathway we’ve spoken to, we would expect to see negative year-over-year revenue declines, like we’ve seen in prior recessions. You will have the benefit of easier comps in the second half, which will help offset some of that potential weakness. On the flip side, we’re just talking about, well, is the recession, when does it come? How deep is it? All those sorts of things, which we can sit here and prognosticate on, but ultimately, we’re going to find out over the next 6 to 12 months.

That’s right. And then, just on expenses, curious if you could just give a little bit more color or numbers around the major food group’s property taxes, marketing, etc., that I know you called out a little bit in your prepared remarks but hoping to flesh that a little bit more.

Yes, sure. So specifically within the same-store operating expenses, our largest operating expense line item is property taxes. We ended the year 2022 with property taxes with a 4-handle percent growth on them. We continue to expect that that’s likely to be a higher growth rate as we move into the coming years, given the NOI growth that we’ve seen in the sector over the past several years. So, we’re expecting something like 5% to 6% growth there, and obviously, we’ll update as we move through the year. That’s certainly the biggest driver of operating expense growth. The others are smaller. The second one I highlighted in my prepared remarks was marketing. You saw, in the fourth quarter, we increased marketing expense to drive further top-of-funnel demand into the system, and we saw very good returns associated with that, really comping against a period in 2021 when there was very little spending in most of our markets. The percentage growth looks elevated against really low comps. So marketing expense is likely to be another one because in the first part of this year, we’re facing those similar really low comps. Some of the other line items that are facing inflationary pressures, again, the strength of the labor market today continues. There’s wage pressure. But you could see even in the fourth quarter, we were able to mitigate some of those wage pressures, given the digital transformation and operating model transformation that we’ve been working through over the past several years, leading to efficiencies in staffing. That will help mitigate. Utilities is another one that we’ve seen utility rates move higher, but we’re looking to combat that with our investments in energy efficiency, be it our solar programs, which we’re seeking to add about 300 properties with solar by the end of the year to bring our aggregate total to about 500 properties and with more room to go there in future years as well as our LED conversion helping to mitigate that. So, that’s a high-level landscape of a number of the line items. Happy to go into any further detail if helpful.

Our next question will come from Todd Thomas with KeyBanc Capital Markets.

Tom, first question, I guess, back to the guidance. You mentioned that occupancy will likely be lower throughout the year. Was wondering if you can maybe provide a little bit more detail around what you might expect at sort of the low and high end of the range relative to where you ended the year, so call it, down 250 basis points. Do you see that year-over-year spread widening or narrowing as you move throughout the year?

Well, let me talk about the first half first and then we can talk about the second half, which obviously, we’ve spoken about, there’s macro uncertainty that will influence that. But as you think about the first half, we’re starting the year with occupancy down about 2.4%. We do think the occupancy decline that we experienced in the back half of 2022 was a seasonal occupancy decline. In fact, the decline from June to December was a touch better than a typical seasonal decline. But inherent in that is that what we’re seeing today is a pickup in occupancy in some of our seasonal markets. I would anticipate there’s certainly the opportunity for that spread to narrow as we get into the busy season as we’ve spoken to, but then would follow a typical seasonal pattern from there in the back half.

Okay. And when you talk about the seasonal markets where you’re already starting to see some occupancy build, which markets are those?

Well, they typically tend to be colder weather markets, so your Miamis and your Los Angeles and San Diegos, you don’t see that same seasonal pattern. But if you look at a Minneapolis or Chicago or the Northeast, you start to see that seasonal pattern be more pronounced.

Okay, got it. And then just circling back to capital deployment and some of the comments that you made earlier around investments. When making acquisitions and some larger deals like you did in 2021, you’ve talked about upside to the initial yields through margin improvements, the Company’s scale and so forth. An extreme example during 2021 was the $1.5 billion All Storage deal, which was sort of a mid-2% cap rate going in with an expectation to substantially increase that at stabilization. I realize the environment is different today and all deals have different characteristics. But as you look at the current landscape and think about acquisitions, would you still be willing to tolerate initial dilution relative to your cost of capital early on, like you have in '21 or in prior cycles, or does the greater uncertainty today give you a little bit of pause around how you think about future growth and the spread to your cost of capital that you would be willing to invest at?

Yes, Todd. I mentioned what we’ve been doing strategically now for the last three years or more is looking for opportunities with assets that do have that upside that you’re speaking to. Whether it’s through some of the larger portfolios, All Storage included, we bought that portfolio at about 74% occupancy, had a nice lift really in a very short period of time relative to continued lease-up and stabilization of the revenue metrics, et cetera. We’ve done the exact same thing with one-off deals as well. So, that’s something we’re not going to be shy about doing, and it continues to be a very good playbook for us. When we’ve got deep-seated knowledge market to market, which we do on the vast majority of deals that we acquire, we have an elevated level of confidence that once we put these assets into our own platform, you can see that extracted opportunity literally right out of the gate. You see the benefits, as we’ve been speaking to relative to our brand, our platform, our efficiencies that assist higher-margin opportunities, et cetera. We’re definitely looking for those kinds of assets and have not backed away from them at all. That has and will continue to be a very vibrant part of our capital allocation process.

Our next question will come from Spenser Allaway with Green Street.

Can you provide an update on the rent freeze that was put in place related to the California storms early in the year? Has this been lifted? And if not, is there any type of NOI headwinds contemplated in guidance?

Sure. So I think, Spenser, you’re speaking to the storms that took place in early January out here in California. There was a state of emergency that was put in place that is expiring here in February. As anticipated, there are going to continue to be one-off events like storms and rain in California, believe it or not, that can lead to state of emergency and pricing restrictions. We’ll navigate those. As it relates to what’s embedded into our guidance expectations, there are things like that that come in and come out of different markets. We’ll try to take a reasonable estimate as to what those could be through the year. We’re not underwriting any significant rental rate restrictions as we move through the year embedded in our outlook.

Okay. Please continue.

No, go ahead.

I was going to say, you guys have provided a lot of great commentary on guidance in general and specifically on move-in rates and volumes and how those are trending thus far in '23. But are you guys able to comment on the recent magnitude of ECRI activity? Without providing specific line item guidance, is there any color you can provide on what’s being contemplated in terms of ECRIs at both the high and low end of guidance?

Sure. I’d go back to my response around existing tenant rate increases earlier, which is that there’s no question that in certain markets, we have a moderation in the magnitude and frequency that we’ve sent them. I highlighted Miami as an example where rents in Miami for new customers were up 25%, 30% each year for the past several years, and that’s started to slow down as we anticipated. That market and others can’t grow like that in perpetuity. Because of that, the magnitude and frequency of rental rate increases to existing customers is likely to moderate this year, and we’ve already seen that at the start of the year. There’s a wide range of increases that we send to the tenant based on what we understand their sensitivity to the value they place in the unit as well as the cost to replace that tenant if they choose to move out. In the stronger outlook, it’s going to result in a stronger existing tenant rate increase, magnitude and frequency, but the weaker outlook for tenants is going to have the opposite effect.

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

Thanks. A quick one first. Implicit in your 2023 guidance, what are you thinking for move-in rates?

Yes. Good question, Ki Bin. So certainly, we started the year, as I’ve highlighted, with move-in rents that are below prior year, and we finished the fourth quarter in a similar territory. We are anticipating that we see rents lift as we move through the busy season months. As you’d anticipate, as customer demand increases, inventory gets tighter as you get to that point in the year, leading to higher absolute rents. But as I noted, earlier around the comments about the second half, there’s a lot of variability on what could play out. If we’re in a recessionary environment, we’d anticipate that move-in rental rates are lower to capture demand. In an environment where consumer demand remains strong, that’s going to result in higher rental rates as we move through the year. As I noted earlier, part of the story in the second half compared to the first is comps. The comps are definitely tougher in the first half than they are in the second.

So maybe I should have rephrased it. Your move-in rents are down 5% as of 4Q. So, on a year-over-year basis, that’s the way I’m trying to understand the trend...

And that’s what they are right now, too, Ki Bin. That’s what they are right now as well.

Okay. And on your CapEx guidance of $450 million, obviously, this line item has grown over the past three years, and you do a great job of breaking out between maintenance CapEx, Property of Tomorrow and the solar LED. I’m just curious if some components of this CapEx might have a return associated with it and if you can provide some color around that.

The energy efficiency investment definitely leads to good returns. As Tom mentioned, we’re combing the portfolio as we speak for solar opportunities in particular. We’ve basically re-lit the entire portfolio to LED. We had good, again, returns from that investment. The additional stimulus has come through with recent legislation, providing more motivation on our part to continue to look at multiple markets. Likely, we’ll get into a very sizable percentage of the entire portfolio that will help solar, I think, over the next, say, three to five years. At the onset here, as Tom mentioned, we’ve got 300 to 400 properties that are near-term candidates for good strong returns. Property of Tomorrow, we’re lifting the aesthetics and the curb appeal and some of the functionality of the properties. It’s a little harder to measure specific returns on that type of investment. We do see a higher elevated level of customer satisfaction, employee satisfaction, etc. The enhancement market to market we’re seeing from just the brand awareness, now that we’re at a point of over 55% to 60% of the portfolio has been rebranded to the Property of Tomorrow standard market by market, and we’re seeing very good receptivity to that as well. So, it’s a little harder to measure just on a pure economic basis but continue to see good results from that investment as well.

Thank you. Our next question will come from Ronald Kamdem with Morgan Stanley.

Hey. Just going back to the guidance. Maybe any more color on sort of the bad debt assumption for the same-store revenue at the middle and at the upper and lower end of the range? Thanks.

Ron, you’re a bit quiet, but I believe you mentioned bad debt expectations in the guidance outlook. Overall, I would say bad debt performance has been good in the first half of this year and the latter part of last year. At the beginning of the pandemic, we discussed how delinquency and bad debt significantly decreased. While we are no longer at those low levels, consumers are still managing to pay their bills, and our delinquency rates remain considerably lower than they were before the pandemic. To specifically talk about guidance and the ranges, within the recessionary scenario we've spent time discussing this morning, we have raised the bad debt assumption, as we anticipate an increase in bad debt along that path and a potential reversal towards the higher end.

Great. And then, my second one, you talked about sort of the macro assumptions in the guidance, which was super helpful. Just wondering, you guys are operating the business. Are there sort of any leading indicators that you would see in, first, maybe before sort of the macro turns, whether it’s move-in volumes or whatever? Are there sort of leading indicators that you guys are tracking to sort of get a handle on this from the ground?

Yes. I mean, obviously, we’re running a month-to-month lease business. We move in over 80,000 customers monthly and we have a healthy amount of move-outs as well. So with that continuous flow of activity, we’re constantly monitoring things like payment patterns to the degree of either change or what might be happening market to market relative to other macro events, etc. But one of the more obvious metrics that we look at relative to just the stress of the evolving nature of the economy at large is payment patterns. Those continue to be actually quite good. There’s some elevated level of stress, but on a relative basis, still below what we saw pre-pandemic. We’re keeping a very close eye on it. We’ve got new and different ways to track this now that so much of our business is tied to digital interaction with customers, etc. We’ve got good tools to stay ahead of that and guide us relative to whatever stress points might be evolving.

Our next question will come from Smedes Rose with Citi.

I wanted to ask if you have noticed any changes in the supply outlook and if you have any insights regarding developers' current access to capital.

Yes. Smedes, I mentioned that in my opening remarks. We’ve had the benefit nationally where deliveries have been somewhat static for the last two years, and we’re looking at 2023 in a very similar fashion relative to likely not an elevated uptick in overall deliveries. That ties to the amount of complication from a cost standpoint. There’s more risk with many of the unknowns coming into the economy. The complication is tied to just getting approvals as you go through step-by-step development processes. The overall supply picture is actually very good, meaning we’re not seeing a rush to new development. Our lens through our third-party development platform gives us a little bit more validation of that as well, where the majority of those opportunities are tied to development. We’re keeping an even closer eye on that beyond what our day-to-day development team and our real estate team are seeing as we’re out either acquiring or looking for development opportunities. So hopefully, fingers crossed, we’re going to continue to see that amount of deliveries through 2023 and going forward, again either in the same range or it could actually be a slightly downtick, but we’ll continue to track that.

I'm curious about your long history during previous economic downturns and recessions. As we may be approaching another one, are there two or three strategic approaches you might adopt differently compared to past recessions, such as occupancy or pricing strategies? Have there been changes in the number of AutoPay users compared to before, which might be beneficial? I'd appreciate any insights you can share, considering the company has been operating for 50 years.

Well again, cycle to cycle, we continue to take away best practices, different strategies, different ways to buffer and build upon not only our strengths, but it goes to the core of our platform and the resiliency that we see relative to those types of ebbs and flows of overall economic stress, etc. The things that we’re constantly doing is running the business on a very fluid basis. We’ve got more data now than clearly we’ve ever had. I mentioned our move-in and move-out volume for instance. The amount of, again, testing that we do relative to pricing, whether it’s marketing, whether it’s promotions, all the tools that we have that are far more tied to analytical processes that can guide us to optimization. We’ve got great tools. We’ve got great reconnaissance, and we think we’ve got even deeper technologies that we continue to make very strong investments into it, that have served us well. We’ve actually, in a whole variety of different ways, been able to test those in and out of economic cycles, so we’re going to continue to do just that.

Thank you. Our next question will come from Keegan Carl with Wolfe Research.

Yes. So maybe starting off with a bigger picture question here. When we think back to your May 2021 investor deck, you guys forecasted a long-term growth range of 6.7% to 9.2% on FFO. Just kind of curious, is that still in play going forward or do you anticipate growth to continue to moderate?

Yes. Reflecting on the investor presentation, we identified several key growth drivers. I appreciate your question. Firstly, concerning the long-term storage growth rates, we've experienced strong growth over the past couple of years, and we are now trending back towards those long-term averages. One of the key drivers of our growth strategy includes the operational improvements and enhancements we discussed. I previously mentioned the transformation of our operating model and the energy efficiency initiatives currently benefiting our same-store NOI growth. The investor community heard updates from our revenue management and data science team. As Joe pointed out, we are consistently testing and implementing new systems and methodologies. With more than one million move-ins and over one million rental rate increases annually, we have the capability to refine these processes effectively. We believe this aspect remains strong. Regarding portfolio growth, it’s evident that the cost of capital has changed since we last presented that information, and there will be variations from year to year. We have invested a substantial amount of capital in recent years, and last year's investments were aligned with what we expected during Investor Day. Additionally, complementary growth and leveraging strategies contributed to our FFO growth outlook, and these remain solid as we expand our tenant reinsurance platform and third-party management business, as well as our investment in Shurgard, which has been beneficial. In conclusion, many of these factors are still relevant and continue to enhance our competitive advantages for driving growth. I anticipate that portfolio growth will vary more significantly from year to year.

Got it. I’ll throw another tough one out here. But if we think through the pandemic and the subsequent demand tailwind, how many first-time users do you think utilize self-storage? And how sticky do you guys expect these customers ultimately to be? I’m just trying to sit here and reconcile where demand could level out, given your prior commentary where you don’t necessarily anticipate any meaningful occupancy gain.

Yes. So, the first part of the question around new first-time users. No question, there was a significant influx of new storage users through the pandemic. We’ve spoken a lot around different use cases as well, right? The surge in home sale activity during a part of the last several years, now a decline in home sale activity, a change to hybrid work and a big pickup in home improvement activity drove new first-time users of storage and, frankly, the fact that people are spending a lot more time in their homes. We do think that’s a tailwind as we move forward over time. As you think about the adoption of storage has continued to grow from a smaller base in the 1970s to where it is today. We’re encouraged by those first-time users, the younger users that continue to seek storage as a good value to store their goods and do think that is a tailwind for the industry moving forward.

Thank you. Our next question will come from Michael Mueller with JP Morgan.

Yes. Hi. I think you mentioned the record length of stay. And I was wondering, first, can you just throw out the stats in terms of the percentage of customers there over a year and over two years?

Sure. First, I’ll mention the metric that we like to communicate, which is the average length of time our current tenants have been with us, now at around 37 months. We’ve previously noted that this has increased from about 32 or 33 months a few years ago. It’s clear that having longer tenures continues to provide benefits, as Joe highlighted in his comments. Regarding your question about the different time frames, we currently have over 60% of our customers, specifically around 61% to 62%, who have been with us for more than a year. Those who have been customers for over two years make up a robust 43% to 44%. We are observing positive trends among our loyal existing tenants, and we are excited about this development.

Got it. Okay. And then I guess going to not drilling down on the same-store guidance but you talked about the recession scenario versus soft landing. If you do head down that recession scenario, would you envision taking the foot off the gas on development starts at all or probably not?

Yes, Mike. The development cycle is long. I mentioned you’ve got to have the fortitude, particularly in environments or macroeconomic cycles that would persuade others to not pursue development. We still think that’s a very good opportunity for us, as I mentioned, to go out and capture even better land sites in some cases, or with our own view and financial capabilities and basically, view of the longer-term value creation we can see through cycles like this. Many cases can lead us to opportunities we might not otherwise see. The benefit of, again, having our deep-seated knowledge, our very entrenched development and real estate teams nationally out looking for sites and then getting into all of the complications of getting entitlements, approvals, etc. There’s been, and we don’t see any immediate relief to the amount of inflationary pressures that have come through component costs, whether it’s steel or lumber or anything tied to oil, etc. There’s a lot of risk that continues to evolve into the development business. We think we have uniquely the ability to see through cycles, and we look to make sure that we’ve got enough bandwidth and even in our own underwriting to give us very good capability not only to hit our expected returns but hopefully exceed them, particularly if market corrections happen through these ebbs and flows of market cycles. We’re always looking and trying to assess what the near- and longer-term market dynamics are, but we’ve got the fortitude to do that.

Thank you. This concludes the question-and-answer portion of our call. I would now like to turn the call back to Ryan Burke for any additional or closing remarks.

Thank you, Chelsea, and thanks to all of you for joining us. Have a great day.

Thank you, ladies and gentlemen. This does conclude the Public Storage fourth quarter and full year 2022 earnings call. We appreciate your participation. And you may disconnect at any time.