Thank you all for joining us today for the Public Storage Second Quarter 2023 Earnings Call. I will now hand it over to Ryan Burke, Vice President of Investor Relations. Ryan, you can proceed.

Thank you, Shelby. Hello, everyone. Thank you for joining us for our second quarter 2023 earnings call. I'm here with Joe Russell and Tom Boyle. Before we start, we want to remind you that some of the topics discussed during this call may include forward-looking statements under federal securities laws. These statements are subject to various economic risks and uncertainties. All forward-looking statements are made as of today, August 3, 2023, and we do not take on any obligation to update or revise statements that may become untrue due to future events. A reconciliation to GAAP of the non-GAAP financial measures discussed on this call is available in our earnings release. You can find our press release, supplemental report, SEC reports, and an audio replay of this conference call on our website, publicstorage.com. With that, I'll turn the call over to Joe.

Thank you, Ryan, and thank you all for joining us today. As demonstrated by our second quarter performance and raised outlook for the year, Public Storage continues to maximize its competitive advantages across our platform with several key factors driving positive results, including a better-than-expected macro environment with higher odds of a soft landing; increased rental activity from our needs-oriented customer base; and execution across all aspects of our industry-leading platform. We are built to operate in all macro environments, and we are proving just that. Let me highlight three specific areas. First, we are driving record year-over-year growth in customer move-in volumes. Move-in volume growth has accelerated throughout the year, up nearly 14% in the second quarter. We have closed the year-over-year occupancy gap from down 220 basis points at the end of March to down 160 basis points at the end of June. We have the right team technologies and analytics to determine the appropriate mix of marketing, promotions, and rental rates to meet customer expectations in the current environment. Drawn by our leading brand and enhanced digital customer experience, self-storage users are clearly choosing Public Storage. These trends support our raised outlook, along with the easing of difficult year-over-year comps as we move through the second half of the year. Second, we are growing our portfolio amidst broader market dislocation. Last Monday, we announced and fully funded the $2.2 billion Simply Self Storage acquisition in a matter of a few hours. This is something that very few companies could do today and separates Public Storage as the acquirer of choice within our industry. We have the strongest balance sheet and the lowest cost of capital, both of which were highlighted by our rapid execution on the Simply Self Storage transaction. With the Simply Self Storage acquisition, we are excited to combine our respective strengths as we integrate their portfolio to ours and achieve significant operational enhancements immediately and into the future. As an example, under our platform, the $1.8 billion ezStorage portfolio acquired in 2021 has seen significant operating margin improvement of 1,100 basis points from 72% to 83%. As we do with all of our acquisitions, the entire Simply Self Storage portfolio will be rebranded to Public Storage in order to maximize the benefits and value of our iconic brand and platform. We expect to stabilize the portfolio at a mid-6% nominal yield by year three. Third, we are well positioned for continued strong execution and growth across the company. From an operating perspective, our digital and operating model transformations are proving to be significant win-win experiences with results exceeding expectations. Customers benefit from having robust digital options at their fingertips across the entire journey, finding a unit, renting a unit, moving in, managing their account, and navigating the property when on site. Our proprietary digital ecosystem will continue to be a primary reason that customers choose us, with more than 2 million PS app downloads and over 60% of customers renting through our online leasing platform today. Additionally, Public Storage team members benefit from being able to place even more focus on our customers, and for those that excel, the transformation has enabled us to create new pathways for career advancement. And our financial profile benefits as well. We are putting these digital tools in the hands of our customers and employees for convenience, combined with in-person on-site customer service when and where it's needed. The result is a better customer and employee experience and a higher operating margin. From an external growth perspective, our industry-leading NOI margins, multifactor in-house platform, access and cost of capital, and growth-oriented balance sheet put us in a unique position. So far this year, we have secured $2.5 billion worth of properties. We will have also delivered $375 million in development by year-end and have a pipeline of more than $1 billion of development to be delivered over the next two years. Our advantages enable us to acquire and develop when others can't. We have a strong appetite for more with a matching ability to execute.

Thanks, Joe. As Joe highlighted, we sit here more than halfway through the year with both our year-to-date performance and updated outlook better than we expected. Core FFO per share was $4.28 for the second quarter, representing an 11.5% growth year-over-year, excluding the contribution from PS Business Parks. Looking at the key components for the quarter. Same-store revenues increased 6.3% as we drove record move-in growth. Our existing tenant base continues to perform well, and these trends continued into July with the year-over-year occupancy gap narrowing to 130 basis points at month-end. Same-store cost of operations were up 5.2%, leading to 6.6% stabilized same-store net operating income growth at a direct operating margin exceeding 80%. In addition to the same-store, the lease-up and performance of recently acquired and developed facilities continues to be a standout, with net operating income increasing 20% year-over-year. These 544 properties and more than 50 million square feet comprise 25% of our total portfolio and are an engine of growth. And this pool will grow further with the addition of the Simply Self Storage acquisition. Shifting to guidance. We once again lifted our outlook for the year, primarily driven by a 50-basis point increase to the low end of our same-store revenue growth guidance, reflecting outperformance to date and an improved outlook for the remainder of the year. We also lifted our non-same-store NOI expectation by $40 million at the midpoint to primarily reflect outperformance and improved outlook and also to incorporate the impact of the Simply acquisition. Interest expense expectations increased accordingly. Our outlook for the non-same-store pool beyond 2023 improved as well. We lifted our expectations for incremental NOI stabilization from $80 million to $190 million to reflect outperformance to date, stronger future expectations, and the Simply acquisition. And last but not least, our capital and liquidity position remain rock solid. We refinanced our untapped line of credit in June, tripling its size to $1.5 billion, and as Joe mentioned, fully funded the $2.2 billion Simply acquisition in the unsecured bond market immediately following the announcement. We're well positioned with a strong appetite for growth, coupled with the ability to execute upon the opportunity.

Good morning, good afternoon. Thanks for taking my question. The guidance for the full year implies a pretty material slowdown in the back half of the year with potential for same-store revenue growth and same-store NOI growth to turn negative in the fourth quarter. So, what would you have to see from the input of revenue growth, like occupancy, move-in volume, street rates and ECRIs in order to hit the middle and bottom range of the guidance, and if you see these as realistic or conservative scenarios? Thanks.

Sure. Thanks, Michael. It's a good question with lots of components. So maybe taking a step back, we've been consistent throughout the year providing investors and analysts with a range of outcomes. In terms of the different components of the outlook, I've been consistent that the upper end of that outlook encapsulates an environment where we experienced a soft landing. And as we move through the year, the probability of that soft landing has increased. As we think about the assumptions that are baked into the lower end, that is more of a tougher macroeconomic environment. And in particular, we're assuming that the same-store growth moderates but starts to stabilize. In that midpoint outcome, it does encapsulate a negative outcome in the fourth quarter for same-store revenue growth. But again, easier comps help and start to stabilize. And from an overall FFO standpoint, the midpoint is certainly aided by continued standout growth from the non-same-store pool of properties there as well. So again, a range of outcomes embedded within our out.

Hi. Shelby, this is Ryan Burke from Public Storage. Trying to get through to you to resume the call. Are you hearing us?

Absolutely. Yes, sir. You're coming in loud and clear, and your conference may continue.

Thank you, Shelby, and apologies to everybody if you're hearing us. We've had some technical difficulties. We're hoping that we're through those at this point. Shelby, if we could go back to Q&A, we would appreciate it.

We will now move to the next question. Our next question is from Spenser Allaway with Green Street. Your line is open. Moving on to the next question, we will take a question from Samir Khanal with Evercore.

Hi, good morning, Joe and Tom. Can you talk about what you're seeing in July, maybe move-in rates and demand trends, and if anything, on the customer side, given some of the price increases? Thanks.

Yes. Great question, Samir. So, in July, we've seen largely continuing trends from the second quarter. So, as we think about the different components of customer activity, we saw a good move-in volume growth, call it, 7% or 8% above prior year. Move-in rents are down a similar kind, about 14% as we sit here in July. Move-outs have begun to moderate, again, as we talked about. Easing comps as we move into the second part of the year. Move-outs are up about 4% in July, ultimately leading to that occupancy gap closing, again, as I mentioned earlier, down 130 basis points at the end of July. There's a couple of points I'd highlight about July. One is we've talked about how comps in the first half of the year are more challenging. And I think from a move-in rate standpoint, we do believe July is really the point in time where those comps are the most challenging and should ease up from here. And so, as you think about the different pathways for growth going forward, we're anticipating that move-in rate declines year-over-year start to moderate. In terms of existing tenant performance, continues to be quite strong. And the length of stays within the customer base, we're at records through the second quarter. Some of the activity we're seeing to date mathematically is likely to bring that average length of stay down a little bit, given the significant amounts of new customers that we're adding to the pool year-to-date. But the core longer-term customer base, be it greater than one year or greater than two years, continues to perform quite well throughout the summer here.

And then just talking about maybe given the LA market is a big market for you, it was still solid. I mean, don't get me wrong but sort of like maybe decelerate a little bit from the first quarter. I know the restrictions have been lifted there. So maybe just talk around kind of the trends you're seeing in that market as we kind of think through maybe the next sort of six months to 12 months.

Yes, Samir. The LA market continues to serve us well. We clearly have a very strong position here with north of 200 properties, excellent locations. We've completely rebranded the portfolio through a POT effort. And with that, we've continued even outside of lifting the restrictions that we were burdened by for over three years, we still got good opportunity to drive revenue and strong occupancy, still very good top-of-funnel demand. It's well documented. There's very little supply that has or will come into that market by virtue of lack of land sites, cost of new development, et cetera. So, we're well positioned and feel very confident that that market is going to continue to perform well. Tom can give you a little bit more color on how we're looking at the horizon based on the fact that we've certainly gone through a wave of recovering, to some degree, the amount of pricing power that we did not have for that three-year period. But we still feel confident that the market itself is going to perform quite well.

Yes. And specifically, if you remember, Samir, last year, we talked about 150 basis points to 200 basis points of same-store revenue benefit because of the expiration of those restrictions. This year, it's more like 50 basis points to 100 basis points. And the deceleration that you're seeing through 2023 is really attributable to the fact that this year, we're facing comps where we were playing catch-up on customers last year. And so that market is expected to continue to moderate its growth because of those comps. But overall, as Joe mentioned, fundamentals in the marketplace remain quite strong. And frankly, it's not just an LA phenomenon either; if you look at San Diego, that's one of our top markets as well. Southern California is performing well through 2023 for Public Storage today.

Can you hear me okay?

We can. Thank you for checking. Hopefully, you can hear us.

Yes, loud and clear. I wanted to ask about the occupancy build in 2Q, which was a little bit more muted than it has been in prior spring and summer seasons, and it sounds like the year-over-year occupancy gaps narrowed a bit further in July, which is positive. And Tom, you mentioned July is a tough comp. But as we think about the seasonality of the business, do you think that the peak rental season, particularly this year, has a little bit less weight than it has in prior years and prior cycles in your view? And does the lower seasonality in the spring and summer mean that you might expect to have less seasonality around Labor Day and sort of through fall and winter in the back half of the year?

Yes, that's a great question, Todd. I think stepping back, we haven't had a typical demand year since 2019, and we could debate whether 2019 was one as well. Every year has had its unique attributes given what we've all lived through over the last several years. And certainly, 2023 is no different than that. This year, some of the factors at play, certainly the housing market is one that I would highlight. And we've been highlighting for some time the existing home sales volumes declining, having an impact on some of the seasonal demand that we would oftentimes see in a May, June, and July time period, we're not seeing as much of this year. And I do think that that's one of the primary reasons for the difference in occupancy build as we move through the year. That said, we've continued to see very good move-in volumes, as we've highlighted already on the call. And that's being made up by renter activity by folks that continue to run out of space at home, which is also somewhat tied to people not selling their existing homes. And so, we feel good about the level of new customers that we're acquiring today, but it is a different year. And then maybe to your second part of your question around how does that impact our thoughts on the second half, I think because of how the first year has played out and that demand dynamic, we would anticipate that we'd probably see a little bit less of a seasonal decline in occupancy as we move through the year, which is likely to lead to continued modest closing of the occupancy gap year-over-year as we move through the year.

And just to highlight a couple of other things, Todd, the seasonality predictable components are shifting. And what you have to be in an environment like this is quite nimble and to interpret what effects or counter-effects you may have or be able to deploy as the traditional seasonality theories or events are shifting. And to Tom's point, since 2019, we've learned all kinds of different range of impacts, whether it's tied directly to housing, hybrid work-from-home environments. I can tell you maybe the one consistent predictable driver is just college, and that too got upended during the pandemic. That seems to be back, so there's a little bit of movement that we think we can predict there. But the good news is with our platform and our ability to interpret changing demand factors, we're actually able to maneuver through what would be, as Tom pointed out, less predictability around seasonality, but at the same time, we're seeing very good customer demand driven by even new and additional factors, many of which seem to be deep-seated and are likely to be with us for some period of time.

Okay. And so, Tom, I guess just in terms of the revised guidance, I mean, does that account for lower seasonality in the second half of the year, less move-out activity than you would ordinarily see in terms of occupancy loss through Labor Day in the back half of the year? And then the last piece here, I guess with less rental activity driven by moving activity related to the housing market, do you feel that you have sort of a healthier, longer staying customer in the portfolio today?

So, first component of your question there, we're adding them up here, yes. So, the outlook does incorporate what I highlighted earlier. The second component of your question is also a good one to highlight, and that is that customers that have moved in year-to-date are exhibiting longer length of stay attributes because of what you're highlighting and what Joe highlighted around the use cases for storage. So consistently, each month's cohort of move-ins are performing better than prior year, which is encouraging as you think about the tenant base and the durability of revenue heading through '23 and into '24.

Thank you. I just wanted to, I guess, go through your comments on record move-ins, better-than-expected first half, and tie this into some of the concerns, let's say, going back to at least last year and the follow-on weaker street rate. Like how do you explain the dynamic and how you're thinking about it? You're mentioning you're bringing in the right customers, it sounds like, through June, but private continue to compete on lower street rates. So how should we think about that dynamic? And again, there's this concern that it will eventually impact your ability to push on existing but that existing customer continues to exhibit great behavior. So, it is a bit confusing.

All right. Jeff, there's a good number of parts to that question, too. Let's take them one by one. So, to your point around good move-in volume, as Joe highlighted earlier, we think the tools that we have are working quite well. We run a very granular and dynamic pricing and advertising process, and our ops team is built to drive move-in volumes, paired with our digital ecosystem that Joe spoke to. We think the customers are reacting quite well to. So, all of that, combined with our brand, I think it's certainly helping drive good move-in volumes. I think your point specifically on move-in rate, there's a couple of components there. One is, no question that the industry overall, as there's been more vacancy through last year and into this year, has lowered rental rates, and it's a very competitive environment for new customers today. We feel like, as I noted, we're getting good customers and a good volume of them, but the rents are lower than what they were in the prior year, down about 14% in the second quarter. To give you context, in the second quarter, our rents were about a couple percent above our competitors within the trade areas. So, we're largely charging what our competitors are charging in the marketplace but seeing very good volume and traction associated with that. It is certainly one of the components that drives the deceleration of revenue growth as we moved through last fall and through the beginning part of this year. And I noted earlier that as we sit here today, the comps do start to ease, and we think the July print could be the trough as we move through the year, and that's embedded in our outlook as we look through the second half of the year. But overall, that's certainly been a drag to revenue growth but should be a stabilizing factor as we move forward. The third component to your question related to its impact on existing tenant rate increases. And that's something we've been very consistent in speaking about. We like to talk about it in two components. One is how is the customer base performing. And as I've noted in prior calls, the existing customer base continues to perform quite well. So, the length of stays of the longer-term tenants, one-year, two-year-plus continue to be strong. Delinquencies are below pre-pandemic levels, and they are accepting of our rental rate increases. The thing that has changed over the past two years is what it is to replace those tenants when they move out. And so, that's the second component, the replacement cost of those tenants if they move. And that has certainly flipped from in certain markets, there was actually a benefit to replace those tenants in certain prior years. And this year, it's certainly a cost to replace, again going back to what you highlighted, which is move-in rental rates lower year-over-year. That's led to lower magnitude and lower frequency of increases through the start of 2023, but no real change there as we sit here in July versus what we would have told you in February on that point.

Okay, that’s very helpful. If I could ask, I’m receiving a few requests to repeat your initial response to the first question regarding the guidance for the second half of the year. I believe we missed a significant part of that answer. Could you please clarify whether the lower end of the guidance still indicates a recessionary scenario?

Yes. Thanks, Jeff. And bummer that you couldn't hear my first response, but I'll go at it for attempt number two. Hopefully, this works. So, the outlook as we move through the year, we've now raised it two times. And we highlighted earlier, that's because of better-than-expected performance year-to-date as well as improved outlook for the second half of the year. We've been consistent since February in speaking about the outlook as a relatively wide range of potential outcomes. And that's driven by a combination of an uncertain macro environment, which we're all still living in day-to-day as well as a consumer backdrop that continues to shift, obviously impacted by that macro line. At the lower end of our guidance does encapsulate the potential that the Fed doesn't quite stick the landing here in the second half of the year. It doesn't have as much of an impact on 2023 as what it may have on 2024, which is certainly leading to improved outlook at the lower end. But there's certainly that possibility that the consumer weakens, longer-term length of stay customers start to vacate at a higher frequency. Again, something we're not seeing today but could play out as we move through the year and would be typical in a tougher macro environment. And a still competitive move-in environment, which the point earlier, is something that we've seen year-to-date, a very competitive move-in environment. The flip side, though, is also fair, which is we continue to think that there's a good potential for a soft landing and a continued strong performance from the existing tenant base and the easing of comps in the second half, which would lead to the higher end of that range as well. So again, a good performance year-to-date. The outlook's improving as we move through the second half, but we do still encapsulate that broad range of potential outcomes here.

Thank you. Can you guys hear me?

We can. Thanks, Spenser, for being patient.

No problem. So, apologies if this was covered, but marketing spend is up this quarter and that's understandable, given you weren't spending much in '22. But just curious if you can talk about the absolute customer acquisition costs and how does that trend versus historic norms?

Yes. Thanks, Spenser. So, you noted clearly high year-over-year growth in marketing spend because we didn't really spend last year. I think one way to look at it that we track through time periods is the percentage of marketing spend as a percentage of revenue. And in the second quarter, I believe that was about 1.7% of revenue. And that's a good bit below pre-pandemic averages that were in the 2% to 3% range. If you think about overall customer acquisition costs are frankly attractive, which is one of the reasons why we continue to use that tool, along with the other tools in our toolkit to drive good move-in volume, and we're seeing very good response from that. So, we'll continue to use marketing spend as a component of the customer acquisition toolkit and have an ability to continue to spend there if we get good return.

Yes. Sure, Spenser. Year-to-date, from a sector standpoint, the amount of transaction volume is pretty similar to what we saw in 2022. So, I would tell you, to your point, there are a number of more inbound calls coming to us. Many of the owners coming into the market are looking for a different level of commitment and a surety that a close can take place. Clearly, with the lending environment not only from availability of capital, the cost of capital, a number of traditional or otherwise active buyers in past years are not as active or capable as they would be today. So that gives us a leg up. As I mentioned, we are hearing, time and again, we're an acquirer of choice. We've got a very unique opportunity to continue to execute very effectively. Just as we did, obviously, on a very large scale with the Simply deal. We typically know an asset quite well in the market position. It's at again, have very efficient discussions with the existing owner, whether it's a one-off transaction or a portfolio. So, we're using that opportunity, and we're being contacted more directly by virtue of the fact that there's much more surety of close, and we can be very effective and efficient and it's been a good window for us. So many of the deals, to your question, that came through were along those lines. We're still doing traditional marketed opportunities where the economics and the quality of the asset makes sense. One of the things that's fresh, ten days now post-announcement of the Simply deal, we are getting some additional inbounds knowing, again, the effectiveness that played through on a $2.2 billion acquisition. And that plays through, again, whether it's a one-off deal or a much smaller portfolio, that continues to be good bread-and-butter growth and acquisition opportunity for us, and the team continues to be busy. As typical this time of year, next quarter or so is typically the more active time of year for transaction opportunities, so we're going to continue to stay focused on that, and we feel we're in a very good spot.

Hi, thank you. I just wanted to ask, it sounds like from your remarks that you were able to come to a decision very quickly on the decision to acquire the Simply portfolio. And I was just wondering how you would compare maybe some of the opportunities you saw with that acquisition versus your original proposed acquisition of the Life Storage portfolio.

Well, Smedes, very different processes and M&A opportunities got a whole different level of complexity and moving parts than maybe a traditional private opportunity. Speaking more directly to the Simply transaction, that was a process where it was a market or a deal that was brought to the market through their own advisory. And so, there was a process that Blackstone went through to bring the portfolio to the market. Because of its size and the portfolio has been in place for nearly 20 years, we knew it quite well. We had understood and studied the evolution of the portfolio, so we had very good and crisp knowledge of the portfolio going into that process that was set up by Blackstone. So again, very good opportunity for us to look at a portfolio of that size, integrate it very effectively. As I mentioned, we're about ten days into the process right now, and we expect to close in the middle of September. By all accounts, the integration opportunity looks every bit, if not more, compelling than it was when we announced the deal. So very confident about our ability to integrate the 127 assets and the 25 properties that are in the third-party management platform. So, feel good about the ability to allocate capital of that size. In a private transaction market, this is the largest deal that's been done since roughly the end of 2021 or the beginning of 2022 if you think about the timing of Manhattan Mini. But we're very confident that it's a very strong ability in our to allocate capital, get very strong returns, and integrate those assets very quickly.

Yes. It does.

Okay, thank you.

Thanks, Smedes.

Just curious on the investment side, and the balance sheet, kind of marrying those two areas together. You used a lot of the dry powder here on simply, and the accretion was modest kind of initially. So, just curious how we should think about what the remaining capacity is and what kind of cap rates or yield expectations going into deploying that kind of precious capital.

Yes. Well, happy to take that. As we looked at underwriting the Simply portfolio, we viewed it as an attractive real estate transaction really across any way that you underwrite it or you think about the cost of capital. As we've spoken about in the past, we view things on an unlevered basis despite the fact, certainly in prior years, we've used leverage in order to acquire assets very quickly. We look at things on an unlevered basis and real estate level returns as well as basis. We view the Simply transaction as an attractive one. Your comment around accretion, we grew the asset base by about 4%, and we're anticipating growing FFO by 1%. That's a pretty good ratio. And our leverage at the time was 3.3 times. We increased it to 3.8 times, which is a good bit below our long-term target of 4 times to 5 times, which gives us still significant capacity to grow for the right sorts of transactions. As Joe highlighted, we're poised to do that. To give you context, I think post-transaction, we have over $5 billion of capacity to continue to grow towards the higher end of that long-term target of ours. So, still have a very good bit of capacity and are actively seeking good real estate opportunities to grow the platform.

As a follow-up, you mentioned earlier that due to the more modest peak leasing season we've had so far, you expect a softer recovery or slowdown in the latter half of the year. However, I'm curious if there's a perspective that the opposite might actually be true; since we didn't see a significant increase during the peak season, could this indicate a weaker underlying trend? It raises the question of whether there are consumer or housing factors beneath the surface that could lead to a stronger recovery than usual. I'm interested in your thoughts on this.

Sure, Juan. I mean, we've walked through now the range of potential outcomes, and so we do think we have a wide range encapsulated in our outlook. My comments around our belief that we don't see as big of an occupancy decline is really driven by the fact that we didn't see the seasonal demand that typically can be a shorter length of stay. And I highlighted earlier that our customers that have moved into date have been longer lengths of stay, which supports less move-out activity through the second half of the year. Ultimately, we'll have to see how the year plays out. And we've given you some guideposts as to what that looks like throughout our outlook range and feel like we're very well-positioned to navigate through the environment in the second half.

Thank you very much.

Thanks, man.

We'll take our next question from Ki Bin Kim with Truist. Your line is open. Hearing no response, we'll move on to the next question. We'll take our next question from Keegan Carl with Wolfe Research. Your line is open. Hearing no response, we'll move on to the next question. We'll take our next question from Michael Goldsmith with UBS. Your line is open.

As my second question, kind of on the occupancy and kind of the churn of the portfolio through the quarter. Occupancy at the end of March was 92.8%, end of May was 93.1%, and end of June was 93.2%. But the average occupancy in the second quarter was 93.7%, which is higher than all of that. So, does that mean that there's elevated churn within the portfolio? And how do you think about the potential loss of some of these high-quality, high-rate customers that have been driving the growth of your portfolio in an environment where maybe there's a little bit more elevated churn?

Yes. Thanks, Michael. A couple of components there. One, churn is actually improving on a year-over-year basis as we move through the year. And you can see that in year-over-year move-out volume growth in the first quarter compared to the second quarter. And then I highlighted in July, the move-out volume's only up 4% year-over-year. So, continue to see good behavior from the tenant base. Highlighted earlier that length of stays from new customers that have moved in have been attractive. And so, we feel good about the customer base overall and easier comps as we move through the year on normalization of churn from that tenant base playing out. As you think about the occupancy lift and the difference between the average and the period end, that's going to be consistently the case because of how we operate the portfolio month in and month out, our average occupancy or occupancy peaks in the middle of the month, and then we typically see more move-out activity towards the back half of the month, which lowers occupancy. That's the case month in and month out. And so, nothing concerning there. You can interpret the lift in average and the lift in the period end as occupancy was higher through those periods, i.e., higher in June than it was in May.

Got it. And just from the first quarter to the second quarter, same-store revenue growth stepped down by 350 basis points to 6.3%. As we move through the rest of the year, does the step-down get smaller? And does that reflect just like the comparisons getting easier? I'm just trying to better understand the cadence of the step-down as you guys see it.

Okay, good question, Michael. The cadence of the step-downs will begin to ease, and I think we've highlighted that the comps really start to ease in September, October. And so, as we move through, I highlighted earlier, comps are actually quite challenging as we sit here in July, and we would anticipate the comps to ease as we move through the back half of the year. And so, embedded in that range of outlooks is a differing range of moderation of that deceleration rate but would anticipate that comps help, but particularly in the fourth quarter versus the third quarter.

Thank you, Michael.

We'll take our next question from Mike Mueller with JPMorgan. Your line is open. Hearing no response, we'll move on to the next question. We'll take our next question from Ki Bin Kim with Truist. Your line is open.

Hi, can you hear me?

Yes.

Yes.

Yes, thank you. So your move-in rates increased about 5.5% sequentially going into 2Q. I'm just curious like when you look at say, whatever you want to call it, a normal year, how does that 5.5% increase compare?

Yes, Ki Bin, that is a little bit lower of an increase than what you typically see. Typically, in a seasonal year, you'd see more occupancy lift, and associated with that more occupancy lift, you see more pricing power. And in a typical year, you'd see more like low teens difference between the end of the year and the midpoint of the year. And so, if you think about first to second quarter comparison, it's probably upper single digits full first quarter versus full second quarter increase. So, a little bit softer but along the same themes that we've been speaking about with a little bit less seasonal demand, in particular, in the second quarter.

Okay. And in terms of your $450 million CapEx guidance for the year, obviously, when you look back historically, it was under $300 million in 2021, and under $100 million pretty much every year before that. So, I'm just curious like how many more years of this newer and more elevated CapEx should we think about versus returning back to something that's more approaching from a historical level?

Yes, Ki Bin. A couple of moving parts there. So, we're three-quarters of the way through our $600 million Property of Tomorrow initiative. We're targeting the end of 2024. It may taper in the part of 2025 to get the full portfolio completed, so that spending will continue through that time period. The other additional but very effective component of that program that we're going to continue to invest on top of the easing down of just that spend tied to the Property of Tomorrow program is solar. So, we're putting more additional dollars into our solar initiatives in many markets. Our goal is to get north of 1,000 properties to some level of solar orientation, which would include just the property needs itself. And you may have seen yesterday, we made an announcement relative to what we're doing with community solar in certain markets. That's a program that's continued to grow as well. So, with that, Tom, you can give a little color on what we're seeing relative to outlook relating to spend on a year-over-year basis. But for those factors, we've still got a couple more years of elevated capital spend.

Yes. And I think to Joe's point, the Property of Tomorrow spend, when we wrap up that program will go away. The spend on solar, we think, is a very good opportunity. To Joe's point, we're getting mid-teens IRRs on the capital we're investing in that program, and we've got a lot of opportunity there. And at the end of the year, we're targeting having solar on about 500 properties, with the expectation of getting over 1,000 properties over the next several years. So, a lot of opportunity there that will be capital spent but also with a good return associated with it.

Okay, thank you.

Thank you.

We'll take our next question from Keegan Carl with Wolfe Research. Your line is open. Hearing no response, moving to the next question. We'll take our next question from Michael Mueller with JPMorgan. Your line is open.

Can you hear me this time?

We can, Mike. Thanks for trying again.

Yes, I had no clue if you talked about this already. I basically dropped at 12:40 and dialed back in because I had silence. But could you talk about the percentage of customers in place for over a year and two years and if you're seeing any notable changes to those pool sizes?

We haven't discussed that yet. To give you some additional insight, we continue to see strong performance from our long-term customers, specifically those who have been with us for over two years. This group makes up around 40% of our tenant base, which represents an increase of about 5% to 6% compared to pre-pandemic levels. We are also noticing strong performance and composition from this group. New tenants are continuously coming in, and I previously mentioned that we might start to see the overall average length of stay become more moderate due to the influx of new, valuable customers entering the platform, which may lower that average. However, our long-term tenants remain strong and significantly above the pre-pandemic averages, and the new customers we are bringing in are also showing improved length of stay trends year-over-year.

Got it okay great thank you.

Thanks, Michael.

A quick follow-up. On the ECRI question, I just wanted to confirm, has the pace or cadence of increases declined at all year-to-date from your initial expectations to start the year or is that holding steady?

Juan, it's holding steady. There's some seasonal factors which I won't quite get into, but generally speaking, on plan and consistent with expectations.

Okay, great. And then just one more, if you could humor me. So, what does the guidance range imply for the kind of fourth quarter or exit run rate? Just trying to think about the decel Layering into easier comps in the fall.

Yes. So again, the outlook encapsulates the range. The low end of the range reflects that recessionary scenario. That would likely lead to same-store revenue growth dipping into negative territory at the lower end there. At the higher end, we would anticipate that same-store revenue growth remains positive. Again, those easier comps lead to a stabilization through the second half of the year and exiting in that manner. Obviously, the midpoint is in between there. I think the midpoint does touch negative in the fourth quarter, and certainly positive in the third quarter. But again, we'll update you on performance through that range as we move through the year. We've been encouraged year-to-date on performance, and we'll continue to update you on where we end up through the year.

Thank you, Juan. Thank you for your patience.

And it appears that we have no further questions at this time. I will now turn the program back over to Ryan Burke for any additional or closing remarks.

Thank you, Shelby, and thanks once again to all of you for your patience today on the technical difficulties. We appreciate it. We hope you have a good rest of the week and into the weekend.

That concludes today's teleconference. Thank you for your participation. You may now disconnect.