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

Thanks, Rob. Hi, everyone. Thank you for joining us for our fourth quarter 2023 earnings call. I'm here with Joe Russell and Tom Boyle. Before we begin, we want to remind you that certain matters discussed during this call may constitute forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to certain economic risks and uncertainties. All forward-looking statements speak only as of today, February 21, 2024, and we assume no obligation to update, revise or supplement statements that become untrue because of subsequent events. A reconciliation to GAAP of the non-GAAP financial measures we provide on this call is included in our earnings release. You can find our press release, supplement report, SEC reports and an audio replay of this conference call on our website, publicstorage.com. We do ask that you initially limit yourself to two questions. Of course, if you have more, please feel free to jump back in queue. With that, I'll turn it over to Joe.

Thank you, Ryan, and thank you for joining us today. Tom and I will walk you through our fourth quarter and full year 2023 performance, industry views, and 2024 outlook. Then we'll open it up for Q&A. 2023 was a year of significant achievement for Public Storage amidst a competitive industry environment. The team elevated our customer experience and financial profile through digital and operating model transformation. Enhanced existing properties with over 500 solar installations and the Property of Tomorrow program. Advanced complementary business lines, including tenant reinsurance and third-party management, and grew the portfolio through acquisitions, development, and redevelopment. We did so while maintaining one of the real estate industry's best balance sheets, which is poised to fund growth moving forward in conjunction with significant retained cash flow. Just a few of our collective accomplishments include: exceeding 3,000 owned properties and serving nearly 2 million in-place customers. Achieving an approximately 80% stabilized direct NOI margin through revenue generation and expense efficiency that only Public Storage is capable of. Acquiring and quickly integrating the $2.2 billion Simply Self Storage portfolio with approximately 90,000 customers across nearly 130 properties. This was the largest private acquisition in company history. Increasing the size of our high-growth non-same-store pool to 705 properties and 63 million square feet, now comprising nearly 30% of our overall portfolio. Generating record revenues, net operating income, and core funds from operations. Accelerating growth in third-party property management, adding 132 properties and reaching 324 properties in total. And receiving several accolades tied to sustainability including NAREIT's Leader in the Light Award, a second consecutive Great Place to Work award, and achieving top scoring benchmarks among U.S. self-storage REITs. The strength of our team, platform, and brand was evident with move-in volumes up an impressive 9% in 2023, despite a backdrop of weaker customer demand during the year. The new customer environment remains challenging, but we have seen a degree of improvement in move-in rent trends recently. And our in-place customer base continues to perform well with average lengths of stay that are longer than the historic norm. We expect demand from new customers to stabilize during 2024 and the behavior of existing customers, including our recent move-ins, to remain strong due to clear macro conditions, including the potential for a soft landing, the potential for easing interest rates, resilient consumers, leveling home sales, and strong home renter behavior. We also anticipate fewer completions of new self-storage facilities nationally, reducing the competitive impact of new supply in our local markets. All in, the industry is in a better position entering 2024 than it was entering 2023. The full Public Storage team is focused on exercising our competitive advantages, which include advancing our digital and operating model transformation, expanding complementary businesses, and creating partnerships across the broader industry, growing the portfolio through acquisitions, development, redevelopment, and third-party management, and funding innovation and growth today and into the future with the industry's best balance sheet. All of this adds to the growth of our business over the near, medium, and long term. And it comes at a time with the potential for further stabilization in the move-in environment, existing customers exhibiting strong behavior and an outlook for new competitive supply that is clearly in our favor. With good trends in customer demand, less pressure from new supply, and our numerous competitive advantages, we are well-positioned for 2024 and beyond. Now, I'll turn the call over to Tom.

Thanks, Joe. On to financial performance, we finished the year reporting core FFO of $4.20 for the quarter and $16.89 for the year, ahead of the upper end of our guidance range representing a 1% growth over the fourth quarter of '22, and an 8.3% growth for 2023 overall, excluding the impact of PSB. Looking at the same-store portfolio, revenue increased by 80 basis points compared to the fourth quarter of '22, at the higher end of our expectation. That was driven by better move-in volume and move-in rate performance. On expenses, same-store cost of operations were up 5.1% for the fourth quarter, largely driven by increases in marketing spend to support that move-in activity. In total, net operating income for the same-store pool of stabilized properties declined by 50 basis points in the quarter. Meanwhile, the non-same-store NOI grew 31% and 25% for the fourth quarter and '23, respectively, demonstrating the continued strength of our lease-up and non-stabilized assets. Now turning to the outlook for '24, we introduced 2024 core FFO guidance with a $16.90 midpoint on par with 2023. As Joe mentioned, we entered the year more encouraged than we were last year at this time. We've seen the industry work through the declines in new customer demand from the peaks of 2021. We're anticipating that new customer demand stabilizes in 2024 as the macroeconomic picture becomes clearer. That paired with a consistently strong consumer and lower new competitive supply. If we look at the same-store outlook for '24 specifically, the midpoint calls for revenue on par with '23. Similar to last year, move-in rates continue to be the biggest variable in the forecast heading through 2024 as well. We're anticipating at the midpoint case that move-in rents will lap easier comps through the year and cross zero on a year-over-year basis towards the end of the summer. Occupancy results are expected to decline by 80 basis points, which is roughly on top of 2019 occupancies as we sit here today. Our expectations are for 2.75% same-store expense growth driven primarily by property tax and marketing expense. This leads to same-store NOI growth at the midpoint of a decline of 90 basis points. Our non-same-store acquisition and development properties are poised to be a strong contributor again in 2024, growing from $370 million of NOI contribution in '23 to $505 million at the midpoint, with further growth expected in future years. Additionally, embedded in the outlook is incremental acquisition and development activity of $500 million of acquisitions, and we plan to deliver a record $450 million of development in '24. Finally, our capital and liquidity position remains solid. Our leverage of 3.9x net debt and preferred to EBITDA combined with nearly $400 million of cash on hand at quarter end puts us in a very strong position heading into 2024. With that, I'll turn it back to you, Rob.

Our first question comes from Steve Sakwa with Evercore ISI. Please go ahead with your question.

I was wondering, Tom, if you could talk a little bit about the ECRIs that are maybe embedded in the high and low end of growth and how those may be compared to the ECRIs that you achieved in '23.

Sure. Happy to add that color, Steve. I think as you know, I'd like to speak about existing customer rent increases as a combination of customer price sensitivity as well as the cost to replace that customer if they vacate upon receiving a rental rate increase. As we look at 2024, there's a couple of things at play here. One is, as we enter the year, demand is a little weaker, and I'll give you a January, February update here shortly, where move-in rents are down year-over-year as we start the year, similar to how we finished in 2023. That's going to lead to higher replacement costs through the first part of this year. That's going to be a little bit of a drag to ECRI performance. The flip side is, Joe spoke to the strength in move-in volumes that we experienced through '23. Those new customers are going to be eligible for rental rate increases, which will lead to more contribution from the volume of increases that are sent this year. Such that at the midpoint case, we're looking at contribution overall, pretty consistent with 2023 with those two pieces offsetting each other. In the high-end case and low-end case, a little bit better price sensitivity in the high end and a little bit worse than the low end.

Great. And then on the expense growth, can you maybe just talk about what's embedded for marketing and sort of how you're thinking about that? I guess, we were a little surprised that expense growth overall was coming in kind of at $275 at the midpoint. But just what do you have baked in for marketing just given the still somewhat challenging demand environment?

Yes. So as I noted in my prepared remarks, the key drivers of expense growth are property taxes and marketing. So I will note, property tax is our largest expense line item. We do anticipate to be up 4% plus or minus, which is a contributor. And then on marketing expense, taking a step back, we increased marketing spend through the year in 2023 and saw very good returns associated with that. In the fourth quarter, our marketing expense as a percentage of revenue was 2.5%. As you've heard from me in the past, being in that 1% to 3%, 1% back in 2021 when demand was really strong and back towards 3% when you go to a more typical operating environment, pre-pandemic, is a comfortable place for us to be. The first part of 2024, we're going to be lapping comps that will lead to year-over-year growth levels that are higher, similar to what we experienced in the fourth quarter, and then we'll evaluate as we go from there. But we're comfortable in that range and continue to see a very strong return on that advertising dollar.

Our next question is from Michael Goldsmith with UBS. Please proceed with your question.

You finished the year with 80 basis points of same-store revenue growth, and your guidance for the upcoming year ranges from a decline of 1% to an increase of 1%. This suggests that same-store revenue growth is expected to dip before rebounding, which aligns with your expectations for street rates. In the midpoint of your guidance, how much of a dip are you anticipating, and when do you expect the trends to improve over the course of the year?

Good question, Michael. So there's a couple of components to this question that I'll respond to. The first is, as we look at our operating metrics, our operating metrics are starting to improve, right? We talked about occupancy closing the gap as we move through last year, and we finished the year with occupancy down 70 basis points compared to down 240 basis points when we started '23. If you look at move-in rent trends, move-in rents on a year-over-year basis decelerated through the year. In the fourth quarter, they were down 18%. Throughout the quarter, but as we noted in our January update, they improved to down 11% in December. Looking at January and February, they're down in that same 10%, 11% sort of range. So, that improvement has been lasting. As you heard through our outlook, we anticipate that to continue to close as we move through this year. I highlight that because operating metrics tend to lead financial metrics, meaning that as we're talking about some of these operating metrics improve, it will take several quarters to see that in financial metrics. If you think about the shape of the curve and the description of the midpoint case that I gave earlier, it would imply that, to your point, we're going to see some deceleration through the first couple of quarters of this year. But then the second derivative, the rate of change of growth is going to flip positive in that midpoint case in the second half and you're going to see some reacceleration in the financial metrics, again, lagging those operating metrics in the second half. The second component of the question that I just highlighted is, we're already seeing that in certain markets. If you look at the Mid-Atlantic, for instance, or Seattle, markets that maybe didn't have the high highs in 2021, but have been solid performers. We're actually seeing those accelerate as we sit here today in the first quarter and would expect those high, high markets, the Floridas, the Atlantas, for instance, to take a little bit longer to find that turn given how high their high was. But we're already seeing some of that turnaround in some of our operating metrics today.

I have a multi-part question, but it shouldn't be too intimidating. You mentioned that you expect industry-wide demand from new customers to stabilize this year due to improving macroeconomic conditions. First, are you seeing that trend today? Second, can you provide an update on move-in rents for January and any insights for February? Lastly, you mentioned moving rents crossing the zero. If that momentum has continued, how positive could moving rents be as we approach the end of the year?

Okay. Apologies accepted, but you took some liberty there, Michael, but we'll address your question. All right. So let me start with consumer strength and what we continue to see in the portfolio that's been trending to a clear advantage, even with the performance we saw quarter-by-quarter in 2023. The consumer activity, first of all, in existing customers, as I've mentioned, has been quite strong, and we're really not seeing any on the margin evidence that that's likely to change even going into what we've seen through almost two months of this year. Balance sheets are quite healthy. Payment patterns are still better than they were pre-pandemic. We're not seeing any undue or new stress evolving into customer activity. The acceptance of our ongoing revenue management tied to existing customer rate increases. We have a very active engagement process with existing customers that guides us to the tolerance and the level of activity that we're pushing through on ECRIs, that too has not hit different levels of either areas that we’ve become more concerned about. In fact, it's validating many of the things that we've already talked about relative to the performance of existing customers and our confidence that that's likely to stay with us, even coupled with what Tom just mentioned, indicating in certain markets where you're actually seeing some good percolation taking place. That ties clearly to the kind of activity from a new customer demand activity. We’re having to work harder as we did all through 2023 with a variety of tools that we have. They're quite good. In fact, they continue to get much better. We are very confident market-to-market with our scale and the knowledge we have market-to-market. We have the right tools, we have the right brand, and we have the right technologies to continue to pull customers to our platform, and we're going to continue to leverage those going into the next several months. With the anticipation, as Tom mentioned, that by summer or late summer, we're going to start seeing the residual effects to the positive from all those efforts. And then Tom, you can tackle if you choose to, Michael's additional questions.

So, Michael, I'll just maybe take a step back and talk a little bit about how we thought about the macro environment in our guidance. Last year, on this call, we spent a good bit of time talking about the macro environment. We couched the guidance range last year in macro terms and that we viewed it as appropriate given the landscape at the time. At the time, 65% of Bloomberg economists were expecting a recession during the calendar year, for instance, and we thought it would make sense to provide the investment community our assumptions of what that could potentially look like within our guidance range. Clearly, as we move through '23, that recession outcome became less probable. And as such, our financial performance proved out to be towards the higher end of those expectations as we moved through the year. This year, we are not capturing the range in terms of macro. As you think about the midpoint of the range, we are not assuming that the macro environment needs to improve at the midpoint range, but more around the lines of what Joe was speaking to and what we're seeing today. So I hope that's helpful in terms of how we thought about the range. And then I will hit on one of your comments just again because you asked about what move-in rents were doing in January and February. I'll just reiterate that for the group. Move-in rents were down 10%, 11%. So pretty consistent with December performance, which is what you'd anticipate, right, because we're at kind of the trough of rental rates in the winter season here, and we'll be looking to March, April, and May to see some acceleration in moving rents.

Our next question is from Juan Sanabria with BMO Capital Markets. Please proceed with your question.

Could you elaborate on when you expect street rates to surpass the year-over-year breakeven point? Additionally, do you have any insights on how occupancy assumptions might differ at the high or low ends of that range?

Sure, Juan. I'll give you some context around both the high and the low. Specifically, you're speaking to same-store revenues. So that's where I'll focus my attention. As I noted, at the midpoint case, that assumes that we cross that zero on a year-over-year basis for moving rents at the end of the summer and occupancy being down about 80 basis points. Pretty similar to where we finished the year in '23. I would note that, that as we sit here today, year-to-date, we're down 70, 80 basis points in occupancy, so consistent with where we sit today. The low end assumes that it takes a little bit longer for operating metrics to stabilize here. As such, the assumption on when we cross zero on year-over-year move-in rents is at the end of the year. In that case, we're assuming it takes a little longer to stabilize. The move-in environment is going to be a little bit tougher, occupancy is down about 120 basis points year-over-year. At the high end, we're assuming a more vibrant spring leasing season, one which we see a little bit of a rebound in the housing market, something we spent a good bit of time talking about through the fall of last year. There are some indications that we could experience that this year. The high end of the range assumes that. As such, that zero crossing point is at the beginning of the summer in that spring leasing season and occupancy, as you'd expect, results in better performance down about 20 basis points throughout the year, with an acceleration in the summer and a higher peak seasonally.

And then for my follow-up, you're assuming acquisitions in the guidance. So just curious if you could speak to the investment environment, any color on where you're seeing stabilized cap rates and just the quality and the quantum of opportunities out in the marketplace?

Yes, sure, Juan. I'll take that. I would say, at this point, we're continuing to see the same environment that we saw through most of 2023. So a lot of owners are reluctant to put properties into the market, knowing that they're going to potentially not achieve the cap rate or the valuation that they expected based on prior year inflated valuations, et cetera, when interest rates were at a much different price point. So the reluctance continues. The amount of activity going into the first part of this year, which is typically very light, is just that. We are getting a number of inbound discussions that are tied to properties that are quote-unquote not on the market to either test the water or judge whether or not we are ready to transact at a valuation that either meets or would be acceptable for that particular seller. We do not have anything as noted in our release, currently under contract. The team is busy. We're engaged in a number of different conversations with a variety of different-sized opportunities, whether single assets or larger portfolios. But as we saw in 2023, the beginning of 2024 is likely to be very similar. We'll see going into the next few months if there's either some pent-up demand or additional realization that cap rates have adjusted, and we'll just see if, in fact, there's going to be more trading. Clearly, one thing that could moderate that to some degree in push activity to a higher level is some activity by the Fed reducing interest rates, potentially with some impact on cap rate adjustments, et cetera. But frankly, there's just not a lot of trading going on right now to give you any really clear sense of how directly cap rates have changed at the moment. But the gap continues, meaning the level of seller expectations to what we feel are prudent ways for us to allocate capital. Many of the conversations just start with that, and we'll see how that plays out here in the near term.

Our next question is from Jeff Spector with Bank of America. Please proceed with your question.

Great. Just trying to think about all the comments, upper end, the lower end assumptions, skepticism, we continue to hear. Just some of the concerns, I mean, I guess to be clear, are you saying from the data you're seeing year-to-date that you finally feel there is more or greater visibility on how to forecast this year versus, let's say, last year?

Yes, Jeff, I think as we sit here today, we do have more visibility, we think, heading into this year. I mean, I just spoke earlier around how we couched the ranges last year in the macroeconomic environment. Our view is the macroeconomic environment is clearer this year. We're not couching the ranges that way. As we sit here today, right, it is very different than last year. Last year, we knew that demand was weaker, and we were going to see revenue growth decelerate through the year in a pretty meaningful way. This year, that pace of deceleration has really slowed. As I highlighted earlier, there's actually some markets in our portfolio that are reaccelerating already in the first quarter, which we view as leading as we move through the year. From a range of variability, less than last year, that's not to diminish the fact that we're still in an uncertain environment. We're still talking about moving rents being down 10%, 11% to start the year. That's not like a typical pre-pandemic year, where we'd be debating our move-in rent is going to be up 3% or are they going to be up 5% in a very tight band. That's not the environment we've been operating through in the last several years. As such, we think we've couched the ranges appropriately to encapsulate that variability. We do feel more confident in the range of outcomes this year than we did last year.

And like many times, Jeff, it's never one single issue, but Tom just went through a number of the things that have given us more clarity and perspective going into this year that we think are additive one by one. Another factor that's continuing to trend very favorably to the entire industry that we're seeing, particularly in nearly every market we operate in, are reduced levels of deliveries. The development business has continued to be very, very difficult. Funding for new construction is either at a very high cost or from an availability standpoint, very limited. The time to get through entitlements even for our own processes are continuing to be very difficult. So this too creates another additive element that we have even more perspective on now that we've been through a multiyear deceleration of new development deliveries, putting us in a very different position even year-by-year that we've had more confidence to say this is a different environment, very different than where we were even a year ago. So with that, we think that we've got the right perspective, continue to read the variety of tea leaves out there, but we are very confident that we've got the right tools to guide us and put the kind of perspective that we've got into our outlook for 2024.

Great. And then my follow-up is, can you discuss trends you're seeing in January and February, including move-ins, move-outs, and maybe which markets are doing better or worse? Let's say, year-to-date?

Sure, Jeff. I mean I think I've already covered the move-in rate component as well as the occupancy side. So maybe I'll just focus on the market part of the question, which is not too dissimilar to fourth quarter performance. We continue to see strength in Southern California, for instance, as our strongest area of growth. As we spoke about through '23, the markets that had the highest highs in '21 and '22 are giving back some of that appropriately. The weaker markets on a growth rate basis to start the year are some of those southeastern markets, Florida, Atlanta, et cetera.

Our next question comes from Keegan Carl with Wolfe Research. Please proceed with your question.

Could you provide an update on your development pipeline for the year? Where do you anticipate finishing based on your expected deliveries in 2024?

Yes, Keegan, maybe I'll just talk a little bit about the development environment and then some of the sequencing of our deliveries. As we've sat here today, we've been trying to grow our development business from where we were delivering more like $100 million to $200 million in deliveries in '21 and '22. Last year, we delivered $360 million, as I noted in my remarks, we're looking to deliver $450 million in this year. So an acceleration when the industry overall is seeing delivery slowdown. So we're taking some share there in growing that business. We're doing so because we think it's the highest risk-adjusted return on capital. You can see the returns that we've achieved on our development vintages in the sub. We have an in-house team that's dedicated to this program, development, construction, and design that are all out working on growing that pipeline. This will be a record year. The team is out figuring out how we're going to backfill that development pipeline from here in a challenging development environment. As we sit here today, that's a business we want to grow. We'll be looking to backfill that pipeline and have deliveries next year, hopefully around the same levels that we have this year and go from there.

And yes, just from a timing standpoint, Keegan, a little lighter in Q1, but then pretty balanced deliveries in the subsequent three quarters a little bit differently than what we saw in 2023, where we had a lot of deliveries hit more toward the second half of the year. We've got a good combination of both ground-up new development, and we're a little over-weighted on expansion and redevelopment opportunities, particularly tied to unusually large projects that we'll complete in 2024. As Tom mentioned, the team is working hard not only to continue to grow the overall pipeline, but to continue to put these generation five Class A properties into a whole variety of markets. We're continuing to see very good lease-up and again, returns tied to the development activity, both new development and redevelopment.

Got it. That's really helpful. And then shifting gears here, I know Tom mentioned a little bit about demand. I'm just curious, have you seen a material change for storage demand in L.A. on the back of the flooding? And then can you just remind us of what the typical tailwind of a natural disaster is for demand in a given market?

Sure. So I wouldn't call the rains that we've had in the winter here in Southern California a natural disaster. It has been raining this week, frankly. So we don't see a surge in demand. In fact, what we tend to see is Southern California residents and drivers tend to stay off the roads, and you don’t see as much move-in activity or move-out activity, for instance, in periods of time when it's raining here in SoCal. Overall, I'd say demand remains healthy here. Occupancies are very healthy in L.A., San Diego, and Orange County. So we feel very good about how the portfolio is set up, and we'll work through the rains here in SoCal.

Our next question comes from Spenser Allaway with Green Street Advisors. Please proceed with your question.

Maybe just a more pointed question on the transaction market. And I know it's a small sample set here, but the 11 assets you closed in the fourth quarter. Can you share the going in yield and then where you expect that to stabilize?

Sure. To get into specifics, there's a range of initial yields depending on the stability of the assets. Among those 11 assets, some were properties without a Certificate of Occupancy, meaning their initial yield is zero or slightly negative. Others were more stabilized, with initial yields likely between 5% and 6%. We're aiming to enhance the operations of those portfolios and increase their yields to over 6% as we consider the return profile of those assets. This trend aligns with what we observed throughout most of 2023. As Joe mentioned, we'll assess how the interest rate and capital environment develop in 2024, but hopefully, this provides you with a benchmark on yields.

And Spenser, from a strategy and appetite standpoint, we continue to look for properties that are potentially either lease-up opportunities or stabilization opportunities by putting those assets on our own platform. So we're not shy at all about taking on lease-up risk. In fact, many times we see an actual pretty sharp improvement once we put those assets onto our own platform. We're confident again that those strategies will play well even going into this year and continue to look for a whole range of different types of assets even based on age and maturity of the tenant base, et cetera. But clearly, no differentiation relative to the strategy we've deployed over the last few years looking for opportunities when properties are far from stabilized. Again, buying the properties at the right price point, location, et cetera, continues to be very advantageous for us.

Okay. Great. And to that point, in regards to the Simply portfolio. Can you provide an update on where the rent and occupancy stands today for those properties relative to the same-store pool?

Sure. The rents of that portfolio have been improving as they've been added into our portfolio. We've already seen some of the benefits of adding that portfolio in. The occupancy, as it sits there, I think it's in the mid-80s today, seasonally, I think when we took it over in the peak of the summer, it was towards the upper 80s. We'll obviously look to lease that back up into the spring leasing season and take the occupancy of there, ultimately into the '90s on stabilization. We're seeing good trends as we've added that portfolio and those 90,000 customers into our portfolio and on track for a good spring leasing season with that portfolio with properties orange painted and public storage signage, which the customers are reacting well to.

Our next question comes from Todd Thomas with KeyBanc Capital Markets. Please proceed with your question.

This is A.J. on for Todd. I appreciate you guys taking the time. Just First one, as you've noted, you made good progress on narrowing the occupancy gap year-over-year over the past few quarters. I guess, why would you not expect to call back more occupancy throughout the year, given the easier comps and the broader stabilization that you're anticipating in your base case around move-in rent and demand?

Yes. I think part of what you're seeing in that midpoint case is if you take a step back, right, we had really strong demands in occupancies in '21 and '22. As those tenants cycled through and we experienced weaker demand through '23, we're seeking to maximize revenue ultimately in a trade-off between rents and occupancies. That's managed at a very granular level, at the unit level across our properties based on the demand we're seeing, the customer price sensitivity, et cetera. And so that balance is real at the granular level. What you see at the output is it made sense to give up some of that 2021 heightened level of occupancy to maximize revenues. As we sit here today, our occupancies are down about 70, 80 basis points compared to where we started in 2023. Again, that midpoint case doesn't assume that there's a big uplift in seasonal demand. And so you're not going to see a big lift there similar to how we experienced last year. As we move through the year, you may see some closing towards the end of the year, but you're going to probably be finished on average through the year about the same as where we're sitting today.

Okay. That's helpful. And then just on the seasonality, you had softer seasonality last year. What's embedded in the guidance for 2024? And I guess, really looking at historical data. When do you expect to start seeing the pickup in rental demand for the peak rental season?

Sure. I'll discuss seasonality in terms of the change in occupancy from peak to trough. Looking back to 2015 to 2019, there was usually around a 280 basis point change in occupancy from June 30 to December 31. In 2022, this change was about 240 basis points, which was slightly less seasonal than usual. In 2023, it dropped further to about 160 basis points. Our midpoint case for 2024 is just over 200 basis points. This indicates a bit more seasonality, but not as much as we saw in 2022 and significantly less than what we experienced before the pandemic.

Our next question comes from Eric Wolfe with Citi. Please proceed with your question.

You talked about the moving rents crossing over into positive territory in late summer. Just curious where moving rents will be at that time. So what's the annual contract rate that you expect to see in late summer? And how much of that improvement from current levels is just driven by seasonality versus a strengthening of your business?

Thanks, Eric. I don't have the exact figures for our third quarter move-in rents right now, but we expect them to turn positive by the end of summer. I believe the team will gather the third quarter contract rents for you. Each year, there is some seasonality to consider. Last year was quite unusual, as we didn't see much seasonal strength in April, May, and June, partly due to the housing market adjusting to lower transaction volumes. We anticipate that move-in rents will increase, as they did last year, and will rise in absolute terms during the summer. We expect to see more growth in rental rates this year, helping to close the gap from now until the end of the summer compared to last year. Does that make sense?

Yes, that makes sense. The question really is about the extra gap that needs to close to surpass seasonality. Can you provide some context? Is this gap relatively large compared to historical data? Is it somewhat typical when compared to other recovery periods? I'm trying to grasp whether this situation is unusual based on past experiences.

Yes. I guess the way I'd characterize it is we saw less than what we would typically see last year in terms of a seasonal uplift in rents. What we're saying is we're expecting stabilization in demand through this year, which means that we shouldn't continue to set new lows seasonally adjusted on moving rents in the midpoint case. That's going to result in the closing of that gap. We're not suggesting that the environment needs to get significantly better, but rather stabilize as we move through this year and not set fresh lows. And to follow up on your question, the team dug it up. We had move-in rents on a contract basis in the third quarter about $16.

Our next question is from Ki Bin Kim with Truist Securities. Please proceed with your question.

A quick question on ECRIs. As you look ahead, are you projecting to be a bit more aggressive in terms of magnitude or frequency with your ECRI program compared to 2023?

We previously discussed this, and there's a balance to consider this year. On one hand, the consumer remains strong, as Joe mentioned in his comments, and we haven't observed a notable change in customer price sensitivity, which has been encouraging through 2022 and 2023. On the other hand, replacement costs are higher at the start of this year compared to the beginning of last year, with move-in rents down by 10% to 11%. This will negatively impact overall contribution. However, we did bring in significantly more new customers last year, with strong move-in rents up about 9%, which will positively influence the number of increases we implement throughout the year. Overall, these factors will balance out, making the contribution of ECRIs fairly consistent year-over-year based on our current midpoint projection.

Okay. And I'm not sure how you internally gauged us, but can you provide any color on changes that you noticed on your customer conversion rate or your market share win of customers?

Yes. So Joe spoke to a lot of the tools that we were using through last year. Advertising, promotions, rental rates, and the power of our advertising platform online. We saw better than industry top-of-funnel demand into our system, which ultimately led to good move-ins. We also saw stronger conversion associated with both pricing and promotion, which are more conversion-related items such that conversion rates through all the channels that we operate in, both website, call center, and folks walking in, are higher in '23 compared to '22, and we're seeing good trends into '24 as well.

On top of that, Ki Bin, as we've talked about, our digital platform continues to give customers the ability to again transact with us through not only the digital platform but now even through our care center, et cetera. We're making that conversion activity even that much more effective relative to consumer intent with all the tools that we have to get them to top-of-funnel activity, but then actually to the conversion itself from a speed, efficiency time of day. Frankly, many of our customers transact with us and off business hours now. So all very good tools that continue to lead to a very strong conversion that to Tom's point, we feel like we've got good industry-leading capabilities that we're going to continue to invest in and optimize going forward.

Next question comes from Zhan Huang with JPMorgan. Please proceed with your question.

I guess, first off, I'm glad you fare homes better and Shurgard definitely fell a little bit more of Northern California. But I guess my first question is just, is it safe to think about the low end of the range, that's basically there being no return, no seasonal demand? Or are you expecting higher seasonal demand compared to last year even at the low end?

We're assuming less seasonal demand in the low end, I agree with that. I think that's something I mentioned earlier. So I agree with that and more seasonal demand in the high end.

Okay. And then I guess my second question. You've grown your management platform pretty well. Have you had any success in sourcing acquisitions from there yet? And how big of a potential source of acquisitions do you think that could represent in the future?

Yes. That's a key component of the growth of the platform itself. It's a very relationship-oriented business. Thus far, we've acquired close to 40 assets out of the program. Over the last few quarters, it's been on the light side. Again, it's indicative of the environment that we've been seeing in acquisitions in general with many owners not of a mindset that this is the right time necessarily to do a transaction or a trade. But with the growing platform itself, again, we saw very good traction in 2023. We've got good momentum going into this year as well. Those additive relationships, knowledge of the assets, and their comfort level with our own ability to transact very efficiently, will continue to be a good source of not only relationships but acquisition activity over time. I noted that now the program is at about 325 assets. We still see good momentum to continue to grow towards our ultimate goal and optimization of the platform. So we'll likely see that in the next year or two, and with that, more acquisition opportunities.

Our next question is from Eric Luebchow with Wells Fargo. Please proceed with your question.

You could talk a little bit about the spread between move-in and move-out rents. I assume that gap should start to narrow by midyear just based on the move-in rent improvement you talked about. But should we expect any change in the average rents of customers moving out based on average length of stay or any other variables that we should consider there?

Eric, it sounds like you have a pretty good handle on that. We're sitting here in the winter, Q4 and Q1, you're going to have that differential between the move-ins and move-outs to be higher. That's going to then narrow as we move into Q2 and Q3, and then rewiden again in the fourth quarter. Obviously, the comments that I made around moving rents getting to a point where they're not declining on a year-over-year basis through the fourth quarter will be helpful on that. You're still probably going to end in a similar territory on gap there between move-in and move-outs in the midpoint case. We're very comfortable with that and managing to achieve those higher revenues from our in-place customers who are placing a lot of value on our space.

And just my follow-up, you touched on this several times, but the newer customers you've loaded at much lower move-in rates the past year. You talked about increasing the frequency and the magnitude of rate increases for that cohort. So have you seen those large rate increases kind of perform within expectations as you've started to push those through kind of toward the end of '23 and early 2024 in terms of either retention or customer receptivity?

Yes, I'd say to reiterate something that Joe mentioned earlier, which is that the customers continue to behave as expected and with some strength, and we continue to see good momentum within that program, and that includes both newer customers as well as longer-term customers in the program.

Our next question is from Ronald Kamdem with Morgan Stanley. Please proceed with your question.

The first is just on the same-store revenue guidance of flat. I guess I'm trying to tie your comments about a first half and second half dynamic where the first half maybe is a little bit slower and you have a pickup in the second half. So should we be bracing for sort of negative same-store as you start the year before you end the year somewhere sort of well above zero to get to the midpoint of the guidance?

Yes. That's a good question, Ron. I hope that everyone is not embracing. But I would anticipate that we see deceleration through the first part of the year. Yes, that likely involves a negative performance on a year-over-year basis through the first half. Then yes, reacceleration as the lag between operating metric improvement and financial metric performance starts to show in the second half of the year.

Great. My second question is about understanding the nature of your guidance. Last year, there were significant macro concerns, which may have justified a more conservative outlook. However, you mentioned that move-in volumes at 9% are essentially twice what you achieved in 2022, indicating strong potential for pricing power. Can you elaborate on how much conservatism is factored into this year’s guidance and how we should interpret that?

Sure. Last year, we examined a range of macro scenarios for our guidance. The same-store revenue range was approximately 250 basis points. Currently, there's still some uncertainty, though possibly slightly reduced compared to last year. This year's range is 200 basis points, which is not significantly different. Our core FFO range was about $0.70 last year, and this year it's around $0.60, indicating similar levels. As a reminder, we operate a month-to-month lease business, so there is potential for variability throughout the year. I've aimed to clearly communicate the range of possible outcomes for several key metrics, both high and low. We're focused on executing our plan this year, and I'm leaving the assessment of conservatism or aggressiveness to the investment community. We want to maintain transparency about our assumptions and our approach to navigating the year.

Our next question is from Steve Sakwa with Evercore ISI. Please proceed with your question.

Just one quick follow-up, Tom. It sounds like your contractual rent for move-ins will still be negative in the first half of the year. I think you said it was running down about 11% in the first quarter. You expect it to get to about breakeven in the third quarter. I guess, what is the overall expectation for the year? I assume fourth quarter might be up fourth quarter over fourth quarter, but that still leaves you kind of negative for the year? Is that kind of the right way to think about it?

Yes. That's the right way to think about it, Steve. The midpoint case, I think move-in rents will be down 3% on average through the year.

Our next question is from Michael Goldsmith with UBS. Please proceed with your question.

I have a quick follow-up. From our discussions with investors, it seems they were anticipating same-store revenue growth at the lower end of your guidance. What indicators do you need regarding consumer behavior or the length of stay to achieve that same-store revenue growth at the lower end of the guidance, assuming other factors remain constant? I realize there are many variables at play, but what would be necessary to reach the low end of the store revenue guidance?

Well, I would...

Subject to the ECRIs, we provided various metrics at the lower end that would guide you there. The perspective I shared is that new customer demand in that lower case scenario doesn't stabilize until later in the year, and we won't see year-over-year moving rents cross until the fourth quarter, really toward the year's end. In this scenario, we are assuming there’s a bit more price sensitivity than what we are currently experiencing. To answer your question directly, we anticipate that move-out churn will align with the same levels we observed last year, which is very consistent with 2019. Churn levels are slightly elevated in that lower end scenario, but not significantly. That’s how we arrive at the low end.

And then again, Michael, as we've been speaking to, we're seeing, again, continued validation of a healthy economy, a very consumer-oriented economy where the pressure points of a year ago or beyond relative to whether it was inflation, interest rates, employment, et cetera, are at a better place today with more clarity today than they were certainly at the beginning of 2023. That continues to play through relative to our own month-by-month operating metrics that we're seeing going even into 2024. Something would have to shift pretty materially away from that to give us a different low-end view as well.

We'll obviously update you on that as we go through the year. I'd maybe reiterate something I said in my prepared remarks that I'd focus more on move-in rents. That has been the big area of variability over the last year or two on same-store revenue performance. I tried to give the investment community some guideposts in terms of how we think about that going through the year. We operate a month-to-month lease business where we're going to be adding about 6% to 8% of our tenant base every month. The rate with which we add those customers is going to be very impactful on where we end up through this range. We'll update you on what we're seeing on operating trends as we move through the year.

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

Thanks, Rob, and thanks to all of you for joining us today. We'll talk to you soon. Take care.

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