Greetings and welcome to Public Storage Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ryan Burke. Thank you. You may begin.

Thank you, Rob. Hello everyone. Thank you for joining us for our second quarter 2024 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, July 31st, 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, after that, feel free to jump in queue with more. With that, I'll turn the call over to Joe.

Thank you, Ryan, and thank you all for joining us today. Tom and I will walk you through our recent performance and updated views. Our second-quarter performance exceeded our expectations regarding existing customer behavior and occupancy levels, but fell short on rents charged to new move-in customers. Move-in rents were down 14% with competitive pricing dynamics in many markets. That compares to down 6% in our original forecast. Accordingly, we have adjusted our guidance ranges to reflect more competitive market move-in rent conditions for the remainder of the year, which Tom will cover in a moment. Overall, we are encouraged by positive momentum in our business, including new customer activity, supported by a healthy consumer with a sustained need for more space at home and the effectiveness of our broad-based customer acquisition strategies. Occupancy trends are outpacing expectations with positive net move-ins year-to-date. Our in-place customers are behaving well with good payment patterns, reduced vacate activity on a year-over-year basis, and strong length of stays. Our high-growth non-same-store pool, which comprises 542 properties and 22% of total portfolio square footage, is leasing up quickly with NOI growing nearly 50% during the second quarter. Several markets within our portfolio are seeing month-over-month revenue growth improvement. Waning development of new competitive supply will be supportive to accelerating operating fundamentals. The acquisition market, while still quiet, is showing some signs of broader activity. Based on these favorable trends and our strong capital position, we also repurchased $200 million in Public Storage common shares during the quarter. We continue to view 2024 as a year of stabilization across our portfolio. We are excited about our trajectory over the near, medium, and long term. Now, Tom will provide additional detail.

Thanks, Joe. We reported second-quarter core FFO of $4.23 per share, representing a 1.2% decline compared to the same period in 2023, and in line with the same 1.2% experienced during the first quarter. Looking at the same-store portfolio of stabilized properties, revenues declined 1% compared to the second quarter of 2023. A relatively even mix of lower occupancy and rents drove that decline. The rent decline was primarily driven by lower market move-in rents, which were partially offset by better-than-expected behavior of our in-place customers. Our occupancy gap compared to 2023 narrowed to down 30 basis points at quarter end, outperforming our expectation on positive net move-ins. On expenses, same-store cost of operations were up 90 basis points in the second quarter. Our operating model transformation and solar power generation strategic initiatives helped reduce payroll, utilities, and indirect costs, offsetting other line items. In total, net operating income for the same-store pool declined 1.6% in the quarter. Our operating margin remains healthy at an industry-leading 79%. The strong performance of our non-same-store pool continues, as Joe mentioned. With this pool at 83% occupancy and comprising 22% of our total square footage, it will be an engine of growth for the remainder of this year and into the future, which is a good segue into our updated outlook for 2024. We revised our same-store revenue assumptions and core FFO per share guidance to reflect lower move-in rents during our busy season, namely in May, June, and into July. We removed more optimistic scenarios within our revenue growth range, which reflected the possibility of move-in rents reaching parity with last year during 2024. The assumptions underpinning the negative 1% growth scenario at our new midpoint are as follows: move-in rents, on average, down 12% for the full year, finishing in December with move-in rents down mid-single digits. Our other assumptions are unchanged. Occupancy averaging down 80 basis points for the year and a consistent contribution from existing customer rent increases compared to last year. We also adjusted our 2024 non-same-store NOI outlook by $17 million at the midpoint to reflect later timing of acquisition closings and lower move-in rents similar to the same-store pool. Our outlook for the non-same-store pool is for a strong 32% growth this year at the midpoint. Based on those assumption changes, we have revised our core FFO guidance to a range of $16.50 to $16.85 per share, an approximate 1% reduction compared to the midpoint of our prior guidance range. Our outlook for capital allocation in 2024 is unchanged. We will deliver $450 million in new development activity this year, a record year for Public Storage. We're seeing signs of activity in the acquisition transaction market, and we're both eager and well-positioned for pent-up activity services there. Our capital and liquidity position remains strong. We refinanced our 2024 maturities in April, and leverage of 3.9 times net debt and preferred to EBITDA puts us in a very strong position. As Joe highlighted earlier, we are encouraged by positive momentum in many aspects of the business. We're confident in our trajectory as we move through this year of stabilization in 2024. So with that, I'll turn the call back to Rob to open it up for Q&A.

Thank you. At this time, we'll be conducting a question-and-answer session. Our first question comes from Steve Sakwa with Evercore ISI. Please proceed with your question.

Thanks. I guess, good morning out there. Maybe, Tom, just sort of following up on the guidance changes in the down 12% that you and Joe sort of spoke about. Maybe just talk about either the market mix or how you thought about that? And I guess under what economic conditions or housing scenarios could that possibly get better in the back half of the year? And I guess, what are the risks that, that down 12% could maybe be worse than you're currently forecasting?

Yes. Sure, Steve. So, there are a couple of components there. I'll start with the first piece that you highlighted, which is, what are we seeing in markets? And we are seeing continued positive momentum in many of the markets that we've highlighted to date, the markets like the Mid-Atlantic, Seattle, San Francisco, and we can reiterate those if helpful. But we're seeing improvements in move-in rents in those markets as well. For example, a market like Seattle was nearly flat on move-in rents for the second quarter, already with improving trends there. The flip side, and we've spoken about this a good bit, is that markets that were maybe more high flyers during the last several years have tougher comps and continue to have move-in rent growth that is more like down 20%, even higher in many instances. Those markets are still in very good shape versus pre-pandemic in terms of their demand fundamentals, population inflows, and the like, but are going to take a little bit longer to stabilize. And I'd say big picture, for move-in rents, we've seen a modest improvement year-to-date. If you look at the first quarter, move-in rents for us were down 16%, the second quarter down 14%. As we sit here in July, they're down 12%. So the improvement is there, it's just more modest in terms of pace than what we had originally outlined in our February call. And as we sit here today, we're still calling for modest improvements here, but we've recalibrated that pace into the second half as well.

Okay. Regarding capital allocation, it was interesting to note the share buybacks, which I assume is partly due to a lack of capital activity related to acquisitions. What are you observing on the acquisition front? You mentioned that things might be picking up a bit, but what opportunities are available and how do you evaluate the buybacks in relation to development spending or acquisitions?

Okay. Sure. I'll start, Steve. From an acquisition opportunity standpoint, for the last two or three quarters, we've pointed to the fact that there was a relatively active amount of inbound calls that we were in dialogue with a whole host of different types of owners, whether individual, small, and in some cases, somewhat larger portfolios. That type of activity is still in hand. What typically happens on an annual basis is that you'll see more activity start to percolate in the second half of the year. We think that type of activity is likely ahead of us. There are a number of different owners that, for a variety of reasons, are in a position to transact, whether it’s capital constraint related or need for recapitalizing existing assets or pivoting out of any asset for any particular reason. So we have a fair amount of activity that gives us a level of confidence that we're likely to meet the number that we guided to at the beginning of the year. Clearly, we'll see how that continues to play out. But we're encouraged by the amount of activity that's playing through as we speak. Now, from an alternative standpoint, regarding how we think about the timing, the size, and the efficacy of actually buying back our own stock, that's typically something we look at from a capital alternative investment standpoint. We felt for a variety of reasons that we had a good opportunity in the quarter to buy back shares. Obviously, we've got plenty of capital to deploy. We felt it was a good opportunity for us to extract the value that we see in our shares. And as we go forward, we'll continue to look at that alternative as we always do. And with that, we'll see what plays through as we go forward.

Thanks.

Thank you.

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

Hi, good morning. With the revised same-store revenue range, could you discuss the cadence or the expected exit run rate for 2024, particularly in relation to how 2025 might begin?

Yes, sure, Juan. So, obviously, implied in the revised outlook is a number for the second half, right? And I think as you look at the first half, our same-store revenue growth was down about 50 basis points, while the implied second half is down about 1.5%. So I wouldn't get any more specific in terms of where exactly we're going to be the month of December or otherwise. Obviously, we'll give you a 2025 outlook as we get into February. The one set of points that I would share is that we continue to be positive around the trajectory of both industry fundamentals as well as our fundamentals as we sit here today. We've spoken about how this year is a year of stability and stabilization for the sector. There are reasons to be optimistic around future demand growth as we get through 2025 to 2027. At the same time, that's going to be counterbalanced with declining deliveries of new competitive supply, given the challenges in new construction today. So we continue to be optimistic around the outlook for the business in future years without getting into any 2025 specifics.

Fair enough. And then just a follow-up to Steve's question. Hoping you could talk a little bit about cap rates, maybe where you're looking to buy assets whether stabilized or still leasing up? And kind of maybe where assets are transacting, recognizing there's not a huge amount of volume changing hands, but just commentary on asset pricing, please?

We definitely need more transaction activity to stabilize or reinforce the current trends in cap rates. If you look back over the past couple of years, cap rates were around 4% but have trended up to 5%. Currently, we're seeing around 6% for transaction activity. To stabilize those rates, we need to see more trading volume. From our perspective, given our cost of capital, we are positioned to transact in that 6% range. We are closely monitoring the market and assessing potential value creation, whether it involves stabilized assets or those that are still in the leasing process. We are well-equipped with the necessary capital to pursue opportunities that align with our value creation goals.

Thank you.

Thank you.

Our next question comes from Nick Yulico with Scotiabank. Please proceed with your question.

Thank you. Sorry if I missed this. Did you give any commentary yet, or are you able to, on the July occupancy and move-in rates?

Yes. Sure, Nick. I can provide some commentary there. I did highlight that July move-in rents are down about 12% as we sit here today. So, again, sequential improvement from the first and second quarters there. On occupancy, we're closing the month down circa 40 basis points in occupancy. So, a touch below where we finished June, but in a narrower gap than where we started the year.

Okay. Thanks for that, Tom. And then in terms of a question on ECRI, what are you seeing in trends with tenants? I mean, is there any signs of fatigue or pushback that you're getting on ECRI? I just wanted to be clear as well on the same-store guidance change. Was there any assumptions that were changed on ECRIs? Or is it all just moving rents?

Yes. Thanks. So, we continue to be encouraged by behavior from our existing tenants. If you think about the existing tenant base and storage, a lot of the existing tenants we're speaking to today were move-in customers last year and the year before. We continue to be encouraged by the performance of those tenants as they age with us and find value in our product in their marketplaces. What we've seen from a trend standpoint is very consistent price sensitivity from that customer base. And at the same time, we've got an environment where we moved a lot more customers in the last year than we had in the prior year. Frankly, we've largely matched that sort of volume in the first half year-to-date, such that the contribution from more recent move-ins has been quite strong. And so we've been pointing to a relatively consistent overall contribution from that program to revenue growth in 2024 compared to 2023. And that, to your point, is unchanged from our original outlook; we continue to be encouraged by that customer base.

All right. Thanks, Tom.

Thanks.

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

Thank you. My first question is about the move-ins. You've mentioned before that the net move-ins have exceeded expectations. Can you elaborate on that? I know housing is usually a key factor, but I'm curious if there have been any changes influencing people's decisions to move in. Do you conduct surveys on this?

Sure, Jeff. Yes, we definitely keep a very close eye on the variety of demand factors that bring customers to us. Housing in general, obviously, is an important part of that overall acquisition opportunity. What has continued to be quite strong. I mentioned in my opening comments, the need for more space, whether you're an owner or a renter, continues to be a very active rationale or active reason to come to self-storage. Clearly, it was surfacing through the pandemic. We're far past that now. The different dynamic tied to needing more space at home is the affordability factor, whether you're a renter or an owner. There’s clearly less activity going on in existing sale activity. The counter to that and actually the driver that’s two-plus or times larger than home sale activity is renter activity. Those customer types continue to be quite good relative to length of stay, commitment to the space, affordability factors, etc. We're really not seeing any erosion relative to that kind of activity, which has been quite beneficial to the acquisition opportunity that we've been able to keep moving activity quite vibrant. So, no real change there. And actually, as Tom and I have spoken to, we look at that as, again, a very key driver relative to the vibrancy of the business overall. We're just in a more competitive environment relative to what those initial move-in rates are. But the stabilization and the behavior of existing customers is quite good.

And then my second question, I think you said in your opening remarks, you talked about waning development and new supply, lower supply. Can you quantify that? Or I guess, elaborate on that comment, please?

Yes, sure. Again, I wouldn't say there's any sea change in the consistent view that we've had on national development deliveries, meaning, we're kind of in that mid-2% range or so. The development activity that we're seeing in any particular market has been quite positive. It's not the same volume that we've seen certainly in prior cycles, and we don't really see any momentum coming back to the amount of volume that's likely to happen nationally. Like always, we're keeping a close eye on a handful of markets that might be a little too active relative to development activity. One example might be the West Coast of Florida; there's quite a bit of activity going on there. Phoenix and Las Vegas, on a percentage of existing stock, have a little bit more activity than we'd like to see. But frankly, beyond that, we're very happy with the lack of new development activity coming into the markets. The headwinds around development activity are very consistent with what we've spoken about over the last several quarters. Costs of capital, timing for entitlements, risk around component costs, and then, again, the amount of time and projections that are going into rent levels and stabilization need to be factored in as well. So with all that, we basically have a backdrop of very low development activity. On the flip side, for our own development team, it's given us a good opportunity to jump into a number of markets that's fueling the amount of development activity we particularly continue to drive. As Tom mentioned, we're looking at a record level of development activity in 2024, and the team is working hard to look for additional opportunities into 2025, 2026, and 2027.

Thank you.

Thanks, Jeff.

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

Hey, just two quick ones. One is, just starting with the expenses. Maybe just a little bit more commentary on both the property taxes as well as sort of the payroll reductions? And how much has being able to get a lot of tenants moving in digitally sort of helped with that? And how much more is there to go?

Yes. So the first question around property taxes for the quarter, up 3.9% year-to-date, up 5.6%. I think our outlook is plus or minus 5% for the year in property taxes, which is right around what we're anticipating there. And really, that's working through assessments that are still catching up to both NOI as well as property value increases over the last several years based on assessment cycles. What more interesting is your question around property payroll. I highlighted earlier around some of the operating model transformation that we've continued to embark upon over the last several years, and we've talked about more specifics around our Investor Day going back several years. Our initial expectations at that time were to utilize one of the elements that you highlighted, which is our digital leasing platform, which we call eRental, where today about 70% of our new lease transactions are coming to us being signed digitally before a customer arrives at the property, and that's powerful. This has allowed us to put a digital ecosystem around that. That has enabled us to think differently around both operational roles and staffing levels. And you can see that in the P&L. Initially, we had shared reducing property hours by about 25%. We achieved that at the end of last year. Through this year, we've got continued optimization that's taking place. We're not done talking about this. We think there's opportunity from here. We continue to be encouraged by that activity providing a digital and consistent customer experience. While I have the mic on, I might as well highlight our solar power initiatives as well. I highlighted in my prepared remarks that you can see utilities down 8% in the quarter also. We're on a path of putting solar on over 1,000 of our properties over the next several years. You're starting to see that benefit in utilities as well. That obviously benefits both our utility expenses and our carbon footprint. We continue to be encouraged by that initiative as well.

Got it. Thanks for that. My second question is regarding the recent changes in guidance related to new tenant pricing. When considering the current environment, including website visits and bad debt, it seems that the commentary indicates a generally positive outlook. What we are trying to understand is what is driving the increased competition. Is it simply a more cost-conscious consumer or perhaps housing factors? If the indicators for demand remain strong and supply is believed to be decreasing, what is the main reason for the more competitive environment we are experiencing? Thanks.

Yes. That's a good question, Ron. I think there are a couple of components to talk through there. One is what Joe mentioned earlier around our own move-in traffic has been pretty consistent with last year, which was a very strong year. We continue to see good traffic on our side. But we're using tools in order to attract those customers, including increased advertising, etc. Looking at the industry overall, as we think about the impact on the competitive landscape in our local markets, demand is down year-over-year. One of the metrics that we can share with you is around Google keyword search volumes for storage-related terms. We've highlighted that in the past as being down year-over-year. We started the year down year-over-year. We continue to, and the encouraging thing there is that the year-over-year decline is half today of what it was at the start of the year. We’re continuing to see signs of stabilization there, but I think that's contributed to the competitive move-in dynamic for new customers in many of our markets.

That’s it from me. Thanks so much.

Thanks, Ron.

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

Good morning. Thanks a lot for taking my question. On the market rent growth, you said it was down 14% in the second quarter and down 12% in July. Can you just provide context on what happened in June just to see the most recent sequential improvement? And then, are your expectations for the improvement in the back half of the year, is it the same magnitude of improvement just like with a different starting point? Thanks.

Yes. So, a couple of components there. One, June was pretty similar, down about 12%. We saw pretty good improvement from April and May into June and July, but nowhere near the pace or the magnitude of improvement that we were anticipating. As you get into June and July, you're at the peak of the rents. And that is a very important guidepost as you think about the rents through the remainder of the year. That’s also why those several months are so important as it relates to setting market rents for the year. In terms of the pace of improvement, we are anticipating moderation in that decline as we move through the second half of the year, but we have recalibrated that based on the June and July performance. And so we're starting from a different place than what we had originally assumed, but seek modest improvement here.

Thanks for that. My follow-up question is just like when this may be a little bit speculative, but when things start to get better, how quickly can things unwind, right? It seems a lot of the independents and the privates kind of took their time re-cutting street rate as street rates move down. Is there an expectation that when demand starts to come back, the other players and the rest of the industry will kind of more rapidly bring rates up? So, when does it get better? It should improve a lot quicker than maybe this kind of slow grind down that we've kind of experienced? Thanks.

I think that still remains to be seen in terms of the ultimate pace, right? We've given you guideposts in terms of what our assumptions are through the remainder of the year. We've highlighted about the fact that this is a variable and competitive dynamic for new customer rates. I'm not going to speculate specifically around private operators and how they'll react.

Thank you very much.

Thanks, Michael.

Our next question comes from Nick Joseph with Citi. Please proceed with your question.

Thanks. I just wanted to touch on occupancy. You mentioned July being down 40 basis points year-over-year. It seems like implied in guidance could that gap be narrowed in the back half, you're down about 100 basis points. So, can you talk about kind of what's underpinning that assumption?

Yes, that's a good question. So, we did see improvements in occupancy and more of an upward slope to occupancy through the spring here, based on the move-in activity that Joe was highlighting and frankly, really strong performance from the existing tenant base through the first part of the year as well. Heading into the back half, we're anticipating if we did last year from an assumption standpoint that as you go up in the spring, you're likely to come down in the fall. That's what's underpinning some of that activity. Recall, we're talking about seasonal moves in occupancy that are much less than what we experienced in the pre-pandemic time period. While we're talking about a little bit more decline in occupancy this year versus last year because of the rise in occupancy we saw in the first half, we're still nowhere near the seasonal decline that we saw in a typical year.

Thank you. And then just for the $110 million of incremental non-same-store NOI, is there any additional capital that needs to be spent for that? Or is that all basically just dropping to the NOI as it flows through?

Yes, that's a good clarification. So, that is on the in-place assets. As we think about the in-place NOI for 2024, you can add that $110 million to that to get to, in effect, our expectation for stabilization of that in-place pool. No additional capital is required there. As we invest capital into the second half of this year, we'll adjust that number. Frankly, that will only be incremental upside from here.

Thanks. And then some of that will become within the same-store pool in 2025?

Well, the upside isn't likely to come into the same-store pool, right? As you think about it, we add properties into our same-store pool that are stabilized for both occupancy, rents, and operating expenses. As we think about upside to stabilization, that will remain in our non-same-store pool, but the stabilized properties over time will cycle into the same-store pool.

Perfect. Thank you very much.

Thank you.

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

Yes, thanks for the time, guys. I guess just first, maybe broad commentary on what you're seeing with the consumer? And are you seeing any material softness that sort of impacted your outlook for the rest of the year?

Yes, Keegan, I wouldn't highlight any particular new or evolving levels of stress and/or change in the pattern of both behavior from a payment standpoint, length of stay, the amount of activity that we're just seeing relative to even movement that we can assess based on any particular stress that's playing through on our own customer base. We've been pleasantly surprised that all the tools that we're using to keep, again, delinquency in good shape or continue to serve us well. We're not seeing any new and changing risk factor tied to consumer payment patterns that have been relatively consistent now for a number of quarters.

Got it. And then just shifting gears. I'm just curious for how your third-party management platform is trending and if there are any changes in the pipeline versus last quarter?

Yes, sure. So frankly, we've had a pretty good run for the last few quarters with the improved size and complexion of our third-party management platform. So, today, we have approximately 375 assets in that program. 260 of them are open, and we have another 115 that are in a variety of different stages relative to development that we'll be opening over the next year or so. This quarter, we added 17. That puts us at year-to-date over 60 additional additions to the program. So, again, seeing a good amount of activity, both small and frankly, some larger portfolios where we've got a number of existing clients that are actually expanding the number of assets they're putting into our program. It's continuing to serve us well relative to additional scale in many markets. Different things can be very advantageous, not only to our clients but ourselves. So, we're continuing to see good growth in the program and putting a fair amount of resource into it with the public storage team that's wholly dedicated to that platform. So, again, good traction, and we see some good activity going into the second half of this year.

Super helpful. Thanks for your time, guys.

You bet. Thank you.

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

Hi thanks. I just wanted to follow up on the ECRIs and pricing a bit. Tom, I understand the contribution to revenue growth has not changed with the revised guidance. But just given the softer demand environment and the lack of pricing power that you experienced during the quarter and into July versus your prior expectations. Is there an effort to preserve occupancy a little bit more ahead of and into the back half of the off-peak rental season just to provide a little bit of a better potential setup in 2025 when demand might recover?

Okay, there's a lot there, Todd. Let me take a step back and talk through how we think about the program because I think that will reinforce the drivers as we think about where we're going from here. I've consistently spoken about really two components to the existing customer rent increase side. I've already spoken on this call around the customer price sensitivity side of the equation, which has been very consistent. The other side that I think is around the cost to replace the tenants. That component, right, the cost to replace tenant is influenced by the market moving rents, how long the space will remain vacant, marketing expenses, and all those sorts of things play into that side. Over the last several years, that has been the component that has been more variable, both on the upside and then on the downside. There isn't an over-focus internally around preserving occupancy or otherwise. As the cost to replace increases, the frequency and magnitude of increases will moderate. There's no overt decisions around protecting or not protecting occupancy. It's more of an optimization around the rents that we can charge from our existing customers who find a lot of value in their units.

Okay. Got it. So, the percent of tenants eligible for rent increases is higher today than it was last year, it sounds.

Yes, yes, and there are more near-term tenants that are in the program.

Right. Okay, that's helpful. And then my second question was just around the latest Board appointment, Maria Hawthorne. I was just curious if you could speak to that announcement and the process the Board went through to make that decision; the PSP transaction closed in 2022. So, I'm just curious about the timing and the decision to expand the Board today?

Yes, sure. The Board itself has a very committed and vibrant process relative to board composition skill and the collective amount of knowledge and wisdom that any phase of our Board configuration continues to serve the company as a whole. Maria is a great addition to that in many ways, not only based on her experience as a standing CEO of another public REIT, but also her knowledge relative to real estate. She sits on two other public boards as well. She's got a very strong financial acumen, coupled with a very strong history of delivering great shareholder value, etc. We feel she's a great addition to the Board and look forward to her contributions with the rest of the board as it stands today.

Okay. all right. thank you.

Thank you.

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

Thank you. Good morning. When I compare your combined marketing expenses and promotions to the new contract rates that you brought into the company, it appears that the percentage is slightly higher than last year. How do you interpret that? Do you think there was an opportunity to spend more to maximize revenue, or do you believe that the somewhat weaker demand would have made any additional spending less effective?

Yes, Ki Bin, you're highlighting both promotions and marketing spend. Let me maybe take the two independently. Those are two of the levers. In addition, obviously, the move-in rents that we are toggling back and forth in the competitive move-in environment. We've been very active utilizing both over the last several years. On marketing specifically, we've increased our marketing spend consistently over the last couple of years because we're seeing very good returns. We speak regularly around the advantages of our scale and marketplace, providing customers a rich inventory set, and the power of our brand, which is increasingly recognized by customers in our markets, and that efficacy continues today. So, as you look at the spend increase in the second quarter and year-to-date, those have been very good returns associated with those investments in new customer acquisition, and we'll continue to use that lever moving forward, given the good returns associated with it, and we anticipate that to continue into the second half. On promotional activity, there's a couple of things going on with that particular metric that you're looking at. One is, I'd highlight that about the same number of customers year-over-year have received promotions, maybe a touch more. The reason you're seeing a decline in that metric is, it's promotional activity versus our move-in rents. As we've discussed, our move-in rents themselves were down 14%. Nominally the discount dollars and promotional dollars associated with giving, for instance, the first month for $1, are less on a nominal basis year-over-year, but that continues to be a vibrant tool we're using.

Okay. And second question, where do you think your rents are today versus, let's say, 2019, move-in rents?

Yes. Our rents today are in a similar territory to where they were in 2019, depending on the market. We've got some markets that are considerably above 2019, and we have some markets that are below 2019 as well. We've highlighted in the past around some markets that we feel like have overcorrected in terms of move-in rents, and I'd reiterate that as it relates to 2019.

Yes. So that's the part I'm trying to understand better, right? Since 2019, we've probably had about 20% cumulative inflation, but rents are relatively flat versus that time period. So we've definitely given back more than just the COVID surge in rents. So, I was just curious about your take, I guess, what accounts for the additional weakness. Is it absorbed through additional supply? Or is there something else by the consumer that's changed over that timeframe? Just trying to understand where that demand has abated?

Yes, I would characterize it, and Joe, you can chime in here too. I would characterize it as we've had a sharp number of years in movement in demand. We had a sharp move higher and sharp move lower. As I said, that metric is pretty variable depending on the marketplace that you're looking at. Some of the markets that Joe highlighted are impacted by new supply, hence some of that competitive dynamic. But overall, I'd say the shift in demand lower and the tough comps of 2021 and 2022 have led to pretty competitive pricing activity amongst operators in the sector. In many cases, that may have led to an overcorrection in marketplaces. The positive component that you're highlighting is, if you think about the move-in rents today that we're charging versus discretionary income or consumers' monthly budget, it's frankly even more attractive today than it was in the past. As we work through that stabilization of demand, we as an industry will get to the other side.

Okay. Thank you.

Thanks.

Our next question comes from Eric Luebchow with Wells Fargo. Please go ahead with your question.

Thanks for taking the question. Could you talk about any changes you've seen year-to-date and more recently on length of stay of the in-place space in terms of the type of customers that are moving out? Are they coming from more of the lower replacement cost customers that are at lower rates versus the longer tenured customers that are materially above current movement rates?

Yes, sure, Eric. Stepping back and looking at the last several years, we've spoken a lot around how length of stay really extended from 2020 to 2022. That was a combination of longer length of stay tenants staying for longer, as well as the need to replace those tenants with fewer new customers. Length of stay grew pretty sharply over that time period and was a big contributor to some of the pricing power and financial performance we had. Since then, we've been seeing moderation. We've been really encouraged at the pace of that moderation. If I were to go back and listen to myself on these calls from a couple of years ago, I may have anticipated a quicker return to pre-pandemic length of stays. Length of stays on average continue to be longer than what they were in 2019. Some encouraging trends there. The second component of your question was just around vacate levels. Our longer-term tenants tend to be stickier. They’ve gotten comfortable using their space. They have goods in there that have a use case of sitting in the unit for a long time versus maybe an apartment renter that's moving between one apartment and another and is using the space for a period of time, as an example, use case. The vacate frequency from those tenants is less. As you look at our vacate activity, really, in any given quarter, it's more concentrated within those customers that have been more recently joined the Public Storage customer base.

Great. Appreciate that commentary. And just a follow-up, sorry to harp about moving rents. But as we think about what you've assumed in the second half of this year, you said the guide assumes we exit the year down about mid-single digits. Does that assume a relatively normal amount of seasonality from kind of the peak summer months into the fall and winter because I know that from a comp perspective, things do get a lot easier in September and October, given there were some more aggressive pricing actions made last year. So just thinking about how seasonality compares to what would be a normal year, and I realize we haven't had a normal year in quite some time.

Yes, I think that last point is probably the operable one, which is we haven't had a "normal year" for a number of years. Clearly, we recognize and have taken into consideration what you highlighted around last year being a very competitive move-in environment where moving rents for the industry did decline on a more accelerated path last fall. Our assumptions, clearly, based on a narrowing in the year-over-year gap is that we don't face that same sort of decline. We're continuing to expect a competitive moving environment in the second half and that move-in rents are below where they were last year.

Okay. Thank you. Appreciate it.

Thanks, Eric.

Our next question comes from Jonathan Hughes with Raymond James. Please proceed with your question.

Hi, good morning out there. The predictive revenue growth metric when I combine contract rent and occupancy for the next quarter has been pretty accurate lately. When I do that for a third quarter and combine it with a full year guide, it implies revenue growth actually accelerates or gets less negative in the fourth quarter. The only time in the last decade that revenue growth improved from 3Q to 4Q was 4Q 2020 when we were coming out of COVID lockdowns. So, does that sequential improvement in the fourth quarter sound like what's embedded in guidance? And if so, what gives you the confidence we'll see that improvement since it is so unique?

One of the things that I've highlighted over the last couple of years around that forward metric based on period-end numbers, is that when things are moving around quite a bit, it loses some efficacy. We've started to provide a more robust transparency related to our outlook for the year on financial terms with our guidance. I'd point you more towards the implied outlook from guidance than using any particular period-end metrics 1 quarter versus the other, given how things have been moving around. I'm not going to comment quarter-by-quarter, right? We're giving you annual outlook. As I noted earlier, the second half is implied to be down 1.5% on same-store revenue specifically. We do have confidence in improving trends in many of our markets that it's going to lead to stabilization and then ultimately reacceleration across those markets over time.

Okay. My second question. Just looking at L.A., I noticed that the revenue growth premium there did slow to, call it, 60 basis points from an average of 500 basis points the prior five quarters. I know comps are tough, but yesterday, Equity Residential kind of talked about some affordability and supply headwinds in L.A. So, maybe there’s a broader economic slowdown in that specific market but can expect a more modest revenue growth premium in L.A. going forward? Could that even turn negative as rents and occupancy there are the highest in the portfolio?

Yes. First of all, just the overall health of that market continues to be very good, Jonathan. It's a market that we're not going to see any meaningful addition to supply. The trend that you're pointing to relative to the outstripped revenue growth that we saw in that market for a sustained period of time is leveling off. We hope that we'll continue to see a good trajectory going into future periods. We don't see some of the issues, certainly in Los Angeles that you might in other markets that have been more impacted by supply or a material shift in overall demand. It's relatively stable at this point, and we'll continue to see how it performs. We're in very good shape relative to the quality of those assets. We see very strong occupancies. No new and concerning dynamics from new supply. So, the other thing that supports L.A. over time is it is a high cost of living market, which again supports the inherent demand for storage relative to our particular portfolio there due to great locations and scale within the market.

Okay. Thanks for the time.

Thank you.

Our next question comes from Mike Mueller with JPMorgan. Please proceed with your question.

Yes, hi. Just a quick follow-up on move-in rates. Is the guidance an assumption of move-in rates improving to down mid-single digits by year-end? Is that being driven, I guess, by improvement in spot rates or just the comp issue or some sort of combination of both?

Well, I'm trying to think about the right way to think about this. No question that seasonally, we're at the peaks of rental rates. As we talk about what's going to play out through the second half and what's assumed in the outlook, the level of rents in the fourth quarter are going to be lower than where they are now, right. But as you think about the year-over-year differential, we did have a significant move-in rent decline as we moved through last year. Recall that last year's fourth quarter move-ins for us were down about 18% year-over-year. The comps do ease on a year-over-year basis. While we expect, as we do every year, that rents decline between here and where they are in December, the level of decline between now and December, we're anticipating to be more modest than what we experienced last year, which was a sharp decline.

Got it. So, it seems like you're making some improvement in there, just ignoring the comp dynamic?

I would say it's primarily the comp dynamic, and we're expecting rents to decline as we typically would between a summer and winter.

Okay. Yes, I was thinking a little bit more outside of seasonality as the overall environment getting better from that front, but okay. That's it. Thank you.

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

Thank you. Maybe just one more on the non-same-store pool. You guys have had great success on the lease-up front, but are you able to provide additional color on markets where you're seeing either above-average lease-up trends or, conversely, where you're seeing some slower activity here on the leasing front?

I'd say overall, leasing activity has been very strong, really, across the board within the non-same-store pool. One of the things I highlighted right, obviously, the lower move-in rents impact the whole portfolio, not just the same store. But when we think about actual lease-up pace, you can see a strong lease-up pace in our development, redevelopment vintages, which are probably the easiest place to see that lease-up pace. We continue to be encouraged by that. As Joe mentioned, I think that's being supplemented by the fact that there isn't an overwhelming amount of new supply in these markets that we're delivering into. Because of that, the new activity that we are delivering is being well received in the marketplace, absorbed efficiently, and we think that helps both our non-same-store pool as well as the dynamics for the industry and the local marketplace of our same-store assets in those marketplaces.

Maybe Spenser, just on a headline portfolio standpoint, if you look at the larger portfolios that we've taken down over the last couple of years. I'd say they are all kind of in a similar range relative to either meeting or exceeding not only our underwriting but we've seen good traction particularly in markets where we've been able to increase scale. Most recently, the Simply portfolio, which touched 18 different states. Again, I wouldn't point out or call out any unusual negative trends. In fact, we're seeing continued outperformance relative to our own underwriting even in that portfolio that was multi-market based. So just to reinforce what Tom was speaking to, we're continuing to see good traction and stabilization throughout that entire portfolio and definitely look at it as being a continued driver of growth going into future periods.

Okay, great. Thank you both for the color. And Tom, you kind of alluded to this, but how does this time the stabilization for readouts and new developments today compare to historic averages in your portfolio?

Yes, we typically underwrite three to four years to get to a level of stabilization of the earnings profile of the asset. There are certainly been time periods where we've seen much faster than that over the last several years. Year in and year out, we're looking for three to four years. Obviously, three or four years is a long period of time. You're going to have demand and supply drivers within individual markets that shift for one asset or otherwise, but I'd still point you to that kind of three or four-year time period.

Okay, great. Thank you.

Thank you.

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. Have a great day.

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