Earnings Call Transcript - PSA Q2 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Public Storage Second Quarter 2021 Earnings Call. It is now my pleasure to turn the floor over to Ryan Burke, Vice President of Investor Relations. Ryan, you may begin.

Ryan Burke, Vice President of Investor Relations

Thank you for joining us for our second quarter 2021 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, August 4, 2021, and we assume no obligation to update, revise or supplement these statements if they become untrue due to 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, supplemental report, SEC reports and an audio replay of this conference call on our website at publicstorage.com. We do ask that you initially limit yourself to two questions. Of course, after two, if you have further questions, please feel free to jump back in the queue. With that, I'll turn the call over to Joe.

Joseph Russell, CEO

Thanks, Ryan. Good morning, and thank you for joining us. Tom and I will walk you through some highlights from Q2, as well as our perspective on the second half of the year. And then we will open up the call for questions. I'd like to start by stating the obvious: business is excellent. Moving rates are up 27% from where they were in 2019 and there is little evidence that pricing strength is abating. A meaningful wave of new first-time customers are using storage based on a combination of traditional and non-traditional reasons. In 2021, we have welcomed nearly 700,000 new customers to our platform, many having never used Self Storage before. Demand has been strong for several quarters, with upward pressure tied to vibrant home sales, which are up 34% year-over-year. In addition, a hybrid work home environment is being planned by 68% of companies according to a recent Deloitte survey. This certainly gives us confidence that overall adoption of Self Storage will continue to grow and is looked upon favorably by consumers and businesses as a cost-efficient alternative to storing goods in residential or commercial space. I'd like to step back for a moment and reflect on our May 3 investor day. The Public Storage leadership team took you behind the orange door and outlined several strategic initiatives. I am pleased to say many of these strategies are taking hold in 2021 and I'd like to highlight three areas that were particularly evident in our Q2 results. First, organic growth powered by innovation. Our multi-year and continued investment in technology has allowed us to give customers what they want: an efficient and more consistent leasing experience with the support of a knowledgeable and helpful property manager when needed. Our industry-leading online e-rental platform opened up an entirely new channel for customers to rent a Self Storage unit and adoption has been impressive. Nearly 50% of our customers now select this option. It's fast, intuitive, and simple. What's even better, the quality of the customers using this option has been excellent, and our employees have embraced it as well. We are already seeing the impact this new channel will have on labor utilization while improving customer satisfaction. This has clearly been a win-win for customers and our operations team. In 2021, we also launched the PS Storage app, giving customers a new tool to access their property via smartphone along with the ability to manage their account, including automatic payment of rent. Second, our four-factor growth platform: Public Storage is uniquely positioned to drive growth through acquisitions, development, redevelopment, and third-party management. All areas took steps forward in Q2. Acquisition volume is robust. Year-to-date, we have closed or are under contract on nearly $3 billion of assets. The $1.8 billion Easy Storage portfolio closed 90 days ago, and the integration and performance of those assets has exceeded expectations. Our development and redevelopment pipeline continues to grow by $150 million this quarter as we are seeing good opportunities to expand the largest development program in the industry. And third-party management is growing with assets under management totaling 131 properties along with a deepening pipeline of assets under review. Our goal is to reach 500 assets by 2025. Overall, our non-same-store assets had a $0.20 of FFO this quarter, with NOI of 138% driven by improving yields on both development, redevelopment, and acquisitions. This 34 million square foot base of assets is now 86% occupied compared to the same-store portfolio, which had 96.5% occupancy, with strong momentum to drive additional shareholder value. And third, the utilization of our exceptional balance sheet. This quarter we funded $2.3 billion in transactions through bond issuances, driving down our blended cost of leverage to 3.1%. Public Storage has the longest duration balance sheet in the industry, with one of the lowest cost profiles, leaving room to fund significant additional growth. Overall, we remain optimistic about the core drivers in our business along with the commanding capabilities tied to the Public Storage brand. Our industry-leading ownership position in core national markets is all led by a talented and committed team of professionals in every part of our business. Now, I will hand the call over to Tom.

Thomas Boyle, CFO

Thanks, Joe. Our financial performance accelerated into the second quarter driven by both strong demand from customers and execution from the team. Our same-store revenue increased 10.8% compared to the second quarter of 2020. That performance represented a sequential improvement and growth of 7.4% from the first quarter driven by rate. Two factors led to the acceleration in realized rate per foot. First, about half came from strong demand and limited inventory which allowed us to achieve moving rates that were up 48% versus 2020, and as Joe mentioned, 27% versus pre-pandemic 2019. Secondly, existing tenant rate increases also made up about half of the improvement, compared against a period when we did not send increases at the onset of the pandemic in 2020. Now onto expenses. The team did a great job executing in this environment. Lower expenses were driven by property payroll, utilities, marketing, and a timing benefit on property taxes. On property payroll, we discussed at our investor day the operating model transformation underway. About half of the year-over-year decline in payroll expense was attributable to those initiatives that use technology and role specialization to drive improvements in customer experience, employee experience, and our expense levels. The other half of the payroll decline is comparing against the onset of the pandemic last year when we put in place a program that we call the PS Cares program to provide additional support to our operations team including a $3 per hour incentive for property managers. On property tax, we will expense our annual estimate ratably through the year, leading to an approximately $0.05 benefit in each of the first three quarters of the year and reversing to a $0.15 headwind in the fourth quarter. This will lead to a more stable quarter-over-quarter expense profile in the future. In total, net operating income for the same-store pool stabilized properties was up 21.7% in the quarter. In addition to the same-store results, as Joe mentioned, the lease-up and performance of recently acquired and developed facilities was also a standout in the quarter adding $35 million in NOI or $0.20 of FFO. As we sit here today at the peak of the leasing season, customer demand remains robust and business is good. So let's shift to the outlook. We raised our core FFO guidance by $0.55 at the midpoint or 4.8%. Looking at the drivers, we increased our outlook for same-store revenue to grow from 7% to 8.5% in 2021. That outlook implies a faster rate of growth in the second half compared to our 7.1% growth in the first half. Our current expectations are for occupancy to moderate from here by about 300 basis points from peak now to trough at the end of the year. This would generally reflect a return to typical seasonality of the business, albeit at higher occupancies than historically achieved. But big picture, the baton has clearly been passed to rate growth in the second quarter, which will be the driver of performance in the second half. We also expect continued strong expense control throughout 2021. Our expectations are for 0% to 1% same-store expense growth. And we also increased our guidance for non-same-store performance given the acceleration of acquisitions and the strong lease-up of our own stabilized facilities. The balance sheet, as Joe mentioned, is poised for incremental activity in the second half of this year. To wrap up, business is good and the strategies we discussed at our investor day in May are evident in this quarter.

Operator, Operator

Your first question is from the line of Jeffrey Spector with Bank of America.

Jeffrey Spector, Analyst

Great, good afternoon. My first question, I guess I'm trying to tie a couple of the comments you made. I think, Joe I know that you've been positive of course in the sector, but your opening remarks about the vibrant home sales, hybrid work environment steadiness, and overall adoption of the business to continue versus the guidance of occupancy dropping through in your bits and the slower months ahead. How do we tie those two comments together?

Joseph Russell, CEO

Yes, Jeff. The business itself is, as we noted, quite strong. We're seeing additive momentum from different drivers and traditional drivers, as I mentioned. The thing that's questionable, but could play through is a reversion to some degree of what we would say normal seasonality and some of the metrics that we've seen historically, which have gone into our guidance for the second half of the year. Now clearly if the momentum that we've seen for the last several quarters continues to be as strong as it has, that could soften or not be as typical as what we see from a seasonality standpoint. But that's to be determined. We were very pleased by the continued level of demand that we're seeing from customers and our pricing abilities based on that demand across all markets. To some degree, we're seeing a little bit of shifting in markets that may not have quite as pronounced in migration or overall movement, but still on a relative basis very healthy demand.

Jeffrey Spector, Analyst

Thank you. And then my follow-up question is again, on the opening remarks. Joe, you commented on the adoption of business customers. And I guess, can you talk about that a little bit more? Are you starting any new initiatives to grab that customer? I'm sorry, I'm not as aware of that initiative at PSA. Is something changing here to try to do more with that business customer?

Joseph Russell, CEO

So Jeff, we've always had a blended focus on both consumers and business customers. Property to property we will see a varying degree of demand that comes from either cohort. Our business customers, too, are very active as you can imagine, with the economy starting to percolate in many different ways. Many businesses are coming back to properties that may have not used the space one or two years ago with different economic drivers. But with the resurgence and the opening up of many economies, we're just seeing, again, an elevated level of both consumer and business activity. Our spaces cater to both. We have good activity and we continue to cater to each type of customer whether again, it's a consumer or a business.

Jeffrey Spector, Analyst

Okay, sorry, if I could just clarify. So I knew that I'm sorry, I should have been more clear like you are not, you don't have initiatives, like one of your peers has micro fulfillment initiatives. You're not. Are you moving in that direction?

Joseph Russell, CEO

Well, I'm not speaking to that. I'm speaking more to the holistic activity levels we're seeing from both types of customers. Both types of customers' demand has been strong, and we continue to see good activity. And as I mentioned, in some cases, depending on the location of a property, you might have a higher degree of business-oriented customers compared to another, but very good activity from both types of customer bases.

Jeffrey Spector, Analyst

Okay, thank you. Congrats on the quarter.

Joseph Russell, CEO

Great. Thanks, Jeff.

Operator, Operator

Your next question is from the line of Juan Sanabria with BMO Capital Markets.

Juan Sanabria, Analyst

Good morning. Just wanted to follow up on the rate commentary about half of the increase you said came from rate increases to existing customers. I'm sorry, same-store revenue. And that was helped out by the easy comps with no real bumps being passed through the customers last year due to COVID. So how should we think about that, I guess in the second half of the year? At what point where I guess, rate bumps reinstituted last year, if you could remind us and does that mean that rate growth then decelerates? Is that easy comp goes away or not necessarily, because you're still having strong kind of equals to new customers you sit here nearly 30% of 2019 levels? So if you could just help us think about those two components relative to your experience this year, and how that plays out in the second half?

Joseph Russell, CEO

Yes that's a good question Juan. So last year, we did send those increases that we didn't send in the second quarter. We sent them in the third quarter. But I wouldn't highlight that as a headwind in the second half of this year. And the primary reason is that the magnitude of the increases that we can send this year are more elevated versus the previous year. And that goes back to really two factors: one, moving rents being up as significantly as they are, which gives us pricing power with existing tenants as well; and then secondly, last year, we were under pricing regulations in many, many of our markets. With this year, the majority of those having been expired. So those are both tailwinds to existing tenant rate magnitude as we move to the second half. So we don't anticipate a big giveback on existing tenants in the third quarter.

Juan Sanabria, Analyst

And just on the occupancy piece of the same-store revenue guide, the 300 basis points that you're assuming comes off of I'm assuming the 630 number in sequential deceleration. Could you just give us a sense of how that compares to the historical trend? Is that more or less than your experiences in the past?

Thomas Boyle, CFO

Yes. Juan it's right in the ballpark of the historical and generally speaking, actually, the middle of July is our peak occupancy. We actually had occupancy of north of 97% in the middle of July. So there's a little bit of incremental peaks there to be had from June 30 numbers, but overall, generally in line. The real story in the second half is you highlighted this rate, though, and I think we can talk about occupancy a little bit here or there. But the driver will be how can we keep the pricing strength in play through the second half, both for new customers and existing customers, and that will drive performance more meaningfully through the second half?

Juan Sanabria, Analyst

Just to clarify, you said typically, your occupancy peaks mid-July, but that hasn't necessarily come off this year. That's pretty sticky, at least to date in early August.

Joseph Russell, CEO

No, it has started to come off a little bit.

Juan Sanabria, Analyst

Okay.

Joseph Russell, CEO

Very modestly. I mean, we're still at the peak of the season here.

Juan Sanabria, Analyst

Got you. Thank you very much.

Operator, Operator

Your next question is from a line of Steve Sakwa with Evercore ISI.

Steve Sakwa, Analyst

Thanks. I guess first on just kind of the acquisition pipeline, you guys have obviously been extremely busy this year. I'm just curious what the kind of the forward pipeline looks like. And how are kind of pricing expectations changing for sellers today just given the amount of capital kind of chasing deals?

Joseph Russell, CEO

Sure, Steve. No question. As I noted, yes, we've been busy. We expect to continue to be busy. There is a fair amount of product that's in the market. If you step back and think about how much new product has been delivered to the sector over the last four or five years with peak deliveries hitting in 2019, plus or minus 500 new assets being delivered to the market in 2019. And then tapering down a bit 10% to 15% in 2020. And again, another similar tapering down this year. But again, if you take that whole pool of assets, year-by-year that was ranging over the last, say, five or six years, from 300 to 500 properties per year. There is a fair amount of very attractive, good quality assets that we've been very pleased to go out and capture at what we feel are good values, many of which has been asset quality that we build too as well. So from a value standpoint, and a capital allocation standpoint, we've been very pleased with the pool of candidates that we've been able to acquire. Much of this has also been predicated on some of the unique tools that we have, some of which we talked about in our investor day relative to the amount of data that we have market to market that guides us to the targeted parts of markets or new markets that we're entering that may be underserved from a storage standpoint. So that too is a different way in which that we're underwriting and choosing to acquire assets. Valuations are competitive. There is no doubt about it. As to your point, we are seeing a fair amount of capital that is still anxious to get into Self Storage. One of the ways that we've been able to maneuver around that is by buying assets that are not as stabilized. More stabilized assets can typically attract far greater levels of competition and tighter yields. If on average, you look at the pool of assets that we bought this year outside of easy storage, average occupancies plus or minus 50% to 60%. And those have been great assets for us to put right into our platform, lease them up, see good revenue growth and very good returns by virtue of that. So going forward, there is continued activity and many sellers are looking at this environment as a good time to bring product to market, whether it's on a one-off basis or there is a few larger portfolios likely to hit in the second half of 2021. Our capital is well primed. As I mentioned, we've been able to optimize the cost and efficiency of our own leverage. And we see very good opportunities to continue to allocate capital and we're continuing to underwrite a fair amount of assets.

Steve Sakwa, Analyst

You sort of touched on capital structure, which kind of leads to my second question. You guys have clearly been willing to deploy leverage and take up and use the balance sheet capacity as pricing is rising and deals are offering lower yields. I mean, how are you sort of balancing the use of the balance sheet today against lower returns and maybe that means more development? But how are you sort of weighing the point of capital and using the balance sheet with rising pricing?

Thomas Boyle, CFO

Yes. Well, maybe comment on a few of your embedded questions there. One, we do view development as a continued good allocation of capital. Joe mentioned that the pipeline increased by about $150 million this quarter and we obviously outlined in the investor day in May, plans to increase it a good bit further from there. In addition to that, though, we are finding good deals that will meet not just a marginal debt cost of capital, but ultimately our overall cost of capital and provide good returns based on our ability to take properties as Joe mentioned, lease them up and earn a good return to stabilization and then rent growth from there. So overall, we're still finding good high-quality deals that will exceed our cost of capital across the board and we have the balance sheet flexibility to use attractively priced unsecured debt to fund that.

Steve Sakwa, Analyst

Great, thanks.

Operator, Operator

Your next question is from the line of Michael Goldsmith with UBS.

Michael Goldsmith, Analyst

Hey guys, thanks a lot for taking my question. Occupancies elevated at 97% average for the quarter. Obviously, the math suggests that some are above the average and some are below. So can you help frame how much your same-store pool is like 98% - 99% occupied or completely below? How are you operating the stores differently than those where there's more upside? And then as we think forward should we expect them all to experience seasonality the same or do you anticipate some differences between them? Thanks.

Joseph Russell, CEO

Sure. So maybe looking at market by market performance, there's clear differentiation in the market dynamics across the country. We do have many markets, if you look in the supplement, that highlight 96% to 98% occupancies that are really strong versus historical. And that's really being driven by the ability of us to attract new customers, but also the fact that our existing tenants are performing quite well. And that's something we spent a lot of time talking about last year that has persisted into 2021. So it's allowed occupancies to creep higher. But at this point, with 97% occupancy or even falling modestly from there, it's about driving rate. And as I mentioned, that was really the story in the second quarter and through the second half, versus trying to drive incremental occupancy here. We're trying to balance that occupancy versus inventory but clearly looking to drive rate. In terms of strength within the markets there are some standouts. If you look at what's going on, for instance, in the state of Florida, we have particular strengths there: population growth, housing activity, as Joe discussed, we're seeing really strong activity there. And really across the economy there. We view that as encouraging as we think about those strong pro-cyclical demand drivers driving our business, which is a counter to last year when we did see some more counter-cyclical drivers that were driving the business at this point in time. So we're encouraged by that and we will see some variation there by market. In terms of your question on occupancy, which markets will fall, which will stay, there are definitely trends in different markets that will influence that; for instance, our colder markets tend to see a bigger seasonal swing and occupancy than our warmer markets. But it'll vary.

Thomas Boyle, CFO

Yes, and Michael, just to add our west coast markets from Seattle, all the way down to San Diego are dealing with extremely high occupancy levels. The amount of new supply coming in those markets for the most part is limited. But on the other side of the barbell, which is really tight right now, Houston, which has been a poster child for lower occupancy, high supply, I mean, Houston is at 95%. That speaks to what Tom just talked about, which is another added driver that we're seeing in different parts of the country primarily Texas and the southeast is amplified levels of activity because of migration and we're even looking for signals to see if some of that will taper down, and it's not at all. Even as many of those markets actually returned to some level of normal, again, activity from opening up businesses, etc., we really see no degradation in demand and/or occupancy levels. So we continue to fill up even higher supply markets has been quite pronounced, and we're pleased to see that and we're continuing to look for any signals if there's any reversion. But as we speak, that band of very tight occupancy market to market is quite strong.

Michael Goldsmith, Analyst

That's helpful. And can you talk about the performance of the Easy Storage portfolio since you acquired it? They had an 86% occupancy rate, and are you, or can you share where it is now? Maybe talk about how some of the lease-up properties within it are performing? And then if you can break out kind of how much of any growth is reflective of the market versus what you've been able to do with it, and what sort of initiatives you've been able to put in to generate additional growth? Thanks.

Joseph Russell, CEO

Sure. I mentioned we're 90 days into the ownership of that portfolio. So we had about 115 properties in the metro D.C. area and with the Easy portfolio now we're north of 160. So very good activity from elevated occupancy growth. The portfolio today is at about 94% occupied. If you remember, one of the things that we had talked about is the prior owner was a very good operator, but also didn't have some of the sophisticated tools that we've been able to apply into that portfolio in relation to existing cuts, customer tactics, or strategies. We're starting to deploy those, seeing a very good level of transition and integration. We inherited about 43,000 customers. We're seeing good continued tenancy, good integration with our own existing portfolio, and we've just begun the expansion process; about 10% expansions possible by again magnifying in some cases the size of properties in certain markets that had already been pre-entitled. So that too is taking place. The properties for the most part have gone through the first wave of rebranding. They look great in orange, and we've also seen a very good integration from hiring a number of very strong property managers and district managers that have come into our portfolio as well. So overall, very pleased with what we've seen. And we, as I mentioned, have a very strong presence in that market far beyond any other operator, and the quality of these assets is very additive to what we've continued to do and see from a benefit standpoint in the Washington metro market.

Michael Goldsmith, Analyst

Thank you very much.

Operator, Operator

Your next question is from the line of Smedes Rose with Citi.

Smedes Rose, Analyst

Hi, thanks. I just wanted to ask you a little more about the third-party management platform and the path to get to 500 by I think year-end 2024 you said. Is that mostly driven by new properties that are on deck to come online? Or are you also adding just converting independent properties? Or maybe from other brands in the space?

Joseph Russell, CEO

Yes. Smedes, the goal is 2025. So we're definitely on the path to continue driving the size of that program. To your point, it is a process where there is a high level of activity tied to new development. I mentioned that our backlog continues to grow and we've seen a number of one-off developers and some with multiple properties come to our platform that are in various stages of development. It's a different lens, clearly, that points to the fact that the development part of our industry is still active, and we're seeing the opportunity to grow the platform through that. Now, having said that, we are also finding some good opportunities to bring existing assets into the program as well. Many of the owners have started off with say one or two assets and are now starting to give us multiple assets. So that's indicative of the performance that we continue to show to the owners that have come into the platform and the benefit they're seeing by being within the Public Storage brand. The other thing I pointed out is we've now actually acquired 10 assets that have come into the program as well. So it's another avenue or channel for us to get closer to many owners who actually are coming back to us and saying would we have interest in actually acquiring these assets. So there are multiple drivers that we're going to continue to focus on as we build the program. We've got a team that's focused nationally. The assets that we've added, and having our backlog are literally widespread across the 39 states that we operate in. So we're pleased by that as well, and look forward to continue to grow the program.

Smedes Rose, Analyst

Great. Thanks. And then I just wanted to ask you last, on your last call, you talked a little bit about the supply outlook with I think 2021, you're looking for kind of a 10% to 15% leg down in the pace of deliveries relative to 2020. It just, I just over the past few months, have you seen any change in that or kind of any updated sort of thoughts on what the supply picture might look like going forward?

Joseph Russell, CEO

Yes. I mean the added color I can give you and you are right, that's the view that we've had, looking at the amount of volume that is likely to come into 2021. One thing that we're seeing is low approval processes at multiple cities. And that, coupled with the fact that component costs are elevated, whether it's steel, labor, concrete, etc., is stalling some of the development starts that might have been predicted either for 2021 and going into 2022. So we're keeping a close eye on it. We're clearly very deep into the development cycle in our own portfolio and understand and see the various headwinds that are playing through right now. Fortunately, we've got different ways to combat some of the cost pressures that are coming through that one-off developers might not have the advantage to do so, whether it's bulk buying or knowing and understanding how to pre-bid certain assets or components of assets. But with that, we're likely to see again that leg down you talked to in 2021. In 2022, I would be surprised if it accelerates. It could take either a moderate step down or could be flatline based on the amount of activity that we're seeing in 2021, and then what's more unclear is what could happen in 2023 and beyond. So we'll see.

Smedes Rose, Analyst

Okay, fine. Thank you.

Operator, Operator

Your next question is from the line of Ki Bin Kim with Truist.

Ki Bin Kim, Analyst

Thanks. Good morning. So you already touched on some of this. But when you look at the market-by-market performance, obviously you're performing well, but some markets it seems to revenues up a lot more than LA, San Francisco or New York. Is it really just some markets are positive net migration markets and that's driving the relative performance? Or are there other elements that you're noticing in between these markets?

Joseph Russell, CEO

I'd say overall Ki Bin, no question we're seeing broad-based strength. I mean, you look at all of our markets in the second quarter, really strong growth and acceleration from the first quarter. I think what you're highlighting is there is some variation, which is something we see with a strong nationally diversified portfolio. What I highlighted earlier was a shift that I think I'll reiterate because we view it as pretty meaningful internally, where last year at this time, some of our absolute strongest markets were experiencing some what I would consider a pandemic-related dislocation and you can put the New York's or San Francisco's into that bucket and so they weren't our strongest markets. And you fast forward a year and our strongest markets now, as Joe and I mentioned earlier on the call are Florida, Texas, Sunbelt markets, and a few others. But there is some clear relationship between some of the macro drivers in Florida and Texas, and Sunbelt markets, for instance, that are driving demand, housing clearly being one of them, population inflows. And we're seeing real strength to highlight one market as an example, Miami, which is our fifth largest market. We have about 90 stores there in the same-store pool. Moving rents are up 43% versus 2019. So a big market is being fueled by macro drivers and real strength. In terms of what we're seeing in some of the bigger coastal markets, we're seeing good demand there and still really strong occupancies and the ability to push rate. Year-over-year comps, frankly, are tougher in those markets right now as we sit compared to say, Miami, for instance. But if you look at performance versus 2019, still quite good. And we were encouraged by the demand trends there. I mean, what we're seeing in Los Angeles is really strong. North of 98% occupancy here in Los Angeles and strong demand drivers across the board. So generally, pretty encouraged. But there are some factors that are causing some differentiation, and I would add that we're going to continue to see new supply come into some of these markets and impact performance from here just like we have over the last five years.

Ki Bin Kim, Analyst

Got it. And the second question, it's been a little bit over a year now since COVID. Are you noticing any difference in the lifetime value of a customer that customers that have moved in over the past year or length of stay versus what a typical customer profile would look like pre-COVID?

Joseph Russell, CEO

We spent a good bit of time talking about this through last year. We did see a shift towards longer length of stay and really strong existing tenant performance through the year last year. That's persisted. So tenants that were in-house or moved in last year have continued to perform really well and ahead of pre-pandemic expectations. Customers that have moved in this year have behaved more like our typical storage customers from 2019, for instance. Still performing really well, but not at that market improvement that we saw last year. The one thing I'd highlight from a lifetime value is clearly the rate portion of the equation. So if we're seeing good length of stays and significantly higher rates, that clearly leads to higher lifetime values.

Ki Bin Kim, Analyst

Okay, thank you.

Operator, Operator

Your next question is from the line of Ronald Kamdem with Morgan Stanley.

Ronald Kamdem, Analyst

Hey, a couple quick questions. Congrats on the quarter. The first is just talk about potential restrictions in the portfolio on rent increases. Is there a way to sort of quantify that the magnitude of that is at 5% or the 10%? Just big ballpark numbers. And was curious as well if there's still any sort of restrictions or on the late charges and administrative fees? Is there still some, are you guys back to normal? Or is it still sort of hampered?

Joseph Russell, CEO

Sure. So the first question around rent regulations. For the most part those have expired and there was a big push through the first half of this year in many local governments to move past those state of emergency and pricing restrictions. And so for the most part they're no longer in place. The one I would highlight that is meaningful for us is the pricing restrictions from the state of emergency tied to wildfires here in Los Angeles. Los Angeles is our number one market with about 15% of our revenue, and we continue to be a constraint here on rental activity. So that's one I highlight. The others have largely expired. There are a few here and there. That fact is a tailwind as we move to the second half, where last year we were restricted on rent in many markets across the country. But it will take time to move existing tenants back up to where they would have otherwise been. And then your second question was on late fees. We did see some local jurisdictions put those in place. Some of the restrictions as it relates to our delinquent tenant processes remain in place but similar to rent regulations. Those are expiring and governments are looking to get back to regular business. Nothing material, I'd highlight there from a financial impact in the quarter. And I would I Ki Bin we've talked about this throughout last year fees, Ron, sorry, the fees were a big drag last year and we saw it now for the first time we've lapped that fee drag and don't anticipate that to continue to be a negative driver as we move through the second half. So that was a big shift in the second quarter.

Ronald Kamdem, Analyst

Got it. Helpful. And the second question was just going to be just taking in all the expenses a little bit. Obviously, the marketing makes a lot of sense, but can you just provide a little bit more color on you know whether it's the on-site property manager payroll, sort of the 34% decline there? What's driving that? Is that e-rentals? Is it less man hours? Just a little bit more color on that big drop?

Joseph Russell, CEO

Sure Ron. It's a number of things that you just spoke to. It points to the variety of things that we're doing from the infusion and the digitization of the business. We have a lot of analytics that help us look to the optimized level of labor. e-rental as I mentioned is having a pronounced effect. If you kind of step back and think about the traditional operating model for the entire self-storage industry. Historically, it's always been centered on an interaction necessary at the counter with a property manager. And in our case if 50% or so of our customers are choosing to do this electronically and self-directed that typical 30 to 45 minute transaction process that would happen at a counter is no longer necessary for again about half the customers that are at their own election choosing that option. So it's giving us the opportunity to retool and re-prioritize levels of labor utilization while also enhancing customer satisfaction. So as I mentioned we think that that's working well both from a customer's perspective and from an operations perspective. We continue to look at a variety of different tools through the amount of data that we collect at properties relative to activity levels whether it's time of the week, time of the month and again using those analytics to put people in the right places at the right times. So good things to come from that and we're continuing to see different levels of optimization as this again plays out from a customer standpoint in a much more optimized way.

Ronald Kamdem, Analyst

Got it. Helpful. Thank you.

Operator, Operator

Our next question is from the line of Mike Mueller with J.P. Morgan.

Mike Mueller, Analyst

Yes. Hi. I'm curious what do you see as the longer-term margin on the third-party management business and what sort of property count do you have to scale up to hit that?

Joseph Russell, CEO

Sure. That margin will vary based on geographic concentration and the like. But there is certainly a path for us to get that margin up to 25% - 30%. I think at this point one of the drags to that margin as we look at our own performance is the fact that many of the properties that we've taken to manage are in lease-up, and that's going to continue as we look to grow this business. So I would anticipate that our margins are a good bit below that for the next several years as we look to increase the size and scope and in particular with properties in lease-up.

Mike Mueller, Analyst

Got it. Okay. That was it. Thank you.

Operator, Operator

At this time, there are no further questions. I will now hand the call over to Mr. Burke for any closing remarks.

Ryan Burke, Vice President of Investor Relations

Thanks to all of you for joining us today. We look forward to interacting through the third quarter and enjoy the rest of your summers.