Public Storage

NYSE:PSA

Earnings Call Analysis

Company Faces Decline in Move-in Rents

The company's latest earnings call indicated a challenging environment with move-in rents projected to decrease by 3% on average over the year. This forecast is based on the midpoint case scenario, shedding light on some of the headwinds the company is facing.

Public Storage Caps Notable 2023 with Strategic Acquisitions and Digital Transformation

In a spirited year marked by industry competition, Public Storage, a self-storage behemoth, made significant strides by enhancing customer experience and fortifying its financial position through digital transformation and a series of strategic developments. The company achieved a direct NOI margin of approximately 80%, acquired the $2.2 billion Simply Self Storage portfolio, and expanded its non-same-store pool to 705 properties. Despite weaker customer demand, impressive move-in volumes rose by 9% in 2023. The company foresees a possible stabilization of move-in trends, sustained strong behavior from existing customers, and a reduction in competitive pressure from new self-storage facilities, setting a favorable tone for 2024.

Financial Performance Reflects Core FFO Growth and a Sturdy Balance Sheet

The company concluded the year with a core FFO of $4.20 per quarter, totaling $16.89 for the entire year, showcasing substantial growth of 8.3% over the entire year. The same-store portfolio witnessed an 80 basis points revenue increase in Q4 ‘22, propelled by robust move-in volume and rates. However, a 5.1% rise in operating expenses due to marketing investments led to a 50 basis points dip in net operating income for stabilized properties. The non-same-store NOI demonstrated a more robust growth at a clip of 31% and 25% for the quarter and the year, respectively. Heading into 2024, Public Storage presents a consistent core FFO guidance of $16.90, leveled with 2023, and expects revenue to stay steady, with a projected slight decline in same-store NOI growth.

2024 Outlook Optimistic with Continued Portfolio Expansion and Solid Capital Position

Looking forward, Public Storage remains encouraged about its prospects in 2024, envisioning a stabilized new customer demand influenced by clearer macroeconomic conditions and reduced competitive supply. The company anticipates a dip in same-store revenue growth initially, followed by a potential uptrend later in the year. Expenses are expected to inflate by 2.75%, mainly due to property tax and marketing expenses. A decline of 90 basis points is projected for same-store NOI growth. Nonetheless, non-same-store acquisition and development properties are positioned to drive growth in NOI from $370 million in 2023 to a projected $505 million in 2024. The company is embarking on a record $450 million of development activities alongside anticipated acquisitions worth $500 million. Public Storage's leverage stands at a healthy 3.9x net debt and preferred to EBITDA, with $400 million in cash reserves as it steps into 2024, affirming its financial resilience.

Operational Metrics Show Improvement and Marketing Efficiency

The company experienced improvement in operating metrics, with occupancy rates closing the year down only by 70 basis points from an initial 240 basis points deficit. Move-in rents showed a decrease throughout the year, dipping to 18% in Q4, which further improved to a decrease of 11% in December and remained stable through January and February. These favorable metrics are expected to translate into improved financial results after a few quarters, with certain markets such as the Mid-Atlantic and Seattle already showing positive momentum. Marketing spend, accounting for 2.5% of revenue, has yielded strong returns, aligning with the 1% to 3% range deemed comfortable by the company. This strategic investment reflects Public Storage’s proactive response to the challenging demand environment and its emphasis on maintaining a healthy profitability ratio.

Earnings Call Transcript 2023-Q4

[Operator]

Greetings, and welcome to the Public Storage Fourth Quarter 2023 Earnings Call. [Operator Instructions]. 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.

[Ryan Burke, executive]

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 2 questions. Of course, if you have more, please feel free to jump back in queue.

With that, I'll turn it over to Joe.

[Joseph Russell, executive]

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 length 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 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.

[H. Boyle, executive]

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 1% growth over the fourth quarter of '22, and 8.3% growth for 2023 overall, excluding the impact of PSB.

Looking at the same-store portfolio, revenue increased 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 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 nonstabilized 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 new 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 lap easier comps through the year, and crossed 0 on a year-over-year basis towards the end of the summer. And occupancy results down 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. That leads to same-store NOI growth at the midpoint of a decline of 90 basis points.

Our nonsame-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 and will grow from there in future years. In addition, embedded in the outlook is incremental acquisition and development activity, $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.

[Operator]

[Operator Instructions]. Our first question comes from Steve Sakwa with Evercore ISI.

[Steve Sakwa, analyst]

Thanks 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.

[H. Boyle, executive]

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. And as we look at in 2024, there's a couple of things at play here. One is, as we enter the year, right, demand is a little weaker, we'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 2 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.

[Steve Sakwa, analyst]

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 2.75% at the midpoint. But just what do you have baked in for marketing just given the still somewhat challenging demand environment?

[H. Boyle, executive]

Yes. So as I noted in my prepared remarks that 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. The fourth quarter, our marketing expense as a percentage of revenue was 2.5%. And as you've heard from me in the past, being in that 1% to 3%, 1% back in 2021 when demand was really, 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.

And so 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 the ZIP Code and continue to see a very strong return on that advertising dollar.

[Operator]

Our next question is from Michael Goldsmith with UBS.

[Michael Goldsmith, analyst]

You finished the year with 80 basis points of same-store revenue growth and your guidance for the upcoming year ranges from down 1% to up 1%. So presumably same-store revenue growth is going to dip before it kind of rebounds and that goes in line with the -- I think, some of what you've been saying with the -- with your expectations of street rates. So -- how much of -- in the midpoint of your guidance, how much of a dip are you expecting? And when are you expecting trends to kind of inflect better through the year?

[H. Boyle, executive]

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 ZIP code. So that improvement has been lasting. And 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. And so 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. And so 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.

[Michael Goldsmith, analyst]

And my second question, it's a multiparter, but it shouldn't be too intimidating. You comment in the that softer that -- you say, you expect industry-wide demand from new customers. To stabilize this year due to improving macroeconomic conditions. So one, are you seeing that today? Two, can you kind of provide an update on where the move-in rents were in January and to the extent that you're able to provide insight into February? And then three, the -- you've talked about move-in rents crossing the zero. How positive, if that momentum has continued -- how positive could move in rents be as we kind of exit the year?

[Joseph Russell, executive]

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 2 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've actually seeing the -- 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. 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.

[H. Boyle, executive]

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. So last year, on this call, we spent a good bit of time talking about the macro environment. And we did couch 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 move through the year.

This year, we are not couching the range in terms of macro. And as you think about the midpoint of the range, we're 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.

[Operator]

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

[Juan Sanabria, analyst]

Maybe just piggybacking off of part of Michael's question. I guess what is assumed within the range of -- when street rates break that year-over-year breakeven point? And if you have any color around changes in -- or difference in occupancy assumptions at the high or low end of the range?

[H. Boyle, executive]

Sure, Juan. I'll give you some context around both the high and the low. And specifically, you're speaking to same-store revenues. So that's where I'll focus my attention. So as I noted, at the midpoint case, that assumes that we cross that 0 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. And I would note that, that's -- as we sit here today, year-to-date, we're down 70, 80 basis points in occupancy, so consistent with where we sit today.

In terms of the high end and the low end, the low end assumes that it takes a little bit longer for operating metrics to stabilize here. And as such, the assumption on when we cross 0 on year-over-year move-in rents is at the end of the year. And in that case, we're assuming, right, 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. And as such, that 0 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% -- or 20 basis points -- sorry, 20 basis points throughout the year with an acceleration in the summer and a higher peak seasonally.

[Juan Sanabria, analyst]

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?

[Joseph Russell, executive]

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 "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 size opportunities, whether single assets or larger portfolios. But as we saw in 2023, the beginning of 2024 is likely to be very similar. And 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.

[Operator]

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

[Jeffrey Spector, analyst]

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?

[H. Boyle, executive]

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.

And as we sit here today, right, 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. And 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. And so from a range of variability less than last year. Now 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 prepandemic 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.

And as such, we think we've couched the ranges appropriately to encapsulate that variability. But we do feel more confident in the range of outcomes this year than we did last year.

[Joseph Russell, executive]

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, a, 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 our 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.

[Jeffrey Spector, analyst]

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

[H. Boyle, executive]

Sure, Jeff. I mean I think I've already covered the move-in rate component and 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. And as we spoke about through '23, the markets that had the highest highs in '21 and '22 are giving back some of that appropriately so. And so the weaker markets on a growth rate basis to start the year are some of those southeastern markets, Florida, Atlanta, et cetera.

[Operator]

Our next question comes from Keegan Carl with Wolfe Research.

[Keegan Carl, analyst]

Maybe first, just where is your development line -- your development pipelines start for the year? And where are you expecting to end based on your anticipated deliveries in '24?

[H. Boyle, executive]

Yes, Keegan, maybe I'll just talk a little bit about the development environment and then some of the sequencing of our deliveries. So 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. And you can see the returns that we've achieved on our development vintages in the sub. And we have an in-house team that's dedicated to this program, development, construction, design that are all out working on growing that pipeline.

This will be a record year. The team is out of figuring out how we're going to backfill that development pipeline from here in a challenging development environment. But as we sit here today, that's a business we want to grow. And 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.

[Joseph Russell, executive]

And yes, just from a timing standpoint, Keegan, a little lighter in Q1 but then pretty balanced deliveries in the subsequent 3 quarters, a little bit differently than what we saw in 2023, where we had a lot of deliveries hit more towards the second half of the year. So we've got a good combination of both ground up new development, and we're a little overweighted on expansion and redevelopment opportunities, particularly tied to unusually large projects that we'll complete in 2024.

So -- as Tom mentioned, the team is working hard not only to continue to grow the overall pipeline, but to continue to put these generation 5 Class A properties into a whole variety of markets. And we're continuing to see very good lease-up and again, returns tied to the development activity, both new development and redevelopment.

[Keegan Carl, analyst]

Got it. That's really helpful. And then shifting gears here, I know Tom mentioned a little bit about SoCal 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 fair demand in a given market?

[H. Boyle, executive]

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. But overall, I'd say demand remains healthy here. Occupancies are very healthy in L.A., San Diego, Orange County. So we feel very good about how the portfolio is set up, and we'll work through the rains here in SoCal. Sun shined today so we had a busier day today.

[Operator]

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

[Spenser Allaway, analyst]

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?

[H. Boyle, executive]

Sure. Getting into specifics, I'd say -- the -- there's a range of going in yields depending on how stabilized the assets are. So of those 11 assets, some of them were CofO properties where the going-in yield is 0 or a little bit negative. And then you had some that were more stabilized that going in yields are probably mid 5% to 6%, and we're going to seek to improve the operations on those portfolios and get them to those assets rather, and get them to 6% plus as we think about the return profile of those assets.

And that's pretty consistent with what we saw through most of 2023. As Joe mentioned, we'll see how the interest rate and capital environment plays through into '24, but that hopefully gives you a guidepost on yields.

[Joseph Russell, executive]

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 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. And we're confident that again, those strategies will play well even going into this year. And continue to look for a whole range of different type 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. And again, buying the properties at the right price point, location, et cetera, continues to be very advantageous for us.

[Spenser Allaway, analyst]

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?

[H. Boyle, executive]

Sure. So the rents of that portfolio have been improving as they've been added into our portfolio. So 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.

So 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.

[Operator]

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

[Anthony Peak, analyst]

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?

[H. Boyle, executive]

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, '22. And 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. And 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. And what you see at the output is it made sense to give up in effect some of that 2021 heightened level of occupancy to maximize revenues. And 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 kind of -- you're not getting a big lift there similar to how we experienced last year. And so 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.

[Anthony Peak, analyst]

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?

[H. Boyle, executive]

Sure. So I'll couch seasonality in terms of the peak-to-trough change in occupancy. So last year, we experienced -- taking a step back even further in 2015 to 2019, there was typically about a 280 basis point peak-to-trough change in occupancy, call that from June 30 to December 31. In 2022, we experienced about a 240 basis points. So it was a little bit less seasonal than a typical year. In 2023, that fell all the way down to about 160 basis points peak-to-trough. And in 2024, our midpoint case is a touch over 200. So a little bit more seasonality, but not as much as we experienced in '22 and a far cry from what we experienced in the pre-pandemic time period.

[Operator]

[Operator Instructions] Our next question comes from Eric Wolfe with Citi.

[Eric Wolfe, analyst]

You talked about the move-in rents crossing over into positive territory in late summer. Just curious where move-in 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?

[H. Boyle, executive]

Thanks, Eric. So I think we'll have to dig up and we can get to you exactly. I don't have in front of me what our third quarter move-in rents were, for instance. But at end of summer, we're expecting it to cross 0. So I'd look at plus or minus our third quarter of '23 move-in rents. And I think the team is going to dig up third quarter contract rents, so you can have them.

In terms of what we need to see to get there, there's seasonality every year. So as the question earlier, so even in a year last year where I'd call it an atypical year where we didn't see a lot of seasonal strength through your April, May and June. The housing market has been very well publicized as resetting lower in terms of transaction volumes as being a driver there.

As we think about move-in rents they're going to rise and they rose last year, they're going to rise on an absolute basis into the summer. And then what you're going to see is a little bit more growth in rental rates this year to close that gap over the time between now and the end of the year last year, or the end of the summer, this upcoming year. Does that make sense?

[Eric Wolfe, analyst]

Yes. No, that makes sense. And I guess the question then really is, just -- you talked about that extra gap that it needs to sort of close to get them above and beyond seasonality. Can you just put that in context? Like is that a is that extra gap that it needs to close pretty large relative to history? Is it somewhat normal relative to other recovery period? Just trying to understand sort of whether it's unusual relative to what you've seen in the past?

[H. Boyle, executive]

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. And 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 move-in rents in the midpoint case. And so that's going to result in 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.

[Operator]

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

[Ki Bin Kim, analyst]

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?

[H. Boyle, executive]

So, Ki Bin, we spoke about this a little earlier. There's a little bit of a give and take this year. We're expecting that on the one side, the consumer remains strong, as Joe highlighted in his remarks, and that we don't see a significant shift in customer price sensitivity, which we've been very encouraged in experiencing through '22 and '23. So that's one side.

On the other side, on replacement costs, move-in rents are still down 10%, 11%. So replacement cost is higher at the start of this year than it was at the start of last year on average. And so that's going to have a detriment to overall contribution.

But the flip side of that, that I highlighted earlier was the fact that we moved in a lot more new customers. Last year, move-in rents were strong, up about 9%, and that will have a positive impact on the -- not the magnitude, but the number of increases that we send throughout the year. And those things largely will offset such that the contribution of ECRIs as we sit here today in the midpoint case is pretty consistent year-over-year.

[Ki Bin Kim, analyst]

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?

[H. Boyle, executive]

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 advertising platform online. So we saw better than industry top-of-funnel demand into our system, which ultimately led to good move-ins. But we also saw stronger conversion associated with both pricing and promotion, which are more conversion-related items such that conversion rates both through -- well, 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.

[Joseph Russell, executive]

And 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 digital platform, but now even through our care center, et cetera. So we're making that conversion activity even that much more effective relative to -- again, 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 and optimize going forward.

[Operator]

Next question comes from [ Hong Hang ] with JPMorgan.

[Unknown Analyst]

I guess, first off, you [indiscernible] fair homes better and [ SoCal ] 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 community than last year, even at the low end?

[H. Boyle, executive]

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.

[Unknown Analyst]

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?

[Joseph Russell, executive]

Yes. That's 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, I think, 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, their comfort level with our own ability to transact very efficiently. We'll continue to be a good source of not only relationships but acquisition activity over time. So I noted that now the program is at about 325 assets. And we still see good momentum to continue to grow to our ultimate goal and optimization of the platform. So we'll likely see that in the next year to two. And with that more acquisition opportunities.

[Operator]

Our next question is from Eric Luebchow with Wells Fargo.

[Eric Luebchow, analyst]

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?

[H. Boyle, executive]

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 move-in 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, but you're still probably going to end in a similar territory on gap there between move-in and move-outs in the midpoint case. And 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.

[Eric Luebchow, analyst]

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?

[H. Boyle, executive]

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 customer as well as longer-term customers in the program.

[Operator]

Our next question is from Ronald Kamdem with Morgan Stanley.

[Ronald Kamdem, analyst]

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 0 to get to the midpoint of the guidance.

[H. Boyle, executive]

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. And yes, that likely involves a negative performance. on a year-over-year basis through the first half. And then yes, reacceleration as those -- the lag between operating metric improvement and financial metric performance starts to show in the second half of the year.

[Ronald Kamdem, analyst]

Great. And then, look, my second question is just, I guess, we're trying to figure out how aggressive or conservative the guidance is because on the one hand, you talked about last year, there were a lot more macro concerns. So maybe that was a reason to be a little bit more conservative versus this year. But you also sort of mentioned that the move in volumes at 9% was basically 2x what you did in sort of 2022, which should presumably set up well for pricing power.

So maybe could you -- when you're putting all that together, maybe, can you talk about how much conservatism or not is built into the guidance this year and how we think about that?

[H. Boyle, executive]

Sure. So I guess the way I'd couch it is we did cover a macro series of scenarios for our guidance ranges last year. The range on same-store revenue was about 250 basis points. This year, as we sit here, there's still uncertainty as I highlighted, maybe a little bit less than what we experienced last year -- what we were expecting last year. And so the range is 200 basis points this year, so not too far different. Our core FFO range was about $0.70 last year. I think the range this year is $0.60. So we're still talking about similar levels of range. And as a reminder, we operate a month-to-month lease business. And so there is some variability that could play out through the year. I've tried to be very transparent on what the range of potential outcomes are in a number of the key metrics, both at the high and the low end.

And we'll look on to executing through our plan this year, and I'll leave judging, conservatism or aggressiveness to the investment community, but we want to try to be transparent around what our assumptions are and how we plan on navigating through the year.

[Operator]

Our next question is from Steve Sakwa with Evercore ISI.

[Steve Sakwa, analyst]

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. I think you said you expect it to get to about a breakeven in the third quarter. I guess, what is the overall expectation for the year? I mean I presume 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?

[H. Boyle, executive]

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

[Operator]

Our next question is from Michael Goldsmith with UBS.

[Michael Goldsmith, analyst]

Just one quick follow-up for me. I think from our conversations with investors, I think they were expecting same-store revenue growth at kind of like the low end of your same-store revenue guidance. So, what do you need to see or believe about the consumer or the length of stay to get ECRIs to drive kind of that same-store revenue growth at that low end of the guidance, all else being equal? And I know it's kind of like there's a lot of moving parts there. But just what would need to get the ECRI to the low end of the same-store revenue guidance?

[Joseph Russell, executive]

Well, I would...

[H. Boyle, executive]

Subject to ECRIs, right? I mean we gave you a lot of different metrics at the low end that gets you there. I gave you the perspective that demand -- new customer demand in that lower end case doesn't stabilize until later in the year and you don't cross year-over-year move-in rents until the fourth quarter, really towards the end of the year.

ECRIs, we're assuming in that case that there's a little bit more price sensitivity than what we're experiencing right now. To directly answer your question, move-out churn. We're anticipating really in is centered around in the midpoint case, the same levels of churn we saw last year, which is very consistent with what we saw in 2019. Churn levels are up a little bit in that low-end case, but not materially. So that's what gets you at the low end.

[Joseph Russell, executive]

And then again, Michael, as we've been speaking to, we're seeing, again, continued validation of, I would say, healthy economy, 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. So something would have to shift pretty materially away from that to give us a different low-end view as well.

[H. Boyle, executive]

Yes. And 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 would 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. Try to give the investment community some guideposts in terms of how we think about that going through the year. But 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. And the rate with which we add those customers is going to be very impactful on where we end up through this range. And we'll update you on what we're seeing on operating trends as we move through the year.

[Operator]

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.

[Ryan Burke, executive]

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

[Operator]

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