Public Storage - Q2 2023
August 3, 2023
Transcript
Operator (participant)
Ladies and gentlemen, thank you for standing by, and welcome to the Public Storage second quarter 2023 earnings call. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you have a question at that time, please press star one on your telephone keypad. If you wish to remove yourself from the queue, please press star two. It is now my pleasure to turn the floor over to Ryan Burke, Vice President of Investor Relations. Ryan, you may begin.
Ryan Burke (VP of Investor Relations)
Thank you, Shelby. Hello, everyone. Thank you for joining us for our second quarter 2023 earnings call. I'm here with Joe Russell and Tom Boyle. Before we 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 3, 2023, 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.
As usual, we ask that you keep your initial questions limited to two. Of course, if you want to ask additional questions, please feel free to jump back in queue. With that, I'll turn the call over to Joe.
Joe Russell (President and CEO)
Thank you, Ryan, and thank you all for joining us today. As demonstrated by our second quarter performance and raised outlook for the year, Public Storage continues to maximize its competitive advantages across our platform, with several key factors driving positive results, including a better-than-expected macro environment with higher odds of a soft landing, increased rental activity from our needs-oriented customer base, and execution across all aspects of our industry-leading platform. We are built to operate in all macro environments, and we are proving just that. Let me highlight three specific areas. First, we are driving record year-over-year growth in customer move-in volumes. Move-in volume growth has accelerated throughout the year, up nearly 14% in the second quarter.
We have closed the year-over-year occupancy gap from down 220 basis points at the end of March, to down 160 basis points at the end of June. We have the right team, technologies, and analytics to determine the appropriate mix of marketing, promotions, and rental rates to meet customer expectations in the current environment. Drawn by our leading brand and enhanced digital customer experience, self-storage users are clearly choosing Public Storage. These trends support our raised outlook, along with the easing of difficult year-over-year comps as we move through the second half of the year. Second, we are growing our portfolio amidst broader market dislocation. Last Monday, we announced and fully funded the $2.2 billion Simply Self Storage acquisition in a matter of a few hours.
This is something that very few companies could do today and separates Public Storage as the acquirer of choice within our industry. We have the strongest balance sheet and the lowest cost of capital, both of which were highlighted by our rapid execution on the Simply Self Storage transaction. With the Simply Self Storage acquisition, we are excited to combine our respective strengths as we integrate their portfolio to ours and achieve significant operational enhancements immediately and into the future. As an example, under our platform, the $1.8 billion ezStorage portfolio, acquired in 2021, has seen significant operating margin improvement of 1,100 basis points from 72% to 83%. As we do with all of our acquisitions, the entire Simply Self Storage portfolio will be rebranded to Public Storage in order to maximize the benefits and value of our iconic brand and platform.
We expect to stabilize the portfolio at a mid 6% nominal yield by year three. Third, we are well positioned for continued strong execution and growth across the company. From an operating perspective, our digital and operating model transformations are proving to be significant win-win-wins, with result to exceeding expectations. Customers benefit from having robust digital options at their fingertips across the entire journey: finding a unit, renting a unit, moving in, managing their account, and navigating the property when on site. Our proprietary digital ecosystem will continue to be a primary reason that customers choose us, with more than 2 million PS app downloads and over 60% of customers renting through our online leasing platform today. Additionally, Public Storage team members benefit from being able to place even more focus on our customers.
For those that excel, the transformation has enabled us to create new pathways for career advancement. Our financial profile benefits as well. We are putting these digital tools in the hands of our customers and employees for convenience, combined with in-person, on-site customer service when and where it's needed. The result is a better customer and employee experience and a higher operating margin. From an external growth perspective, our industry-leading NOI margins, multi-factor in-house platform, access and cost of capital, and growth-oriented balance sheet put us in a unique position. Far this year, we have secured $2.5 billion worth of properties. We will have also delivered $375 million in development by year-end and have a pipeline of more than $1 billion of development to be delivered over the next two years.
Our advantages enable us to acquire and develop when others can't. We have a strong appetite for more, with a matching ability to execute. Now I'll turn the call over to Tom.
Tom Boyle (CFO and Chief Investment Officer)
Thanks, Joe. As Joe highlighted, we sit here more than halfway through the year with both our year-to-date performance and updated outlook better than we expected. Core FFO per share was $4.28 for the second quarter, representing 11.5% growth year-over-year, excluding the contribution from PS Business Parks. Looking at the key components for the quarter, same-store revenues increased 6.3% as we drove record move-in growth. Our existing tenant base continues to perform well, and these trends continued into July, with the year-over-year occupancy gap narrowing to 130 basis points at month-end. Same-store cost of operations were up 5.2%, leading to 6.6% stabilized same-store net operating income growth at a direct operating margin exceeding 80%.
In addition to the same store, the lease-up and performance of recently acquired and developed facilities continues to be a standout, with net operating income increasing 20% year-over-year. These 544 properties in more than 50 million sq ft comprise 25% of our total portfolio and are an engine of growth. This pool will grow further with the addition of the Simply Self Storage acquisition. Shifting to guidance, we once again lifted our outlook for the year, primarily driven by a 50 basis point increase to the low end of our same-store revenue growth guidance, reflecting outperformance to date and an improved outlook for the remainder of the year. We also lifted our non-same-store NOI expectation by $40 million at the midpoint to primarily reflect outperformance and improved outlook, and also to incorporate the impact of the Simply acquisition.
Interest expense expectations increased accordingly. Our outlook for the non-same-store pool beyond 2023 improved as well. We lifted our expectations for incremental NOI to stabilization from $80 million-$190 million to reflect outperformance to date, stronger future expectations in the Simply acquisition. Last but not least, our capital and liquidity position remain rock solid. We refinanced our untapped line of credit in June, tripling its size to $1.5 billion. As Joe mentioned, fully funded the $2.2 billion Simply acquisition in the unsecured bond market immediately following the announcement. We're well positioned with a strong appetite for growth, coupled with the ability to execute upon the opportunity. Now I'll turn the call back to Shelby to open it up for questions.
Operator (participant)
Thank you. At this time, if you would like to ask a question, please press the star one on your touch tone phone. You may remove yourself from the queue at any time by pressing star two. Once again, that is star and one to ask a question. We will pause for a moment to allow questions to queue. We'll take our first question from Michael Goldsmith with UBS. Your line is open.
Michael Goldsmith (US REITs Analyst)
Good morning. Good afternoon. Thanks a lot for taking my question. The guidance for the full year implies a pretty material slowdown in the back half of the year, with potential for same-store revenue growth and same-store NOI growth to turn negative in the fourth quarter. What would you have to see from the inputs of revenue growth like occupancy, move-in volume, street rates, and ECRI in order to hit the middle and bottom range of the guidance, and if you see these as realistic or conservative scenarios? Thanks.
Tom Boyle (CFO and Chief Investment Officer)
Sure. Thanks, Michael. It's a good question with lots of components. Taking a step back, we've been consistent throughout the year, providing investors and analysts with a range of- In terms of the different components of the outlook, I've been consistent that the upper end of that outlook encapsulates an environment where we experience a soft landing. As we move through the year, you know, the probability of that soft landing has increased. As we think about the assumptions that are baked into the lower end, that is more of a tougher macroeconomic environment. In particular, we're assuming-... Think about the midpoint, you know, the same-store growth moderates but starts to stabilize. And that midpoint outcome does encapsulate a negative outcome in the fourth quarter for same-store revenue growth.
Again, easier comps help and start to stabilize. From an overall FFO standpoint, the midpoint is certainly aided by continued standout growth from the non-same store pool of properties there as well. Again, a range of outcomes embedded within our out-.
Operator (participant)
Please stand by. Your conference will begin momentarily. Thank you for your patience in holding. Please stand by. Your program will continue momentarily. Thank you for your patience in holding.
Tom Boyle (CFO and Chief Investment Officer)
You did that.
Operator (participant)
Twice I told, we appreciate your patience and ask that you continue to stand by. Your conference will begin in a few moments.
Ryan Burke (VP of Investor Relations)
Hi, Shelby. This is Ryan Burke from Public Storage, trying to get through to you to resume the call. Are you hearing us?
Operator (participant)
Absolutely. Yes, sir, you are coming in loud and clear, and your conference may continue.
Joe Russell (President and CEO)
Thank you. Thank you, Shelby. Apologies to everybody if you're hearing us. We've had some technical difficulties. We're hoping that we're through those at this point. Shelby, if we could go back to Q&A, we would appreciate it.
Operator (participant)
Absolutely. As a reminder, at this time, if you would like to ask a question, please press star one. We'll pause for another moment to allow questions to queue. We'll take our next question from Jeff Spector with Bank of America. Your line is open. Jeff Spector, your line is open. Please ask your question. I'm hearing no response. We will move to the next question. We'll take our next question from Spenser Allaway with Green Street. Your line is open. Hearing no response, moving on to the next question. We'll take our next question from Samir Khanal with Evercore. As a reminder, if you would like to ask a question, please press star one, and please make sure you are not muted on your end.
Samir Khanal (Equity Research Analyst)
Hey, good morning, Joe or Tom. Can you talk about what you're seeing in July, maybe move-in rates and demand trends, and, and if anything, on the customer side, given some of the price increases? Thanks.
Tom Boyle (CFO and Chief Investment Officer)
Yeah, great, great question, Samir. In July, we've seen largely continuing trends from the second quarter. You know, as we think about the different components of customer activity, we saw a good move-in volume growth, call it 7% or 8% above prior year. Move-in rents down a similar or kind of down 14% as we sit here in July. Move-outs have begun to moderate. Again, as we've talked about, easing comps as we move into the second part of the year. Move-outs are up about 4% in July, ultimately leading to that occupancy gap closing again, as I mentioned earlier, down to down 130 basis points at the end of July. There's a couple points I'd highlight about July.
One is, you know, we've talked about how comps in the first half of the year are more challenging, and I think from a move-in rate standpoint, we do believe July is really the, the point in time where those comps are the most challenging and should ease up from here. As you think about the different pathways for growth going forward, we're anticipating that move-in rate declines year-over-year, start to moderate. In terms of existing tenant performance, continues to be quite strong, and length of stays within the customer base, we're at records through the second quarter.
Yeah, some of the activity we're seeing to date, mathematically, is likely to bring that average length of stay down a little bit, given the significant amounts of new customers that we're adding to the pool year to date. The core longer-term customer base, be it greater than one year or greater than two years, continues to perform quite well throughout the summer here.
Samir Khanal (Equity Research Analyst)
Then just talking about maybe, you know, given the, you know, the L.A. market is a big market for you, you know, it was still solid. I mean, don't get me wrong, but, you know, it sort of felt like maybe it decelerated a little bit from the first quarter. I, I know the restrictions are, are, have been lifted there. Maybe just talk around kind of the trends you're seeing in that market, as we kind of think through maybe the next sort of 6-12 months.
Joe Russell (President and CEO)
Yeah, Samir, the LA market continues to serve us well. We clearly have a very strong position here with north of 200 properties, excellent locations. We've completely rebranded the portfolio through a POT effort, and with that, you know, we've continued, even outside of lifting the restrictions that we were burdened by for over three years, we've still got good opportunity to drive revenue and strong occupancy, still very good top-of-funnel demand. You know, it's well documented. There's very little supply that has or will come into that market by virtue of, you know, lack of land sites, cost of new development, et cetera. We're well-positioned and feel very confident that that market's gonna continue to perform well.
Tom can give you a little bit more color on how we're looking at the horizon based on the fact that we've, you know, certainly gone through a wave of recovering, to some degree, the amount of pricing power that we did not have for that three-year period, but we still feel confident that the market itself is gonna perform quite well.
Tom Boyle (CFO and Chief Investment Officer)
Yeah, specifically, if you remember, Samir, last year, we talked about 150-200 basis points of same-store revenue benefit because of the expiration of those restrictions. This year, it's more like 50-100 basis points. The deceleration that you're seeing through 2023 is really attributable to the fact that this year we're facing comps where we were playing catch-up on customers last year. So that market is expected to continue to, to moderate its growth because of those comps. Overall, as Joe mentioned, fundamentals in the marketplace remain quite strong. And, frankly, it's not just an L.A. phenomenon either. If you look at San Diego, that's one of our top markets as well.
Southern California performing well, through 2023 for Public Storage today.
Samir Khanal (Equity Research Analyst)
Thank you, guys.
Joe Russell (President and CEO)
Thank you.
Tom Boyle (CFO and Chief Investment Officer)
Thanks, Samir.
Operator (participant)
We'll take our next question from Todd Thomas with KeyBanc Capital Markets. Your line is open.
Todd Thomas (Managing Director)
Hi, thanks. Can you hear me okay?
Joe Russell (President and CEO)
We can. Thank you for checking.
Todd Thomas (Managing Director)
All right.
Joe Russell (President and CEO)
Hopefully, you can hear us.
Todd Thomas (Managing Director)
Yep, all loud and clear.
Joe Russell (President and CEO)
Great.
Todd Thomas (Managing Director)
I wanted to ask about the occupancy build in, in 2Q, and, you know, which, which was a little bit more muted than it has been in, in prior spring and summer seasons, and it sounds like the, the year-over-year occupancy gaps narrowed a bit further in, in July, which is positive. Tom, you mentioned July is a tough comp. As we think about the seasonality of the business, do you, do you think that the peak rental season, you know, particularly this year, you know, has, has a little bit less weight than it has in prior years and in, in prior cycles in your view?
Does the lower seasonality in, in the spring and summer mean that you might expect to have less seasonality, you know, around Labor Day and sort of through fall and winter in the back half of the year?
Tom Boyle (CFO and Chief Investment Officer)
Yeah, that's a great question, Todd. I think stepping back, we haven't had a typical demand year since 2019, and, you know, we could debate whether 2019 was, was one as well. Every year has had its unique attributes, given what we've all lived through over the last several years, and certainly 2023 is no different than that. This year, some of the factors at play, certainly the, the housing market is one that I would highlight, and we've been highlighting for some time. The existing home sales volumes, declining, having an impact on some of the seasonal demand that we would oftentimes see in a May, June, and July time period, we're not seeing as much of this year.
I, I do think that that's one of the primary reasons for the difference in occupancy build as we move through the year. That said, we've continued to see very good move-in volumes, as we've highlighted already on the call, and that's being made up by renter activity by folks that continue to, to run out of space at home, which is also somewhat tied to people not, not selling their existing homes. We feel good about the level of, of new customers that we're acquiring today, but it is a different year. Maybe to your second part of your question around how does that impact our thoughts on the second half?
I, I think because of how the first year has played out and that demand dynamic, we would anticipate that we probably see a little bit less of a seasonal decline in occupancy as we move through the year, which is likely to lead to continued modest closing of the occupancy gap year-over-year as we move through the year.
Joe Russell (President and CEO)
Yeah, just, you know, to highlight a couple other things, Todd. You know, the seasonality, predictable components are shifting, and what you have to be in an environment like this is quite nimble to interpret what effects or counter effects you may have or be able to deploy as the traditional seasonality theories or events are shifting. As to Tom's point, since 2019, we've learned all kinds of different range of impacts, whether it's tied directly to housing, hybrid work from home environments. I can tell you maybe the one consistent, predictable driver is just college, and that too got upended during the pandemic. That seems to be back, so there's a little bit of movement that we think we can predict there.
The good news is, with our platform and our ability to interpret changing demand factors, we're actually able to maneuver through what would be, as Tom pointed out, less predictability around seasonality. At the same time, we're seeing very good customer demand driven by even new and additional factors, many of which seem to be deep-seated and are likely to be with us for some period of time.
Todd Thomas (Managing Director)
Okay. Tom, I guess just in, in terms of the revised guidance, I mean, does that account for, lower seasonality in the second half of the year? You know, less, less move-out activity than you would ordinarily see, in terms of occupancy loss, through, through Labor Day and, and the back half of the year. Then the, the last piece here, I guess, with, you know, less rental activity driven by moving activity, you know, related to the housing market, do you feel that you have, sort of a healthier, longer-staying customer in the portfolio today?
Tom Boyle (CFO and Chief Investment Officer)
The first component of your question there, and we're, we're adding them up here, is yes. The outlook does incorporate what I highlighted earlier. The second component of your question, is also a good one to highlight, and that is that customers that have moved in year to date are exhibiting longer length of stay attributes, because of what, what you're highlighting and, and what Joe highlighted around the use cases for storage. Consistently, each month's cohort of move-ins are performing better than prior year, which is encouraging as you think about the tenant base, and, and the durability of, of revenue heading through 2023 and into 2024.
Todd Thomas (Managing Director)
Okay. All right. Thank you.
Tom Boyle (CFO and Chief Investment Officer)
Thanks, Todd.
Operator (participant)
We'll take our next question from Jeff Spector with Bank of America. Your line is open.
Jeff Spector (Managing Director)
Great. Thank you. I just wanted to, I guess, go through, you know, your, you know, the, the comments on record move-ins, better than expected first half, and tie this into some of the concerns, let's say, going back to at least last year in the fall on, you know, weaker street rate. Like, how do you explain the dynamic and how you're thinking about it? You're mentioning you're bringing in the right customers, it sounds like, through June, but, you know, private continue to compete on, on lower street rates. How should we think about that dynamic? Again, there's this concern that it will eventually impact your ability to push on existing, but that existing customer continues to exhibit great behavior, so it is a bit confusing.
Tom Boyle (CFO and Chief Investment Officer)
All right, Jeff, there's a good, good number of parts to that question, too. Let's take them one by one. To your point around good move-in volume, as Joe highlighted earlier, we think the tools that we have are working quite well. We run a very granular and dynamic pricing and advertising process, and our ops team is built to drive move-in volumes, paired with our digital ecosystem that Joe spoke to, we think the customers are reacting quite well to. All of that combined with our brand, I think is certainly helping drive good move-in volumes. I think your point specifically on move-in rate, there's a couple components there.
One is, no question that the industry overall, as there's been more vacancy through last year and into this year, has lowered rental rates, and it's a very competitive environment for new customers today. We feel like, as I, as I noted, we're, we're getting good customers and, and a good volume of them, but the rents are lower than what they were in the prior year, down about 14% in the second quarter. To give you context, in the second quarter, our rents were about a couple % above our competitors within the trade areas. We're largely charging what our competitors are charging in the marketplace, but seeing very good volume and traction associated with that.
It, it is certainly one of the components that drives the deceleration of revenue growth as we moved through last fall and through the beginning part of this year. I noted earlier that as we sit here today, the comps do start to ease, and we think the July print could be the, the trough as we move through the year, and that's embedded in our outlook as we look through the second half of the year. Overall, that's certainly been a drag to revenue growth, but should be a stabilizing factor as we move forward. The, the third component to your question related to its impact on existing tenant rate increases, and that's something we've been very consistent in speaking about. We like to talk about it in two components. One is: how is the customer base performing?
As I've noted in prior calls, the existing customer base continues to perform quite well. The length of stays of the longer-term tenants, one year, two year plus, continue to be strong. Delinquencies are below pre-pandemic levels, and they are accepting of our rental rate increases. The thing that has changed over the past two years is what it is to replace those tenants when they move out. That's the second component, the replacement cost of those tenants if they move. That has certainly flipped from, in certain markets, there was actually a benefit to replace those tenants in certain prior years, and this year it's certainly a cost to replace. Again, going back to what you highlighted, which is move-in rental rates lower year-over-year.
That's led to lower magnitude and lower frequency of increases through the start of 2023, but no real change there, as we sit here in July versus what we would have told you in February on that point.
Jeff Spector (Managing Director)
Okay, thanks. Very helpful. If I could ask, given, I'm getting a few incoming, to repeat your first answer to the first question, kind of on the back half guidance. I think we missed a lot of that answer, and maybe I would just try to clarify, you know, that the bottom end of guidance, does that still reflect-- It sounds like it still reflects that recessionary scenario.
Tom Boyle (CFO and Chief Investment Officer)
Yeah. Thanks, Jeff. A bummer that you couldn't hear my first response, but I'll, I'll go at it for attempt number 2. Hopefully, this works. You know, the outlook as we moved through the year, we've, we've now raised it 2x, and we highlighted earlier that's because of better than expected performance year to date, as well as, you know, improved outlook for the 2nd half of the year. We've been consistent since February in speaking about the outlook as a relatively wide range of potential outcomes, and that's driven by a, a combination of an uncertain macro environment, which we're all still living in day to day, as well as a consumer backdrop that continues to shift, obviously impacted by that macro environment.
at the lower end of our guidance, does encapsulate the potential that the Fed doesn't quite stick the landing here in the second half of the year. It doesn't have as much of an impact on 2023, as what it may have on, on 2024, which is certainly leading to, to improved outlook at the lower end. There's certainly that possibility that the, the consumer weakens, longer-term length of stay customers start to vacate at a higher frequency. Again, something we're not seeing today, but could play out as we move through the year and would be typical in a tougher macro environment. A still competitive move-in environment, which, to, to the point earlier, is something that we've seen year to date, a very competitive move-in environment.
The, the flip side, though, is also fair, which is we continue to think that there's a, a good potential for a soft landing and a continued strong performance from the existing tenant base, the easing of comps in the second half, which would lead to the higher end of that range as well. Again, a good performance year to date, the, the outlook's improving as we move through the second half, but we do still encapsulate that broad range of potential outcomes here.
Jeff Spector (Managing Director)
Thank you.
Tom Boyle (CFO and Chief Investment Officer)
Thanks.
Operator (participant)
We'll take our next question from Spenser Allaway with Green Street. Your line is open.
Spenser Allaway (Managing Director)
Thank you. Can you guys hear me?
Tom Boyle (CFO and Chief Investment Officer)
We can. Thanks, Spencer.
Spenser Allaway (Managing Director)
Okay, great.
Tom Boyle (CFO and Chief Investment Officer)
For being patient.
Spenser Allaway (Managing Director)
No problem. No problem. Apologies if this was covered, but marketing spend, up in the quarter and, you know, that's understandable, given you weren't spending much in 2022. Just curious if you can talk about the absolute customer acquisition costs, and how does that trend, or how is that trending, sorry, versus historic norms?
Tom Boyle (CFO and Chief Investment Officer)
Yeah. Thanks, Spencer. You noted clearly high year-over-year growth in marketing spend because we didn't really spend last year. I think one way to look at it, that, that we track, through time periods, is the percentage of marketing spend as a percentage of revenue. In the second quarter, I believe that was about 1.7% of revenue, and that's a good bit below, pre-pandemic averages that were in the 2%-3% range. If, if you think about overall customer acquisition costs are frankly attractive, which is one of the reasons why we continue to use that tool, along with the other tools in our, toolkit, to, to drive good move-in volume, and we're seeing very good response from that.
We'll continue to use marketing spend as a component of the customer acquisition toolkit and, you know, have an ability to continue to spend there if we get good return.
Spenser Allaway (Managing Director)
Okay, great. At NAREIT, you commented that you were receiving a high volume of inbound calls as it relates to potential deal activity. Can you just comment on the 22 assets that were acquired in 2Q and 3Q? Were these inbounds? Then, how much is activity are you guys kind of seeing in 3Q outside of the Simply deal?
Tom Boyle (CFO and Chief Investment Officer)
Yeah, sure, Spencer. you know, year to date, from a sector standpoint, the amount of transaction volume is pretty similar to what we saw in 2022. I would tell you, to your point, there are a number of more inbound calls coming to us. Many of the owners coming into the market are looking for a different level of commitment and assurity that a close can take place. Clearly, with the lending environment, not only from availability capital, but cost of capital, a number of traditional or otherwise active buyers in past years are not as active or capable as they would be today. That gives us a leg up. As I mentioned, we are hearing time and again, we're an acquirer of choice.
We've got a very unique opportunity to continue to execute very effectively, just as we did, you know, on a, obviously, on a very large scale with a Simply deal. We typically know an asset quite well, in the market position it's at, to, again, have very efficient discussions with the existing owner, whether it's a one-off transaction or a, a portfolio. We're using, you know, that opportunity, and we're being contacted more directly, by virtue of the fact that there's much more assurity of close, and we can be very effective and efficient, and it's been a good window for us. Many of the deals, to your question, that came through, were along those lines. We're still doing, you know, traditional marketed opportunities where the economics and the quality of the asset makes sense.
One of the things, that's fresh, you know, 10 days now, post-announcement of the Simply deal, we are getting some additional inbounds, knowing, again, the effectiveness that played through on a $2.2 billion acquisition. You know, that plays through, again, whether it's a one-off deal or a much smaller portfolio. That continues to be good bread-and-butter growth and acquisition opportunity for us, and the team continues to be busy. As typical, this time of year, next quarter or so, is typically the more active, time of year for transaction opportunities, so we're going to continue to stay focused on that, and we feel we're in a very good spot.
Spenser Allaway (Managing Director)
Okay. Thanks so much.
Tom Boyle (CFO and Chief Investment Officer)
Great. Thank you.
Operator (participant)
Thank you. We'll take our next question from Smedes Rose with Citi.
Smedes Rose (Director)
Hi, thank you. I just wanted to ask you, it sounds like, from your remarks, that you were able to come to a decision very quickly on, on the decision to acquire the Simply portfolio. I'm just wondering how you would compare maybe some of the opportunities you saw with that acquisition versus, you know, your original proposed acquisition of the Life Storage portfolio?
Joe Russell (President and CEO)
Well, I mean, very different, processes. You know, an M&A, opportunities, you know, got a whole different level of complexity and moving parts than maybe a traditional private opportunity. Speaking more directly to the Simply transaction, you know, that was a process where, it was a, a market or a deal that was brought to the market through their own advisory. There was a process that Blackstone went through to, bring the portfolio to the market. Because of its size and, you know, the portfolio had been in place for nearly 20 years, we knew it quite well. We had understood and studied the evolution of the portfolio, so we had very good and crisp knowledge of the portfolio going into that process that was set up by Blackstone.
Again, very, a good opportunity for us to look at a portfolio of that size, integrate it very effectively. As I mentioned, we're about 10 days into the process right now, and we expect to close in the middle of September. It by all accounts, the integration opportunity looks every bit, if not more compelling than it was when we announced the deal. Very confident about our ability to integrate the 127 assets in the 25 properties that are in the third-party management platform. Feel good about the ability to allocate capital of that size. It's in the private transaction market, this is the largest deal that's been done since roughly the end of 2021 or the beginning of 2022, if you think about the timing of Manhattan Mini.
We're very confident that it's a very strong ability on our part to allocate capital, get very strong returns, and integrate those assets very quickly.
Smedes Rose (Director)
Thanks. Then I just wanted to make sure, the $190 million of the non-same store contribution you called out, that includes the Simply execution?
Joe Russell (President and CEO)
Yeah, it does.
Tom Boyle (CFO and Chief Investment Officer)
Yes, it does.
Smedes Rose (Director)
Okay. Okay, thank you, guys.
Joe Russell (President and CEO)
Thanks, Smedes.
Operator (participant)
We'll take our next question from Juan Sanabria with BMO Capital Markets. Your line is open.
Juan Sanabria (Managing Director)
Hi, good morning. Just curious on the investment side and the balance sheet, kind of marrying those two areas together. You used a lot of the dry powder here on Simply, and the accretion was modest kind of initially. Just curious how we should think about what the remaining capacity is, and kind of cap rates, your yield expectations going in to deploy that kind of precious capital?
Tom Boyle (CFO and Chief Investment Officer)
Yeah, Juan, happy to take that. You know, as we looked at underwriting the Simply Portfolio, you know, we viewed it as an attractive real estate transaction, really, across any way that you underwrite it or you think about cost of capital. We've spoken about in the past, we view things on an unlevered basis, despite the fact, certainly in prior years, we've used leverage in order to acquire assets very quickly. We look at things on an unlevered basis, and real estate level returns as well as basis. We view the Simply transaction as an attractive one. Your comment around accretion, you know, we grew the asset base by about 4%, and we're anticipating growing FFO by 1%. That's a pretty good ratio.
And our leverage at the time was 3.3x. We increased it to 3.8x, which is a good bit below our long-term target of 4x-5x, which gives us still significant capacity to grow for the right sorts of transactions. As Joe highlighted, we're poised to do that. To give you context, I think post-transaction, we have over $5 billion of capacity to continue to grow towards the higher end of that long-term target of ours. Still a very good bit of capacity and are actively seeking good real estate opportunities to grow the platform.
Juan Sanabria (Managing Director)
Just as my follow-up, you made comments earlier that given the more modest peak leasing season experience to date, that you would expect a softer kind of giveback or decel in the back half. Just curious if there's any thought to maybe the opposite actually holding true, that because you didn't see a steeper climb during the peak leasing season, that that portends something weaker, and whether that's the consumer or the housing, that it's laying under the surface, that may see an actually a bigger giveback than normal. Just curious on that, those, those thoughts there.
Tom Boyle (CFO and Chief Investment Officer)
Sure, Juan. Well, I mean, we've walked through now, the range of potential outcomes, so we do think we have a wide range encapsulated in our outlook. You know, my comments around our belief that we don't see as big of an occupancy decline is really driven by the fact that we didn't see the seasonal demand that typically can be shorter length of stay. I highlighted earlier that our customers that have moved in to date have been longer length of stay, which supports less move-out activity through the second half of the year. Ultimately, we'll have to see how the year plays out, and we've given you some guideposts as to what that looks like throughout our, our outlook range.
Feel like we're very well positioned to navigate through the environment, in the second half.
Juan Sanabria (Managing Director)
Makes sense. Thank you very much.
Tom Boyle (CFO and Chief Investment Officer)
Thanks, Juan.
Operator (participant)
We'll take our next question from Ki Bin Kim with Truist. Your line is open. Okay, Ki Bin Kim, your line is open. Please ask your question. Hearing no response, moving to the next question. We'll take our next question from Keegan Carl with Wolfe Research. Mr. Carl, your line is open. Please make sure you're not muted. Hearing no response, moving to the next question. As a reminder, if you would like to ask a question, please press star one, and please make sure you are not self-muted on your phone. We'll take our next question from Michael Goldsmith with UBS. Your line is open.
Michael Goldsmith (US REITs Analyst)
Hey, guys. As my second question, you know, was kind of on the occupancy and kind of the churn of the portfolio through the quarter. Occupancy at the end of March was 92.8%, end of May was 93.1%, end of June was 93.2%, but the average occupancy in the second quarter was 93.7%, which is higher than all of that. Does that mean that there's elevated churn within the portfolio? How do you think about, you know, the potential loss of some of these high-quality, high-rate customers that have been driving the growth of your portfolio in an environment where maybe there's a little bit more elevated churn?
Tom Boyle (CFO and Chief Investment Officer)
Yeah. Thanks, Michael. Just a, a couple components there. One, one, churn is actually improving on a year-over-year basis as we move through the year, and you can see that in year-over-year move-out volume growth in the first quarter compared to the second quarter. Then I highlighted in July, move-out volume's only up, up 4% year over year. Continue to see a good, good behavior from the tenant base. Highlighted earlier that length of stays from new customers that have moved in have been attractive, and so we feel good about the customer base overall and easier comps as we move through the year on, on a normalization of churn from that tenant base playing out.
You know, as you think about the occupancy lift and the and the difference between the average and the period end, that's gonna be consistently the case because of how we operate the portfolio month in and month out. Our average occupancy or our occupancy peaks in the middle of the month, and then we typically see more move-out activity towards the back half of the month, which lowers occupancy. That's the case month in and month out, and, so, so nothing concerning there. You can interpret the lift in average and the lift in period end as occupancy was higher through those periods, i.e., higher in June than it was in May.
Michael Goldsmith (US REITs Analyst)
Got it. Just from the first quarter to the second quarter, same-store revenue growth stepped down by 350 basis points to 6.3%. As we move through the rest of the year, do you know, does that does the step down get smaller? You know, and does that reflect just, like, the, the comparisons getting easier? I'm just trying to better understand kind of the cadence of the step down as you guys see it.
Tom Boyle (CFO and Chief Investment Officer)
That's a good question, Michael. The cadence of the step downs will begin to ease, I think we've highlighted that the comps really start to ease in September, October. As we move through. I highlighted earlier, comps are actually quite challenging as we sit here in July, we would anticipate the comps do ease as we move through the back half of the year. You know, embedded in that range of outlooks is obviously a differing range of moderation of that deceleration rate, but would anticipate the comps help, but particularly in the fourth quarter versus the third quarter.
Michael Goldsmith (US REITs Analyst)
Got it. Thank you very much. Good luck in the back half.
Tom Boyle (CFO and Chief Investment Officer)
Thanks, Michael.
Operator (participant)
Thanks, Michael. Thank you. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. We'll take our next question from Mike Mueller with JPMorgan. Your line is open. As a reminder, please unmute your phone before posing your question. Hearing no response, moving on to the next question. We'll take our next question from Ki Bin Kim with Truist. Your line is open.
Ki Bin Kim (Managing Director)
Hi, can you hear me?
Tom Boyle (CFO and Chief Investment Officer)
Yes.
Operator (participant)
We can.
Ki Bin Kim (Managing Director)
Okay, good.
Tom Boyle (CFO and Chief Investment Officer)
Thank you for trying.
Ki Bin Kim (Managing Director)
Yeah. Your movement rate increased about 5.5% sequentially, going into 2Q. I'm just curious, like, when you look at a, whatever you want to call it, normal year, how does that 5.5% increase compare?
Tom Boyle (CFO and Chief Investment Officer)
Yeah, Ki Bin, that is a little bit lower of an increase than what you typically see. Typically, in a seasonal year, you'd see more occupancy lift, and associated with that more occupancy lift, you see more pricing power. In a typical year, you'd see more like low, low teens difference between the end of the year and the midpoint of the year. If you think about 1st to 2nd quarter comparison, it's probably upper single digits, you know, full 1st quarter versus full 2nd quarter increase. A little bit softer, but along the same themes that we've been speaking about with a little bit less seasonal demand in particular in the 2nd quarter.
Ki Bin Kim (Managing Director)
Okay, in terms of your $450 million CapEx guidance for the year, obviously, when you look back historically, it was, you know, under $300 million in 2021, and under $100 million pretty much every year before that. I'm just curious, like, how many more years of this newer and more elevated CapEx should we think about versus returning back to something that's more, you know, approaching some historical level?
Joe Russell (President and CEO)
Yeah, Keith, a couple of moving parts there. We're three quarters of the way through our $600 million Property of Tomorrow initiative. We're targeting, you know, end of 2024. It may taper into part of 2025 to get the full portfolio completed. You know, that spend will continue through that time period. The other, additional, but very effective component of that program that we're going to continue to invest on top of, you know, the easing down of just that spend tied to the Property of Tomorrow program is solar. We're putting more additional dollars into our solar initiatives in many, many markets. Our goal is to get north of 1,000 properties to some level of solar orientation, which would include just the property needs itself.
You may have seen, yesterday, we made an announcement relative to what we're doing with community solar in certain markets. That's a program that's continued to grow as well. You know, with that, you know, Tom, you can give a little color on what we're seeing relative to outlook, relative to spend on a year-over-year basis. For those factors, we've still got a couple more years of elevated capital spend.
Tom Boyle (CFO and Chief Investment Officer)
I think, you know, to Joe's point, the Property of Tomorrow spend, when we wrap up that program, will, will go away. The, the spend on solar, we think, is a very good opportunity. To Joe's point, we're getting mid-teens IRRs on the capital we're investing in that program, and we've got a lot of opportunity there. At the end of the year, we're targeting having solar on about 500 properties, with the expectation of getting over 1,000 properties over the next several years. A lot of opportunity there, that will be capital spent, but also with a good return associated with it.
Ki Bin Kim (Managing Director)
Okay. Thank you.
Joe Russell (President and CEO)
Thank you.
Tom Boyle (CFO and Chief Investment Officer)
Thanks, Kim.
Operator (participant)
We'll take our next question from Keegan Carl with Wolfe Research. Your line is open.
Keegan Carl (VP of Equity Research)
Can you guys hear me?
Joe Russell (President and CEO)
We can.
Keegan Carl (VP of Equity Research)
All right, cool. Annual contract rent per square foot in the same-store pool is up 7.1% year-over-year. Just looking for some more color on the ECRI program. What rate increase are you sending out, and what are your plans on it for the back half of the year?
Tom Boyle (CFO and Chief Investment Officer)
Yeah, Keegan, as I highlighted earlier on a, on a question, we think about the existing customer rate increase program as the two components of existing tenant performance and behavior, as well as the replacement cost. The existing tenants continue to perform well, so we're sending healthy increases to that tenant base. The magnitudes of those increases are less than prior year, and the frequencies are less as well. Still sending increases, and they're being accepted by that tenant base, which is helping to drive that rental rate performance that you saw through the first half.
Keegan Carl (VP of Equity Research)
Is that, is that a fair assumption then, for the back half of the year, that that continues to moderate?
Tom Boyle (CFO and Chief Investment Officer)
I, I'd say that because of everything I highlighted earlier around rental rate comps, as well as occupancy through the, through the year and the churn rates, that we'd anticipate it's pretty similar as what we saw through the first half.
Keegan Carl (VP of Equity Research)
Okay. Shifting gears to your third-party management platform, you guys added 16 net stores in the quarter. Just curious, one, what you're seeing out there in the market today, and two, on the back of Extra Space acquiring Life Storage, are you seeing any new customers from that portfolio come to you?
Joe Russell (President and CEO)
Yeah, Keegan, we added actually 23 properties in the quarter, and then one was taken out of the platform by virtue of being sold, you know, to another party. The program now is at 215 assets. We're still seeing a dominant factor play through relative to properties typically coming into the platform through development processes. You know, we've got, I think a whole host of encouraging conversations and relationships that we're developing on that side of the business. You know, we'll certainly welcome and entertain any existing assets in any other platform, as we always do, if they're flagged in another third-party management platform, public or private.
From time to time, you know, there's some pretty unique opportunities, whether it is, as you're asking, relative to a portfolio changing hands, that might have a third-party management component to it or not. We've got, you know, very good traction in the program. We, we've got a very good offering, and we're seeing the opportunity to continue to grow it.
Keegan Carl (VP of Equity Research)
Okay. Thanks for the time.
Joe Russell (President and CEO)
Thank you.
Operator (participant)
Thank you. We'll take our next question from Michael Mueller with JPMorgan. Your line is open.
Mike Mueller (Senior Analyst)
Can, can you hear me this time?
Joe Russell (President and CEO)
We can, Mike. Thanks for trying again. They're trying.
Mike Mueller (Senior Analyst)
Yeah, I have no clue if, if you talked about this already. I basically dropped at 12:40 and dialed back in because I had silence. Did you talk about the percentage of customers in place for over one year and two years, and if you're seeing any notable changes to those pool sizes?
Joe Russell (President and CEO)
No, that's not been asked.
Tom Boyle (CFO and Chief Investment Officer)
Not been asked.
Joe Russell (President and CEO)
I'm more than happy to give you some color.
Tom Boyle (CFO and Chief Investment Officer)
We continue to see very good performance from our longer length of stay customers. The customers that have been with us for longer than two years, for instance, as a percentage of the tenant base is in the low 40s, which is up still 5%, 6% compared to what it was pre-pandemic. Continue to see very strong composition, as well as performance from, from that group. The newer tenants continue to cycle in. I highlighted earlier that we're actually likely to start talking about a potential that the overall average length of stay starts to moderate because we're getting so many new, good customers that are coming into the platform, which are gonna bring that, that average down.
Overall, the, the longer term tenants continue to be solid and a good bit above pre-pandemic norms, and the new customers that we're acquiring are also experiencing better length of stay trends on a year-over-year basis.
Operator (participant)
Got it. Okay, thank you.
Tom Boyle (CFO and Chief Investment Officer)
Thanks, Mike.
Operator (participant)
We'll take our next question from Juan Sanabria with BMO Capital Markets. Your line is open.
Juan Sanabria (Managing Director)
Hi, a quick follow-up. On the ECRI question, I just wanted to confirm, has the pace or cadence of increases declined at all year to date from your initial expectations to start the year, or is that holding steady?
Tom Boyle (CFO and Chief Investment Officer)
Juan, it, it's holding steady. There's some seasonal factors, which I won't go to get into, but generally speaking, on plan, and, and consistent with expectations.
Juan Sanabria (Managing Director)
Okay, great. Then just one more, if you, if you humor me. What, what does the guidance range imply for the kind of fourth quarter or exit run rate? I'm just trying to think about the, the decel, layering in the easier comps in the fall.
Tom Boyle (CFO and Chief Investment Officer)
Again, the outlook encapsulates a range. The low end of the range is a tougher macro environment, no question. That would likely lead to same-store revenue growth dipping into negative territory at the lower end there. At the higher end, would anticipate that same-store revenue growth remains positive. Again, those easier comps lead to a stabilization through the second half of the year, and exiting in that manner. Obviously, the midpoint is in between there. I think the midpoint does touch negative in the fourth quarter, and certainly positive in the third quarter. But again, we'll update you on performance through that range as we move through the year.
We've been encouraged year to date on performance, and we'll continue to update you on where we end up through the year.
Juan Sanabria (Managing Director)
Thank you for being patient.
Tom Boyle (CFO and Chief Investment Officer)
Thanks, Juan. Thank you for being patient.
Operator (participant)
It appears that we have no further questions at this time. I will now turn the program back over to Ryan Burke for any additional or closing remarks.
Ryan Burke (VP of Investor Relations)
Thank you, Shelby, and thanks once again to all of you for your patience today on the technical difficulties. We appreciate it. We hope you have a good rest of the week and into the weekend.
Operator (participant)
That concludes today's teleconference. Thank you for your participation. You may now disconnect.