Public Storage (PSA) Q2 2022 Earnings Call Transcript

Public Storage  (NYSE: PSA) Q2 2022 earnings call dated Aug. 05, 2022

Corporate Participants:

Ryan Burke — Vice President, Investor Relations

Joseph D. Russell, Jr. — President, Chief Executive Officer

Tom Boyle — Senior Vice President, Chief Financial Officer

Analysts:

Jeff Spector — Bank of America — Analyst

Michael Goldsmith — UBS — Analyst

Ki Bin Kim — Truist — Analyst

Steve Sakwa — Evercore ISI — Analyst

Mike Mueller — JPMorgan — Analyst

Spenser Allaway — Green Street — Analyst

Juan Sanabria — BMO Capital Markets — Analyst

Keegan Carl — Berenberg — Analyst

Ronald Kamdem — Morgan Stanley — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Public Storage Second Quarter 2022 Earnings Call. [Operator Instructions]

It is now my pleasure to turn the floor over to Ryan Burke, Vice President of Investor Relations. Ryan, you may begin.

Ryan Burke — Vice President, Investor Relations

Thank you, Chelsea. Hello, everyone. Thank you for joining us for our second quarter 2022 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 speak only as of today, August 5, 2022, and we assume no obligation to update, revise or supplement statements 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 at publicstorage.com. We do ask that you initially limit yourselves to two questions. Of course, if you have an additional question, feel free to jump back in queue.

With that, I’ll turn the call over to Joe.

Joseph D. Russell, Jr. — President, Chief Executive Officer

Thank you, Ryan. Good morning, and thank you for joining us. Tom and I will cover second quarter highlights as we achieved a number of record performance metrics and milestones. Now that we are past the midpoint of the year, we are happy to share our view of the next six months, which has resulted in our guidance raise. Before I go to those details, I would like to take a brief moment and acknowledge a significant milestone for Public Storage that takes place this month. On August 14, 1972, Public Storage was launched by two creative and determined entrepreneurs, Wayne Hughes and Ken Volk, opening the first Public Storage facility in El Cajon, California. The concept of paying to store stuff was new. But the simple name, a great location and roll up doors painted the color of orange created a powerful formula to grow the Company, so much so that our brand quickly became synonymous with the self-storage industry. Now five decades later, the Public Storage team and I are inspired to stay just as focused on entrepreneurial pursuits, expanding the iconic Public Storage brand and empowering the 5,500-plus dedicated employees that cater to our 1.7 million customers on a daily basis. We are appreciative of our shareholders, particularly those that have continued their commitment to Public Storage over our history, while knowing we have the right culture to ensure an equally bright future.

Now to Q2 results. Business year-to-date remains quite good, with robust performance in both, our same-store and non-same-store portfolios. New customer demand through the typical summer leasing season has been exceptional as well as growing length of stay with existing customers. This, against the backdrop of muted new property deliveries in most markets. We have good pricing dynamics on both, move-ins and with existing customer rate increases, leading to the highest rent levels we have seen historically. Arguably, a number of the pandemic-related drivers to our business are receding, but we are pleased to see elevated levels of demand, new customer adoption and longevity of use. Customers, consumers and businesses alike are still in need of more space for a variety of reasons that include decreasing affordability of renting or owning a home, tight inventories of commercial space, hybrid work environments and the typical movement that takes place nationally this time of year. I would like to highlight a handful of particularly significant milestones or first in the quarter. We achieved $1 billion in revenue. Our average length of stay is now 39 months. Operating margins exceeded 80%. Our development pipeline has reached $1 billion and being named by Forbes as Best Place to Work by our employees. Now to acquisitions. By all accounts, 2021 was a historic year, and we were pleased to capture approximately 30% of the total sector volume.

These 230 assets are performing well, in fact, above expectation with more growth ahead for the entire 525 properties in the non-same-store portfolio that is now over 50 million square feet. As we anticipated, 2022 acquisition volume has shifted down with fewer large portfolios entering the market. We are also getting more last calls from sellers and brokers with fewer buyers in the market. Cap rates have adjusted up and could move further. It’s a different playing field, and we anticipate some interesting opportunities with over $1 billion in cash, a balance sheet prime for growth and a reputation as a preferred buyer. The self-storage sector and our own history point of resilience in times of economic change, including recessions of varying degrees. We too are looking for all ways to interpret any shift in customer demand and behavior. We are well positioned to compete for customers across all of our markets with the exceptional scale and product offerings in the 39 states we operate in. Our same-store and non-same-store assets are poised to deliver strong results through the second half of 2022, positioning us well for whatever may play through as we enter 2023. Our leadership team is well equipped to grow and deliver exceptional shareholder returns.

Now Tom will share some financial highlights with you as well. Tom?

Tom Boyle — Senior Vice President, Chief Financial Officer

Thanks, Joe. We reported core FFO of $3.99 for the quarter, representing 26.7% growth over the second quarter of 2021. Our first half results represent a strong start to the year and an acceleration from 2021. Let’s look at the contributors for the quarter. In the same-store, our revenue increased 15.9% compared to the second quarter of 2021. Growth was driven by rate once again with two factors leading to the continued strength: first, strong move-in rates that were up 12% versus 2021; and secondly, existing tenant rate increases contributing with a lengthening customer stay. Los Angeles was a particularly strong contributor accelerating from 12% same-store revenue growth in the first quarter to 17% in the second quarter and will continue to accelerate into the third. Moving down the P&L. Same-store cost of operations were up 7.6%, driven by growth in property payroll, utilities and marketing. Our strategic initiatives, including operating model efficiencies and LED and solar investments helped offset a portion of the wage and utility inflation. In total, net operating income with the same-store pool of stabilized properties was up 18.7% in the quarter.

In addition to the same-store, the lease-up and performance of recently acquired and developed facilities remained a standout in the quarter. There is significant growth ahead from this pool of properties as well, which is a good segue to our outlook for the remainder of the year. As Joe mentioned, we raised our outlook for the second half. In April, we provided our core FFO outlook with a $15.20 midpoint. The PSA business outlook improved by $0.37 or 2.4%. The improved outlook is driven by strong performance from our non-same-store pool of assets and to a lesser extent, ancillary growth and a reduction in interest expense. On net, our year-to-date performance has been in line with our expectations, but our outlook for the second half is improving. We did reflect the impact of the sale of PS Business Parks and a corresponding $0.22 impact resulting in a new midpoint of $15.35 per share of core FFO. And associated with the PSB sale, yesterday, we paid a $13.15 special dividend, returning capital to our shareholders. Overall, our capital and liquidity position remain strong, as Joe mentioned. We have a well laddered long-term debt profile and $4 billion of preferred stock with perpetual fixed distributions. With $1 billion of cash on hand at quarter end and 3.7 times net debt and preferred to EBITDA we’re well positioned to finance the growth initiatives ahead.

With that, we’d like to open it up for questions.

Questions and Answers:

 

Operator

Thank you. [Operator Instructions] And our first question will come from Jeff Spector with Bank of America.

Jeff Spector — Bank of America — Analyst

Great. Thank you. Good morning. I guess, my first question, could we maybe discuss a little bit more, flesh out your comment on the outlook for the second half is improving, please? And how does that — I guess, your thoughts then how — heading into ’23, how that impacts the setup into ’23?

Joseph D. Russell, Jr. — President, Chief Executive Officer

Yes. Jeff, Good morning. As Tom and I highlighted, we continue to be encouraged by the health of the business. You start with customer demand. Quite good. We’re seeing top of funnel demand that continues to encourage us that the adoption of self-storage is quite robust across our markets. The existing customer behavior has been consistent, and if anything, continues to encourage us relative to customers needing and using their space for longer periods of time. Our average length of stay now is 39 months. Compare that to about a year ago, and it was around 34 months, very encouraging. The things that I spoke to relative to muted deliveries across, again, the national market as a whole are also quite healthy, meaning that we’re not seeing any particular market getting burdened by an unusual or heavy level of new supply. That’s always a good thing for the business. And we’re, again, measuring the changing dynamics that go with the 1.7 million customer base that we have. And we’re really not seeing from a cohort standpoint, any change in behavior or elevated levels of stress by cohort. So that too is very encouraging. So with all that said, coupled with the fact our same-store continues to perform quite well. And on an exceptional basis, our non-same store, as I mentioned, is very well poised to continue to deliver good results, not only through this second half of the year, but going into 2023. With all that said, Tom can give you a little bit of perspective on what we’re thinking through the end of the year and what that positions us to do going into 2023?

Tom Boyle — Senior Vice President, Chief Financial Officer

Sure. Thanks, Joe. So, in particular, I’ll highlight two elements as we think about where we’ll play out through the second half and then go into 2023 and I’ll hit on both the same-store as well as the non-same-store because I think they’re both important. So, as we look at the same store, as you recall, we initiated a strong outlook for same-store illustrating or demonstrating acceleration from 2021 at the start of the year. And frankly, we’re executing right along that path. So, the assumptions as we move into the second half on the same-store are pretty consistent and quite strong with modest deceleration into the second half given the tough comps that we have, particularly on rates, but also the typical seasonal occupancy pattern that we’re expecting this year more so than we’ve seen in the last couple. So, call it a 250 basis-point occupancy decline. So strong trends within the same store. And if you just look at what the first half performance is and the implied outlook for the second half, it implies an outlook or an exit level of revenue growth with low double digits on it, which is frankly not too dissimilar to where we started this year. So, a good outlook through the same-store in the second half and then I’m expecting your question is leading to the 2023, which is also a good setup for 2023. On the non-same-store, as we’ve highlighted now a number of times in our prepared remarks, continues to exceed our expectations. And so we did lift our outlook for the year in the non-same-store by $40 million. But importantly, that wasn’t just a pull forward of stabilization activity. We actually raised our outlook of what those assets will stabilize with. And so there continues to be a strong outlook for growth in 2023 and beyond from that level of capital that we deployed to date. So, all encouraging trends as we look forward to 2023.

Jeff Spector — Bank of America — Analyst

Great. Thanks. Very helpful. And then my one follow-up. Joe, you commented on cap rates are up and we saw you at NAREIT, I think there’s still somewhat limited information, but I’d say this earnings season is still a key debate really across all sectors. I guess, can you talk a little bit more about your comment on cap rates? But I guess, most important on maybe asset values, like do you think — where do you think storage asset values are today versus, let’s say, six months ago?

Joseph D. Russell, Jr. — President, Chief Executive Officer

Yes. Jeff, there’s a few elements that go into that. So, as I mentioned, trading volumes definitely at a different place year-to-date than we were in 2021 at this time. As I mentioned, far fewer, if any of the big jumbo size hovering $1 billion or more portfolios, either come to the market or traded. So, the level of information that we’re tracking relative to cap rate impact goes to the segment of the market that is much smaller, whether they’re individual assets, smaller portfolios, and there’s a range playing through depending on the asset quality, the stabilization of a particular asset, etc. But there’s no question, as you would expect, as interest rates are behaving the way they are i.e., they’re increasing and depending on what the Fed continues to do downstream, we’ll see what additional impact we have relative to just interest rate levels themselves. Bidding activity plays through, meaning how aggressive or less aggressive our buyer is going to be for certain types of assets. So, we’ll see how cap rates continue to trend, but our view is they’ve elevated plus or minus, say, 50 basis points. They could trend a little bit higher. But again, it’s going to be subject to the amount of capital that’s still anxious to come into the sector. I mentioned our team is seeing what I would call more last calls.

We think that’s a good thing, meaning that — at the end of the day, maybe some of the feverish buying activity that was in part of the market in 2021 is softened. That always gives us a different opportunity to engage with certain sellers relative to their need to actually do a transaction. As I mentioned, we are clearly looked upon as a very preferred buyer. We know typically the asset at hand quite well in many cases, maybe even better than the owner, may know either the submarket or the opportunity that might be tied to an asset. So, a lot of things that come into the mix that can affect cap rates. But as I mentioned, I think that too can be very healthy and particularly for a well-heeled and deep-seated buyer and knowledge a buyer like we are, that can be a very compelling time to engage with an owner. And we’re seeing activity to that degree. So, we’ll continue to pace and see what change plays through. But as you would expect with the change in interest rates alone, there’s going to be some movement in cap rates.

Jeff Spector — Bank of America — Analyst

Thank you.

Operator

Thank you. Our next questions will come from Michael Goldsmith with UBS.

Michael Goldsmith — UBS — Analyst

Good morning and thanks for taking the question. I wanted to dig into a comment that was made earlier about some of the properties in the non-same-store pool that are expecting to stabilize at a higher level. Can you provide a little bit more information on that? And then, I guess, related to that, how does that change your process of underwriting or acquiring your portfolio as your properties start to move higher, stabilize and stabilize at a higher level?

Joseph D. Russell, Jr. — President, Chief Executive Officer

Yes. Mike, I’ll start with a few things. First, if you think about the strategy that we’ve deployed now for the last two years plus, we’ve entered transactions with a priority around finding additional upside in any asset acquisition that we’re either entertaining or bringing into the portfolio. So, of the $5.1 billion of asset acquisitions that we did in 2021, average occupancy hovered around 60% to 65%. So, by design, we’ve been very focused on finding and taking assets that may be either at a state of fill-up or a state of optimization that clearly hasn’t met either the owner’s expectation or an optimization level that we feel that we can clearly achieve, once we own the asset. So, that has given us a very compelling opportunity to drive the types of returns that Tom spoke about that, in many cases, are even more elevated than we expected when we bought the assets. A couple of very simple examples, that’s definitely playing through with the two bigger portfolios that we bought in 2021, the easy storage portfolio that we took down in April of last year, a $1.8 billion transaction, seeing very good lift relative to not only the results we expected in the first year, but we’re even doing better than expectation. And then, the same thing is playing through with All Storage, the transaction that we did in the fourth quarter, again, another large portfolio. But the same type of trajectory is honestly playing through with the one-off and the much smaller portfolios as well. And part of that, again, by strategy and design, we’ve been very focused on identifying assets that we can bring into the portfolio and drive much further optimization through not only fill-up of maturation of the existing revenue base, the customer base, etc. Tom, you can give a little bit of color, if you like to relative to some specifics.

Tom Boyle — Senior Vice President, Chief Financial Officer

Yes. Thanks, Joe. So Michael, I’ll give you some of the financial components that we included in guidance that we’re providing to in order to be able to model this a little bit easier. So, for the year, as part of our core FFO outlook, we’re providing a non-same-store NOI contribution number. And in addition to that, there’s a line item below core FFO that is the non-same-store NOI to stabilization, which will occur after 2022. And so you can think about adding those two numbers together to reach our view of stabilized NOI of that pool. And so, if you look back in April, our non-same-store NOI contribution for 2022 in our guidance was a midpoint of $450 million, and we included at the bottom of the page $180 million of incremental NOI to stabilization. So, if you add those two numbers together, you’re going to get your $630 million of stabilized NOI. If you compare that to this quarter, we lifted our non-same-store outlook by $40 million at the midpoint. So, you’re looking at a $490 million NOI contribution from the non-same-store pool in the calendar year 2022. But then we also retained that line item below at $172 million of incremental NOI to stabilization. So, if you add those two numbers together, the $490 million and the $172 million, you get to $662 million. So, in effect, we raised our outlook for ultimate stabilization by $32 million to $662 million. So, again, an improving outlook. The performance we’re seeing this year is not just a pull forward of stabilization. It’s also outperformance and outperformance versus expectations.

Joseph D. Russell, Jr. — President, Chief Executive Officer

And Mike, one other thing I’d add, we haven’t spoken to the performance of our development assets. And those two not only continue to drive very good returns, but are beating expectations relative to, again, level of lease-up, the performance of the asset. We clearly have very unique advantage being the only public developer of the product in the space and by far, the largest developer in the sector. The team is doing a very nice job identifying prime land sites, using many of the data elements that we uniquely have to find pockets of opportunities, whether they’re markets that are more mature and/or growing markets, and those assets to continue to drive very good returns. As I noted, our development pipeline for the first time hit $1 billion. We’re encouraged that we’ve got a nice window to continue to find compelling opportunities, and we’ll continue to allocate capital in that arena as well, which has been very fruitful.

Michael Goldsmith — UBS — Analyst

That’s very helpful. And then, as a follow-up, the non-same-store pool outperformed the expectations. The same-store pool has been in line with your expectations. As we look ahead, how much of a non-same-store portfolio is — through the same store pool in 2023 as we think of kind of the maturation of these stabilized assets?

Tom Boyle — Senior Vice President, Chief Financial Officer

Yes. Thanks, Michael. So, the first thing I’d highlight is, as we think about adding properties to our same-store pool, we’re focused on adding them when they’re stabilized. And so, as I just walked through, there’s meaningful NOI contribution to come from those assets before they reach stabilization in the coming years. And so, we won’t add those into the same-store pool until they’ve reached that stabilized level. And so, there will be some properties added. But as we just demonstrated, there’s significant growth ahead that will sit in the non-same-store versus the same-store pool as we move into 2023. And we’ll continue to provide the level of disclosure that we do today by acquisition and development vintage, so that you can see and track that performance over time.

Michael Goldsmith — UBS — Analyst

Thank you very much. Good luck in the back half.

Tom Boyle — Senior Vice President, Chief Financial Officer

Thanks, Michael.

Joseph D. Russell, Jr. — President, Chief Executive Officer

Thanks, Michael.

Operator

Our next questions will come from Ki Bin Kim with Truist.

Ki Bin Kim — Truist — Analyst

Thanks, good afternoon. Just going back to your comments about any kind of consumer trends that you might be seeing. Are there any discernible trends between maybe weaker demographic type of customers when they get a rent increase letter versus higher income customers, or are they all kind of responding in a similar fashion?

Tom Boyle — Senior Vice President, Chief Financial Officer

Sure. So specifically around rent increases, I’ll hit that and then maybe I’ll take a step back as well and talk about overall customer trends as I think that may be instructive. The existing tenant rate increase program is something that obviously has been running for a very long time, but it’s an area we continue to make investments in and it’s really driven by extensive testing. Joe mentioned we have over 1.7 million customers today. We send over 1 million rent increases a year, and that gives us the ability to dynamically manage that program and frankly, use data science today in a way that we couldn’t use in years past. And so that program continues to improve, and ultimately, we continue to see the benefit of that program in our realized rents. In terms of customer reaction, that’s a really important part of the program is to understand what we predict the customer behavior to be, and we’re constantly tuning and understanding if there’s any shifts in ultimate behavior. And I’d say year-to-date is, in fact, customers are behaving as good or better, frankly, than what our models have been predicting for them as we move through the year.

So continue to see good behavior from our customers. And as Joe mentioned, the length of stay continues to extend, which is a really favorable trend for that program as there are more customers to send increases too. So, that all played out well. And then, I think your second question around or the second component that I want to focus on is around demographics. And are we seeing any shifts in customer behavior by demographics, even away from that data-driven existing tenant approach? And the short answer is we’re not really seeing anything across the customer base and continue to see broad-based strength. There are a few operating metrics that if you look at them versus last year, they’re deteriorating. So, things like move-outs, right, that move-outs are higher for us and I think across the sector, but they’re off incredibly low bases and still well below pre-pandemic levels. You could say the same thing around delinquency, etc. But as you slice and dice that by demography or other customer segments, nothing there that’s percolating that we’d highlight as being concerning, frankly, overall continued broad-based strength around the customer base.

Ki Bin Kim — Truist — Analyst

And on the same topic on ECRI, can you just describe high level, what types of increases you’re pushing out there? And maybe the frequency?

Tom Boyle — Senior Vice President, Chief Financial Officer

Sure. So, what we’ve highlighted in the past is the magnitude and frequency of our increases are really driven by two components. One is what do we anticipate the reaction to be to the increase. And as I just spoke to, that performance has been as good or better than our expectations and, frankly, better than history. And the second component is an optimization based on if the customer moves out, what’s the cost to replace that tenant. And in both instances versus pre-pandemic levels, they’re both pointing to higher magnitude and frequency of increase. And so, if in the past, we were sending 8% to 10% increases to our longer term tenants, we’re sending higher increases today and higher frequency.

Ki Bin Kim — Truist — Analyst

Okay, thank you.

Tom Boyle — Senior Vice President, Chief Financial Officer

Thanks.

Operator

Thank you. Our next question will come from Ronald Kamdem with Morgan Stanley. Ronald, your line is now open. Ronald, are you by chance muted?

Tom Boyle — Senior Vice President, Chief Financial Officer

Why don’t we go to the next question, and we can let Ron jump back in queue.

Operator

All right. Next, we’ll take Steve Sakwa with Evercore ISI.

Steve Sakwa — Evercore ISI — Analyst

Yeah, thanks. Good morning, Tom. I guess I just wanted to circle up. Your first half results were obviously very strong, up 19.5%. I know you didn’t change guidance, but I guess, to hit the low end of the range on NOI, you need to be like at 7% in the back half of the year. And just given the commentary that you’ve talked about, it seems highly unlikely even with tough comps. So I guess what are we missing at the low end or is it just pretty clear that you’re sort of at the midpoint, the high end at this point, but you’re still sort of in that range? And just sort of the low end just seems very unfavorable.

Tom Boyle — Senior Vice President, Chief Financial Officer

Thanks, Steve. I appreciate the question. I guess, what I’d characterize is obviously, we’re not going to change the outlook here on the call. But what I’d say is when we set the outlook at the beginning of the year and we continue to reaffirm it is we wanted to set a wider range to encapsulate a broader range of outcomes. That’s both on the high end as well as the low end, given the uncertainty of a month-to-month lease business and frankly, how dynamic the industry has performed over the last several years. And so, we did set a broad range. And as we move through the second half, there’s still a reasonable range of outcomes that could play out in the environment. And so, we didn’t touch the range. But to your point, the first half has been strong and frankly, right on our expectations. And so — and to all the points around customer demand trends and the like, things are set up well as we head into the second half, but we do face some pretty tough comps, both on rents as well as occupancies moving into the second half. And I’d say similarly on expenses, right? We saw expense growth accelerating into the second quarter. We left our same-store expense positioned at the same level at the start of the year. And we are seeing inflationary pressures. We have multiple initiatives to mitigate the impact of some of the inflationary pressure. But there’s no question the labor market is tight and you don’t have to look any further than the jobs number that came out this morning to indicate how tight the labor market is in this environment. And so we want to make sure we’re encapsulating the outcomes there on expenses as well.

Steve Sakwa — Evercore ISI — Analyst

Great. And then, a follow-up, Joe, you guys left the acquisition guidance unchanged at $1 billion. If you include sort of — you closed or going to close to quarter end, you’re about $0.5 billion. So, maybe just talk a little bit about the pipeline. I know you’re certainly seeing more opportunities and given your balance sheet, I’m just wondering, given that you can be an all-cash buyer, do you actually expect volumes to accelerate even if there’s less product on the market?

Joseph D. Russell, Jr. — President, Chief Executive Officer

Yes. That’s going to be subject, Steve, on a number of factors. As far as the $1 billion target or guidance for 2022, to your point, we’re tracking well to that level of volume. What’s typical is this time of year, you’re going to see even an unpredictable amount of potential volume coming to the market, knowing that the market is different from a predictability standpoint this year than last year because of the range of big portfolio opportunities being quite limited if in fact at all. Very, very different outlook, as I mentioned. We’re going to continue to look for a whole range of opportunities. As I mentioned, we’re very confident. We’re very well set to engage and unlock anything that would be particularly compelling. It will just depend on, again, what’s going to play through, particularly in the next, say, three to four months. And with that, we’ll see what kind of opportunities arise. The things that we continue to look for, as I mentioned, are assets that we are clearly seeing upside opportunity from a value creation standpoint. That’s clearly part of the set of asset acquisitions that have been completed or that are pending as we guided to, and we’ll continue to look for those and other types of opportunities as well. So, this — as Tom mentioned, there’s some shifting things out there relative to different pressure points that could play through with different owners and that could be an interesting opportunity for us as well. So, very excited about that. And the team is working hard. We’re highly engaged across multiple markets, and we’ll continue to see what additional volumes play through by virtue of that.

Steve Sakwa — Evercore ISI — Analyst

Great, thanks.

Joseph D. Russell, Jr. — President, Chief Executive Officer

Thanks, Steve.

Operator

[Operator Instructions] We’ll go back now to Ronald Kamdem with Morgan Stanley. All right. We’ll move on to Mike Mueller with JPMorgan.

Mike Mueller — JPMorgan — Analyst

Can you talk a little bit about the potential for a dividend increase? It looks like it hasn’t been raised since about the fourth quarter of 2016. The growth has been good. It looks like you’re looking at fewer big deals where you can accelerate expenses. And now you have the PSB dilution on it. It just feels like you have to be getting pretty darn close to being forced to raise it.

Tom Boyle — Senior Vice President, Chief Financial Officer

Thanks, Mike. So, the first thing I’d highlight is we did just send a big distribution out to our shareholders yesterday, $13.15. But as it relates to the regular dividend, to your point, the dividend has been relatively consistent for some time or has been consistent since the fourth quarter of 2016. And one of the drivers of that, and we’ve talked about this in the past is some tax law changes in 2017 that introduced bonus depreciation in effect lowering our taxable income for that intervening period. And to your point, cash flow growth and taxable income growth has been strong, which has been increasing taxable income. As we move into 2023, though, the notable element is that bonus depreciation will begin to phase out. And that benefit that we’ve received over the last several years in terms of lowering our taxable income will go away, and that will allow us to increase our dividend and ultimately return more capital to shareholders in the coming years as we go, while at the same time, retaining a significant amount of retained cash flow to reinvest in the business. And so, to your point around, it’s been some time and growth has been strong. It’s that as well as taxable income increasing that is likely to increase our dividend over time here as we move forward. And that’s something that we highlighted at Investor Day as well as taxable income increases. We’ll be poised to increase the current return to our shareholders. And that is, as we move forward into 2023, something that will begin to be more of a topic.

Mike Mueller — JPMorgan — Analyst

Got it. Appreciate it. And then just a quick follow-up. With the development pipeline now at $1 billion, what’s your average annual development spend run rate at that level?

Tom Boyle — Senior Vice President, Chief Financial Officer

Well, right now, obviously, we’re increasing the level of development pipeline. So, that’s going to come with it increased annual spend. But as you think about like the cadence this year, for instance, we’re going to deliver about $250 million of developments this year, but we probably spend $400 million or so, which implies increased deliveries for next year, and that’s going to continue to move higher. So, the spend next year is probably $450 million to $500 million, which will lead to increased deliveries then as we get into 2024. All on pace to reach the objective that we outlined at Investor Day of $700 million in annual deliveries and annual spend by 2026.

Mike Mueller — JPMorgan — Analyst

Got it, okay. Thank you.

Tom Boyle — Senior Vice President, Chief Financial Officer

Thanks.

Operator

Our next question will come from Spenser Allaway with Green Street.

Spenser Allaway — Green Street — Analyst

Thank you. Maybe just stepping back from operations. I just had a question on the capex front. So, I understand that the commodity like sector capex isn’t as crucial as in other sectors. But just wanted to get your thoughts on how important it is to reinvest in the properties just to preserve competitive positioning, given the inevitability of supply ways in the space?

Joseph D. Russell, Jr. — President, Chief Executive Officer

Yes. Sure, Spenser. Clearly, that’s one of the compelling parts of the whole self-storage model is, frankly, if you design an asset and locate it well, the enduring and lack of obsolescence tied to the product is quite significant. So, we have assets now in our 50 years of history in many markets that were developed 40-plus years ago that are just as functional and desirable to users today as they were when they were initially built and have not required much annual and/or consistent level of additional capital. It ties to the simplicity of the product. One of the things that we’ve been speaking to strategically over the last couple of years is holistically, we are stepping back in putting many of the attributes of our latest generation development products into our existing assets. That’s called the Property of Tomorrow program. So this year, we will spend about $300 million or so into that program. We’re about halfway through the portfolio. We’ve got another three-plus years to finish that up. The thing that that’s resetting is lifting again, not only brand, but by necessity property, property, any additional functionality or attributes that we feel are even that much more compelling to add to a particular asset.

So, that too is something that we’re intentionally doing and getting a nice set of reactions from existing new customers or employees, etc. So, that continues to be an ongoing investment that you’ll see us make again in the coming years. Another component that we’re early into is our adoption of solar across hundreds of properties as we speak. The goal is to at least put solar on half of the portfolio or more in the next two to three years. So that, too, is a very intentional and efficiency-related, environmentally-related investment that is playing well. We’re just finishing up LED lighting. That’s a project that started actually five-plus years ago. As you can imagine, a lot of real estate to touch, but we’ve now relet to LED, the entire exterior of all of our assets and are just finishing up interior LED as well, good efficiency, energy conservation. And again, another nice attribute adding to the properties themselves. So, it’s more akin to that. And again, if you step back and think about great location, functional design and the enduring value of the asset itself, it can play through very, very effectively with little, again, traditional capex spend compared to any type of other sector.

Spenser Allaway — Green Street — Analyst

I’ll try. Helpful color. Thank you.

Operator

Thank you. Our next question will come from Juan Sanabria with BMO Capital Markets.

Juan Sanabria — BMO Capital Markets — Analyst

Hi, good morning. Just wanted to ask about California and New Jersey, the two markets that have had rent restrictions that have fairly recently come off and how you are in those two markets relative to the current market with your existing portfolio, and how much have you been able to drive rate and close that gap to the current market rate? And if you could just remind us on the contributions to same-store revenue growth as a result of those restrictions lifting?

Tom Boyle — Senior Vice President, Chief Financial Officer

Sure. So, the first thing I’d say is I’d segment the two markets you just spoke to. So, I’m going to go into a little bit more detail around California. New Jersey does have pricing restrictions upon state of emergency similar to California and a similar price cap. But that state of emergency was in place for a much shorter duration time period. So, it was in place for a little over a year or so, which certainly has an impact on revenues but nowhere near the multiyear impact that we experienced in Los Angeles County, in particular. So, the overall impact to our properties in New Jersey was more modest. So, shifting gears to Los Angeles County, in particular, I’d say the same story is in place as it relates to the difference between San Francisco and Los Angeles. San Francisco had some state of emergencies that were declared particularly around COVID that again, were in place for a little over a year, but nowhere near the impact to Los Angeles County. So getting to Los Angeles, the state of emergency was in place from the fall of 2018 through the very beginning of this year.

And so, that 10% price limitation was more significant to our overall revenues and it will take a little bit longer to recoup that. But as I noted earlier, we are seeing strong acceleration within Los Angeles. And if you look at the differential, for instance, between how Los Angeles County has performed compared to Orange County or San Bernardino or Riverside counties all in the same, obviously, metropolitan area. I’d say we’re just getting to a point where Los Angeles County is on par on a revenue growth basis with those markets, which indicates that we have still a good bit of revenue growth to go and recapture. And obviously, the team is executing on that to date. This year, we compartmentalize the Los Angeles County contribution to same-store revenue growth is being an incremental 1.5% to 2% of same-store revenue growth. And I’d say, as we get into 2023, you’re going to hear us talk about this again because there will be incremental benefit still as we move into to 2023, given the accelerating performance there.

Juan Sanabria — BMO Capital Markets — Analyst

Great. And could you just talk a little bit about, given your history and how much data you have about how you would expect the portfolio to perform maybe on a same-store revenue or NOI perspective, if we do get in fact, a recession, assuming it’s not as bad as the financial crisis, but more of a “run-of-the-mill recession”. What would you expect the business to be able to do in the face of that kind of external pressure?

Tom Boyle — Senior Vice President, Chief Financial Officer

Well, I think one of the key clarification points, Juan, is no recession is the same as another. So, I’m not sure we can categorize what a typical recession would look like. But just looking back over time, what we’ve seen is same-store revenues that dip into negative growth territory and same-store NOIs that dip into the kind of the mid to high single digits depending on the severity of the recession. But ultimately, it’s going to depend on the nature and what the drivers are of that recession. Certainly, we’re going into what could be a recession here. There’s lots of headlines around potential recessions, but we haven’t seen any impact to our business to date that would indicate that there’s been a sharp move or otherwise, as we’ve spoken to. So, hypothesizing what could play out, I think looking back at previous recessions and those kind of low to mid-single-digit same-store revenue impacts and mid to high-single-digit NOI impact is probably the best guide. But again, we’ll see as we get there.

Joseph D. Russell, Jr. — President, Chief Executive Officer

Yes. And I think just to put a little bit more color on some of the dynamics and the multi dimensions, which frankly makes storage that much more compelling, even in a recessionary environment, there’s definitely history that points to storage continues to be an extension of home. As I mentioned, if home affordability is a pressure point, storage benefits by that. Supply has been very muted. So, if there were recessionary pressures out there, but we’re not dealing with the same level of supply that may have coming on in certain other recessionary environments that could be a very different dynamic. The employment picture is very fluid as we speak, as Tom mentioned, very strong numbers came out today. So even with some commentary that how could we be going into a recession with such strong employment data. So, a lot of different crosscurrents. We have a month-to-month business. We have a very nimble business. We can calibrate around demand and pricing factors that will serve us well. And we’re continuing to operate the business at very high efficiency from a cost standpoint. As I mentioned, our margins are now over 80%. So again, very good components for us to continue to maneuver whatever could play through recessionary or otherwise.

Juan Sanabria — BMO Capital Markets — Analyst

Thank you.

Joseph D. Russell, Jr. — President, Chief Executive Officer

Yes, thanks. Sure.

Operator

Our next question will come from Keegan Carl with Berenberg.

Keegan Carl — Berenberg — Analyst

Hey guys, thanks for the time. Just a little bit more color on your third-party management platform. Maybe how is demand shaping up? And regarding a potential slowdown in construction and new supply, I mean, how do you tend to think of the long-term growth prospects?

Joseph D. Russell, Jr. — President, Chief Executive Officer

Yes, sure. Third-party management pipeline continues to build. We added 12 assets to the platform this last quarter, our backlog continues to build as it has and has — and as the third-party management as a whole has grown through additional development. So, some of this is time-oriented. So, we’ll continue to build the size of the platform as some of these newer assets are actually delivered. We’re building also on top of that some different and new relationships. It has been and will continue to be an opportunity for us to source likely acquisitions through those relationships. So, we’re pleased by the trajectory and the growth that continues to come through our third-party management platform. Getting very good feedback from existing customers, many of whom are actually bringing us additional properties as we speak. As far as supply, again, there’s a number of factors that have been I would call it beneficial and have put somewhat of a lid on supply accelerating. That includes more complications tied to just approvals themselves. I’ve talked about this for the last few quarters.

We’re nationally building in many markets, and I can’t name one that it’s easier and more efficient today than it was either pre-pandemic or even historically. So very complicated sets of hurdles that you go through, unexpected time delays, etc. Then on top of that, clearly, in an inflationary time frame, we’re looking at more pressure on that front. Many of the developers that are out in the market may not have the financial wherewithal to actually absorb some of those type of cost increases that may either delay or actually decide not to build. And then, on top of it, interest rate levels. Construction loans are more expensive, access to lending may be more complicated. So, all those things are actually putting through more discipline and keeping somewhat of a lid on the amount of additional development coming through. So, we see that, as I mentioned, as a very healthy thing. And it’s a good window for us to come in and compete very differently. More often than not, we’re not seeing as many bids on certain land sites, and we’re also seeing some land owners come to us that have either taken a site through percentage of its entitlement process or maybe holistically and still want to actually do a land trade instead of actually doing the development themselves.

Keegan Carl — Berenberg — Analyst

Got it. And apologies if I missed this earlier, but did you guys disclose what percentage of your portfolio is currently…

Tom Boyle — Senior Vice President, Chief Financial Officer

Keegan, that’s not something that we disclose. We do disclose a healthy amount of information around move-in and move-out trends as well as the rates compared to in-place levels. What I would characterize, and I think what you’re getting to is what could be the rent roll-up opportunity or otherwise? And maybe take a step back and self-storage is a little bit different than other property types in terms of how we manage revenue and how leases operate. So, as you think about managing revenue across the tenant base, one of the great aspects of self-storage is month-to-month leases. So, the team is focused not only on moving and signing new leases, but also managing the revenue on the entire existing population as well. And so, what you see historically, and you saw it again in this quarter, is that you can see a rent rolled out, which may sound a little bit odd for other property types, but to reiterate for self-storage that is — that’s a sign that we’re successfully managing the existing tenants that are in-house. And as we spoke earlier, length of stays have been growing, which gives us more ability to do that and to send increases to our existing customers and ultimately tune that based on a data-driven approach. So again, this quarter and as we sit here today, our in-place rents are a good bit above where our move-in rents are and our move-out rents are also above where our move-in rents are, but that’s healthy. And we anticipate that to continue through the rest of the year.

Keegan Carl — Berenberg — Analyst

That’s it from me. Thanks for the color.

Tom Boyle — Senior Vice President, Chief Financial Officer

Great, thank you.

Operator

All right Next, we have Ronald Kamdem with Morgan Stanley.

Ronald Kamdem — Morgan Stanley — Analyst

Hey. Hopefully, you can hear me. Third time’s a charm.

Ryan Burke — Vice President, Investor Relations

Yes, Hi. Third time’s a charm.

Ronald Kamdem — Morgan Stanley — Analyst

Quick one. It’s definitely user error. So, two quick ones on my end. One is just when you’re taking a step back sort of big picture, the portfolio is at record rents, sort of record pricing power, just this cycle operationally, is there anything you sort of try to do differently to try to measure the customer’s pricing power, whether it’s look at rent-to-income ratios or other than just move-out activity, which you monitor, is there any sort of different way to leverage all the data that you have to get at sort of the pricing power at the sort of unprecedented levels.

Tom Boyle — Senior Vice President, Chief Financial Officer

Sure. So, I think there’s a couple of things here. One is, as you think about rent-to-income levels or otherwise, those are kind of macro trends that we do look at periodically, we look and see what housing affordability is by different markets as we look forward. But frankly, that’s not how we manage the business on a day-to-day basis. And the way we manage it day-to-day is much more driven on testing. And we have the ability to segment our customers and conduct continuous price testing, both for new customers as well as existing customers in terms of what we expect that elasticity to be. And overall, we’re just speaking about with Keegan, price elasticity is more acute for new tenants than it is for existing tenants, which is ultimately why existing tenants will pay a higher price than new tenants moving in. And that’s continuous testing across the platform for both sets of tenants to understand that elasticity by market, by unit type and that’s managed dynamically. So, in terms of what we’re seeing today compared to what we’ve seen in the past, is continued — or a continuation of that, which is, yes, there’s no question there’s price sensitivity for new customers today, and that’s built in how we price our units on a day-to-day basis. That said, our move-in rents in the quarter were up 12%. And so, we continue to have an ability to increase rent in the face of that elasticity. And in July, move-in rents were up 8%. So, we are seeing moderation but continued strength in move-in rents. So nothing that I’d highlight that is overly concerning from the micro. And I think from the macro standpoint, one of the key elements in self-storage is it’s a nominal spend versus a consumer’s income. And I think that continues to benefit the sector as we see rents resetting at all-time highs.

Ronald Kamdem — Morgan Stanley — Analyst

Great. And then, just following up on the questions on sort of the second half growth, the implied guidance on same-store revenue is 11.1%. And if we think about that as sort of a good run rate for the end of this year going into next year, is there anything, we’re trying to figure out what the potential deceleration is going to be? Is there anything in terms of comp, customer behavior as we’re — again, as we’re rolling into next year to think about sort of that growth function?

Tom Boyle — Senior Vice President, Chief Financial Officer

Yes. I think, we’ll give you a view on how 2023 is going to play out as we move into next year. But, I think you hit it right, which is a strong second half setting us up well for 2023. But in terms of the cadence of 2023, we’ll maybe save that in terms of when we have more visibility.

Ronald Kamdem — Morgan Stanley — Analyst

That’s it from me. Thanks so much.

Tom Boyle — Senior Vice President, Chief Financial Officer

Thanks, Rob.

Operator

Thank you. I’d now like to turn the call back over to Ryan Burke for any additional or closing remarks.

Ryan Burke — Vice President, Investor Relations

Thanks, Chelsea, and thanks to all of you for joining us today. Have a great weekend.

Operator

[Operator Closing Remarks]