Public Storage's Q3 2025: Contradictions Emerge on Los Angeles Rent Restrictions, Demand/Supply Trends, Occupancy, and Peak Leasing Season Expectations

Guidance:

• Raised 2025 outlook for the second consecutive quarter driven by outperformance in same-store and non-same-store NOI, acquisition volume, and core FFO per share.
• Increased core FFO per share growth by nearly 1% with one quarter remaining in 2025.
• Raised outlooks for same-store revenue, same-store NOI, and non-same-store NOI; incremental NOI to stabilization from non-same-store assets increased to $130M for 2026 and beyond.
• Expect >$1.3B of acquisitions YTD and a $650M development pipeline to be delivered over the next two years.
• Continue to fund growth from a strong balance sheet (net leverage ~4.2x) and retained cash flow (~$650M).

Business Commentary:

• Strong Financial Performance and Growth:
• Public Storage reported significant outperformance in same store and non-same store NOI growth, acquisition volume, and core FFO growth per share.

• The company raised its 2025 outlook for the second consecutive quarter, driven by operational stabilization, lower competition from new supply, and increasing acquisition activity.

• Operational Efficiency and Technology Initiatives:

• The company implemented operational innovations like AI-driven customer service, which reduced labor hours by over 30% while increasing employee engagement and lowering turnover.

• These initiatives, along with AI and data-driven strategies, drove higher revenues, margins, and core FFO per share growth.

• Capital Allocation and Development Strategy:

• Public Storage announced over $1.3 billion in wholly owned acquisitions and developments this year, with a $650 million development pipeline slated for delivery over the next two years.

• The company leveraged its industry relationships, data-driven underwriting, and strong capital position to execute on these activities.

• Geographical Market Performance:

• The West Coast, which constitutes about a third of Public Storage's NOI, showed strong demand trends and limited new supply, contributing to good revenue growth in the 2% to 4% same store revenue range.
• This region's performance was supported by comprehensive market analysis and strategic development activities.

Sentiment Analysis:

Overall Tone: Positive

• Management: "we are raising our 2025 outlook for the second consecutive quarter" and noted "outperformance in same store and non-same store NOI growth." Tom: "core FFO per share higher by 2.6%" and "we increased core FFO per share growth by nearly 1%." Company emphasized digital/AI-driven operating gains, reduced labor hours >30%, and accelerating acquisition and development activity.

Q&A:

• Question from Eric Wolf (Citi): Could you talk about the process you go through in setting your budgets for 2026 and how you determine moving rents, occupancy and other main variables?
  Response: Continuous, data-driven forecasting and predictive analytics across every function, challenging teams to identify initiatives, with a revenue-optimization focus enabled by digital investments.

• Question from Eric Wolf (Citi): Do you see trends moving back to a normal run rate growth or just stabilization; how are recent October trends shaping that view?
  Response: Management sees steady stabilization with demand rebounding from 2024 lows, reduced new supply, and pockets (e.g., West Coast) growing ~2-4% same-store revenue.

• Question from Michael Griffith (Evercore): Any insight into whether new customer behavior has changed and whether move-in rents are troughing?
  Response: Company emphasizes total revenue over move-in rents alone—revenue is driven by move-in rents, volumes, move-outs and existing-customer behavior; new move-ins remain competitive and platform investments are being used to drive revenue.

• Question from Michael Griffith (Evercore): Are there any specific puts and takes we should think about for implied Q4 guidance (tougher comps or line items)?
  Response: Tougher comps include property-tax refund comps from last year and continued Los Angeles rent restrictions expected to weigh on Q4 same-store results.

• Question from Samir Kanali (Bank of America): What are you hearing on the ground regarding Los Angeles price restrictions and the expected 'burn off' in January?
  Response: Outcome is in the governor's hands with a decision expected in early January; no additional color and a range of outcomes remains possible.

• Question from Samir Kanali (Bank of America): How much room do you have to sustain ~2% expense growth over the next 12-24 months?
  Response: Digital investments and solar deployments (solar on >1,100 properties) continue to reduce labor and utility costs and should support ongoing OpEx control.

• Question from Caitlin Burrows (Goldman Sachs): How do you expect supply in the next 12 months to compare to the last 12 months and what's driving that outlook?
  Response: Industry-wide supply delivery momentum is declining into 2026–27 due to entitlement complexity, higher cost structures and development risk, which supports fewer deliveries.

• Question from Caitlin Burrows (Goldman Sachs): What differentiates Public Storage's development strategy and how are stabilizations tracking versus underwriting?
  Response: Deep market-level operational data and underwriting allow optimized sizing/mix and faster lease-up; recent developments are pacing ahead of expectations and delivering strong risk-adjusted returns.

• Question from Ron Camden (Morgan Stanley): Are you seeing any top-of-funnel demand deterioration (web-search or other data) given guidance assumes some Q4 deceleration?
  Response: No broad demand weakening observed; the anticipated Q4 decel is driven mainly by LA rental restrictions and property-tax comp headwinds rather than weaker demand.

• Question from Ron Camden (Morgan Stanley): On acquisitions, what product types are you seeing and how are you thinking about cap rates/returns?
  Response: Active across a mix of stabilized and unstabilized assets from diverse sellers (off-market and curated portfolios); confident in underwriting, integration and achieving targeted returns.

• Question from Eric Lubchow (Wells Fargo): Can you update operating trends through October for occupancy and move-in rates?
  Response: Q3 new-customer activity was down ~9% YoY; October is slightly better; move-in rates down ~10–11% but volumes rose ~3–4%, driving occupancy roughly 40 bps lower YoY; focus remains on maximizing revenue.

• Question from Eric Lubchow (Wells Fargo): Can you update expectations for LA rent restriction headwinds for Q4 and any impact from recent ICE/immigration-related actions?
  Response: LA is trending better than earlier expectations (now expected down ~1–2% for the year vs prior ~-3%); the recent state of emergency yields negligible incremental impact on Q4 performance.

• Question from Spencer Alloway (Green Street Advisors): How much NOI upside do you underwrite when buying mom-and-pop assets and will AI materially increase that upside?
  Response: Typical margin enhancement is roughly a 10% improvement driven by revenue and OpEx advantages; ongoing AI/tech investments should further enhance operating uplift over time.

• Question from Todd Thomas (KeyBanc): What is the outlook for acquisition pace into 2026 and appetite for large-scale transactions?
  Response: Improving transaction and debt markets support higher activity; appetite is strong and the platform can integrate large volumes similar to prior years.

• Question from Todd Thomas (KeyBanc): How much more expense efficiency remains from technology and what will have the biggest impact over 3–5 years?
  Response: Management says they are early in the roadmap—digital penetration (85% digital interactions) and ongoing investments across revenue and ops will deliver compounding efficiencies and further margin upside.

• Question from Juan Santabria (BMO Capital Markets): Are there offsets from West Coast strength to the LA drag, and what are expected going-in/stabilized yields?
  Response: West Coast strength helps but LA still drags same-store results; targeted going-in yields are ~5.25% (mixed stabilized/unstabilized) and assets stabilize toward the ~6% range after platform integration.

• Question from Michael Goldsmith (UBS): Does the $10M increase in non-same-store NOI reflect better performance of previously owned properties or newly acquired ones?
  Response: It's a combination—better lease-up performance from recent vintages plus closing additional acquisitions; incremental NOI to stabilization was raised to $130M for 2026+.

• Question from Michael Goldsmith (UBS): Marketing spend and promotions are down—what's the thought process on using these levers when demand is uneven?
  Response: Promotions and advertising are tactical tools used to optimize customer volumes and revenue; the company deploys them selectively to maximize overall revenue rather than leaning on any single lever.

• Question from Mike Mueller (JP Morgan): How do move-in rent comps in your stronger markets compare to the roll-up in the South?
  Response: Stronger markets exhibit better move-in trends and healthier existing-customer behavior, contributing to steadier and stronger revenue growth versus weaker regions.

• Question from Mike Mueller (JP Morgan): Any changes in pushback from customers on ECRI levels?
  Response: No material change—existing customers continue to perform well, vacates were down, and price sensitivity remains consistent with company models.

• Question from Brandon Lynch (Barclays): How do you evaluate whether you've cut labor too much and what's your approach to over/under staffing?
  Response: Multi-year A/B testing, customer-service metrics, market-specific predictive tools and employee feedback guide staffing; digital tools have reduced hours >30% while improving employee engagement.

• Question from Brandon Lynch (Barclays): Are you seeing any improvement in housing-related demand that would boost 2026 versus recent years?
  Response: Housing is a component of demand and is relatively stable; modestly lower mortgage rates may help but no meaningful shift yet—expect steady or slightly improved activity over time.

Contradiction Point 1

Los Angeles Rental Rate Restrictions Impact

It involves differing descriptions of the impact of rental rate restrictions in Los Angeles on the company's financial performance, which could affect investor expectations.

What are you hearing about Los Angeles' and ICE rent restrictions? - Samir Kanali(Bank of America)

2025Q3: The situation is unchanged regarding the state of emergency and pricing restrictions. ICE-related restrictions have a negligible impact. Los Angeles performance is now expected to be down 1-2% for the year, better than initially expected. - Tom Boyle(CFO)

Are there any updates on L.A.'s rent restrictions? Are the restrictions likely to be extended or funded soon? - Salil Mehta(Green Street)

2025Q1: We're complying with restrictions and expect them to result in a 100 basis point impact on same-store revenue, with back-half weighting. - Tom Boyle(CFO)

Contradiction Point 2

Demand and Supply Trends

It involves differing perspectives on the trends in demand and supply, which are critical factors affecting the company's revenue and market position.

Can you discuss the trends in October and November and whether there's a path to normalization or stabilization? - Eric Wolf(Citi)

2025Q3: We're seeing stabilization with demand bouncing off the bottom from 2024. New supply is decreasing, and some markets show healthy growth. - Tom Boyle(CFO)

Can you explain the assumptions for street rate in 2025, specifically a 5% decline and a slight decrease in occupancy? - Jeffrey Spector(Bank of America)

2024Q4: We've seen continued levels of activity, demand stabilization that we talked through 2024 play out at the start of 2025. Move-in volumes are up a strong 5% to start the year. - H. Boyle(CFO)

Contradiction Point 3

Occupancy Trends and Customer Activity

The responses differ in their portrayal of occupancy trends and customer activity, which are key indicators for business performance and demand.

Can you update us on October's operating trends, especially occupancy and moving rates? - Eric Lubchow(Wells Fargo)

2025Q3: New customer activity was down about 9% year over year, but October saw some improvement. Occupancy closed down 40 basis points year over year. - Tom Boyle(CFO)

Update on July operating trends relative to your revised midpoint year-to-date and storage fundamentals' potential recovery? - Michael Griffin(Evercore)

2025Q2: Operating fundamentals are in line with seasonal expectations, move-in rents down about 5% while occupancy gap has closed to 40 basis points. July trends see continued customer interest, move-in rents similar in July. - H. Boyle(CFO)

Contradiction Point 4

Peak Leasing Season Expectations

It involves differing expectations about the peak leasing season, which could influence strategic planning and investor perceptions of market demand.

How do you determine your 2026 budgets, including rent adjustments, occupancy rates, and key drivers of growth? - Eric Wolf(Citi)

2025Q3: We're seeing stabilization with demand bouncing off the bottom from 2024. New supply is decreasing, and some markets show healthy growth. - Tom Boyle(CFO)

Have you observed any post-tariff trends in business customer segments or specific regions? - Ron Kamdem(Morgan Stanley)

2025Q1: Our base case does not assume a peak leasing season this year. The demand factors driving customers are broad-based, but typically, peak leasing is tied to existing home sales, which has been muted. - Joe Russell(CEO)

Contradiction Point 5

Los Angeles Rent Restrictions Impact

It highlights different views on the impact of rent restrictions in Los Angeles, which could affect the company's revenue and market strategy.

What are your thoughts on Los Angeles' rental rate restrictions and ICE-related rent restrictions? - Samir Kanali(Bank of America)

2025Q3: The situation is unchanged regarding the state of emergency and pricing restrictions. ICE-related restrictions have a negligible impact. Los Angeles performance is now expected to be down 1-2% for the year, better than initially expected. - Tom Boyle(CFO)

Can you explain the estimated 100 basis point negative impact on same-store revenue from Los Angeles? - Todd Thomas(KeyBanc Capital Markets)

2024Q4: Los Angeles continues to be a strong market. The 100 basis points that we're speaking to is really a rent restriction and pricing restriction impact. It will have less of an impact in the first quarter, accumulate through the year. - H. Boyle(CFO)