Public Storage (PSA) 2002 Q1 法說會逐字稿

Good afternoon. Welcome to the Shurgard Storage incorporated first quarter earnings teleconference. At this time all participants will be placed on a listen only mode and the floor will be open for questions and comments following the present. I would now like to turn the floor over to your host, Mr. Jeff [Zurich.] You may begin.

Thank you for joining us on Shurgard Storage's first quarter 2002 conference. Speaking on today's call will be Shurgard CEO Chuck Barbo, David Grant, president of Shurgard Storage European group, and Harrell Beck, CFO of Shurgard. Chuck, David, and Harrell will make some remarks, and then we will open the phone lines for your questions. This will contain forward-looking statements. We will refer to the metric known as FFO. It is a financial metric defined by the real estate investment trust. Now please give your attention to Chuck Barbo.

Thank you. Our same store NOI increase was one of the best improvements by any this quarter. It is interesting to note, however, that the end of the recession did not seem to have much impact on Shurgard. We marked the end of the recession at the same point that looked a like during the beginning of the recession.

I have to say, the stability of our operating performance was to pure prize to us. For three decades I have seen the stability of this business. Another feature of our business is tremendous growth process that we enjoy. Among the opportunities in the United States we are still finding opportunities to develop new stores in excellent locations -- to improve the portfolio. Opportunity in Europe is unparalleled. Shurgard Storage is the leader in Europe. We have 75 stores open in six countries as of the end of the quarter. Stores contain more than 4 million square feet of space where we currently serve 28,000 customers. Shurgard Storage stabilized European stores continue to turn in terrific operating results. We have adding new stores at the rate of 25 per year, and considering additional countries for expansion. Most important, we have assembled an outstanding team or Dave has assembled an outstanding team of associates in every department to implement our ambitious plan going forward. Those of you who follow these calls or meet with me, know I am enthusiastic about Europe. You also know I am well aware none of the great performance is meaningful to our shareholders in the United States unless it translates to realized value right here in the United States. Striking the proper balance will be critical. It is obviously important our shareholders get rewarded in some form for the value we have created in Europe and will continue to create. We must do so in a way that does not [inaudible] the leadership position. We must be sensitive to the partners in Europe who helped us create the value and leadership position. If we maintain the proper balance, I am sure we will grow much more.

I am temper my earlier statements -- enthusiasm because I am concerned about two issues. One, it is our -- number one, is our ability to continue to drive same store revenue and NOI performance during the rest of the year. You will note we reduced the low end of the range for the same store growth expectations for the year. As we entered the second quarter, we noticed softer demand than historically. We don't know if this is a trend but it is worth mentioning. Two, until the economy experiences a full and sustained recovery, it will be tough to increase rates to the extent we have in the last two years. Except for those caveats, we otherwise have a remarkably stable core platform. To me, that seems to be the perfect equation for long-term value creation. Now Harrell will have a few things to say.

Thanks, Chuck. This morning I wanted to take a few minutes to touch on the company's first quarter operating results and then briefly talk about the balance sheet. Chuck said, the economy continues to recover our product type continues to demonstrate less volatility than what we have seen in many other sectors of the real estate industry. Again, I think this was demonstrated with the company's operating results for the first quarter of 2002. When you look at net operating income from our same store portfolio NOI was up 4.5 percent for the first quarter of 2002, compared to first quarter of 2001. And if you look at NOI growth after indirect and leasehold expenses, our NOI growth was under 6 percent, 5.9 percent for the quarter. To give you a little color on the breadth of our same store performance, we operate in 20 markets. If you look at that, the same store NOI in all of those markets were positive with the exception of two. Six of those markets actually had double digit same store growth rates. This trend is really consistent if you look at just what has happened with revenues in our overall -- in all of the markets that we operate in today. Again, and all of the markets that we operate in are over -- our same store revenue growth was positive in all markets but three. If you look at revenue growth for the quarter it was up 4 percent, that was almost exclusively by rate increases we implemented. Our rate increases came to about 5.5 percent and the average [inaudible] per square foot for the first quarter was under 11.70 a square foot, compares to 11.08 compared to the first quarter of 2001. Occupancy was 84 percent for first quarter, compared to 86 in first quarter and 2001. This 200 basis point in occupancy for the quarter that we saw was frankly not a significant concern of ours as we have been running it -- this deficit really since the end of the second quarter of last year. However, what has caused us some pause is we are beginning to see additional occupancy softening somewhere between 50 and 75 basis points where historically we would see occupancies beginning to increase. We believe this is due to decreasing discount programs offered by various competitors. Chuck said it is too early for us to assess what impact, if any, it will have over the remainder of the year. To be conservative, as you saw on the press release this morning, we lowered the bottom end of the same store guidance of 3 percent, and FFO range by 3 percent. This guidance is we run at the basis point occupancy throughout the remainder of the year. From expense standpoint we are pleased with the ability with minimum expense growth. Expenses year over year growth rose 1 and a half percent. Some of it was a function of timing, and obviously the mild winter we experienced. We would expect over the remainder of the year, growth increases will gear up to 4 and a half to 5 percent range. Moving up to FFO, per share range, went up 7 cents a share for first quarter 2002, compared to 2001. And as we saw in the past, we expect it to accelerate as same store FFO is the delusion we created from the developments we have done on balance sheet begins to reverse. I believable obviously we are beginning to see this impact. If you look at kind of the segments that made up FFO increase, on a gross dollar basis, FFO increased 4.8 million dollars. 2 million of that really came from same store NOI growth. We had about 1.7 million growth in our new stores from NOI perspective. And then as a result of now having two warehouses open, storage to go warehouses, delusion decreased by approximately half million dollars. Turning to net income, net income on per share basis was 27 cents for first quarter of 2002. That compares to 4 cents of first quarter of 2001. It represents 23 cent increase. And that increase is really due to the result of purchasing our partners' interest in three joint ventures during 2001. These had previously been accounted for as financing arrangements. As of today we have one remaining joint venture still accounted for under the financing arrangement. Turning to outlook, our FFO guidance for the second quarter range from 74 to 77 cents, that compares to 71 cents for the second quarter of 2001. One of the things that I saw this morning is some of the -- one of the new services had actually picked up our prior year numbers before our restated financial statement. So one of the things I wanted to do was try to make clear is the comparisons that we are giving you this morning, and the comparison that I will give you for the prior year really relate to the restated numbers that were filed last year.

FFO guidance for the full year, we expect to be in the range of 307 to 315, and again, that compares to FFO for 2001 for the full year of 2.66. Moving to net income, we would expect net income for the second quarter of the year, EPS on per share basis to be 34 to 37 cents. And that compares to 19 cents for the second quarter of 2001. And for the full year we would expect our EPS, earnings per share to be in the 1.45 to 1.53, that compares to 64 cents for the full year of 2001. This is really the first time we have gotten guidance on EPS. We plan to continue to provide this on a go forward basis. As with the case of projecting any new metric, it probably will take us time to make precision with this. We appreciate your patient as we fine tune this process. Let me turn quickly to the portfolio growth. During the quarter we added seven new stores. Two new developments and five acquisitions. Of these seven projects, four of them were acquired through the tax attention operating lease we put in place. As of the end of the first quarter within the tax attention operating structure we put in place we had 26 properties. Of those 26 we had 11 that were open and operating. And 15 that were either under or pending construction. When these 26 projects are fully developed, we would expect total costs to be in the neighborhood of 150 million dollars, and as of the end of the first quarter we actually incurred 85 million dollars in costs. One of the things that we have tried do in order to have, you know, transparency to the [inaudible] is financial disclosure. And within each of these ownership forms, what our obligations are and how those individual assets are performing. One of the things you would notice in our financial statements is that our other operating revenues were up dramatically. As a result of developing projects now through the tax attention operating lease, we now are reimbursed for internal development costs. This resulted in a 2 million dollar increase in other revenues. And also an offsetting 2 million dollars of expense in the operating expense line on the P&L. Quickly moving to the [inaudible] sheet. Total assets end of the quarter, 1.5 billion dollars. If you looked at the company on total market cap basis, 1.7 billion dollars. That represents debt to total assets of 29 percent in debt total market capital for approximately 25 percent. Moving quickly to coverage ratios, our interest coverage ratio for the first quarter was about 4.4 times. And if you looked at the company on a fixed charge coverage basis, or fixed charge cover for the quashing was 2.9 times for the first quarter. That's really it for my prepared remarks. I will turn the Mike over to Dave for an update on Europe.

Hi, everybody, calling in from the Europe headquarters in Brussels tonight. Going through our past results, maybe I can start with development side. We opened another three stores in the first quarter bringing total we had at the end to 75. We have about another ten under construction as we speak, and with the balance we have in permit, we are in good tract to open another 25 this year, similar to the amount that we had opened in the previous year. In the real estate markets we continue to see good opportunities to acquire land. I think the economies over here being should we say not as robust of a growth situation as a year or so ago, continue to make that easier for our teams to find good sites at good reasonable prices. So in that sense I think the future looks good for us over here. We recently on the financing side brought another bank into our debt syndicate for additional 25 million. That brings our total financing line to 280 million for European development. We are also working on some other financing option that is we open to have an announcement about within the next few weeks. And between our existing resources and these commitments we should be in good shape to cover our growth out through the middle of next year, 2003. If I may mention one other thing. We have to do annual appraisals on our properties as part of our bank financing activities. And just received the appraisals in for the first 48 stores in the portfolio. And those stores appraised by an independent well-known international appraisal firm had tagged the increase in value over cost on an as-is where-is basis at 42 percent for the portfolio. In general, was showing good healthy increase across all markets. If I turn it over to the store results, obviously with the portfolio growing at the speed it is, we are seeing significant jumps in revenues to go with it. Revenues were up for the quarter -- were 8 and a half million for the quarter, which is up 60 percent over the previous year's quarter. NOI also was just under 4 million U.S., and that's an increase over the quarter the year before. Probably most interesting statistic for you as we mentioned in the first quarter at the end of last year I should say call, we are seeing in the fourth quarter of last year the company was just breaking through into EBITDA positive mode. We are on track for EBITDA projections for this year. First quarter EBITDA projections for this year was positive 8,000. Same stores, you will see we reported same store results in our release on 28 stores. And those results show revenues increasing for those stores by over 25 percent quarter on quarter from the previous year. NOI up 42 percent and one of the things -- and actually NOI after indirect expenses and lease holds up almost 90 percent. Something I should point out, with the definition we use for same store, we end up with quite a few in there that are still in their later stages of occupancy rent up. And there is no question that those stores drive the occupancy increases drive a bunch of the increase we experience in quarter over quarter results in this comparison. But maybe what I could do is take you to the opposite end of the spectrum a little bit and focus on some of the earlier stores F I took the earliest 11 stores where you have had virtually no occupancy increase at all because they have been sitting right around 90 percent now for some time, to give you at least a better barometer on how rates affect our movement of NOI, and for those 11 stores that are the oldest ones we have, they also saw a revenue gain of 7 percent for the first quarter this year over the same quarter last year. NOI was also up 9 percent. And of this increase, only 1 percent related to occupancy and 5 percent related to the growth in the rental rates. When you compare that to the 28 [inaudible] I mentioned, that we also had a 5 percent in rental rates but 17 percent in the increase in occupancy is obviously a big factor there. All in all, we are still very pleased with how the same store results are showing, and continue to be pleased to see that we are as these stores fill up, we are still able to consistently move rents at a good pace, and still keep the demand at a good and consistent level. So at any rate, we are finding that the quarter's results overall for operations were well within our expectations and continue to be pleased with the progress. And I expect to see something similar for the rest of the year ahead. That's all I have on prepared remarks. Chuck, I will turn it back over to you.

Thanks, Dave. I want to reiterate what a fabulous job Dave has done in Europe, putting together a team and just really achieving goals over there. We are pleased with it. Operator, we are ready to take some questions now.

Thank you. The floor is now open for questions. If you have a question or a comment, you may press one followed by 4 at your touch-tone phone at any time. Thank you, our first question is coming from Brian Lake of Merrill Lynch.

Yeah, hi, Chuck. Just wanted to see if you could expand further on your comments about increasing the awareness of the value of Shurgard Europe. And I guess what you are saying, you might try to realize some of that value. Can you expand further on that?

Yeah. It has -- in conversations with you and others, and with institutional investors and regular investors that we have, we realize that people say, gee, we see this European opportunity. It looks fantastic. We agree with you. When will we start seeing results in the United States? The problem we have, of course, is Europe is growing so fast and that we have been doing it all on the balance sheet in Europe that we really are not getting the earnings out of Europe that can translate back for our provided share of it back in the United States because the actual earnings are pretty small because we are growing at such a rate and continue to add new stores which are very diluted to earnings when you open. You remember, you open with zero occupancy and it takes a couple years for the properties to fill up. We are looking at ways in which we can begin to stabilize the platform over there, and, you know, frankly, it will take billions of dollars in capital to really take advantage of getting to where I want to be in Europe. I mean I want to be, you know, continue to be the lead player in Europe. And I would like to have 1,000 locations in ten years over there. And to do that, is going to take billions of dollars. So we are going to have to do some joint venture financing, and joint venture ownership with others, in Europe, and utilize some of our expertise in the development and operation side to do fee driven income. If we were to do that, that would have a real impact as the stores opening over there stabilize. Then we would be able to bring back the earnings to the United States.

Okay. And, Dave, regarding the 25 openings, you only have ten under construction and opened three so far year to date. Can you build these things that quickly to get 25 openings?

Same question we had as we headed into the fourth quarter last year. For a variety of reasons we have a disproportionate number that will actually open and have open in the fourth quarter. Last year we opened 15 stores in the fourth quarter. And only 10 in the first three quarters. We will be on somewhat of a similar pace here. And the results I was given you were as of the end of first quarter. Since that time we obviously have opened a couple more stores. We have more under construction, and as long as we get stores started by even as late as late August, we can have them open by year-end. But there is a bit of a break that occurs because over here in Europe, when they shut down for vacation time in July or August, they completely shut down. And it pushes some of your construction times back and bunches it up more into the fourth quarter. No, it is a pattern that we are actually in better shape this year on our pipeline than we were last year.

And going back to the U.S., Chuck, you and Harrell talked about some softness in the markets. Do you see this as an industry wide trend? Is this supply or is this really a demand, Chuck?

I am not sure. There has been over the last few years a significant amount of supply has come into the market which has been trailing off substantially. I mean there is much less under construction today than there was three years ago. But that supply has made its way into the marketplace. And as a result, what typically happens when someone opens one of these things, they tend to discount the rates or give the space away to get people in the door and then raise rates later. We have to deal with that in certain markets. And we had to deal with that in two or three markets this last quarter. But, on the other hand, we have seen a slight reduction in call volume to the stores. Now we are not really sure whether that's real or whether it's just we are counting it better now than we did before. We have to be very careful about that. I mean the call volume is not -- we don't have a way right now to count every single call and know for sure that it is being counted correctly. So what we are looking at is a trend, year over year, but we are doing a better job of counting. And maybe what that call volume reduction is, is just us doing a better job of counting. We just don't know yet.

Okay. And regarding discounting, how much discounting? Is it fairly aggressive. Will we see this realized rent growth of 5 percent that you realized this quarter come down significantly.

I wouldn't say significantly. But I don't know. People do all kinds of different kinds of programs. The one that is problem most famous, is Public Storage, one dollar for the first month, or a certain month free. Other people follow that example. Even though we tend to have higher rents than most people in the marketplace, we can't be hugely higher than they are. So we have to follow the markets and we have to, you know, be responsive. Interestingly enough, even though the call volume is down a little bit. The closing ratio we are getting especially at the sales center has gone up. So even though we are having fewer calls by a small amount coming in, we think, we are not sure, but we think we are, we are closing more as we get better at that. So you know, it is not a huge problem. But, you know, it is one of those things we want to point out because we see it here, and we are not exactly sure what it means.

Since you brought up public storage, they obviously had a big drop off in occupancy, is that -- I assume you are saying that was company specific. Because your occupancy August though it dropped, was not as severe as they dropped?

They had significant rent increases in the last couple of years to catch up with us, quite frankly. And then they changed the way they collected their rent. And as a result they had some occupancy dropoff. I don't know -- I mean we had a little bit of it. But they had a lot of occupancy dropoff. Now whether their numbers are indicative of the market or ours are, we don't know.

Harrell, can you give us an idea of the five properties you acquired, the amount of dollars you spent, the timing of the acquisition and yields?

The five acquisitions that we did, we had -- we acquired three of those kind of on our balance sheet. And two of those properties were acquired through the tax retention operating lease. Excuse me. If you look at the three that we acquired on the balance sheet, the total cost of those properties was approximately 7.2 million dollars. And they represent about -- I want to say it is about 170,000 square feet. And those properties are located -- one is in Orlando, and two of them are in Indianapolis. The two properties acquired in the tax retention property lease were really properties that were in [Lisa.] And the other was located in Indianapolis. And I think they represent 130,000 square feet. As to projected yields, clearly when we acquire properties that are in [LESEP], we would expect incrementally higher yield once they stabilize, I am going to say, typically we would look for something in the mid-10 to 11 percent. Mid-10 is probably when they stabilize. Properties we acquire upon acquisition I think you are looking at something either in the low tens or mid-nines.

Are cap rates coming up in general? Or staying the same?

I don't know that cap rates are coming up, to be honest with you. The acquisitions I would say -- a couple of points on acquisitions. The ones that we have done -- the five acquisitions that we have done, three of properties we have already managed or were in our system before. And so we acquired -- I mean we obviously have a lot of operating history with the projects and know them very, very well. We do not spend a lot of time focusing on what I would call one up acquisitions. We clearly get packages on them. They are obviously being shopped. We don't think that we have done -- well, we have not been very effective in terms of competing or one up acquisitions based on price. We just think they are too expensive. The area that I think that is unique for us and where I think there is a real advantage for us is those acquisitions that we can do that are strategic where there is more to a -- the relationship beyond just buying a property. But it is like the relationship we have with the developer in Orlando or the developer in Tennessee or even southern California where we do more of a joint venture where we will buy existing properties or interest in existing properties and then jointly develop out the market. And it's -- it is those situations where I think owners are looking to us more for obviously operating expertise in the portfolio, but also some development expertise. I think that's where we are able to really differentiate ourselves from our competitors and compete not just on price. If we compete just on price, -- we have not been successful at buying anything.

Okay. And your last joint venture property, can you give us an idea about the timing of when you might acquire that interest and how much.

I am sorry.

Yeah.

inaudible] the time frame of that joint venture was contemplated to be really next year.

Okay. And so do you know the general size?

The general size of it?

Yeah.

It represents, I want to say 20 properties, 21 properties, and it represents about 110, 115 million dollars in total capital. That is fully consolidated in our balance sheet and in the operating results for the company. I want to say that there is approximately 67 or 68 million dollars of mortgage financing on those assets. It is, of course, not recourse to either of the partners.

Sorry. One last question.

To be honest I can't give you percent of NOI. I can give you the top and bottom and give you a sense from an operating standpoint how they perform but the best market that we had was Houston. And in Houston our revenue growth was up about 13 percent, NOI growth was up 20. And the bottom market was North Carolina. I think today we have about four properties there in North Carolina. But revenues were down 3 and a half, and NOI was down 7 percent.

Important to realize Houston would have been on the bottom of the list. I mean these lists are very fluid.

I think the thing that is more important to understand or really to understand the breadth of the same store results and the comment I made earlier, when all of these markets we are operating in, obviously all across the country, you know, our NOI was positive in every single market with the exception of two. I think that really speaks, you know, much better than looking at what Houston did or what southern California did or Portland or whatever. Any particular market. Because Chuck is right, the markets go through cycles. Clearly when you look at this relative to other, you know, sectors of real estate, I think not only is just the overall increase impressive but the breadth across a number of different markets, 18 of 20.

Okay. Thank you.

Thank you. The next question is coming from Patrick F. of Investco.

Just some further clarification on the occupancy. You mentioned that it dropped 200 basis points, quarter over quarter. And you saw an additional softening of 50 to 75 basis points, I guess that is so far in this quarter versus second quarter last year. Is that correct?

Yeah. I mean basically what happened is if you will remember at the end of the second quarter of last year we saw a decline in occupancy. That decline really ran for the balance of the year somewhere between 100, 200 basis points below where 2000 levels were. So coming into the beginning of 2002 we frankly had expected to be at kind of that same deficit which is kind of exactly what we saw in the first quarter of this year. Just recently what we would expect is to see that start to turn around and occupancy start to go up. It is really since that we have saw that additional 50 to 75 basis point decline.

That's basically because of the discounting that PSA is doing?

We are certainly seeing more discounts being put in place, and more discount programs being offered by competitors. We think that has something to do. Chuck alluded to earlier, it is not an exact science, but from a call volume standpoint, we have seen some diminishing of demand.

Right. I mean -- we see a bottom or we don't know yet.

Yeah, we don't know. But we are not too concerned about it. This is a very -- there is a hugely seasonal aspect to this business. Exactly when the season [uptick] starts, can move from week to week, month to month, year to year. We would anticipate this thing would bottom out and start going up the other way. We will let you know.

Okay. Fair enough.

Thank you. Our next question is coming from John [Lit] of Solomon Smith Barney.

It is Jordan [Saddler] here with John. Not to beat a dead horse but on the occupancy. Harrell, I believe you said three markets did not get same store revenue growth. Can you identify those markets.

I don't want to get into specifics. I would say the bottom end of the market was North Carolina. And that market was down 3.6 percent in terms of revenue growth, and 7 percent down from same store NOI standpoint. And that was the worst market of all of the markets we are in.

I guess I am trying to get my hands around whether -- and you know, this is occupancy erosion is really more demand related or are you seeing more saturation in some of these markets.

I don't know if it is so much demand. Clearly there are more self-storage properties on the market. But I think what we have seen is that clearly over the last year, year and a half, we are seeing, you know, a slow down of anything of any new properties being built. So I am not sure it is as much of a function of new stores being opened. Although I am sure that has some impact on it as much as -- [inaudible].

Of the weak revenue markets, like North Carolina, and others, would you characterize them as having maybe more stores built close tore your stores?

You know, this is Chuck. It is really hard for us to give specific answers to that because it is just a combination of all things. And the interesting thing about it is, is Houston which is leading the parade with 13 percent growth initiative this quarter, all of last year was probably at the bottom or close to it. I would guess North Carolina would be close to the top next year because they are starting from a smaller base this year. So it really -- it is really better to look at the overall portfolio. And the overall portfolio is really, really stable.

I agree. Dave also discussed and mentioned the economies in Europe obviously being weak as well. And he said that was a good opportunity I guess to source additional developments or land. Now are we also seeing slower lease-up in development, Dave?

No. If you take Chuck's comments about be careful with the data you look at, in our situation with fast growth, we have more dynamics going on. But, no, it is continuing to go at a good solid pace. And haven't seen anything that's particular to any market that I could really pin as an economic trend.

Interesting thing about Europe, Europe has so little competition that it would be better if other people went into the markets and did some building. It would help drive the awareness faster. Europe is exactly where the United States was 30 years ago. I mean this is -- we have got the wind at our back for 20 years in Europe.

Right. I understand. I guess my point was that it seemed like you guys -- like the U.S. is suffering a little bit from the economy where -- and less -- not so much from saturation or at least it sounds like that a little bit.

Let me tell you why I couldn't give you an answer to the component. Let's suppose because of the European economy there is what would be a normal slack in demand of some amount. inaudible] U.S. historically. Why it is hard to hear that, what is happening at a fairly good rate is a significant increase in customer awareness. Last year in Paris, for instance, 5 percent of the population knew what self-storage was. That's my whole customer base to go after. Right? If this year 10 percent of that group is aware of the product, that growth in this natural demand pool is overcompensating for what I have lost theoretically on the economy side.

Okay. I understand.

Follow me. That's why you can't isolate that piece. You have got this natural growing awareness issue that gets in the way if you want to call it.

I understand. Thank you. Harrell, just on the remaining Shurgard to go stores, how are those performing? Break even?

There are. BUSY SIGNAL] Operator, operator.

Just one moment please. I am sorry for the delay, gentlemen. Mr. Grant's line got disconnected. I will get him back on for you. Please continue with the conference.

Shurgard to go, I am curious how the remaining two stores are doing?

Three left. We have one in Seattle, second one in Portland, and third one in Northern California. We close two of the warehouses last year. And for the first quarter, we had about 100,000 dollars loss. That compares to about 600,000 the previous year.

Okay. And that's it for my questions.

Operator, are there additional questions.

Once again, if you have a question or comment, please press one followed by four on your touch-tone phone.

Operator it appears that there are no -- I want to thank everyone for joining us on the call. We will be available at the convention in a month. And we look forward to speaking to you again soon. Thank you.

Thank you. This concludes today's teleconference.