Public Storage (PSA) 2003 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen.

Welcome to the Shurgard Storage Centers analyst conference call. At this time all participants are in a listen-only mode.

Following today's presentation, instructions will be given for the question-and-answer session. If anyone needs assistance at any time during today's conference, please press the star, followed by the zero on your push-button phone.

A reminder, this conference is being recorded today, Thursday, May 22nd, 2003.

I'd now like to turn the conference to Mr. Jeff Zoric. Please go ahead, sir.

Thank you, operator.

Good afternoon, everyone, and thank you for joining us today on Shurgard Storage Centers' analyst call.

Speaking on todays' will be Harrell Beck, Senior Vice President, Chief Financial Officer and Treasurer of Shurgard, Chuck Barbo, Chairman, President and CEO of Shurgard, is also on the call and he is available to answer your questions after Harrell's prepared remarks.

The following discussion includes forward-looking statements. Shurgard Storage Centers' actual results may differ materially from projected results. Additional information concerning the factors that may cause such a difference are included in our first quarter 2003 10Q filed with the Securities and Exchange Commission on May 20th, 2003.

Now please give your attention to Harrell.

Thanks, Jeff.

Given the extensive nature of our call a couple weeks ago, my remarks this morning will really be fairly limited.

First, again, I think I just want to kinda' recap and -- what we said on the call a couple weeks ago. And that is from an operating perspective, I think the first quarter really played out as we had thought.

Specifically, we were very pleased to see continued stabilization in the business and a rebound in our operating fundamentals. Our same store occupancies, again, during the first quarter of 2003 grew by 120 basis points compared to the first quarter of 2002, and our same store occupancies in 2003 have grown sequentially each month during the quarter.

The second point is that we are able to push occupancies during the quarter and still maintain our rate structure. I think, as you know, our actual collected rate for the first quarter of 2003 was $11.74, which is essentially flat when you compare it to the same quarter of 2002.

By building occupancies and maintaining our rates, we are able to push revenue growth in our same stores by 1.6% over the same quarter of 2002. This really represents a significant acceleration from where we had been in the prior two quarters at less than about a half a percent year-over-year growth.

The other thing I think that was important to note from an operating perspective is our closing ratios were up 10% to 20%, which resulted in an increase in total leases sold for the first quarter of 2003 compared to the first quarter of 2002. Again, going forward, I think it will be, for us, it's really imperative for us to continue to build on the occupancy momentum that we established in the first quarter.

The other thing that will be very critical for us will be maintaining the integrity of our rate structure, again, on a quarter over quarter basis when you look back on the second quarter of 2002.

The last point I'd make about our operating fundamentals, is again, that our 2003 same store outlook has not changed. Specifically, our same store revenue growth is still projected to be in the 1% to 3% range. This growth will come primarily from occupancy gains, as opposed to our rates. Essentially we expect to remain relatively flat. We do expect our same store operating expenses to trend into the 5% to 6% range. This is really a result of longer store hours and projected increases in real estate taxes.

And finally, our same store net operating income, we expect to be somewhere between flat to a 2% growth rate.

Let me switch real quickly for a minute to talk about FFO and net income. FFO for the quarter on a per share basis was 67 cents, compares to 62 cents for the first quarter of 2002. This represents about an 8% growth rate for the first quarter of 2003 when you compare to the first quarter of 2002.

The growth in FFO is really the result of primarily two things. One is just our store operations, contributed about $1.3 million in increase in FFO. The other thing is that really interest income, and in expense, were down when you look at that on a year-over-year basis.

I think when you look at the interest expense numbers, you gotta to look at it relative to the perpetual preferred as well, because we did refinance preferred during the second of half of last year.

Net income on a per share basis was 30 cents for the first quarter of 2003, compared to 28 cents for the first quarter of 2002.

One other point I want to make, I think it's important, is that we did provide a schedule to the press release, where we did restate FFO for 2002. The re-stated FFO is really a function of two things. The first one is the unrealized loss on financial instruments. That's a result of having to amend the previously-filed 10K.

The other thing that we have done in order to be in strict compliance with the (INAUDIBLE) definition of FFO is that we have not added back the amortization of participation rights, which we had done previously and in previous calculation of FFO.

From a guidance perspective going forward, we expect the full year 2003 FFO guidance to be in the $2.73 to $2.86 range. Again, no change in our operating assumptions as previously discussed. We see the business as stabilizing, while occupancies continue to firm.

For the second quarter, we would expect FFO to be in the 68 to 72 cents a share range. The assumptions underlying this projection is really more fully disclosed in the Q end press release.

From an earnings per share standpoint for the full year of 2003, we would expect EPS to be in the $1.12 to $1.22 per share range. I think most of you know that we did re-file our 10K earlier this week. I think our prior releases have been very self explanatory. The 10K as re-filed, had no significant changes in either the nature or magnitude of the adjustments from what we previously reported, and I think all of you have access to that 10K.

Moving quickly to the balance sheet. Total assets at the end of the quarter was about $1.8 billion. That's before depreciation.

Debt to total assets, we had about 38% debt to market cap, today is about 34%, and our interest coverage, both interest and fixed charge coverage are approximately 3.7 and 2.9 times respectively.

That's really it for my prepared remarks.

Operator, we're now prepared to take questions from our callers.

Thank you.

Ladies and gentlemen, at this time we will begin the question-and-answer session.

If anyone has a question, please press the star, followed by the 1 on your push-button phone. If you would like to decline from the polling process, please press the star, followed by the 2. You will hear a 3-tone prompt acknowledging your selection and your questions will be polled in the order they are received. If you are using speaker equipment, you will need to lift the handset before pressing the numbers. One moment for our first question.

Our first question comes from Ross Nussbaum with Smith Barney. Please go ahead.

Hi, guys, good afternoon.

Can you talk about your guidance as it relates to the losses on financial instruments going forward for the rest of the year? What are you expecting to record?

Hi, Ross, this is Harrell.

If you look at the press release that we put out, essentially we have not tried to predict or to guess the movement in interest rates. And so, on a prospective basis, we're assuming the losses that have been recorded to date would not change, either such that we would record a gain on the hedge that now goes through the P&L or additional losses that go through that P&L.

Okay, so you're not going to restructure in any way the hedges that are out there to avoid -- I guess, can you get the hedges to classify for 133?

Yes, absolutely. We are in the process of looking at redesignating the hedges. So that they do qualify for under FAS-133 for hedge accounting, and I believe we will be in a position over the course of the next probably 30 days to have those hedges redesignated, such that we would get favorable accounting treatment and we would be treated under the hedge accounting rules. And if that happens or when that happens, then the impact on the P&L, at least on a perspective basis or going-forward basis -- there wouldn't be an impact.

If I understand you, there shouldn't be an impact in the second half of the year, but in the second quarter there may still be.

I think that's fair to say because the hedges are still in place today, and it would be to the extent of whatever's happened, the interest rates between the end of the first quarter and the end of the second quarter. There would be some impact.

And do you have the re-stated quarterly numbers, FFO numbers for 2002?

Yes, we do. As part of the press release that we put out, it was one of the schedules we attached -- It was table 9 is the press release.

Okay, I'll find that, thanks.

Thanks, Ross.

And in terms of your consolidation of the TROLS in Shurgard Europe, any updates on how or when that's going to occur?

I don't know that I have any real specific update.

I will tell you that we are still committed to doing that, we are still on track to do that. We expect that most of the -- if not all of the assets within the TROL will be brought back on the company's balance sheet by the end of the second quarter. So you should see that in our financial statements for the second quarter.

We are certainly underway or doing things to bring those things back on, and I'd say the same thing with you know, the monetizing our European positions as well. That will happen either right at the end of the second quarter or the beginning of the third.

Okay, and final question. Now that it's almost the end of May, any update on what you're seeing in your business during the second quarter in terms of occupancy and risk?

We have not disclosed any of that information, so I don't think it would be appropriate for us to comment on that.

But you -- you tell me you file an 8-K --

I think the release speaks for itself.

Thank you.

Does that answer your question, sir?

Yes, thank you..

Our next question comes from David Kopp with RBC Capital Markets. Please go ahead.

Hi. Good morning. I'm here with Jay as well. Could you talk a bit about the CAP rate or key markets and if there's any shift in those cap rates lately, given that you think, maybe the perception anyway is that the business is stabilizing?

I'm not sure -- this is Chuck -- I'm not sure we're seeing it in cap rates because there's not that many transactions going on that I'm aware of. But generally speaking, we have been living through a period of time with the lower interest rates where cap rates have come down quite a bit, I think, in our industry, in real estate generally, which is sort of an anomaly because we have, in most real estate categories, have softening operating results and lowering cap rates, which are off-setting, which would normally be a reduction in value of the assets.

And that's really a finance function, and when we have seen properties come on the market for sale that we have been interested in, the purchase prices have gone pretty high on those because private buyers can finance the things at pretty low interest rates, but it's really hard to you know, speculate exactly what cap rates are, because it really depends on the value of the asset as well. I would guess that you could probably find cap rates in the self storage industry as low as 8 and as high as 13 or 14, depending on the quality of the assets.

Great, thank you.

Thank you. Our next question comes from Jim Sullivan with Green Street Advisors. Please go ahead, sir.

Thanks. Harrell, I thought in your prepared remarks, you would probably touch on the underlying transaction that caused the restatement.

We've been through your filings and frankly don't understand why the earnings had to be re-stated. Without getting bogged down in the details, can you explain the underlying transaction and what changed or what at least changed in your auditor's mind?

Sure, Jim. Let me try to be as concise as I can.

To start with, when companies enter into hedges or in our case really swapping from fixed to floating interest rate, that is governed by what's known as FAS-133. Those rules are very, very complex, and so in essence, before we enter into any transaction, we have experts that we use, both from a derivative standpoint, and quite frankly as well as our auditors, in terms of reviewing the documentation and procedures, before we put those hedges in place. We did that in this particular transaction.

The transactions were entered in 2001 and what they related to was a fixing of the interest rate related to the options that we have under the TROL, and originally when we went through that process, we had favorable accounting treatment. Our auditors had looked at that again during the first quarter of 2003, and what their conclusion was that the hedge that we had originally entered into was not considered -- at least under accounting terms -- as a financial hedge. And as a result of that, the rules say that you have to hedge the entire -- or the risk of the entire transaction.

Our goal was, as we went into it, was to hedge the interest rate component of that. And as a result of that, I think that's really the reason that, on re-reviewing transaction, it did not qualify for hedge accounting.

Also, Jim, this is Chuck.

Under that -- because of the particular circumstances, under that we would have had to hedge all of the risk of rent-up and all of those things, and there's no way for us -- I mean, that's the business we're in taking that kind of risk. Had we known that those were the rules, then we would have never entered into the transaction. I mean, it was just strictly to hedge the financial, you know, the interest rate risk part of it.

And quite frankly, I find it somewhat extraordinary that when circumstances change within an auditing firm, and you get somebody else looking at it, who's an expert in the -- now the new expert in FAS-133 -- that opinions change. And I just find that to be extraordinary.

What happens to these swaps from an economic standpoint?

Well from an economic standpoint, we have essentially taken the properties -- or the balance that's building up in the TROL, in our residual guarantee, and have fixed a portion of it at a fixed rate of interest. It's fixed through 2005 -- February, 2005, which was the original termination of that TROL.

Is that termination affected in any way as you buy these properties?

No, but that's part of -- or would be part of -- I think the question that came out earlier in terms of just being able to re-designate that hedge. So I think when we entered into those hedges, we did it for what we thought were appropriate business reasons. We still think they're appropriate, and so that is part of the re-designation process. As we buy them back, we would look to re-designate them in that respect and keep them in place.

Okay.

Different topic. The euro has appreciated significantly against the dollar --

Yeah.

Can you just walk me through what that means for your European investment and the commitments that you have.

I guess I'm trying to understand from a balance sheet, from an income statement, and I guess importantly that the commitment of capital that you have -- which has yet to be funded -- what does all of that mean?

Yeah, the capital that we have to fund is dollar denominated. So, to the extent that the euro has strengthened, the resulting investment that we are making has strengthened as well or improved.

The acquisition that we did, I think subsequent to the end of the quarter, which was, we did acquire the CSFB position in Shurgard of Europe. That has been funded, and again, since it was funded the euro has strengthened. And as a result of that, obviously the cash flows are euro denominated as well, so the cash flows are strengthening as well. Relative to the dollar investment.

Do you hedge foreign exchange?

We don't hedge permanent investments that we make. I don't know that you can.

Today, as that entity is you know, retaining any cash flow that they have, it's not producing earnings today, and so there really is no need to hedge cash flows because we're not repatriating cash flows back to the United States.

At the point in time that we want to look at repatriating cash flows back to the United States, at that point in time, I believe it would be appropriate to look at hedging those cash flows. But as long as the dollars or the euros are staying in Europe, or staying in the continent there, I don't know that there's any reason why you would hedge.

The final question, you have some pretty substantial capital commitments throughout the balance of '03. What's the game plan for funding those?

Yes, well, the two primary commitments that we have, of course, relate to the TROL, and relate to the funding of our monetizing our European interests. We have certainly liquidity to fund both of those.

Again, one of the things you have to remember as it relates to the TROL is the TROL -- as we commit to develop properties in the TROL, or we incur actual cost on those developments -- it reduces our capacity on our line of credit dollar-for-dollar.

Si, in essence, one way -- as we buy the properties back from the TROL, in essence, that capacity has already been reserved under our line of credit. So it would just in essence be put on our line of credit at that point in time. It would be on our balance sheet.

With respect to our funding of our monetizing our position in Europe, we have always provided for capacity, just both internally as part of a capital planning event internally, from a company perspective, but also has been fully reserved in our current covenants and under our line of credit.

Okay, thanks.

Thank you, sir.

Ladies and gentlemen, if you have an additional question, please press the star, followed by the 1 on your push-button phone. And if you are using speaker equipment, you will need to lift the hand set before pressing the numbers.

Our next question comes from Scott O'Shay with Deutsche Banc. Please go ahead, sir.

Good afternoon, guys. A couple questions.

The Minnesota Mini portfolio -- does that come with any debt on the properties?

Hi, Scott this is Harrell.

No, it does not. It will be unincumbered.

Okay, that's great.

The loan that's out to Recom right now, the $134 million that's due in July -- is that right?

Yeah.

How is that gonna get repaid? Is that gonna be a debt financing on your part?

Yeah, I mean, again, that's how we will monetize our position in the European entity, and that is something that from a capacity perspective on our balance sheet, something that we already provide for.

Okay, so you're looking at a bond deal to do that, rather than equity?

Well, I mean, how we ultimately end up funding it, I'm not sure we're in a position to say today, I'm not sure, but I would say that we have capacity, I think, under you know, on our balance sheet, to take that down. When it matures.

Okay. But that is due July first then?

The note, absolutely.

The $312.5 million that's the line of credit on Europe's balance sheet --

yeah.

-- when is that due?

I want to say it matures at the end of this year with an option to extend for one additional year.

Okay.

Now, when you consolidate Recom or Recom goes away, Europe is essentially gonna flip on your balance sheet as well, is that correct?

Well, that's one of the -- quite frankly that's one of the things we're going through right now now to try to determine if it's appropriate to consolidate or not. We still have - I mean, we will own a majority of the entity, but we don't necessarily as of today necessarily control it.

So, we need to go through that process and are going through that process today with our auditors to determine specifically if this is something that we should or can consolidate, and it really is tied up around a lot of the new guidance that comes out in terms of you know, 10-46.

Okay, when you buy out the Recom loan and succeed to the equity position, and with the CSFB piece and the equity you had in Europe already, does that get you to the 60%?

I'm sorry, a little over 60 --

A little over 60. So, at this point, to get to the 60, you just need to buy out Recom, it doesn't include the buyout of other equity partners?

No, no, no, that's correct.

Okay, are you considering buying out additional equity partners such as CSFB did at this point?

Well, as -- we offered the other equity partners the same thing that CSFB had, and they all turned it down, but we would be interested in having conversations with them and at some point in time they're gonna want to have an exit event, but we haven't got anything to report at this time.

Okay. Okay. The CSFB evaluation, roughly $50 million for 10.6%, if I got that right?

I think that's accurate.

In terms of reaching a total evaluation for Europe, you know, would that imply an equity evaluation somewhere just under $500 million? And then debt on the kind of third party debt would be roughly $360 in addition to that? Is that a rough way of looking at it?

No, exactly, exactly.

Okay.

I mean, clearly -- I mean, again, part of that is, you know, the fact that the Euro strengthened.

Uhm-uhm. Okay.

I mean, if you want to convert it to dollars, but yeah, no, that's clearly a way to look at it.

Okay.

The last question I have has to do with the NOI coming off of Europe. In the Q here, under European operations, it says that the 96 properties generated $5.3 million of NOI for three months. Yet, if you look in the table, the revenues were 14.3 and the expenses were 13.3, which gets you down to about $1 million. Can you reconcile the difference there?

Not off the top of my head, Scott, I'm sorry. I'll have to look that up. I can certainly get back to you on that.

Okay. Let's see, I think that's it for me. Thanks.

Okay.

Thank you.

Mr. Zoric, we have no further questions at this time. I'd like to turn it back over to you.

Well, seeing there are no further questions, we'd like to thank everybody for being on the call and we look forward to speaking with you again soon.

Thank you.

Ladies and gentlemen, this concludes the Shurgard Storage Centers analyst conference call.

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