Public Storage (PSA) 2006 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Shurgard Storage Centers first-quarter 2006 earnings release conference call. (Operator Instructions). As a reminder, this conference is being recorded Thursday, May 11, 2006. I would now like to turn the conference over to Mr. Dev Ghose, the Chief Financial Officer. Please go ahead, sir.

Thanks, Operator. Thank you all for joining us for Shurgard Storage Centers first-quarter 2006 earnings conference call. I'm Dev Ghose, CFO for the Company. With me on the earnings call today are Dave Grant, President and CEO; Harrell Beck, EVP and Chief Investment Officer; and Steve Tyler, Senior Vice President of Retail Sales.

Before we start, I would read the required forward-looking statement. The statements made on this call concerning the beliefs, expectations, intentions, future events, future performance, business prospects, and business strategy constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act and are based on several assumptions. If any of these assumptions are not satisfied or prove to be incorrect, actual results could differ materially from those indicated in the forward-looking statements.

For a discussion of additional risks and other factors that could affect these forward-looking statements and Shurgard's financial performance, please see Shurgard's Annual Report on Form 10-K for 2005 as we filed with the SEC on March 20, 2006 and the Form 10-Q for the quarter ended March 31, 2006, which we filed with the SEC yesterday.

Our comments today will be focused primarily on our operating results for the first quarter of 2006. We will not be discussing any prospective information for the balance of 2006 or regarding the recently-announced merger of Shurgard Storage Centers, Inc. with Public Storage.

We are pleased with our operating results for the first quarter of 2006. They reflect the success of several initiatives that we discussed on our earnings calls over the past couple of years. We reported net income to common shareholders of 2 million or $0.04 per share for the first quarter of 2006 compared with 2.2 million or $0.05 per share for the first quarter of 2005. However, net income for the first quarter of 2005 included 6.4 million from gains on sale of real estate properties.

Funds from operations attributable to common shareholders for the first quarter of 2006 were 24.6 million or $0.51 per share compared to 15.5 million or $0.33 per share last year. So, the revenues for the first quarter of 2006 were 127.6 million, an increase of 12% over the first quarter of 2005. This is due to primarily -- primarily due to higher rental rates for our domestic stores, higher occupancy in our European stores and growth in a number of stores.

The 54.5% or $0.18 per share increase in FFO per share was attributable to the following positive changes -- firstly, strong NOI growth of approximately $0.25 per share, representing the effects of significant revenue increases compared to a modest increase in operating expenses; second, a net positive swing of $0.08 per share from foreign exchange and derivatives -- as a result of not incurring losses in these areas in conjunction with the acquisition of Fremont's interest in Shurgard Europe last year, we were able to take steps to reduce volatility in foreign exchange, which had impacted the Company significantly in the first part of 2005 -- thirdly, lower real estate development expenses of $0.04 per share from stabilization of our real estate development platform; and finally, from lower G&A of $0.01 per share from reduction in SOX-compliance costs.

These increases were moderated by higher borrowing costs of $0.11 per share. This is due to increased short-term borrowings of approximately 200 million used to finance acquisitions, a 2% increase in short-term borrowing rates, and from higher borrowings in our European development joint ventures; secondly, from merger-related costs of approximately $0.03 per share; and finally, higher stock compensation costs of $0.03 per share. Approximately half of this increase is from implementing FAS 123R, the new accounting standard for stock compensation expense, and the balance from the effect of higher stock prices on our European stock option plans.

Turning now to the balance sheet, balance sheet at March 31, 2006 compared with December 2005 shows the effect of the following -- increase in storage centers due to the acquisitions of 10 storage facilities in France for approximately 48 million and higher US development and capital spending of approximately 16 million. Secondly, accounts payable and other liabilities decreased by 28 million due to the payment in the first quarter of expenses accrued for financial advisory fees and other accrued expenses with a balance coming from payment of our semi-annual interest on unsecured bonds. Thirdly, usage of our US line of credit increased by approximately 37 million, primarily related to the development in capital spending and the reduction in accounts payable that I just discussed. Fourthly, notes payable increased due to increased borrowings to finance the French acquisitions and property development within our second Shurgard joint venture in Europe. And finally, minority interest increased due to contributions made by a European joint venture for the French acquisitions. With regard to capital and liquidity, we had availability on March 31, 2006 of just under 80 million of capacity under the US bank line and approximately 97 million under our second Shurgard bank line all allocated to new European development projects.

Dave Grant will speak more to our operations. So, without further ado, I would like to turn the call over to him.

Thanks, Dev. Good morning and afternoon, everyone. Dev mentioned at the beginning of the call, I will be limiting my remarks today to our Company's operating results only. Public Storage in their earnings call last week answered questions regarding the merger and our integration plan. We will have no further comments to add on that subject other than to say the cooperation between the two companies in developing an integration plan has been excellent.

So, with that said, let's start by taking a brief look at FFO that Dev describes. As he mentioned, it was up almost 55% over the quarter from a year ago. A couple of things I wanted to point out in relation to that, first, obviously, our improved results in Europe are having a big impact in this improvement. For this quarter, Europe generated FFO that accounts for 16% of the overall FFO for the consolidated company for the quarter, which is about $0.09 a share. If you were to go back and look at the same quarter a year ago, Europe actually was dilutive to FFO by about $0.06 a share. So, that's a $0.15 per share improvement from that time. Along the similar vein, our US stores continue to show a good solid increase in contribution to FFO as well. They provided an additional $0.14 to FFO this quarter thanks to their improvements. And those two areas of improvement are what helped to overcome the increased finance and stock option costs that Dev was describing.

So, let's look at some of the highlights behind those improvements. Starting with the US, US self storage demand fundamentals are definitely holding firm. Our US store portfolio continues to perform well, as the group of same-store revenues showing almost an 8% improvement in revenues over last year. Now, this growth came mainly from rate increases as opposed to occupancies with our average rates up about 6.5% from a year ago to about $12.66 a foot. Furthermore, the growth is still very broad-based across most of our markets with the Southeast and the West Coast markets continuing to lead the way. [Leave] our weaker markets, such as Texas and Michigan, showed positive quarter-over-quarter revenue gains. And of particular note, Chicago market, which has been a week one for us the last couple of years, showed solid improvement over last year.

Against this backdrop of rate improvements, a few other things to note. The actual amount of discounts we were giving to our domestic customers during this quarter is actually down modestly from the levels we were giving a year ago. Our move-out rate, which is the percentage of customers that move out compared to our total customer base, remained almost exactly the same as last year's quarter ago as an annualized rate of 6%.

I would also note that our closing rate on inquiries we receive at our national call center has continued to show improvements, and it was up again somewhat over the same period from a year ago. So, these are all indicators to us along with the fact results for April that have just recently come in continue to show this revenue growth pace as continued. On top of that, our overall operating expenses have moderated compared to where they were a year ago. So, as a result, we are able to generate a NOI improvement of about 10.7%.

Now, turning over to Europe, that portfolio has continued to show strong growth. Now, here, it is not a rate improvement issue that drove revenue; it's an occupancy gain as our average rental rate per foot there has held fairly steady at about $22 a foot for the same-store pool. Our same-store pool took a pretty big jump in size this year, as we moved another 27 stores into the group, bringing the total stores in the pool to 123. Now that group of stores generated an improvement in revenue of 18% over last year, with occupancy as I mentioned growing from an average for the quarter of 68% to 80%.

But, even if you take these 27 stores out of the group and just look at the same-store pool that we had last year, they too continued to show good, strong growth, as their occupancies moved from 73 to 82%. And I would note that that is only 2 percentage points behind where our US same-store pool came in for this quarter. And so, this smaller -- or group -- the 2005 store group of 96 stores still generated a quarter-over-quarter gain in revenue of 14%.

So, for the same-store pools with that revenue gain and operating cost being virtually flat -- that's direct operating cost compared to last year -- and with our indirect cost being down more than 36%, net NOI for the same-store group was up 74% over a year ago. And again, if you want to look at just the 2005 same-store group, it still was a very strong 47% gain in NOI.

Now, the substantial drop in our indirect operating cost in Europe stems from a restructuring program we announced last summer at the time we acquired the last remaining minority partner's interest from Fremont. If you recall, we were running indirect costs on our same-store pool at that time at a rate of about 12 to 13% of revenues and that we were targeting to get that ratio down to about 6% of revenues by the time we arrived at the fourth quarter of 2007.

Clearly, we are making great progress toward that initiative. By the fourth quarter of last year, we were already down to a 10% run rate and this quarter's number results in us being down to about an 8% level. So, we're very pleased with the moves that we made in the restructuring starting last summer and clearly heading in the direction we expected.

In a similar vein, last August, we announced our plans to reduce by the fourth quarter of 2007 our Company G&A to a level of about 4% of revenue by that same point in time. And, we were running at the time at about an 8% revenue level. Again, as Dev mentioned, we made good progress there with the reductions in SOX-compliance costs. And G&A for this quarter was down about 7% from a year ago, and that represents a run rate at about 5.8% of revenue.

So, finally, turning over to our investment activities, we continue to make good progress with our pipelines in the US and Europe. In the US, we didn't open any new stores during the quarter but had 11 projects under construction we are about to commence. We had 4 additional properties going through redevelopment, which has continued to be a very good initiative for us. In Europe, we acquired 10 existing stores, all in France from other operators, for about 48 million and we had 6 additional new stores under construction. Now, all of these investments are going into our second Shurgard joint venture over there.

Probably more importantly, we're very pleased with the general rent-up speed of both our new US and European stores. The new store group as you may recall is at about 57 stores in total, which is about 10% of our portfolio. So, we are obviously looking to them for a lot of the future growth. And at this point, that group only was at breakeven for the first quarter.

So, in summary, we're very pleased with the progress in all critical areas of our business. And, at the same time, while we were devoting energy to this goal, the successful merger and integration with Public Storage, our people have done an outstanding job of maintaining their focus throughout this process and will continue to do so.

That's the end of my prepared remarks, Operator. So we would now like to turn it over for questions.

(Operator Instructions). Ross Nussbaum, Banc of America.

It's Christine McElroy here with Ross. Can you comment on the year-over-year decline in same-store marketing expenses, both domestically and in Europe? What drove that?

I wouldn't read anything particularly into that. In the US, we did -- we continued to gain some operating efficiencies in our call center labor costs; that's reduced the charges that come from that center, which all go to marketing. But in general, marketing is a very volatile expense category. We apply campaigns and programs where we feel they are needed at the time they are needed. So, beyond the specific issue with the call center, I don't think that I could say anything in particular. I will add that there was in Europe's case a particular desire to put more focus of marketing dollars on the new store group in trying to accelerate their rent up. But, this will continue to be an area that will move up and down from quarter to quarter.

Then you talked about G&A a little bit. Do you expect any additional Sarbanes-Oxley cost savings, or is that 5% G&A run rate a good level?

Well, I think since this is Dev's favorite area, I will let him answer that.

Clearly, we had significant expenses last year on SOX compliance. And having been compliant, it's more of a maintenance dose. So, we expect to work our way down to the 4% kind of area in the fourth quarter of 2007; I would look at continuing declines there.

Okay, and then, you mentioned that your discounting has been down. Can you comment on kind of what you're seeing among your competitors?

Oh, you know, I think all the -- at least on the publicly-reporting side, all of our competitors have shown good, strong growth in revenues over last year, a similar experience to what we have. I don't have any specific insights into their discounting practices or when you add it all up, whether their discounts are up or down. It's just when we look at what we have provided or needed to provide in this past quarter, it was below the level in the same-store group that we had to a year ago.

Then lastly, the proposed merger advisory fees of 12.9 million that you disclosed in your Q, are you booking any of these fees before the deal closes? Was any portion of that included in the 1.5 million of merger costs in Q1?

Well, as we disclosed in the Q, any fees and costs that are contingent upon the merger closing are not recognized until that time. But, we will continue to report and recognize expenses that are paid as we go, which is what you see reflected -- the $0.03 worth in this quarter.

Can you give us a sense at all for what it's going to be next quarter in (multiple speakers)?

No.

Craig Melcher, Citigroup.

Can you talk a little bit more about your rent growth? Of the 6.5%, how much of that would you say is related to the concessions coming down versus the market rates going up?

Well, you know our discounts are not a major part of our marketing strategy. While we did see a decline in the amount of discounts from last year, it was still a modest level. To me, I was more focused on the trend of was it having to go up to accomplish these rate increases or not. So, I think you could really look at that 6.5% being pretty much -- I won't say entirely -- but substantially related to movement upwards in rates.

Did you do a similar analysis on the domestic same-store pool if you stripped out the assets that were added this quarter? It looked like there was about 20 properties that were added to the domestic same-store pool.

You know, I haven't got that at my fingertips. But, as you can imagine, that's a very small portion of the overall group. I can tell you that if you were to strip that group out, the revenue gains for the older stores was still very strong. They were still north of 7% if that's any help in that sense.

Yes, thank you. Dev, I guess this would probably be one for you. On the G&A, where do you think the major areas there are to cut to get down to the 4% of revenues by the end of next year?

Well, looking at it from the vantage point of that 8% number that we talked about last year, that was significantly due to higher audit and SOX-consulting costs. You recall that we spent about 11 million total for those categories. And, we've said that over time, we would expect to have those categories come down to the 3 million kind of area. So, that's where we would expect the big, big declines.

How much of that was in the first quarter? Are you saying it's 3 million for a full-year run rate? How much was the full-year run rate based on the first-quarter results?

Right now, we're looking at somewhere in the region of you know 5, 5.5 million for the year for the year.

Dave, could you comment on the joint bid that was made for -- that you guys made with Shurgard Europe over the past year?

Well, as we said at the beginning of the call, we are beyond what has been disclosed in the S-4 and prior statements that we're not going to get into any of the details on the bid process.

Paul Adornato, Harris Nesbitt.

In the first quarter with respect to pricing and promotion decisions, I was wondering if they have been -- if they were made as they had been made in prior quarters or if there was any collaboration with PSA?

Well, we've certainly, obviously had a lot of interaction with PSA on a lot of levels. It's all been focused on integration, understanding each other's companies. Neither of us are trying to modify or adopt practices at this point, even if the merged company -- there's no question -- will be focused on best practices. But, what you see reflected in the discounting activity for this past quarter is purely part of our ongoing process and collaboration of thinking at different levels within the field and down at the ground and really no change in that sense. It's really more up to what they believe is appropriate and necessary in the individual markets.

Okay, great. And, with respect to the store level, I was wondering if you could comment on sentiment among employees at the store level.

Sentiment, you mean regarding the merger?

Yes.

Well, obviously anytime there is change, people are nervous and what does it mean and etc. But, I think that beyond just the waiting for certain questions to be answered, the people at Public Storage have just done a super job of getting out and meeting our people in the field directly and getting them to see a lot about what the future can be and I think have really gone a long way to mitigating the natural concerns that would be there. So, I've been very pleased with how the process has gone so far.

Okay, can you comment on turnover in the first quarter versus last year?

You know, we obviously watched that as a regular habit anyway, and we've really not had any significant variation whatsoever on that aspect from the prior years.

(Operator Instructions). At this time, I show no further questions.

All right. Well, thank you, Operator. Thanks, everybody, for joining the call.

Thank you. Ladies and gentlemen, this concludes the Shurgard Storage Centers first-quarter 2006 earnings release conference call. If you would like to listen to the replay of today's conference, you may dial 303-590-3000 or 1-800-405-2236 and you'll need to enter the access code of 11060821 followed by the #. Once again, thank you for participating in today's conference. And at this time, you may now disconnect.