Public Storage (PSA) 2007 Q1 法說會逐字稿

Good afternoon, my name is Melissa and I'll be your conference operator today. At this time, I would like to welcome everyone to the Public Storage first quarter 2007 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) Thank you.

It is now my pleasure to turn the call over to your host, Clem Teng, Vice President of Investor Relations. Sir, you may begin your conference.

Good morning and thank you for joining us for our first quarter earnings call. Here with me today are Ron Havner, CEO, and John Reyes, CFO. We'll follow the usual format, followed by a question and answer period. However, to allow for equal participation we request that you ask only one question when your turn comes up and return to the queue for any follow-up questions.

Before we begin, I will provide the forward looking statement warning. All statements other than statements of historical facts included in this conference call are forward-looking statements. All forward-looking statements speak only as the date of this conference call, and Public Storage undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond -- that could cause actual results to differ materially from those set forth in or implied by such forward-looking statements.

In addition to the risk and uncertainties of ordinary business operations, the forward-looking statements of Public Storage made on this conference call are also subject to, among others, the effect of general and local and real estate condition and the risk associated with international operations. Additional information about risks and uncertainties that could adversely affect Public Storage's forward-looking statements are described in the company's reports filed with the Securities and Exchange Commission including our 2006 annual report on form 10-K, our current reports on form 8-K, and our other SEC filings including the first quarter of 2007 10-Q which will be filed shortly.

We'll also provide certain non-GAAP financial measures. The reconciliation to GAAP of these non-GAAP financial measures is included in our press release, which can be found at our website at www.publicstorage.com. As a reminder, our press release and an audio webcast replay of this conference call are available on our website. now, I'll turn it over to John Reyes.

Thank you, Clem. For the quarter we reported a net loss of $0.03 per share as compared to net income of $0.48 for the same period last year. Our funds from operations increased to $1.05 per share for the quarter versus $0.94 for the same period last year, an increase of $0.11 or 11.7%.

The current quarter operating results were impacted by several noncore items that included merger expenses of $4 million, a gain relating to a foreign exchange and derivative of $4.3 million, and a gain related to the expected receipt of additional insurance proceeds from damages caused by Hurricane Katrina of $2.7 million. In addition, further affecting our income per common share, but not our FFO per share was the amortization of tangible assets we acquired in the Shurgard merger. Amortization expense totaled $86 million for the quarter, reducing our income by $0.51 per common share. We expect to record an additional amortization expense of $158 million for the remainder of 2007.

Our funds from operations after adjusting for these noncore items, was $1.02 per share as compared to $0.95 per share in 2006, an increase of $0.07 or 7.4%. The increase in our core numbers was primarily due to the continued improvement in our same-store operations, which contributed $0.03, the continued improvement in our newly developed and acquired facilities added $0.02, and our ancillary business provided $0.02 of growth.

For the first quarter of 2007, the revenue growth for our same store moderated to 2.9%. This increase was due to a 3.2% increase in rental rate partially offset by slight reduction in occupancy levels. Operating expenses and net operating income rose by 2.7% and 3% respectively. Our margins remained constant at approximately 65.5%. There are many factors that are weighing on our occupancy, pricing power and ultimately our revenue growth. Such factors include the addition of 33% more properties into our system as a result of the Shurgard merger, hurricane activity in the Florida market, and, of course, the downturn in the national housing market to name a few.

Since the merger with Shurgard, we have been committed to improving the occupancy levels of the acquired properties to equal those of the existing same stores. As indicated by our press release, we have made significant progress in this area. Revenues for the Shurgard domestic same stores increased by 3.3% in the first quarter, driven primarily by higher occupancy. Operating expenses for the Shurgard same stores declined by 7.3% benefiting from lower payroll expense that was partially offset by higher property taxes, advertising, and promotional expenses. As a result, net operating income for these properties rose by 10.3% and operating margins increased to 64.2% from 60.1% last year.

General and administrative expenses totaled $16.5 million for the quarter, compared to $6.8 million for the same period last year. In both periods, we incurred merger-related costs of $4 million and $1.2 million respectively. We expect for the remainder of 2007, G&A will be approximately 30 to $35 million. This includes additional merger related expenses of approximately $2 million and a variety of integration and repositioning expenses. These include legal fees associated with the debt retirement in Europe, the reincorporation into a Maryland trust, higher tax consulting fees and joint venture arbitration costs.

In January, we prepaid $433 million of debt associated with our wholly owned facilities in Europe. This debt had an effective interest rate of approximately 4% and was retired with the proceeds from the issuance of our 6.625% preferred. The remaining debt in Europe, of approximately $305 million relates solely to the joint venture properties in which we have a 20% equity interest, but is consolidated for financial reporting purposes. We also retired in April $50 million of 6.5% term debt. In the third quarter, we can call the redemption our 7.5% Series B preferred stock, totaling 173 million. EIT SB42 charges associated with this redemption will be about $6 million. A decision has been not been made to redeem the securities.

For the first quarter, distributions paid to our common shareholders were approximately 49% of our funds available for distribution, an improvement from 56% compared to this first quarter of 2006. As a result, retained operating cash flow was $87 million for the first quarter. Maintenance capital expenditures, which totaled $4.7 million, were unusually low during the quarter and contributed to the improvement. We still anticipate approximately $65 million in maintenance capital expenditures for 2007.

With that, I will now turn it over to Ron.

Thank you, John. We had another solid quarter with good results in all of our businesses. With respect to the Shurgard integration, we have completed several cost reduction objectives for both the U.S. and European operations. Our focus now is to drive Shurgard domestic property occupancies to the 91% level historically experienced by the Public Storage same-store portfolio.

Looking at the domestic operations as a whole, we continue to have a big opportunity. During the quarter, the overall domestic portfolio generated annualized revenues of $1.6 billion with a weighted average occupancy of 87.5%, up from an average occupancy of 87.1% during the fourth quarter. At the beginning of Q1, we were at 86.8% occupancy and ended the quarter at 88% occupancy. So we've seen reasonably good positive absorption as a result of our expanding marketing and pricing programs.

The Shurgard same-store properties have benefited the most, but we've been able to hold the line in the Public Storage same-store portfolio. This trend has continued through April with the overall domestic portfolio reaching 88.6% occupancy at April 30th. The Public Storage same stores were at 90.4% and Shurgard same stores were at 88.4% at April 30th. This 200 basis point spread compares very favorably to the 710 basis point spread at the time of the merger.

Going into the second quarter, we're expanding our media programs and will be on TV in approximately 25 markets versus 14 last year along with national cable and selected radio. Overall media spend is expected to be more than double last year. Despite positive absorption and expanded marketing, we expect modest revenue growth in the Public Storage same-store pool of properties in the second quarter. This is due to aggressive pricing and discounting to drive overall customer volumes compared to moderate discounting in 2006.

Moving to our European operations, European same-store properties averaged 89% during the first quarter compared to 82% in 2006. Along with higher rates, this led to a 10% increase in revenue. Europe has achieved this with modest promotional discounts and is better marketing and pricing programs. Operating expenses declined by 8% primarily from lower advertising and payroll costs. Net operating income increased by 29% and the operating margin expanded to 57% from 49% last year.

As we mentioned last quarter, we have been evaluating various financing strategies for Shurgard Europe. We've concluded that a share offering best positions Shurgard Europe and Public Storage for long-term growth in Europe. As a result of the offering, which is subject to Belgian regulatory approval, market conditions, and a variety of other factors, we expect to reduce our ownership in Shurgard Europe but will retain a significant equity interest. Due to regulatory requirements, that is all we can say on this subject for now.

You may recall that in January, we filed an arbitration action with our joint venture partner in Europe. As part of our efforts to resolve the dispute we've entered into an agreement to exchange their interest in joint venture per shares in the proposed public company. Overall, our business is good. We continue to assimilate the Shurgard properties in our operating platform and are working hard to realize all the potential benefits of the merger.

With that, operator, I'd like to open it up for questions.

Thank you. (OPERATOR INSTRUCTIONS). I'll pause for just a moment to compile the Q&A roster. Your first question is coming from Christy McElroy with Banc of America. Please go ahead.

Hi, good morning. To what extent do you expect tenant reinsurance revenues to pick up in Q2 and Q3, along with the seasonal pickup in rental activity? Can you give us a general sense for what your expectations are there?

Christie, this is Ron. Our insurance penetration rate have improved nicely over the past year and commensurate with the seasonal uptick in the second and third quarter, we generally have a greater customer volumes and, therefore, the tenant insurance business should be commensurate with general move in volume.

Thank you, your next question is coming from Jon Litt with Citigroup, please go ahead.

Hi, it's Craig Melcher here with John. On the G&A for the remainder of the year, last quarter you quoted a number that was lower than what you're expecting now. Is this all one-time items that you think are going to be an '07 issue or is that 5 to $6 million of incremental G&A from Shurgard Europe last quarter? Is that still applied today?

It's a combination of two things. As John Reyes touched on, there's additional repositioning integration expenses such as the joint venture arbitration which is continuing and the retirement of the debt over in Europe, the reincorporation of Maryland. You can look at these as one-time items. We're not really putting them into a bucket and trying to separate them. They're going to be continuing. In terms of the run rate we quoted last quarter or two quarters ago, I'll be blunt. We blew it. Okay? So we've got a higher run rate of G&A. And that's what we're trying to communicate here.

Thank you. Your next question is coming from Lou Taylor with Deutsche Bank. Please go ahead.

Thanks. Ron, I know you can't say too much about Europe, but maybe if you could give us a little bit of direction with regards to, is this going to be externally managed and you'll get a fee, a sense for how long between filing and what an IPO would occur? And then just to ballpark use of proceeds from your perspective?

Lou, I have the attorneys here with a gun at my head. And so I, we really can't say anything on Europe.

Thank you. Your next question is coming from Chris Pike with Merrill Lynch. Please go ahead.

Good morning. Ron, I guess, if it was 90 days ago, and given some of the head winds that you guys talked about in your call this morning and someone told you you would be posting the numbers you did on the same-store basis, would that have been a pleasant surprise, and then I guess secondly on a related topic, I think I read a footnote regarding the same store significant change in the geographic location of some of those assets in the same store pool, maybe you can comment on that.

Well, overall, I'm pretty darn happy with what we're doing in the portfolio. If you would have asked me in September or August if we would have closed the occupancy gap between the Shurgard same stores and the public same stores from 700 basis points to 200 basis points by April, I would have said no way. So the overall portfolio growth, the net absorption that's happening, I'm very pleased. It's, and there's probably some head winds out there as John Reyes touched on with respect to the hurricanes, housing, whatever is going on in the economy. But I'm pretty pleased, especially when you -- there's a lot of new customer that we have to get and we're getting it done. With respect to the change in the same store, I'll let John Reyes touch on that.

We, as you know, every year, we reevaluate the same-store pool. We adjust it to take out properties, in this case we took out some properties added some properties that were no longer comparable because condemnation issues, or they are being expanded. So we're adding more space and taking some space offline. So, but the pool that you're looking at now is an expended pool over last year. They are comparable properties. There's nothing unusual about them. What you're reading in terms of the geographic mix, to be honest with you, it's kind of standard, kind of legalese for the most part. The reality is that the geographic mix has not really changed that much.

Thank you, your next question is coming from Mark Biffert with Goldman Sachs. Please go ahead.

Yeah, this is for John. I'm actually about the amortization you're expecting $158 million for the rest of '07. Can you give us a sense as to the timing of that?

Yes, actually in the press release, knocked it down by quarter, I believe. It's on page, I want to say page 7. And I'll read it to you, the second quarter we're expecting about $69 million, $52 million in the third and about $38 million in the fourth quarter.

Thank you. Your next question is coming from David Toti with Lehman Brothers.

Good morning. Can you guys sort of talk about the impact of the housing market slowdown relative to the list of headwinds that feel you are facing? Do you feel this is a long-term issue for the company?

Overall, it is as we've mentioned in prior quarters, it's really hard for us to correlate changes in the housing market to changes in our business. And I'll give you two examples. I think Las Vegas and Phoenix are well known to be sort of housing market disasters. Las Vegas has been tough for us for the last 18 to 24 months. Still challenging, and I think overall we're at 88, 89% in Vegas. That's down from 93, 94 two years ago. Rates are down. But it's softer.

In Phoenix, we are still going like gangbusters. We have no modest promotional discounting going on in Phoenix, we're 92, 93% occupied with pricing power. So sitting here, it's a little hard to say, housing is creating a large disturbance in our business. In the Florida market, we've anticipated and we've seen relative volume slow down or pricing power slow down in the Florida markets from the absence of hurricanes, but overall, we're doing pretty good if Florida.

Thank you, your next question is coming from Ross Nussbaum with Banc of America. Please go ahead.

Hi, good morning, everyone. Ron, question, this may not actually be for you, but question on property taxes, when I look at same store pool for Shurgard versus the legacy PSA portfolio, Shurgard's property taxes were up nearly 9%, PSA is up 4%. So can you talk a little bit about why the growth rate on the Shurgard tax side is so much higher?

Well, this is John. When we did the merger with Shurgard, there was reassessment property taxes, particularly in the California market. Which is primarily one of the reasons it's up in the Shurgard portfolios. With regard to Public Storage portfolio, it's California again. We have prop 13 here in California, you don't get the wild spikes. Since we have a significant, about 10% of our portfolio is here in California, and much older properties, you're not going to see that kind of movement going forward. So kind of really tag it on to California and because of the merger, reassessment in the Shurgard portfolio that caused the bump vis-a-vis the legacy properties of Public Storage.

Thank you, your next question is coming from Michael Knott with Green Street Advisors, please go ahead.

Good morning, guys. Ron, I'm just curious if you can give us a little perspective on how much of the operating success of Shurgard Europe is attributable to the PSA platform versus the team that was in place at the time of the merger.

Michael, you put me in a delicate spot here. First of all, Europe is run by the European team. And they frankly deserve all the credit for what's happened in the European operations. Okay? We have communicated with them. I mean, they've been there several times, we've been over there. So there is certainly a cross fertilization sharing of ideas between two organizations. But as we've said earlier in Europe, it's a customer awareness issue and so the marketing strategies are slightly different. Certainly pricing, they've adopted some stuff. But the European team really deserves all the credit.

Thank you. Your next question is coming from David Cohen with Morgan Stanley. Please go ahead.

Good good afternoon. Just on the advertising and promotions, when you've got, when you're doing advertising in a market that's got both Shurgard and PSA facilities, how are you allocating the costs to the different same store portfolio? How might that impact the same-store results going forward?

In a marketplace, like if you take Los Angeles, the properties, if they're across the street from each other, would get the same advertising cost per property. So we're not skewing the television more to the Shurgard even though they're getting more of the benefit, than we are to the Public Storage. It's basically by property cost and it's by market. So if we, like Seattle has done very well without any media advertising, half the portfolio in Seattle is Public Storage, half is Shurgard. So while we're doing TV in a number of markets, those Seattle properties are not getting any TV because there's no TV going on in Seattle.

Thank you. (OPERATOR INSTRUCTIONS). Your next question is coming from Michael Mueller with JPMorgan Securities. Please go ahead.

Hi. Your question about G&A, going back to your comments, Ron, on the one hand you mentioned a bunch of items that you characterize as one-time and then you kind of said blew it in terms of the G&A run rate guidance from early in the year. I mean, originally it sounded like it was supposed to be 7 to 8 now it sounds like it's 10 to 11. Does that 10 to 11 drop off once you get through those one-time items and then you're back down to the 7, 8 range? Or should we think that this current run rate for the balance of the year continuing foreseeable future?

In the future, Mike. I think that run rate is going to be higher than we had anticipated, we're a larger company, there were things that we didn't foresee, unfortunately. But I think we are at that higher run rate at about 10 to 11 million on an ongoing basis.

Thank you. Your next question is coming from Paul Adornato with BMO Capital Markets. Please go ahead.

Hi, was wondering why you decided to reincorporate as a Maryland corp at this point and what the advantages are.

Paul, I'll refer to you the prospectus to go through all the various pros and cons of going into Maryland. And simply state that as the attorneys have recommended to us, no one really incorporates in California. It's not a place to kind of set up your business. We were incorporated here in 1980 with our predecessor company, Storage Equities. Most REITs are in Maryland, they have a body of law that understand rates and all those things, so that's really why we moved to Maryland. But the prospectus or the proxy goes through that in exhaustive detail.

Thank you. Your next question is coming from Lou Taylor with Deutsche Bank. Please go ahead.

Thanks, Ron, you mentioned that the occupancy gap narrowing pretty quickly. Can you give us a little color? Have you closed the gap completely in some markets and then what markets is the gap, still wider than maybe you would want it to be at this point?

Well, I think, I mean, I don't have a market by market comparison here in front of me. There's still gaps. You take a market like Indianapolis. There was probably a 1500 basis point occupancy gap at the time of the merger, our properties were 91, 92 and the Shurgard properties I think were somewhere in the mid 70s, low 80s. So very wide gap. And we've moved those properties up in Indianapolis nicely. Seattle was strong. The gap wasn't that great, so we've kind of, kind have maintained the high occupancy levels across markets. So you got a variety of things going on in terms of some smaller markets closing the gap, a big gap and other markets just kind of holding steady.

And then you have the local market conditions and the challenges of particular properties that could either accelerate or impede that. I know that probably doesn't help you, but there's a whole variety of reasons for the gaps across the country. So there's not one particular reason. We're very focused on obviously the lower occupancy properties and trying to close that gap. But overall, to reduce the gap by 500 basis points in this period of time. I think is pretty darn good. The operations team here is really doing a good job.

Thank you. Your next question is coming from Michael Mueller with JPMorgan. Please go ahead.

Hi, going back to the comments on more moderate PSA pricing. I guess in the second quarter, was that a comment just, I guess relative to what the first quarter level was or just in general, compared to what the normal strategy has been? Should we imply from that that Q2 is a little weaker than Q1 or it's just continuing on the same trend from Q1?

I think I touched on two things there, Mike. We are trying to drive overall customer volume in the entire portfolio. We're not really distinguishing whether the customer gos into a Public Storage property or into a Shurgard property. It's the overall portfolio that we're trying to manage. We report the results to you in separate focus -- see what's happening but from a business standpoint, it's one portfolio. So we're trying to drive overall customer volume, we have more promotional discounts going on, more media as I touched on, double media, this year vis-a-vis last year and while you're trying to drive that volume, you're not going to have as great of pricing power and your promotional discounts are going to be higher. That compares to the second quarter of last year, where we had better pricing power, not as much media, and less promotional discounts. So when you comp one to the other, you're not going to get as much growth this year as we did last year.

Thank you. Your next question is coming from David Cohen with Morgan Stanley. Please go ahead.

Ron, as I look at the Shurgard rents, it looks like those are basically flat year-over-year. So I'm wondering about the pricing strategy there. Is that not going -- are you lowering your price to get people in and that will drift down as it rolls into the portfolio or are you holding firm on those rents?

It's really a market or property by property basis in the Shurgard properties where the 91, 92, 93, like the ones in Phoenix. We have pricing power, we have less promotional discounts going on. So you have substantive rental growth in that particular market. Same with Seattle. As I touched on earlier, Indianapolis, we had a huge gap and a long ways to go to fill up those properties.

So initially, those rental rates were reduced, combining with promotional specials and media spin. So what you see there is a blend across the platform, across the Shurgard platform of what's happening in a variety of properties in a variety of markets. So the pricing strategy is not set at the aggregate legal of, okay, let's maintain the rental rates in the portfolio as a whole. It is set at the property level, and Max and them will tell you that it's set at the unit level in terms of driving volume into those basis. Overall, again, while we're trying to drive aggregate customer volume into the system to overall drive occupancy into the system to get to that 91% or so sweet spot, we will be more aggressive on pricing and promotional discounts, as well as the media spin.

Thank you. Your next question is coming from Michael Knott with Green Street Advisors, please go ahead.

Ron, I'm just curious as what you're seeing as the potentially most attractive capital allocation alternatives these days.

The most -- well, the acquisition environment is challenging. There's one or two guys out there trying to create self-storage REITs and so they're being very aggressive on pricing but we're still finding opportunities. And my hope that our acquisition pipeline and transaction volume will increase over the balance of the year. Doing repackaging the properties, I think we're over 100 million of that. That's still a very attractive as well. That's kind of what we're focused on in terms of the near-term capital allocation, Michael.

Thank you. Your next question is coming from Jeff Donnelly with Wachovia, please go ahead.

I guess as a follow-up to that. What would it take for you to consider repurchasing shares, considering you have remaining capacity in certainly shares are down significantly from their peak?

You know, Jeff, that is something that we're always mindful of and always paying attention to. We can't really provide you guidance on that, other than just watch our actions. But we're always paying attention to it and you're right, we have the financial capacity to do that really at any time.

Thank you, your next question is coming from Chris Pike with Merrill lynch. Please go ahead.

My question has been answered. Thanks a lot.

Thank you. Your next question is coming from Jeff Donnelly with Wachovia.

That was quick. Just I'll try a question on Shurgard Europe. Just to be clear, Ron, you said you're reducing your interest in the portfolio. If I could clarify, is that by virtue of the sale of some of your insider shares or is that by raising incremental capital and keeping your interest constant?

I'm really sorry, Jeff. But I really can't talk about capital activities in Shurgard Europe.

Thank you. At this time, I would like to turn the floor back over to Mr.Clem Teng for any closing remarks.

I want to thank everybody for attending our conference call this morning and we'll talk to you next quarter. Thanks and bye.

Thank you, today's call will be available on digital replay at 877-519-4471. And 973-341-3080 with the pin number of 8680419. This replay will be available until May 18th, 2007. This concludes today's Public Storage first quarter and 2007 earnings conference call. You may now disconnect.