Public Storage (PSA) 2010 Q1 法說會逐字稿

Good afternoon my name is Jackie and I will be your conference operator today. At this time I would like to welcome everyone to Public Storage first quarter 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator Instructions) Thank you. Mr Clem Teng, 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 then return to the queue for any follow-up questions.

Before we start, I want to remind you that all statements other than statements of historical facts, included in this conference call are forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those projected in these statements. These risks and other factors that could adversely affect our business and future results are described in today's earnings press release, as well as in our reports filed with the Securities and Exchange Commission. All forward-looking statements speak only as of today, May 7, 2010. We assume no obligation to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise. A reconciliation of GAAP, of the non-GAAP financial measures we are providing on this call, is included in our earnings press release. You can find our press release, SEC reports, and an audio webcast of this conference call on our website at www.publicstorage.com. Now I'll turn it over to John Reyes.

Thank you, Clem. For the first quarter, our core FFO per share was $1.15 compared to $1.16 last year, representing a decline of about 1%. Core FFO per share excludes such items as foreign currency exchange gains or losses, and the effective income allocations from repurchasing and redeeming our preferred securities and equity stock. Significant items impacting our core FFO during the quarter included a $7 million decline in our same-store net operating income, which was partially offset by growth in our non-same-store properties of $1 million, and in Shurgard Europe of $3 million. Our interest earned on our cash balances declined by $2 million due to lower interest rates, and interest expense and preferred dividends declined by $2 million due to prior repurchases.

The declines in our same-store revenue and net operating income continued to moderate in the first quarter, as compared to the fourth quarter. On a year-over-year basis, revenues declined 2.2% in the first quarter compared to a 3.9% decline in the fourth quarter, and NOI declined 3% in the first quarter versus the decline of 3.7% in the fourth quarter. Our same-store NOI in the first quarter was impacted by higher property taxes and higher snow removal expenses, offset by lower media advertising and property insurance expenses. As a result of changes to the accounting rules, costs associated with the acquisition of properties will now be expensed rather than capitalized. During the second quarter, we expect to expense approximately $2 million in acquisition costs related to our recent acquisitions.

In the first quarter, we retained approximately $80 million of our operating cash flow, or about 43% of our funds available for distribution. At March 31, our cash balance and marketable securities were just over $800 million. In April, we had three capital transactions impacting our cash balances. First, we completed the redemption of all of our outstanding equity stock for a total of $205 million. Second, we called for redemption our 7.5% Series V preferred stock totaling $155 million, which will result in an AITF D-42 charge of approximately $5 million during the second quarter. And lastly, we issued $145 million of Series O preferred shares with an annual coupon rate of about 6.875%.

We continue to actively work on refinancing of the EUR116 million JV loan due July 2010. Shurgard Europe has a 20% ownership in the JV. We increased our quarterly dividend by $0.15 per share, or 23%. This brings our regular quarterly dividend to $0.80 per share. Our consistent long-term dividend policy has been to distribute only our taxable income. Taxable income attributable to our common shareholders has increased due to recent repurchases and redemptions of our preferred securities and equity stock, as well as reduced property depreciation, offset in part by declines in operating income. With that, I will now turn it over to Ron.

Thank you, John. I'll start with current trends in our domestic same-store properties. Occupancy trended higher on a year-over-year basis, ending the quarter at 88.9%, about 1% higher than last year, and 2% higher than in Q4. Occupancy has continued to improve into April, reaching 89.9%, about 1% higher than last year. Asking rates are at or modestly above last year and are trending better each month. Asking rates are still lower than in-place rents, so we continue to experience rent roll down, but at a much slower pace. Higher occupancies are offsetting part of the rental rate roll down, resulting in improving revenue trends. The revenue decline was lower in the first quarter than in Q4, just as Q4 was better than Q3 last year. We expect this trend will continue into the second quarter. The first quarter media spend was lower than prior year, as we modified both the mix and day part along with advertising in fewer markets. We expect the second quarter media spend will be comparable to last year.

In Europe, same-store operating trends have continued to improve. Europe started 2010 at 85.7% occupancy and ended the first quarter at 84.8%. April occupancy was 84.5%, about 1% lower than last year. Lower occupancies were offset by higher asking rents, generally about 10% higher than last year, and 7% higher than in-place rents. Revenues to net operating income grew by 1% and 6% respectively in the first quarter. NOI benefited from lower marketing, R&M, and lower payroll expenses. Going into Q2, we expect top line revenue trends will continue to improve.

With respect to acquisitions, we entered into an agreement to acquire 30 self storage facilities for $189 million, including debt assumption of $100 million. 28 of the facilities are about 1.8 million square feet are located in Southern California. The other facilities are located in the Chicago area. The properties complement our existing portfolio nicely and we have a good upside potential, as we rebrand and integrate them into the PSA platform. We expect to close the transaction during the second quarter. In Europe, we opened our 22nd store in the London market, a 50,000 square foot development property, costing about $14 million. Initial asking rates are about $40 a foot.

Lastly, Steven De Tollenaere, Shurgard Europe CEO, will be leaving effective June 1, having accepted a position in a different industry. Steven has done a superb job of creating shareholder value since our acquisition of Shurgard Europe in 2006. We wish Steven the best of luck in his new endeavors. Jean Kreusch, Shurgard Europe's long time CFO, will assume the additional responsibility of interim CEO. We have a solid management team in place in Europe and we will continue to grow Shurgard Europe. With that, operator, let's open it up for questions.

(Operator Instructions) Your first question comes from the line of Christy McElroy with UBS.

Good morning. Just with regard to your increase in occupancy by 200 basis points from Q4 to Q1, any specific strategy that you had going into Q1 that caused that seasonal abnormality and was it caused primarily by lower vacates or higher rentals or both?

Hi, Christy. This is John. There was no change in our operating strategy. We continue to operate the business just like we did last year. This year, however, we did benefit from lower move-out activity, but the move-in activity also contributed to the occupancy. I would say the bulk of the improvement was due to lower move-outs happening this year vis-a-vis last year.

What were the changes in move-outs and move-ins year-over-year?

The changes -- move-ins during the quarter were down about 4%, and move-outs were down about 10%.

Okay, thank you.

Christy, I would also add last year, seasonally Q1 for us typically is a net absorption month. We typically take occupancy up Q1 versus Q4. Even last year as challenging as it was, Q4 occupancy 2008 ended at 87.1. And in March, we were 88.2. So we picked up about a percent last year as well in occupancy. This year, we're close to 2% takeout.

Great, thank you.

Your next question comes from the line of Michael Bilerman with Citi.

Thanks. This is Eric Wolf here with Michael. Just starting with the portfolio of assets that you acquired this quarter, with the average occupancy in the 80% range, is there any reason to believe that these assets couldn't get to the 90% range, similar to your current Southern California assets? And how long do you think it might take to get to that level?

There's no reason to believe that they can't get to the same occupancy level. And historically we've demonstrated that on our acquisitions. Certainly in the Shurgard acquisition, we demonstrated that as well, the ability to bring an acquired portfolio up to Public Storage's comparable occupancy levels, and we fully expect to do that on these properties. How long it will take, that's more challenging. I really can't guess on that. Hopefully less than a year.

Okay, and it sounds like from peers that the pipeline of acquisitions is pretty dry right now, at least for the quality and location of assets that you would be interested in owning. Do you think there are more portfolio-type acquisitions similar to the one you just completed to come, or is this more of a one-off event?

We're fortunate here that we got David Doll, who is President of our Real Estate Group. I'll let him tell you about what he and his team are seeing in the marketplace. David?

We are seeing many more opportunities this year than we had even the end of last year. During the first four months, we've looked at about 11 million square feet of properties, with an aggregate value of about $1.1 billion. These are single property assets, REOs, and portfolios. So a little bit of both -- a little bit of everything.

Got you. Okay, and just one last question, if I could, given the strong occupancy you've seen, how do you think about pushing rental rates at this point? You're sort of at that 90% level that you're comfortable with. I'm just wondering when you're going to get more aggressive on rates.

Well, one, we're pushing rates just due to seasonality. And two, we're pushing them a little higher than we were at this time last year. So we do have higher rental rates in place, and they are higher than they were obviously than the first quarter just due to seasonality.

Okay. Thank you.

Your next question comes from the line of Todd Thomas with KeyBanc Capital Markets.

Hi. It's Jordan Sadler here with Todd. Just following up in that last question, I think in your commentary, John, you said that asking rates are still lower than in-place. Did you say by how much?

Actually, Ron mentioned that in his commentary and that is true. Asking rates during the first quarter still are lower than in-place rates. I could give you the number at the end of March, at the end of March we were down about 4%. That compares to March of last year, where we were down about 11%.

And at the beginning of the year or the end of last year?

That's year-over-year. March versus March. At the beginning of this current fiscal year, so at the end of December, we were down about 8.2%.

Okay. Sounds like it's come back up and you pushed pretty hard in the first quarter. And then on the existings, are you back on sort of your typical schedule of increasing? Is everybody getting increases at this point?

Well, that's not our typical. We don't give them to everybody. We typically wait until people have been here approximately a year before we give them an increase. But we have commenced -- this is that time of the year when Public Storage gives rental rate increase letters to its existing tenant base. We started with the effective date of May of this year, just like we did last year. So we're right on target with the same business plan that we did last year. I will tell you this, we are sending out more letters this year, so more folks are getting them, and the average increase is roughly about 5%, which is similar to last year.

Okay. That's helpful. Thanks. And lastly, it sounds like things are coming along. The move-ins are still down year-over-year. But are you getting more optimistic based on what you're seeing in -- early in the leasing season that sort of movement will pick up and there's a chance of maybe a positive NOI print at some point this year?

Well, I hope that at some point this year we do. But we're not predicting that right now. But I will tell you this. On the move-in -- the move-ins, notwithstanding the fact that I mentioned they are down, part of our problem is that we're so highly occupied relative to last year, we're basically 100 basis points higher than last year, that naturally our move-in volume will slow down. We have less stuff to sell. So what that does for us is it gives us the opportunity to now try to push pricing through to the new incoming tenants. So I'm not worried right now that our move-ins are down. It is a metric, but our occupancies are higher, so it's natural that move-in volume will come down.

Okay. Thank you.

Your next question comes from the line of Jay Habermann with Goldman Sachs.

Hi, everyone. You mentioned media spend increasing in the second quarter similar to what it was last year. I'm just curious, given the better than expected trends, why you would essentially assign the same rate you had a year ago.

Jay, we haven't completed our Q2 media spend. That's our guess, is it will be comparable to last year. One of the reasons it's going to be comparable is costs are up somewhere between 10% and 20% on media spend. So even though we're probably -- my guess is we'll be in a couple less markets. The cost to do the media spend will be higher than last year. That's a function of rates, the advertising rates, as well as a shift in our day part mix going more towards fringe prime versus non-prime last year.

Okay. Ron, can you also comment on plans to find a new CEO in Europe?

We -- we are going to begin the search shortly, but we've got a great guy, Jean, to lead the Company, and he may even be -- well, I think he's also a viable candidate to become the CEO.

Okay, thanks.

Your next question comes from the line of Ki Kim with Macquarie.

Thank you. So last quarter you introduced a new internet discount pricing strategy. I was wondering with another quarter passed you what the impact of that promotion has been on earnings. Or volume.

It's hard. We've gotten, obviously, more volume to our internet with that discount, because we do not offer the discount to our walk-in customers or customers calling into our call center. So naturally it has pushed more volume into our website from coming through our website. I can't -- we have not quantified the impact to our earnings on that, but we are pleased with the results we've seen so far and we'll probably continue to play this program out further into the year.

So can you give a proportionate breakdown? If it's 20% internet this year, what was it last year?

I can't do that.

Okay. All right. Thank you.

You're welcome.

Your next question comes from the line of Michael Mueller with JPMorgan.

Yes, hi. Couple things. First of all, can you give us any color in terms of the $95 million of marketable securities on the balance sheet?

Mike, what we did is we basically have some dept that's coming due about, I think it's February or March, so it's 2011. So we decided to take some of our cash balance that was earning roughly 15 basis points and invested in some highly rated paper by reputable companies that matures about a month before that debt payment comes due. So we try to match that security investment with some debt that's coming due in the hopes of trying to get some higher yield on our cash balances, which we did, but not a whole lot.

Okay.

I think we picked up maybe 50 basis points on it.

Got it, okay. And then second, on the dividend, what happened since February that caused you to raise the dividend again? Because you raised it pretty significantly in February as well.

Well, it's the things that we talk about in terms of our long-term dividend policy. It's a function of operations, depreciation, redemptions of -- redemptions and repurchases of preferred and equity securities. So a couple things have happened. We redeem the equity security. There's a small arbitrage on the preferreds that we issued, and operations are better.

Okay. Okay, great. Thank you.

Your next question comes from the line of Paula Poskon with Robert W Baird.

Thank you. Good afternoon, everyone. How would you characterize the demand trends between what you're seeing here and what you're seeing in Shurgard Europe? And more broadly, how are you thinking these days about your holdings there long-term?

Well, I would say the demand trends Shurgard Europe's been about two quarters kind of ahead of the US in terms of recovering. This quarter they had positive NOI. We're still negative here in the US, but the trends are positive. I think they have been a little more aggressive on pricing than we have here in the US, so you've got to flip-flop kind of between occupancy and rates, but fundamentally, the business is the same. All but one market country where we operate in Europe improved year-over-year, so the trends are positive across Europe, except in one market. So that's very good.

In terms of our long-term strategy, with Europe, we've continually said, and it's true, that Shurgard Europe is our kind of European growth platform, similar to PS Business Parts, which we've owned since 1996. We expect to hold that position for a long, long, long time. And we continue to work with the European team to grow that platform. You'll recall Europe has tremendous growth opportunities. There's only 1,500 facilities in Europe, but a comparable population to the US. So there's just a tremendous growth opportunity in Europe, and we want to participate in it.

Thanks very much.

Thank you. (Operator Instructions) Your next question comes from the line of Christy McElroy with UBS.

Just following up on Jordan's question, what factors do you consider when thinking about how much to push rents on existing tenants? And having started to do the 5% increases, I know that move-outs are down overall, but what about the trends in move-outs related to the rent increases?

Christy, we just now have really seen whatever effects that -- since the letters basically are effective just this May 1, we haven't had enough time to really analyze the effect of any move-out uptick as a result of folks getting increases. But given -- given our historical work that we've done on that, we don't really expect a whole lot of increase as a result of our letters going out and this is one of the reasons why we do it this time of the year because we have kind of the wind at our back. If it does uptick, the demand volume is there because of our seasonal uptick this time of the year. So we can kind of backfill any vacates that happen as a result of that.

And when you decide to do the increases by 5%, what sort of goes into that? Is that sort of an optimal number that historically has worked for you?

It's purely a guess.

Okay.

Now, you know that's not true, Christy. But for obvious competitive reasons, John really can't go into kind of how we think about who gets a rate increase and who doesn't, but there's a lot of analytics behind it in terms of who and when and how much. And you hit on the right point. It's really zeroing in on how much you can press price versus how much you accelerate the churn rate.

Understood. Thank you.

Your next question comes from the line of Todd Thomas with KeyBanc Capital Markets.

Yes, hi. Just a quick follow-up actually sort of on that, but over in Europe. So the occupancy in the same-store at Shurgard Europe was positive 80 basis points on average, and then it dipped to a negative 40 basis point Delta at quarter end. And I think if I heard you right, at the end of April, the portfolio was down 100 basis points year-over-year, so I was just wondering if you could talk about the difference in strategy in Europe. It sounds like you chose to raise rates there perhaps a little too quick. I'm not sure, but can you just comment on that? And also versus what you're doing here in the United States perhaps.

The European team sets their own pricing. I don't think their strategy -- I know their strategy is not materially different than ours, which is to optimize growth and revenue per available foot. But there's ways to do that, whether it's holding rates down, going for more occupancy or pushing rates a little more when you feel demand is strong. And so there's a trade-off and a balancing act. The numbers that I gave you would say that, okay, we've been more aggressive on rates in Europe than in the US, and that has resulted in a slight occupancy degradation in Europe versus the US, where we've had an uptick in occupancy. But overall, revenue growth is still positive. And we've moved to a positive street rate, above in-place rents, and some nice growth there on the revenue per available foot.

The other thing in Europe, if you looked at it by market, we're in seven countries, kind of one lagger there, Holland, which is dragging down the averages. But across the platform, whether it's UK, Belgium, France, Sweden, we're up across all the markets.

All right. That's helpful, thank you.

Your next question comes from the line of Ki Kim with Macquarie.

Thank you. Just to follow up on your acquisitions this quarter, did AA America try to sell you a lot more than the 30 properties? And if so, how much was the notional value?

I'm sorry. I didn't catch the last half of that question.

So did AA America try to sell you more than the 30 properties that you purchased?

We looked at the entire portfolio, but ultimately selected 30 assets that fit best for our portfolio. Those that were complimentary, but did not cannibalize existing stores that we own.

I see. From the amount of assets they want to sell you, what was that beginning notional value?

We really can't talk about that.

Okay, thank you.

Your next question comes from the line of Jay Habermann with Goldman Sachs.

Hi, just a follow-up. Can you speak to the debt maturity in Europe in July and I guess where you see the debt market today, what rates are available?

Jay, the one that's due in July, our European team's been doing a fantastic job working with our joint venture partner and trying to either rework or refinance the loans. Some of the preliminary term sheets, and they are just pure term sheets right now, indicate that the spreads could be about 225 to 250 basis points over LIBOR, and perhaps a term of about five years. But with all of that said, there's been obviously a lot of turmoil going on in Europe. So, until it gets actually -- a loan gets done, it's really hard for us to sit here and say what actually can get done.

Okay. Thank you.

At this time, we have no further questions. I'll now turn the floor back over to Clem Teng for any closing remarks.

Okay. I want to thank everybody for attending our conference call this morning. We'll see many of you in a few weeks in Chicago at the May REIT, and talk to you then.

Thank you. This concludes today's conference call. You may now disconnect.