Public Storage (PSA) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the Public Storage fourth quarter 2011 earnings 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. I would now like to turn the conference over to Mr. Clem Teng. Sir, you may begin your conference.

Good morning, and thank you for joining us for our fourth quarter earnings call. Here with me today are Ron Havner and John Reyes.

All statements, other than statements of historical facts, included in this conference call are forward-looking statements, 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 and in our reports filed with the SEC. All forward-looking statements speak only as of February 24, 2012, and 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 to 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 replay of this conference call on our website at www.publicstorage.com.

Now I'll turn the call over to John Reyes.

Thank you, Clem.

Our fourth quarter core FFO per share was $1.66 compared to $1.45 last year, a 15% increase. Five items contributed to this growth. First, our same-store net operating income increased by 6.1%, adding $0.09 per share. Non-same-store properties provided $0.03 per share. Buying affiliated partnership interest in the third quarter added $0.02. Our investment in Shurgard Europe added $0.02 per share, driven primarily by Shurgard's first quarter acquisition of the remaining interest in two joint ventures. And lower financing costs added $0.05 per share.

We recently completed several capital transactions in the first quarter. We issued $460 million of 5.9% preferred stock, a record low coupon rate for us. We also announced the redemption of three preferred series totaling $357 million, having a blended rate of 6.75%. There will be a charge recorded in the first quarter, associated with redemptions of about $13 million, or $0.08 per share. As a result of recent capital transactions, preferred dividends are expected to be about $4 million lower in the first quarter.

In November, Shurgard Europe completed the refinancing of its joint venture loans with a new EUR215 million term loan. This new loan, which will mature in November of 2014, has an interest rate of about 125 basis points lower than the joint venture loans. We also extended the maturity date of our 9% loan to Shurgard Europe, to February 2015. We expect nominal paydowns on our loan in 2012.

We increased our quarterly dividend to $1.10 per share, representing an increase of 16%. Since 2007, our dividend has more than doubled. Our consistent long term dividend policy has been to distribute only our taxable income.

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

Thank you, John.

The fourth quarter benefited from higher occupancy and better pricing. Our same-store movements were up 2% year-over-year in the quarter, offset by higher move-outs of 3%. At the end of January 2012, occupancy, in-place rent, and asking rents were all higher than the same period last year. In Q4, all of our markets achieved positive revenue growth. The Detroit and Dallas markets led the country with growth of about 8%. Los Angeles, our largest market, grew by 3%. San Francisco, our second largest market, increased by 5.4%. And the Northeast markets grew by 6.1%. Given these positive trends in occupancies and rates, we expect our Q1 media spend will be about $1 million lower.

Overall, we had a solid 2011. Our same-store properties generated NOI growth of 6%. And we achieved record high occupancies of 91.1% for the year. We acquired about $500 million of various property interests; and reduced leverage, both debt and preferred, by another $500 million. We have positive momentum going into 2012.

With that, Operator, let's open it up for questions.

(Operator Instructions) Christine McElroy of UBS.

I realize that you wouldn't give specific guidance on this. But I'm wondering, given the fundamental trends appear to be slowing in the European portfolio, I'm wondering if you could talk about expectations for performance this year. Do you think that revenue growth can remain positive in 2012? And can you talk about the success that you've had pushing existing customer rents in Europe versus what you've been able to do in the US?

Okay, Christy. I think in 2012, we'll have a pretty challenging operating environment in Europe. Whether we have positive revenue or NOI growth, I'm not going to comment on that, but I think it will be a challenging operating environment. France, our largest market, has slowed down. The bright spot, I think, for us in Europe in 2011 and going into 2012 is London. We rolled out a new website, new online pricing last year in London. And we were able to drive occupancies to 87% in the fourth quarter, up from 83.7% last year. So a nice uptick in occupancy. And you could tell at 87%, I think that's higher than the overall portfolio average of about 85% for the quarter. So bright spot is London.

Are you pushing existing customer rents?

Yes. We moved the pricing function for Europe here into Glendale in June of last year. And we've got a nice pop on rental rate increases in Europe in Q3. With respect to what we're going to do in Europe 2012, John, do you have anything?

We're going to continue to send out increases, Christy, just like what was happening last year. Probably send out more increases to existing tenants. And probably a little more aggressive on the rates than what was done last year.

Thank you.

Michael Knott of Green Street Advisors.

Just would like to see if you want to comment on your general outlook for the business in 2012, given the juxtaposition of seemingly better economy and a little bit of momentum for your business compared to maybe some concerns on oil and gas prices.

Michael, I don't think I'm quite capable of commenting on the impact of oil prices on the economy or us. What we're seeing in January and into February is good momentum on the business in terms of move-in volumes. We're gaining some pricing power. And our occupancies are up over last year, in January and in February. So, so far into Q1 we're feeling pretty good. I think the occupancy spread will narrow as the year goes along, which we touched on, I think, in the last quarter. So this will be a year of pricing and rental rate increases to existing customers. But we're feeling pretty good.

How have the last few months and maybe the beginning of 2012 compared to what you would have thought?

Better than I would have thought. John? Doing good?

Yes.

So better than we anticipated, Michael.

Thanks.

Michael Mueller of JPMorgan.

It looks like you're finding some stuff to buy. I think you have about $40 million under contract. Can you just talk about what you're seeing in the acquisition market? Are you seeing more product, less product? Just any comments there.

Michael, we got David Doll here so I'll let him touch on that.

We are seeing an increased amount of owners coming to market, at least testing the waters, this year than we did in the fourth quarter of last year. Whether it be refinancing risk, certainty for tax structure foreclosings in 2012. But we are beginning to see an increase in owners testing the waters. Clearly, the consolidation that we saw that has been talked about, it continues. I think last year the four REITs closed on about $1 billion worth of transactions versus about $400 million the prior year. So I think we'll see that trend continue into 2012.

How would you characterize pricing? Does it feel like the sellers have what you consider to be realistic expectations?

Sellers are struggling with deterioration to their operating results. So cap rates about the same, maybe a tick lower. But clearly on trailing results, pricing hasn't changed that much.

Got it. Okay, thank you.

Ki Bin Kim of Macquarie.

Given that your occupancy level is hitting that structural feeling, how does that make you think about being more aggressive on street rate increases or sending out rent increase letters to your existing customers? Does it make you more aggressive? And also, have you thought about switching to not just sending out in March but maybe a rolling year type of plan?

Ki, we have been more aggressive on street rates, for the most part. I think what maybe you'll see us, is turning back down on the discounting somewhat as we move forward. In terms of increases to the existing tenant base, I would say that we're probably going to be pretty consistent with what we did in 2011. We had sent out more letters than we had the prior year. And the average increase was about 8% to 8.5%. So I think you should see that we'll probably continue that policy. Will we change to more of a rolling year? No.

Okay, and just a second question. It's been over a year, I think, since your A-America transaction. Could you just comment on the returns that you've seen from that portfolio purchase? And what kind of growth you've been able to pull out of that acquisition?

I could tell you that the returns on that portfolio for the year were, for this past year, were approximately 8.5%. And there's a number of properties that will still relatively fill up. I think the average occupancy of that portfolio, I think for the fourth quarter, was somewhere in the neighborhood of about 84%. So we still haven't yet gotten it to where our same-store portfolio is performing. Most of that is here in Los Angeles. So there's still more room to grow on that.

Okay, thank you.

Swaroop Yalla of Morgan Stanley.

I was just wondering, your realized rent moderated slightly this quarter. The last quarter it was 4% year on year, it's 3.4%. Just wondering, is that because of some increase in discounting or a moderation you're seeing in street rates?

You're talking about the sequential trend between third quarter and fourth quarter?

No, just the year on year realized rent per square foot.

The realized rent per square foot in Q4 was up 3.4%. For the year it was up 2.8%. And moved up in Q4. I'm not sure I know what your question is.

Yes, what I meant was in the third quarter, it was up 4% year on year. It's still growing. I was just wondering if this was a slight moderation in the growth.

One of the things that happened in the third quarter is we sent out a huge volume of rental rate increase letters which had a significant impact of bumping that rent realized rent per square foot during the third quarter. But as time marches on, some of those tenants move out and they turnover generally in the fourth quarter. And so you'll see a rent roll down that's happened, which is what you're noting. So that growth rate has moderated as a result of it.

That's helpful. One question turning to expenses. Your peers talked about expenses expected to be higher compared to the last two years. Are you seeing similar pressure from property tax increases in your portfolio for 2012?

I could comment on property taxes. Definitely property taxes, we believe, are going to be higher than we saw in this past year. And, in fact, we are internally budgeting that property taxes will probably be up somewhere in the neighborhood of 4% to 4.5%. So definitely higher than the 2% that we saw for fiscal 2011.

Thanks, that's very helpful.

Todd Thomas of KeyBanc Capital Markets.

I'm on the line with Jordan Sadler, as well. Just a quick follow-up question, maybe for David, on acquisitions. How would you characterize the quality of what you're seeing now versus what's been transacted throughout the industry as a whole over the last 12 months or so?

I don't think there's a change in the quality. The transactions that occurred over the last year were generally relatively good portfolios in major markets. And I think that's what you'll see at least us focusing on in the coming year, as well.

Okay. And then just for Ron, just a little bit of a bigger picture question in terms of your portfolio. Are you seeing any changes to the quality of the renters in your portfolio? Anything you can point to and their maybe willingness to take higher prices? Or any change in their length of stay or anything along those lines?

I would say no, Last year, as John touched on, we sent out more rental rate increase letters. We were a little more aggressive on the rates in terms of what those rate increases were. And yet our percentage of customers in the portfolio greater than one year into Q4 at about 56%, the same as last year. So we've not seen an uptick in the churn rate of our longer-staying tenants.

Okay, thank you.

Mike Salinsky of RBC Capital Markets.

Ron, you touched a little bit on street rates. And with your occupancy elevated I'm assuming you're going to be pretty aggressive in dialing back concessions. Can you give us a sense of what your expectations are for street rates in 2012?

This is John. We can't give you a sense because we don't know. We play it by ear, trying to maintain a certain occupancy level and revenue growth. So we will fluctuate our street rates, as needed. And our discounting will, likewise, also fluctuate as we go by. So we can't sit here and give you some projection or estimate of what we think street rates will be.

Can you give us a sense of what they were in January, how far ahead?

They were up probably about -- January's were up about 7.5%.

And then my follow-up question, can you talk a little bit about your capital spending plans for 2012 between recurring maintenance as well as any redevelopment plans?

The maintenance CapEx, Mike, should be about the same as 2011, maybe slightly lower. So that's mainly CapEx. R&M should be flat to slightly down in 2012. And then redevelopment, I think we have $25 million, $30 million of stuff in the hopper right now. But we'll have some more starts going on during the year. So probably $40 million of redevelopment will actually the money will go out the door this year. Four or five of those developments are the A-American properties that someone asked about earlier. We've gotten the plans done and those will be under redevelopment this year. So those are some of the bigger properties with occupancy opportunities for the balance, later in 2012 and into 2013.

Great. Thank you.

Eric Wolf of Citi.

It's Michael Bilerman speaking. Ron, you said occupancy was higher January, February, but you didn't specify how much over relative to last year. Can you just give us a number of where occupancy is trending?

I'll give you January, Michael. We ended alt 89.8% versus 89.1% prior year, so up 0.7%.

And then I guess your comment was that those increases should moderate during the year but be offset by higher rental rates effectively, to come out to a growth profile that's probably similar, as you start baking in the increases you had from last year also.

I'm not sure I follow you, Mike. Baking in the increases from last year?

You've increased rents during 2011. Obviously there's a full-year effect of some of those increases if the tenants stay in 2012.

There's three or four things, if I understand your question correctly. So we're going through Q1. Today we're at higher occupancies. January, I gave you. So that means Q1 occupancy should be higher than last year. We've got rental rate increases which we're starting to send out. John touched on, about the same as last year. Pricing is up. Someone asked about that, with the pricing up 8%, 10%. And then the fourth variable will be promotional discounts which we will probably dial down as we get into the summer months because we'll be at a higher occupancy level and feel better about that. Dialing back discounts because we're basically full. That will be the variable that we'll play with as the year progresses.

And then just one on global expansion. You obviously have the stake in Europe. Is there any opportunity at all to consolidate Public Storage Canada? And I assume you can't go into that market other than through that vehicle. Or maybe you could but that would be kind of strange. Or any other global markets that you're looking at?

We're presented with opportunities from a variety of portfolios around the world. We are always thinking about those. With respect to Canada, that portfolio is owned by the Hughes family. It's really up to them whether they want to sell or not. But our arrangement with them does not preclude us from going into Canada. They have the right to use the Public Storage name but we could go into Canada, as well, and also use the Public Storage name. So there's no exclusivity in that arrangement for them with respect to Canada.

And do they have any desire to trigger a sale? And how does that process work? Obviously Wayne and the family have sold stock in the Company and reduced their stake. Is their a desire also to reduce the ownership? And do you see that as a near-term opportunity?

I don't know what their plans are, Michael.

Okay, thank you.

Christine McElroy of UBS.

John, I just wanted to follow-up on something you were talking about in your opening comments. You said that the loan triggered Europe's new EUR215 million term loan with Wells, 125 basis points lower. Is that lower than the 9% loan that you currently have with them?

No. It's lower than the two joint venture loans that were repaid off.

Okay, so what was that? I'm sorry.

The rate on the new loan is EURIBOR plus 1.75%.

Okay. And you also talked about nominal pay downs in 2012. I assume you were talking about the EUR311 million loan. Can you just quantify how much you expect? And are there any prepayment penalties associated with that?

On the EUR311 million loan, which is our 9% loan, the loan that Shurgard Europe owes to Public Storage, there's no prepayment penalty. They can pay that off whenever they have the desire to. Repayments will probably not be any more than EUR10 million to EUR15 million in any one year until the Wells Fargo loan has been repaid. The Wells Fargo is the one who provided the new loan to them.

Okay, thank you.

(Operator Instructions) Paula Poskon, Robert W. Baird.

What portion of the preferreds outstanding are actually callable in 2012? And what's your appetite to continue doing that?

We have quite a bit that are still callable, Paula. Roughly almost $1 billion of preferred are still callable. And that's after we've called the three series that I mentioned in my prepared remarks. To the extent that coupons continue to be driven down, or stay low, we will continue to try to refinance some preferreds. We do have a preferred that, although not callable yet, will be callable in July. It's $172 million at 7%. And all other things being equal, we expect to call that preferred if we can continue to issue preferreds at the levels we've just been doing.

Thanks, John. And on the pending acquisition, are those assets stabilized? Or is there some lease-up opportunity? And could you just discuss the asset quality? Do they need any investment capital?

Paula, this is Ron. No they aren't stabilized. I think the blended occupancy is about 65%. So there's uplift on occupancy there. And then I think we're going to, assuming we consummate the transaction, put in about $1 million, $1.5 million of capital into the property.

Thanks, Ron. And then, just finally, you said that 2012 would be the year of the rate. What do you think the biggest contributor to revenue growth will be this year? Will it be increases on existing customers or higher street rents?

I touched on -- someone else asked the question, Paula. Street rates, higher street rates take a long time to roll through the portfolio. The rental rate increases, obviously, have a more immediate impact. Promotional discounts and changing promotional discounts have a very immediate impact in terms of revenue growth. So we've got all three of those, plus we'll get some occupancy uptick this year.

Thanks, that's all I have.

Ross Nussbaum of UBS.

How much higher do you think market rents need to be for you to start putting some shovels in the ground on new construction?

Ross, development is a market by market question. So it depends on which market. But I would say at this time, we have no plans for development.

Do you see anybody else in the industry taking a look at that now?

I think the guys that CubeSmart bought their portfolio from have got a couple properties under development in New York. I think the boroughs. There's several guys out there developing. There's a couple guys down in Texas. That's about it. It's pretty light in terms of development activity. And I don't think any of the public companies have any plans for development. I haven't listened to their calls but I don't think any of them are planning to develop.

When you try to model out and take a look at potential projects, is it just that the yields are obviously coming out too low at this stage?

Ross, the development, if you think about development of self-storage, it's not something that you undertake lightly. If you're going to do a development program you have to get site acquisition people. That takes time for them to find properties. It takes six to nine months to build the properties and two to three years to lease them up. So if we started development today, it would be four to five years before you really saw the stabilized income from those development activities. So it's a big decision in terms of undertaking a development program.

That's the basis of my question. It's been a good five years, really, since we've seen any meaningful starts in the self-storage sector. At some point here we're going to need more storage in this country. But it sounds like from your comments you don't necessarily think there's going to be such a wave of demand that's going to require new supply any time soon? I'm trying to gauge how development fits into an overall demand outlook for your industry.

I think if you go back in history over the last decade, most of that new development came from local operators, not from the public companies. While we had some, I think Extra Space had some. As a percentage of new supply over the last decade, it was a very small fraction of the total new supply coming into the market that were from public companies. So you've got the local guys who were there who were able to get very attractive financing, either from banks or in the CMBS market. And I don't see that source of financing coming back any time soon. Much different than the apartment guys that have Fannie and Freddie to finance apartments. That simply doesn't exist in the self-storage business. And I've heard nothing to indicate that that market is coming back any time soon. So, so to speak, the great supplier, the local operator, is very capital-constrained right now. And so for the industry, it's great in terms of supply and demand. As you can see, everyone is having higher demand for their product, better pricing, with very little supply on the horizon in the near term. And I would even say the supply longer term, it will be challenging to add meaningful new product to the industry.

Okay. And if I could ask one other question. As you look at the performance of your Company, let's call it the same-store portfolio, heading into the recession and now out of the recession, and you compare that to what PS Business Parks has done over the same time frame, does it cause you to rethink whether or not Public Storage should maintain its investment in PS Business Parks?

No.

Thank you.

Ki Bin Kim of Macquarie.

To follow-up on Ross's question, how about redevelopment? A lot of your assets don't have climate control, maybe appropriately or maybe not. But could you comment on, it's probably much easier to do redevelopment. And if you could comment on how much volume opportunity there is in your portfolio and what kind of returns those could possibly generate?

Ki, we're constantly looking at redevelopment in our portfolio. We've been doing that for the last five or seven years. I think on average we probably put $40 million to $50 million a year into redevelopment a year. It's a nice add-on. I think we break out in the press release or the Q how much incremental income we're getting from redevelopment, and it's quite a nice source of growth for us. Unfortunately, it's not in the billions. It's in the $50 million to $100 million, if we're really cooking along here. The returns are quite exceptional, well into the double digits, as you can imagine, because there's no land cost. And the incremental cost of buildings is somewhere between $30 and $50 a foot. So the great thing is, just not enough of it, and it's also very low risk because you know what the market is, what the rental rates are for the space that you're redoing.

So can we expect that to, maybe even $40 million to $50 million, to $50 million to $100 million?

We're doing as much as we can as fast as we can.

And is that mostly just climate control type of redevelopment projects?

Climate control adds a little bit. But it's a bigger opportunity to take a land parcel, take a single-story drive-up building and tear it down and go multi-story and redensify the property. That's the bigger opportunity. I don't know if it's a bigger opportunity but that's the bigger return, bigger investment, and where you get more meaningful return on the capital.

Okay, thanks. That's helpful. And just one last quick question. Given the whole industries push on street rates and sending out rent increase letters, has the average customer profile changed at all? And maybe you could provide some color on the average length of stay?

Ki, in terms of churn rate, we haven't seen an uptick in that discernible. And as I touched on, our Q4, the percentage of customers in our portfolio greater than a year was the same as it was in 2010. So despite the more aggressive rental rate increases that John touched on for 2011, we haven't seen an erosion of our long-term customer base.

And what is that percentage of greater than a year?

56%.

Thank you so much.

Michael Knott of Green Street Advisors.

Just curious how recent sales transactions measure up to your estimate of replacement costs. Are we still trading at a discount or are we getting closer to replacement cost? And not necessarily just for the deals you've bought. I'd be happy to hear your commentary on that but also just more broadly.

Michael, you're baiting me here. I'm going to be diplomatic and just say for most of the stuff, I know all of the stuff we bought in 2011 and what we're looking at in 2012 is below replacement cost. The stuff, and the more distressed it is in terms of a bank liquidation or whatever, the farther below replacement cost we get. I think some of the well-marketed portfolios, higher-quality stuff have been demonstrably above what our estimate would be of replacement cost.

So on average, any broad brush take away or is it just too asset-specific and market-specific?

I think it's buyer-specific.

Okay, fair enough. Thank you.

Michael Mueller of JPMorgan.

Just one last one. What's involved in a self-storage redevelopment that's different from what's picked up in CapEx?

The difference, Mike, in that is that if it's a redevelopment, there's no added square footage. We're improving the infrastructure of the property, climate control. If we do redevelopment we've added square footage.

Okay. So these are all pretty much expansions, when you talk about redevelopment?

Correct.

Okay, great. Thanks.

This concludes our question and answer session. I would now like to turn the floor back over to Mr. Clem Teng for any closing remarks.

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

Thank you. This concludes your conference. You may now disconnect.