Public Storage (PSA) 2012 Q1 法說會逐字稿

Good afternoon. My name Jackie and I will be your conference operator today. At this time I would like to welcome everyone to the Public Storage first quarter 2012 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. I would now like to turn the call over to Clem Teng. Mr. Teng, please go ahead.

Good morning. And thank you for joining us for our first 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 today, May 4, 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 in this call is included in our earnings press release. You can find our press release, SEC reports and 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 first quarter core FFO per share was $1.44, compared to $1.28 last year, a 13% increase. Five items contributed to this growth. First, our same store net operating income increased by 6.3%, adding $0.09 per share. Our non-same store properties added $0.02. Last year's acquisition of affiliated partnership interest added $0.02. Lower financing costs added $0.02. And ancillary operations, primarily our tenant reinsurance business, added $0.01.

In the press release we changed some of our presentation. First, we increased the size of our same store pools to include properties that we have operated for the last three years at a stabilized occupancy level. For our US same stores, we increased the pool by 10, and for Shurgard Europe the pool was increased by 13. We also modified our same store expense classification to highlight other direct property costs, supervisory payroll and allocated overhead. Other self storage companies may include some or all of these costs in their G&A expenses. While we modified the presentation, we did not change what is included in our same store expenses.

We completed several capital transactions in 2012. We issued $923 million of preferred securities with a blended rate of 5.8% and redeemed $833 million with an average rate of 6.7%. We had about 4 million of negative carry in the first quarter associated with these issuances. In addition, on July 2 we will redeem $173 million of our 7% Series N preferred stock. We expect to record an EITF charge of approximately $5.4 million in the second quarter. Assuming no further issuances, preferred dividends are expected to be about $7 million lower in the second quarter as compared to last year. Our weighted average preferred coupon is now 6.3%. With that, I will now turn it over to Ron.

Thank you, John. First quarter benefited from solid demand, resulting in higher occupancy and better pricing. Our same store movements were up 2% year-over-year, offset in part by higher move-outs of 5%. At the end of April, occupancy, in place rents and asking rents were all higher than the same period last year, despite lower media spend for the period.

In Q1 all of our markets achieved positive revenue growth. The Dallas, Denver and Detroit markets led the country with revenue growth over 7%. Miami market was second at 6.3%. Los Angeles, our largest market, grew 3.5% and San Francisco, our second largest market, increased revenue 6% for the quarter. Given these positive trends in occupancies and rates, we expect our Q2 media spend will be comparable to last year.

In Europe, same store rental revenues were flat to last year, as higher realized rents were offset by lower occupancy. We did improve the year-over-year occupancy gap from 1.2% at the end of the year to 0.7% at the end of March. Operating expenses were lower, resulting in NOI growth of about 1%. We continue to expect a challenging operating environment in Europe for the remainder of the year. During the second quarter, we entered into contracts to purchase four facilities with about 300,000 square feet for $46 million. With that, Operator, let's open it up for questions.

(Operator Instructions). Christine McElroy, UBS.

Looking at your occupancy trends, in Q4 you averaged 90.2%, and then ended the year at 89.6%, so a natural seasonal trend toward year-end. Then this quarter looks like you were able to reverse course pretty early in the year and actually show a 10-basis-point increase in average occupancy in Q1 versus Q4, which is pretty abnormal in this industry.

You've talked in the past about possibly trying to reduce some of the seasonality in occupancy during the slower months, so I'm wondering is this Q1 trend reflective of that? If so, maybe you can provide a little color on your efforts on that front.

Christy, I think last quarter, in the third quarter, we did say, after we had record occupancies during last summer, that we would be focusing on trying to mitigate the seasonal downturn as you pointed out. We did that in Q1. We were also doing it in Q4. As we move into the rental season, you're going to see that occupancy gap narrow into Q2 and Q3, and we're going to be happy if we just really comp last year.

Is it a function of how you're discounting or how you're setting rents? How are you able to reduce that seasonality?

It's all that, Christine. It's the rents. It's the discounts. It's the level of advertising spend, be it on television or the Internet. It's all of the above and working in concert, we're trying to maintain an even keel of occupancy as best we can. Granted, there's still going to be seasonality, but I think what you're seeing is a little bit of that smoothing out over -- on a sequential basis, looking from the fourth quarter to the first quarter.

Todd Thomas, KeyBanc Capital Markets.

A question on expenses. I was wondering if you could comment about the increase that we saw this quarter, not that 1.9% increase is real concerning, but we saw declines from the other storage REITs this quarter. A lot of the pressure it looked like stemmed from real estate taxes and payroll and some of the other overhead that you broke out this quarter. Should we expect to see similar year-over-year increases on those lines throughout the year and are we starting to see some pressure build on expenses a bit?

Todd, I'll take a couple of the expenses and John can take a couple. Probably the biggest swing item is R&M and R&M has two categories. You've got, what I'll call, ongoing R&M, the usual painting, fixing gates, that kind of stuff. We accelerated that in Q1 and so that was up due to the mild weather. That was up about $2.5 million. You can see that, both on that line as well as if you go further back in the press release, the maintenance CapEx was also up about 20% for the quarter over prior-year, also due to the mild weather.

Offsetting that in the R&M line was about $1.2 million, $1.3 million reduction in snow removal. You've got two different things going on there. Our best guess is that as the year goes on, the ongoing R&M will moderate so that we hopefully end the year flat to maybe slightly down year-over-year and realize some of the benefit from the snow removal.

The supervisory payroll is higher headcount on DMs versus last year, as well as some state unemployment taxes and then the allocated overhead is also slightly higher headcount. We expect the allocated overhead growth to moderate as we go through the balance of the year.

On property taxes we were up about -- I think about $1.7 million on property taxes and about $600,000 of that $1.7 million is due to the fact that last year when we bought the partnership interest in affiliated partnerships, that resulted in basically a technical termination of those partnerships, which meant that they were -- let me back up. They were primarily California properties.

With the technical termination of the partnerships, it resulted in a stepped up basis for property tax purposes and, therefore, increased property taxes. That was built into the acquisition and the yield when we bought those interests. What you're seeing here is now a $600,000 a quarter bump in property taxes, as a result of doing that transaction last year. Aside from that, we still think property taxes are going to be up and from our budgets, we're still budgeting somewhere in the neighborhood of 3.5% to 4% for the entire year.

Eric Wolfe, Citi.

Can you talk a little -- go into a little bit more detail on Europe and what you're seeing on the ground? And I recognize that occupancy -- I think you said came up a little bit. I know it was down year-over-year, but it sounded like you had some positive comment. Talk a little about what the trends are.

Europe has got a wide variety of things, depending on the country. Let me try to break down the same-store NOI for you by country. Belgium was up 6.3%. Occupancy was up 0.5% to 86.5% for the quarter. Holland, which has been our weakest market for probably 1.5 years, NOI was down 5.5% and occupancy in that portfolio is at 76% versus 78% last year. Germany, NOI was up 22% and occupancy was down 1 point to 89%.

France, occupancies was down to 84%, down 1.5 points, NOI was flat. Sweden, NOI was down 4%, occupancy down 2.5. Denmark, occupancy down 2.5% to 83%, but NOI was up 10, mainly due to changes in advertising. The UK, our occupancy was up nicely to 86.8% for the quarter, that's up 3.8% over last year and NOI was up about 2%. It's a whole bunch of things going plus and minus across the continent. Overall, Europe's -- there's a lot of things going on in Europe and that's why our expectations are pretty modest for the year.

Is there any other changes in terms of the entity itself and how you're thinking about it and the more medium- to longer-term goal in Europe?

Our longer term goal -- I don't know whether I mentioned it or not. In January we had our new CEO started in Europe. He's doing a great job. He's out in the field a lot.

Our immediate term, immediate focus is really on operations, especially in markets like Holland and Sweden where we've gotten a little soft, but Holland's been a big challenge, so we're really focused on that market. We've done some things on the Internet in the UK, both Internet marketing and on the website and that appears to be working. We're very encouraged by that. We'll continue to focus on that.

From a balance sheet management standpoint, we're really trying to delever Europe over the next 12 to 18 months, so that we hopefully can get it investment grade-rated and find alternative sources of financing rather than the banks. Long term, we're very positive on Europe and I hope in a year or two to be talking about growth and additional facilities, and/or some development in Europe.

Smedes Rose, KBW.

I was wondering if you could talk about anything you're seeing on the acquisition front in terms of deal flow, and other sectors we're hearing that's picking up considerably and I'm just seeing -- wondering if you're seeing anything along the same lines.

We did about $40 million, $45 million in Q1 and that was short sale and we've got another $40 million or $45 million in the queue that's really not bank foreclosure stuff, but we're seeing the pipeline from the, I'll call it, short sales or bank foreclosure increase nicely. We're much more encouraged by the acquisition flow at this -- where we are today, versus where we were last year.

Is pricing stabilized or moving up or down either way?

It's a really bifurcated market. The stuff that is in the short sales with the banks, you're buying properties that have weak occupancies, not great NOI, and so it's a price per pound kind of acquisition. The one we did in Q1, I think was about $80 a foot, which is probably $30 to $40 a foot below replacement cost, but only had $1 million or so of NOI. There's a lot of upside there, but going in cap rate's pretty low.

The stuff that's in the open market, trading, if there's a broker associated with it, you're buying more in a stabilized or current NOI basis and those cap rates have come down, but it's more on an NOI and for us also price per pound. Those are much closer to replacement cost.

Ki Bin Kim, Macquarie.

Follow up on the question about Europe. Is your pricing and advertising strategy the same in Europe as it is in the US? Also comment on if the customers are inherently different there.

If I had a chart for you on customer duration, US versus Europe, you would see that they're exactly the same, that they behave exactly the same to promotional discounts. I would say everything we've been able to analyze over in Europe and study with the customer base, it's the same type of usage, same length of stay that we have in the US. Last year we moved the pricing for product in Europe here to Glendale. We've integrated that into our pricing program here in the US.

What we do in Europe, though, is different. I touched on what we did in the UK on the Internet site. We're rolling out new websites across the different platforms in Europe, each country. We're not able to really use TV effectively in Europe, so that's a big difference between the US and Europe. We will be able to use the web and I think the Internet marketing in Europe as effectively as we do here in the US.

What do you think -- what are your internal projections on how much that will benefit new customers coming in or whichever metric you're looking at?

We're really trying to drive customer flow. The real tangible benefit, as I pointed out earlier, is I think the UK is a pretty good demonstration where occupancy's gone from 83.6% last year to 86.8%. Rates were up slightly and NOIs positive. That in part, in large part, is a direct result of the website and the different pricing and promotional strategies that we've applied from the US over to the UK market.

(Operator Instructions). Michael Knott, Green Street Advisors.

I was hoping to ask Clem about the Buffalo head comment that he was quoted on in a story last week. Found it interesting. Ron, how do you feel about the outlook for the rest of 2012 now compared to maybe late last year, early this year? How do you feel like your outlook has changed, if it has?

It really hasn't. I think we had a great quarter and we're going into Q2 with higher occupancy, which I'm really pleased with that we were able to actually gain occupancy in Q1. Rates are up. Street rates are up. In place rents are up. I think as we go through the summer, you'll see us moderating the promotional discounts, I hope. I'm optimistic on 2012 as I was three months ago.

As a follow-up to Michael's question on Europe, the public companies there trade at big discounts to NAV and so my question for you, do you see that as more of an opportunity for you? Or do you feel like it's more -- if it's more permanent that it's a hurdle for Shurgard Europe's longer-term cost of capital and maybe the odds of ever being able to take that public at a reasonable cost of capital?

Michael, Europe markets are cyclical and so Europe is down today. Will it return to pricing of real estate stocks at NAV or above? Probably. We're not predicating our business plan in Europe on that. We're really focused on, as I touched on, deleveraging Europe so we can hopefully attain investment grade rating and then do something.

Either in the US private placement market or in the euro bond market, and get an alternative source of financing rather than the European banks, which I don't view -- John and I have never really viewed them as a permanent source of capital.

Given the situation over in Europe in the last year, we definitely don't view them as a permanent source of capital. We really need to get investment grade rated over there and get a different financing. Once that's in place, we really have -- Europe generates EUR110 million, EUR115 million euro EBITDA, has got plenty of cash to amortize a term loan and have capital to grow.

Paula Poskon, Robert W. Baird.

Ron, I know you've said in the past that you thought the third-party management business wasn't worth the effort, given the margin that you can often get. Given the dynamics in the sector now where the mom and pop shops are really coming under increasing pressure relative to the institutional players taking more and more share, are you revisiting that at all?

Paula, first of all, let me step back. We've done third-party management for years. I think we have 30 or 40 properties that we manage for others. We just haven't -- it's been more like a short movie for us versus a feature-length film for some of the other guys. We're looking. We have looked at it. We continue to look at it. Our biggest concern on third-party management is cannibalization of our own properties, but I would not rule out expansion of the third-party business.

Mike Mueller, JPMorgan.

Going back to Europe for a second, Ron, I was just wondering if you could follow up a little bit on your comments about Europe and the deleveraging that you'd like to do. Maybe put a framework around it in terms of how you think it could come about, what sort of metrics you're looking to move from and to.

As I mentioned earlier, think of Europe as about EUR110 million to EUR115 million euro EBITDA. Debt in Europe is about 525, considering the Public Storage loan as well as the Wells Fargo loan that's over there. To get investment grade, we need to get that to about 4 to 4.5 times debt to EBITDA. That will take us about 18 to 24 months to amortize the aggregate debt down to that level and that's really the kind of metric, the number one metric that we need to achieve to walk into the rating agencies to then get an investment grade rating.

With the investment grade rating, then we can evaluate, as I said, the US private placement market or the euro bond market. It's really taking the existing cash and amortizing down to 4 to 4.5 times debt to EBITDA.

It's nothing on the equity side, nothing on the sale side, it's really just using cash flow.

No, no. Europe may not be growing very fast, but it's generating lots of free cash flow, which is amortizing down that debt.

Ki Bin Kim, Macquarie.

I don't know if I missed this, but did you comment on or could you comment on what you think cap rates are for good market, good assets and good markets? Secondly, with your answer in mind do you think the private market cap rates are just plainly wrong given that self storage isn't really a major food group?

Your second part of your question is probably a little bit of a lengthy answer for a conference call. I'll be happy to talk to you about that. You can call me afterwards. As I touched on earlier, with respect to cap rates, there's two buckets of assets coming to market.

One are the bank liquidations, the foreclosures, the short sales. Two are the more established properties where you've got some partners that can't agree or someone wants a liquidity event and they're marketed, or they've picked three or four players to go bid the property and those are what I would call more of a cap rate buy and that depends on the market, as you mentioned. Somewhere between 6 and 7 on a stabilized basis.

The foreclosure stuff, we're buying stuff that's breakeven, losing money or 1% yield on day one. Does that help you in terms of what we're seeing in the markets?

Yes, definitely. No preview on the follow-up question?

No, you can call me afterwards.

Swaroop Yalla, Morgan Stanley.

Wondering if you can comment on the changes in the composition of self storage users as we compare -- as we headed into the recession and as we're coming out of recession. Specifically small business users, homeowners who are down-sizing to apartments and now may be moving out to buy homes, if you can comment on the composition.

I'll tell you, we've been asked this question many times and our response is basically the same. We don't poll or survey our customer base as to whether they're small business, large business, residential or what have you. I can't sit here and tell you that the composition has changed one way or another.

It's a very localized business and depending on where that self storage facility is located, for example, if it's located primarily residential area, most of the customers are going to be residential. If it's located in an industrial area, it's going to be probably those industrial businesses that are using it. I can't tell you how it's changed because we simply don't ask. We're focused on getting in people to occupy space and pay rent.

Right now, is there a way to find out what is the small business users in your portfolio?

No.

Paula Poskon, Robert W. Baird.

I'm sorry if I missed this in your prepared comments. Did you talk about the April trends, where you finished up April?

The April -- I didn't give the exact numbers, but I'll do that for you now. April occupancy, it was 91.4% versus 91.3% last year. In place rents were higher by about $0.05, $0.06 a foot and asking rents were up about $0.06, $0.07 a foot versus last year.

Mike Mueller, JPMorgan.

I was wondering -- this is probably a question for John. On the G&A, it looks like this quarter the number was quite a bit higher than the past few quarters' run rates and it was my understanding that in 2012 we would see part of the comp package or the comp plan, some of that burn off and theoretically lower G&A a little bit. I was wondering if you can comment on if there's anything one-time, what a better run rate is, anything like that.

First quarter we paid out higher -- the big increase is primarily due to higher bonuses that were paid out in the first quarter this year relative to the first quarter of last year. As we move forward, all other things being equal, assuming we don't really do -- excluding acquisitions, I should say, we think probably the run rate of G&A for the full year will probably be approximately the same as last year, probably a little bit less. Last year we were at about $52 million, so we're probably looking somewhere around there, but it might be a little bit less than that.

Mike, you've got about a $2 million uptick in Q1 for the year. As John mentioned, we'll probably be down $1 million or $2 million for the year, so you've got a $4 million swing that's got to get amortized over the balance of the year, excluding acquisition costs.

Christine McElroy, UBS.

Ron, I heard you say that asking rents were higher year-over-year in Q1. What was the percentage change?

Christy, those were as of April. I thought that was Paula's question.

You said on a cents per square foot. Less than 1%.

Asking rents?

Asking rents, right.

For April we're about $1.19 versus $1.13, or just over 5%.

I heard you said at the beginning of the call the percentage increase in move-ins and I totally missed it.

Move-ins, this is for the quarter, Christy, or do you want April?

Both would be great.

For the quarter, move-ins were up 2% and for April move-ins were down 1%.

Eric Wolfe, Citi.

The stats you're giving for April, those are end of April or those are weighted average for the month?

I think these are end of month.

Those are end of month. Shawn Weidmann's been on the job now seven months. I think when you originally hired him, you said you'd put him out in the field for six months and figure things out. After that time, what's he come back with and how is -- what sort of initiatives and things is he thinking about as he looks at the self storage business from the flower business?

He's still on the field a lot, so maybe he needs a little longer than six months, but he's still out in the field a lot. We didn't hire Shawn to come in here and reinvent the business, but he's a good manager, knows how to hire people, and he's got a good head on his shoulders. I think what you should look for from Shawn is a refinement of what we're doing and incrementally additive value there in terms of refining our processes, continuing to focus on execution, customer service, and hiring top talent.

Lastly on comp, PSB put in a new comp plan tied to, in part, to growth in NAV per share over four years. I'm curious at PSA is there -- are you thinking about a longer-term comp plan. I wasn't sure if one was in place and whether we should expect that at all.

Nothing for this year, Michael. We've got some RSUs tied to revenue growth and if you recall for the last -- if you went through the proxy for the last three years, the senior and middle management team were tied to an RSU plan that was directly linked to same-store revenue growth.

Last year -- the first two years there was no payout under that plan and last year there was a two-for-one payout, which is one of the reasons the G&A spiked up last year and it's still at a somewhat elevated level this year. We have nothing in the hopper right now for this year.

You're Chairman of the Board of PSB, right?

Yes.

As Chairman of the Board of PSB, in terms of instituting that plan for that company, do you not feel like that's apropos in terms of NAV growth for PSA? I'm trying to figure out if it was good for one, why is it -- good for the goose, not good for the gander type of thing?

That's a long conversation that I'm happy to have with you offline. But, there's slightly different businesses between PSB and PSA. PSB has not had a long-term incentive plan in place for the last two or three years.

You don't view PSA as a more NAV growth story, you view it as a top line --

I view it definitely as a NAV growth story. One of the principal determinants of NAV growth at PSA is top line revenue for same stores.

Thank you. That was our final question. I'd now like to turn the floor over to Clem Teng for any closing remarks.

Want to thank everybody for attending our conference call this morning and we'll look forward to seeing some of you at NAREIT in a few weeks, and also on the next quarter call. Thank you.

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