Public Storage (PSA) 2012 Q3 法說會逐字稿

Good afternoon. My name is Jackie and I'll be your conference operator today. At this time I would like to welcome everyone to the Public Storage third 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.

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

All statements other than statements of historical fact 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, November 9, 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 and 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 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. I have a few comments on the impact of Hurricane Sandy. We have 90 facilities in the New York/New Jersey market of which 70 are in our Same Store Pool of properties. These 70 facilities generated approximately $27 million in revenues during the third quarter. Within a few days all of these facilities were open and operating. Damage to our facilities was minimal. We expect expenditures will be less than $1.5 million for repairs.

With respect to third quarter earnings, our FFO, -- our core FFO per share was $1.76 compared to $1.56 last year, a 13% increase. This growth was primarily driven by a 7.9% increase in our same-store net operating income or $0.13 per share and lower preferred stock dividends of $0.05 per share. As announced yesterday, we will be redeeming on December 27, three series of our preferred securities totaling $363 million. As a result we expect to record an EITF expense of approximately $12 million in the fourth quarter. With that I'll now turn it over to Ron.

Thank you, John. The third quarter benefited from solid demand resulting in a record high occupancies and higher realized risk. In Q3, customer acquisition costs decline and customer move-ins increased by 6,200 or about 3%. Customer move-outs declined by about 2,500.

At the end of October, occupancy and in place rents were higher than last year. The Charlotte and Denver markets lead the country with revenue growth of 8% followed by Houston and Miami with about 6%. Los Angeles, our largest market, grew by 4.4% and San Francisco, our second largest market increased by about 5.5%. In Europe, same-store NOI improved 2% despite a challenging operating environment. We recently acquired eight facilities and have two others under contract. Total 2012 acquisition volumes for third parties will be just over $200 million. With that, Operator let's open it up for questions.

(Operator Instructions)

Michael Knott, Green Street Advisors.

Hey, Ron. Just curious your thoughts or level of worry about what happened in California this week. It seemed like with respect to the Prop 30, maybe that's actually good for the 99% versus the 1%; so maybe that's actually good for your business, but what about the Democratic Super Majority and the possibility of changing Prop 13 for commercial? Does that scare you a lot?

Well, Mike, I think it's a little early to comment on that since the election just happened this week.

You don't worry about that too much yet?

Well, we've always had the issue in California. It comes up from time to time on Prop 13, but in terms of saying that something imminent is going to happen when the legislature hasn't even convened, is a little premature.

Okay. Why do you think rent, realized rent growth didn't accelerate from the 2Q pace?

Didn't accelerate -- Michael, because we were in a position during the third quarter where we did more promotional discounting than we did in Q2, so on a relative basis our growth slowed down.

Q3, Michael, is a net move-out quarter versus Q2, which is up to flat; so as the quarter progresses, you trend down in terms of losing occupancy. So it tends to be a little more higher discounts than Q2. Q2 -- you know, we peak in occupancy at 93% or so.

Okay, can I ask one more question? I forget if you guys have a limit or not.

We do, but go ahead.

Okay. Just the percent of tenants that have been in your facilities one year or more versus last year?

Yes, it's about 55%; hold on a second.

That sounds like that would be about unchanged from 2Q.

It's pretty much unchanged, Michael, for the most part. But that said, though, we have more tenants, so that's going to kind of put pressure on the percentage that's going to be greater than one year.

Right, got it. Okay thanks.

Michael, 2010 -- for Q3, we are at 54.9%; 2011, 55.3%; and this year, 55% at the end of the quarter.

Thank you.

Todd Thomas, KeyBanc Capital.

Thanks, good morning out there. Just without much occupancy to gain at this point in the cycle, do you think that we are in an environment where you can continue to see realized rent increases of, say, 4% to 5% just based on what you're seeing in the portfolio today?

Todd, I'll let John address the pricing. If you recall, last year, we started talking about how we were going to try to get our average occupancy for the year up. Due to the seasonality of our business, historically Q4 and Q1 have been 300 to 500 basis points lower in occupancy versus Q2/Q3. So what we did at the beginning of this year, and we're continuing here into the fourth quarter, is really trying to drive that occupancy into Q4 so that we take some of the seasonality out of the business.

Do you want to touch on pricing?

Yes, and, Todd, to do that we've been keeping our pricing pretty much consistent with prior years. So people that are moving in are moving in at rates that are pretty much flat on a year-over-year basis. One of the things that we have been able to do is reduce the level of discounting that we've been giving up. So, we've been able to gain occupancy, reduce discounts, but the move-in rate is about flat.

Okay. And then my second question -- you mentioned the redemptions, the preferred redemptions that were announced last night -- another $300 million and change or so. I think that there's strong demand for your preferreds. Do you expect to begin to lever up a little bit and continue to issue new preferreds? Or should we continue to see you delever at this point?

Well, I would expect that we will be in the market some time in the next couple of months to try to issue additional preferred securities and take advantage of the current rate environment that's very favorable. We're not -- we don't have it as a goal to delever the Company per se. We're right now just trying to reduce the overall cost of capital to the Company.

Okay, thanks.

Michael Mueller, JPMorgan.

I was wondering if you can just talk a little bit about what you've been seeing with market rates and market-rate growth? Ron, I think in past calls you've typically talked about occupancy levels up through the current months, so I was wondering if you could also comment on if that occupancy increase at quarter end was sticking through October?

Sure, Michael. At the end of October, our occupancy was 92.3% versus 90.9% last year.

Thanks.

And with the rates--

Rates are pretty much constant, Mike, pretty flat year-over-year on the street rates.

Okay, great. Thanks.

(Operator Instructions)

Michael Knott, Green Street Advisors.

Hey, guys. Just going back to the preferred comment -- John or Ron, do you expect that you can break that 5.25% barrier?

Ron expects it, I'm hoping that we can do it. (laughter) So we will find out, but I don't know, Michael, right now.

And then, Ron -- on the $200 million of acquisitions, can you guys just talk a little bit about your appetite for investments, what you see out there? Because I think one challenge people have with your stock, and one reason maybe it's not done as well lately as we're all accustomed to, is that $200 million on your asset base is almost nothing. So, maybe just talk about what you're seeing and why not be maybe a little more aggressive, given your low cost of capital?

Well, Michael, as you've heard me say before, it's easy to buy real estate. All you have to do is show up with the biggest check, so that's not that hard to do. Buying real estate at or below replacement cost, quality assets, that's hard to do. So, I think we pretty much have a no-lose strategy; 60% to 70% of the stuff we bought this year was distressed in one form or another and was acquired at substantial discount to replacement cost.

The other stuff was either marketed or off-market deals, and so I'm very pleased with the acquisitions that we're doing. As I said I don't think we can really lose with that.

Okay, and then last question for me would be just how this quarter's performance came in versus your own expectations?

A little better. We felt good coming out of Q2 with high occupancies. As we touched on in Q2, our promotional discounts were down, media spend was down, and as we had in our second quarter call, the trend was good. So a little better, especially on the expense side, than we anticipated, but overall about as planned.

Okay, thanks.

Paula Poskon, Robert W. Baird.

Thanks, good morning everyone out there. Just to follow-up on the acquisition conversation, are you not seeing the kinds of opportunities that are attractive and meeting your investment criteria? Or is there just a complete dearth of an opportunity set, broadly? And sort of a corollary to that -- are you considering selling any assets?

Well, we're not considering selling any assets at this time. David Doll is here so I'll let him give you some color on the acquisition market. But as I touched on with Michael, we look at properties, we look at replacement costs, and that's a key factor. And so, sometimes we get outbid, but I'll let David give some more color on that.

Thank you, Ron.

Paula, we're not seeing a real change in the product that's coming to market. There are plenty of assets in markets that we're not interested that come to market. In the quality properties in major metro markets, no real change in terms of product supply at this point in time.

Thanks very much. That's all I had.

Todd Stender, Wells Fargo.

Thanks guys.

Just looking at the properties you acquired recently and the stuff you have under contract -- how do those look like compared to your other properties in those respective MSAs, just from an occupancy and a rent per square foot basis?

Well, most of the stuff as I touched on, Todd -- 60% to 70% of the stuff that we've acquired this year was in one form of stress or not. Usually -- not usually; they're always under-occupied, generally mispriced, lots of fill-up opportunities. People ask what cap rates. Well, some of them were operating at losses, some of them are at 1% or 2% yields. But we have enough market knowledge to know that, okay, we can attain a $2 a foot rent, $2.50 rent, and our surrounding properties are 92% to 93% occupied. So we're not too worried about achieving a stabilized yield of 7%, 8% or 9% on those assets. If you look at them on a what-is-the-going-in yield, it's generally nominal, and they're pretty under-managed.

Does that address your question?

Yes, are the occupancies, say, 40%? Or are they closer to, say, 70%?

Generally, the assets we bought this year are probably in the 50% to 70% range.

Okay, thanks guys.

Eric Wolfe, Citi.

Michael Bilerman with Eric.

John, just in terms of the preferred, and you think about entering the market next year -- with the redemptions announced last night, correct me if I'm wrong -- you have nothing left now from a redemption perspective until 2015, correct?

That is correct, yes.

And so from you'll certainly feel the accretive effects from the amount that you did this year in lowering the average cost of that. But how should we think about going forward? Any issuance just sits as cash until you use it, and with Ron's comments on the acquisition market, I would just take it that -- I don't know, at what point would you issue then, just to sit on cash?

Well, at that point, once we take care of, let's just say the refinancing the $362 million that we called last night, we're not afraid to sit on cash. We've done that before. We'll opportunistically issue preferred, probably in 2013, put some cash on the balance sheet; and hopefully, opportunities come our way and we can utilize that cash. We want to make sure that we're taking advantage of the current rate environment and load up the balance sheet with some cash if we need to be.

Michael, we also have about $250 million or so of debt due in the first quarter.

Of next year? So we should expect you'll just take that out with capital -- with preferred?

Yes.

And how -- maybe just -- and I jumped on late, so when you jump on late to a Public Storage call you miss the opening comments. Can you talk a little bit about Europe -- and I apologize if you did -- just in terms of the operations, but also the structure and financing and how we should think about that going forward?

Well, Europe -- I made the comment, Michael, that same-store NOI was improved by 2% despite a challenging operating environment. That NOI growth was principally achieved by expense reductions, principally in the R&M and advertising area.

Europe itself -- our European operation -- would be in what I would call a deleveraging mode. Last year we acquired the JV interest and refinanced it in the fourth quarter with a third-party loan from Wells Fargo. We're taking our cash from operations and paying down that credit facility pursuant to its terms. Our hope is longer term, some time in '13, maybe '14, that our debt to EBITDA will get in the 4% to 4.5% range. We hope to qualify for an investment grade rating, at which time we'll consider various opportunities to refinance out the balance of the Wells Fargo loan as well as possibly the Public Storage inner company debt.

Just last question, you just commented in terms of your feelings about how you performed in the third quarter, and you made comments about heading into the third quarter how you felt. Can you make similar commentary today about how you feel now in the fourth quarter about where things stand, and your outlook for the rest of the year?

Yes, overall, I think Europe is -- well I know it's doing better than we anticipated. John and I thought Europe would be a pretty negative same-store NOI growth this year, and the team over there has done a good job. While occupancy is back about 300 basis points, in-place rents are up, about 3.5%. We've been able to hold it in terms of the revenue line pretty well, and then be pretty aggressive on cost management. Overall it's a positive NOI year, which, quite frankly, is surprising.

Our toughest market continues to be Holland, where we're at 73% occupied at the end of the quarter, which is down 6.5% from last year. Despite very aggressive rental rate reductions and promotional discounts, we've been very challenged to get traction there in Holland. Most of the other markets are kind of chugging along.

France is a little soft. Denmark, we've got some tough year-over-year comps. There was a big flood up in Denmark. London is doing great -- same-store NOI in London for the quarter was up 18% year-over-year, and occupancy and rates are up. So London is kind of the bright spot for us in Europe.

And I meant more so about your optimism or pessimism for the fourth quarter in the US business -- whether there's anything in the first, effectively, six weeks of the quarter that you think how it will trend for the rest of the quarter?

Well, we're coming into Q4 very strong with higher year-over-year occupancies. As someone else earlier asked about the October occupancies, they're at 92.3% versus 90.9%. So they've gapped out about 1%, 1.4% or 1.5%, so we're heading into Q4 very strong. John touched on rates -- are about the same as last year, so we're feeling pretty good going into Q4 in the US.

Great, thank you.

Todd Thomas, KeyBanc capital.

Thanks. Ron, I know you look at replacement costs, but does issuing preferreds at 5.25% or even lower change the threshold that you'll pay for acquisitions?

I don't think whether we issue 5% or 5.25% preferred changes what replacement cost has. Managing one side of the balance sheet is a little independent of the other.

Okay, but let me ask it a different way -- how aggressive would you be to perhaps gain additional exposure in some markets that are attractive to you today? Does a portfolio or significant opportunity change the mind set somewhat? And would you pay a premium on a price per square foot basis with having such a low cost of capital today?

Todd, let me try to touch on being aggressive. We recently acquired two properties in Hawaii. What, $2.50 a foot?

About $2.50 a foot, probably a 10% or 15% premium to replacement cost. There are 2 of probably 15 A properties in the Hawaii market; it was an off-market deal. So, we definitely paid up for that. Will we do that again? Yes. A product in A Markets -- in my mind, we're very aggressive in terms of bidding for that kind of product.

Okay, thanks.

Seth Laughlin, ISI.

Ron and John, it's Steve.

I guess a bunch of my questions were answered on Europe, but just in general, what are you seeing on the new development side? I know you guys aren't really developing anything. But are you seeing anything changing on that? And is there a point at which you would actually look to go back into the development business?

Steve, as I've touched on in previous quarters, I think development is inevitable. We're starting to see it. We've been seeing it this year around the country in various markets. We took down a property in New York that you could consider it a large redevelopment or a development. We're redeveloping an existing building there in the Bronx. So, yes, I think you're going to see it's a little more aggressive on the development and redevelopment front in 2013.

Thanks.

Michael Knott, Green Street Advisors.

Hey, guys. Ron, do you feel like there's a practical cap on rent growth that you can achieve? I think in the last cycle you guys peaked out at maybe a 5% or 6% type of realized rent growth, and that's almost where you're at here. Do you feel like you can get higher than that maybe next rental season? Or do you feel like just practically you can't really get there above that?

Well, Michael, let's think about rent growth here for a couple of things. There's a couple levers, one occupancy, which is volume. I've touched on where our occupancies are at the end of September, where they are in October. You're going to see some growth in the rental revenue line from that gap in occupancy, which we hope to maintain or expand in Q4 and into Q1. The second thing is, with respect to rental rate increases to existing customers -- John can touch on that.

We've been running -- a lot of our growth comes from that, and I think its been 3.5%, 4% of our growth comes from those. And then the third factor, that's been probably a bigger impact in 2012 versus last three or four years, is promotional discounts, which we've been able to modulate down, especially during the second and third quarter, due to our high occupancies. Going into 2013, if we're able to sustain the higher level of occupancies, we hope to be able to modulate further down the promotional discounts.

You've got three drivers to the rental revenue line -- discounts, volume, and rental rate increases to existing customers.

Okay, thanks. And then, when we look at the operating expense line, you're down a little over 0.5% for the year. Obviously the media spend is down a lot. Do you feel like that number starts to stabilize next year? Or do you feel like there's continued savings there as you get even better at the internet marketing side of the shop?

I think there's some opportunities on the expense side going into 2013. Not a lot, but some. I would go back to what I always tell people, and that is you should assume 2% to 3% expense growth on a long term basis.

Yes, but does that start next year? Sounds like maybe not.

Michael, I'm not going to give you guidance. Thank you.

Last question would be -- just in terms of the $200 million of acquisitions for the year, do you feel like that's a baseline level that you could probably exceed next year? Or do you feel lake that is sort of a fair betting line for next year as well?

I'd like to see us do $1 billion dollars of acquisitions next year.

Great, so would I. (laughter)

Michael Mueller, JPMorgan.

Yes. Two quick things -- one, Ron -- I was wondering, you mentioned the Hawaii acquisition; you paid up for that. Can you throw out what the cap rate was or range on that? And then also on G&A -- I think it was a quarter or two ago, you were talking about a $50 million, $51 million run rate. Q3, it popped a little bit compared to prior quarters; and I think your year-to-date is about $44 million or $45 million or so. I was just wondering what you're thinking on a go-forward basis there?

I'll let John address G&A. The cap rate on the Hawaii properties -- I think the going in was about 2%, 2.5% and they're about 45%, 50% occupied.

Okay.

And on G&A, Mike, most of the pop was due to stock-based compensation. We had a little higher in expenditures of legal fees. Expect a run rate for 2012 to be somewhere in the $57 million range; and then 2013, just as soon, as Ron said, [inflator] off of that.

Okay, thanks.

Ross Nussbaum, UBS.

Hey, good morning guys. Ron, can you talk about the discounts -- maybe I can tackle it a little different way. What percentage of the customers who moved in, in the third quarter received discounts versus the same quarter a year ago?

Roughly about 82% probably were getting discounts, Ross, versus maybe about 92% last year.

Discounts have clearly been a big part of the self-storage industry since almost its birth, I would guess. It would seem to me that your ability to continue to drive that level of discounts down -- do you think that's more a function of what your peers do? That you're subject in some respects to the advertising and the marketing of the broad market as opposed to what you want to do?

In some respects, yes, it's what our peers are doing, Ron. But in a lot of respects it's what our portfolio of tenants are doing. They're staying longer. They're more sticky now, which is enabling us to maintain occupancies without having to have necessarily the same level of move-in volume and giving away more and more promotions. So we're being conservative on the rate to get them in, but we're also being a little stingier on the discounts.

We've said this before -- the whole game and growing the revenues, at least on the rate side, is sending increases to the existing tenant base. Ron had mentioned that, although our tenant base, our aging tenant base, is roughly a little bit less than last year, in absolute numbers that is actually growing. So as we come back around to 2013, we hope that our tenant base will continue to be more stable and we will send out more increases in terms of absolute number of increases to tenants as we get into 2013.

So it's really, a lot has to do with a stabilization of our tenants.

Understood.

So that takes me to the next question which is -- if street rates have been roughly flat year-over-year, as you send out the increases to existing customers, do you find -- I guess you'll find yourself in a position perhaps of having some level of rent roll down on a portion of the portfolio? Are you at that point yet?

Well, there's always some rent roll down, but on the increases that go on, we can send out increases of 9% to folks and it will result in an uptick in move out activity. But on a net-net basis, for those who stay and pay the 9%, it's a big win for us. What we are saying is that, that uptick in move out activity is starting to diminish somewhat, too. Again, the tenant base is becoming more sticky, they are accepting the increases more, and I think we're being a lot smarter in how we're going about sending out those increases.

Last quick one for me.

In your best markets, Ron, that you alluded to, are you seeing anything different from an economic perspective versus your worst markets? So is it a function of better job growth, migration patterns -- can you isolate anything that's driving the good versus the bad markets?

You know, Ross, John and I were talking about this the other day, and pretty much across the portfolio, business is good. Whether it's Kansas City, Austin, San Francisco, Houston, Miami -- across the portfolio it's good. Probably our softer market is somewhere in the Northeast -- Philly, DC, -- but it's still good.

Appreciate it. Thanks.

Tayo Okusanya, Jefferies.

Yes, good afternoon.

Just two quick questions, first along the lines of the hurricane. I believe you disclosed the number in regards to repairs, but could you give us a sense yet if that's starting to drive increased demand in any of the assets you own in any of the affected markets?

Well, in some of the sub markets where the hurricane hit, yes, as we've gotten the properties back online, we've had pretty robust demand. We have a number of properties that are simply out of space.

How many properties are those, roughly?

Well, we have 90 facilities in the New York/New Jersey market. The properties that are benefiting the most, so to speak, from the storm, are those along the Jersey Coast and on Long Island. I can't tell you how many we have there, because I don't know, so I'd just be guessing. But those properties are doing well. As Ron said, some of them are 100% occupied right now. Some of the other 90 properties that are in the New Jersey/New York market are north of the city and they are pretty much business as usual. We didn't see any real uptick in demand.

Got it, okay. That's helpful.

And then, the second question is just around the Internet being, again, a driver of reservations. Just curious what you're seeing in regards to those trends, and if that continues to impact how you think about media spend on a going forward basis?

A little more than half of our move-in volume is coming from the Internet, be it the Internet from search engines, organic searches, mobile devices, what have you; and yes it has started to change our way of how we spend advertising dollars. I mean we do spend a lot of money on keyword search, as well as other Internet strategies. The bulk of our advertising spend is being done on the web for the most part.

Okay. Very helpful, thank you.

At this time we have no further questions.

Okay, this is Clem.

Want to appreciate everybody's participation this afternoon. We look forward to seeing many of you next week in San Diego at the NAREIT conference, and if you're not going to be there we'll talk to you next quarter. Have a good day and weekend. Bye.

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