Public Storage (PSA) 2012 Q4 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 the Public Storage fourth-quarter 2012 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 call over to Clem Teng. Mr. Teng, please go ahead.

Thank you, Jackie. Good morning, and thank you for joining us this morning 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 today, February 22, 2013, 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 them, 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 core FFO per share was $1.86 compared to $1.66 last year, a 12% increase. This increase was driven by a 9% growth in our same-store NOI, growth from our non-same-store properties, and lower preferred stock dividends.

With respect to our capital activity for 2012, we issued a total of $1.7 billion in new preferred securities, with an average coupon rate of 5.7%, and redeemed $2 billion with an average rate of 6.6%. Last month we issued $500 million of preferred stock at 5.2%, our lowest rate ever. A portion of the net proceeds from this issuance was used to pay off the outstanding debt under our revolving credit facility.

We increased our quarterly dividend to $1.25 per share, representing an increase of 14%. 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 solid demand, resulting in record-high occupancies and higher realized rents. Customer acquisition costs continued to decline, while customer move-in volumes increased and move-outs declined. At the end of January 2013, occupancy and in-place rents were higher than last year.

In Europe, same-store NOI improved by 1%, despite a difficult operating environment. Of note, in the UK market, Q4 revenue declined by 8.6% compared to last year, and compared to a 4% growth in Q3, as we reduced rental rates to compensate for the introduction of the value-added tax in October. In Q4, we acquired 10 facilities for approximately $82 million, adding about 910,000 net rentable square feet to the portfolio.

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

(Operator Instructions)

Christine McElroy, UBS.

With regard to the reduced seasonal impact on occupancy that you saw in Q4, is the 200 basis point occupancy gap that you had at year end something that you'll try to sustain through Q2 and Q3, or is it really more a function of your efforts to smooth out the occupancy cycle throughout the year?

Christy, I'd say it's the latter. We're trying to smooth out the seasonality of our occupancies, and so you saw a -- we talked about this on our last conference call, that we were going to try to do that during the fourth quarter which we did. We gap'ed up versus last year by the 200 basis points that you mentioned. We should continue that into the first quarter, but by the time we get into the summer months it's going to be probably more difficult to keep that gap just because of year over year comp's going to be much tougher for us.

Just to follow up on that, in regard to the ultimate goal being to maximize REVPAF growth, given the different levers that you have, would you expect that you could see a similar level of REVPAF growth in 2013 versus the 5% you saw in 2012?

Christy, that kind of borders on guidance.

A little.

I'd say this, Christy. If you look at where we started the year, we started the year and I'm talking about 2013, we have the 200 bips of occupancy gap. Our in-place rents were up 2.9%. If you add those together we were kind of looking at 4.9%, starting the year. If you go back a year prior to that, as we started 2011, that same number, comparable number was at 3.6%.

As we move forward into this year, so we're starting at a better place than we did last year. And as we move forward into 2013, we expect that we will continue to send rental rate increase letters to our existing tenant base. That's where we're going to get and have been getting a significant amount of our rental rate growth. We expect that the rates that we will send will be comparable to 2012. But one thing, one benefit we do have in addition to that is that we have more tenants that have aged longer than one year as we start this current year, by about 2%. So we have a higher base of tenants to send rental rate increases to. So we're pretty confident that we can continue to grow our rental rate and I'm not giving guidance, I'm just saying we can continue to grow our rental rate as we move forward.

And those notices have been around 8% to 10%; is that right?

Correct. On average, I believe it's about 8.5% increases.

Okay. Thank you so much.

Todd Thomas, KeyBanc Capital.

Just a question on rent to new customers. You've been at or above 90% occupancy now for some time. I think you've commented in the past that you've tried to raise rates across the portfolio several times over the last few years, but the industry wasn't really quite ready to raise rates since it was still filling up. But now that the industry is at a higher occupancy level, are results this year on your efforts to increase asking rents any different? Is there any comments on pricing power that you can make?

Todd, we'll have to see that as it unfolds in 2013 and kind of what the competition does vis-a-vis rental rate increases. There's two levers here that I think you need to think about. If you look at the average move-in rate for last year, it was about flat. However, promotional discounts, which is mainly the $1 special up-front, we're down about 9% for the year and down about 20% for the quarter. And for last year we gave away about $90 million in our same store pool of promotional discounts. So irrespective of what's happening to street rates, there's a big opportunity in terms of promotional discounts, money that we're -- the incentives that we give to customers to move in, there's a big opportunity there to improve the top line just by reducing those.

Okay. And then just one last question on the expense side. You've talked about implementing some new on-site training systems that might help reduce payroll costs. We also saw a real big decrease in repairs and maintenance. Is there a lot more savings here? What might we see sort of going forward a little bit on the expense side?

I think the two big items, touch on three big items that you should think about. Property taxes last year were 3%, and I know this sounds like a broken record that we keep saying they're going to be 4% to 5%, but we're pretty confident that they're going to be somewhere between 4% to 5% in 2013. Property and supervisory payroll will be up slightly, probably below 2%. R&M baseline should be down 2013 but that will be offset in part by snow.

And here in Q1, we're looking at probably $1 million more of snow, at least, in Q1 than last year. 2012 was a pretty moderate year in terms of weather up until Q4. And then the big swing item is media advertising and we -- at this current time we expect television will be down a $1 million, $1.5 million in Q1. That's a big variable. That will depend quarter to quarter, depending on what's happening to demand and customer volumes.

Okay. Thank you.

Garov Mahia, Cantor Fitzgerald.

You talked about UK a little bit in the prepared remarks. Can you talk about the European market as to what you're seeing in Europe?

Well, big picture, it's ugly. Europe's in a -- basically in a recession, has been. It's a very challenging operating environment. The team over there I will say in 2012 far exceeded my expectations, John's expectations, we expected negative NOI growth in 2012 and yet the team over there produced positive NOI growth, which was very, very impressive to me.

Our challenging markets over there, UK, 20% tax implemented in October, and the way we dealt with that is we passed it on to new customers but existing customers we basically absorbed it. So think of it as taking your in-place rents and writing them down 20%, which largely drove the 8% decline in revenue in the UK in Q1. Overall for the year, the UK had a great year with 8% NOI growth despite a tough Q4. Most of the markets in Europe were up. Our other challenging market continues to be Holland. My gut is, it's bottoming out so it should start to improve. But it's a challenging operating environment in Europe. Does that help?

Yes, that's very helpful. One follow-up question on investing. In your press release you mentioned that you acquired a conversion property. Is this the same redevelopment opportunity in Bronx? And are you expecting to see more redevelopment opportunities as we go ahead?

Yes.

Okay. Thank you.

Michael Knott, Green Street Advisors.

I think in the past you've been a little less optimistic about the far out impact of new supply hitting the industry. I think you thought it would come sooner. What's your current thinking on the supply picture?

Well, Michael, I think we -- last call, or maybe it's two calls ago we told people we were starting some developments and we're doing that. That's accelerating. We are seeing some regional operators across the country start to develop or they have been developing. Is it in mass quantity? It's pretty miniscule relative to the overall industry supply or -- yes, supply of product in the industry. I think, though, development is inevitable because as acquisitions continue to move above -- significantly above replacement cost, certainly in some markets, that will precipitate regional guys looking at that price, at which acquisitions are trading, saying hey, I can build it for a lot less, I'll build it, fill it up and sell it. So I think it's inevitable. How much, I don't know. Today it's pretty small.

A question on your realized rents. I think 3.5% growth in the quarter, which was slower than the first part of 2012. Why do you think there was a slowdown there? Why shouldn't that be going the other way? Especially if discounts are being reduced, et cetera.

Michael, because we were reducing rental rates to attract more tenants, as well as you have to think about the move-outs side of the equation. Even though as Ron mentioned, our move-out volume was down, the rental rate that they were moving out at versus last year was higher. So on a net-net basis, that brought our net rent down. That's not surprising that they would move out at a higher rental rate because we've been more aggressive increasing their rates over the past two years. But with that said, their move-outs velocity [effects I'd say] here is slowing down because our move-outs, the actual numbers are slowing down. Customers are staying longer. Our tenant base is aging out better. And I think you'll see that as we move forward.

Thank you. One other quick one out there. Did you guys ever think you'd see a 76% NOI margin? Thanks.

(laughter) Thanks, Michael.

Eric Wolfe, Citi.

I just wanted to follow up on Michael's question a moment ago. Curious as you look at development today, what do development economics look like versus, say, 2005 and 2006 when we were seeing a bit more of normal supplies in the market?

I can't really comment on what yields were, per se, in 2005, 2006. That's a long time ago. I could tell you that we're looking probably at somewhere between 9% and 11% today on our kind of ground-up developments. It varies by market. The other thing that we have in the pipeline is what we call redevelopments, where we're taking existing properties that maybe had raw land sitting there, where we had cars parked on them and we're building out self storage, or if you take the old Shurgard headquarters, we're on our, what, third --

Third.

Third redevelopment of that property. We'll be over 2,000.

2,300.

We'll be over 2,300 units when that property is done. It's in the Lake Union part of Seattle. So as we redevelop that, it continues to fill up. So we're in the process of adding another 75,000, 80,000 square feet onto that property. So we've got both developments and redevelopments in the pipeline, about $160 million, $170 million or so.

Got you. That's very helpful. I guess my second question is obviously the economics sound good from what you're saying, maybe it's something specific to your portfolio. But with where cap rates are today, why don't you think we're seeing a bit more ground-up development? Is it just a lack of construction financing? It seems like the returns are starting to get there. So I'm just curious as to why we're not really seeing it quite yet.

Well, if you look historically at who has built self storage and added product in the industry, it really hasn't been the public guys, the four public companies. We've added -- extra space was developing. We've always been developing. It just hasn't been a meaningful amount. But we've been developing even through the downturn and redeveloping properties. But we had 10, 15, 20 properties a year relative to the supply that was added in the early part of the 2000s, it's miniscule.

So the new supply has come from the local sharp shooter, the local developer, and financing in that arena is very, very limited. In fact, a lot of the product we bought last year was foreclosures or short sales from guys that had developed in '06, '07, gotten financing, and were not able to fill up their properties, got crushed, and therefore went into some kind of foreclosure. So I think it will be quite a while before we see those operators come back into the marketplace and start developing. And it's the same thing that I've heard in the home building industry. The large public companies with capital are the ones building homes, and the local guys, the local home developer is pretty much out of the market. And I think the same thing applies to self storage.

Got you. That's helpful, Ron. Thank you.

Michael Salinsky, RBC Capital Markets.

Operations question. Ron, what are street rates today? You mentioned you were discounting a bit in the first quarter to drive occupancy. Where do street rates stand on a year over year basis? Also in the context of where -- you gave some statistics on the number of renewals. As we think about the delta between move-in and move-out rates, how does that compare currently versus this time last year?

Well, Mike, this is John. Street rates I think today -- our street rates are probably down about 2% to 3%. Notwithstanding that, I would tell you that the move-in rate's probably still flat. There's a different rate that people are actually moving in vis-a-vis what we're asking. As for your question on move-ins, move-outs, our move-ins right now are I would say probably a little down compared to last year as we move forward, and that's due to the fact that we're more occupied and we're giving away less discounts and we're doing less television.

So we're not surprised by what's going on with the move-ins slowing down. We can probably ramp that up if we reverse course on our pricing and our promotions. Move-outs, though, what we're seeing, again, as I mentioned earlier, people are staying longer. So that's a huge benefit for us because more people are starting to fall into the bucket of being here long enough for us to now send them a rental rate increase for an annual renewal.

As they stay longer, are you seeing that gap then when they do move out widen?

In terms of rate, the rental rate?

The delta between a move-in and a move-out rate.

Yes, it does widen, because, one, we're really increasing rates to the existing tenant base, while the move-in guy is not really getting his rate moved up. Remember, they're coming in flat, while the move-out is going out at a higher rate. So on a net-net basis, yes, we basically rent roll down on that equation.

Okay. Thank you.

(Operator Instructions)

Michael Mueller, JPMorgan.

Ron, it looks like the quarterly acquisition volumes have been slowly moving up as you kind of went throughout 2012. What's the expectation as you move into 2013? Are you still seeing I guess more product than you were this time last year?

Well, Q1's not a high volume quarter for new product coming to the marketplace. So it's a little hard for me to say what is going to happen in 2013, other than the amount and pricing of financing for acquisitions continues to improve, meaning there's more capital at lower prices chasing deals. And so I think it's going to be a challenging, very competitive acquisition environment in 2013. It's one more reason why we're expanding our development program.

Got it. And did you say how big, how much in terms of development you have dollar-wise in terms of total projects up and running at this point?

We've got stuff that's under construction, stuff where we've pulled the trigger, I mean, we're going to start any day in the stuff where we're kind of in the permitting process. So if you add all that together, somewhere between $160 million, $170 million that will come online in 2013, 2014. That's today. It changes every week.

Got it.

That's a combination of -- Mike, that's a combination of kind of new developments as well as expansions, modifications of existing property. I touched on we're on our third expansion of the old Shurgard headquarters.

Got it. Thanks.

Tayo Okusanya, Jefferies.

You did make some commentary just about the UK and the VAT taxes. Just wondering what you're hearing domestically in the US in regards to states starting to put sales tax on self storage.

Well, that's been a -- that's an ongoing thing that's for the last decade, 15 years, I think Philadelphia's got a sales tax on self storage and has for 15 or so years. So there's always various initiatives across the country. We work closely with other operators in the self storage association to try to mitigate or prevent that from happening. But it's an ongoing thing, has been for years.

But the movement doesn't sound like it's getting a little bit more probable or less probable, is it kind of like same as usual, a lot of conversations?

I wouldn't say it's changed. It's an ongoing thing from -- I mean, we had a town in Illinois last year, Rhode Island I think tried it, California tried it. So it's ongoing.

That's helpful. And then if you could also just give us your thoughts on if you think Prop 13 could actually happen where commercial real estate is kind of exempt from it and what the potential impact could be on PSA?

I have no idea.

Okay. Fair enough. Thank you very much.

Michael Knott, Green Street Advisors.

Hey, Ron, wanted to ask you about your tenant insurance business. Your margins on an after tax basis I believe are -- I think your margin has been about 80% over time. Just curious how that's so high, and is there any risk that maybe there's some tax shields that burn off eventually that's embedded in that number?

No, Michael, we've been running the tenant insurance business the same way for -- well, even before Public Storage bought it. So I don't think that's a concern at this time.

Margin is after tax; correct?

Yes.

Michael Salinsky, RBC Capital Markets.

Hey, Ron. Could you talk a little about what you're seeing on the transaction front? And also if activity were to exceed cash generated from operations in '13, would you look to the preferred markets or to the equity markets or to even the debt markets there as a source of funding? Given where the stock price is trading today.

Mike, I think I touched on acquisition activity, someone else asked that question in terms of acquisitions, the amount of financing available out there, and I think it will be a competitive market. There's not a lot of deals in the market today. Q1's usually a pretty slow quarter for that. We'll see how the year unfolds. I hope there's activity. I hope it's reasonably priced. We'll participate. But we'll see as the year unfolds.

With respect to how we'll raise capital, we have several billion dollars of preferred capacity. Each new issue seems to be we test new rates. I hope one of these days we break a five handle on preferred. So we'll continue to test that and see if we can continue to raise very low coupon preferred stock going forward.

David Harris, Imperial Capital.

Just sneaked in there. Ron, a couple questions on development, if I may. One of the challenges of development in your space has been the long stabilization period. Is there anything different about what these projects that you've got on stock or should we be thinking of, what, two years?

Yes, David, it really depends on the size of the property. But yes, the typical self storage property, kind of the old genre was 500 to 600 units, 50,000 to 60,000 square feet, 2.5 to 3 years to stabilization. Some of the properties we're building, like the one in the Bronx, is much larger, so my guess will be that will be -- that could be a four-year stabilization period. And some of the projects that we have underway are add-ons to existing properties where you already have a good customer flow, and so that could be much shorter.

It really depends on the size of the property. But if you take the basic model of 500 to 600 units, 2.5 to 3 years, that kind of fill-up generally applies, just adjusting for size.

Okay. To be clear, none of these developments are in Europe?

No.

Okay. It's all in the US. Any particular geography or is it just kind of they're one-offs opportunistic as per the specific locations, rather than an attempt to build up more in Florida or California.

No, one-off opportunistic.

Okay. Great. Thank you.

Michael Mueller, JPMorgan.

Real quick, just following up on the development, redevelopment. That $160 million you mentioned, what's the rough split between new development and then the redevelopment expansion, and what are targeted returns for the aggregate?

Well, the targeted -- I wouldn't say there's a targeted return, Mike, because it depends on the property, the opportunity, so if I were to say what are we looking for, somewhere between 8% and 10% stabilized, assuming some costs for fill-up. We've got, if I add it up here, probably about 7 or 8 that you would consider kind of ground-up developments or conversions and then the balance are -- we've got about 25 properties here. The balance are some form of expansion or modification of an existing property.

So dollar-wise, maybe one-third of it is new development and two-thirds expansions?

About 100 new and 60 expansions.

Okay. The opposite. Okay. Thanks.

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

Okay. Want to thank everybody for attending our conference call this morning. And we look forward to talking to you next quarter. Have a good afternoon.

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