Public Storage (PSA) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Public Storage first-quarter 2013 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 will now turn the call over to Clem Teng. Please go ahead, sir.

Good morning, and thank you for joining us for our first-quarter earnings call. Here with are 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 10, 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 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 Ron.

Thank you, Clem. The first quarter benefited from solid demand, resulting in record high occupancies and higher realized rents. Net customer acquisition cost declined $2.00 per customer versus $31.00 per customer in 2012. The Charlotte, Denver and New York markets were our leading markets, growing by over 8%. Los Angeles, our largest market, grew by 5.5%, and San Francisco, our second largest market, increased by 6%. At the end of April, occupancy and in-storage rents were higher than last year. In the second quarter, we expect lower media and Yellow Page spend, due to our record high occupancies.

In Europe, same story, NOI declined by 1%. The UK market continues to be negatively impacted by the VAT that was introduced last October. Q1 NOI declined by 8% in that market. We have acquired or have under contract three facilities. We also have about $170 million in projects under development or redevelopment.

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

(Operator Instructions)

Gaurav Mehta, Cantor Fitzgerald.

Thank you.

A question on your expenses. If you look at your same-store expenses, your expenses have been going down for last couple of years. So when you look at your expenses today, do you think the 1Q number reflects the long-term run rate for you guys? Or you think there's more expense savings ahead?

Gaurav, this is Ron.

I think, we tell people long-term you should assume a 3% to 4% expense increase, longer-term. I think what we have benefited from the last couple of years, and in particular Q1, again, is lower advertising, media costs, lower Yellow Page cost. As I touched on earlier, we expect Q2 expenses in that area to also be lower. The other big swing items were repairs and maintenance. And if you call in Q1 of 2012, we had a big surge in R&M. So we've got easier comps this quarter versus last year. That was partially offset by snow removal cost in Q1, and you should expect to see an uptick in snow removal cost in Q2 offset by somewhat lower core R&M expenses.

Thank you. That's very helpful. And one follow-up question.

In your prepared remarks, you talked about the markets that outperformed. Could you also talk about the markets that did not meet your expectations?

Yes, the two that come to mind are the DC-Northern Virginia markets, which I think the growth is 2% to 3%; and Philadelphia is about 1.5%.

Todd Thomas, KeyBanc Capital.

Hello. Thanks. Good morning out there.

Ron, over the last few years, I believe Public Storage has attempted to raise rates to new customers during each of the last couple of cycles, but the pricing power wasn't really there, as the industry as a whole was filling up a bit. But it seems like the industry now and the other storage REITs are more stabilized, from an occupancy perspective. I was just wondering -- based on what you're seeing if you think that the industry on a broad level will be able to sustain increases in asking rents this season? And since we're maybe halfway through May, maybe you can shed some light on what you're seeing so far?

Hey, Todd. This is John, actually, not Ron.

Right now, our street rates are about flat year over year, which is consistent with your comment about what we've been talking about over the past conference calls. With our occupancies as high as they are, we are certainly going to try to push our street rates, as we move further into May and into June. So we'll test those waters again. And to the extent that they stick and our occupancies stick, we'll certainly be happy with that. But to the extent that we start losing occupancy, we will probably backtrack off of that.

So we haven't started doing it, but plan on doing it fairly soon. And we'll see how it goes.

Okay. Then a second question.

I was curious -- within Shurgard Europe what the strategy is like there, with demand declining a bit? Occupancy was lower year over year, but realized rates were higher. And I'm curious if you could talk about the strategy to stabilize operations in Europe a bit?

Yes, Todd, the big laggard for us in Europe continues to be Holland, which is one of our larger markets. We've got in the same-store group, 30 properties out of 163, so about 20% of the same-store properties. And that same-store group is down to 70% occupancy. We've done some experimenting there with some pretty aggressive rate reductions. And, in fact, we've got a test going on right now with what I would call draconian rate reductions to see if we can stimulate demand for our product. That's the big one that's influencing, really, the drag there on the same-store property.

David Harris, Imperial Capital.

Hello. I noticed the CapEx spend for the quarter was significantly lower this quarter and way below the run rates you booked in '12. Is that just seasonal?

Yes. This year -- recall last year we had a pretty mild winter, and we accelerated CapEx, as well as R&M. This year, much different weather -- a lot more snow, rain across the country, so it pushed back some of the CapEx spend. But we're not expecting a material change in the normalized CapEx this year versus prior years.

Okay. And then on your preferred -- your next preferred stock -- that I think pays callable is April 15, which is obviously quite a gap. I know you probably don't want to talk about your prospects of issuance, but I am just wondering if you might be tempted, given if rates stay low, to issue to help fund, say, development or acquisition activities? Or would you wait until the next series of preferred is due?

Well, I seriously doubt we'll wait until the next preferred is due before we issue another preferred, because that would be another two years out before we issued another preferred.

Right.

And I would hope that we would be able to invest the excess cash that we have in our balance sheet between now and then a lot sooner before then. So I would expect us to be out in the market issuing preferred sometime in the near future to continue to put some capital on the balance sheet at these historic low coupons, so we can build a fund to continue to develop and buy properties.

With high yield piercing the 5% range, we've touched a couple times on the call about trying do a 4% preferred. And the probability of that seems to increase each and every month.

Looks like it's coming your way, Ron.

It is. (Laughter)

All right. Good luck. Thank you.

Thank you.

Michael Knott, Green Street Advisors.

Ron, just curious -- looking back on acquisition activity over the past few years, you guys haven't grown as much through acquisitions relative to size as your peers. Just curious how you grade yourself, given how well the asset class has performed over that time period? And then, looking forward, do you guys still think that you're going to be acquiring at this pretty slow pace?

Well, Michael, acquiring at the same percentage as the public comps, you run into a mathematical problem there, given our size. So no one should expect us to acquire the same percentage of our asset base as the smaller public companies.

In terms of what we've acquired over the last couple years, I'd have to say David Doll and his team have done an outstanding job. If you look at our 2010 acquisitions, I think for the most part they're north of a10% cash-on-cash, excluding 10 in insurance and merchandise. That's well 100, 150 basis points north of what we underwrote them. The 2011 acquisitions are doing great, as well.

So the stuff that we bought, it's been great product, great return on investment of capital. And we plan to continue to remain disciplined buyers.

Does that suggest your return thresholds are an 8.5%-type return? Is that -- just subtracting 150 bps from 10%. There's no doubt those are great acquisitions. Just curious -- if that math is about right, is that return hurdle too high to grow as much as you might need to?

I don't know that I need to grow. But in terms of the returns, that's what we underwrote them for in 2010. What we underwrite today is different, and it varies by market in terms of what replacement cost is, what we think the growth potential is by market.

Thank you, guys.

Mike Mueller, JPMorgan.

Hello.

Looking at Europe occupancy, it's hovering around 80%. I know you talked a little bit about Holland, but even before the downturn, it was running lower than the US. I was just wondering -- when you look at the disparity between the US and Europe, do you think there is something structural there, where maybe you don't have as big a pool of tenants and that's going to keep occupancy always lower? Or is it really the economics of what's going on today?

Well, Michael, I am sure the economy over in Europe is having some impact on our business. But recall, in Europe we're in seven different countries and a number of markets in those countries. So in Europe, we have nowhere near the scale, the brand recognition or the customer awareness that we have here in the US. Television is uneconomical, for the most part, for us in Europe, because the portfolio is spread across multiple markets, multiple languages. And to put that in perspective, we have more properties in Los Angeles than we have in all of Europe.

So we just don't have the ability to drive the brand or customer awareness in Europe. Western Europe itself has 1,400, 1,500 facilities; 800 of them, though, are in Great Britain. So for the most part in the continent, self-storage is a relatively small, unknown business. Having said that, we've done well, and the return on capital is pretty darn good. And the team over there, I think, operating the business has done a pretty exceptional job.

Got it. And one other quick one.

John, sequential G&A picked up pretty significantly. I was wondering if you can just talk about what was happening in the first quarter?

In the first quarter, Mike, on a year-over-year basis, our G&A was mostly up because we had about $1.7 million, $1.8 million of severance costs. That was a non-recurring cost that hit this year that wasn't there last year. So that's the uptick that you're seeing on a year-over-year basis.

Okay. Thanks.

You're welcome.

Michael Salinsky, RBC Capital Markets.

Good morning.

Ron, I think you mentioned $160 million under development, or in redevelopment. How big do you plan to grow that pipeline? And also, as we look at the $400 million of cash on the balance sheet, is that development pre-funding or is that more reflective of the acquisition opportunities you're seeing in the market?

Well, I think, Mike, John touched on it -- we hope to be able to deploy that capital, and actually go back into the preferred market and deploy that capital both for development and acquisitions. And the development pipeline, as you touched on, I said it's $170 million or so. I expect that, that will continue to ramp up over the next year to two years. What the stabilized rate's going to be, I can't tell you at this time. Because as that ramps up, there will be properties coming online that will come in and out of that pool. So I can't predict what the absolute level is going to be, but it will be higher than $170 million.

And then just as a follow-up to that, as you're underwriting new development versus acquisitions, what spread premium do you need, given the three- to four-year lease-up there?

Well, the way we underwrite developments is we factor in the lease-up reserve and cost of money to do that and the fill-up time. The fill-up time varies by the size of the property. I think on average, our developments are coming in what, 150, at least 200 basis points north of the acquisitions.

Thank you.

Paula Poskon, Robert W. Baird.

Thanks. Good morning.

Ron, are you seeing any better acceptability than this industry has historically seen around neighborhood concerns of, not in my backyard, given the dearth of new supply? Or are you finding that municipalities are more welcoming?

Well, Paula, we're really just ramping up the development program. I've got David Doll here, so I'll let him touch a little bit. But I know, over the years, like here in Southern California, there's two communities that for five-plus years have had a ban on self-storage -- Pasadena and Long Beach. You can't build them in those markets, in those particular cities.

And that's really because -- they've put those bans in because we don't generate sales tax. We don't provide housing. And we don't generate a lot of jobs in self-storage. So those municipalities have wanted a densification, either wanting apartments or retail for space, not self-storage.

Dave, any thoughts on zoning issues that you've --?

No. I think, as Ron mentioned, those are old legacy issues, but quality of the architecture can bend some of those. The fact that there aren't a lot of retail uses in the market place today for what historically had been retail properties is starting to get us through some of those hurdles that had been thrown up over the years. So as long as there's not a great retail demand, I think that there will be some great opportunities for us out there.

Okay. Thanks very much.

Thank you.

(Operator Instructions)

Tayo Okusanya, Jefferies.

Yes, good afternoon. Just one quick question.

We had higher taxes going in for (inaudible) in January. Your numbers still look very good despite that. Just kind of curious, over the past three to nine months, if you could talk about any meaningful changes you've generally seen in regards to consumer behavior and their demand for self-storage space, relative to how they've behaved in the past?

Tayo, I'll let John amplify this. We haven't seen any discernable adverse behavior. Demand for the product is good. And I think you've seen it with the other public self-storage companies. It's across the entire industry and across multiple markets. Demand is pretty solid for the product across multiple platforms and multiple markets. So it's across the country, in terms of pretty solid demand.

John?

I would tell you, Tayo, that demand into our system is down, but I would attribute that mostly to the fact that we've scaled back on our advertising campaigns. Combine that with the fact that our call volume is down, because generally people call multiple times before they actually rent a space. Part of the problem, which is a good problem in some respects, is that we're pretty full. So we don't have as much inventory to sell. So we can't quite satisfy all the demand that's coming into our call center or website. So we have scaled back the advertising, which has slowed down, at least the amount of calls and hits to our website. But I would not attribute that necessarily to the increased taxes that had rolled in or anything of that nature. I'm not that smart to figure that out. I'm mostly attributing that to the fact that we are scaling back on marketing campaigns, as well as the fact that we don't have as much inventory to sell as we did last year.

Got it. Okay. That's helpful. Thank you.

Michael Knott, Green Street Advisors.

I was just wondering if you can maybe comment on the realized rent profile and the growth there as you head into the prime rental season? Obviously, you're really well positioned from an occupancy standpoint. I think the rental growth has been about (technical difficulties), and I think you'd be really positioned to really start pushing rents with how high your occupancy is, as you head into rental season. Do you think --?

You know what, Michael, you're cutting out on your question. So could you repeat it?

Yes, sorry about that. Can you hear me now?

Yes.

Okay. Thanks. Sorry about that.

Question is really just on realized rent growth. Do you think, as we head into the prime rental season, that it seems like you're well positioned to maybe have some of the best realized rent growth you've ever had in your company's history. Do you feel like pricing power is that strong, or is that too optimistic of a sentiment?

Mike, I'll let John amplify this, since he runs all the revenue and the pricing.

Earlier in the call, I touched on our customer acquisition costs being down to $2.00 per new customer versus $31.00 last year. And if you recall, customer acquisition cost, the way we define it, consists of two things -- our marketing cost, which is Yellow Pages, the phone center, Internet advertising, television; as well as promotional discounts, principally the $1.00 special that we offer new customers. And if you look at the combined total of those two numbers in Q1, it was about $27 million versus $33 million last year. And that's split between -- that decrease of about $6 million is about 50% reduced media, Yellow Pages cost, and 50% reduced dollar specials. So the reduced dollar specials go right into the realized rent per foot line. So we've had about a 15%, 16% reduction in the dollar specials that we gave out in the Q1.

John, pricing?

So what Ron was talking about is an effective increase to the incoming tenant, by reducing the discounts. I think Todd Thomas had asked earlier about pushing street rates. And my comment was, I'm going to try to push the street rates. But I'll tell you, I'm not real optimistic that we're going to be able to push much. Because our experience has been that as we push street rates, most of our competition is not coming with us. So my guess is they just want to purely grow their revenues on occupancy gains as opposed to the new incoming tenant, in terms of pushing the absolute street rate.

So, Michael, as we move forward, really where I expect our revenue growth to come from is still the occupancy spreads, the reduced discounts that Ron talked about, as well as -- and the biggest part is going to be the renewals, the annual increases that we send to our existing tenants. Because we're able to be very aggressive with them. And we're finding that they're still very sticky, sticking around and paying those higher rates, notwithstanding the fact that a good chunk of our tenant base is paying well above current street rates today.

Okay. That's interesting. Thanks.

And then a follow-up question would be -- it sounds like the entire state of California performed below the portfolio average, including Northern California. Can you just maybe touch on what you see in Northern Cal and Southern Cal, and maybe what in particular might help Southern California perform better?

LA, I think I mentioned grew top line 5.5%, which I think is consistent with the same-store pool at 5.5%. And then San Francisco was up 6%, which is 50 bps north of the same-store pool average.

Okay. I thought you were giving those numbers on the NOI line.

No, the revenue line. Revenue line, I'm sorry.

On the NOI line, Michael, it's kind of outlined in our 10-Q. Los Angeles was up 8.5%, San Francisco up 9.4%.

Thank you.

You're welcome.

Michael Salinsky, RBC Capital Markets.

John, just a follow up to all the leasing questions. What percentage of your tenant base is applicable for a rent increase this year? And how does that compare to last year, going into peak leasing season?

We generally send them to tenants that have been here longer than a year. And roughly about 56%, or 55% of our tenant base has been here longer than a year. And that's fairly consistent with last year.

In terms of absolute numbers, however, I think we're slightly higher in terms of the number of tenants that have been here longer than a year. We're up a little bit there. But what we're going do is be a little more aggressive, actually, on the absolute percentage increase to the tenants versus last year.

Thank you.

So again, roughly 55%. As the year progresses, however, we will probably send out increases somewhere in the neighborhood of 70% to 75% of the tenant base will get them, because I'm telling you the aging at a point in time. And as each month goes by, an additional group of tenants becomes aged past a year, so we'll send them increases also.

Sounds good. Thank you.

You're welcome.

Michael Bilerman, Citi.

Good morning out there.

John, what percentage of your customers, or maybe just of NOI, is paying above street rates?

I don't have that particular number. But I would say it's a fairly significant number of our tenants are paying above street rates. It varies, too, in terms of the street rates, because of that differential between street rates. Because street rates fluctuate with seasonality, so that differential narrows quite a bit during the summer months and then widens again during the winter months.

So we're getting into the summer months, so our street rates are rising. So the differential is starting to narrow and will continue to narrow until we peak somewhere in July, August, and then it will start widening out again. That's been the case for, I would say, the past five years or so. This is not nothing new.

Right. And that spread, in terms of, is it 5% or 10% above street, magnitude-wise?

Again, it varies all over the place. It depends on the time of the year. And I couldn't tell you exactly where it is today.

And just thinking about where occupancy was at the end of the quarter and just talking a little bit about what's been happening in April and early May, as your occupancy comps do become extraordinarily more difficult as we move into the second quarter and the back half of the year relative to last year. So I'm curious, last year it was 92.6% in the second quarter. Where are you trending in the first half of the quarter right now?

Well, Michael, at the end of April, our occupancy was 93% versus 91.4% last year.

So you're still a little bit -- even though last year in the second quarter you averaged 93.1% for the quarter, in April, it was much less?

No. This April, we are at 93%. Last April, we were at 91.4%. And that's just for April. May, June -- we'll tell you what happens. But I think your question is, okay, what's the trend going into Q2?

Correct.

The occupancy spread is still there. We're nicely ahead of last year, heading into the rental season.

Okay. Yes, I would have thought second quarter last year, you were at 92.6%. So I guess I was surprised to hear that you were 91.4% in April of last year.

Well, it trends up each month.

It trends up quite a bit, Michael. So in May and June, we were a little above 93% last year. I think your point is -- which is a valid point -- is that the occupancy spread that we've experienced in Q1, even though Ron's telling you that it was still there during April, it's going to tighten up when we get into May and to June. So that for the full second quarter, I don't expect our occupancy spread to be a similar spread that we experienced in Q1.

That's what I was just trying to hone in on. Thank you.

It gets really tough to get above 93% occupancy. We kind of have this frictional vacancy, when you have roughly 7% of your portfolio vacating each and every month, and they're month-to-month leases. We don't pre-lease a space, because we don't know who is going to move out. They don't necessarily stand up and tell us. They just move out. So we have this kind of frictional vacancy of about 6% to 7%. So it's really tough for us, or anyone, I think, to get past 93% occupied. Not that it can't happen, because obviously we average 93%, so there's a lot of our properties that are well above 93%. But as a full system, it's very difficult.

Have you noticed a change in the types of customers that are coming or in the types of goods that being stored?

I can't tell you that, Michael, because I just don't know. I can tell you that customers are staying longer. They're more sticky than they have been in the past.

But nothing about the new customer that's coming in that differentiates it, or the type of demand that you're seeing?

You know, Michael, the great thing about our business is we serve everyone for a wide variety of needs.

Four D's. Okay. Have a great weekend.

Thank you. You remember. (Laughter)

Your final question comes from the line the Michael Knott of Green Street Advisers.

Ron, I was just curious if you had that statistic that you've given before -- speaking of the tenants staying longer -- the percent of tenants that have been there over a year this quarter compared to last year's first quarter?

Yes, Michael, the actual percentage of this quarter is 55.4% versus 56.1% last year. That is in part attributable to the fact that we have more customers, so the absolute number of customers that have been here longer than a year is up about 2,100 versus last year. So it's a slightly smaller percentage of the portfolio. The portfolio's grown, so it's reduced that percentage. It will age out and move up. But the absolute number of customers greater than a year as of today, or as of the end of the quarter, was up about 2,100 year over year.

Thanks. And then last question -- is just on the idea of the advantages that the big operators have over smaller operators and the ability to spend on mobile and the Internet. What's your current view on that? Is that advantage widening, or is it -- where do you stand on that?

Well, I think in our business, Michael, there are economies of scale. There's definitely economies of scale. I think even among, if you compare Public Storage to some of our smaller public companies, I'm sure there's differences in Internet spend, media spend, and how it's allocated on a property-by-property basis.

So I have to believe that when you talk about the mom and pops out there trying to compete on the Internet, it's probably fairly expensive on a per click or per move-in cost, relative to some of the public guys. You are seeing a lot of the mom and pops jump into bed with aggregators. And there's a couple aggregators that are now popping up in the self-storage space who are gathering together a lot of the mom and pops to help, basically help them compete in key word search, relevancy, and I am sure cost per clicks and cost per move-ins.

Thank you.

Your final question comes from the line of Todd Thomas of KeyBanc Capital.

Good morning, guys. It's Jordan Sadler.

John, just wanted to dig back into one comment regarding pricing and the ability to push rate. You made a comment along the lines of not having, necessarily, the confidence to push rate -- I don't want to put words in your mouth -- but because the industry tends to not come along with you. And I'm kind of curious about that. Do you think -- is that going to be perpetual, or at what point does that change or can it change? And then, in that same context, have you thought about -- I'm sure you have -- but how do you think about using media or advertising as a lever to continue to drive traffic, despite the fact that your occupancy is high, if you're trying to push rate?

Let me touch on the media part. We've scaled back on media, not because the media or television doesn't work. It works. It's a very competitive advantage that Public Storage has, because we could afford to be on television, whereas many of our competitors cannot. The reason why we scaled back is, obviously, on a ROI basis, media doesn't pencil out, because of our occupancies. We'll get a lot of call volume in, but we just can't satisfy the demand. The thought of, geez, let's generate a lot of demand with media and therefore we can charge higher prices, that just doesn't hold water.

People shop around. They shop off of our website. I think something like 70% of our move-in traffic tell us that they've been to our website, which tells me they're shopping around. Whether they made a reservation or just walked in, they still go to the websites and they're shopping. So going down the path of spending more on media to drive more demand, thinking that you're going to get better pricing within our system -- it just doesn't work.

When I was talking about pricing and trying to push pricing, I'm talking about street rates. Because I'm confident we could push pricing to our existing tenants. But in terms of pushing them to new customers via higher street rates, part of the problem that we've had there is that our competition doesn't really tend to move much. As we are driving rates, competition doesn't do that, and we start experiencing a drop-off in move-in volumes. And that bothers me, in the sense that I don't want to be losing occupancy.

When does that change? I don't know. Ask the other guys. But I suspect it changes at some point in time when they get to occupancy levels that they're comfortable with and then they want to start pushing rates, too.

And just on the promotions -- I might have missed this -- what percent were you able to pull off year-over-year?

In the first quarter, we were probably down about 18% in terms of absolute dollar reduction and discounts. So we're going to continue to see how far we can continue to reduce discounts. I think last year alone we gave away almost about $90 million of discounts. So it's a fairly large number that we're going to try to chip away at. It's not going to zero. It's not going to go to half of that amount, but we'll continue to chip away at that.

Okay. Thank you.

You're welcome.

At this time, there are no further questions. I will now return the call to Clem Teng for any additional or closing remarks.

Thank you, everybody, for attending our conference call this morning, and we'll speak to you next quarter. Have a good afternoon.

Thank you for participating in the Public Storage first-quarter 2013 earnings conference call. You may now disconnect.