Public Storage (PSA) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Public Storage first quarter 2014 earnings conference call.

(Operator Instructions)

I will now turn the call over to Clem Teng. Please go ahead, sir.

Good morning. Thank you, Laurie. Thank you all 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 2, 2014, and we assume no obligation to update or revise any forward-looking statement, 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 a audio webcast replay of this conference on our website at www.publicstorage.com. Now, I'll turn the call over to Ron.

Good morning, and thanks, Clem. We had another solid quarter. Fundamentals for the self storage business, I have to say, are pretty good. During Q1, we had higher move-ins at higher move in rates, and spent less to acquire new customers, which are staying longer. Further, new supply in our industry is nominal, and this makes for an ideal operating environment. With that, Operator, let's open it up for questions.

(Operator Instructions)

Your first question comes from the line of Ross Nussbaum of UBS.

Hello, Ron, good morning.

Good morning.

Can you talk a little bit more about what you're seeing on the rate side? Your realized rate growth has been hovering here in the 4% to 4.3% range for the last three quarters. So just a little more color on the traction you're getting, in terms of being able to start pushing rate higher, now that your occupancy comps hit the wall, probably, this Summer?

Ross, this is John. We're starting to push the street rates, and we're seeing people actually taking those rates, so that our move in rates are starting to creep higher. In the first quarter, as Ron mentioned, our move-in volume was up, and it was -- and the move-in rate was actually up about 3%. Combined with that, we gave a little bit less discounts away. As we moved into April, we continued to push street rates, and our move-in volume was about flat for the month of April. But the take rate was up about 6%, again with lower discounting.

As we move forward, I think we'll continue to try to push these street rates, with the street rates are currently up about 6% to 7%. I don't think we'll get a lot of traction on reducing discounts further. Our strategy right now is to continue to push street rates, and I don't think we could do both at the same time. So we'll see how that goes as we move into our really busy months, which are May and June, and see how well we can continue to hold our occupancies with the higher street rates.

Your next question comes from the line of Vikram Malhotra of Morgan Stanley.

Hi, this is Landon on for Vikram. Just had a question on the occupancy gain that we saw in the first quarter. The 70 basis point magnitude, is that something that you think that we can continue to see for the rest of the year? Or is that magnitude going to trail off in the higher -- in the high season?

Yes, Vikram, this is Ron. I'll let John amplify that. For the -- or Landon. April -- end of April, our occupancies were 93.9% versus 92.9% last year, so up a full 100 bips year over year on the same-store pool. But as we go into May and June, if it's consistent with last year, which we have no reason to believe it won't be, we'll get sold out. So we'll peak out at 95%, 95.5% occupancy in the system.

Okay, great. And then just moving to expenses. I know there was obviously excess snow removal cost in the quarter, but was there anything one time, other than that, in the quarter? Or ex the snow removal, is that the rate that we should expect to see going forward?

Overall expenses, if you take out the weather-related costs, both on the snow removal and the utilities, I think our expenses were pretty flat. And going into -- and property taxes are up 4% to 5%, I think payroll is up 1% to 2%. So we think those trends will continue into the balance of the year. In Q2, we expect about $0.5 million less on advertising. But other than that, most everything should trend, at least at this time, what we saw in Q1.

So that flat growth, you think, can continue?

I think we benefit in Q1 from lower advertising, and we're only going to get about $0.5 million off on that in Q2. So the other stuff that you see, the payroll, the property taxes, management, those will trend about the same as Q1.

Okay, great. Thank you very much for the clarification. That's all I have.

Your next question comes from the line of Todd Thomas of KeyBanc.

Hello, it's Jordan Sadler here with Todd. Wanted to just follow-up on the total revenue growth potential. It seems like the street rates is, you're getting really nice traction, up 6% to 7%, I think you said, John. If you layer in a little bit of occupancy and a little bit of reduced discounting on a year-over-year basis, I know you are not necessarily going to try and drive it further -- or down further, through the rest of the year. But are we looking at a 10%-ish type RevPAR potential growth?

In our same-store, Jordan?

Yes.

Not at all.

Not at all?

No. The piece of the equation that I think you missed is the move-outs. The move-out volume has picked up a little bit versus last year. And they're moving out at higher rates -- rental rates. And the reason why that's happening is because we've been aggressive at pushing rates to existing tenants. And over time, obviously, they've gapped up quite a bit. And now when they're moving out -- not that they are moving out any faster than they were before. But when they do move out, they are taking with them higher rental rates with them.

So as we're moving people in, even though they're coming in at 6% higher year-over-year rates on the move-in side, they're moving out at higher rates than the move-in rates are. So for every move-in that we replace -- or move out that we replace with a move in, we actually rent roll down. And we have been rent rolling down for quite a number of quarters now, for at least the past, I would say, three years or so. So there is leakage. So although mathematically, what you said may work, the leakage brings it back down quite a bit.

But moving the street rates, Jordan, narrows that gap between the rent roll -- between the move-outs and the move-ins. So that's a positive in that regard. The other thing that I would add to what John said is, I touched on, customers are staying longer. 56% of our customer base has been here a year. That's a pretty low-churn part of the portfolio. So those customers will get rental rate increases, consistent with last year, but they are not going to be changing based on changes in street rate.

Okay, that makes sense. Have the roll downs changed at all, as you have started to push street rate here in April? Are we looking at 3% mark-to-market, when you -- in terms of the roll-down, as replacing a move-out?

Well the roll down has changed a little bit, but just really recently. Because just recently, have we really been pushing the street rates, and that's been this month in April. Because as I mentioned during the first quarter, the move in rate was up about 3%, whereas in April, it was up about -- a little over 6%. So it's just recently that we've really maybe narrowed that spread -- that year-over-year spread.

Okay. Thank you.

You're welcome.

Your next question comes from the line of Christy McElroy of Citigroup.

Good morning to you guys. Ron, I'm wondering if you could talk a little bit about your view of the acquisitions environment? What sort of opportunities you're seeing out there currently? And what are your efforts internally in terms of trying to source fields?

Our efforts in terms of sourcing deals are consistent with what we've always had. We got a couple people that do focus on acquisitions. They are very experienced people, and they are pretty much in the flow of everything going on, so that hasn't changed at all. In terms of what we're seeing, I think I touched on last quarter that the product that we're seeing is of lesser quality than we saw last year.

That continues to be the case, although I will say that there's been an up-trend in terms of quality coming to the market. Which is probably not unusual, given it takes people time to decide and get product out onto the market. So the quality is up-ticking a little bit, but it's still, overall, I'd say, lesser than last year.

And then in Europe, you've had some nice traction there, in terms of turning revenue and NOI growth positive. Occupancies are up, but rents are down. How are you approaching revenue management in the region? Is the environment there similar to a few years ago in the US, early stages of a recovery?

Christy, that's a very good summation. Last year, second half of the year, we started to tag differently in Europe, with much more aggressive asking rate, rental reductions, something that we had experimented with here in the US. We applied over there, first month 50% off. We tried it in a couple markets in September. It really worked. We did it again in November, and again in March and.

And as you touched on, we've seen a nice uptick in occupancies. At the end of the quarter, we were 86.1% in Europe versus 79.5%. So that's over 600 basis points year-over-year uptick in occupancy at -- offsetting that was a reduction in in-place rents of about 5%. But our goal over there is the same, similar to US: get the portfolio up there -- over there to the low to mid 90%s occupancy. And so we'll continue with that pricing strategy until we get the portfolio stabilized at a higher rate.

Thank you.

Your next question comes from the line of Ryan Burke of Greenstreet Advisors.

Just hoping for an update in the preferred market. In particular, the March offering was sizeable, but the April offering was pretty small. So did you go smaller on that ladder offering, just simply based on your immediate capital needs? Or is there something that you foresee playing out in the preferred market over the rest of the year?

The April offering that we did was really reopening of our Series Y preferred. We had an interest from a single institutional investor, who was interested in taking down about 50 million of our existing Series Y, so we went ahead and consummated that transaction. So that wasn't marketed by any means.

Okay.

In terms of the preferred market, I think it's firming up. It's getting better. Our existing preferreds out there are trading well. We're hoping to get better, obviously, and I wouldn't put it past us from trying to go out into the market sometime during Q2, Q3, and test it again and see what we can raise, if the market is there for us. We still have about $320 million on our bank term loan that we need to deal with before it matures in December of this year, and that would be one way that we would think about repaying the rest of it.

Okay, thank you. And then question, looking at the back page of the supplemental, on the 2012 acquisition break out. On my numbers, the NOI you give there implies that you're getting a yield on cost on those assets north of 7%. That's on assets that are 86% occupied. I believe that the 2011 acquisition bucket ended up north of a 10% yield. Just curious if you can give us your thoughts on what we should -- how we should think about the yields moving forward on the 2012 and 2013 buckets?

Is it -- the 2012 -- you're right, it's close to 7% on the -- we still have room for occupancy growth. We still have room for rate growth. One of the things that we do when we acquire properties is, we get very conservative on the rates, so we can fill up the properties rather quickly. And then, as they're getting to a stabilized occupancy level, then we start being aggressive on increasing rental rates to the existing tenant base.

And we really haven't been aggressive on the 2012 and 2013 acquisition tenant base, but there are -- we plan on starting to do that this year. So I think in both portfolios, whether it be the 2012 or the 2013, we have both occupancy gains to be had there, as well as increasing the existing tenant base rental rates.

Great, thank you. That's all for me.

Your next question comes from the line of Mike Mueller of JPMorgan.

Yes, hi. Looking at the development, what are you seeing in terms of the pace of lease-up, compared to what you typically underwrite for? And just what the experience was during the last cycle before the downturn?

Mike, the last cycle before the downturns, 2005, 2006, 2007, we didn't have much in the development pipeline during that period of time, so I really can't comment on how this will compare to that time. I could tell you, on the stuff that we're opening, it is filling up faster than we anticipated.

But as John just touched on, when we open new developments or acquire properties that are lower -- at occupancy levels lower than what we view as stabilized, we're a little more aggressive on rental rates until they achieve stabilization. And a good example is our Bronx Gerard property that ended April at 67% occupied, not even open a year, so its got 3,000 plus units leased up. But those were at rates about 60% or 70% of what we forecast. So we're filling up much faster, but we're doing with more aggressive rental rates.

Got it Okay. And one follow-up. On G&A, it was about $18 million this quarter. Can you talk about, was there anything impacting that that was one-time in nature? And what do you expect for the balance of the year?

Mike, there wasn't anything in there that was really one-time in G&A. As for the balance of the year, I think we're going to be relatively consistent with last year. And I caveat that with, it will depend, though, on our acquisition volumes going forward, because a lot of the acquisition costs do get expensed through G&A. So depending on how much acquisitions we do, that could change it quite a bit, one way or another.

Excluding those acquisition costs, do you think it will be comparable year over year, as well?

As far as we can tell right now. We don't see anything right now that would cause us to believe that it would be either significantly higher or lower.

Okay, great. Thanks.

(Operator Instructions)

Your next question comes from the line of Tayo Okusanya of Jefferies.

Hi, good afternoon, everyone. I may have missed this, but Ron, your comments earlier on about the roll down in the rents, when you -- an old tenant -- when a current tenant moves out. I'm just kind of curious, could you just give us a sense of what that average rent is, versus what street rents are, so we can get a sense of what that roll down is?

Tayo, I think -- and John can elaborate this, that will be in the 10-Q. And so you can compare it -- what it was last year, what it was this year. And obviously, it varies by market.

Let me give you some numbers, because I'm not sure to what degree it's actually disclosed in our 10-Q, but it's disclosed on a square foot basis, actually, in our 10-Q. I'm going to give it to you on a unit basis, or a move in basis. So during the first quarter of this year, for example, the average move-in rate in our same-store was about $114 per move-in. The move-out rate during that same period of time was about $123. So it's about a $10 swing -- negative swing. Last year, it was -- the move-in rate was about $111, versus a move-out rate of $119.

Got it. Okay. That's very helpful. Thank you, sir.

You're welcome.

Your next question comes from the line of Neil Malkin of RBC.

Hello, gentlemen, good morning. My first question is, given the strengthen in the storage, have you guys seen opportunities, or are you going to look at opportunities, with private developers to take out their development CO buyouts, as it were? Or is that something you've been looking at or seeing come to the market more?

Mike, we're seeing and hearing about people doing that, and -- but we're not doing that ourselves. We've engaged some, we've got some local guys helping us develop in certain markets, but for the most part, we've got our own team building our properties. And it's not to say we wouldn't do that. At a C of O last year we acquired some properties in Boston, one newly C of O, and then one that was still under development. So we have done that. I wouldn't rule it out. But that's not really how we're undertaking our development program.

Got it. Okay, next question. Clearly, the Public guys have been very successful at increasing demand. Occupancies have been continuing to go up, almost at record levels. Do you think that's contributing --do you think that's from a paradigm shift to people using mobile or online to get rate -- or deals that a mom and pop couldn't provide? Do you think that's definitely helped you? Or is that just an extra gravy for you guys?

I think the ability of the larger operators to place themselves in better rankings on either the desktop or mobile is very helpful, in the sense that more and more people are using the internet or mobile to access information on self storage rentals. I could tell you that, as we've tracked it internally, last year -- during the first quarter of last year, roughly 51% of our move-ins came through an internet channel. And that compares to this year, where it's now 58%. So it continues to increase, as people are using internet and mobile.

Mobile has been rising quite a bit. And it's certainly helpful to be a big player, because you can get -- you can afford to buy your way into placement, as well as have the relevancy to place well on desktop and natural and local maps searches. So yes, it's as advantage to be a large operator in self storage.

Okay, thanks. And then finally, just given the commentary about the roll downs. You guys are pushing street rates pretty aggressively, which is great, but the renewals, on average, are 2% to 3% higher than street rates. Are you worried at all because, from the higher maintained occupancy and lower churn, that over time, that effect will be compounded, and the roll downs will continue and exacerbate the retarding of revenue growth? Thanks.

That's been happening for years now, as we've talked about. The rent roll down has been going on. And it's largely because of the dynamic that the mark-to-market is actually a negative number, and has been for quite some time. So our existing tenant base is -- if you look at it, on average -- is paying more than our market rates are. And that's a testament to how sticky people are, and you can continue to hit them with increases. And notwithstanding the fact that they could be paying 10%, 15% above market, they still stay. The difficulty is, when they moved out -- when they move out, though, however, we have the immediate roll down as we replace them.

Mike, to further John's point -- and I don't have this on a per square foot basis. But if you look at our average move-in rates over the last six or eight years, in 2007, 2008, customers were moving in at about $123, $124. Q4, they were moving in at $114. So while the rates -- the $114 is up year over year, as John went through, they are still, call it, $10 a month lower than where they were in 2007, 2008.

Thank you.

Your next question comes from the line of Ross Nussbaum of UBS.

Hello, guys, couple follow-ups. First, where do you think your street rates are today, versus your closest competition?

It depends, Ross. We track it by market, by properties, so it really depends. I think overall in the system, we're probably a little bit above competition for the most part, and probably most markets that we operate in.

Second question would be, just to confirm. I think last year, you were bumping rents on existing customers. I thought the number was around 8% or 9%. Is that still the case?

Yes, pretty much the same this year.

Thank you.

Your next question comes from the line of Paula Poskon of Robert W. Baird.

Thanks, good afternoon, everyone.

Hi, Paula.

I just have a big picture question on the acquisition market, Ron. I think that some of us tend to have a tendency to forget just how fragmented this industry continues to be. On the private side, what do you think the number of truly large but institutional quality portfolios exist? That maybe are just still in hands of reluctant sellers?

Paula, our best guess, I've got David Doll here with me, and we've looked at that in a number of markets. My guess is less than 20.

Thanks, Ron.

Your final question comes from the line of Ki Bin Kim of SunTrust.

Quick question on the number of customers you plan to sent out rent increases to in the Summertime. I think last time, it was about 55%. Any change in that number that you're planning for this year?

No it's about the same, Ki. Maybe a little bit more, because the aging, as Ron pointed out earlier, we have a little bit -- we have a better age tenant base. So in other words, we have more customers that meet the criteria. So we'll probably give out, in terms of the number, the volume, slightly more than last year.

Okay. And final question for me. Number of customers receiving promotions, I know you guys get asked that once in a while. Any update on where it is today versus last year in the same period?

It's roughly about 80% of the move-in volume received some sort of promotion, either the full-blown dollar for the first month or 50% off.

Okay. All right. Thank you.

You're welcome.

We have time for one more question. Your next question comes from the line of Todd Thomas of KeyBanc.

Hello, it's Jordan Sadler, here, again. I -- just on the acquisition side, it's rumored that there's a sizeable portfolio out there for sale. We're just talking about 20 or so, or less, that remain out there that are of institutional quality. Is there anything on your radar right now that's for sale?

Jordan, there's always stuff on our radar, both stuff that's, quote, in the market, and being marketed, as well as just that's not, quote, being marketed. Three of our largest transactions -- our largest transactions -- our two largest transactions last year had no packages, no broker involved. So we're in dialogue with -- we know the, call it, 20 or so people, as well as people or groups of people, institutions, or invest -- operators that have -- aren't in the big group all the time. So there's always stuff on our radar.

Always -- of course. I guess another way of slicing it. I'm curious about maybe your -- how you see the competitive set in terms of capital today? Are you able to get deals done here, given your discipline on the underwriting, still?

I think you can look at Q4 last year, where we took down, I don't know, $700 million in the fourth Quarter. Are we able to get deals? Yes. Is it competitive? Yes. Stabilized properties are a challenge, especially one- and two-offs, because there's -- to your point, there's plenty of financing, where there's CMBS, bank financing, or public market financing. So when money is cheap, assets are expensive.

Is there any change on the underwriting side? Meaning, I know that you've historically been a replacement cost buyer, but is there a replacement cost moving up? Or is your view of replacement cost moving up materially? Or do you attribute value to in-place customers and cash flow to a greater extent today than before?

That's a lot of questions, but I'll try to answer them. A property that's stabilized with an existing customer base is worth more than one that has to go through three years or so of fill-up. Not only because you don't have the fill-up risk, but generally the customer base is mature and more stable. And therefore, is more susceptible, promptly, to rental annual rental rate increases, whereas a property that is in fill-up, it is going to be much more challenging. And obviously fewer customers to send out rental rate increases to for a property that's in fill-up than one that's stabilized.

So yes, stabilized acquisitions are worth more, per se, than developments. I think I've touched on before, in terms of our view -- my view of replacement cost, and I went through this in this year's shareholders letter. In a market like Reno, Nevada, where there's lots of land, an abundance of product, and low population density with lower incomes, those are properties that we would acquire. But we would want to do them at substantial discounts to replacement costs, call it 50% or 60%.

You contrast that to lower Manhattan, where there's higher incomes, very little competition, great density of people, and we would be willing to pay 150%, 175% of replacement cost. Because of the huge barrier to entries and the great customer aspects of that market. So it just depends on the particular market. Does that address your question?

Yes, I appreciate you fleshing it out. Gave you an opportunity to advertise the letter. I'm going to have to go back and read it again. (laughter)

Okay, thanks, Jordan.

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

Yes, I just wanted to mention that JPMorgan will be hosting a tour of our 4,000 unit Gerard facility in the Bronx. The tour will take place on Monday, June 2, the day prior to the NEREIT conference in New York City. So with that, I just want to appreciate everybody's questions this morning, and we'll talk to you next quarter.

Thank you for participating in the Public Storage first quarter 2014 earnings conference call. You may now disconnect.