Public Storage (PSA) 2014 Q2 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 second quarter 2014 earnings conference call.

(Operator Instructions)

I would like now to turn the call over to Clem Teng.

Thank you for joining us for our second-quarter earnings call. Here with me 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. Those 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, August 1, 2014, 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.

I will turn the call over to Ron.

Thank you, Clem, and welcome everyone. We had another solid quarter. Fundamentals for the self-storage business continue to be excellent.

And with that, operator, we will open it up for questions.

(Operator Instructions)

Our first question comes from Ki Bin Kim with SunTrust.

Good morning, guys. Could you just talk a little bit more about your future, longer-term capital deployment plans, especially as it relates to development? You have about $242 million today. What is the longer term -- it's probably hard to say -- but longer-term dollar value that you feel comfortable with?

Ki, this is Ron. Is your question, how big do we expect the pipeline to grow, in terms of -- because it was, I think, $150 million, $190 million at the beginning of the year, and it's now $240 million. Is that your question?

Yes.

Yes, I think we are trying to get it up to about $300 million, $350 million. Keep in mind that most of our projects are $7 million to $8 million. So -- and it takes -- we have to go through three or four properties to get one into the pipeline.

So that's a lot of projects, when you get to $300 million to $350 million. If we get there, and feel good about it, we could take it to $400 million. That would be fine, if the market's there, and our processes are in place to achieve that level of production.

And to -- just a follow-up to that. So let's say -- let's call it $350 million. How much visibility do you have, in terms of, let's say, next year?

Are you trying to start at $350 million, or get to that, in terms of which markets can support it, should you do it? Those type of questions.

We have a number of people in the development group that are looking at sites in certain identified key markets. And so part of our development activity is first being able to find the appropriate site, get the right zoning, and being able to develop and conceive of a project that actually makes economic sense to us. Both in terms of rate of return, but also where it fits into the portfolio.

Okay. Thank you.

Our next question comes from the line of Ross Nussbaum with UBS.

Hi. Good morning. Jeremy Love on for Ross.

Can you just talk about where your net rents, net of discounts, where they were from move-in this quarter, versus move-out? And how that spread compared to last year? Is it getting wider or narrowing?

Jeremy, this is John. Move-ins were coming in at a monthly rate of about $121.97, on average. The move-outs were leaving at an average rate of about $124. So there's a net negative spread there of about $2.03.

On the move-in side, in terms of the discount side, roughly -- we gave away roughly $20 million of discounts. That was the same during -- this is during the quarter.

And that was the same as last year. For last year, the same quarter, move-ins were coming in at $114.20 and they vacating at $119.70. So that was a negative spread of about $5.50. So the spreads obviously narrowed, but nonetheless, it's still a negative spread. Rent rolled down.

Okay. And then just in terms of the discounts, for the 5.3% revenue growth this quarter that you put up, just how much of that was your ability to squeeze discounts? And as you look out at the back half of this year, can you squeeze discounts even more from here? Or is that leveling off at this point?

Jeremy, the discounts were about $20 million in both quarters, for the second quarter of this year. Not withstanding the fact that we're actually giving away, in terms of the absolute number, less discounts, the dollar value of those discounts is more because the rental rates were higher.

Folks are moving in at about 7% higher rates during the quarter than they were last year. So even though -- not withstanding the fact, again, that we gave away less discounts on a per move-in, the absolute dollars was flat because of the rental rate being up 7%.

Going forward, I think the discounts will probably be fairly consistent with last year. Probably pretty flat.

Okay. Thank you.

Our next question comes from the line of Christine McElroy with Citigroup.

Just a follow-up on Ki Bin's question. Ron, you have been rebuilding your ground-up development platform for a couple of years now. Now that you are a year or two into doing projects, are the returns looking better or worse than when you originally set out?

Are you thinking about any changes to the process? Or in doing projects on balance sheet versus with a partner? Some of your REIT peers have been increasingly buying C-of-O deals to get some development exposure. Just hoping to get your current philosophy on your approach to development today?

Those are -- that's a lot of questions, Christy.

Sorry.

Our development program, I would say we initiated it probably two, two and a half years ago. It continues to grow. The team's not yet quite complete. Our processes are somewhat evolving. And what we're finding in the market, we're having to adapt to different things in the marketplace.

In terms of returns, and are we achieving the yields that we thought? In our business, it takes 6 months to find a site, 6 month to 12 months to build it, and generally two to three years to fill it. So it will be a couple years before we absolutely know whether we achieved our targeted yields.

But so far, most of the properties are filling up faster than we anticipated. Although in some cases, lower than pro forma rents, because we are trying to accelerate the fill-up. We are building them pretty close to on time, pretty close to on budget. We haven't had any big hiccups.

So I'm feeling really good about our development activities at this juncture. In terms of other people buying C-of-O's, or partially completed properties, I think we've mentioned before that we anticipated that. Some have been rather vocal about not wanting a development program.

But you can do development in a variety of ways. And one of them is just by C-of-O buildings.

And how do you think about doing projects with a partner versus on your own?

We're fine with that. It's really a cost-to-capital analysis.

Thank you.

Our next question comes from the line of Jeff Spector with Bank of America.

Good afternoon. Thanks for the time. Can you comment on supply tracking in your markets today versus, let's say, a year ago?

Jeff, we don't have any stats here by market. I can tell you, as I've said before, that development is much more of a conversation today. There are people developing in a number of markets.

Is it significant relative to the existing base? No, but it's accelerating. And I would expect it to continue to accelerate over the next year or two.

Okay. Thanks, Ron. And then quick question on occupancy. You had another nice quarter of occupancy growth.

How are you thinking about occupancy? I guess, how high you can get it versus pushing rents? What are your latest thoughts there on that balance?

We're going to continue to push rents, as we've talked about. In terms of occupancy, we mentioned that it's going to get tougher and tougher to move the occupancy spread. Which you see that during the quarter, that spread is narrowed quite a bit.

It's gapped out a little bit by the end of July. What I'm hoping to try to accomplish with our portfolio is to see if, during the fourth quarter, we can gap it out a little bit more by maybe doing a little more advertising on television. And seeing if we can get some traction and flatten out the occupancy curve during the first -- the fourth quarter and into the first quarter of 2015.

Okay. Thank you.

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

I want to just touch on Europe. You have had a couple of quarters of increasing off of improving occupancy. Just want to get a sense of what you're seeing there? And could we expect, at some point, rents to start increasing there, as well?

We've gotten some positive traction here in Europe, starting in Q3 of last year, where we changed our pricing strategy there and done some pretty aggressive promotional programs. And that seems to have worked, both into Q4 last year and into this year, which you see reflected in the occupancy. It's up about 7% year-over-year, and that's pretty much across the entire platform. Even Holland is up to 74.2% from 69.2% last year.

At this juncture, we -- and we're doing that at the expense of rolling down rents. So if you look at the table, you'll see that the in-place rents are rolling down. I would expect that program to continue for the foreseeable future, until we get the portfolio at a much higher stabilized occupancy level, say in the low 90%s, and drive volumes with promotional discounts.

Okay. Thanks, guys.

Our next question comes from the line of Todd Thomas with KeyBanc Capital Markets.

Hey, it's Jordan Sadler with Todd. 95% occupancy. Stunning. How is that even possible?

I guess -- I'm just trying to think of the frictional vacancy. And just maybe -- I don't think, if I asked you guys if you could get a 95% occupancy six months ago, or even a year ago, that you would have said, yes, no problem. I'm just -- are you doing anything differently? Anything you could shed some light on?

Jordan, this is Ron. I'll analogize it to flying a plane. It's one thing to take a low-level plane and operate at 85%. It's another for a jet at 90%.

And when you get into the 95%, this of it more as like an astronaut. So you have got to operate a little differently. Your inventory systems have to be a little different. Your pricing has to be a little different.

And so we continue to push it here. And if we can get it to 96%, we'd love to do that. Right now, as John said, we're trying to take some of the seasonality out of the business, both in Q1 and Q4 of this year. And I think that will be a good achievement, in and of itself.

And where were you at the end of July?

We were at 94.8%.

Okay. About the same level, essentially. Would you expect, as we get into the back half of the year, you lose a little bit, but try to retain as much as possible?

(multiple speakers) After June, Jordan, and you know this, because you have followed the industry and us for a long time. After June, it's net move-outs for the balance of the year. So in July, we had net move-outs of 4,200 customers versus about 6,000 last year.

So while our occupancy was 94.8%, that's up from 94.4% the prior year. So we did a little better in July, both on the move-in and the move-out side, than we did last year.

Thank you. And then just a quick follow-up. A little bigger picture on the aggregators that are out there.

You guys have had this -- the larger players in the space, the public players, have this big competitive advantage, it seems. I'm just curious as to your thoughts, in terms of the ability of these aggregators out there to help out the little guys and close the gap, if you will, in terms of that relative advantage?

You think that's a year out? Two years out? Or never?

Jordan, this is John. I think the aggregators have, in fact, helped the little guys improve, probably, their occupancies and their ability to get visibility on the Internet.

So I think -- I don't know whether it's economically a benefit to the little guys. I think it has benefited their ability to get move-in volume. So I think it's a positive for them.

For us, we would rather them not be there than be there, all other things being equal. But they are there, and we deal with them, and we compete with them when we are bidding for search terms. Which, again, I would rather not be competing with them. But they're there, and we have to compete with them.

Thank you.

Our next question comes from the line of Michael Mueller with JPMorgan.

Hi. I was wondering if you can comment on the properties you bought, not necessarily in the second quarter, but in July, that $240 million? And where is occupancy? Where did they come from, et cetera?

They were principally one portfolio, Mike. And they were in -- let's see. DC, Orlando, Tampa, Sarasota, Fort Meyers, and then various other sub-markets across Florida and New Jersey and North Carolina.

I think their occupancy when -- at the end of July was about 92%. And that ranged from a high of, let's see, 96.9% for one property, down to one that was at 68.8%.

So this would kind of validate something I've said for a long time, is if you have good properties and a good manager, you'll do just fine in this business. These properties were operated with a variety of different names. No Internet marketing. No branding.

And yet they had a number of properties at 96% plus occupancy. So really good-quality real estate.

It seems like when you typically buy stuff in the past, the occupancy is lower, and that's part of the play. Occupancy is clearly higher on this one. Is there something, just in terms of rate, that's compelling? Or something else?

It's Florida, so my guess is we'll probably end up doing a little better on expenses. Maybe a little better on pricing. And there is some properties in here with some occupancy opportunities, as well.

Okay. Thanks.

(Operator Instructions)

Our next question comes from the line of Ryan Burke with Green Street Advisors.

Thank you. A follow-up to Jordan's question earlier. Can you just provide some more detail on how operating a property that is 95% occupied might be fundamentally different, in some ways, than operating a property that's, say, 85% or below that?

Ryan, this is Ron. There is a variety of things. And I'd rather not do that, because from a competitive standpoint, this is really not the forum to get into that kind of discussion.

Okay. Understood. Thank you. Second question.

You achieved a pretty nice increase in the yields on your 2012 acquisition bucket year-over-year. It's been a fantastic operating environment over that time period. Both new supply and the effective aggregators have been mentioned on the call so far. But looking forward, from where we stand right now, say over the next two, three years, is there anything that you see that might fundamentally change in the sector, whether it be for better or worse?

I don't -- I'm not sure, in terms of two to three years, that's a long time. And I'm not really capable of forecasting out that far. I would say right now, the fundamentals are very good.

I think the -- I don't know if all the public companies have reported, but certainly the ones that have demonstrated strong fundamentals. Certainly our Same Store properties demonstrated strong fundamentals.

There is development going on in the marketplace. We're developing. Other people are developing. So supply is on the uptick.

So when you look at the big picture of the industry, from where it was four years ago, rates are higher, occupancy are higher, and development is just starting. So the risk of the industry is probably a little greater today than it was four years ago. But I think we probably have at least another year or two of great fundamentals for this business.

Great. Thank you.

Our next question comes from the line of Tayo Okusanya with Jefferies.

Yes. Good afternoon. Just two quick questions from me.

The first one, just along the line of the aggregators that are now moving into the sector. Just wondering, does it make sense, again, as you guys being the largest player in the market, to try to take on that role? Or build up a third-party asset management businesslike, like some of your peers? Or when you look at the economics of that business, do you just don't think it's worth it?

Tayo, this is Ron. I think one of the really distinguishing features about Public Storage vis-a-vis the other operators and the aggregators is branding. We get -- a fair amount of our -- 70% of searches are organic. That means someone is punching in Public Storage. And so we don't pay for that.

And I am pretty confident no one is close to that number, in terms of organic searches. And when 70% or 80% of the business is coming through the web, and then another 70% or 80% of that is organic for us, we are just in a much different place than the other operators in the industry that really don't have a brand name.

Okay. All right. That's helpful.

And then the second question is, with the ramp up on the ground-up development. Just curious if that's a commentary on you feeling less bullish on the acquisition side of the business? Or you really see good opportunities for external growth both from development and acquisitions?

The second.

Okay, the second. Great. Thank you very much. Great quarter.

Thank you.

Our next question comes from the line of Ki Bin Kim with SunTrust.

Just a couple quick follow-ups. Could you give the -- you guys [give the] promotions stat. What was in the second quarter, in terms of number of customers receiving a promotion? And I guess you typically give it in percentage terms of decline, in the amount of promotion dollars?

Ki, I think that -- this is just off the top of my head. I think we give away -- about roughly 65% of our move-ins receive some sort of a promotion. And remember, our promotions could be 50% off the first month, or a dollar for the first month. And then last year, I think it was roughly around 70%-ish or something like that.

Dollar amount, Ki, John mentioned earlier, is about the same. $20 million to $20 million.

Okay. And --

Our rates were up 7%. So that would tell you, if rates were up 7% on that, that the number of customers must be down. Or the dollar -- the percent -- the actual dollars we're giving away, in terms of 50% versus the dollar, would be down 7% to offset that.

And second question. Your payroll costs declined 4% on your same-store portfolio. Just curious what you did there?

We've done some things, in terms of labor management, to help improve the productivity of field operations.

So just basically less hours to pay for?

It was hours, yes.

Okay. Thank you.

Our next question comes from the line of Todd Thomas with KeyBanc Capital Markets.

Hey, it's Jordan again. I just wanted to come back to the acquisition question. Sounds like there is some opportunities.

With Europe turning around as sharply as it is now, operationally, is that on the radar again? Maybe views on incremental investment there?

Jordan, the -- I wish there were more acquisition opportunities in Europe of the product that we like. It's pretty slim pickings. In large measure, because the industry size over there is far smaller than the US.

Recall Europe's probably got 1,500 facilities, and I think 800 or 900 of them are in Great Britain. And in Great Britain, we are really not interested in too much product outside of the London and the M25. And there is a lot of product outside there in the countryside that we're -- is of no interest to us.

When you get into the continent, there is not a lot of property portfolios that are of interest to us. A couple, and we are in contact with those people. If we could do something, we'd probably do that. Especially since we have got the finances in the balance sheet in Europe fixed.

My longer-term expectation is that in Europe, it's more of a development play. And so we're looking to undertake some development there, mainly in London.

You've started to invest in the development platform in London again?

Yes.

Okay. Thank you.

Thank you, Jordan.

Our next question comes from the line of Christy McElroy with Citigroup.

Yes, it's Michael Bilerman. I just had a follow-up.

In terms of the occupancy, what's that standard? If you have 2,000 facilities, how clustered are those around the 95%? So I don't know if you can maybe put them into some groupings, in terms of, is there -- are there a certain amount of facilities that are running much higher in that, call it, 97%, 98% or up to full? Which is kind of nutty, but maybe you do have some. And then how far down does it go, and what that bucket is?

Jordan, this is John. If you --

It's Bilerman.

Sorry, Michael.

I used to work with Jordan, but --

I'm sorry. We do have some properties that are highly occupied. There is probably one in there that's 99%, and there may even be one that is 100% occupied. We have seen that in our portfolio for our same-store properties.

But I would say the bulk of them are clustered. If you did like a bell curve, it would be a very tight bell curve right around that 95%.

The odds are, there is probably nothing below -- in the same store below 85%, because we would have done something with that property, with pricing or promotion, to try to push it back up real quick. So it is a fairly tight kind of bell curve around the 95%.

And then as we think about the acquisitions that you did last year, I think it was north of over $1 billion. And I can remember, last year, we talked about yields. And Ron, I think you said it was zero to eight.

I'm curious now, as those acquisitions have been under your belt for a little while, what that current yield is? And where, ultimately, it can go as we look into the 2015? Because, arguably, that's a nice piece of your growth platform.

Yes. Michael, for the 2013 acquisitions for the six months, the yield was 5.1%, excluding merchandise-intended insurance. And what it will be next year, I'm not sure. But I'm pretty confident it's going to be higher.

Thank you.

And that appears to be our final question. I would now like to turn the floor back over to Clem Teng for any additional or closing remarks.

We appreciate everybody's participation this morning, and we will talk to you next quarter. Thank you.

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