Public Storage (PSA) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Public Storage third-quarter 2014 earnings call.

(Operator Instructions)

I would now like to turn the conference over to Mr. Clem Teng. Please go ahead, sir.

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

All statements other than statements of historical 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. 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, October 31, 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 of 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. As we reported yesterday, we had pretty good Q3. Trends are positive. Our development pipeline is expanding nicely. We will take down about $400 million plus of acquisitions this year, so it's turning out to be a pretty good 2014.

With that, we'll open it up for questions.

(Operator Instructions)

Ross Nussbaum, UBS.

Hey, good morning. Jeremy Metz on with Ross. Hey, Ron, can you just talk about rent and discount trends have been going here in the fourth quarter?

Sure. I'll let John touch on that. The trends are positive.

Yes. Much dave max over our move-in volumes up about 3%. The rates that are being taken are up about 4%. So we're pretty happy about that. Street rates are up currently about 5.5%. I will say this, however, during the month of October, we did start discounting a little bit more than we have in the past. Our discounting is up about 5% or so. One of the things were trying to do, as I mentioned in the last call, is we're trying to gap-out our occupancy going into the fourth quarter and the first quarter of next year so we are spending more on television advertising as well as internet advertising. Along those lines we're also giving away more discounting to try to get our occupancy spreads wider.

For the move-ins during the quarter, what was the gap between the realized rents for the move-ins versus the move-outs?

For the quarter, folks were moving out at about $133 a month, monthly rent, versus move-ins were coming in about $131.

Okay. So it sounds like that gap has actually narrowed some from prior quarters?

Yes. And if you want to compare it to the quarter of last year, they were moving out at $128 and moving in at $126.

And then I think Ross had a question as well.

Yes. Hey, Ron. I missed, unfortunately, your lengthy opening comments, so hopefully you didn't touch on this. That was a joke. Can you talk about your development pipeline, and in particular, it looks like you added $100 million of projects to the pipeline? Can you just review where those new projects are and where do you see the overall size of that development pipeline going in the next year?

Sure. I've got David here, so I'll let him -- since he's doing all the work, explain the pipeline. As I mentioned, I think I've mentioned in previous calls, we're trying to get up to a $300 million to $400 million pipeline run rate, which very proud of the team for getting that achieved this quarter. It'll fluctuate quarter by quarter as there's deliveries and inflows, but we pretty well got the development team staffed up now and they are starting to hit the stride. In terms of where were developing, I'll have David run through that with you.

Thank you, Ron. Today with got about -- we have developments going in 13 different states, California, Texas, Florida, North Carolina, Arizona, Maryland, lead the list of locations as where we're developing today. It's really, where are the best opportunities to fit new developments inside our existing portfolio?

David, your modeling what for stabilized yields on those projects based on current market rates?

As high as we can get them.

That's not overly helpful. (laughter) Any numbers?

You know, Ross, I'd say, you've got to think about 200 to 300 basis points over acquisitions. With that, that's your third question, so I need you to get back in the queue.

Vikram Malhotra, Morgan Stanley.

Thanks, guys. I wanted to just understand how you thought about occupancy your during this past quarter? Maybe a year ago, a year and a half ago, we probably wouldn't have expected you to hit 94% plus. I'm wondering how you thought about maybe taking the occupancy to maybe even 96%? How you thought about pricing? Just looking forward, as you said, you're trying to narrow the gap, so how do you think of it in terms of taking it up even further?

Well, I would say this. We're not about, although, maybe everybody thinks we're about occupancy, we are not about occupancy. We are really about revenue growth in the long haul. To get that growth that we're targeting, we pull the different levers, whether it be occupancy, promotion, pricing and what have you. It's, perhaps, not solely about occupancy. It is important, don't get me wrong, but in the third quarter, we allowed the occupancy to tighten up for the spread to narrow vis-a-vie last year by being more aggressive on pricing and giving away less promotions. As we move into the next couple of quarters, we're going to try to now expand the occupancy. We vacillate between which lever to pull and which lever we think is going to be optimal to get us our revenue growth as we move forward. It's not one component solely.

Okay. Thanks. I just want -- sorry -- is there another -- ?

I would add to that, John said where our long-term goal is. It's optimizing the revenue per foot, but at the end of the date it's really cash flow per foot that we own, so expenses and CapEx go along with the revenue side of the equation. If you're trying to maximize your cash flow per foot of real estate that you own, you want, in an ideal situation, 100% of the building occupied, because you want every square foot you own paying rent.

No, that's a fair point. Then just one quick clarification on the expense side. I know you said you started maybe spending a bit more to help manage the dip in the occupancy, but it seems like this is a pretty solid quarter in terms of expense management and on the payroll side and advertising. I would assume maybe some of that has run its course, but it just appears that maybe you could see a few more quarters of nice control there. How are you thinking about expenses?

Well, I think on the expense side, the big dip for the quarter was advertising, which was down almost $1 million year over year. Utilities moderated a bit. Then on-site payroll was down 2%, and that's been trending down as we've done some things to improve the efficiency out of the property. That's all an hour variance of productivity variance, not a rate variance.

So you'd say most of that is -- you've realized most of that or is there still more to come?

Expense control and improvement in productivity is an ongoing thing here, so it's never done. We have initiatives going in all areas to moderate expenses. It's not a one-time thing or we just did one thing and that's the end of it. We're constantly doing things.

As I've touched on before though, on the long run, despite our productivity and scale and all that, I mean you should think about expense growth here for the long term at 2% to 3%, especially given the weighting of property taxes being our largest expense and the fact that while we're aggressively appealing them and all sorts of things, we don't have as much control over property taxes as we do some of the other expense items. What John touched on in terms of advertising and selling is that in the fourth quarter of last year we basically had none. This year will probably have $2 million to $3 million in Q4 for advertising. You'll see the expense growth pick up in Q4, but it's mainly -- the big variable in our expenses is always -- I should say advertising and snow. It's the other big variable we have year over year.

Okay. Thank you.

Brian Burke, Green Street Advisors.

Thank you. Ron, your average construction costs on the current development pipeline is $115 per square foot. Can you talk about that mark relative to where stabilized assets are trading on a per-square-foot basis in those markets?

Yes. It's a little hard to give you an exact number. I mean if you take our development pipeline in Texas, it's 11 properties. Our blended cost per foot is $91. In Austin we're probably developing there in the low $105, $110 max.

Max.

Maybe $100. We are seeing assets trade in that market north of $200. We've got some stuff here in California that we're developing at $124 a foot. California usually trades north of $200 a foot. Arizona, we're developing at $80. We've seen stuff trade there at $150. Then, New York, that's really a redevelopment at $175 a foot, and those trade at $300 a foot plus. I would say somewhere between -- if I had to make a guess, but it varies by market, 150% to 200% of replacement costs in some cases.

Okay. How does that gap compared to past development cycles?

I couldn't tell you.

Okay. Thanks. One more question. Is there a point where gap rates on your stabilized properties get so low that you start considering selling more assets, obviously, with an eye towards recycling capital back into opportunities that are still ripe for value creation?

Well, I -- that's a logical question and something we think about, but when you step back and look at Public Storage, we have a lot of firepower in terms of ability to acquire and/or develop assets. Our balance sheet is pretty under levered. So, sitting back and thinking about selling assets, once you start to think about how under levered the balance sheet is, it moves off the priority list.

Understood. Thank you.

Michael Bilerman, Citigroup.

Yes. Good morning, out there. Ron, you talked about the 200 to 300 basis point spread on the developments over acquisitions. If I remember your comment from, I think it was last year, it was a 0% to an 8% cap, so that 200 to 300 is off the 0% or it is off of the 8%?

Come on, Michael. (laughter)

I'm just curious if you had an average, what would be the average yield?

I think developments are somewhere between 8% and 11%.

Okay. You haven't been in the capital raising market from a preferred perspective in a bit. You have, I think, $270 million actually being able to be redeemed next year and a good $145 million in April at 6.875% and 125 at 6.5% in October. I'm just curious as you think about, potentially with the ramping development pipeline and ramping acquisitions, would you look to seek to do that at all?

To do what, Michael?

To redeem those (multiple speakers)

And also issue new and where you think that capital cost would be today?

Well, I think a new preferred for Public Storage is probably about 6% to 6.125%, somewhere in that neighborhood for Public Storage. Certainly not where we would like it to be. We have other capital sources and a variety of sources and we talked about potentially issuing some debt in the past. We may go out in the fourth quarter, first quarter and raise some capital in anticipation of calling those preferreds and in anticipation of the ramp up of the development spend. I would expect that something within the new next probably 4 to 5 months we would be out in the capital markets trying to do something.

I guess your comment is that given where the preferred pricing is, you would prefer to go out and do that as debt rather than issuing -- ?

I'm just saying that there's other possibilities. We could do preferred. That's certainly our normal mode of operations, but we can do debt. As Ron, mentioned our balance sheet is very delevered.

Yes.

We currently only have about $71 million of debt on our books. That's dropping down as we move into the end of the fourth quarter, so we may tap into some of the debt market that's possible.

Perfect. Then the last question, as we think about when the $342 million of the current development pipeline, it looks like most of the spend will occur by the end of next year. When should we start thinking about deliveries of that capital being spent from an income recognition standpoint? Should we think about, I don't know if there's going to be some stuff hitting next year, and obviously it'll take time to stabilize? How should we think about that aspect?

Michael, I think you ought to think about 300,000 to 400,000 feet a quarter coming online. Let's see, we've got in Q4 we've got eight properties 450,000 square feet. Q1 2015, eight properties, 300,000. Q2. Five properties, 500,000. Does that give you a sense? Is that what you're looking for? Or are you looking for dollars? It's about $35 million, $40 million per quarter of development coming online. Keep in mind though, on developments, in our business it takes 2 to 3 years to hit stabilization normally, so they're generally going to lose money and overall or breakeven, if we're lucky in the first year.

Okay. Thank you.

(Operator Instructions)

Todd Thomas, KeyBanc capital.

Hi. Thanks. Good morning out there. Ron, just curious to get your broader thoughts on new supply? All four public company pipelines are increasing and the regional developers are looking to get involved to the extent that they can. What's your outlook here on the new supply overall?

Same as it's been. It's coming. We're ramped up. As I said, we're north of $300 million. Listening to some of the comments of the other CEOs in terms of what they are doing on CFO deals and how their thinking about buying CFO properties and all that, I'm sure the developers are very excited to be building. That will, in my mind, accelerate new supply.

Okay. Then, John, you mentioned that discounting is up in October, is that up from September or is that up year over year? Last year, I'm curious, in the fourth quarter, when did you begin to really start to increase discounts, at what point in the year?

My commentary about it being up, it's a year over year, October this year compared to October of last year. In terms of the fourth quarter of last year, we discount like throughout the period. There's no ramping up last year really, so last year we gave away discounts of about $19 million in the fourth quarter. I would expect that discounts will probably be up a little bit above that. Right now, like I mentioned, we are up about 5%. That's month-to-date October. Depending on how the move-in volumes pick up, as well as occupancy spread picks up, we'll throttle it back or increase it more depending on how the volume picks up.

Okay. Thank you.

You're welcome.

George Hoglund, Jefferies.

I was wondering if you comment on some of the recent trends in the Shurgard portfolio? Just color on what you're expecting over the next six months or so?

We started a pricing strategy in Europe, not really novel. Cut rates dramatically and lo and behold more people move in. We started getting really aggressive in Q4 last year in Europe. We've continued that into this year. You're seeing the results with move-in rates, realized rents down, let's see, for the quarter about 3.7% but a 7% uptick in occupancy, very strong move-in volumes, which is overall leading to positive revenue per available foot. We hit 90% at the end of Q3, which we haven't been at for several years.

We're positive revenue growth in all markets, even Holland, which has been in our Achilles' heel over the last couple of years, up 1.7% in the quarter. My expectation is that you will see that revenue growth accelerate into 2015 as we achieve stabilized higher occupancies and are able to moderate the price concessions and discounting. Also recall, I think 2011 -- I believe it was 2011 -- the VAT in London. We basically absorbed that, which is a 20% rent reduction on all existing tenants. As those customers have rolled out, we've gotten a nice uplift in the UK. Our same-store revenue growth in the UK for the quarter was up 5.8%.

Okay. One other question, actually, going back to capital raising issues. In terms of debt that you guys would potentially do, would you consider doing a traditional bond deal or potentially it's another term loan?

I'll that John elaborate, but in Q3 we did -- the Shurgard team, actually, did a EUR300 million bond offering. While it doesn't show up on our balance sheet, effectively 49% of that was ours. The proceeds were used to repay the inter-company loan, so you could look at that as a debt financing. We have a variety of sources to think about in terms of where we get capital. John?

Yes. I don't really have much to add, George. Again, we could issue preferred. That's still on the table. I don't want to suggest that that's off the table, but just want to make sure that folks understand that issuing debt is not off the table it's something that we have considered and are still considering, the possibility of issuing debt, be it either in the public markets, private markets, or what have you. We're keeping our options open. We are not at the point where we need to do anything at this point in time. We have plenty of capital with cash on hand, our retained cash flow, as well as a line of credit, at this point in time. We are not pressed to do anything at the moment.

Thanks guys.

You're welcome.

Michael Mueller, JPMorgan.

On the fourth-quarter acquisitions, I was wondering if you can throw out a blended occupancy number for them, and the ones under contracted, too? I mean just what's a rough number?

Yes. The occupancy. What's the occupancy. Mike, I think most of these are probably about 85% on a blended basis. Best guess.

Okay. Is that about what the Q3 ones were as well or is that lower?

I don't have those numbers here.

Okay.

It's usually -- probably 5 to 8 points of occupancy growth in most of the stuff we're buying, but it varies by portfolio.

Okay. That's helpful. Then given that today's of the 31st, I'm sure you probably don't have the October 31 occupancies. Do you have a more recent mark like you typically provide when the call is the following week?

Yes. I mean, we're up on occupancy year over year, as John touched on, our move-ins are up. Net, meaning move-ins versus move-outs, we're up 151%, which sounds like wow that's incredible. We got 3,300 net positive this month versus 1,300 last year. The 31st is a big move-out day, so I wouldn't read too much into that number. I mean those are the numbers, but it'll change by the end of today.

Got it. Okay. Thank you.

Ki Bin Kim, SunTrust.

Thank you, and good morning. John, I know you guys have a more conservative same-store NOI accounting policy than some of your peers. So just curious do you guys have the number if you included some of the acquisitions you've made and not waited three years for the inclusion in some cases, what you're same-store NOI growth would have looked like?

No. I don't. We just don't think about it that way. That's not how we look at our same-store, so no I don't have that.

Yes. It's, obviously, for more comparison purposes.

I'll tell you this, Ki Bin, by Monday we will have filed our 10-Q and we do breakout each of the vintage years of the acquisitions, and you can really just add those to our same-stores and compute what the number is.

Okay. This quarter it seems interesting that a lot of the -- you guys included, a lot of the self storage peers have decided to, on a year-over-year basis, maybe increase promotions or decrease rate a little bit earlier than your typically do it, even though it is seasonal. Just curious what collectively the self-storage companies rather than you, for yourselves, are seeing out there that is causing you to be maybe a little more competitive on pricing heading into the winter?

Well, I can't speak on behalf of the other folks. I expressed what our strategy is, and we're trying to pick up some momentum on our occupancy spread. We're trying, again, to level out the seasonal trends in our occupancy and view the fourth quarter and first quarter as areas where we can pick up some occupancy spread. That's our game plan. As a result of that, as I mentioned, we are spending more on television and a little bit more on the internet advertising. We are being a little more conservative on pricing and promotions.

Do you think that might create a little bit risk in 4Q from the optical standpoint of same-store NOI?

Again, that's why I'm telling you about it because I think at the end of the day our fourth-quarter NOI is going to be negatively affected by it, but it certainly, I think, will set up for a decent or better than expected Q1.

Okay. Thank you.

Ki, I would just add something on the same store. We started doing that 20 plus years ago and the purpose of the same-store reporting, which is by the way the same way we report to our Directors, is to give people, investors, our shareholders, a picture of the core underlying growth rate of the business and what are the fundamental trends, so that people like you can figure out, okay, is the business growing? Slowing down? What are the fundamental trends? Unfortunately, it's become a bit of a gamesmanship in terms of what gets included in same store and what doesn't. But, that is the purpose and that's why John doesn't know what it is if you include recent acquisitions because that's not the purpose of reporting the number from our standpoint.

Okay. Thank you.

Ross Nussbaum, UBS.

Thanks. Ron, are you seeing anything in the business today, from a competitive standpoint, from pricing standpoint that would lead you to believe that your same-store revenue growth can breakout higher from the, call it, 5% to 5.5% ish range you guys have been in for the last year or two?

I'll let John elaborate on that, but one of the things, Ross, that might give you a picture in terms of why that's a pretty darn good number, and the Q, as John said, will be coming out on Monday, is the 5%, 5.5% is a blend of a whole bunch of markets, 2,000 properties. So at any one time, some were up 8%, 9%. I think Denver was up 9% Q3. Then, you have markets like DC, which were up maybe 1% in Q3. Dependent on your portfolio weighting, you get a mix that averages out to the 5.5%. In Northern California, the Pacific Northwest is more really strong right now. LA is doing well. DC's soft. Philly is picking up, but it's relatively soft. New York is coming off the hurricane of a couple years ago. It's a 2% or 3%, but having 5%, 6% a couple years ago.

I'd add to that. Florida has lagged the rest of our portfolio, and one of the primary reasons for that is we added a lot of new product into Florida that we're busy trying to fill up. We are filling that up, and so I think that Florida will show more strength.

Let me add a little bit more to what Ron's talking about. For the West Coast properties, revenue growth for the quarter was 6.4%. In Texas market, all the Texas properties are on average 6.7%. In the Southeast, excluding Florida we're at 6.4%, so we have a lot of markets that are really doing really well. The Northeast, we've taken a bit of a hit, on the average is about 2.9%. That's the drag on our portfolio right now. Some of that's comps, as Ron said, with respect to Superstorm Sandy that has now -- we're comping against that and it's hurt New York and we struggled in Washington DC.

So can it get higher? It depends on your market mix. We're pretty diversified, so when one market's up, there's probably a market that's down. On an overall net-net I think 5% to 5.5% is, as you've mentioned, we've consistently done that for probably the last three years now.

That leads me to the follow up, which is, that's been in an environment, lately, that's had -- I don't want to say zero supply but virtually zero supply. That's changing and feels like it's going to be changing fairly rapidly given the spread between development yields and where market cap rates are. If we look out a year from now, year and a half from now, is it unreasonable for investors to say, hey, what if the economy stays constant? Supply is picking up, the self storage industry is going to have a heck of a problem maintaining 5% ish same-store revenue growth?

Ross, it's -- with the qualification of the portfolio, where it's diversified. A number of markets are relatively straightforward to build in and a number of markets are very challenging to build in. If you take Los Angeles or San Francisco, the Bay Area, or Seattle, very challenging markets to build in. Not a lot of new supply. We're struggling to find product to build in those market places and yet in those markets, especially, in the urban areas you have tremendous densification of population with the apartment construction. We were up in Seattle last week and I was amazed at all the apartment construction going on up there. Now, we have a lot of properties in the Seattle market and they are going to benefit tremendously from that influx of people. You take a market like Dallas, Texas, not as hard to build in. It's our highest volume market. My guess, that's a market that will probably get over supplied faster and more than other markets around the country. Florida is a usual market that typically gets over supplied, but if you're in Miami and that West Palm Beach area, also very difficult to find land and very difficult to build in. We have a big presence there, so that market will do better than average. It depends on where your portfolio is and which market.

Paula Poskon, D.A. Davidson.

Thanks. Just a follow up on new supply. Are you seeing any increase in adaptive re-use in solo locations?

Redevelopment, Paula?

Yes.

Yes, well our Gerard property is a big redevelopment. We just took down a property, an industrial building in Irvine that we're going to redevelop into industrial, so yes. We can take existing, other building uses and reconfigure them into self storage.

But are you seeing non self-storage builders doing that, I guess?

Non self-storage builders? I don't have any anecdotal evidence. It's not something I monitor, so I really can't answer you on that.

Okay. Thanks. That's all I had.

Okay. Thank you.

At this time there are no further questions. I would now like to turn the floor back over to Mr. Clem Tang for any additional or closing remarks.

Thank you for your attendance at today's conference call. We'll speak to you next quarter.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.