Public Storage (PSA) 2014 Q4 法說會逐字稿

Good afternoon. My name is Angie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Public Storage Q4 2014 earnings conference call.

(Operator Instructions)

Thank you. I would now like to turn the conference over to Clem Teng. Please go ahead.

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

All statements, other than statements of historical facts included in this conference call are forward-looking statements, subject to a number of risks and uncertainties, that could cause actual results to differ materially from those projected in these statements. These risks and other factors that could aversely affect our business and future results are described in today's earnings press release, and in our reports filed with the SEC. All forward-looking statements speak only as of today, February 20, 2015, 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 audio webcast replay of this conference call on our website at www.PublicStorage.com. Now, I'll turn the call over to Ron.

Thanks, Clem. We had a pretty good quarter, Q4 and year in 2014. I want to commend the operations field support, pricing, and real estate groups for doing such a superb job last year, and really positioning us well for a solid 2015. With that, operator, let's open it up for questions.

(Operator Instructions)

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

I was just wondering if you could talk a little bit about how rent and discounting trended in Q4 on a year-over-year basis, and how that translated into January?

This is John. From a discounting standpoint, we increased our discounting during the fourth quarter, which was consistent with what we had talked about in the third-quarter conference call, where we wanted to ramp up the occupancy spread, and we were going to discount more, as well as spend more on television advertising, which we did. And we were able to accomplish a goal of increasing our occupancy.

In terms of street rates and move-in rates, they were both higher in the fourth quarter, relative to the fourth quarter of last year. On the move-in rate, which is more important than the street rate, move-ins were coming in at about 4% higher, and we got about 4% more move-ins also. So it was a great quarter. We accomplished what we wanted to accomplish, so we're pretty happy with that.

And have those trends held into January pretty well?

Into January, we did a little bit more television and move-in volumes flattened out a little bit, but we were increasing street rates more, so we've pretty much broke even on the move-ins, but they were moving in at rates that were higher than the 4%, I would say.

Okay. And the second question from me on the Shurgard acquisition, the basic math gets you to about $250 a foot there, which seems pretty rich. Can you just maybe give us a little more color on the assets they bought and if that's market, or what was unique about those assets to drive the pricing there?

I'll just say the portfolio's about 69%, 70% occupied. On a trailing NOI basis, the NOI's somewhere between 4% and 5% and you should know -- European rental rates on average are about double the US.

Okay. Thanks, guys.

Your next question comes from the line of Ki Bin Kim with SunTrust Robinson Humphrey.

Could you -- I'm referring to -- actually your third-quarter 10-Q, just given your fourth quarter's not out yet. I know in this sector and most realty sectors, that the same store NOI definition is a little bit different by Company. Yours is obviously a little more conservative, given that you wait three years for assets to move into your pool. Going back to the third-quarter Q, it seems like the property pool from 2013, the things that you bought, the NOI differential in 3Q 2014 over 3Q 2013 was about $15 million, pretty substantial, and your 2012 pool was up $1.4 million.

Now, just hypothetically, if you made your definition a little bit more loose and more similar to other companies in this sector, how would your 6.8% same-store NOI growth, what would that be? Would it be close to 8% or more than that? Less than that? Just curious really trying to look at it from an apples-to-apples basis.

Ki, I'll touch on that, and I'll let John add. I don't know whether you I could call our same-store pool more conservative. I would call it more practical.

Because what we're trying to do is give you, the investor, as well as our Directors, and this is the way we run the Company as well, what an apples-to-apples comparison of the business, in terms of our store performance by properties. And we're not trying to manage to a number, or put in properties that clearly are not stabilized, to improve our same store NOI. So the numbers that we publish for you and for the 10-K and the 10-Q are the same numbers that we run the business with. Properties that aren't stabilized go into a non-stabilized pool. And the Management teams are measured on those differently than they are on the same-store operations.

What the numbers are with non-stabilized properties, obviously they'd be higher, because the properties aren't stabilized, and so their growth rates are higher. What it is, I don't know. John?

I have nothing to add to that.

Okay. And second question, if I look at your New York revenue growth, and not just your New York assets but for most of the public peers, with self storage in New York, it doesn't seem like from a same-store revenue standpoint it's really growing that much faster than any other market. Even the big bucket you call other markets is pretty close to that, or better. So just curious, is a market like New York really -- based on the pricing, is it really going to put up that much better growth than you think self storage in most other markets or is this kind of a 2014 anomaly?

If you're referring specifically to New York, we talked about that in the third quarter also, where I mentioned that part of the problem we had was a year-over-year comp, because we saw a huge lift from Superstorm Sandy, which occurred in the fourth quarter of 2012. And that carried over in throughout 2013, where occupancies were very high in New York, and we were experiencing above average rental rate growth.

When we got to 2014, then the comps became very difficult and so that's what you're seeing in your -- if you're looking at Q3, and when we show you Q4 in our 10-K, you'll see a similar thing. But what we are seeing now is as the comps now -- we're kind of rounding the corner again, New York is beginning to fare better, meaning that the year-over-year growth is going -- is starting to rise and get back on track to what I would say a normal growth would be for it.

Ki, if you look across the portfolio in Q4 and you'll see this when the K is out, you're going to see an acceleration on the West Coast markets. For example, if you take Portland for the year, it was up 7.4%, but in Q4 it was up 8.6%. San Diego for the year was up 4.9% but for the fourth quarter up 6.6%. Sacramento for the year, up 4.7%, but Q4, 6.6%. Los Angeles for the year, 5.2% but for the quarter, 6.1%. So you're seeing a real acceleration in the rate of growth in our West Coast markets and then also in some of the Florida markets, Orlando for the year was 4.4%, but in Q4, 5.6%.

Okay. Thank you.

The next question comes from the line of Jana Galan that with Bank of America Merrill Lynch.

Thank you. On the third quarter call you mentioned looking at other debt financing options. Curious why you decided on the preferred financing in December, and how you're thinking about capital needs in 2015?

Well, the preferred financing in Q4 we thought 5.8% or 5.87% was a pretty attractive rate. It wasn't a big trade but it was -- it was a nice trade below a 6% coupon. Regarding the debt financing, we're still looking at various options. Do you have anything to add on that, John?

No. I think right now, we're not under pressure to do anything, even though our development pipeline is ramping up, as we've noted in the press release. But for the most part, the ramp-up in development can be funded with our retained cash flow. So the big question mark for us is the acquisition environment, and how that plays out for the rest of the year. Currently, we're sitting on about $150 million to $180 million of cash. Most of that is from that preferred that we issued in December. But as Ron said, we are looking at issuing -- potentially issuing debt, but that's not something that we feel under pressure to be doing any time soon.

Thank you. And then just a quick question on advertising. If you can kind of comment on paid search trends, where you think pricing will increase in 2015, and maybe the decision to continue doing TV advertising?

Yes, we did, as I mentioned we did television in Q4. We did some in January. We continue to evaluate the effectiveness of television advertising. My gut is that we will probably do similar amounts as we did in 2014, but that kind of remains to be seen. Our occupancies are so high right now, it gets more and more difficult to justify spending television advertising dollars. With respect to other advertising, we continue to spend money on search terms with both Google and Yahoo, and I expect that to continue, probably at the same pace as we've experienced in 2014.

Your next question comes from the line of Smedes Rose with Citi.

Thanks. I wanted to ask you just about the payroll. I know you've talked earlier in the year about reducing hours, and it did decline again in the fourth quarter and of course for the year. Are you seeing any pressure at that segment of the labor market, and any thoughts on where pricing might go in 2015?

Well, Smedes, I think we've done some things to improve labor productivity in the course of 2014 and I would anticipate probably a little more normalized rate of increase in wages between 1% and 2% in 2015 year-over-year. I say that, not knowing the impact that Walmart's decision to increase their wage rates is going to have, in terms of our ability to recruit people. So that was just announced. I don't know what impact that's going to have, because we usually -- we're kind in that labor market, wage rate zone for our people that we hire as relief managers. So hard to anticipate the impact of that right now.

Okay. That's helpful. And then on the Shurgard expenses, it looked like they went up a lot in the fourth quarter. Was that just transaction oriented and related, and will that sort of stabilize going forward?

Are you talking about the same store operating expenses that were up quite a bit?

Yes.

That was -- we had some credits in the fourth quarter of last year that we didn't have in the fourth quarter this year and then they accelerated some R&M and some -- yes, the credits were mainly related to property taxes. So they look higher, but I think if you look at the full year, they're pretty good expense control for the full year.

Okay. Thank you.

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

Just following up on the Shurgard Europe acquisitions, I was wondering, Ron, maybe can you frame up what the investment opportunity set for Shurgard Europe looks like, what the pipeline looks like and maybe what the current thinking is towards investments here?

Yes, Todd. As you probably know, 2014, the investments we made combined around $90 million or $95 million are the first investments we made in quite some time in Shurgard. We've really been focusing on taking the cash flow and deleveraging the entity. With the completion of the private placement in June of last year, refinancing of the debt, Shurgard has a fair amount of free cash flow, and so they've been ramping up their opportunity set in terms of acquisitions and development.

And so at year end, I think we have three or four properties in the pipeline to develop in London and then we did this acquisition in Germany, and I would anticipate that you'll see more activity out of Shurgard in 2015. We generally don't comment on transactions and they've got some stuff in the hopper, so I don't want to really get into what the details are. I would anticipate that Shurgard will be active again in 2015.

Okay. And then second, on the developments, domestic developments, you're starting to deliver that product to the market now, and I was wondering if you could just give us an update, any thoughts on lease-up time frames here? I know historically, I believe it would take anywhere from maybe three or four years or so to lease up and stabilize a new development. I know that your large Bronx facility leased up much quicker than that. Just curious what you think the average time to get these projects delivered over the next 12 months to stabilization might look like?

Our underwriting of -- to achieve stabilization has not changed. It's generally somewhere between three and four years, depending on the property size. And that achievement of stabilization, part of our underwriting is we impute a cost to carry until we do achieve stabilized NOI.

So far, we've been fortunate. I believe most, if not all of our developments are ahead of schedule, in terms of pro forma occupancies and cash flow. They are not ahead of schedule in terms of achieving targeted rents, and that's by design, in terms of we use a different pricing strategy for developments than we do for stabilized properties.

The Bronx, the Gerard property's actually about 92% occupied today, which if you would have asked me 18 months ago when it opened if we'd be at 92% occupied in 18 months with 4,000 units, I would have laughed. The pricing group, the marketing groups have done a great job, and operations in getting that property filled up. That's kind of the way it's working across the platform. Hopefully we'll be delivering pleasant surprises with respect to our developments, but our underwriting hasn't changed.

Okay. Great. Thank you.

Your next question comes from the line of George Hoglund with Jefferies.

Just want to see if I can get the occupancy for the end of January?

George, it's about -- let's see. Occupancy's about 93%, versus 92.3% last year.

Okay. Got you. And then also, just wondering if you can comment on the potential FX impacts from the Shurgard portfolio, how you're addressing that for 2015?

With respect to the foreign currency exchange?

Yes.

There's not a lot we can do about the dollar strengthening against the euro, if that's what you're referring to. It's certainly going to have a negative effect on Public Storage, given that I think for all of 2014, I think the average exchange ratio was somewhere about $1.32, whereas the euro I think that exchange rate today is somewhere down about $1.14. There's about a 13%, 15% decline there, meaning all other things being equal, the income we pick up from Shurgard Europe will go down. Keep in mind, however, that Shurgard Europe represents about 5% of our FFO or so. So it's not a significant effect on the overall Public Storage earnings potential.

We were fortunate that our inter-Company loan got refinanced just about a month before the precipitous decline in the euro, because that would have been a real hit.

Okay. And then can you also comment on rental rates in Europe, given you're still seeing year-over-year declines in the Shurgard portfolio?

You mean what is the outlook for rental rates in Europe?

Yes.

Yes. In Europe we've gotten really aggressive on pricing to drive occupancy, and we've been able to do that. I think we're up 500, 600 basis points year-over-year in occupancy. But the net effect of both of those is that we've still been able to deliver positive revenue per available foot growth.

So while the rates have gone down, the volume has increased greater. So revenue growth is positive. I would expect that to continue in 2015, because our average for the year 2014 was about 86% and Mark and the team over there are targeting to get their portfolio up to 90%, 91%. So I think you'll see probably continued in-place rent movement down, offset by higher volume, and I think we'll see some pretty good top line revenue growth net-net out of Shurgard in 2015.

Thanks. Very helpful.

(Operator Instructions)

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

You talked about Europe being more active seemingly on the acquisition side. Looking at the press release, it talked about a new EUR40 million credit facility. Was that meant to be a one-off facility for the acquisitions, or is that something that can be expanded and fund anything that's on their plate going forward?

The $40 million is a revolver, Mike. So it will -- it has a term of about 3.5 years. So yes, they're putting it in place to help fund the acquisition, but to the extent they do pay it down between now and when the facility expires, they can redraw on the line, on that revolver.

Okay. Thanks. That was it.

Mike, just -- your question might lead to what is the financing capacity of Shurgard, and under their loan, the private placement that they did in June, I think they have borrowing capacity of another EUR100 million, EUR150 million.

Got it. Okay. That was helpful. Thanks, bye.

Your next question comes from the line of Michael Salinsky with RBC Capital Markets.

Just given the high occupancy going into the year here, as well as it sounds like keeping advertising cost the same, just kind of talk about where you see the greatest opportunities in the leasing front in 2015, whether maybe you plan to push rate a bit more, just given the high occupancy, how much concessions are left to reduce, can you just talk about that a little bit?

Mike, I'll start and I'll let John add to this. If you look at Q4, we were able to do what I think are two really incredible things. We were able to move period-end occupancy up 0.8%, which is a real achievement in the fourth quarter, as well as move in-place rents up from 4.6% to 4.9%. So moving in-place rents as well as occupancy in Q4 really set us up nicely for January. And if you go back to what we've been talking about, our opportunities on occupancy are really in the fourth quarter, and in the first quarter. So what we did on the promotional discounts and the television in Q4 not only helped our positioning, our revenue growth in Q4, which accelerated over Q3, but it's positioned us nicely going into Q3 for higher occupancies -- Q1, excuse me, for higher occupancies and higher in place rents.

I would add to that. I think that street rates are going to be higher this year. I think we're seeing competition now pushing street rates more aggressively than they have in the past. Probably due to the fact that their occupancies are much higher than they've experienced before, which overall is a good thing for Public Storage because that's been one of our more difficult places to grow revenue. So as I mentioned, we are seeing move-in rates starting to accelerate. Hopefully that will continue.

I would also think that the level of discounting will subside, will come down. In Q4, we gave away approximately $20 million of discounts on an annual basis. That's about $80 million. So there's a lot of room to reduce discounting. So we'll work on that also.

The third bucket, Mike, just to add to that, is customers greater than a year upticked in Q4 as well to 56.7%, versus 55.8%. So we end the year with about 10,000-plus more customers in that age cohort of greater than a year.

That's very helpful. Then just as my follow-up question, you talked about Europe and the acquisition opportunities seen there. Can you talk a little about the US? Obviously third-quarter, fourth-quarter activity seemed to pick up there. Are you seeing more product on the market? And then just given the success that you've had in expanding the development pipeline over the last few months, are opportunities becoming more attractive -- opportunities becoming more plentiful there?

Well, Q1 is typically a low product opportunity. There's not a lot of product coming into the market in Q1. It really starts to pick up in Q2 and Q3. So there's not a lot of stuff in the market right now in terms of acquisitions. As we move through 2014, I would tell you pricing continued to get more and more aggressive. We've moved out into some other markets where we have a strong presence, some of the more core competitive markets in terms of acquisitions.

And I would tell you -- I mean, there's deals getting done well below 5% cap rates on the acquisition front, which is -- I'd have to say, we somewhat saw this coming a couple years ago, which is why we've accelerated the development pipeline. If you look at our pipeline, it's almost double what it was at the end of 2013. And I think you'll see us continue to try to accelerate that form of expansion vis-a-vis acquisitions. Very happy with our development pipeline, both the growth of it and the quality of the assets.

Thank you.

Your next question comes from the line of Ki Bin Kim with SunTrust Robinson Humphrey.

A couple quick follow-ups. What is the percent of customers receiving a discount in the fourth quarter this year versus last year?

I don't have that in front of me. My gut reaction is probably somewhere about 76% versus, I don't know, a little less than that last year.

Okay. And I know you don't typically do this, but just given where your occupancy rates are in your commentary regarding street rates that might be improving in 2015, just ballpark figure, what do you think your portfolio can handle or push through in terms of street rates in 2015?

I don't know. I wouldn't want to guess.

Okay.

I know I'd be wrong.

All right.

Your next question comes from the line of Dave Bragg with Green Street Advisors. Dave, your line is open.

Most of my questions have been answered, but I wanted to follow up on your point made on low acquisition cap rates driving you incrementally into development. To what degree are you seeing that across the rest of the market? How much new supply do you observe under construction today, relative to a year ago?

Well, the simple answer is more, and I'd tell you, it's more than people realize. We had a real estate meeting yesterday and I was surprised at the number of markets where we're starting to see development. So there's a fair amount more activity than people realize, and it's logical. If you're a developer, and you've got these public companies buying the C of O deals at nice spreads to what you can build it for, why not build the product? And it is coming to market. Texas is an easier market to build in, so there's a fair amount of product coming online in Dallas and Houston. The Carolinas. So we're going to see more and more development.

So is it your sense that the construction environment has loosened up considerably for the private developers?

Yes.

Okay. Thank you.

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

Hey, Ron, it's Ross this time in case you didn't know it wasn't me before.

I thought your voice had changed.

Thank you. So if I look at the per square foot cost of your acquisitions that you did last year, I think it was about $128 a foot. If I look at the cost of your current development pipeline, you're building to about $117 a foot. I know it's not directly apples-to-apples in terms of the geographic mix, but I guess my question is, do you think it's a fair comment to say that you're paying above replacement cost for the acquisitions? That's part A.

Yes.

And if that's true, which sounds like it is, why not -- and I know you've accelerated development, but why not put even more capital into the development bucket and pull back on acquisitions?

Ross, we are trying. It may -- relative to our size, $400 million may not look like a lot, but that's -- what we report on is like a pipeline of 29, 30 properties. Behind that are another 25 or so properties that we're working on, to get into the development pipeline. So there's a lot of properties in that mix. We've ramped up the staff considerably, and as we get more and more comfortable in terms of the market, people and place experience, I think you will see the development pipeline increase.

The great thing about the development pipeline is, obviously, we're building to replacement cost. We're building brand-new product. We're getting into submarkets where there's little competition, and where we have little product. So we're really able with the development teams to fill in markets and submarkets that we want to be in, and really improve our market share and the quality of our portfolio in the various markets.

And just remind me again, the stabilized yield that you are building to, based on current market rents is what?

Varies by property but I'd say somewhere between 8% and 10%.

And just an extension of that prior question, if that's true, and people are paying pretty low cap rates today, why aren't we about to see, for lack of a better word, an explosion in self storage construction the next 12 to 24 months?

Ross, it's still hard to do. But as I just touched on with Dave Bragg, there is more development going on, and it is accelerating. Think back two years ago, no one was really talking about development except us. Now you go to self storage conferences, and everyone's talking about development, and trying to do it. I believe you will see an acceleration of development. We are seeing it, and it will continue to accelerate.

In some markets like Austin, there was a portfolio that traded north of $200 a foot. We're developing in Austin at $80 to $90 a foot. Assume a local guy there could develop at $100. That's a big spread.

I see. Thank you.

Your final question comes from the line of Paula Poskon with D.A. Davidson.

Thank you. I just wanted to follow up a little bit more on the new supply and the amount of development, Ron. Are you seeing that new development in what you would consider to be good infill locations, or are we back to razing the cornfields at the edge of town?

We don't spend a lot of time in the cornfields, so I can't tell you about that. In terms of --

Metaphorically speaking.

Yes, yes. No, I know. Where we're seeing the more development in markets you would expect, the Southeast, where it's easier to build and Texas, where it's easier to build.

New York.

Yes. Dave Doll's here. In New York, New York we start to see development pick up 18 months ago, and a lot of stuff is really coming online in New York. So those are the major markets. We're doing some stuff. We are doing some stuff in California. We don't see other people doing stuff in California. Not a lot in Florida. Give you some idea.

That's helpful. And are you seeing much redevelopment or repurposing?

We've been doing redevelopment for five or eight years. In terms of what other people are doing, I can't comment. That's an ongoing part of our program. So we've been doing it and we will continue to do that.

Okay. Thanks very much.

At this time there are no further questions. I will now turn the conference over to Management for closing remarks.

Want to thank everybody for participating on our call today. And we look forward to talking to you next quarter.

Thank you for participating in today's conference call. You may now disconnect your lines, and have a wonderful day.