Public Storage (PSA) 2015 Q1 法說會逐字稿

Welcome to the Public Storage first-quarter 2015 earnings conference call.

(Operator Instructions)

Thank you. I will now turn the call over to Clem Teng, Vice President of Investor Relations. Please go ahead.

Good morning, and thank you 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 1, 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 and the non-GAAP financial measures that 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. We had another solid quarter. We continued to execute on all fronts. In the US and Europe, revenue growth continues to accelerate, our development pipeline continues to expand, and industry fundamentals are good. With that, operator, let's open up for questions.

(Operator Instructions)

Michael Mueller, JPMorgan.

Thanks. Europe's obviously pretty small at this point relative to everything overall, but can you give us an update on pricing, occupancy, the NOI trends there?

Sure, Mike. Occupancy for the quarter was, for all of Europe, was 87.9% versus 82.1% last year, so up 7.1%. Rates were backwards 3%, so REVPAF was up close to 4%, 3.8% for the quarter. So we're feeling good about Europe. All markets but one was up in NOI. Holland, our most challenging market, occupancy was 81.4% versus 70.7% last year. A big 15% increase in occupancy year over year.

Great. I forget. Is there a follow-up or just one question?

You can follow up.

Can you talk a little bit about the G&A increase relative to prior quarters and what's a good run rate to expect for the balance of 2015.

Hi, Mike. This is John. Our G&A for the quarter was about $24 million and that compared to last year at around $19 million. And the major swing items, the increases, were basically in three categories. One was share-based compensation expense, which was up about $1 million. The second item was our development overhead that's being expensed, that was up about $0.5 million. And then legal costs, which is up about $4 million for the quarter.

On a run rate basis going forward, I would expect that our G&A, although it's running about $24 million for the quarter, don't think it will run $24 million for each of the next three quarters, but it will continue to run higher than last year primarily due to we expect additional increased legal costs as well as share-based compensation and development overhead costs being expensed. Expect higher G&A going forward.

Got it. What's the legal cost tied to?

Various litigation matters, various parts of the Company.

Got it. Okay. Thank you.

Ross Nussbaum, UBS.

Good morning. Jeremy Metz on with Ross. I was just wondering if you could talk a little bit more about the traction you're making on rate growth. You obviously saw some good acceleration in 1Q.

It appears to be at some of the highest levels in quite a long time. And just how much of an impact, you know, lower discounting is having and where realized rents from move-ins were relative to move-outs?

Yes, Jeremy, this is John again. For the quarter, our move-in -- our street rates were up about 6% roughly. And our move-in rates were up about a little over 5%. Our volume of move-ins were up about 1.3%. Pretty happy that we were able to move street rates and people are accepting those higher rates. We're seeing competition also raise their street rates, which we really hadn't seen a whole lot over the past couple years.

I got to believe everybody's fairly full and people are getting more aggressive on rates. On the discounting side, at least for the quarter, the number of move-ins receiving discounts was -- the percentage was about the same as the first quarter of last year. So roughly about 80% of our move-ins were getting a discount.

I expect that as we move forward given our occupancies, we'll start toning that back. And we're starting to do that in the month of April. Street rates continued to move higher in April. They're now somewhere in the neighborhood of about 7% higher, and move-in rates are also moving higher at this point in time, so pretty happy with that right now.

Great. And then just one for Ron, if I can. A little bit bigger picture on the development front, more broadly, obviously your guys pipeline grew a little bit this quarter, but anecdotally, we're hearing about a pick-up from all the new money trying to enter storage. It's looking for different ways beyond acquisitions and they're looking at more CO deals. Just given your footprint what you're seeing sort of nationally on the development side.

Jeremy, we started our development program a couple years ago in part because acquisition pricing was getting -- starting to trend above replacement cost, and I'd say in many cases well above that. So we're really happy we've got a good development program growing. Despite some meaningful deliveries this quarter, we still expanded the pipeline.

We're up to 31 projects, about 3.6 million square feet. We're seeing increased development across the US. Is it something to worry about today? No, not really.

It's kind of natural given the comments John just said in terms of rates moving up. It's natural then that developers would look at those rates by us and others and say, okay, at those rates I can develop and make a decent return on capital. We've got Dave Doll here, so I'll let him add any color you've got on development.

I think we're pretty happy with the things that we're opening. In fact, we'll open one next Tuesday here in Glendale. And continue to see other new development in the major markets like Miami, Houston, Dallas, but not so much in southern California, northern California, or some of our other key markets.

Okay. Thanks.

George Hoglund, Jefferies.

Internally acquisition environment, are you seeing any difference in the composition of potential buyers out there? And also any difference from the motivation from sellers, if anyone's feeling more of a rush to get deals done nowadays?

This is Dave Doll, again. Not in terms of new equity players. There has been a constant inflow of folks trying to come into the marketplace. I don't think that's changed any perception -- any over the last several quarters.

But in terms of quality of product coming to the marketplace, we don't see high quality product available today, and hence it's one of the reasons why we're so happy with our development program. It gives us an opportunity to bring better product to the marketplace, or to our customers.

In terms of development you guys are seeing outside of the projects you guys are doing, stuff that's scheduled to come online in your markets, generally who are the developers or the operators of these facilities?

Many of the local regional players that have continued to hold their portfolios have active development programs started. There are a number of developers that had sold out in the prior 2006, 2007, 2008 timeframes. They're back in business again trying to start up development programs. It's generally people that have had -- (technical difficulty) in the business over the years.

Keep in mind, remember the industry, right, has got 50,000 facilities. The top five operators have less than 10% market share so the industry is highly fragmented. You can extrapolate that into the development programs, though, as well. It's highly fragmented. A lot of small one, two, three property operators doing development programs.

Okay. Thanks, guys.

Todd Thomas, KeyBanc Capital Markets.

I was curious, where do you think the portfolio can get from an occupancy standpoint? Is 96% possible in late July? Along those lines, are you seeing any changes in move-out activity related to existing customer rent increases? Any changes in behavior around that?

Todd, I'll start and Ron can jump in. In terms of changes in customer behavior with rate increases, no. We haven't seen any changes. It's still very sticky. For the most part, we're sending tenants who have been with us longer than a year an annual increase and we're not seeing any change in that.

In fact, we're seeing that our aging of our tenant base is actually -- continues to improve. I think we're at about 56.5%, 57% of our tenants have been here longer than a year. So that continues to improve. How high can occupancies get? I don't know. I've made an attempt two years ago saying that I didn't think they can get higher than 94% and we're higher than 94%. So, can they get to 96%?

We have properties that are at 96%. We have properties that are probably higher than 96%. There are certain properties and maybe even markets that can get to those levels. I don't think our entire portfolio can get there.

I'd just add during April we had three markets where the market as a whole was 97% or better occupied during the month of April. As John said -- I would agree with John. To get 2,000 properties at 97%, probably not going happen. Okay. That's helpful. If I could just follow-up. With regard to the litigation matters, can you just shed some light on what that pertains to. It seems like sort of a big number. Is that something that you foresee continuing throughout the balance of the year?

Whatever we could talk about will be in the 10-Q. That's what you should read to get clarity on the litigation.

Okay. All right. Thank you.

(Operator Instructions)

Smedes Rose, Citigroup.

Good morning. I wanted to ask you, as you look back on some of the properties that you've acquired, are you reaching stabilization maybe faster than you had expected given how strong fundamentals are in the business? And as you look forward, have you changed your expectations around how long it would take to reach stabilization as you lease up new assets?

Smedes, this is Ron. Generally, what we do on properties that aren't what we consider stabilized 90%-plus occupancy is we tend to be a little aggressive, actually a lot aggressive on rates to fill them up. And as they fill up and stabilize, then we'll start to push the street rate and the in-place rents on customers. Are we filling up faster than we anticipated? Yes.

You take the Gerard property, which opened in May or June of 2013, 4,000 units, and it ended April at 93.9%. I think we forecast that property taking four years to fill up. It's basically filled up in less than two, so much faster than we anticipated. However, it is at -- it filled up at lower rates than we anticipated but we think we'll make that up, and so net-net we'll be ahead of the game. And we're seeing that in both our developments and acquisitions.

The table that is in the press release, if you look at the 13 acquisitions -- 2013 acquisitions kind of give you an indication of what we are doing. Last year, they were at 86.3%. They ended Q1 at 92.8%. Up 7.5%, and then you see the contract rents moving from $13.25 to $14, or up 5.7%.

You should expect in that portfolio that maybe occupancy comes up a little bit in terms of stabilization, but that the rates will continue to move up at above average levels for probably the next couple of years because we fill them up at below market rates.

Okay. That's helpful. Then I just wanted to ask you, you announced redemption of some preferred in the quarter. Are you still leaning towards issuing debt at some point as well for your financing needs, in as much as you have any or has your thoughts around that changed at all?

No. No, we're still looking at potential issuance of debt sometime in 2015.

All right. Thank you.

Ki Bin Kim, SunTrust Robinson Humphrey.

Thanks, and good morning. Just following up on that last question. If you did pursue debt, where is your mindset because obviously you extend your line of credit. Is it more shorter term in duration or are you looking more at the 30 year type of range?

Hi, Ki. This is John. What we did expand our line of credit so most likely what we'll do is we'll get in deep into our line of credit before we start thinking about longer tenure debt. We could do anything from 7, 10, 12, 15, 30. I think we can look at the whole spectrum and tranche out debt the way we see best fit for Public Storage. We haven't gotten to that point to have to make a decision yet, but I think we have a lot of options open for us.

Okay. Maybe just turning to your same store expenses. You've done a very good job of keeping it very flat, and similar most other REIT companies are expecting a lot of expense increases.

Just curious, besides the payroll part of it we just talked the last quarter, but how are you keeping it flat so well? And noticed that your allocated overhead was favorable to the expense number by $1 million or so. If you could talk about that and how long can this stay or does it eventually have to return to an inflationary rate?

The answer to the second part of your question, will it return long term to an inflationary rate, yes. We consistently say that. Having said that, as we've also consistently said, we're always working on ways to take costs out of our system to get more efficient, more productive in all aspects of our business.

If you look at Q1, big increase item was snow removal; we were up $1 million over last year. I can't believe we are up $1 million over last year, but we were. Utilities are down, gas prices are down, oil prices are down, and so we've renegotiated some utility contracts so I think that number could remain flat to slightly down.

Advertising and selling, when we're 95% occupied, there is not a lot of need for that. I think when we get to Q2, we didn't do advertising in Q2 of last year, so you won't see advertising this year. That line will probably be flat. And whether we do advertising the balance of this year is yet to be determined.

Other direct property costs were up 3.6%. Allocated overhead was down mainly because we used to have our annual sales conference in the first quarter, and we moved it into the third and fourth quarters of last year. Last year was a double up and this year we have the expense savings in Q1.

Okay. Thank you.

Todd Stender, Wells Fargo.

For the acquisitions already completed this year, the annual contract rent is $11.65, and just lower than some of the previous years. Is there anything we can read into that number? Is it a reflection of the markets you're entering? Are any [sevo] deals included in that?

It's a function -- Todd, it really varies by market. You've got some of the properties are down in Texas. I think we've got one under contract in East Palo Alto that probably has a in-place rent of double what is down in Houston. So it just depends on which markets for the properties that are in that quarter's acquisitions.

Thanks.

We're not sitting here targeting we want to buy properties at $13 or $14 of in-place rent. It's really a function of do we want that property, yes, and therefore the rent makes sense, and so we'll buy it.

Okay. That's helpful. Maybe the sample size is small that I'm looking at.

Yes.

Second, can you provide any color on the land lease buyout that you had in Q1?

Yes. It was a remnant transaction from the Shurgard merger in 2006 and we had an option to acquire the land lease this year. And so it was a predetermined formula and we exercised our option and closed on the transaction.

Great. Thank you.

Pretty good transaction for us. Only $15 million, but it's a pretty good transaction.

Thank you.

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

We appreciate everybody's interest in Public Storage in our first-quarter -- oh, wait. There is one more call there.

Dave Bragg, Green Street Advisors

Good morning. Just snuck in under the wire there. A bigger picture question on supply for you. There is a lot of concern over this new supply that's emerging but in light of your strong operating results, the question is how much new supply does the industry need?

It seems as though the supply is needed and when you take a step back, Ron, and you look at eight square feet per capita, does that seem like the right level going forward/

You know, Dave, I think I've said that before. You take the US population, 7-8 square feet per capita, normal population growth of 1% a year. Or you can take 50,000 facilities and 1% a year, that's 400 to 500 facilities per year. That kind of keeps everything at 7 or 8 feet per capita. I will tell you as you go across the country, markets vary greatly.

Between 2 and 3 square feet per capita and 12 and 15 square feet per capita. Obviously, the ones that have the higher square footage tend to have lower rate growth. If you ask me where development will happen fastest, New York has been working on development programs for a while so I think we'll see a big uptick -- meaningful uptick in supply in the New York area.

And then across the country, it'll vary between infield markets and then outlying markets where it's easier to get zoning permitting and land is cheaper. But 400 or 500 properties a year kind of keeps things static, and we haven't had much development since 2009. We are four or five years behind in terms of the curve of new supply relative to organic population growth.

The industry saw a significant secular shift in terms of growth of square feet per capita of maybe three 20 years ago to eight today. It seems like your thought is that we grow in line -- growth in line with population growth would make sense that these results, the demand that we're seeing don't necessarily indicate that we need 9 or 10 square feet per capita.

I guess my point in mentioning the 9 or 10, like I know Austin has got over 11 square feet per capita, and Austin is a pretty good market for us. Is the max seven? I don't think so, it varies by market. And could the country -- in the US, could we go to a 10 or 11 square foot per capita?

I don't think that's unreasonable given the trend toward movement to apartments, smaller homes, especially in markets like Manhattan and San Francisco, and even parts of LA. It's not impossible to get to a 10 or 11 per square foot. Is that going to happen? I can't say.

Thank you for that. One quick housekeeping one. You referenced as to the 10-Q. Is that coming out today?

Probably next week, David.

Thank you.

Smedes Rose, Citigroup.

It's Michael Bilerman, here. Ron, I may have missed in your opening comments because I dialed in late, but did you comment at all in terms of how you're going to replace the COO role? I know Shawn left in late March to be the COO of some private educational company. Can you just talk a little bit about what those plans are?

Yes, well those plans have already been put in place. We have divided up the country and given responsibility to three outstanding executives that have been with Public Storage 15 plus years. Those three exceptional executives are now running operations.

By committee?

With the team?

The three report effectively. I ask it more so because I think the COO role has had some turnover over the last five or six years. I think Shawn may have been the third in that seat. I didn't know if there was something structurally that wasn't working. Just talk about what has -- maybe there is just reasons why each of them left.

There are different reasons why each of them left, but you can ascribe it to my inability to hire a COO. I'll just leave it at that. But the guys we have running the operations are long-time Public Storage execs that have grown up here in the operations and they're just doing -- well, you can tell by the results, they're doing an exceptional job.

And then what was the change in Chief Legal Officer at the beginning of the year? Was that a retirement or what transpired there?

Yes. Steve retired. I don't know what Steve is doing but he is retired and we brought on Lily Hughes.

Okay. Thanks.

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

Thank you again for all your interest in Public Storage, and we'll speak to you next quarter.

Thank you for participating in the Public Storage first-quarter 2015 earnings conference call. You may now disconnect.