Public Storage (PSA) 2015 Q4 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 fourth-quarter 2015 earnings conference call.

(Operator Instructions)

Thank you. I would now like to turn the conference own to Clem Teng to begin.

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

I just wanted to remind everybody that 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, February 17, 2016, 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.

Now I'll turn the call over to Ron.

Thank you, Clem. We had a pretty good fourth quarter in 2015. So we're happy to open up for questions.

(Operator Instructions)

Our first question comes from the line of Smedes Rose with CitiGroup.

Hi, thank you. My question is, just looking at your property manager payroll and supervisory payroll, those line items combined came in, it looks like, about 1% for the full year in terms of total increases. You guys always do a good job of keeping those payroll numbers fairly low in terms of percentage increases. But as you think about 2016, is that sustainable keeping it at that pace? Or what kind of increases would you expect maybe going forward?

Smedes, I would say you should probably expect between 2% and 3%.

That high?

Yes. You got supervisory payroll the year for 1.9%. We were light a few district managers in 2015, so we will fill in the bench there. On-site property manager payroll, I'm looking at 0.6%. That will probably be up 1% to 1.5%, would be my guess.

Okay. And then could I just ask you, the acquisition activity thus far in the first quarter looks like almost as much as you did for the full year in 2015. Can you share maybe what yields you're buying at, or maybe any thoughts on just pricing that you're seeing now versus what you were seeing last year, or availability of product? It just seems like it accelerated quite a bit from what you had done last year.

Yes, I wouldn't read too much into that. I think last year we were a little light on volume. Pricing had, for the most part, gotten away from us. The transactions that we see, a lot of the transactions we see in the marketplace, it doesn't work in terms of what we're looking for in terms of returns or value per foot.

And that was pretty much the case last year, and I'd say it's continued into this year. We get deals here and there, and so that's why the volume's $100 million, $150 million.

Thank you. Appreciate it.

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

Thank you. Ron, as you look into this year and next year, do you see anything on the horizon that you can point to that would suggest or make that 6% realized rent growth or contract rent growth number you posted this year to slow down at all?

Ki, I have been saying for the last couple of quarters, and I think it's true, eventually the uptick in new supply, number of properties being constructed, will have an impact on rental rates or realized rents per foot. When that takes place, I don't know. Is it back half of this year, or is it 2017 or 2018? I don't know. The new supply stats are kind of a best guess. My best guess is we probably got 1,000 to 1,200 properties under construction in the US, and that's probably 2%, 2.5%, which is close to 3 times population growth.

Now, the flip side of that is, that new supply is not coming in in all markets, so the markets with the greater-than-average supply growth, unless the population is flowing there, will have rental rates impacted sooner rather than later. But when that takes place, I don't know. It will happen, though. It's economics, it's supply and demand. So, as that supply comes on, it will impact our ability to price product.

Okay. And you said 2.5% of stock coming online. How much of that is in your markets though when you looked at it from, not from areas where you're not in, but just where you're competing in?

The new supply usually comes in in the markets where it's easier to build, so Texas and Florida. The burroughs of New York have had a number of projects under construction for a while, big projects. So I'd focus on those markets in terms of new supply.

The flip side of that is Florida and Texas have great population flows to them, so they can handle above-average supply growth. We are not seeing a lot of stuff here in California or really on the West Coast, to speak of.

Okay. Thank you.

Our next question comes from the line of Jana Galan with Bank of America.

I was wondering if you could talk to just operations during the slower winter months, use of concessions, and what you saw. I was surprised the occupancy held up stronger than prior fourth quarters.

Hi, Jana. This is John. Yes, the occupancy continued to hold up. We did some television advertising in Q4, as we did it in Q4 last year. I don't think it was as effective, though, as we saw in prior years. But nonetheless, I think the demand was still there, but not as strong as we were hoping.

Our move-in volumes were up about 0.9%, and people were moving in at rates that were approximately 4% higher. But overall I was very pleased. I think the demand coming into our systems, either through the call center or the websites, continues to be strong.

I think our biggest problem right now is really having the available space to rent and to satisfy that demand. So we'll keep working on that as we move forward. Demand continues to be strong year t -date for the first month and a half of this year. So, things still look pretty good right now.

And just in terms of any geographic variance, are you still experiencing stronger rent growth and occupancies on the West Coast markets?

West Coast is definitely our strongest markets, regions. The Midwest and I would say the Great Lakes markets are probably the weakest right now -- the Chicago markets, the Milwaukee market, Minneapolis, down into St. Louis. Florida's doing very well. Most of Texas is doing well. The Carolinas also doing well. We are a little weak in the DC markets, the Baltimore market. But other than that, most of the other markets are doing pretty good.

Thanks, John.

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

Hi. Thanks. Just thinking about fundamentals and the current environment and your operating strategy here in the new year with the peak leasing season approaching, do you think that your customer acquisition costs will continue to improve in 2016? I think last quarter you said you profited $35 per move-in in the first month. That was net of marketing and discounts. And that was a peak since you began tracking that metric. Do you think you can improve upon that in 2016?

The short answer, Todd, is, yes, because I think Street rates will be higher in 2016 than 2015. We probably won't be do as much advertising and we'll be mindful of holding customer volumes. So, net-net, if you reduce your marketing cost, rates go higher and you hold volumes, then the customer profitability will go up.

In Q4 our profit was about $27 per customer versus $19. So we were up 42% in terms of customer profitability in Q4. For the year, we were up about 33%.

Okay. And then just following up on, I think, a prior question, you said that the TV advertising was not as effective in the fourth quarter. Any reason why that you can point to to explain that?

Todd, no. I can't explain it. It's one of the things, you just never really know how markets are going to react. It could be weather. It could be people busy doing something else, not paying attention. We just don't know.

Okay. Thank you.

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

Hey, good morning to you guys. Ron, can you talk about how the fourth quarter played out to what your expectations were? And in particular, as you well know, the retailers had a tough calendar fourth quarter because of the warm winter weather, so people weren't buying jackets. But I'd imagine it probably meant that they might have been getting out of their houses more to do things like use self-storage. Do you think the winter weather played into your favor in the fourth quarter?

From a revenue management standpoint, I think we came in where we thought.

Yes. There were no surprises, Ross, in terms of demand into the system, the rental rates that we were getting. A lot of our properties aren't really -- the West Coast is still doing very well, which is really driving a lot of this. And I don't think the West Coast is as subject to weather changes as maybe the East Coast is.

Ross, move-in volume in Q4 was up 0.9%. The move-out volume was up 1.7%. Recall last year in the fourth quarter, a pretty harsh winter, so my guess is people were maybe unable to get out of their storage facilities. So, maybe that's why we had an uptick in volume. But we still had positive flows on the inside.

Okay. Second question -- can you talk a little bit about to what extent you're using targeted online advertising such as Facebook? And I think about when I travel to Los Angeles, Mark Zuckerberg somehow knows I am in Los Angeles and starts sending me LA-based business ads. Are you guys doing that in any fashion and thinking about shifting more of your spend away from TV towards targeted online and embracing that channel a little more?

I would say this -- we actually spend more money on online advertising, either through key word search bids or banner advertising, than we to on television advertising. Television has really come down in terms of our spend. Much of our dollars are now being spent online.

In terms of what you're referring to in terms of using social media to do things, we certainly are thinking about things like that. I don't want to tell you that we are doing things like that at the moment. But it's certainly something that we -- we're constantly exploring thoughts on how we can attract the customer, and a better customer, actually, using the demographic information we have or can get from some other source to try to attract a better customer. But I would tell you this -- we're in the very beginning stages of even thinking about doing stuff like that.

Ross, to give you some color, on television last year we spent about $4.5 million, and on the Internet we spent about $13 million. So, the Internet is by far our major marketing channel. And that's a combination of some of the marketing stuff John just touched on, the website, and then bidding on various terms and phrases across the country.

Appreciate it. Thank you.

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

Hi. Can you just talk a little bit about G&A costs for 2016, what might be a good run rate? And how much legal costs are you guys assuming for 2016?

I am looking at our GC here and she is smiling and shaking her head. She doesn't know what legal costs will be. We're estimating a ballpark range of between, for G&A for the entire FY16, somewhere in the neighborhood of between $80 million and $90 million.

Okay. Thanks. And then just one thing on Europe, can you just comment a little bit on Shurgard's performance? And then also how is development ramping up in Europe? Last quarter you guys had mentioned that it's starting to pick up.

Sure. Let me start with development. Last year we opened three properties in London, and we've got three more at various stages of development, as well, either we're taking down the land or we're about to take down the land. We're working through the zoning process. So, all combined, when that's done we'll be at about 500,000 feet added, about $90 million invested there. And we're looking -- our other market to look to do some development in is Berlin, but we don't have anything in the hopper at the moment.

For Europe, Q4 revenues were up 4.7%, income was up 1.3%. They had a fair number of R&M stuff. And property tax credits last year that didn't flow through this year. So expenses were up a bit. All the revenue growth didn't flow through to the bottom line.

For the year, Europe revenues were up 4.5% and NOI was up 5.5%. So, Europe had a very good year. Occupancies averaged for the year 89.8% versus 85.3% last year. And minor degradation in rents. So, it was a very good year in Europe operationally.

Okay. Thank you.

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

Thank you. Ron, a gap in operating ability has always existed between PSA and your private competitors. In your view, has this gap widened or narrowed over the last five years, and why?

Since I have no information on private competitors, I can't answer that question.

Okay. And if we can look to a point beyond 2016, just speaking specifically towards PSA, in an environment where operating fundamentals have slowed meaningfully, what are the main weapons you will utilize to continue to capture outside share of demand? Is there anything in particular that you have left in the closet right now that hasn't been brought out yet?

The great thing about Public Storage is we have this thing called a brand, which no one else has. That is the, by far, the biggest, so to speak, bazooka, which we're using all the time. Combine that with the operational skills of our field personnel, who are exceptional, the Internet marketing, the technology, all of that, and the platform.

If you look at what market share we have in the major metro markets, for the most part we are the dominant provider. As I think I've said before, when things get tough, the big dog eats first. And we're the big dog.

Sure. Thanks. And you produced 22% NOI growth in your 2013 acquisition bucket during 2015. Can you provide just in general the early stage strategy of acquisitions? What do you focus on from a revenue and expense standpoint during year one versus year two versus year three?

Expenses, they fit into the platform, right? So, if you have a property in Miami or Dallas or LA, they just fold into the district and the operating platform, and the expenses become very consistent very quickly with what other properties in that market are operating at in terms of an expense per foot, other than property taxes, which is always the swing item on the expense side.

On the revenue side it's fill them up as fast as possible, generally, discount rates, increase promotional discounts, fill them up, get them stabilized and get that tenant base in there. And then operate them consistent with the way we do the rest of the portfolio.

Okay, thank you.

(Operator Instructions)

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

Hi. A couple things. First, I was wondering can you give us the January 31 spot rates that you typically do, the year-over-year rate increase for occupancy, et cetera?

Sure, Mike. At the end of January, occupancies were 93.2%, (inaudible) 93.0%, and our in-place rents were $15.50 versus $14.61. So occupancy's up 0.2%. In place rent's up 6%. (inaudible) higher.

Okay. And then for rate increases going out to tenants at this point, any color you can share with us?

Yes, Mike. This is John. We really haven't started sending out increases. We will be gearing up at the end of this month to really start sending the first wave out. I anticipate that it will be very similar to the past two years. People have been here longer than a year will receive an increase. The increases that we've been doing in terms of percentage, year-over-year percentage increases, have been in the neighborhood of 8% to 10%. I expect that we'll continue that in 2016.

Got it. Okay. Thanks.

Our next question comes from the line of Todd Stender with Wells Fargo.

Thanks. Just looking at the full-year acquisitions, it looks like occupancies were in the 85% range and rental rates were sub 13%. Can you give us a feel for what those numbers look like at the end of last year, and -- I know you have made some acquisitions so far this year -- just what the fundamental trends are?

I am sorry, Todd. What number are you referring to?

What were the occupancies of the acquisitions you have made lately, and then rental rates. Just seeing how far they can be pushed once you hold on them. That's where I'm going.

Most of the acquisitions were -- David -- 80%, 85%? Yes, 80%, 85%. I don't think we bought anything that's ground-up empty. We got one in Houston that was zero, Todd, that's a fill-up. But, for the most part, they are somewhat stabilized properties somewhere between 80%, 85%.

Extrapolating what that's going to be versus what is in our press release, because the acquisitions -- I'm looking here - the annual contract rate of $15.06, that's probably not the way to go because the rate per foot is going to vary by market. So, if you get a property in Ohio, it's going to have a very different rental rate than a property in New York. So, you really can't take things and say everything is going to migrate to $15.06 a foot. Generally, though, once we get them stabilized and up into the platform, our ability to push rates, consistent with everything else we have said on the call, 6% and then rental rate increases pretty much happens.

That's helpful, Ron. And how long is that period for you to stabilize? According to your metrics, once you layer in tenant insurance, and maybe do concessions start to slow down, what does that period look like?

Operationally, in terms of fitting them into the system and operating them as a Public Storage property, that's usually 30 to 90 days. The real estate group is great at fixing the offices, rebranding the property. It goes into the system in terms of Internet, marketing on the website, in the call center on day one.

So, you can usually see quickly the impact on move-in volumes once it gets into our system. There is usually problems on delinquency, so we have outflow. Generally six months to a year you get the thing stabilized. Then the second year is when you start to see some meaningful growth. Recall, if you are going to lower rates and increase promotional discounts to fill it up, revenue growth is not going to be very strong in the first six months to a year.

Great. Thank you.

Our next question comes from the line of RJ Milligan with Baird.

Good morning, guys. I was wondering if you could give any color on the estimated development yields and redevelopment yields on the projects within your pipeline.

Development yields, after an imputed absorption cost, are going to be somewhere between 8% and 10%. On a cash-on-cash basis, no absorption, it's going to be 150 basis points higher than that. That's on the developments.

The redevelopments can go anywhere from 10% to 30%. As I've said over and over again, redevelopments are great because it's low risk, you know the property, you're not paying for the land again. I wish we could do $1 billion a year of those. But there's just not that much opportunity.

And in terms of those development yields, is there a difference between markets? Are there any markets where the development yields are much more attractive, particularly the high barrier-to-entry markets, or what traditionally has been those high barrier-to-entry markets? Are you seeing any difference in development yields regionally?

Generally, the higher barrier-to-entry markets are where we're having greater competition for the land and we are having to pay up for the costs. So, those yields tend to run a little lower than the lower barrier-to-entry markets. And the way we look at it is, on a lower barrier-to-entry market, we need a higher yield because it probably won't grow as much as the high barrier-to-entry market.

That's helpful. Thanks, guys.

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

Hey, guys. Just looking at the balance sheet, you guys have about $375 million of the Series Q preferreds that are callable in April, and almost $500 million of the Series R that are callable in July. I was wondering what the plans are there.

George, this is John. We don't have any definite plans at the moment. But I would say that it's pretty likely that we may call one or both of those series. But we haven't made that final decision yet on that. But I wouldn't put it past us from calling them.

Okay. And would you be more inclined to just re-fi it with more prefers, or would you include some unsecured debt?

We could do both. We did a preferred in January. So we're sitting on cash, which will cause a little dilution to our FFO in Q1. That was a $300 million deal.

Don't know whether the preferred market will be opened throughout the remainder of 2016. We did mention that we were looking at the doing unsecured debt. That is not off the table. It's still on the table. So we could do that also. So we'll wait and make a decision when we need to.

Okay. Thanks.

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

It's Jordan Sadler here. Just a quick question regarding appetite on the acquisition front. I know you've got some competition out there from some of the smaller competitors. But just curious, there were some that seemed like they would be a little bit more in your wheelhouse geographically in LA, that crossed recently. Curious if those were on your radar, if you had interest. And just maybe talk about little bit about your appetite.

Jordan, good to hear from you. We have an appetite for acquisitions. We try to be disciplined in our approach in the stuff in California. We looked at it. It's pretty good product. We just couldn't get our heads around -- I think that went from close to $300 a foot and we just couldn't get there in terms of that kind of pricing. But it's a good product, it's fine.

Okay. And then on a separate but similar note, when you guys make acquisitions, I know you give some pretty good disclosure on this in terms of breaking your acquisitions from prior years out separately rather than include them in your same-store portfolio, but what do you view as the potential uplift in terms of buying something from a private operator? You buy something that's maybe not fully stabilized, but what maybe a private guy would call somewhat stabilized. What are you able to pick up in incremental yield on those acquisitions over a one- to two-year timeframe?

Jordan, that depends on a lot of variable factors. Generally, we try to underwrite where we think there is, I'd say, on average, 150, 200 basis points uptick in terms of NOI over 12 to 18 months. One of the things that we overcome in acquisitions is property tax reassessments. So, whereas an operator may have had the property for 20 years, he has a low tax basis, we buy it, now we've got a big tax bill. So, you have to make that up in your NOI and your growth rate. But generally 150 to 200 basis points.

The stuff we bought in 2013 and prior, and even 2014, is performing better than we anticipated because the industry fundamentals are better than anticipated. We underwrite things on today's rents in that marketplace. We don't do a forward forecast of what we think rents might be two or three years out.

So, the fact that the operating fundamentals in the marketplace across most of the US have been very good the last 24 months has helped us outperform our own expectations in terms of our last couple of years acquisitions. As well as our developments. Our developments are performing across the board better than we anticipated.

That's helpful. Thank you. Then Todd has one on demand. I know you know that business a little bit. Hi. Just quickly, a number of those on-demand storage services that are operating in a few of the major metros, are you seeing any impact from them in some of your markets, any competition or anything that you can comment on?

At record occupancies, I would say no. The Bay Area, where a lot of that tech stuff, we know of a couple things up there that are going on, no impact. We are chock full in the Bay Area.

Okay. Thank you.

Our next question comes from the line of Wes Golladay with RBC Capital Markets.

Good morning, everyone. Can you provide an update on the development in Glendale? How is that leasing so far?

85% or 90%. It's full.

What type of yield did you get on that? It looks like it's vastly exceeding underwriting.

It will. It has not been opened a year. So, taking the last ten months of income is not indicative of what that income is going to be over the next 12 months. I think we underwrote it with three-year fill-up, probably even a little bit longer than that. So, it's far exceeded our expectations.

And the other thing about that fill-up on the property is we did not have to discount rates as heavily to get it filled up as we normally do on a typical development. So it's a home run.

Okay. And then when you look at acquisitions, how far off are you on the final price where a deal clears that? And with the cost of preferred coming down and cost of equity coming down, will more deals make sense now versus, say, last year?

I am sorry. I didn't understand the first part of your question, Wes.

Yes. How far off are you when you look at an acquisition? You said you're missing on pricing. Are you like 5% away from the final price or like 10% to 15%? Just wondering if the improved costs of equity, costs of preferred equity will help you pencil more deals in this year.

There's two things. It's both yield and then price per foot. Because we have a development platform, we know about what these things cost to build. So, even though the yield may fit the current cost of capital, and you could get, in terms of cost of capital, creative and say -- our line costs less than 1% so why don't we use that in terms of underwriting acquisitions, which we don't. But when we're looking at LA properties at $300 a foot and we're building in LA at $150, $160 a foot, we are just not going to pay $300 a foot.

Got you. Thank you.

There appear to be no further questions at this time. I would like to turn the floor back over to Clem Teng for any additional or closing remarks.

I want to hank everybody for participating on our call this morning. We will talk to you next quarter. Have a good day.

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