Public Storage (PSA) 2016 Q1 法說會逐字稿

I'd like to welcome everyone to the Public Storage first quarter 2016 earnings conference call.

(Operator Instructions)

I would now like to turn the conference over to Clem Teng to begin.

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

Before we begin, I want to remind those on the call 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, as of today, April 27, 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 with 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 report, 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. And welcome, everyone. We had another solid quarter here in Q1, so let's open it up for questions.

(Operator Instructions)

Our first question comes from the line of Gwen Clark with Evercore ISI.

Hi, guys. Good afternoon.

Good afternoon.

So I realize this information will be available in the 10-Q, but since that data won't be out for a few days, can you give us some color on the operating performance within your largest Metros?

Yes, Gwen, this is John. I can kind of run through some of those. Los Angeles, which is by far our largest market, revenues were up about 8.2%. San Francisco, which is our second -- I'll just give you our top 10 -- San Francisco was up 7.8. New York, 4.6. Chicago, 2.4. Seattle, 8.4. Washington, DC, 2.6. Miami, 6%. Dallas/Fort Worth, 8.9%. Houston, 5.2%. And Atlanta, 7.8%.

Thank you. And I guess on that note, seems like Chicago and DC were the definite underperformers. Can you just talk about what you think was driving that?

Well, DC has been an underperforming for us for several years actually. We've struggled with DC. I think that's mostly competition.

With respect to Chicago, that's more of a recent phenomenon. I don't really know what's exactly what's going on in Chicago. It's been a struggle for us throughout the market, so it's not just any particular part of the market. I really can't tell. I think we're keeping our occupancy there, but we're lacking pricing power. So we'll just keep working on that and see if we can improve it soon.

Gwen, when you do get the Q, 10-Q, you will see actually Chicago's NOI was up almost 11% and that's not due to operating fundamentals. That's due to less snow than last year.

Okay. Well, that is helpful. With that, I'll hop back in. Thank you.

Thank you.

Our next question comes from the line of Smedes Rose with Citigroup.

Hi, thanks. I wanted to ask you about your acquisition activity, which looks like it's picked up year to date and I think is now in excess of what you did for the entire year in 2015. And I just was curious. Are you seeing more product come to market, or are you changing, you know, what you're looking for in some of the acquisitions you're making, or is there something that's driving that increased volume there?

Smedes, this is Ron. We've not changed our criteria at all; but I would summarize the market for acquisitions has more product, lower quality, higher prices.

Okay. More product, higher prices and lower quality.

Yes.

Okay. But so within all of that, you're still able to find some spots that you like?

The broad market as a whole. You know, inside of that is some good product, some reasonably priced, so we're able to do some transactions here and there. But, you know, historically, you know, we tend to do what makes sense for the franchise, what makes sense for the platform, what makes sense on a price per foot.

It varies by market. And that strategy has not changed. It's consistent. We continue to build out the platform in the markets where we are. Both sub markets as well as, markets in general. So nothing's changed in terms of strategy, but we are seeing, you know, given the robust pricing, more product coming to market and I would say overall, lower quality.

David Doll is here. David, would you have anything to add to that?

No, I think the only reason we're seeing a little more activity is we've got a team out looking for some of those one-off and off-marketed properties that can fill in some of [ours to market,] as Ron suggested, markets where we're trying to build out scale.

That's helpful, thanks. So just, Ron, when you say higher prices, can you maybe just, you know, generally just quantify, like how much cap rates have declined in the last, you know, say year or quarter or however you're going to measure it? Just get a sense of the pace of price increases of what folks are asking?

My guess would be, and you know, everyone measures cap rates different, Smedes, they include tenant insurance or retail or don't include certain operating expenses. So it's a little hard to say in terms of the way we underwrite and what we're seeing out there. I would say 50 to 75 basis points at least, David.

Or one and a half to two times replacement cost.

Yes.

Great. Okay. Thank you very much. That's helpful.

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

Thank you. I was wondering if you could talk to the decision to grow the development pipeline and maybe comment on land prices and construction costs.

Well, the decision to grow the development pipeline, or grow enter development started about, in earnest, about three years ago. And it's -- we started doing that in part because we couldn't find product in markets or sub markets where we wanted to build out our franchise, build out our platform. And two, the -- we saw the continued escalation of prices of acquisitions, which previous question I just answered has kind of come to bear and has been for the last 12 to 18 months.

The pricing on acquisitions wasn't making sense. Then getting new product in markets where we didn't have existing product is the rationale for the development platform. And, you know, to the team's credit this quarter we ended with 600 million in the pipeline, which is a new record for us.

And most of that, about two-thirds of that, 350 million will be delivered this year, which is also fantastic. In terms of construction costs, land costs, David?

So construction costs, across the country there's different markets where we're seeing acceleration of costs, mostly due to labor shortage or subcontractor coverage. Markets like the Bay Area, Miami and smaller markets like Phoenix and Denver we're starting to see some pressure on construction costs.

Land prices, generally it's a factor of availability. And so in those key markets where availability is becoming more and more difficult, then we begin to focus our efforts on redevelopment and most of those markets we've got a great portfolio of assets that can be redeveloped on our existing real estate. So the team has to be nimble in terms of where those opportunities exist and how they get executed.

Thank you. And I believe last quarter you identified overall supply maybe about 1200 self-storage facilities in some stage of development. I was curious if you had an update on that number.

Yes, I think I've been pretty close to between 800 and 1000. And nothing's really changed. My guess though is it's accelerating, so as we go through the year that number will probably accelerate. The number of people entertaining development, trying to get their arms around it or undertaking it continues to grow.

Thank you.

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

Hi, guys. Jeremy Metz on with Ross. John, I was just wondering if you could talk about what you're seeing on the rent front you know given the maturity of the portfolio and close to maxed out occupancy, it does seem like you guys are still able to get some good traction pushing rents and the market continues to bear it. Any color on street rates, where they trended during the quarter, maybe that spread between move-in and move-outs?

I would say that the street rates during the quarter were up about 5%. The take rate on our move-ins, which our move-ins were up about 1% during the quarter and they were moving in at rates that were about 4% higher than last year.

The move-out rates though were up 5.6% year-over-year. So just to give you a flavor of the take rate, the move-in rate was average on per unit basis about $124 versus the move-out rate of about $135. So it's, call it, about $11 difference there. And that compares to last year at about $119 move-in versus $128 move-out.

Pretty similar. And then just one on, you had a pretty good bump on the late charges and admin fees this quarter. I was just wondering, is that more late fee driven? And assuming you would even be willing to provide it, are you able to say, what kind of percentage of the portfolio is in arrears at this point and has that increased at all lately?

Well, with respect to delinquencies, we're close to or at record low delinquencies. So the uptick, it's late fees and admin fees, but late fees haven't changed. It's all in admin fees. We bumped those a little bit last year. So on a year-over-year basis, they are higher. Plus, as John noted, you got about a 1%, 1.5% increase in move-ins.

Okay. And I think Ross has one quick one.

Hi, guys. Your occupancy at the end of March was flat year-over-year. Do you have an update on where you are here at the end of April?

I have an update as of yesterday. We were up about 11 basis points.

Okay. And then, Ron, given your comments on where the transaction market is with lower quality and higher pricing, have you thought about putting some of your quote, unquote, lower quality, non-core, smaller market assets up for sale and using that as a source of development funding?

Well, we have thought about that, Ross. We continue to think about that. In terms of needing that as capital for development, we have plenty of fire power here on the balance sheet to undertake our development program.

Keep in mind $300 million to $400 million -- call it $350 million a year of retained cash flow goes a long way towards funding the development program. That's about what our spend will be this year, so it's basically -- this level of development we're basically taking our retained cash flow and underwriting the development program.

To your first question, yes, we are -- we continue to look at maybe peeling off some markets where we don't want to grow in and we don't have much of a presence.

Appreciate it. Thanks.

(Operator Instructions)

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

Hi, thanks. Ron, just following up on new supply, curious to get your read over whether there are any markets where you think that there's some real over building taking place that you're watching carefully or where you may be a little cautious over the next year or so?

Two markets that come to mind, Todd. One is the boroughs of New York. We have -- we don't have anything in the boroughs per se. Well, we've got one out in Long Island and we've got one over in Jersey City, but that's it. But just looking at the C of O deals of the other public, our public competitors, as well as what we know is going on, the boroughs seem to have materially above-average level of development and high proportion of existing supply coming in. The other is Denver where we've been told there's 40 to 50 properties on the board or about to be developed in that market. Which is a big number for that size of market.

We're developing quite a bit in Dallas. We -- where we are developing north Dallas, we're not seeing a lot of new competitors. We're down in Houston we've seen some uptick in Houston, but nothing relative to the site -- in terms of size of market, nothing from our perspective to be concerned about at this juncture.

And then the lease-up cycles for new developments, they were taking place at a much, much faster pace for quite some time. Has that changed at all? You know, with some of the new deliveries or is absorption taking place at pretty much the same pace?

We're pretty much ahead across the board in terms of our filling up faster ahead of [pro formas]. That process continues. The fundamentals of the business are great. Our customer acquisition costs were down again this quarter. We brought in more customers at lower costs, at higher rates. So the fundamentals of the business continue to be just excellent. That's playing into fortunately our development platform as well.

Okay. Thank you.

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

I was wondering if you can't talk about overall operating expenses. In 1Q you guys benefited from lower snow removal costs, but as far as trends going into the rest of the year, are there any areas where we could see some savings that would keep costs lower? I mean, I would assume you guys wouldn't be expecting a negative, another negative quarter of year-over-year costs, but what else -- where could we see some savings then?

George, I don't recall what Q2 snow removal costs were last year. I'm sure we had some. It was a pretty tough winter last year, so there may be some minor positive expense variance on snow or R&M next year.

But most the other expenses, as I always say I would count on 2 to 3%. Property taxes we've got them running 4.5%. We don't see that changing much. So I -- my -- if I were modeling, I would model 2 to 3%.

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

Thanks. Good morning, guys. So just a follow-up on a previous question.

You guys gave April occupancy stats. I was wondering if you could provide contract rate, what that looks like in April or move-in rates, whichever you think is more useful?

We don't usually provide that. I think -- but I don't think there's any trends different in April than what John mentioned in the first quarter in terms of move-in rates and move-out rates and street rates versus take rates.

So I guess just broader, is this spring leasing season generally behaving the same way the previous couple years' spring leasing seasons have behaved, in terms of you guys being able to push the take-in rate or contact rate, year-over-year, much harder in the springtime versus in the winter times?

This is John. Yes, you're seeing that sequential push. I think that the difficulty for us in Q2 is a comp compared to last year, where we had an exceptional Q2 last year. That was surprising to us about how much demand came in and our ability to continue to push rates. So we're comping against that, but the trend lines are still the same, but it is a tougher comp for Q2 this year than we experienced historically.

Okay. Thank you.

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

Hi. I was wondering, any color on Europe? Can you just give us a quick rundown of what you're seeing over there?

Sure, Mike. Europe, let's see, occupancies for the quarter were 89.8% versus 88.1%, so up 1.9%. Realized rents were up 3.1%, so overall rev path growth was 5.2% for the quarter. Expenses were only up 2.9%, so we had 6.7% NOI growth across Europe.

So the team's doing a great job over there. Every market was up in terms of NOI, being led by Sweden at 16.2%. The laggard was Germany at 0.8%.

In terms of investment activity over there, what's going on in terms of development or anything on the acquisition side?

We opened up three new properties in London in the back half of last year. We've got a couple more that we're undertaking this year.

We're trying to get things started in Berlin. So that's on the development side. Nothing at this juncture in terms of acquisitions.

Got it. Okay. Thank you.

Thank you.

Our next question comes from the line of Jason Belcher with Wells Fargo.

Wonder if you could give us some of the operating metrics for the assets that you acquired in the quarter, as well as those already acquired so far in Q2. Be particularly interested in any color you can share on the occupancy rates, in place versus market rents and cap rates?

Jason, I don't have the occupancies or any of that stuff on the acquisitions here with me. They are generally somewhere between 70% and 85% occupied. In terms of price per foot, the stuff required were about $110, $120 a foot. It varies by market.

Okay, thanks. And then just on the preferred you issued in January, I think it was 5.4% coupon. Wondering where you think you might issue that now?

Lower.

All right. All right. Thanks, guys.

You're welcome.

Thank you.

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

Hi, guys. Looking at Europe, how are the barriers to entry in that market from a development side? Is it difficult to permit finance relative to, say, a core West Coast market such as San Francisco and Los Angeles?

Well, London and Paris -- you know, first of all, those are big markets. I assume you're talking about the major Metro centers, London, Paris, Berlin?

Yes.

Yes, they are just like Los Angeles or San Francisco or Manhattan. I mean, you've got core, core markets, the inner ring in Paris, downtown near Buckingham palace, the central part of London. First of all, you can't get zoning. Second of all, if you -- if a piece of land is for sale, it's incredibly expensive, probably doesn't make sense. So it's equally as tough. And the sites we've done in London are -- they have not been easy in terms of getting the zoning.

Okay.

Same challenges that you face here, where the markets where you really, really want to be in and there's no competition, it's really hard or there's no zoning.

Okay. When you go over to a market such as Europe, is your platform -- we always talk about your platform in the US as being much better than some of the small mom and pops. Do you have that same advantage when you go over to Europe and can you consolidate anything over there?

Well, you got to keep in mind in all of Western Europe and, again, this is best guess statistics, somewhere between [1500] and 1800 facilities in all of Western Europe, including Great Britain, over half of which are in Great Britain. So the product that's available across the continent is pretty thin.

There's not a lot of -- I think in Berlin, there's 10, 12 facilities in all of Berlin. So there's not a lot to buy and the product is on average, I would say, much lower quality than the US because a lot of it was not purpose-built. A lot of it was converted office, converted garages, converted industrial buildings. And it takes a variety of shapes and sizes.

So not a lot of purpose-built product in Europe. Not a lot of product to even buy. And most the product there is over in Great Britain and a lot of it's outside London.

Okay. Thanks for taking the question.

Thank you.

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

Thank you for participating on our call and we look forward to speaking to you next quarter. Have a good afternoon.

Thank you.