Public Storage (PSA) Q1 2014 Earnings Report, Transcript and Summary

Ladies and Gentlemen thank you for standing by and welcome to the Public Storage First Quarter 2014 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. [Operator Instructions]. Thank you. I will now turn the call over to Clem Teng. Please go ahead sir.

Good morning. Thank you, Laurie. 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 2, 2014 and we assume no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Reconciliation to GAAP or 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.

Good morning and thanks Clem. We had another solid quarter; our fundamentals to the self-storage business I have to say are pretty good. During Q1, we had higher movements at higher movement rates instead less to acquire the customers which are staying longer. Further, new supply in our industry is nominal and this makes for an ideal operating environment. Now with that operator, lets open up for questions.

Thank you. (Operator Instructions). Your first question comes from the line of Ross Nussbaum of UBS. Ross T. Nussbaum – UBS Investment Bank, Research Division: Hey, Ron good morning.

Good morning. Ross T. Nussbaum – UBS Investment Bank, Research Division: Can you talk a little bit more about what you are seeing on the rate side, your realized rate growth has sort of being hovering here in the 4 to 4.3% range for the last three quarters. So just a little more color on the traction you are getting in terms of being able to start pushing rate higher now that your occupancy comps hit the wall probably the summer?

As we moved into people, we continue to push Street rates and a move-in volume was about flat for the month of April, but the take rate goes up about 6%. Again, it was probably discounting. As we move forward, I think we’ll continue to try to push Street rates, but the Street rates are currently up about 6% to 7%. I don’t think we’ll get a lot of traction on reducing discounts further. Our standalone strategy right now is to continue to push Street rates and I don’t think they can be both at the same time. So we’ll see how that goes as we move into you know a really busy month which are May and June, and see how well we can consider to keep or hold our occupancies with ahead of Street rates. As we moved into people, we continue to push Street rates and a move-in volume was about flat for the month of April, but the take rate goes up about 6%. Again, it was probably discounting. As we move forward, I think we’ll continue to try to push Street rates, but the Street rates are currently up about 6% to 7%. I don’t think we’ll get a lot of traction on reducing discounts further. Our standalone strategy right now is to continue to push Street rates and I don’t think they can be both at the same time. So we’ll see how that goes as we move into you know a really busy month which are May and June, and see how well we can consider to keep or hold our occupancies with ahead of Street rates. As we moved into people, we continue to push Street rates and a move-in volume was about flat for the month of April, but the take rate goes up about 6%. Again, it was probably discounting. As we move forward, I think we’ll continue to try to push Street rates, but the Street rates are currently up about 6% to 7%. I don’t think we’ll get a lot of traction on reducing discounts further. Our standalone strategy right now is to continue to push Street rates and I don’t think they can be both at the same time. So we’ll see how that goes as we move into you know a really busy month which are May and June, and see how well we can consider to keep or hold our occupancies with ahead of Street rates.

The next question comes from the line of Vikram Malhotra of Morgan Stanley. Landon Park – Morgan Stanley: Hi, this is Landon on for Vikram. I just had a quick question on you know the occupancy gain that we saw in the first quarter, on the 70 basis point magnitude. Is that something that you think that we could continue to see for the rest of the year or is that magnitude you know trail off in the higher – in the high season?

Hi, Vikram this is Ron. I’ll let John amplify that you know for Landon. In April, end of April our occupancies were 93.9 versus 92.9 last year, so up about full 100 bips year-over-year on same-store pool. But as we go into May and June consistent with last year, which we have no reason to believe it won’t be. We’ll kind of get sold out, so we’ll peak out at 95%-95.5% occupancy in the system. Landon Park – Morgan Stanley: Okay, great. And then just moving to expenses, I know there was obviously excess snow removal cost in the quarter, but was there anything one-time other than that in the quarter or excess – or ex the snow removal, is that sort of the rate that we should expect to see going forward?

Overall expenses if you take out the weather-related cost both on the snow removal and the utilities, I think our expenses were pretty flat. And going into – you know, property taxes were up to 4% to 5%, I think payroll is up 1% to 2%. So we think those trends will continue into the balance of the year. In Q2, we expect about $0.5 million less on advertising, but other than that, most everything should trend at least at this time to what we see in Q1. Landon Park – Morgan Stanley: So that flat growth you think can continue.

Well, I think we benefitted in Q1 from lower advertising and we’re only going to get about 0.5 million up on that in Q2. So the other stuff that you see, you know, the payroll, the property taxes, management, those will trend about the same as Q1. Landon Park – Morgan Stanley: Okay, great. Thank you very much for the clarification. That’s all I have.

Okay.

Your next question comes from the line of Todd Thomas of KeyBanc. Jordan Sadler – KeyBanc Capital Markets Inc.: Hey, it’s Jordan Sadler here with Todd. Wanted to just follow up on the total revenue growth potential. It seems like the street rates is – you’re getting real nice traction, up 6% to 7%, I think you said John. If you sort of layer in a little bit of occupancy and a little bit of reduced discounting on a year-over-year basis, I know you’re not necessarily going to try and drive it further – or down further through the rest of the year, but are we looking at a 10-percentish type REVPAF potential growth?

In our same store department? Jordan Sadler – KeyBanc Capital Markets Inc.: Yeah.

Not at all. Jordan Sadler – KeyBanc Capital Markets Inc.: Not at all.

No. The piece of the equation that I think you missed is the move-outs. The move-out volume has picked up a little bit versus last year and they’re moving out at higher rates, rental rates. And the reason why that’s happening is because we’ve been aggressive about pushing rates to existing tenants and other time obviously they’ve gapped up quite a bit. And now when they’re moving out, not that they’re moving out any faster than they were before, but when they do move out, they’re taking with them higher rental rates with them. So as we’re moving people in, even though they’re coming in at 6% higher year-over-year rates on the moving inside, they’re moving out at higher rates than their move-in rates. So for every move-in that we replaced – or every move-out that we replaced with a move-in, we actually rent rolled down. And we have been rent rolling down for quite a number of quarters now, for at least about I would say three years or so. So there is leakage. So although mathematically what you said may work, the leakage brings it back down quite a bit.

But moving (indiscernible) rates, Jordon, narrows that gap between the rent roll, between the move-outs and the move-ins, so that’s a positive in that regard. The other thing that I would add to what John said is, you know, I touched on customers are staying longer, 56% of our customer base has been here over a year, that’s a pretty low churn part of the portfolio. So those customers will give rental rate increases consistent with last year, but they’re not going to be changing based on changes in street rates. Jordan Sadler – KeyBanc Capital Markets Inc.: Okay. That makes sense. Have the roll-downs changed at all as you started to push street rate here in April? Are we looking at 3% mark-to-market when you – in terms of the roll-down as replacing and move-out?

Well, the roll-down has changed a little bit but just really recently because – just recently have we really been pushing the street rates in this month in April, because as I mentioned during the first quarter, the move in rate was up about 3% whereas in April it was up about – a little over 6%. So it’s just recently that we’ve really maybe narrowed that market – that spread – that year-over-year spread. Jordan Sadler – KeyBanc Capital Markets Inc.: Okay. Thank you.

You’re welcome.

Your next question comes from the line of Christy McElroy of Citigroup. Christy McElroy – Citigroup Inc.: Hey, good morning to you guys. Ron, I’m wondering if you could talk a little bit about your view of the acquisitions environment and what sort of opportunities you’re seeing out there currently and what are your efforts internally in terms of trying to source deals?

Well, our efforts in terms of sourcing deals are consistent with what we’ve always had. We’ve had a couple of people that do focus on acquisitions. They’re very experienced people and they’re pretty much in the flow of everything going on. So that hasn’t changed at all. In terms of what we’re seeing, I think I touched on last quarter that the price that we’re seeing is of lesser quality than we saw last year. That continues to be the case. Although I will say that there’s been an uptrend in terms of quality coming to the market, which is probably not unusual given – you know, it takes people time to decide and get product out on to the market. So the quality is up taking a little bit but it’s still overall I’ll say lesser than last year. Christy McElroy – Citigroup Inc.: Then in Europe, you’ve had some nice traction there in terms of turning revenue into high growth positive, occupancies are up or rents are down. How are you approaching revenue management in the region? In the environment there are some orders as sort of few years ago in the US early stages of recovery?

You know Christy that’s a very good information. Last year, second half of the year we’ve started tag differently in Europe with much more aggressive asking rate, rental reductions something that we have experimented with here in the US we applied over there first month 50% off. We tried it in a couple Markets in September. It really worked, we did it again in November and again in March and as you touched on, you’ve seen a nice uptick in occupancies. At the end of the quarter, we were 86.1 in Europe versus 79.5, so it’s over 600 basis points year-over-year uptick in occupancy. At – offsetting that was a reduction in place rents of about 5%. But our goal over there it’s the same similar to US gets a portfolio up there, over there to the low to mid 90s occupancy. And so, we’ll continue with that pricing strategy until we get the portfolio stabilized at a higher rate. Christy McElroy – Citigroup Inc.: Thank you.

Your next question comes from the line of Ryan [Burge] of Green Street Advisors.

Hi just hoping for an update on the preferred market in particular the March offering was sizeable, but the April offering was pretty small. So did you get smaller on that lateral offering just simply based on your immediate capital needs or is there something that you foresee plan out in the preferred market over the rest of the year?

Well the April offering that we did was really re-opening of our series wide preferred. We had an interest move a single institutional investor to who was interested in taking down about 50 million of our existing serried [wire] so we went ahead and consummated that transaction. So that wasn’t marketed by any means.

Okay.

In terms of the preferred market, I think its’ firming up, it’s getting better. Our existing preferred out there are trading well. We are hoping to get better obviously and I wouldn’t put it half this, I’m trying to go out into the market sometime during Q2, Q3 and test it again and see what we can raise you know if the markets are there for us. We still have about 320 million on our bank term loan that we need to deal with before it matures in December of this year; I mean that would be one way that we would think about repaying the rest of it.

Okay. Thank you and then question looking at the back page of the supplemental on the 2012 acquisition break out. On my numbers the NOI you give there implies that you are getting a yield on cost in those assets north of 7% that’s on assets that are 86% occupied. I believe that the 2011 acquisition bucket ended up north of the 10% yield. Just curious if you can give us your thoughts on you know what we should, how we should think about the yields moving forward on the 2012 and ’13 buckets?

Well -- the [12] you are right exclusive close to 7% on the occupancy sell out room for occupancy growth. We start moving for rate growth. One of the things that we do when we acquire properties as we get very conservative on the rates, so we can fill up the properties rather quickly and then as they are getting to you know a stabilized occupancy level then we start being aggressive on increasing rental rates to the existing tenant base and we really haven’t been aggressive on the 2012 and 2013 acquisition tenant base, but we plan on starting to do that this year. So, I think in both portfolios whether it be the 20, the 2012 or the 2013 we have both occupancy gains to be had there as well as increasing the existing tenant base prior rental rates.

Great. Thank you, that’s all from me.

Your next question comes from the line of Michael Mueller of JP Morgan Michael W. Mueller – JP Morgan: Yeah, hi looking at the development, what do you see in terms of the pace of lease up compared to like what you typically underwrite for and just kind of what the experience was during the last cycle due for the downturn?

Well Mike, you know that the last cycle before a downturns ’05, ’06,’07 we didn’t have much in the development pipeline during that period of time. So I really can’t kind of comment on how this would compare to that time. I could tell you on the step that we’re opening it is filling up faster that we anticipated. But as John just touched on when we opened new developments or acquired properties that are you know lower at occupancy levels lower than what we view as stabilized, we’re a little more aggressive on rental rates until they achieved stabilization. You know and a good example is our Bronx Gerard property that ended April at 67% occupied, not even open, a year or so it’s got 3000 plus units leased up, but those are at rates about 60% or 70% of what we’ve forecast. So we’re filling up much faster but we’re doing with more aggressive rental rates. Michael W. Mueller – JP Morgan: Got it, okay. And one follow-up, on G&A, it was about 18 million this quarter. Can you talk about was there anything impacting that that was one-time in nature and what do you expect for the balance of the year?

Mike, there wasn’t anything in there that was really one-time in G&A. As for the balance of the year, you know, I think we’re going to be relatively consistent with last year and I caveat that with it will depend on our acquisition volumes going forward because a lot of the acquisition costs do get expensed through G&A. So depending on how much acquisitions we do, that could change it quite a bit one way or another. Michael W. Mueller – JP Morgan: And excluding those acquisition costs, you think it will be comparable year-over-year as well?

As far as we can tell right now, we don’t see anything right now that would cause us to believe that it could be either significantly higher or lower. Michael W. Mueller – JP Morgan: Okay, great. Thanks.

(Operator Instructions) The next question comes from the line of Tayo Okusanya of Jefferies. Omotayo T. Okusanya - Jefferies & Company, Inc.: Hi, good afternoon everyone. I may have missed this, but Ron, your comments earlier on about the roll-down in the rents when you – an old tenant – when a current tenant moves out. I’m just kind of curious, could you just give us a sense of what that average rent is versus what street rents are, so we can get a sense of what that roll-down is?

Tayo, I think – and John can elaborate this, that will be in the 10Q and so you can compare it, you know what it was last year, what it was this year and obviously it varies by market.

Let me give you some numbers. I’m not sure to what degree it’s actually disclosed in our 10Q, but it’s disclosed on a square foot basis actually in our 10Q. I’m going to give it to you on a unit basis or a move-in basis, so during the first quarter of this year, for example, the average move-in rate in our same store was about $114 per move-in. The move-out rate during that same period of time was about $123, and so it’s about $10 swing – negative swing. Last year it was – the move-in rate was about $111 versus a move-out rate of $119. Omotayo T. Okusanya - Jefferies & Company, Inc.: Got it. Okay. That’s very helpful. Thank you, there.

You’re welcome.

Your next question comes from the line of Neil Malkin of RBC.

Hey, gentlemen, good morning. My question is, given the strength in storage, have you guys seen opportunities or are you going to look at opportunities with private developers to take out their development CO buyout as it were. I just – you’ve been looking at this theme come to the market more.

Mike, we’re seeing and hearing about people doing that and – but we’re not doing that ourselves. We’ve engaged some – we’ve got some local guys helping us develop in certain markets but for the most part we’ve got our own team building our property. And it’s not to say we wouldn’t do that at a C of O. Last year, we acquired some properties in Boston, one newly C of O and then one that was still under development. So we have done that. I wouldn’t rule it out, but that’s really not how we’re undertaking our development program.

Got it, got it. Okay, next question, clearly the Public guys have been very successful at increasing demand – you know, occupancies have been continuing to go up and almost at record levels. Do you think that’s from paradigm shift sort of to people using mobile or online to get rate or deals that a mom-and-pop couldn’t provide. Do you think that’s definitely helped you or is that just an extra gravy for you guys?

Well, I think the ability of the larger operators to place themselves in better rankings on either the desktop or mobile is very helpful, in the sense that more and more people are using the internet or mobile to access the information on top storage rentals. I could tell you that as we’ve tracked it internally, last year – during the first quarter of last year, roughly 51% of our move-ins came through an internet channel. And that compares to this year, where it’s now 58%. So it continues to increase as people are using internet and mobile. Mobile has been rising quite a bit, and it’s certainly helpful to be a big player because you can get – you could afford to buy your way into placement as well as have the relevancy to place well on desktop and match one and local maps, suit yourself. So yeah, it’s managed to be a large operator in self storage.

Okay. Thank you and finally and assume the commentaries about the roll down. You know you guys are pushing Street rates pretty aggressively which is great. But, you know the renewals on average are 2% to 3% higher than Street rates. Are you worried at all because from the higher maintained occupancy and lower churns that overtime that in fact will be compounded and the roll downs will continue and exacerbate the retarding of revenue growth? Thanks.

That’s alright. That’s been happening for years now. We have talked about the rent roll down has been going on. And it’s largely because there is a dynamic that the mark-to-market is actually a negative number and has been for quite sometime. So, our existing tenant base is if you look at it on average is paying more than our market rates are. And that’s its you know a testament to how sticky people are and you can continue to head in what their increase is and not withstanding the fact that they could be you know obtain 10, 15% above market, they still stay. The difficulty is when they moved out, when they move out though, however we have the immediate roll down as we replace them.

You know Mike, to further John’s point they don’t have this on a per square foot basis. But if you look at our average move-in rates over the last six or eight years, in 2007, 2008 customers were moving it about $123, $124. Q4 they were moving into the $114. So while the rates, the 114 starts year-over-year as John went through. They are still you know call it $10 a month longer than where they work in ’07,’08.

Thank you.

Your next question comes form the line of Ross Nussbaum of UBS Ross T. Nussbaum – UBS: Hey guys couple of follow up. First, where do you think your Street rates are today versus your closest competition?

It depends Ross. We track it by market, by property, so it really depnds I think overall in the system, we are probably a little bit above competition for the most part and in probably most markets that we operate in. Ross T. Nussbaum – UBS: Second question would be just to confirm, I think last year you were bumping around 10 existing customers probably number was like around 8% or 9%, is that still the case?

Yes, it’s pretty much the same this year.

Your next question comes from the line of Paula Poskon of Robert W. Baird

Thanks, good afternoon everyone.

Hi, Paula.

I got a big picture question on the acquisition market, Ron. I think that some of us tend to have a tendency to forget just how fragmented this industry continues to be. On the private side, what do you think the number of truly large but institutional quality portfolios exist that maybe just still in the hands of reluctant sellers?

Paula, you know our best guess, I’ve got David down here with me and – we’ve looked at that in a number of markets. And my guess is less than 20.

Thanks, Ron.

Your final question comes from the line of Ki Bin Kim of SunTrust.

Quick question on -- the number of customers that you plan to send out rent increases to in the summer time. I think the last time it was about 55% any change in that number that you are planning for this year?

Well I took up the same key just to look maybe a little bit more because the ageing as Ron pointed out earlier; we have a better ace, kind of base in other words. So if we have more customers that meet the criteria, so we’ll probably give out in terms of number the volume, slightly more than last year.

Okay. And final question for me, the number of customers we seen in promotions, I know you guys get asked that once in awhile. Any update on where it is today versus last year in the same period?

No its’ about roughly about 80% of the move-in volumes we see some sort of a promotion in the full blown dollar for the first month or 50% off.

Okay, alright thank you.

You’re welcome.

We have time for one more question. Your next question comes from the line of Todd Thomas of KeyBanc.

Hey it’s Jordan Sadler for Todd here again. I just on the acquisition side, its rumored that there is a sizeable portfolio out there for sale. We’re just talking about 20 or so or less that remain after that that are of institutional quality. Is there anything sort of on your radar right now that’s for sale?

Oh Jordan, there is always stuff on our radar both stuff that’s -- in the market and being marketed as well as stuff that’s not or being marketed. Three of our largest transactions, our largest transactions or two of these transactions last year had no packages no broker involved. So we’re in dialogue, with you know we know the call it 20 or so people as well as people are grouped to people’s institutions or – operators have you know aren’t in the big group all the time. So, so there’s always stuff on our radar.

Always of course. I guess another way of sort of slicing it, I’m curious about sort of maybe your – you know, how you see the competitive set in terms of capital today. I mean, are you able to get deals done here given your sort of discipline on the underwriting still?

Why, I think, you can look in Q4 last year where we took down around 700 million in the fourth quarter. Are we able to get deals? Yes. Is it competitive? Yes. Stabilized properties are a challenge, especially one and two ops because there’s – to your point, there’s plenty of financing where there is CMBS, bank financing or public market financing. So where money is cheap, assets are expensive.

Is there any change on the underwriting side, meaning I know that you’ve historically been a replacement cost buyer but is there – are replacement costs moving up or is your view of replacement costs moving up materially or do you attribute value to in place customers and cash flow to a greater extent today than before?

Well, that’s a lot of questions but I’ll try to answer it. A property that’s stabilized with an existing customer base is worth more than one that has to go through three years or so of fill-up, not only because you don’t have the fill-up risk but generally the customer base is mature and more stable. And therefore is more susceptible promptly to rental – annual rental rate increases whereas a property that is in fill-up, it’s going to be much more challenging and there’s obviously fewer customers to send out rental rate increases to for property that’s in fill-up than one that’s stabilized. So, yes, stabilized acquisitions are worth more per se than development. I think I touched on before in terms of our view – my view of replacement cost, and I kind of went through this in this year’s shareholders letter. In a market like Reno, Nevada where there is lots of land and abundance of product and low population density with lower incomes, those are properties that we would acquire but we want to do them at substantial discounts to replacement costs, about 50% or 60%. You can track that to lower Manhattan where there is higher incomes, very little competition, great density of people and you know, we’d be willing to pay 175% of replacement cost because the huge barriers to entries and the great customer aspects of that market. So it just depends on the particular market. Does that address your question?

Yeah, I appreciate your flushing it out, gave me an opportunity to advertise the letter. I’m going to have to go back and read it again.

Okay. Thanks.

Thanks.

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

Yes. I just wanted to mention that JP Morgan will be hosting a tour of our 4000 unit Gerard facility in the Bronx. The tour would take place on Monday, June 2nd, the day prior to the Navy conference in New York City. So with that, I just want to appreciate everybody questions this morning and we’ll talk to you next quarter.

Thank you for participating in the Public Storage first quarter 2014 earnings conference call. You may now disconnect.