Clemente Teng – Head of Investor Relations Ronald Havner – Chairman of the Board of Trustee, President, Chief Executive Officer John Reyes – Chief Financial Officer, Senior Vice President.

Smedes Rose – Citigroup Ki Bin Kim – SunTrust Jana Galan – Bank of America Todd Thomas – KeyBanc Capital Markets Ross Nussbaum – UBS George Hoglund – Jefferies Ryan Burke – Green Street Advisors Michael Mueller – JPMorgan Todd Stender – Wells Fargo RJ Milligan – Baird Jordan Sadler – KeyBanc Capital Markets Wes Golladay – RBC Capital Markets.

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. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

[Operator Instructions] Thank you. I would now like to turn the conference over 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 and 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, these line items, combined, came in – it looks like about 1% for the full year in terms of total increases and you guys always do a good job with keeping those payroll numbers fairly low in terms of percentage of increases.

But I do 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. Well, I mean, you've got the supervisory payroll up the year for 1.9%, we relied a few district managers in 2015, so we'll fill in the bench there. Onsite property manager payroll, I'm looking, 0.6%. That will probably be up 1% to 1.5%, would be my guess..

Okay. And then, can I just ask you – you did the acquisition activity, thus far, in the first quarter, it looks like almost as much as you did for the full year in 2015.

Can you share maybe what kind of yields you're buying out or maybe any thoughts on kind of just the pricing that you're seeing now versus what you were seeing last year or availability of product? Because it seems like it's accelerated quite a bit from what you have done last year..

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

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

All right. Thank you. Appreciate it..

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

Thank you.

For Ron, as you look into next year or 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?.

Well, Ki, I've 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? 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 U.S. And that's probably 2%, 2.5%, which is close to three times population growth. The flip side of that is that new supply is not coming in, in all markets.

And 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. I mean, its economics, supply and demand. And so as that supply comes on, it will impact our ability to price product..

And you said, 2.5% of that coming on line.

How much of that is in your market when you look at it, not from areas where you're not in, but just where you're competing at?.

Well, the new supply usually comes in in a market where it is easier to build, so Texas and Florida. The bros 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 flipside of that is Florida and Texas have great population close to them, so they can handle above-average supply growth. We're not seeing a lot of stuff here in California or really on the West Coast to speak up..

Okay. Thank you..

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

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

Hi Jana, this is John. 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 on the 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 are 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-to-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 kind of 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 market, the Milwaukee market, Minneapolis, down into St. Louis. Florida is doing very well. Most of Texas is doing well. The Carolinas also doing well. We're a little weak in the D.C.

market, the Baltimore market. But other than that, most of the other markets are doing pretty good..

Thanks, John..

You're welcome..

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

Hi. Thanks. Just thinking about fundamentals in 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 much.

Do you think that you can improve upon that in 2016?.

Hold on. We'll get that. The short answer, Todd, is yes because I think Street rates will be higher in 2016 than 2015. We probably won't do as much advertising and we'll be mindful upholding customer volumes, so net-net, to reduce your marketing cost, rates go higher and you hold volumes and 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, the prior question, you said that the TV advertising was not as effective in the fourth quarter.

Any reason why that you can point to explain that?.

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

Hey, Ross..

Ron, can you talk about how the fourth quarter played out to what your expectations were? And in particular, as you all 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....

Yeah. I think....

I think it came in where we thought..

Yeah. I think we were – there was no surprise, Ross, in terms of demand into the system, the rental rates that we were getting. A lot of our properties aren't really – still 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 subject to weather changes as maybe the East Coast is..

And 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, 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 insight..

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, right, Mark Zuckerberg somehow knows I'm 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?.

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

In terms of what you're referring to in terms of using, I guess, 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 certainly something that we're constantly exploring thoughts on how we can attract the customer and a better customer, actually, using the demographic information that 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 has touched on, the website and then bidding on various terms and prices across the country..

Appreciate it. Thank you..

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

Yeah. Hi.

Can you just talk a little bit about G&A costs for 2016, kind of what might be a good run rate, and how much of legal cost will be – are you guys assuming for 2016?.

I'm looking at our GC here, and she is smiling and shaking her head. She doesn't know what legal costs will be. But we're estimating a ballpark range of between, for G&A, for the entire fiscal 2016, somewhere in the neighborhood of between $80 million and $90 million..

Okay. Thanks. And then just one thing on Europe, I think you just commented a little bit on Shurgard's performance. And then also, how is development ramping up in Europe? Kind of last quarter, you guys had mentioned that they're starting to pick up..

Sure. Well, 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've taken down the land or about to take down the land. We're working through the zoning process.

So, all – combine that, when that's done, we'll be at about 500,000 feet added, $90 million invested there. And we're looking at other market to look to do some development and it's Berlin, but we don't have anything in the [indiscernible] 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 credit last year that didn't fall through this year, so expenses were up a bit. So, it didn't – 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.

Occupancy average for the year 89.8% versus 85.3% last year, and minor degradation of rents. So, it was 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?.

Well, 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 that you'll utilize to continue to capture outsized share demand? Is there anything particular that you have left in the closet right now that hasn't been brought out yet?.

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

If you look at how – what market share we have in the major metro markets, I mean, for the most part, we're the dominant provider. And 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..

Well, expenses, they fit in to the platform.

So, if you have a property in Miami or Dallas or LA, they just kind of 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 for – operating out in terms of an expense per foot other than property taxes which is always kind of the swing item on the expense side.

On the revenue side, it's fill them up as fast as possible. Generally, discount rates increased promotional discounts, fill them up to 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 line of Michael Mueller with JPMorgan..

Hi. A couple of 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% which is 93.0% and our in-place rents were 15.50% versus 14.61%. So, occupancy is up 0.2%, in-place rents up 6%..

Got it. And then....

Street rates were higher..

Okay.

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

Yeah. Mike, this is John. We really haven't started sending that increases or we'd be gearing up at the end of this month to really start sending the first wave out. I anticipate that'll be very similar to the past two years.

People who been here longer than a year will receive an increase, and 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%. So I expect that we'll continue that in 2016..

Got it. Okay. Thanks..

You're welcome..

Thanks, Mike..

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

Thanks. Just looking at the full-year acquisitions, it looks like occupancy were in the 85% range and rental rates were sub 13%.

Can you give us a feel of what those numbers look like at the end of last year, and then I know you made some acquisitions so far this year, just what the fundamental trends are?.

I'm sorry, Todd, what number are you referring to?.

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

Yeah. Well, most of the acquisitions were, David, 80%, 85%? Yeah. 80%, 85%, we didn't, 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're somewhat stabilized properties, somewhere between 80%, 85%.

Extrapolating what's that going to be versus what is in our press release, right, because the acquisitions – I'm looking here at the annual contract rate of 1506, 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, okay, everything's going to migrate to $1,506 a foot.

Generally, though, once we get them stabilized and up into the platform, our ability to push rates consistent with everything else we've 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 them according to your metrics once you layer in tenant insurance, and maybe if concessions start to slow down, what does that period look like?.

Well, operationally, in terms of fitting them into the system and operating them as a Public Storage property, I mean, 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 moving volumes once it gets into our system. There's usually problems on delinquency, so we have outflow. But generally, six months to a year, you get the thing stabilized, and then in the second year is when you start to see some meaningful growth.

Recall, if you're going to lower rates and increased promotional discounts to fill it up, revenues generally going to not – revenue growth is not going to be very strong in the first six months to a year..

Great. Thank you..

Thank you..

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

Hey. 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. With no absorption, it's going to be 150 basis points higher than that. Develop – we developed – so that's on the development. The redevelopments can go anywhere from 10% to 30%.

Then, 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, and I wish we could do $1 billion a year of those. But they're 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 and 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?.

Well, generally, the higher barrier to entry markets are where we're having greater competition for the land, and we're having to pay up for the cost, so those yields tend to run a little lower than the lower barrier to entry market.

And the way we look at it is, okay, on a lower barrier to entry market, we need a higher yield because it probably won't grow as much as these high barrier to entry market..

That's helpful. Thanks, guys..

Thank you..

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

Yeah, guys. Just looking at the balance sheet. You guys have about $375 million of the Series Q preferred, they're callable in April, and almost $500 million of the Series R, they're 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 make call one or both of those series, but we haven't made the final decision yet on that, but I wouldn't put a passage from calling them..

Okay.

And would it be – would you be more inclined to just refi it with more [indiscernible] or do you include some unsecured debt?.

We could be both. We did a preferred in January, so we're sitting on cash which will cause a little dilution to our assets in Q1, and that was a $300 million deal. I don't know whether the preferred market will be open throughout the remainder of 2016.

We did mention that we were looking at doing unsecured debt that's still – 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..

Thank you..

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

Hey. It's Jordan Sadler here. Just a quick question regarding sort of 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'll be a little bit more on your wheelhouse geographically in L.A.

that crossed recently, curious if those were on your radar, if you had interest and just maybe talk a little bit about your appetite..

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

But it's 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 but just 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 sort of 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 sort of pick up in incremental yield on those acquisitions over sort of a one- to two-year timeframe?.

Well, Jordan, that depends on a lot of variable factors. Generally, we try to underwrite where we think there's – I'd say, on average, 150 basis points, 200 basis points uptick in terms of NOI over 12 months to 18 months. One of the things that we overcome in acquisitions is property tax reassessment.

So whereas an operator may have had the property for 20 years, he's got a low tax basis, we buy it. Now, we've got to pay tax bill, so you kind of make that up in your NOI in you growth rate. But generally, 150 basis points 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 rent in that marketplace. We don't do a forward forecast of what we think rents might be two or three years out.

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

That's helpful. Thank you. And then Todd has one on on-demand. I know you know that business a little bit..

Yeah. Hi. Just quickly on 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?.

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

Okay. Thank you..

Thanks, guys..

Thanks, Jordan. Thanks, Todd..

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..

Okay. What type of yield did you get on that? I guess it looks it's vastly exceeding underwriting..

It will. It has not been open a year. So, taking the last 10 months of income is not indicative of what that income is going to be over the next 12 months. But I think we end the road with three-year fill-up pretty good, probably even a little bit longer than that. And so it's far exceeded our expectations.

And the other about that fill-up on the property is we do not have to discount rates. It's heavily – to get it filled up as we normally do on a typical development. So, it's a homerun..

Okay.

And then when you look at acquisitions, how far are you on the final price where [indiscernible]? 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'm sorry. I didn't understand the first part of your question, Wes..

Okay. Yeah. So how far off are you when you look at acquisitions that you're missing on pricing? Are you like 5% away from the final price, or is it like 10% to 15%? Just wondering if the improved cost of equity, cost of preferred equity will help you pencil more deals in this year..

Yeah. Well, 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.

And so even though the yield may kind of fit the current cost of capital, you could get – in terms of cost of capital, you could get really creative and say, well, our line cost, 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-foot and we're building in LA at a 150-160 a foot, we're just not going to pay 300 a foot..

Okay. Got you. Thank you..

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

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

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