Clemente Teng - Vice President of Investor Services Ronald L. Havner - Chairman, Chief Executive Officer and President Edward John Reyes - Chief Financial Officer, Principal Accounting Officer and Senior Vice President David F. Doll - Senior Vice President and President of Real Estate Group.

Jeremy Metz - UBS Investment Bank, Research Division Ross T. Nussbaum - UBS Investment Bank, Research Division Vikram Malhotra - Morgan Stanley, Research Division Ryan Burke Michael Bilerman - Citigroup Inc, Research Division Todd M. Thomas - KeyBanc Capital Markets Inc., Research Division George Hoglund - Jefferies LLC, Research Division Michael W.

Mueller - JP Morgan Chase & Co, Research Division Ki Bin Kim - SunTrust Robinson Humphrey, Inc., Research Division Paula Poskon - D.A. Davidson & Co., Research Division.

Ladies and gentlemen, thank you for standing by and welcome to the Public Storage Third Quarter 2014 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Mr. Clem Teng. Please go ahead, sir..

Good morning, and thank you for joining us for our third 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.

Those risk 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, October 31, 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. A reconciliation of 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. As we reported yesterday, we had pretty good Q3. The trends are positive. Our development pipeline is expanding nicely. And we're taking down -- we will take down about $400 million plus of acquisitions this year. So it's turning out to be a pretty good 2014. With that, we'll open it up for questions..

[Operator Instructions] Your first question comes from Ross Nussbaum of UBS..

Jeremy Matz with Ross.

Ron, can you just talk about how rent and discount trends have been going here into fourth quarter?.

Sure, I'll let John touch on that. The trends are positive..

Yes, month-to-date, in October, our move-in volumes, up about 3%. And the rates that are being taken are about up about 4%. So pretty happy about that. Street rates are up currently about 5.5%. I will say this, however, during the month of October, we did start discounting a little bit more than we had in the past.

So our discounting is up about 5% or so. One of the things we're trying to do, as I mentioned in the last call, was we're trying to gap out our occupancy going to the fourth quarter and the first quarter of next year, so we are spending more on television advertising as well as Internet advertising.

And along those lines, we're also giving away more discounting to try to get our occupancy spreads wider..

And on the -- and for the -- move-ins during the quarter, what was the realize -- the gap between the realized rents for the move-in versus move-outs?.

For the quarter, folks were moving out at about $133 a month -- monthly rent versus move-ins were coming in at $131..

Okay. So it sounds like that gap has actually narrowed some from prior quarters..

Yes. And if you want to compare it to last year -- the quarter of last year, they were moving out at $128 and moving in at $126..

And then, I think Ross had a question as well..

Ron, I missed unfortunately your lengthy opening comments, so hopefully you didn't touch on this. That was a joke. But can you talk about your development pipeline and in particular, it looks like you added $100 million of projects to the pipeline.

Can you just review where those new projects are? And where do you see the overall size of that development pipeline going into next year?.

Sure, I have David here, so I'll let him, since he's doing all the work, explain the pipeline. But as I mentioned, I think I've mentioned in previous calls, we're trying to get up to a $300 million to $400 million pipeline run rate, which I'm very proud of the team for getting that, achieved this quarter.

It will fluctuate quarter-by-quarter as there's deliveries and inflows. But pretty well got the development team staffed up now and they're starting to hit the stride. In terms of where we're developing, I'll have David kind of run through that with you..

California, Texas, Florida, North Carolina, Arizona, Maryland lead the list of locations where we're developing today. So it's really where the best opportunities to fit new development inside our existing portfolio..

David, your modeling what for stabilize yields on those projects based on current market rate?.

As high as we can get them..

That's not overly helpful.

Any numbers?.

Ross, I'd say you have to think about 200 to 300 basis points over acquisitions. And with that, that's your -- the third question, so I need you to get back in the queue..

Your next question comes from Vikram Malhotra of Morgan Stanley..

Wanted to just understand how you thought about occupancy during this past quarter. Maybe a year ago, 1.5 year ago, we probably wouldn't have expected you to kind of hit 94-plus.

So I'm just kind of wondering how you thought about maybe taking the occupancy to maybe even 96? And how you kind of thought about pricing? And just looking forward, as you said you're trying to narrow the gap, so how did you kind of think of it in terms of taking it up even further?.

Well, I would say this, we're not about -- I mean, although maybe everybody thinks we're about occupancy. We're not about occupancy. We're really about revenue growth of long haul. And so to get that growth that we're targeting, we pulled in different levers whether it be occupancy, promotion, pricing and what have you.

So it's for us, it's not solely about occupancy. It is important, don't get me wrong. But in the third quarter, we allowed the occupancy to tighten up with the spread to narrow vis-à-vis last year by being more aggressive on pricing and giving away less promotions.

As we move into the next couple of quarters, we're going to try now to expand the occupancy. So we [indiscernible] between which lever to pull and which lever we think is going to be optimal to get us our revenue growth as we move forward. So it's not one component solely..

Okay.

And just -- there was another?.

I would add to that, John said what our long-term goal is, it's optimizing the revenue per foot. But at the end of the day, it's really cash flow per foot that we own. So expenses and CapEx go along with the revenue side of the equation.

And so if you're trying to maximize your cash flow per foot of real estate that you own, you want an ideal situation, 100% of the building occupied, right? Because you want every square foot you own paying rent..

No, that's a fair point. And then just one quick clarification on the expense side. I know you said you started maybe spending a bit more to kind of help manage the dip in the occupancy.

But it seems like this is a pretty solid quarter in terms of expense management and on the payroll side, in advertising and I would've assumed maybe some of that has kind of run its course. But it just appears that maybe you could see a few more quarters of nice control there.

How are you thinking about expenses?.

I think on the expense side, the big dip for the quarter was advertising, which was down almost $1 million year-over-year. Utilities moderated a bit. And then on-site payroll is down 2% and that's been trending down, as we've done some things to improve the efficiency out of the properties.

That's all on our variance, productivity variance, not a rate variance..

So you'd say more so that is -- you've realized most of that or is there still more to come?.

Expense control and improvement in productivity is an ongoing thing here, so it's never done. And we have initiatives going in all areas to moderate expenses. So it's not a onetime thing or we just did one thing and that's the end of it. We're constantly doing things.

As I've touched on before though, on the long run, despite our productivity and scale and all that, I mean, you should think about expense growth here for the long-term at 2% to 3%, especially given the waiving of property taxes being our largest expense and the fact that while we're aggressively appealing them and all sorts of things, we have -- we don't have as much control over property taxes as we do some other expense items.

What John touched on in terms of advertising and selling is that in the fourth quarter of last year, basically had none. And this year, we'll probably have $2 million to $3 million in Q4 for advertising. So you'll see the expense growth pick up in Q4 but the big variable on our expenses is always, I should say, advertising and snow.

Snow is the other big variable that we have year-over-year..

The next question comes from Ryan Burke of Green Street Advisors..

Ron, your average construction cost on a current development pipeline is $115 per square foot.

Can you talk about that mark relative to where stabilized assets or trading on a per square foot basis on those markets?.

Yes, it's a little hard to give you an exact number. I mean if you take our development pipeline in Texas, there's 11 properties, our blended cost per foot is $91. Austin, we're probably developing there in the low -- $105, $110 max, maybe $100. And we're seeing assets trade in that market North of $200.

We've got some stuff here in California that we're developing at $124-foot, California usually trades north of $200 a foot. Arizona, we're developing at $80. We're seeing stuff trade there at $150. And then New York, that's really a redevelopment at $175 a foot and those traded $300 a foot plus.

So I'd say somewhere between, if I had to make a guess, but it varies by market, 150% to 200% of replacement cost in some cases..

Okay. And how does that gap compared to past development cycles.

I couldn't tell you..

Okay. One more question.

Is there a point where cap rates on your stabilized properties get so low that you start considering selling more assets obviously, with an eye towards recycling capital back into opportunities that are still right for value creation?.

Well, that's a logical question and something we think about. When you step back and look at Public Storage, we have a lot of firepower in terms of ability to acquire and/or develop assets. Our balance sheet is pretty under levered.

So sitting back and thinking about selling assets, once you start to think about how under levered the balance sheet is, it kind of moves off of the priority list..

Your next question comes from Michael Bilerman of Citigroup..

Ron, you talked about 200 to 300 basis point spread on the developments over acquisitions and I remember your comment from, I think it was last year, it was 0 to an 8 cap.

So that 200 to 300 is off the 0 or it's off the 8?.

Come on, Michael..

I'm just curious, you had an average, what would be the average yield?.

I think developments are somewhere between 8% and 11%..

Okay. You haven't been in the capital raising market from a preferred perspective in a bit. You have I think 250, 270 actually being able to be redeemed next year, I think at 145 in April, at [indiscernible] and 125 and 6.5 in October.

I'm just curious as you think about potentially with the ramping development pipeline and ramping acquisitions, would you look to seek to do that at along?.

To do what Michael?.

To redeem those....

And also [indiscernible] and sort of where you think that capital cost would be today?.

Well, I think a new preferred for Public Storage is probably about 6 to 6.8, somewhere in that neighborhood for Public Storage. Certainly not where we would like it to be. But we have other capital sources, a variety of sources. We talked about potentially issuing some debt in the past.

We may go out in the fourth quarter, first quarter and raised some capital in anticipation of calling those preferreds and in anticipation of the ramp-up for the development expense. So I would expect that something within the next, probably, 4 to 5 months we would be out in the capital markets trying to do something..

Okay.

And I guess your comment is given where the preferred pricing is, you'd prefer to go out and do that as debt rather than issuing preferred ?.

Yes, I'm just saying that there's other possibilities. We could do preferred. That certainly are normal mode of operations but we can do debt. As Ron mentioned, our balance sheet is very, very delevered. We currently only have about $71 million of debt on our books. And that's dropping down as we move into the end of the fourth quarter.

So we may tap into some of the debt markets, if possible..

Okay, perfect. And then just last question just as we think about when the $342 million of the current development pipeline, it looks like most of the spend will occur by the end of next year.

When should we start thinking about deliveries of that capital being spent from an income recognition standpoint, so should we think about, I don't know if there's going to be some stuff hitting next year and obviously, it will take time to stabilize, how should we think about that aspect?.

Michael, I think you ought to think about 300,000 to 400,000 feet a quarter coming online. Let's see, we've got, in Q4, we've got 8 properties, 450,000 square feet. Q1, '15, 8 properties 300,000; Q2, 5 properties, 500,000.

That give you a sense is that what you were looking for like dollars? It's about $35 million, $40 million per quarter of developments coming online. Keep in mind though on developments, in our business, it takes 2 to 3 years to hit stabilization, normally. So they're generally going to lose money overall or breakeven if we're lucky in the first year..

[Operator Instructions]. You're next question comes from Todd Thomas of KeyBanc Capital..

Ron, just curious to get your broader thoughts on new supply. All 4 public company pipelines are increasing and the regional developers are looking to get involved to the extent that they can.

What's your outlook here on new supply overall?.

Same as it has been, it's coming. We're ramped up. As I said, we're north of $300 million. And listening to some of the comments of the other CEOs in terms of what they're doing on CEVO deals and how they're thinking about buying CEVO properties and all that. I'm sure the developers are very excited to be building.

And that will, in my mind, accelerate new supply..

Okay. And then, John, you mentioned that discounting is up in October.

Is that up from September or is that up year-over-year? And last year, I'm curious in the fourth quarter, when did you begin to really start to increase discounts, at what point in the year?.

Well, my commentary about it being up, it's year-over-year, October this year compared to October of last year. In terms of fourth quarter of last year, we discount like throughout the period. There's no kind of ramping up last year, really. So last year, we gave away discounts of about $19 million in the fourth quarter.

I would expect that discounts will probably be a little bit above that. Right now, as I mentioned, we're up about 5%, that's month-to-date October. And depending on how the move-in volumes pick up, as well as occupancy spread ticks up, we'll throttle it back or increase it more, depending on how the volume picks up..

Next question comes from George Hoglund of Jefferies..

I was wondering if you could comment on some of the recent trends in the Shurgard portfolio and just sort of color on what you're expecting over the next 6 months or so?.

Well, the -- we started a pricing strategy in Europe, a really novel. Cut rates dramatically and won't behold more people move in. So we started getting really aggressive in the Q4 last year in Europe, and we've continued that into this year.

And you're seeing the results with move-in rates, realized rents down, I see, for the quarter, about 3.7%, but a 7% uptick in occupancy, very strong move-in volumes, which is overall, leading to positive revenue per available foot. And we hit 90% at the end of Q3, which we haven't been at for several years.

We've positive revenue growth in all markets, even Holland, which has been our Achilles' heel over the last couple of years, up 1.7% in the quarter. And my expectation is that you will see that revenue growth accelerate into 2015, as we achieve stabilized higher occupancy and are able to moderate the price concessions and discounting.

Also, we call up, I think 2011, I believe it was 2011, the VAT in London, and we basically absorbed that, which is a 20% rent reduction on all existing tenants. And As those customers have rolled out, we've got a nice uplift in the U.K. Our same-store revenue growth in the U.K. for the quarter was up 5.8%..

Okay. And then one -- another question. Actually, going back to capital raising issues.

In terms of debt that you guys you would potentially do, would you consider doing a traditional bond deal or is this potentially just another term loan?.

I'll let John elaborate, but in Q3, we did the -- the Shurgard team actually did a EUR 300 million bond offering. And so while it doesn't show up on our balance sheet, effectively 49% of that was ours. And the proceeds were used to repay the intercompany loan. So you could look at that as kind of a debt financing.

So we have a variety of sources to think about in terms of where we get capital.

John?.

Yes, I don't really have much to add, George. I mean, again, we could issue preferred, still on the table. I don't want to suggest that that's off the table. But just want to make sure that folks understand that issuing debt is not off the table.

It's something that we have considered and are still considering the possibility of issuing debt to be at either the public markets, private markets or what have you. So we're keeping our options open. We're not at that point where we need to do anything at this point in time.

We have plenty of capital with cash on hand, our retained cash flow as well as our line of credit at this point in time. So we're not pressed to do anything at the moment..

Your next question comes from Michael Mueller of JPMorgan..

On the fourth quarter acquisitions, just wondering, do you have a blended occupancy number for them and the ones on the contract, too, I mean, what's the rough number?.

Yes, Mike, I think most of these are probably about 85% on a blended basis, I guess..

Okay.

And is that about what the Q3 wins were as well or is that lower?.

I don't have those numbers here. It's usually, probably 5 to 8 points of occupancy growth and most of the stuff we're buying but it varies by portfolio..

Okay. That's helpful. And then, given that today's the 31st, I'm sure you probably don't have the October 31 occupancies.

But do you have a more recent mark like you typically provide when the call is -- the following week?.

Yes, I mean, we're up on occupancy year-over-year. As John touched on, our move-ins are up. Net any move-ins versus move-outs, were up 151%, which sounds like, wow, that's incredible. We had 3,000 -- 3,300 net positive this month versus 1,300 last year, but the 31st is a big move-out day. So I wouldn't read too much into that number.

I mean, those are the numbers, but it'll change by the end of today..

Your next question comes from Ki Bin Kim of SunTrust..

John, I know you guys have a more conservative same-store NOI accounting policies than some of your peers.

But I was curious, do you guys have the number if you included some of the acquisitions you've made and not waited 3 years for the inclusion of some cases, what your same-store NOI growth would've looked like?.

No, I don't. We just don't think about it that way. That's not how we look at our same-stores. So no, I don't have that..

Yes, I mean, obviously for more comparative purposes than....

Yes, I'll tell you this, Ki Bin, by Monday, we will have filed our 10-Q, and we do breakout each of the vantage years of the acquisitions and you can easily just add those to our same stores and compute what the number is..

Okay. This quarter, it seems interesting that a lot -- you guys included, a lot of self-storage peers have decided to on a year-over-year basis, maybe increase promotions or decrease rate a little bit earlier than you typically do, even though it is seasonal.

Just curious what collectively, the self-storage company, I guess for yourselves are seeing out there that is causing you to maybe be a little bit more competitive on pricing heading into the winter?.

Well, I can't speak on behalf of the other folks. I expressed kind of what our strategy is, and we're trying to take up some momentum on our occupancy spread. We're trying to gain to level out the seasonal trends in our occupancy. And view the fourth quarter and first quarter as areas where we can pick up some occupancy spread. So that's our game plan.

And as a result of that, as I mentioned, we're spending more on television, a little more on Internet advertising and we're being a little more conservative on pricing and promotions..

Do you think that might create a little bit of risk in 4Q from the optical standpoint on same-store NOI?.

Well, again, that's why I'm telling you about it. Because I think at the end of the day, our fourth quarter NOI is going to be negatively affected by it, but it certainly, I think will set up a decent or better-than-expected Q1..

Ki, I would just add something on the same-store. We started doing that 20-plus years ago and the purpose of the same-store reporting, which is by the way, the same way we report to our directors, is to give people, investors, our shareholders, a picture of kind of the core underlying growth rate of the business.

And what are the fundamental trends, so that people like you can figure out, okay, is the business growing, slowing down, what are the fundamental trends. And so unfortunately, to become a bit of a gamesmanship in terms of what's gets included in same-store and what doesn't.

But that is the purpose and that's why John doesn't know what it is if you include recent acquisitions because that's not the purpose of reporting the number from our standpoint..

Your next question is a follow-up from Ross Nussbaum of UBS..

Ron, are you seeing anything in the business today from a competitive standpoint, from pricing standpoint that would lead you to believe that your same-store revenue growth can breakout higher from the call it, 5% to 5.5-ish percent range you guys have been in the last year or 2?.

I'll let John elaborate on that. But one of the things, Ross, that might give you a picture in terms of why that's a pretty darn good number. The Q, as John said that will be coming out on Monday, is the 5%, 5.5% is a blend of a whole bunch of markets, 2,000 properties.

So at any one time, somewhere of 8%, 9%, I think Denver was up 9%, Q3 and then you have markets like D.C. which were up, maybe 1% in Q3. So depending on your portfolio weighting, you kind of get a mix that averages out to the 5.5%. In Northern California, the Pacific Northwest is really strong right now, LA is doing well. D.C.

soft, Philly is picking up, but it's relatively soft. New York is coming off the hurricane over a couple of years ago, it's a 2% or 3% but having 5%, 6% a couple years ago..

And I'd add that Florida has lagged the rest of our portfolio. And one of the primary reasons for that is we added a lot of new product into Florida that were busy we're trying to fill up and we are filling it up. And so I think that Florida will show more strength. But let me kind of add a little bit more to what Ron is talking about.

So for the West Coast properties, revenue growth for the quarter was 6.4% and Texas market, or the Texas properties were on average 6.7%. In the Southeast we're at -- excluding Florida, we're at 6.4%. So we have a lot of markets that are really doing really well. The Northeast is -- we've taken a bit of a hit on average, it's about 2.9%.

So that's the drag on our portfolio right now. And some of that is constant as Ron said with respect to hurricane or super storm Sandy that has now, we're comping against that and it hurt New York and we've struggled in Washington, D.C.

So can it get higher? It depends on your market mix and we're pretty diversified, so when one market is up, there's probably a market that's down. But on an overall net-net, I think 5% to 5.5%, as you mentioned, we've consistently done that for probably the last 3 years now..

And that sort of leads me to the follow-up, which is that's been in an environment lately that's had, I don't want to say 0 supply, but virtually 0 supply and that's changing and feels like it's going to be changing fairly rapidly given the spread between development yields and where market cap rates are.

So if we look out a year from now, 1.5 years from now, is it unreasonable for the market -- is it unreasonable for investors to say, hey, what if the economy stays constant, supply is picking up, the self-storage industry is going to have a heck of a problem maintaining 5-ish percent same-store revenue growth?.

Ross, it's -- with the qualification of the portfolio where it's diversified, a number of markets are relatively straightforward to build in and a number of markets are very challenging to build in. If you take Los Angeles or San Francisco, the Bay Area, or Seattle, very challenging markets to build in. Not a lot of new supply.

We're struggling to find product to build in those marketplaces. And yet, in those markets, especially in the urban areas, you have tremendous densification of population with the apartment construction. We were up in Seattle last week, and I was amazed at all the apartment construction going on up there.

And we have a lot of properties in the Seattle market and they're going to benefit tremendously from that influx of people. You take a market like Dallas, Texas, right, it's not hard to build in. It's our highest volume market. And my guess that's a market that will probably get oversupplied faster and more than other markets around the country.

Florida is usual market. It tends to get oversupplied. But if you're in Miami and West Palm Beach area, also very difficult to find land and very difficult to build in. And we have a big presence there. So that market will do better than average. So kind of depends on where your portfolio is and which market..

Your next question comes from Paula Poskon of DA Davidson..

Just to follow up on new supply.

Are you seeing any increase in adaptive reuse and in-store locations?.

Redevelopment, Paula?.

Yes..

Yes. Our derived properties are big redevelopment. We just took down a property, industrial building in Irvine that we're going to redevelop into industrial. So yes, we could take existing, other kind of building usage and reconfigure them to self-storage..

But are you seeing non-self-storage builders doing that, I guess?.

Non-self-storage builders. I don't have any anecdotal evidence. It's not something I monitor. So I really can't answer, yet on that..

And this time, there are no further question. I Would like to turn the floor back over to Mr. Clem Teng for any additional or closing remarks..

Thank you for your attendance today's conference call, and we'll speak to you next quarter..

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day..