Public Storage (PSA) Earnings Call Transcript & Summary

Okay. Hi, everybody. I'm Smedes Rose. I'm with Citi Research. We're pleased to have with us today Public Storage and CEO, Joe Russell. Michael Bilerman is joining me as well. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now, and disclosures are available on the webcast. For those of you joining us here today, in order to ask management questions, simply type them into the question box on your screen, and they'll come directly to us, and we can be sure to open -- ask them.

Joe, I'm going to turn it over to you. Just maybe let us know who's on with you today, virtually. And we have an opening question that we're asking all the CEOs, which is coming out of the pandemic, if an investor were to choose only one real estate stock to own, what are 3 reasons why they should invest in Public Storage?

Okay. Great. Thanks, Smedes. Thanks for hosting us today. I'm joined by Tom Boyle, our Chief Financial Officer. Quickly before I get to that question, a number of things that we'll highlight through the discussion this afternoon. First, business is very good. I'm pleased that the Public Storage team is unlocking and driving value in all parts of our business and to their credit, maintaining a safe employee customer environment. We're seeing elevated levels of demand from both residential business customers and self-storage yet against -- again, proving to be a resilient and compelling asset. Going to your question about 3 reasons that I would center on why to invest in Public Storage. First, the powerful combination of our platform, our brand and our management team. We are leading the digital customer experience in the self-storage industry, while producing the highest operating margins and revenue per available square foot. That's number one. Number two, value creation through development, redevelopment and acquisitions. Our non same-store portfolio continues to grow in 2020. It achieved 26% NOI growth at 82% occupancy, and that's on 32 million square feet of assets, and it's poised to continue to deliver very strong value creation. And third, the power of the public storage balance sheet to fuel growth, shareholder returns.

Great. Okay. So we can talk about those more. But I think what's really dominated a lot of the conversation recently on the fourth quarter calls as well as in our discussions today, is really sort of understanding how trends could play out over the course of this year and just this kind of a setup. And I know you guys don't provide specific guidance, but maybe your thoughts around occupancies, "normalizing" in the back half of the year. And how do you think about pricing in that environment, given that you're coming into that with an elevated occupancy level? Then we can go maybe, sort of, talk about that a little bit.

Sure. The environment that we're clearly in, both as a sector and then more specifically to what we're seeing within Public Storage, has been driven by a sustained level of additional demand factors that we're seeing, literally, in every part of the enterprise. It's consistent across markets, and it's been driven by additive demand factors tied to work from home. Seasonally, we're seeing a very different home environment. When I mean home environment, home sales are up statistically, unusually high for this time of year. And the continued resiliency of the product and how it fits to an environment where consumers are looking to optimize their own work environments, obviously as I mentioned work from home. And with some of the movement going on in markets, whether it's temporary or ultimately more permanently, again, those are different demand factors that we're seeing at a very elevated level. So the typical seasonality of our business is not at hand. You mentioned occupancy. We're at record level of occupancy. Even as we speak today, our occupancy has continued to grow even beyond what we saw in the quarter, at levels we've never seen at this time of year. It's giving us a different level of pricing power, too, that is quite unusual and quite different this time of year. We're looking for any and all ways to judge how a return to normal might impact some of these very powerful drivers. But frankly, we haven't seen much of any of that yet. Even in markets that you could argue have started to return to more normal business environments or more normal behavior environments, take Texas, take South Florida or Florida as a whole, we're not seeing any evidence that move-out volume has started to shift back to any level of normal levels of activity. And we're seeing the continued resiliency product itself. It's a great environment for us to continue to test continued adoption from a consumer standpoint, and it's been quite powerful. So it's hard to predict what could play forth in the coming quarters. But thus far, it's been sustained and it's been very good for business, as I mentioned upfront.

It seems like if you look back over, kind of, 10 years in this business or so, there has definitely been an upward bias in occupancies. People were, like the '80s was considered kind of peak, and then it went into the mid-'80s, and now you're, what, I mean, you're basically almost full. I mean, you're what, about 95%-ish or something. It's north of 90%.

North of 95%.

95%. I mean I guess it seems like people tend to stay longer than expected. And I just wonder if we move into the back half of the year, we might be surprised by how high occupancy remains. And it sounds like maybe your -- wouldn't necessarily disagree with that from what you're seeing at least so far.

No, not at all, Smedes. You're right. If you go back to some historical perspective, whether it is even 5 or 10 years ago, it was not uncommon to have that exact perspective, but the storage business itself had these ceilings relative to the optimized level of occupancy that you could expect from a portfolio that is tied to a month-to-month lease environment. And through various economic cycles and with different pressure points tied to deliveries of assets in certain markets that's been dispelled, meaning that these occupancy levels have continued to grow. And in this environment, in particular, it's yet again another test. As I mentioned, our occupancy levels have even grown off of the 95% or so level that we saw through the fourth quarter of 2020. We have some markets that are 200 or maybe 300 basis points higher. So you take Los Angeles or San Francisco, for example, those markets are north of 98%. So the way you can optimize the performance of a portfolio with a month-to-month lease in this environment, again, is a testament to our operational prowess. It's a testament to the appeal of the product itself, and it's a testament to the things that we continue to find leverage relative to ways we can continue to optimize the business, whether it's through digitization, data analytics, the type of customers that are being drawn to the portfolio and the ways in which that we're embracing customers that have been with us for whatever periods of time. We like the fact it's good for business that average length of stay, as you pointed out, continues to grow, and has continued to grow even through the last 3 or 4 quarters.

What was the length -- average length of stay now?

Tom, I'll let you take that one.

Yes, sure. The stat I'd point to is the average tenure of our in-place customers in the same-store pool, and that's moved higher this year. On a year-over-year basis right now, we're sitting north of 36 months compared to about 34 months last year. So a continued elongation of that length of stay and the average tenure base amongst the same-store pool.

Okay. How -- are you testing out, sort of, pushing pricing to existing tenants to sort of be able to push the overall NOI stream? I know it's a careful balance where you don't want to piss off your customers. But if you're running at such a high level then something -- you're not paying me enough, right? It's simple math, right?

Do you need more friction, Michael?

Pardon me?

Do you need more friction?

Yes. I mean, 98%, it means that you probably can push price, especially you're not encumbered by a long duration lease. These people are month-to-month. And so I know you don't want to push them out and have 0 cash flow. But there's got to be a healthy mix. And I just don't know if you're trying different things in different assets to see how much you can push it. Is it all at once? Is it done month-by-month? Just where do you sort of sit there?

Well, it speaks to a number of things that, I believe, will give you more transparency in our Investor Day, but it is the capabilities tied to a range of analytics that we continue to deploy and develop our revenue management processes, our knowledge of customers. Tom, you can talk more about some of the other ingredients, but this is one topic that we'll give you even more clarity on in our upcoming Investor Day.

Yes. That's right. And Michael, you're highlighting one of the great attributes of the business, which is a month-to-month lease and our ability to increase rents with notice in 30 days. And that -- that paired with the fact that the tenant base is much stickier than one might anticipate, is -- will be a good fuel to drive growth into 2021. It was actually a detriment in 2020, given we paused on existing tenant rate increases and state of emergency restrictions as we moved through the year. But as we go into 2021 and 2022 with the move-in rates where they are and really frictional vacancy at this point, it's an opportunity to move rates higher and could offset some of the potential risks to occupancy that Smedes highlighted earlier.

Are you able to share anything on the customers that are coming in? Where are they coming from? The demographics of them? How much is business versus consumer? Just giving us a little bit more, sort of, under the hood in terms of the customer base.

Sure. I'm happy to take that. And Joe, maybe you can supplement. But our business is one that serves America from coast to coast. Meaning we have operations in now 39 states and presence in all major metropolitan markets for the most part. And what that means is that the customer base is very broad-based. And that matches the utilitarian nature of the product itself and that it will serve one use very well for a year, that customer will vacate. The space can be swept and someone with a very different use can move back in. And we saw that through the pandemic, where our survey data indicated a shift in consumer behavior really in the second quarter of last year. We saw much more activity from consumers that were spending time at home, not moving, but needed more space. Things like creating an office out of a third bedroom or renovating part of their home because they're at home a lot more than they were before. The flip side in the second quarter was that we saw less moving activity. Typically, moving is the very big driver of storage demand in the second quarter. Last year, clearly, it was a slower driver given the impediments to home sales. But as we moved through the year, and Joe highlighted this earlier, home sales have picked right back up. And so we've seen that come back to the forefront. But overall, broad strength, I would say the same thing about business customers, we maybe saw a lull in business customer activity for a period of time. But frankly, it's resurged into the back half of the year and we anticipate that into 2021 as well. So really good broad-based demand and top-of-funnel metrics are really encouraging. And have been for the last 9 months. We're looking at web visits and sales calls up 10%, 15%, and that's all juxtaposed against less inventory, right? So a good setup there. In terms of length of stays and customer behavior, Joe hit on it earlier, one of the really encouraging factors is how broad-based the change in behavior was as we move through 2020. And we're seeing the same things in Florida and Texas as we are in California and New York. And that's really encouraging. We ultimately have to see how 2021 plays out, but we think there's some lasting and sustained components of some of the demand we're seeing and some of the habits maybe that have been formed through the pandemic and some first-time users of storage that have found it to be a really utilitarian product for their every day.

Just a percentage of -- go ahead, Joe. Sure.

I was just going to key off to the point Tom just made around the growth, in first-time customers that's happening both generationally, and it's happening in a number of markets, either by purposes or by reasons for movement of one type or another, whether it's in or out migration, et cetera. The reverse of that is still about 20% of our customer activity is from repeat customers. So we're toggling off of both. So it's a great opportunity to not only welcome customers back like it is before, but we're seeing a whole new generation or new class of users in this environment that would be very compelling for a longer period of time. We're accentuating the way that they are coming to us more through different channels tied to digitization of the business, one, in particular, being our e-rental platform. We're now nearly 50% of customers who are coming to choosing that channel where they can do a move-in in 5 minutes or less, without any interaction and without any -- tied to having to be dependent on a property manager. So they can self-select a unit, time to move-in, and they could do it very quickly. So that, too, is another way that we're embracing different types of users that have never used the product before. And they're finding it to be very efficient, and we're getting great customer reaction from that channel, too. So we're looking for and devising new ways to tailor that experience even generationally to users that are much more inclined to look to a decision like this through electronic means. And it's having different, very powerful and good consequences for our business in many ways, whether it's cost structure, whether it's speed, whether it's customer satisfaction, et cetera. So we can do some pretty compelling things around that process.

Do you have just a rough percentage of the percentage of move-ins that were new customers? So highlight, is it 20% of all move-ins over the last 12 months? Or...

It's about 60% of our customers were the first time.

16% or 6-0?

6-0.

60%. Wow. And the split between business and consumer?

The business customer that actually signs a business lease with us is more like 5% to 7%. But the portion that is conducting business from the unit, but renting on a residential lease is multiples of that. So it's probably in the 15%, 20% zip code. But the majority is residential, and we expect it to continue to be.

You mentioned in your opening remarks, Joe, the development and the redevelopment platform and also how well some of the non-same-store assets are doing. And then you also have a very active acquisition pipeline or acquisitions that you've been doing over the last several quarters. Maybe you could just talk about what you're seeing on the acquisitions front. And in terms of thinking about kind of uses of cash, do you still see -- I mean, the opportunities to stabilize assets, leased up -- leasing up assets, and then maybe talk about just the development and the redevelopment platform. And then we have a question from the audience that I think will kind of lead into that, too.

Sure. To your point, Smedes, yes, we've been busy the last 5 quarters. We've acquired approximately $1.4 billion of assets. That's either closed transactions or those, as we speak, are under contract. So the volume tied to 2020 was about $800 million. And as we speak, we have close to $600 million, either under contract or already closed in the first quarter of 2021. Thematically, the way that, that pool of assets is situated or what it was when we acquired it was, on average, about 65% occupied. So you step back and think about the amount of new product volume that's been put into the self-storage sector over the last 5 years or so, and it's year-by-year built, starting in 2016, where we saw plus or minus about $3 billion of deliveries that peaked in 2019 at $5 billion. Last year, it tapered down about 12%. This year it's likely to taper down another 10% to 12%. But it's been a whole new pool of assets that have been brought into markets, some of which were going into markets that were either overbuilt or differently with owners that were trying to get in and out of the sector very quickly. And we've seen a good opportunity to capture many of these assets, either midstream in their own lease-up, whether on an occupancy basis or from a revenue management basis. Many of these owners didn't realize that the business is a bit more complex than they anticipated it to be, because if you don't have sophisticated revenue management systems, if you don't have the necessary brand operating platform, and overall knowledge of a submarket and the competitive environment you're dealing with, you can basically get stuck. What I mean by getting stuck, and this is something that we've talked about, actually over the last couple of years, it's not unusual for us to see one of these new assets, go through a relatively quick lease-up process, say, in a year or 2, getting to maybe 50% or 60% occupied. And then they just stall. They flatline. And the reason they do is that you need to continue to feed these assets with new customer activity, you need to have top-of-funnel reservation systems, you need to have top-of-funnel customer acquisition processes. And if you don't, you're going to be limited, and many of those assets are literally right at that point. So it's been a good opportunity for us to go out and source deals like that. And many of them are at even much lower levels of occupancy. Many are actually at higher levels of occupancy as well. But it's an owner set that's come into the sector in a decent level of quantity, that's become anxious to potentially monetize their investment at a different point than they originally thought they were going to do, because the business is a bit tougher than they thought it was, or they're not getting more close to the type of economic returns as expected, and they actually decided to build the asset. So we've got a lot of relationships that continue to play for both that, I would say, lead to off market opportunities, the most pronounced of which was the $540 million portfolio acquisition that we did in the fourth quarter, the Beyond Self Storage portfolio. And then it goes right down to some of the one-off deals that we're doing, too, very vibrantly, market to market. We're also buying assets that are marketed, but we've seen a good opportunity, as I mentioned, to get into a window of opportunity where there's a decent number of these types of assets. We can buy them, still at attractive -- either per square foot levels or we could see reasonable returns that we can get out of them and put them into our own system and drive the performance to a much higher level in this environment, even quicker than we have historically.

When you acquire -- go ahead.

And then it does, to some degree, also go full circle that we're -- some of the things that we're also seeing in our development activity. So we have the only development team in the public arena, we have by far the largest development team in a self-storage industry. So our team is out seeing a higher degree of land sites that may be in different phases of entitlements for the same reasons. Owners have tied up either properties or developers have tied up properties. They've been taking them through entitlements. They're seeing that it's not going to be as easy and/or a quicker return than they expected, and so we're seeing less competitions around vetting and looking for those types of land sites, too. So we'll continue to see how the overall development delivery cycle plays through. Frankly, one of the things that could work against that to a degree is yet again, resilience of the self-storage sector. There is a lot of capital on the sidelines that's still anxious to get in. But we're going to use all of our market knowledge and all the decisions that we make on a submarket basis to look for and find very attractive land sites as well.

Yes. I wonder, though, if some of the folks that got stalled, say, in their lease-up after a few years of operating and needed to sell, if they're maybe discouraged and are sort of like, got out, I won't put money back into that space for a while. I mean that maybe there's some that won't come back into it and sort of rescuing them.

Yes. That sentiments in the mix to a degree. And we think it's a healthy sentiment to some degree, it should hopefully play through with a different level or different type of discipline. Like I mentioned, it can be an easy view of our sector, looking outside in thinking, okay, it's simple garage space, how complicated can it be? Why would it be that commanding to go through and operate an asset like this when we see them filling up or we see them, over time, being relatively successful? But again, if you don't have that very vibrant management platform, if you don't have the revenue management tools, if you don't have the knowledge on a submarket-by-submarket basis, where you're actually is where you are able to look for and see potential risk factors evolving based on potential development starts, you can get caught, and many of them have.

Okay. We do have a few questions coming in from the audience, if I can maybe just go through a couple of these. The first is basically on CapEx and historical, what this person is writing historically deferred CapEx versus peers, the age of your portfolio. How long do you think it will take to improve the portfolio and what do you see is the costs. And I think you've talked about this a little bit before the "curve appeal" of some assets, et cetera. So maybe you could kind of peg off of that.

Yes. That ties to what we call our Property of Tomorrow program, Smedes, which we have talked about. But to give a little bit more context, we began testing that program in early 2018, where market to market we were going in and putting many of the generation 5, our newest assets amenities into existing assets. We've learned and seen different levels of reaction to that, most of which have been highly positive. So we like what the program is doing. It's rebranding the asset base, which frankly, we haven't done in a couple of decades holistically. And we're getting very good traction relative to customer and employee reaction from the [ point ] that we're doing with those assets. We prioritized the rollout of the program, starting with high revenue markets. By the end of 2022, we'll be about 55% through the portfolio on a revenue priority basis. And for the entire portfolio, the program is likely to take another 4, maybe 5 years. But we're finding ways of accelerating it as we go through markets and year-by-year tackle hundreds of properties. Tom, you can talk a little bit more about the economic side to it, relative to the investment we have made.

Sure. Thanks, Joe. There's some components of the program that certainly come with financial return. There's some that don't, right? I mean, painting a building isn't going to come with a financial return associated with it. But replacing the lighting and the interior with LED lights does. So we've seen good returns from things like LED lights, solar, landscape efficiency-related to water utility usage and the like. So there is some aspects of the program that are not just customer curve or fuel focused, but also efficiency and environmental impact as well as cost efficiency.

Okay. Okay. So there was a question that came in here on ESG, and I'm going to tie it to the question we've been asking each company, which is what are your top 3 priorities to improve your ESG score next year? And the investor who put in the question in the Q says, why is your MSCI ESG score in the bottom 10% of the FTSE NAREIT Developed Index and what are you going to do about it? I have no way of verifying whether that's true or not, other than someone typing it in. So maybe you can just talk overall about your view of your ESG score and what you're going to do to improve it.

Sure. Yes. To answer the question and the key off first off on what we're doing from an energy efficiency standpoint. So that's one of our primary goals as we look at ESG overall, which is the integration of LED lighting, as Tom just mentioned, along with solar, other investments we're making around minimizing or eliminating anything tied to paper usage, that's some digitization of the business, as well as water usage, et cetera. So that's clearly something that's very intentional, and I think, very measurable that we will continue to focus on to enhance our -- not only our scoring through ESG, but I think just that would be the right thing to do from an environmental standpoint. Secondly, we continue to be very focused on enhanced disclosure building upon, for instance, our inaugural sustainability report that we did about a year ago in 2020. So we continue to put more focus and oversight into the way in which we're disclosing the various things that we do around ESG. And then the third thing is the continued investment into what we clearly see as a very talented and diverse employee base. We have over 1,000 employees at Public Storage. We continue to invest in their skill, their diversity and their talent. So that's a third area that we continue to be very focused on. To the score itself. Tom, I don't know if you've got any...

Yes. Maybe add a fourth, which is just further engagement with some of the various different constituencies that all have their own scoring systems and the like. In certain cases, attributes of self-storage itself aren't fully appreciated. So further engagement there. Against the MSCI scores, I think we're in the top 10% of Sustainalytics scores at the top of the peer group with our GRAS scores and above the peer group in CDP. So one of the challenges here is around making sure that our disclosures match what the different stakeholders are looking for and that goes to one -- to Joe's points as well, and we'll continue to evolve our sustainability reporting as we go here.

Okay. Another question that came in was about PSB. And I know, Joe, you and I discussed a little bit about your state on the call. But since then, you have announced the new CEO in Mac Chandler from Regency. Can you just talk about sort of the process there, what you think Mac is going to bring? And just more evolution of that stake and various options that could have to move forward.

Yes. We've spoken about historically, we are supporters of the enterprise, meaning we obviously have a large share of about 42% of the ownership of the company. It's been long standing. It's been a good investment. It is strategically from an entity investment standpoint, something that the Board continues to look to, and we will continue to do just that. We're -- I'm on the Board of PSB. So I was involved in the process, tied to the selection. And Mac Chandler is going to be, I think, a great addition to the management team. The management team is excited about it. The Board of Directors of PS Business Parks is excited about his additional input into the business. And again, very supportive of that enhanced management change and as well as the new CEO.

And then another question came in here on the other public companies take you have. How core is Shurgard to your strategy going forward?

Well, it, too, is an independent publicly traded entity. We've got about 35% ownership stake in that entity. Again, not unlike PSB, very supportive of the enterprise and very pleased with public performance thus far, and its opportunity set going forward. So we're -- again, from a strategic standpoint, we, as a Board, we will continue to evaluate entity investments Shurgard included. But as I mentioned, very pleased with the performance of the entity and very pleased to continue to support its continued success going forward.

You talked about the Investor Day a couple of times. Is there a date set in person versus virtual? And what are the...

Yes, Michael, it's virtual, unfortunately or I don't know how -- we all know that there are pluses and minuses of this virtual environment. But for now, it's definitely set as a virtual environment, it's May 3. More details to come relative to the logistics. But the management team and through a special committee that we put together earlier in the year that I share with 5 independent Trustees of the Board are working diligently on many strategic areas that we'll be anxious and very excited to share with investors. Another thing that we're excited to do is showcase a number of leaders of the company that haven't been as familiar with investors and analysts over time. So I think we'll give even an additional view and level of transparency to the strong and very capable team of leaders here at Public Storage that we have. So we're excited about showcasing them and their talents as well.

What are you going to hope that people come away with? After sitting through -- I don't know how long is it like a 9-hour day, 10-hour day?

Well, our -- yes. No, it will not be that long. No, it will be appropriately configured from a time standpoint. But to my point around showcasing the unique capabilities of the company, its leadership team, our strategic advantages, the power of our platform as a whole, the unique ability that we can drive shareholder value around not only our strategic initiatives, but our balance sheet, the unique capabilities we have with that. A lot of good stuff.

Okay. Well, look, I know we've discussed disclosure and communication, and it's really nice to see the company open up the kimono a little bit more, which I know is hard for the organization historically. But I think it's definitely something to demonstrate what's behind driving the results.

Great. Well, no, we appreciate the feedback. And we continue to listen and value an additional input. So I appreciate that.

I promise I won't do a survey during this because there's no one in the room to raise their hands this time. Okay. Quick, quick rapid fire. When we're sitting physically together in Florida a year from today, what will be the one thing that will have surprised people the most about your business over the prior 12 months?

I think it will tie around the word resiliency.

Okay. What do you think your corporate travel budget will be in 2022 as a rough percentage of what the corporation spent in 2019?

Well, optimistically, I hope it's about 75%. We have a business that we all do a lot of vibrant traveling. We've got a big platform, and we need to be out there and engage in all of our markets. So, yes.

Same-store NOI growth for the self-storage sector in 2022.

Tom, you get that one.

Tom, the weighted average is about 49% for this year.

Yes. He's asking about 2022. What about 2025? I don't know what it's going to be in 2022 or 2025. We're seeing good fundamentals for organic growth as we head into 2021.

10-year treasury a year from today, it's 152 right now?

Up 50 bps.

All right. Thank you, both for the time and look forward to seeing you soon.

Great. Appreciate it.

Thank you.