Public Storage Earnings Call Nuggets: Frictional Occupancy and Long-term Customers

Public Storage (NYSE:PSA) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Frictional Occupancy

Christy McElroy – UBS: John on last quarter’s call you talked at length about the difficulty of achieving occupancy above the 93% level within the portfolio because of the 7% churn per month that causes frictional vacancy of 6% to 7%. Here you said three months later its 95% occupancy. You also changed up your strategy through the winter where you offered some different promotions like the 50% off rent deals that you could boost occupancy in the seasonally slow quarters. So I actually have two questions about all of that. Have you changed your views around frictional occupancy for your portfolio? Then the second question is have you tried to jack up the rents back to market on those 50% off customers and how did that impact move outs in Q2?

John Reyes – SVP and CFO: I guess first Christy, I was wrong in what I had said about the frictional occupancy and our difficulties getting beyond the 93% occupancy, because obviously we did that, so I stand corrected. We were able to do that. Now it’s mostly done because demand was exceptionally strong. Notwithstanding the fact that we kept our rent – rates were a little bit higher but not much higher but we’ve significantly reduced our discounting during the second quarter. But fortunately for us, demand continued to be present to the system and we continued to gain occupancy throughout the quarter. So, but I do think though that over the course of a full year, I would not expect us to maintain occupancy at levels of 95% through the year-after-year that I think is just not likely. In terms of churn and the promotional the 50% off being promotions that we were doing. We have done those as you mentioned we did it during the winter. We also did it during around the Memorial Day timeframe, which does help boost demand for our product and occupancy. We like doing that because notwithstanding the fact that you’re giving away 50% of the rent we more than make up with – for it with improved demand coming into the system. Not only is that demand sufficient to offset the reduction in the rate but that demand is also customers that typically stay here longer because they are not – the rates are low and we also turn off the $1 for those folks. They typically stay here longer which gives us another pool of customers to eventually increase their rates in the future, because remember, it’s month to monthlies and we’re just giving 50% off. It’s not 50% off for a year, it’s not 50% off for a month. It’s 50% off until we decide to raise their rents.

Christy McElroy – UBS: Just a follow-up on that, can you quantify the year-over-year change in discounts you mentioned, they were down significantly and then…

John Reyes – SVP and CFO: In terms of percentage, year-over-year percentage change, they were down about 13% during the quarter…

Christy McElroy – UBS: Do you also have the year-over-year percentage change in move-ins and move-outs? Just to get a sense for traffic?

John Reyes – SVP and CFO: Yeah, move-ins were about flat with – and I’ll tell you what the move-in rates were. Move-in rates were roughly about 1.5% higher. Move outs were down about seven-tenths of a percent.

Ronald L. Havner, Jr. – Chairman of the Board, CEO and President: Christy, I would just add that, John and his team do the pricing and marketing strategies, but our field operations people did a great job this quarter executing. So, you don’t get to 95% without great execution in the field.


Long-term Customers

Jordan Sadler – KeyBanc Capital Markets: A couple of questions, similar line on the occupancy. What percent are now considered your long-term customers, and is that one of the drivers here?

Ronald L. Havner, Jr. – Chairman of the Board, CEO and President: Yeah Jordan, our customers greater than a year here – let’s see, the pool of those was up 5,000 for year-over-year. So, we’re at just about 55% in the pool greater than a year, not much change in the percentage but the number of customers has gone up because the overall occupancy of the portfolio has gone up.

Jordan Sadler – KeyBanc Capital Markets: You maintained the ratio. In terms of customer acquisition costs, I think last quarter you mentioned $2 versus $31 in 1Q, did that actually go negative this quarter or what happened?

Ronald L. Havner, Jr. – Chairman of the Board, CEO and President: Yes. Actually net-net, Jordan, between initial rate and all that we actually went positive. So our net acquisition cost was $28 positive per customer and that’s due to, we were able to reduce our acquisition costs by about $7 million and hold volumes constant or up slightly as John mentioned earlier, hold rates up about 1.2%. So net-net we actually went positive which is the first time, I have only got like the last three, four years of data. But that’s the first time in the last four years we have been positive.

Jordan Sadler – KeyBanc Capital Markets: Do you happen to know what it was 2Q of ’12?

Ronald L. Havner, Jr. – Chairman of the Board, CEO and President: Q2 of 2012, yes, it was negative $24.

Jordan Sadler – KeyBanc Capital Markets: Negative $24. Last question is just on the acquisition pipe. You’ve got quite a bit teed up here. I am just curious about, what’s driving sort of the activity, is it the portfolio pricing?

Ronald L. Havner, Jr. – Chairman of the Board, CEO and President: Yes. Well I think I have said a couple of times this year, the sellers’ market there is lots of capital, lots of financing and what we are seeing is a higher quality portfolios come to the market as a result of that.

Jordan Sadler – KeyBanc Capital Markets: Where are these relative to replacement costs?

Ronald L. Havner, Jr. – Chairman of the Board, CEO and President: It varies by transaction some are above, some are at, some are below.

A Closer Look: Public Storage Earnings Cheat Sheet>>