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 Second Quarter 2016 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. Please go ahead.

Thank you, Jackie. Good morning and thank you for joining us for our second quarter earnings call. Here with me today are Ron Havner and John Reyes. Before we begin, I want to remind those on the call 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, July 28, 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 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. Welcome everyone. We had another solid quarter here in Q2. So, let’s open it up for questions.

[Operator Instructions] Our first question comes from the line of Ki Bin Kim with Sun Trust.

Thank you. Hey Ron, could you comment a little bit about the same-store revenue deceleration? I know, it’s not that much; it’s only 50 basis points also good number, but I am curious if you can provide some details of what caused it. And tied to that, I cover you, I have always known you guys to be little bit more biased towards occupancy part of equation, so maybe a comment on the decline you saw towards the quarter-end?

That’s a lot of questions, Ki, but I’ll try to answer it. And then, I’ll have John chime in with some details. If you look at the same store portfolio and growth year-over-year between -- in our top 20 markets, you see two markets that really stand out, Denver and Houston. Denver’s revenue growth year-over-year declined by 8.3% and Houston year-over-year by 6.6%. So, those markets declined from nearly double-digit growth last year to about 2% this year, and then you’ve got Washington DC chugging along down there at about 2% growth as well. But the big declines were in Houston and Denver. And those are also markets where occupancy degradation was probably 150-200 basis points. So, challenging markets, we have fair amount -- there is a fair amount of new supply in the markets, we have a number of properties and to fill up. So, there is some cannibalization of the product there. But I think Houston itself has some general economic slowdown there. The other markets, our West Coast markets are doing phenomenal from San Francisco to LA to Seattle, Sacramento and they’re full. So, they are not able to grow enough in terms of occupancy to offset the decline in markets like Denver and Houston. So that’s kind of the big picture in terms of revenue growth.

Okay. Does that mean -- I can see those two markets being the supply -- controlled by supply markets…

Supply, in Houston, you’ve also got, I think there is some impact there from the slowdown in the oil industry, probably some outmigration of people in that marketplace right now.

So, would I be stretching too far, if I assumed for the other markets where as you talked about more supply coming on, not just this year but maybe next year as well, is this -- kind of draw straight line and say there is other markets that might be seeing this weakness further down the road that might impact your overall results?

Well, certainly, there is new supply. And I’ve been saying for a year or two years that new supply will definitely impact revenue growth. And certainly, in markets I think like Denver, New York, it is impacting to some degree our revenue growth. But if you look across the markets, you got Denver down 8%, Houston down 6%, Chicago and West Palm Beach were down 2% but everything else is plus or minus 1%, kind of the standout on the upside were Seattle 2% change in the growth rate year-over-year and Sacramento up 3% year-over-year. Sacramento had a phenomenal quarter up 11.8% in terms of total revenue growth. So, everything else is kind of bouncing around plus 1, minus 1. But then, you’ve got these big anchors there in terms of Chicago, Houston and Denver.

Our next question comes from line of Juan Sanabria with Bank of America.

Hi, I am here with Jeff Spector. Just a question on rates. Any sense of what you’re being able to push on a portfolio basis to start the third quarter? And if you can help us maybe get a picture of how that trended throughout the second quarter each month, maybe throughout the second quarter versus July and maybe what we are seeing in August to-date?

Juan, this is John. Our rates, I would say, as we continue to the second quarter and into July, we have continued to -- overall, portfolio continued to ratchet rates downward, so that now our rates are below last year. We have also turned on more discounting, the dollar special discounting as well as discounting our websites. And as Ron mentioned, much of that is coming from some of these weaker markets. So, overall that’s down. But there is markets that are up, like the West Coast that Ron mentioned. So, I would expect, until we see this weakness -- and if the weakness is coming in on the demand side, our existing tenant base is not turning over any faster than it has previously; the move-ins that do come in are sticking around just as long as they have always had, I think the difficulty that we are seeing in these markets is just lack demand into our system and therefore, we are having to reduce pricing and increase promotions.

And could you give us a sense of what the year-over-year delta is in maybe July, just to see how that…

I don’t have that, but I could tell you in the quarter, the year-over-year delta in the move-in rate, last year the delta -- I’d say the year-over-year move-in rate delta is about -- we were up 3.9% on the move-in rate, but our move-in volume was down about 3%. So, overall, in terms of I would say contract or projected ramp, we were up slightly by about 0.5 percentage point.

Great. And then just on the supply picture, could you give us a sense of what you are forecasting or thinking supply could be across your markets…

Do you mind getting back in the queue, so that people can ask? Thanks.

Our next question comes from the line of Steve Sakwa with Evercore ISI.

Ron, do you want to touch on supply?

Sure. I think it continues to expand. I don’t have the second quarter numbers from all the public companies yet. But last year, at the Self Storage Association, I gave kind of a projection of 30 million square feet to be delivered this year. And using the same methodology, it’s up to about 38 million square feet. So, whether my methodology is correct or not, if you extrapolate that, there has been about a 20% uptick in the volume of new supply in the last 12 months. Again, it varies. As I have continued to say, it varies by market. Certainly the lower barrier entry markets such as Dallas, Houston, parts of Florida, people think of New York as a low barrier to entry market, but there is a lot of supply coming in New York. Those are markets that are gaining, I would say, above average growth. And supply, while markets like San Francisco, Seattle and even most of LA have an absence of new supply.

Okay, thanks. And I guess second, it was striking this quarter that your expenses were up little over 4%, I realize the first half of the year you’re still low at 0.6%. I know sort of talked about expenses, maybe finally picking up to a more normal rate, maybe people have doubted that, but maybe it started to come. I guess, can you just talk a little bit about some of the line items that are up? In particular, the onsite payroll was up 6.5%. And I’m just wondering if you’re saying on a sustained basis kind of vague inflation and other things that maybe putting you in a more normalized expense environment.

You said it correctly at the front, Steve, I’ve continued to say expect expenses 3% to 4%. And so, we’re, kind finally there. First quarter, Q1, we got a big benefit of snow removal, and obviously that’s not going to recur. Property taxes continue to drive our expense growth there, by far the largest item, and they are up to a 5% run rate. Onsite payroll, wage growth is about 1% and 1.5%, the change in payroll is really -- we had a workers’ comp credit last year I think of 1 million, 1.5 million, and then we had an uptick in medical insurance. So that’s really what’s driving that line. Going forward though, obviously over the next couple of years, here on the West Coast, we’re going to see an uptick in base wages due to changes in minimum wage laws. Does that address kind of what you’re thinking about?

Yes. I guess it sounds like maybe this sort of call it 3 plus percent expense growth, which you’ve been able to keep in kind of a 1% range, plus or minus maybe ending, and we should be thinking about a more normalized expense environment, sort of from here forward.

I think that’s a fair statement.

Steve, this is John. I’d also add that advertising expense is going to uptick. And what we will be doing in some of these weaker performing markets is we will be increasing our advertising spend on the web, as well as we may increase our spend on television advertising sometime in the third quarter and into fourth quarter.

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

So, staying on the development topic, I mean your development pipeline is now about 630 million. Do you see that number is continuing to grow, and are you seeing any cannibalization from your new developments on your existing portfolio?

Well, last year, I said the development pipeline was hitting about 500 million, I thought that was a peak; and Dave Doll and the team down there have moved it up to 600 million, certainly some of those properties will fall out. But, I’m pleased with what we do have in the pipeline. We’re going to have about 180 million of the deliver in the back -- in the second half of this year. So, it will come down, we’ll see if the team can replace that 180 million. We continue to develop, we see attractive yields; in some markets, just there is some cannibalizations. Although we trying, very focused in terms of developing where we don’t have existing product right near our current products. That’s not always the case, there is some cannibalization. And certainly smaller markets like Austin, Texas where we put a lot of product over the previous two years and we’ve seen a lot of other new product, there has been kind of greater than average cannibalization, say in a market like Dallas where we are building, mainly in North Dallas where we don’t have much product.

Our next question comes from the line of Vikram Malhotra with Morgan Stanley.

So, just looking forward into the back half and 1Q where things are naturally a little slower and maybe rate -- you pulled back on rate a bit. How are you strategically and tactically thinking, given what you’ve expensed this past quarter? Obviously, the results are pretty strong, but I am just looking forward and saying at that time when things are weaker, what do you expect in terms of reiterating [ph] your ability to push overall rate?

We’re still pushing rates, the renewal rates to existing tenants; we are still marching down the same path we have. We are obviously watching that to see if it’s triggering any ramp up and move-out activity. So far, it hasn’t. As I mentioned, the real struggle on some of these markets is on the front end and getting more demand into our system. But if it continues -- the weakness will continue -- we will just continue to cut rates and we will continue to discount until we finally couldn’t get to a point where we are comfortable that we’ve found an equilibrium that we are happy with. So, we are not afraid to cut rates. And we will go right after market share.

And so, just to ,clarify the existing -- can you just give us an update like how much is existing rate -- the rate to existing customers, is that in line with recent trends and street rate is still in that 6% range?

Yes, we are still sitting on increases to the existing tenant rates, just like we did very consistent with what we have done over the one or two years, and the range is somewhere between 8% and 10% increases. Again, we are not seeing that our existing tenant is any less stickier than they have been in past. In fact, I think Ron’s is getting through at it with the deck here, and I’ll let him do that out. But, the problem again in those weak markets that just trying to get the move-in volume coming in the door.

The percentage of customers greater than a year for the second quarter was up to a 56.5%, which is an improvement from last year’s 55.9%; and two years ago, it was down at 54%. So, we have moved that 2.5% over the last couple of years.

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

First, a follow-up. John, I just was wondering if you could provide a little clarification. I think I heard you say that rates were lower year-over-year in July. Was that asking rates that you are referencing?

Yes.

Can you just provide a little more detail there or quantify what the year-over-year delta looks like?

The year-over-year delta, I think the move-in -- I am going to refer it to what they’re move-in and out versus the street rates because street rates, they are not as important as the actual move-in rate that’s coming in, in the door. Move-in rates were down about 2.5% month-to-date compared to the same timeframe in July of last year. I’d say, again, just keep in mind that’s the average for entire system. Seattle’s probably up 6% to 8% and Houston’s probably down 5%. So, this is -- I am just going on averages here.

And over the last few years, is this the first time system-wide that you’ve had a reduction in asking rents year-over-year during a month?

I don’t have that data in front of me, but I think so. But, I don’t know.

Okay. And then, I am just curious, you just -- Ron, you just mentioned that you’re increasing rents to existing customers, the percentage of customers who’s higher year-over-year in the quarter. If you do start -- if you continue to reduce asking rents system-wide, what does that do to the percent of the portfolio that gets a rent increase or is eligible for a rent increase?

Generally, as you reduce rates, customer duration gets longer. And, so that by definition then or axiomatically would say, okay if customer duration increases, percentage of customers greater than year increases, therefore the more customers eligible for annual rate increase. I don’t know if that’s going to happen, but I mean that’s -- in theory, that’s what would happened.

Our next question comes from line of Gwen Clark with Evercore ISI.

Just really quickly, can you give us an update on how Shurgard did during the quarter?

Sure. For the quarter -- this is same store, Shurgard had 7% NOI growth, occupancy was up to 90.6 -- average 90.6 versus 90.1 last year, and realized rents were up 3%. Overall, revenue was up 3.5%, expenses were down 1.3%, that’s how you got to the 7% NOI growth. Do you want by country?

No, I think that’s good, but by and large it looks like those metrics look good. And, how you are guys thinking about your strategy post Brexit, if that hasn’t impact at all?

It has no impact, I mean we’ll deal with whatever kind of unfolds in Brexit. Keep in mind in Europe, over the next 12 to 18 months, you have a substantial number of elections, which could change the political environment quite dramatically over in Europe combined with the Brexit. So, we will see how it plays out.

Our next question comes from the line of Jeremy Metz with UBS.

Ron, I just wanted to ask you one on succession planning, and if you could talk about the decision to Joe Russell over to Public Storage and PSB?

Well, the decision was, we had a great candidate, a person Maria Hawthorne, who was capable of ascending to the CEO position at PS Business Parks, a 31 year employee, and which then made Joe available. Joe has a phenomenal track record at PSB. We have not had a COO at Public Storage for about a year and a half. And so, he is a great addition to the management team.

So, no intension to step down in the not too distant future then I’m hearing.

I’ll be here next quarter.

Okay. And then, in terms of Oklahoma, your acquisition there this quarter more than doubled your footprint in that market. I am guessing maybe this was a portfolio deal. So, I guess my question is, if you did this to protect your current position in the market or is this a market on your radar to further go into?

We haven’t closed anything in Oklahoma.

Okay. I guess you have them under contract, right?

Yes. If it’s under contract and not closed, I’m not going to comment on that. So, if we get it closed, that’s a good question for next quarter.

Our next question come from line of Smedes Rose with Citigroup.

I just wanted to back to -- you mentioned that move-in volumes are down, and I’m just kind trying to think about -- and as much as you can tell, do you think that’s a factor of new supply overall or do you think there is sort of an affordability issue where the industry has push rates, high and long against very high occupancies for so long or people are just sort of turning away, and you need to make it more affordable again, which is kind of -- it sounds like what you’re doing?

I’ll will start and let John finish. Go back to my earlier comments of a number markets whether it’s Sacramento, Seattle, even LA, Dallas, San Francisco, we during the second quarter here, we were full last year at 96%, 97%; we were full again this year at 96%, 97%. So, in terms of net pick up in move-in volumes, there was no more space to sell this year than it was last year. Where the markets are soft whether it’s Houston, Chicago, Denver, as John touched on, we’re cutting rates and it seems to be a demand issue. And so, that’s where you probably had the greater fall off in move-in volume. So, think of it as part of your portfolio, a good part of your portfolio is just sold out year-over-year, and so you’re not going to have much of change in move-in volume. And the stuff that is soft, is where you’re going to have degradation in move-in volumes precipitating the change in rates that John touched about.

Hey, Ron, it’s Michael Bilerman. Just going back to Joe Russell, can you talk a little bit about the role and responsibility? And I think when it was announced, it was President, didn’t have the COO in the press release. So, talk a little bit about, sort role, responsibilities that you want him to accomplish. And then, talk about how it may be different? You have had a number of people through that role over the last five to ten years and not much stuck. And so, I’m curious, how you expect Joe to make an impact and what his tasks are going to be successful in that seat?

Well, Michael, those are all good questions but we’re little early in Joe’s tenure up here at Public Storage to really answer all of that. As you know Joe and REIT community knows Joe, he’s an established leader and accomplished CEO. So, he brings much more to the table than the COOs that I have had. And two, I’ve worked with Joe for 13 years, at PS Business Parks. So, I have a pretty good understanding of his capabilities. Right now, he is focused on learning our business and learning our markets. So, right now, he has no direct operational responsibilities, he is out learning the business and learning the markets.

And he probably had -- he had a pretty big move to make to come over, probably didn’t need any storage?

That’s good, Michael. Thank you.

Our next question comes from the line of Michael Mueller with J.P. Morgan.

When you look at your developments that are in process right now, are you noticing any changes in the time to fill up, I guess going to that incoming demand question, is it impacting the development pipeline as well, the lease up?

No, Mike. So far, knock on wood, the developments are filling up ahead of plan. Now, keep in mind, we’ve had somewhat of a strategy of being a little aggressive on pricing and promotion in some of them to accelerate that. So, the real test would be in a year or two, do we achieve the targeted revenue level, as rates are stabilized. But for the most part there on average, ahead of plan, ahead of plan in terms of NOI, well ahead in terms of occupancy, and we are very happy with the developments, deliveries and what’s been happening. Our San Fernando Road property here in Glendale that we opened in the May last year is already 92%, 93% and is already at stabilized revenue level, so an absolute homerun.

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

You traditionally haven’t been a big seller of assets, but I know you had a few markets you were testing the prospects of selling, one is in the Midwest. Can you provide any updates there and your asset sales, and maybe any other markets you are looking to test?

Yes. We pulled that package and have changed strategy in terms of what we are going to do in those markets. I can’t comment on that now because we are in the middle of trying to do a couple of things, but I would just we’ve pulled that transaction. We don’t have any properties on the market for sale right now. And maybe, next quarter or quarter after, I’ll be able to kind of explain what happened.

[Operator Instructions] Our next question comes from the line of Ryan Burke with Green Street Advisors.

Thank you. Ron, as we talk about the potential for moderating topline growth, is changing consumer behavior or the impact of new supply worry you more over the next 12 to 24 months?

I am not sure I understand that question, change in consumer behavior?

Yes. So, demand from either, or decision patterns of either your in place customer or new customers, what rent increases they are able to digest, where are you going to be able to push rents?

I think we’ve touched kind of the differences in some of the markets where the demand issue is more of a problem, and maybe there is an uptick in supply there certainly in markets like Austin. So, that’s having an impact on demand and rental rates. As I touched on earlier, we have not seen any degradation in the churn rate, and actually I have seen an improvement in length of stay this year versus last year, which would lead you to believe that customer stickiness and our ability to have pricing power with our existing tenant base is still quite good. Does that answer your question?

I think that gets me far enough. In terms of the same store pool, you only rolled about 15 of the 120 assets that you acquired in 2013 into the pool this year, which makes the definition of your same store pool diverge from that of your peers even more so than it usually does. Occupancy on those assets is mid-90%, so I believe you could have rolled the rest of those in. Can you just talk to us about why you did not?

Ryan, this is John. The reason why we didn’t is because stabilization isn’t just about occupancy. I could fill up a property in a year by giving it away for free, right, and throw it into the same store the next year, and revenues would then just go skyrocketing. So, we view stabilization not only as stabilized occupancy but also the stabilization of the rental rates that the existing customers are paying. So, for those properties that we acquired in 2013 that we did not put in the same stores, even though the occupancies were mid-90s, the rental rates that were being charged to existing tenant base were still far below what we think stabilized numbers should be. So, those properties, we didn’t put in; they are still growing at a much more rapid year-over-year change than the same store properties that are operating in those same markets. So, clearly they are not stabilized. And so, we didn’t put them in.

Ryan, to add some color to that, what John just said on the 2013 acquisitions, our occupancies year-over-year were flat 94.6, but the contract rents were up 7.4%. And NOI growth on those was for the quarter about 12%. So, as John said, it will look -- make the numbers look nicer or stronger if we put them in from a objective reality and in terms of are they really stabilized or not; they are not, so we have kept them out.

Our final question comes from line of Todd Thomas with KeyBanc Capital Market.

Ron, realizing that the development machine takes some time to get ramped up here, as you look at growth perhaps moderating a bit at this point in the cycle, do you feel as you look ahead over the next couple of years that you need to make any changes to how you are allocating capital, as it pertains to development?

Todd, I am not quite sure I understand, are you implying or indicating that we should allocate more or less, I am not quite following your question. I am sorry.

I know, in certain markets like Houston for example, you have talked about a commitment to that market long term, plans to develop, say 100 facilities or so. You are also seeing softness in that market today. Does that change at all your commitment to that market or how you think about the pace of development?

Couple of things, Houston is a great market, we think it’s long term -- I mean, I view it as the oil capital of the world. It’s a great dynamic market. There is a lot of sub markets within Houston where we have little to no product, and some markets where we do have some product, but we could penetrate those markets more, same applies to Dallas. And in those numbers, markets around the country, but those two markets in particular are very vibrant, and this does not change our program going forward. Now, what may impact our program is as rates roll down, it may adjust our ability to develop, because it may not make sense in terms of what we can get land for and construction cost and the returns that we want on development to build as much in Houston as I would otherwise liked. But long term, we are committed to those markets. Our development pipeline itself, I think we delivered through June about 320 million or so. And so, there is a fair amount of embedded growth on that. We’re targeting stabilized deals, 8% to 10% on the developments. And I think in the second quarter, we generated about $2 million on that $320 million of investment. So, you can -- going forward, as you kind of go out, ‘17, ‘18, ‘19, those development deals will provide a substantial source of growth for us. Right now, they are bit of a headwind. Our 2016 deliveries for the first six months locked about a $0.5 million. So, net-net, we think it’s a great investment long term. As I touched on, they are filling up ahead of plan. But it’s a bit of a headwind on earnings today but a great source of future growth. Does that address your question?

Yes. That’s helpful. Thank you.

We do have a question from the line of Steve Sakwa with Evercore ISI.

Just a follow-up, on the non-same store pool, I guess if I look at the numbers, John, the occupancy is about 500 or so basis points below your same store pool and the -- I guess the realized rent per foot is about $1.50 lower. I guess one, would you expect this pool to ultimately catch up to the same store pool? And if so, do you think that’s a 12-month process or more like the 24 to 36-month process?

From here on -- well, first off, Steve, it’s a different market mix than the same store pool; so, it’s hard to compare the two, sort of apples and oranges. But, if I would say that in terms of potential future growth in this, I think that will probably another 12 months to 18 months away for another kind of rate increase to existing tenants before we start getting to that level of them reaching that stabilization point.

Okay. So, I guess you wouldn’t expect the operating metrics of this pool of property, assuming it stayed static to maybe get to the same level of occupancy, as the same store or you would?

All else being equal, if they’re in the same market, they should get there. But my point is that there in different market, the different market mix, and I’m not sure what they are. For example, if they are in Houston, could they get to the same market mix against same rates or same stores, probably not because Los Angeles and San Francisco dominate our same store pool. And they have much higher occupancies right now than Houston does.

And higher rental rates?

Correct. So, you’re here asking me to compare apples and oranges. All I’m telling you is that they’re not stabilized and I expect that their growth will continue to outpace the existing same store growth, not only the growth of the overall same store portfolio but those properties that are in the same markets, they will continue to outpace them, just because of still filling up or stabilizing on rental rates.

That was our final question. And I like to turn the floor back over to Clem Teng for any additional or closing remarks.

Thank you for participating on our call this afternoon. And we will talk to you next quarter. Have a good afternoon. Thank you.

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