Welcome to the Public Storage Fourth Quarter and Full Year 2016 Earnings Conference Call and Webcast. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. [Operator Instructions] Today’s call is being recorded. It is now my pleasure to turn the floor over to Mr. Clem Teng. Please go ahead sir.

Good morning and thank you for joining us for our fourth 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, February 23, 2017 and we assume no obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. A reconciliation to GAAP and the non-GAAP financial measures we’re providing on this call is included in our earnings press release. You can find our press release, SEC report and an audio webcast replay of this conference call on our website at www.publicstorage.com. Now I’ll turn the call over to Ron.

Thank you, Clem. We had another solid quarter. So operator, let’s open it up for questions.

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

Thanks, good morning everyone. So if I think about your company is actually you guys have always had a slight preference for keeping occupancy high, with that said ended the quarter we saw 50 bps decline in occupancy, while you guys maintained Street rates 4.7%. So my question is any type of change in the strategy and are you willing to let occupancy slight little bit more for fake of Street rates. And I guess is there a inherent pressure for you to keep Street rates high in order to sustain the profitability of existing customer rate increase program.

Hi, Ki Bin, this is John. All great questions. No, we did not change our strategy to let occupancy falls. So that wasn’t – something that was intended. We certainly would like to see Street rates maintain themselves and move higher because that’s important when it comes time to raising our rates to existing tenants or giving renewals. But that certainly was not the intent of what you saw there in the fourth quarter. So nothing’s change, the occupancies, obviously ebb and flow and what you saw in the fourth quarter was I think a little more move out activity than we had expected, but nothing more than that.

Ki, I would add that our strategy is not principally focused on maintaining high occupancies. Our strategy is growing revenue per available foot. So that’s managing volume, rate, promotional discounts, all three together to optimize the revenue per available foot that we have to lease.

Okay. And Ron, if I think about some of the comments you’ve made in the past about the supply picture in industry. I would say your estimates have a little bit higher and medium or correct on the overall supply coming in, with that said and things – and looking at the results in the fourth quarter and third quarter. Do you think it is possible, when summertime comes around this year that Street rates or net effect of rents can rebound? Or do you think that’s probably difficult given what’s happening with supply and demand out there.

Ki, it’s – really it’s predicated on the market. If you look at the information released now that all the public self-storage guys have reported. If you take their CFO pipelines and we’re planning on delivering in 2017. Our best guess is about – for that group about 5.1 million, 5.2 million square feet. So that’s up about 25% from the 2016 deliveries. Now the current pipeline for 2018 is down, but I don’t believe that the 2018 pipeline is completed yet. I think people still will be working on the 2018 pipeline, in the first half of 2017. So we’re going to see – that looks like about a 25% increase in deliveries just from the public competitors and my guess is that whether the industry is 25 or 20 or 18, there’s a meaningful uptick in new deliveries 2017 versus 2016. But that – those deliveries are not uniformly spread across the country. And I would have to say at least in terms of dollar value it appears most is coming into the New York market, just in terms of absolute dollar amounts in terms of new deliveries. We don’t have anything coming into the New York market. We just opened Jersey City, but we don’t have anything coming into the market going forward. But CUBE and Extra Space appear to have a fair amount coming into that market. So obviously that market’s going to be faced with a lot of supply here in the next couple of years. The other market that kind of pops out is Portland, Oregon. We’ve seen that and we’ve seen a meaningful uptick in new supply there in Portland. We’ve already seen it in Austin, Denver. So it’s not uniform across the country.

Okay, thank you.

Your next question comes from the line of Gaurav Mehta with Cantor Fitzgerald.

Great, thanks. Can you comment on what you saw on promotional and discounts in the quarter.

Yes, I – probably this is John. So, our discounts were up, in terms of dollar amounts were up about 1.5%, we give away about $19.9 million of discounts versus $19.6 million for the same quarter last year and this is for same-stores. Approximately 77% of our move-ins had some sort of discount and that compares to about 72% for the same quarter last year.

Okay, great. And as a follow up, can you comment on how your assets under lease up doing especially in Texas.

Yes, for the most part they’re leasing up, but I would say it’s too early to tell because normally in lease up we’re little more aggressive on rental rates and promotional discounts and so while they occupancy may be higher. It will be a year or two in terms of really understanding. Are we achieving the rental rates that we underwrote? But so far they seem to be doing pretty good.

Okay, thank you.

Your next question comes from the line of Smedes Rose with Citigroup.

Hi there. I wanted to ask you on your pipeline, I think you said in your release of about $430 million under development now being delivered. And what are your thoughts of continuing to develop at this juncture. And maybe also your sort of view on acquisitions given slightly higher cost of capital, but also you seeing any changes in cap rates on potential acquisitions.

So your question is, are we going to continue – is your first question, are we going to continue…

Well, yes, really – yes, on your development, you’re sort of appetite to continued to develop at the same pace that you have been. Is that, I mean, would you expect to continue to do that over the next year?

It really depends on the economics made, if you’re talking about a market like Houston, where construction costs have not come down, land prices have not come down, but rental rates are coming down. I would say future development in the near-term in terms of building our pipeline is probably limited. Same probably goes for Denver, we start building in Austin about 12 to 18 months ago for those very same reasons. But that doesn’t mean other markets such as Seattle, Miami, LA, don’t have deals to pencil and so we will continue to build as long as the economics over there. And then we have a wide variety of redevelopment opportunities at any one juncture. We’ve got 16 redevelopment opportunities in the pipeline and I would expect to see that grow into 2017.

Great. Okay, thank you. And then just on the acquisitions outlook, do you – have you seen any changes I mean giving slowing fundamentals it looks like across the industry, we’re seeing that show up and pricing or not really.

Well, the pipeline first quarter is pretty thin, but that’s consistent with prior years. So my guess is pricing will adjust, but just if nothing else due to changes and expectations of growth rates going forward. But we haven’t seen a lot of transactions clear here in the first quarter or even a lot of product on the market.

Okay, great. Thank you.

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

Hi, thanks good morning out there. You mentioned that the move out activity was a little bit higher in the quarter than you expected and that drove the year-over-year decrease and occupancy at end of the year. Do you anticipate being able to close the occupancy gap on a year-over-year basis or would you expect it to be lower throughout the year in 2017.

I mean Todd, we could easily close the occupancy gap, if we cut our rates and put it on TV and promoted more, so as Ron said it’s not just about the occupancy. So I’ve not focused on that gap or say, again we’re trying to drive our revenues higher create more cash flow per square foot is what we’re really trying to do.

Okay.

I don’t know, what’s going to unfold in terms of what demand characteristics are going to look like or moved out characteristics for that matter.

Okay, and can you talk about where occupancy was maybe on a year-over-year basis, what that spread look like at the end of January or maybe today. Just to get a sense for how business is trending so far on the occupancy side.

I would say it was very similar to how we ended the year. I think we ended the year, but we have about 50 basis points lower.

Okay. All right, thank you.

Thank you.

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

Hey guys, I am on with Nick as well -- has a question here. First I want to follow up on questions from earlier. I was wondering if you could talk about your medium length of stay versus your average length their stay, which I believe is around 35, 36 months. And what exactly that means or revenue growth going forward from here in terms of the impacts from existing customer rate increases versus the need for overall market rent growth to drive revenue growth from here with occupancy basically full at this point?

That’s an interesting question. It’s very important. We’ve talked about the aging of our portfolio those tenants that have been here longer than a year. And the reason why that’s so important is because those are the folks we generally give rate increases to. And in the past have about our increases – the rate increase has generally been I think for the past two to three years somewhere in the neighborhood of 8% to 10%. So to the extent that that tenant base that have been here longer than a year deteriorates, that gives us less opportunity to send those increases out. I could tell you in the – for the full year, our overall increases to tenants resulted in roughly about $16.7 million to our contract rent. And that compared about $14.5 million last year. So that was about a 14% increase, which – when you look – when you think about the ins and the outs that move in and the mood outside, that pretty much is a wash to a negative. So we kind of rent rolled down on the move in and move out activity. So the bulk of the growth that we have experienced over the past couple of years, it’s really come from the rental rate of renewals or the increases as we call them internally. Is that answering your question, Jeremy?

Yes I appreciate it. And it sounds like you are also saying you’re still getting kind of those high single-digit existing rate increases. And assuming that is right, maybe could you just let us know where – how Street rates trended in January versus last year as well, just to frame this all of out?

Well, Street rates were about flat to up maybe 1% or 2%. We haven’t started sending out increases during for 2017 will begin that in a couple of months. But so far the tenant base that has been with the longer than a year hasn’t deteriorated. So it’s pretty much impact, which is a good thing. So the degradation in our occupancy as we discussed earlier is really more from some of the tenants that have been with us – or were only with us over the past six months.

Okay, I think Nick had one, quick one.

Yes, hi, it’s Nick Yulico. Ron, I want to ask you about the Trump in-house proposals to reduce the corporate tax rate to 15% or 20%. I’m wondering, how you and the board are thinking about the benefits are staying REIT, if the corporate tax rate is lower versus instead becoming a C corp or you would have more flexibility and how much capital you can retain or even your ability to say fund a large buyback of stock.

Well, certainly there’s – if you take the extreme at the corporate tax rates of zero, you would say why you would be a REIT. And so has the corporate tax rate goes up, the incentive to become REIT gets greater. I think it’s a little premature to kind of comment on what we would do or not do since what the tax plan is, what’s going to happen to interest expense, what’s going to happen to deductibility of capital improvements will have a big impact in terms of what is the final taxable income. If we bought $700 million of – and developments and acquisitions last year and we got to detect that in the first year that we certainly change our perspective in terms of what our dividend policy is. So there’s a variety of moving parts that that would impact that final analysis in terms of what we would do.

Fair enough, thanks.

Your next question comes from the line of Juan Sanabria with BoA Merrill Lynch.

Hi, good morning. I was just hoping you could speak to how you think about street rates as we go into 2017 and your ability, or the ability for the market to see that improve into the peak leasing season given the 25% year-over-year increase in supply? And how you think it may play out I know it’s early and the Street rate growth this year, versus, let’s say, last year?

I will let John elaborate, but certainly a 25% increase in supply is a headwind to pricing power and certainly in the markets that I mentioned earlier where those deliveries are coming. I believe that will be a big headwind in terms of pricing power and may even and most likely, like in New York where you’ve got 20%,25% increase in supply over the next two years, probably rent roll down.

Yes, I would agree with Ron. It depends on the market, I mean, Houston, P&R rates are probably down about 10% year-over-year whereas in Sacramento, California they’re probably up 10%. So it really depends on the market where the supply is coming from and how it’s affecting demand into our system. So we’ll modulate our rental rates accordingly.

Okay great and just hoping you could speak on sort of development return expectations what you’re penciling in now and how maybe that’s changed. And if the spread at all has compressed between development expectations for cash-on-cash return’s versus stabilized acquisition yields to see if maybe the disincentive – or there is less of an incentive for third-party developers to put capital to work to put your product in the ground?

Well, I think that third-party developers, as you’ve seen the expansion of the CFO [ph] pipelines from our public competitors I think there’s still a big development margin or incentive economic return for them to develop properties, given what appears to me the price per foot that are being paid for these CFO deals versus our best guess of what we could develop product for in those markets. So as long as that big spread to develop product for in those markets. So as long as that big spread – in other words as long as people are willing to pay retail price is at the property stabilized versus what it costs to build, I think there’s real economic incentive for them to continue. With respect to us, we don’t have a per say, we’re going to build $200 million or build $300 million in this year. It’s really predicated on what are the opportunities. And they could be in LA, as I mentioned or Seattle or redevelopment opportunities. But we have our teams pretty well built out, we’ve got a good team, we’ve got some seasoned young adults, so we can go in a variety of directions with respect to our development teams, and if deals don’t make sense and we’re not going to build in that market.

Okay, what kind of returns are you targeting for your pipeline or sorry if I missed it?

Generally 8% to 10% stabilized cash on cash, but that’s going to be a couple of years out.

Okay, thank you very much.

The next question comes in on George Hoglund with Jefferies.

Yes, I guess one question on the financing front, looking at the preferred you have, I think it is too series that are currently callable. And just based on kind of what you’re seeing in the preferred markets, then also on potential for issuing unsecured debt, kind of what are your capital plans for the year?

Capital plans with respect to our preferred, specifically the redeemed the ones that will be become redeemable or redeemable over the course of 2017 will have almost 1.7 billion of preferreds that are a callable at our option, I think the average coupon is like 5.7% I think today George if we went out and tried to first off I don’t think we can issue $1.7 billion of preferred second, I think the coupon that if we could go out and do a preferred today is probably higher than 5.7%. So it’s certainly doesn’t make sense for us to call or refinanced preferreds that are callable now with new preferreds because all we are doing is just swapping rate and not really gaining anything. And I think probably what you’re kind of alluding to is what we issue unsecured debt to take out the preferreds we might – we might do some of that I wouldn’t say no to that. We can probably issue 30 year debt probably 100 basis points lower than that from what our preferreds are at 10 year maybe another 100 below that. So we’re looking at it, but we haven’t made any decision jet on how we’re going to do or what we’re going to do with those preferreds becoming callable.

Okay, thanks. And then can you also just comment on the Shurgard performance in the fourth quarter.

Sure, Shurgard same-store NOI was up 9.8% and that was due to 3% revenue growth, and 5.7% reduction in expenses mainly from various adjustments and lower marketing year-over-year. So 9.8% best performing market was Holland up 22% and the worst was the UK down 5%.

Thank you.

[Operator Instructions] And your next question comes from the line of David Corak with FBR Capital.

John, I just wanted to follow up on a trend that you pointed out to us on the last call and that was the idea that the – end of quarter occupancy in the contract rent change were predictive of the rental income change in the following quarter. And so if we look at the 3Q numbers they were once again pretty accurate in predicting the before rate rental income change this quarter. But, looking into 1Q, the same math what kind of implied rental growth decelerates to low four range, which would imply deceleration is actually picking up a little bit. So could you give us some color on just how you see that playing out if there’s anything different with the math that you guys are thinking about on that end?

The numbers that you just rattled off I mean that’s you know those are factually correct. And I do think they are good indicators so I think I would leave it at that without giving any of our – we don’t give forecasts as you know. But obviously the deceleration continues, because you could see that in the numbers. I would say this is that I think the degree of the deceleration is slowing down but I still think deceleration is happening in many, many markets that we operate in.

Okay, I guess the point was just the opposite of that is that those kind of numbers might in tell the deceleration is actually could be more pronounced from 4Q to 1Q then 3Q to 4Q, so I was just curious on that. But, I’ll leave it that, all right guys, thanks.

You’re welcome.

Your next question comes from the line of Gwen Clark with Evercore.

Hi good afternoon. Can you just run us through the revenue and NOI performance of your major markets in the fourth quarter please?

Gwen, this is John. So I’ll give you the top ten markets. So Los Angeles, I’m going to start with revenues. So Los Angeles was up 6.5%, San Francisco $4.9%, New York 3%, Chicago 2.5%, Seattle-Tacoma market for us is 8%, Washington DC 2.9%, Miami $4.4%, Dallas Fort Worth area 4.9%, Houston minus or negative 1.3%, Atlanta was up 6.5%. So that was revenues.

I’ll give you in a way, in a way Los Angeles 7.6%, San Francisco 5.7%, New York down 2%, Seattle up 8.3%, Washington DC up 1.2%, Chicago up 12.5%, Miami 0.8%, Dallas up 8.6%, Atlanta 10.6%, and you sit down 3.2%.

I will give you NOI. NOI Los Angeles 7.6%, San Francisco 5.7%, New York down 2%, Seattle up 8.3%, Washington DC up 1.2%, Chicago up 12.5%, Miami 0.8%, Dallas up 8.6%, Atlanta 10.6%, and Houston down 3.2%.

Okay, thanks. So it looks like LA and San Francisco are both slowing despite having not a ton of new supply, for the results in the quarter were better or worse than what you expected going in.

I think they were pretty good, but last year we and San Francisco and LA we had – LA had 7.3% revenue growth that’s down to 6.5% and San Francisco at 6.6% it’s down to $4.9%. Still great growth numbers, but the there’s no way we could continue with 7% or 8%

Okay, that’s helpful. Thank you very much.

Your next question comes from Michael Mueller with JPMorgan.

Hi, I know you touched on the different data points earlier this part of various the questions, but I guess from bigger picture standpoint, when you’re thinking about your setup for heading into the spring and the summer high period. How do you think it stacks up heading into 2017 high period compared to last year?

I am not sure you understand the question, Mike. But I think that what we’re going to experience just like everyone else is difficult comps going into Q2, Q3 at least for us we didn’t really see the deceleration start until probably April, May of last year. So Q1, Q2 of this year, we are still confidence against very tough comps only get around to Q3, Q4 we’ve already seeing decelerations of the comps, all the things being equal should be you know easier for us. I don’t know if that answered your question, Mike, but it doesn’t please rephrase.

Yes, it does to integrate. But also when you’re taking a look at setting up rental increases for this year compared to last year. Is that expected to have some similar increases? Because I think, you said that the poor tenants you’ve been there over year, it’s about the same size as it was last year.

Yes, we don’t know yet, Mike, I mean, the pull is the same but I’m not sure, at the end of the day those are going to be as sticky as they happen in the past. So I don’t want to say they’re not but I don’t know, I don’t know yet I am hoping they are sticky as they have in the past but we don’t know.

Got it. Okay, thank you.

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

Hi, every one this is Landon Park on for Vikram. Just wanted to touch base if you can give us any sense on the expense side for the 2017 any one time items we should be aware of or the cadence there.

Landon, my guess is expenses will be somewhere in the 3% to 4% range with the caveat that winter is not over so snow is always a variable. And the other variable is advertising expense. And my guess is we will be doing more advertising in 2017 than 2016. But that is a month by month decision. So I can’t tell you what’s going to be for the year, but my guess is it will be higher than it was last year, so kind of core expense growth 3% to 4%, the biggest driver of which is property taxes which is going to be 4.5% to 5% again.

Okay. That is helpful. Thanks for that color. And then just one more, just from a philosophical standpoint on new supply coming online, how do you guys have your systems set up to react to that at any given market.

In terms of our operating system?

In terms of our – do you guys generally just sort of try to weather the storm or do you try to directly compete with new properties or how do you guys deal with that?

Well. Sometimes there is new supply added to one of our properties, a new development or whatever but it’s on a backstreet or it’s not well-managed or not built properly. And it really does not impact us. So as long as we are seeing the move in volume and the rates are holding, we don’t do anything. And then other times a new competitor will come into the market and maybe cut off the street. And so we have to be more aggressive in terms of our pricing and promotion. So it’s a property by property kind of reaction to what is happening. We do not sit back and say, okay, Houston is going to have 2 million square feet delivered and therefore, our rental rates, we’re going to cut our rental rates by 10%. That’s not the way we manage the revenue. It is property by property, space by space.

Okay. And have you guys seen any changes in trade areas or how do you guys think about the average trade area for your properties.

Well. Generally our customer base is in three to five-mile radius. And so that’s while we focus on – so when we do development or even do acquisitions, we look at the level of competition within the trade area, the household incomes, the densities, what’s the population growth and especially on developments, what we knows in the hopper in terms of other people developing product and what is our guest in terms of what that’s going to do in terms of competition per person in that marketplace.

Great. Thank you very much.

Your next question comes from the line of Jason Belcher with Wells Fargo.

Yes, hi. Just, first this is a follow-up to the preferred and debt issuance question earlier. Can you talk a little bit about your thoughts around tapping the debt markets in Europe versus the U.S.?

We have not, even though we have issued euro denominated debt, but we didn’t actually go to Europe and do that or with European investors for that matter. We issued that debt to U.S. insurance companies. I don’t think we would probably issue, go to Europe and issue euro denominated bonds. I think our next – if we do issue unsecured debt would be here in the U.S., it would be U.S. dollar loans.

Okay, thanks. I didn’t quite get what you said earlier would you mind please repeat those levels were you said you thought you could issue 10-year and 30-year debt currently.

I think 30-year were probably down in 4.5 or 6 and maybe 10 years probably like 3.6 kind of range, but to be honest with you I don’t have exact numbers, because we haven’t really talked to any bankers about that.

Okay, thanks a lot.

You’re welcome.

Thank you.

Our final question comes from the line of Smedes Rose with Citigroup.

Michael Bilerman. Ron, can you remind us when you are talking about the 8 to 10 stabilize cash on can yields on development? When you are modeling that out now a few years out, how much street rate growth are you effectively embedding into getting to that 8 to 10?

Zero.

So it is based on current rate going forward.

Yes. The development group goes to the pricing group and gets the pricing by space size for that particular submarket. So there is kind of a independence check and balance right the pricing group versus the development group. And that’s what they use and then we underwrite to a 90% occupancy even though we tend to operate higher than that we underwrite to a 90% occupancy and we do not include tenant insurance or merchandizing that number.

Okay. And then, I don’t know if anything on the move-in or move-out activity in terms of the space size. I mean, is there been any upsizing or downsizing of existing customers that still find that they have a need for storage, as a need based product. But they need a larger space or feel that rates have gotten too high, so they figured out a way to get their stuff into a smaller box. I just wondered if there are any of those trends that you are seeing at all.

The relationship between square foot occupancy and unit occupancy is pretty consistent year-over-year. And so that would tell me that there’s been no shift. If you have sometimes you’ll see in a property a big difference between the unit occupancy and the square foot occupancy. So you’re selling out of your big units right way and so there is a big difference between the two. But the relationship over time those ratios really haven’t changed in the last – I have not seen them quite a while.

Yes, Michael this is John. So, we do have a lot of times tenants who are occupying a larger space will downsize or transfer as we call them internally into smaller sizes. So this past year about 70,000 folks basically downsized that compares to 70,000 last year too. So it was about – it is almost exactly the same.

And maybe I could ask one more, is that okay.

Sure.

If you think about larger facilities, so thinking development there currently has been a trend were some of the larger facilities have gotten built adding more units adding more supply I think about what you have done here in New York a number of years ago in that project as you look forward in your development pipeline how do you see that shift changing in terms of overall aggregate size of a self storage facility.

Overall if you look at our development pipeline, it’s certainly larger than the properties we built 10 or 15 years ago. But we do not – in the real estate group we do not sit down and say, okay, we want to target 100,000 square feet or 150,000 square feet. It’s really predicated on the opportunity. So like the Jersey City building, we said okay, can we do 250,000 square foot in that particular location, can we build it out, does it make economic sense. If the building had been half that size and something else had been joined it, we do the same underwriting analysis and so we’d have 125,000 square foot properties instead of a 250,000 square foot property. And the same goes for the land lots in terms of being in particular submarket, how big is the lot, what is the zoning, can we go, do we have to stay single story, can we get three story or four story in that particular jurisdiction. So there is a lot of things that influence the particular size of the property other than just absolute – can we go as big as we can. That makes sense.

Yes. All right, thank you.

A lot of jurisdictions won’t let us go above three stories and we like to build five stories because the zoning is very restrictive. But we can’t get more than three stories.

Right. Okay, thank you.

Thank you.

At this time, there are no further questions in queue. I will now turn the conference back to Mr. Clem for any closing remarks.

I appreciate everybody’s attendance at our conference call today. And we’ll talk to you next quarter. Have a good afternoon.

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