Ladies and gentlemen thank you for standing by and welcome to the Public Storage Second Quarter 2017 Earnings 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] I would now like to turn the conference over to Mr. Clem Teng. Please go ahead, sir.

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 27, 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 for 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 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.

Thanks, Clem. And good morning everyone, we had pretty good quarter, Q2. So operator let's open up for questions.

[Operator Instructions] Your first question comes from David Corak of FBR.

Hi, everyone. Looking at your rental income growth for the quarter, the occupancy in the contract rent formula that's historically been a pretty strong predictor of rent growth was off materially to the downside by about 60 bps and it's a first time it's been off for a while, can you just helps us understand why you think that was off so much, John? And how we should think about that going forward, I mean, it looks like the math would imply another 50 bps or so deceleration in 3Q.

Yes. There was nothing really specific that caused that difference, I think it was just really the way the quarter had accelerated quicker than what it normally do. So the deceleration happens faster than what those numbers would normally indicate on how that quarter would predict to be out using those metrics. So there is nothing unusual other than the deceleration and how quickly that happens.

And going forward?

Well going forward we still have those same indicators in there. So right now, if you net the two numbers that it's at about a 2.9%, I don't know what the third quarter is going to be, but it's probably going to be somewhere in the 2% to 3% range.

Okay. And then maybe a bigger picture question for you Ron. I think overall we're kind of struggling to really put our finger on what's having the most impact, on fundamentals right now on the industry whether it's the supply side, the demand side or maybe some combination there in. So maybe just very simplistically if you had to fill out kind of like a pie chart allocating the impact some percentage of supply and percentage of demand, what do you think that looks like today? And then maybe what do you think that chart looks like a year from now?

Well I think I step back and certainly new supplies having an impact, but I think a bigger impact on the numbers is the comps that everyone is coming off from 2015 and 2016. If you recall first quarter '16 and even second quarter most operators were pretty full, peak occupancies promotional discounts had been dial down advertising expense was nominal, but for us, we didn't know advertising in Q2 of 2016. And so the growth in terms of rental growth today is for the most part what your rental rate increases are for your existing customers and that's an offset impart by rental rate roll down because new take rates are lower than in place rents, which peaked probably in Q1 or Q2 of '16. So you have got the headwind of roll down, occupancies are still robust, but promotional discounts are certainly not going down maybe just going up modestly and then for us we're increasing advertising. So it's just incredible tough comps, I'll give you an example, Atlanta certainly has new supply but Atlanta in Q2 of 2016 had a 9.2% same-store revenue growth and came in this year at 3.3%. So that's a pretty good degradation in revenue growth, but I would tell you last year Atlanta at 9.2% it was clearly not sustainable peak occupancies, lower discounts and clearly not a sustainable number. So bigger picture it's just really tough comps peak occupancy, lower discounts and then you probably got some headwind with respect to new supply.

Okay, thanks Ron.

Your next question comes from Steve Sakwa of Evercore.

Thanks, I guess good morning out there. I was just wondering if you and John could maybe talk a little bit about street rate growth and maybe how that street rate growth is trended in some of the markets that have had more supply like New York and some of the major Texas markets like Houston, Dallas and Austin?

Steve this is John. Right now I'll tell you that our street rates are up about 2%, but that's going to change probably pretty - today it will change. We are going to start reducing the rates significantly in some of our major markets. During the - Houston for example is a market that we were down during the quarter about 15% in rates we will probably take those down a lot more. Overall our same-stores on the movement rates the take rates that are coming in were down about 4% during the quarter and we had about flat moving volume. With respect to our other major markets, I would say most of them are down to flat with few exceptions such as like Los Angeles and Seattle, but I would say most of them are fairly flat.

So John is it fair to say that Houston is kind of the market where things are the worse in terms of decline?

Well I mean that's in terms of decline it's our worse performing market in terms of year-over-year growth, but it's not necessarily our worse performing market in terms of the deceleration. There is other markets like Ron pointed out Atlanta that is decelerating I think worse than Houston is.

Right. And could you just maybe speak specifically to New York and kind of the metro area?

Well New York last quarter last year had for us 3.8% revenue growth. And this year had 2.25% revenue growth, so up about 150 basis points in terms of Q2 '16 versus Q2 '17 growth. I think with New York your question is probably related to new supply, and while there is new supply in New York I don't think most of the anticipated new supply has hit the market yet.

Well. I guess that leads me into my next question broadly speaking. As Ron as you sort of look at the landscape and you've been through several cycles. What is your expectation about when new supply peaks, when would that have sort of the maximum impact or negative impact on your business? And I guess when do you sort of see things either stabilizing or turning. I mean is there still another 6, 12, 18 months from now?

Well, Steve it's similar to my answer from last quarter and that is we have higher deliveries this year than last year. And based on my unscientific analysis of looking at pipelines it only have - I don't have the other three publicized CofO pipeline. Yes because they have reported, but going back from last quarter, supply using that methodology new deliveries will be about 20% next year. So I'm guessing 35 million square feet could deliver this year, 43 million square feet or about 700 or 800 properties next year. So if we're hitting a peak in terms of deliveries is probably '18 and then you're going to have a year or two of absorption from that.

Okay. And I guess just sort of last question as you sort of put all this together and you look at sort of slowing revenue, rising expenses more advertising. I mean do you or would you expect NOI growth to turn negative in this cycle and possibly happen in 2018?

I can't say that Steve. Because we'll increase marketing spend as necessary to drive volume. And we're coming off a low base of '16. I would be surprised if we went negative, but I can't say that that's out of the question.

Okay, thanks a lot. Appreciate it.

Your next question comes from George Hoglund of Jefferies.

Yes, good morning. I was just wondering if you can comment just on the expense growth. I mean, I know you said a good portion of increases due to the tough comps. But if you can just talk some of the other just increase in advertising and sort of how much of that die to I guess not an easy comp just other factors?

Well at the end of Q1 we said we spend more on advertising and marketing expense and we did. That was up about $1.7 million in Q2 versus last year, I'm sorry, about $2.7 million. A $1 million of that was the internet marketing. So we went from $3.4 million to $4.4 million, and TV went from zero to $1.7 million. So our total spend on those triumphs was up $2.7 million. The other big driver is which has been constant for the last couple of years is property taxes up again about $4.5 million or $2.5 million.

Okay, thanks. And then just I think it was five properties that were excluded from the same store pool, can you just comment on those?

Those [indiscernible].

Okay. In which market.

Houston and Carolina is I believe some of the South Carolina.

Okay, thanks.

Your next question comes from Gaurav Mehta of Cantor Fitzgerald.

Yes hi. So a quick question on revenue management and you touched upon that a little. But I was wondering if you are thinking about occupancy and I think you mentioned that you will start cutting rate significantly going forward? Is that an effort to maintain occupancy at current levels and would you say that you have hit the floor below, which you don't want your occupancy to go?

No, I think see that we advertise a lot more or we start cutting rates we do both, and we're going to experiment with more rate reductions and see what that gets us. It's not about occupancy precise we're trying to maintain a revenue growth. And so that's really our goal and so we're going to start playing with the rental rates a little bit more.

Okay. And as a follow-up on the expense, you talked about spending more money on TV and internet, have you seen impact of that in getting new customers?

I have to say in Q2 the increased marketing spend, internet spend wasn't as effective as we would have liked everyone is - I could tell you everyone is paying a lot more on the internet, there is a few more competitors and the bids are higher, but it's not really changing the positioning. It's just costing more but not really driving much more volume. And TV, we got some lift in it, but it wasn't as effective as we would have liked.

Okay, thank you.

Your next question comes from Todd Thomas of KeyBanc Capital Markets.

Hi, thanks. John, I just - I wanted to follow-up to your comments also about starting to reduce rents in some markets, I think you said significantly and also said that you would begin today. Can you just elaborate on that a little bit maybe in terms of the magnitude of some of the rent reductions and also maybe speak to some of the markets?

Well, I can't speak as to the magnitude Todd, but the markets, I mean, you can imagine they're the usual suspects that we've been struggling with such as Houston and Denver as well as others were - our revenue growth, our occupancies, our movement volumes are under pressure. So those would be the markets that we've a target. The degree or the significance could be anywhere from 5% or whatever to 15%, 20% reduction in rates. So, don't really know, I don't know those numbers just yet, but our folks are working on them.

Okay. And then just in terms of occupancy, in the context of maximizing revenue growth, do you expect to see that year-over-year occupancy gap stabilize or potentially narrow a little bit or is it a little too soon to tell?

Todd, it's a little hard to tell, as I've mentioned in prior quarters, the occupancy gaps are really in places like Houston and Denver, whereas Chalkville and San Francisco and Los Angeles. And so you can't really move customers. John mentioned in Houston we were down 15%, 20% of rates in the quarter and we really didn't - actually we saw negative movement volume in Houston in the quarter despite increased marketing and lower rates. So some markets are just hard to get the velocity, the movement velocity going.

Okay. And just lastly if I could, real quick Ron, circling back to some comments you made last quarter, I think about macro factors and the consumer a little bit, anything new on that front, either as it pertains to the consumer or just demand in general whether you are seeing any changes to demand on the phones, web hits, reservations anything like that related to inbound enquiries to system?

Well, I would just say that the trends that were relevant last quarter I don't think it changed much, you've got the provision of the banks for consumer credit are continue to tick-up, delinquencies continue to tick-up, overall leverage of the consumer is still high. So those macro factors that I touched on last quarter haven't changed, if you look at our portfolio all top 20 markets had lower revenue growth year-over-year same as Q1. So we're down across the board to different degrees. The markets are somewhat changing in terms of the degradation or rate of degradation, Houston and Denver have been leading the charge. Our big decelerators this quarter were Charlotte, Portland and Atlanta. So there is a change, but in terms of which markets are decelerating a little faster, but overall all the top 20 markets are down in terms of rate of growth.

Okay, thank you

Your next question comes from Smedes Rose of Citigroup.

Hi, thank you. I was just thinking if you could talk a little bit about if there is any change in behavior from your in place customer versus the incoming customers, which I think you said there is some difficultly and you have to up the promotions to get them in. But are you - it seems in the past you've had fairly consistent rate increases for you in place customers. Did you see any change there this quarter?

Smedes this is John. We continue to send out the rental rate increases of the renewals just like we did last year. We haven't change. We're still monitoring it very closely to see if there is an uptick move activity. We haven't noticed anything. So the in place - the long-term talent still is very sticky. Length of stay still appears to be very similar, even our new incoming tenants the issue really is trying to get more demand into our system and we have lack of pricing power, which is what we were talking about in Q1. So those issues to continue to be with us.

Okay. And then switching for gears, first are you seeing any change Ron on the availability of capital to the space given that fundamentals continue to decelerate and I think probably ahead of expectations clearly. Have you heard anything in terms of construction lending or equity checks required to get new construction going?

We've heard of tightening of construction lending. Remind you we don't - we're not people that use construction lending, but we heard of tightening of that. We've gotten a couple of calls from people asking us if we'd like to make construction loans, which would tell me obviously the banks are not making them because they're calling us. And we're seeing a few more deals - enquiries on deals where people have projects in the ground or just out of the ground that they'd like to monetize sooner rather than later. And you've seen there is a couple of packages on the market today where someone has developed four to six portfolio - 46 property portfolios and rather than waiting for them to get stabilized that putting them on the market. So I would say some of the quicker thinking developers are bringing stuff to market and then seeing that the slowdown that's happening overall.

Okay, thank you.

[Operator instructions] Your next question comes from Juan Sanabria of Bank of America.

Hi, good morning. Just hoping if you could give us a sense of how street rates moved throughout the second quarter and into July. And just conceptually speaking all else being equal if street rates let's say go flat. How long do you think it would take for same store revenues to get to that flat level that street rates would be suggesting overtime it should get to?

We get our street rates during Q2 you're not going to speak to that what they move-ins were doing. The move-ins came in at rates that were below last year by about I think it was about 3.7% and we had about flat move-in volume. So that would suggest that our street rates throughout the quarter were pretty much down. Currently our street rates are up about 2% for the month of July, but as I mentioned will probably be cutting many markets by varying degrees. In terms of your question about if street rates stayed flat, I think you were asking if what would that do to revenue growth.

Yes, how long would it take to get same store revenue to match that street rate growth?

I don't know. I have no idea. Right now we're rolling down. I think Ron might have touched on that. People are moving in at about 130 bucks a month - they are moving in at about $130 a month and they're vacating at about $138 a month and that compares to last year where it's about flat where they're moving in at about $136 and vacating at $136. So, we're definitely down and that particular metric work actually accelerating. So that roll down spread has widened.

And the up 2%, where you said street rates were up 2% now versus July is that an improvement for what you saw in May and June or is that kind of fairly stable at…

I don't recall what that was in May and June, I can't answer that.

And then just last question for me on the developments that you guys are have in place any change in terms of expected yields given kind of a softer market and or maybe longer lease up times can you remind us what you are targeting on dollars being spend today?

I'm sorry remind you of what our expected yields are or…

Yes.

When a project come out of the ground it leases up, so far the proprieties coming out of the ground are leasing up faster than we projected albeit at lower rental rates than we projected. So we're getting some benefit of lower rental rates versus greater volume and net-net that's a positive. In terms of the projects that we've so far got out on the ground, they look to be on track, but as I've said before it will be two to three years before we really have a good grasp of are we hitting the numbers or not. Q2 we're going to deliver about 16 properties million 6 square feet across five different markets the largest being Houston where we will deliver 770,000 square feet.

And just what stabilized deals do you think you will get based on kind of markets today, market rents today?

The market rents change every day. So I don't - mark-to-market the portfolio every day in terms of what the yield is, but so far we're on track to take somewhere between an 8% and 10% cash on cash return on cost.

Okay, thank you.

Your next question comes from Ki Bin Kim of SunTrust.

Thanks and good morning everyone. How much is the existing cost in our rate increase program contributing to that 3.2% and same store revenue growth this quarter?

Ki for the quarter the rental rate increases added about $400,000 of monthly contract rent, which did not offset the rent roll down we experienced, which was about $1.9 million.

Okay. So is that the first time in a while where the existing customer rate increase program, which is I guess is lot of debate about it, but doesn't really contributed a whole lot but actually going negative.

It didn't go negative, it was positive $400,000.

I think that was $400,000 plus minus $1 point something million negative.

So the move-in and move-out equation took away because rent volume down took away about $1.9 million of monthly rent whereas the rental rate increases added about $400,000.

Okay. And is that contribution pace, do you think that would be fairly consistent even if like you said move-in rates are down 4% if that's the case the existing customer rate increase program still have the same impact going forward or do you see some risk with that?

Well it still have - I mean, year-over-year it still has the same impact with relative to itself. But my point is that impact is not enough to offset the rent roll down on the move-in move-out volumes. Whereas in the past the move-in move-out volumes pretty much were slightly negative to flat. And so the rate increases had a much more impactful year-over-year growth that growth that we're experiencing that it does now. even notwithstanding the fact that the volume basically the same. I don't know if that make sense, but it's not as impactful because that roll down is just trumping it right now.

Okay. And are you noticing any changes in the closing rate of your call center or website or maybe the date to release the unit increasing at all?

Well, I'll tell you that we call a production rate, our production rate which measures basically the move-in that we get versus the inquiries that we're getting are better. So we're getting a lot less inquiries, about 3% to 4% less inquiries into the various channels we have, whether it be call center, the website, either the mobile, or the desktop. But notwithstanding the fact that we're getting less, we had flat move-ins for the most part. So we're making up for it by getting better reservation rates and getting better shop rates.

Okay, thank you.

You're welcome.

Your next question comes from Vikram Malhotra of Morgan Stanley.

Thank you. Could you just maybe give us any update or anymore colors specifically around San Francisco and LA and then just the revenue growth in the top five markets, same store revenue growth?

Same store revenue growth top five markets Los Angeles was 5.7%, San Francisco was 3.6%, New York was 2.2%, Chicago was 1.1%, D.C. was 2.0% and Miami was 2.2%.

Okay, thank you and just especially on LA and San Francisco, anything different you're seeing this quarter in terms of street rates or just behavior from customers?

Not necessarily behavior from customers, and John can comment on the street rates. San Francisco Q2, 2016 had 7.2% same store growth, and it came in at 3.6%, so and Los Angeles was 7.9% last year and is up 5.74% this year. So actually those two markets were the biggest contributors to our slowdown in revenue growth, not because they're doing bad, 3.6% and 5.7% is very good, is just coming off very tough comps from 2016 of 7 plus percent revenue growth. So those two markets were almost 60 bps of our 2.7% revenue decline year-over-year.

Okay, that's helpful.

95% plus occupied, promotional discounts are good. So overall demand is very good in those markets it's just that they're coming of very tough comp.

Okay. And then just going back to the question on just revenue growth, I remember maybe two, three quarters ago, you had mentioned that your view is that revenue growth sort of stabilizes at long-term average, just maybe any updated thoughts around that it seems like we've dipped a little bit below long-term average. I'm just wondering where you see stabilization?

I believe, I said the long-term growth rate over 20 years or something like 3.4%, 3.6%, we were above trend line for about three years. So we could be below trend line from some period of time to get to overall average of that and again the overall long-term average may change from 3.4% higher or lower. But it's not surprising to me that we're below trend line given how far above trend line we went.

Okay, thank you.

Your next question comes from George Hoglund of Jefferies.

Yes, hi. Just a question on financing, I mean, since you guys just redeemed some preferreds and you've done one of the preferred issuance, just wondering how you're thinking about preferred versus unsecured bonds going forward? And kind of where do you think you could price a 10-year and a 30-year bond and then preferreds today?

Well, we're thinking about both, George, we're thinking about issuing unsecured, as well as maybe continuing to tapping at the preferred market both of them are open for Public Storage. Would really be what's the use of proceeds really in terms of the amount we may issue. I'm sorry, your question was what we can issue 10-year? I think is what you asked?

Yes, 10-year and 30-year dip?

So 10-year we think it's maybe around the 330-ish area and the 30-year maybe about 420, 425. And that's off the top [ph] I mean, but I think it's roughly in that neighborhood.

Okay. And then I just would think preferred today would be similar to where your last issuance?

I think preferred still around the same place we did the last issuance, which is end of May, early June, which was a 515.

Okay, thanks.

You're welcome.

Your next question comes from Michael Mueller of JP Morgan.

Yes, hi. Couple of questions, I guess Ron and John on the development pipeline, the new development you have about 470 in process expansion of about 190, and I guess just given the backdrop and if you're working out to next year, would you imagine that your pipeline is of similar size or do you think you pull back on it a little bit?

At this time, I think it will be about similar size, probably a mix difference in terms of a more shift, continued shift towards redevelopments versus ground-up development. But if I look out to '18 in terms of deliveries and what we've got in our I will call it our second shadow pipeline stuff we have in the works, I think we will be close to where we are today.

Got it. And I apologize, I missed the intro comments if there were any, but for the effective rate increases that went to existing customers this year, did you say what those were at this point?

We didn't say that in our comments at the beginning of the call.

Okay.

But it was - the rate increases are similar to last year Mike roughly in the 8% to 10% range to existing tenants that qualify.

Got it. Okay, thank you.

You're welcome.

At this time, there are no further questions. I will now turn the floor back over to Mr. Clem Teng for any closing remarks.

Thank you for attending our conference call. And we'll talk to you next quarter. Thank you.

Thank you. This concludes your conference. You may now disconnect.