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Public Storage Uses Q3 Call to Answer Key Questions

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Joe Russell, CEO of Public Storage, opened the firm’s Q3 call by asking for questions, the first which he covered the tech front, noting the company’s tech systems are built around a very high degree of customer interface. “So, it includes speed of transactions, knowledge of customer, tools that the property manager and the district manager can use to enhance not only our movement activity, but the ways in which other ways in which we can encourage our customers to stay with us.”

He also pointed out that it is also a paperless system. “So, it has a number of other advantages relative to just the day-to-day operations as well. Now, those are some of the headlines of the system.”

The other things that over time it will continue to give the REIT benefits around “are the ways in which that we grow and understand customer behavior and the knowledge that we have relative to not only the existing customers, plus or minus today about 1.5 million customers, so we got a big pool of existing customers, but even year-to-date, we have moved in nearly 900,000 customers. So the system is working great. We are getting a lot of good traction out of it.”

He pointed out that it is a system that the REIT can continue. “Like I mentioned continues to enhance over time and its inherent design is included in a number of things that we integrate from, again, customer sourcing, revenue management and other things, but a lot of that’s highly proprietary. But I can tell you that we are very pleased with the success the system is bringing to us and efficiencies and knowledge that we continued to gain to optimize our overall environment.”

There was then a follow up question on the occupancy front from a same-store perspective. According to Tom Boyle, occupancy trends throughout the year have frankly been encouraging on a year-over-year basis. “So while we have had year-over-year declines we have seen some positive momentum there. And the hurricanes this quarter in particular mask some of that benefit. So if you look at the occupancy at quarter end for example which was down 1.2%, if you look at the system as a whole excluding the hurricane markets it’s down 0.8%. So there have been some positive trends there. I think generally speaking, we have talked about this in the past with system as a whole before supply really started impacting us in 2016 was north of 96% occupied and there is no question we have been impacted by the opening of new facilities. In many markets which I won’t rattle off here as you know them where occupancy has been more impacted than otherwise. Looking at our markets this quarter we are still looking at Los Angeles 95.4%, San Francisco 94.8%, so very healthy occupancies. And again system wide, I think we are seeing some encouraging trends as we step through 2018.”

Up next was a question from Jeremy Metz, BMO Capital Markets, who asked about an update on the firm’s outlook for supply looking out into the rest of this year and 2019. According to Public Storage’s Joe Russell, “coming into 2016 obviously for a decade plus or minus prior to that, overall nationally you might have been seeing deliveries say plus or minus in the $1 billion range, that doubled in 2016 went to $2 billion. And then 2017 we had $3.5 billion, 2018 our best guess is it’s going to be slightly higher say plus or minus $4 billion. And the data we track in our top 30 markets is telling us 2019 is likely to be equivalent to 2018. So you step back and you look at okay that volumes has been pronounced, Tom just talked about it relative to the impact that we see relative to occupancy. In total let’s say plus or minus 400 to 500 properties a year, plus or minus 30 million square feet. And the other element that we are also tracking is a nuance that goes on with this inventory today is overall facility size is magnifying, so even if you also evaluated on a market to market basis on a per square foot or amount of inventory that’s hitting markets it can be heavy. So we clearly see again part of your question developer motivation to continue to put product into some markets.”

He added that “The motivation is tied to again you can sell assets at still pretty low cap rates. There are a lot of funds and investors out there that want to own this type of product. And in the past, we’ve talked about this ability for a developer to go out and build to a 9%, sell at a 5%, that’s plus or minus an 80% margin even with some shift down, those say today they build for an 8%, but they can still sell it, may be at a 5% or today maybe a 6% cap, that’s still a 33% margin. So, there’s going to be developer motivation that has not eased enough to really shift down the momentum that, that is there.”