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Edited Transcript of PSA earnings conference call or presentation 2-May-19 5:00pm GMT

Q1 2019 Public Storage Earnings Call

GLENDALE May 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Public Storage earnings conference call or presentation Thursday, May 2, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* H. Thomas Boyle

Public Storage - CFO & Senior VP

* Joseph D. Russell

Public Storage - CEO, President & Trustee

* Ryan C. Burke

Public Storage - VP of Investor Services

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Conference Call Participants

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* Andrew Leonard Rosivach

Goldman Sachs Group Inc., Research Division - Security Analyst

* Bennett Smedes Rose

Citigroup Inc, Research Division - Director & Analyst

* Hong Liang Zhang

JP Morgan Chase & Co, Research Division - Analyst

* Ian Christopher Gaule

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Jonathan Hughes

Raymond James & Associates, Inc., Research Division - Senior Research Associate

* Robert Jeremy Metz

BMO Capital Markets Equity Research - Director & Analyst

* Ronald Kamdem

Morgan Stanley, Research Division - Research Associate

* Ryan Cole Burke

Green Street Advisors, LLC, Research Division - Former Analyst

* Shirley Wu

BofA Merrill Lynch, Research Division - Research Analyst

* Stephen Thomas Sakwa

Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst

* Todd Jakobsen Stender

Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst

* Todd Michael Thomas

KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the Public Storage First Quarter 2019 Earnings Conference Call. (Operator Instructions)

It is now my pleasure to turn the floor over to Ryan Burke, Vice President of Investor Relations. Ryan, you may begin.

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Ryan C. Burke, Public Storage - VP of Investor Services [2]

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Thank you, Lori. Good day, everyone. Thank you for joining us for the first quarter 2019 earnings call. I'm here with Joe Russell and Tom Boyle.

Before we begin, we want to remind you that all statements, other than statements of historical fact included on this call, are forward-looking statements that are subject to a number of risks and uncertainties that could cause actual results to differ materially from those projected by the statements. These risks and other factors could adversely affect our business and future results that are described in yesterday's earnings release and in our reports filed with the SEC. All forward-looking statements speak only as of today, May 2, 2019, 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 provide on this call is included in our earnings release. You can find our earnings release, SEC reports and an audio webcast replay of this conference call on our website at publicstorage.com.

With that, I'll turn the call over to Joe.

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Joseph D. Russell, Public Storage - CEO, President & Trustee [3]

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Great. Thanks, Ryan, and thank you all for joining us. We had a good quarter, and I'd like to open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Shirley Wu of Bank of America Merrill Lynch.

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Shirley Wu, BofA Merrill Lynch, Research Division - Research Analyst [2]

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So my first question is in regards to revenue growth. Over the last few quarters, you've ranged in between 1.2% to 1.5% for revenue growth. And your period end data would suggest that revenues stay in that range for 2Q. So it seems like things have been fairly steady in the midst of all those new supply. And given the resilience of demand, how do you feel revenue growth is going to play out in '19 and any thoughts on when revenues could drop?

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H. Thomas Boyle, Public Storage - CFO & Senior VP [3]

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Great. Thanks, Shirley. I can comment on that. I think, you gave a pretty good summary of what our historical revenue growth has been over the previous quarters. And you do point to the period end occupancy and contract rent growth, which do suggest we ended the quarter in a place where contract rents would be growing at the start of April at a similar level. So I think we've been encouraged by customer trends like we spoke about on our last call, really a combination of a tougher move-in environment, balanced really by continued good performance by existing tenant base and our existing tenants. We see move outs down and length of stay modestly increasing and they're all being supported by a strong labor market out there in the broader macroeconomy.

So we've seen good operating trends consistent with what we discussed on our last call, reasonably steady contract rent growth and occupancy through the quarter. In terms of where we go from here, we're obviously at the end of the first quarter, we're about to enter into our seasonally busy move-in time as we get into May and June, that'll be a big determinant of overall 2019 revenue trends and we'll certainly update you on those trends on our next quarterly call.

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Joseph D. Russell, Public Storage - CEO, President & Trustee [4]

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And Shirley, I'll just add the other thing that we've been seeing and we're pleased to see is we're maneuvering through and navigating through what continues to be a commanding arena of new supply in certain markets. Some of that's been shifting out of markets that had been more heavily burdened, say, over the last 2 or 3 years. We've still got other markets ahead of us that are likely to see somewhat similar impact going into '19 and 2020. But again, to Tom's point, we're feeling better and we like what we're seeing relative to the traction and capabilities of what we're putting into many parts of the business to maneuver through this environment.

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Shirley Wu, BofA Merrill Lynch, Research Division - Research Analyst [5]

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Okay. So moving to street rates. How has 1Q trended and even into 2Q? And also, your move-in rates as well?

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H. Thomas Boyle, Public Storage - CFO & Senior VP [6]

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Great. So as you know, we've spoken on the previous calls, we don't tend to watch street rates too closely. Street rates were actually up a little over 1% in the quarter, but we focused on move-in rates as they're actually the rates that customers will be paying us. Move-in rates, as we disclosed in our 10-Q last night, were down for the quarter, down 1%, that's the best move-in rate performance we've seen in some time. And we did see move-in volume down modestly in the quarter, but again, offset by move-out volumes being down as well. In terms of rent roll down, this is, seasonally, one of the bigger rent roll down quarters, given the slower move-in season and the fact that folks have moved in at higher rates through the summer. And so we did continue to see rent roll down of the quarter, which deteriorated modestly. But again, one of the better performances in rent roll down deceleration.

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Shirley Wu, BofA Merrill Lynch, Research Division - Research Analyst [7]

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Got it. So would you say move-in rates have kind of persisted, [not] negative 1% since April as well?

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H. Thomas Boyle, Public Storage - CFO & Senior VP [8]

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Yes. We've seeing consistent trends in April. And that's really a balance of all of the markets in which we have operations. So you look at certain markets like in L.A. on the West Coast or some of our stronger East Coast markets, which have good positive move-in rent performance. And then as Joe highlighted, the markets were being impacted by new supply. We do see negative move-in rates continuing into 2019. So markets like Houston, which were lapping hurricane benefit in prior year, I would lump into that group as well.

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Operator [9]

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Your next question comes from the line of Jeremy Metz of BMO.

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Robert Jeremy Metz, BMO Capital Markets Equity Research - Director & Analyst [10]

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Joe, you touched on navigating supply just a minute ago, but can you just give a broader view on supply as we look in 2019? And any early read on 2020? And whether those views have changed or how they've changed at all as we've moved a little further into the year?

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Joseph D. Russell, Public Storage - CEO, President & Trustee [11]

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Yes. Sure, Jeremy. I would say there's really no change on what, again, our outlook is from even 60 days ago, from our last call. So everything we're tracking points to 2019 to be yet again get another pretty commanding year of deliveries, plus or minus in that $5 billion range, say, 400 to 500 properties plus or minus 30 million square feet. So the one thing, as I noted a few minutes ago, it is shifting somewhat. So if it's encouraging at all, which we like to see, fewer deliveries are taking place in Denver, Charlotte, Houston, Austin and Tampa, for instance. So there's been a pull back there. That's good news. But some developers are starting to get more active in Portland, Boston, Seattle, Miami and New York. So we're keeping a close eye on any residual impact that the supply is likely to have this year and going into next year. The same drivers are out there that has fueled this level of supply over the last 2 to 3 years, in particular, which is a lot of new entrants are still coming into the sector. You've got developers that like -- the potential yields are likely to derive from new development, and fundings out there. So we're keeping a close eye on it.

We're looking at 2020 as potentially a year that things could start shifting down, but again, we've got to track it and see what's at hand. I'll tell you and maybe even to shift a little bit into how that's affecting the acquisition environment. There are a number of conversations that are becoming more pronounced, which are laced around the theme of I want out. Now again, not out because it's a stressful situation or it's one that necessarily is commanding that decision at a level that I've got to get out, but it's a realization that maybe returns aren't going to be met. They may have some lender pressure, maybe expectations from a revenue or performance standpoint aren't there.

So that is a residual effect and potentially a good thing that we're going to continue to see. So if you even look at -- as you saw through the first quarter and what we reported relative to what we have under contract, we've now, through the early part of this year, exceeded the acquisition volume we did in all of 2018. And there's some interesting things as a part of that collection of acquisitions. One, for instance, is for the first time in several years, we have a property that we're acquiring out of bankruptcy. So I've talked about that a little bit over the last few quarters, meaning that we think some of that kind of acquisition opportunity could surface and we've got one, again, under contract.

We bought a portfolio in the first quarter, 9 properties, great assets, long-term ownership and the deal came to us on an off-market basis, but again, the owners decided it was, for them, the right time to exit the sector entirely. And it was a good negotiation, meaning, it was a deal that was fair priced. It wasn't one that they looked at was one that had to meet or get a top level of valuation, but it was a deal they wanted to do on a very efficient and clean basis, and we were an ideal candidate to do that. So there's more of that in the mix as we speak and we're encouraged by that. And we'll see how the rest of the year plays out.

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Robert Jeremy Metz, BMO Capital Markets Equity Research - Director & Analyst [12]

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And is some of that driving just maybe the price per pound here we're seeing just in terms of some of the pipeline. I mean just cause looking at the market mix, it wouldn't appear those are high-cost markets like, say, in New York, but looks like some of the stuff you have under contract, it would equate to around, call it, $60 or $70 a foot, and I know replacement cost is core to your buying velocity. So is any of that factoring into that?

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Joseph D. Russell, Public Storage - CEO, President & Trustee [13]

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Well, a little bit of the mix, on average, is driving that a little higher than maybe what you've seen us do in a few prior quarters as some of our acquisitions on the pipeline right now are in more urban markets and higher finished assets, newer assets that we think not only are very well located, but very hard to duplicate. Again, with the same theme that owners are coming to us and saying, "Okay, we may not need or exceed the type of returns we expected 2 or 3 years ago when we put these properties into development." They're not, by any means, failed assets, but again, actual expectations are not being met. So we've got a few of those in our pipeline right now under contract that are extremely well located, great assets, a handful of them might be a little bit higher on average than you've seen us do in some of the other markets that we've bought assets in, but we still feel great. Replacement cost, deals, we're going to get very good returns. And again, we hope to see more of that kind of activity throughout this year.

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Robert Jeremy Metz, BMO Capital Markets Equity Research - Director & Analyst [14]

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Definitely appreciate that. Last one for me. I just wondered if you could give a quick update on your third-party management initiative? And on that front, are you actually seeing anyone out there jumping platforms between the bigger operators who do third-party? I know, historically, [that] really haven't heard much of the happening, but are you seeing any of that at least on the margin?

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Joseph D. Russell, Public Storage - CEO, President & Trustee [15]

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So on the quarter, we signed 11 properties into the platform. Our backlog continues to grow. It's heavily weighted by development deals that will take a number of quarters to actually come to completion and be pulled directly into the program itself. We're seeing and learning a lot of interesting things through the platform. And yes, I would tell you some of that includes -- which I don't think at the end of the day is maybe new to the business but there are certain owners that do change flags. So whether they're coming to us through either a private or another public third-party platform, we're seeing some of that, but I wouldn't tell you that's the dominant part of the activity in our backlog. It's still highly correlated to deals that are in various forms of development. But we like what we see relative to the type of assets that are coming to us. We've actually, at the end of the day, passed as many properties as we've decided to pull in to the platforms for a number of reasons. So I think, we've got the ability to continue to be particularly cautious about what markets that some of these assets come to us are in and whether or not we choose to go into those or other factors, but again, we feel like over time, we'll be able to grow the scale of business and keep good momentum around itself. So that's where we stand as we speak.

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Operator [16]

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Your next question comes from the line of Smedes Rose of Citi.

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Bennett Smedes Rose, Citigroup Inc, Research Division - Director & Analyst [17]

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I just -- I wanted to ask you just a little bit about marketing expenses in the quarter, second quarter, pretty big increases year-over-year. Do you expect that pace to kind of continue through the balance of the year? And I guess, along with that, it sounds like you are seeing some stabilization throughout your system a little bit. And I mean do you attribute it to maybe changes in the way that you're marketing on the Internet versus other ways? Or can you just add some color around that?

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H. Thomas Boyle, Public Storage - CFO & Senior VP [18]

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Sure. So let me take that in some different components. So the marketing spend that we saw in the quarter was pretty consistent rate of increase from the fourth quarter. And as we've discussed last time, we did that in the fourth quarter really throughout 2018 and increased our spend as we saw good demand response online and great reaction to our brand in online paid search. That's combined with more competitive environment on paid search. As you'd expect in many markets impacted by new supply, the cost of acquiring customers is increasing as that supply is getting absorbed. And so there is some market costs-per-click increases in there as well. Ultimately, our decision-making around that is very dynamic, based on keywords and local market dynamics and traffic. So I'm not going to call a rate of increase for the rest of the year, but it's a tool that we're seeing good returns on today and we're continuing as we get in through the second quarter to use that tool.

That -- the second part of your question was, is that benefiting the overall level of movement activity. And certainly, the answer to that is yes. We do like the demand response we're seeing from that channel, but we're using a combination of advertising rates, which, again, our rates were down about 1% for move-ins for the quarter and promotions to drive traffic to our stores.

In terms of the third component of your question, which is around, is it contributing to stabilization of the portfolio in aggregate, I guess I would say we're seeing good trends in advertising helping move-ins, but move-ins remain challenging in many markets, and so that's where our increased spend is concentrated, in other markets where move-in trends are quite good and healthy. In terms of the stabilization point, we have seen some good trends in some of the early markets that were hit by new supply. So we you'll see markets like Washington, D.C. or Chicago improving. D.C. is up 180 basis points in occupancy for us year-over-year. Chicago is up 160 basis points. So we are seeing some improved trends there.

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Operator [19]

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

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [20]

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I just wanted to circle back to development. It looks -- your development and expansion pipeline decreased specifically and I know you delivered a few stores in the quarter but how's activity looking to backfill the pipeline? Is Public's pipeline selling down here or is it just more timing-related?

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Joseph D. Russell, Public Storage - CEO, President & Trustee [21]

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Yes, Todd, first of all, we had an active Q1. So a lot of the pipeline delivered in the quarter -- we have about 137 million of deliveries for new builds, but what really drove the volume was a number of redevelopments heavily tied to the remaining scrape and rebuilds we did in Houston specifically. So we had an elevated level of first quarter volume. So to a degree, some of that impacted the pipeline. The pipeline did shift down close to $100 million or so, but that can ebb and flow. I wouldn't take that as an indication that overall, we've intentionally tapered that down on a just 1 or 2 quarter basis. We're seeing a lot of good continued potential activity out there. It has shifted intentionally more to our redevelopment activity where we're taking existing properties and putting a lot of the attributes from what we call our gen 5 new product into properties that are extremely well located, where we can expand and increase, not only performance, but scale in certain markets where otherwise you'd never be able to get to those great land sites.

So we see continued very active activity on that front. Today, about 60-plus percent of our development pipeline's tied to that. And the teams are out looking for land sites in a variety of different markets. In some markets, land's becoming more expensive, so we're keeping a close eye on the impact to that. The other thing that is happening is the time to entitle seems to be -- certainly, in a number of markets getting more commanding. Now the reverse of that, which kind of ties to some of the impact with either developers or entrants that have come into the markets over the last 2 or 3 years. We are getting reverse inquiries more than we've seen recently for close to or fully entitled land sites. So again, we've got a healthy collection of different opportunities there. And the team's every bit as focused on how driving that kind of opportunity and we continue to see very good returns from our investments into the development pipeline.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [22]

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Okay. And then -- and Tom, you mentioned the cost to acquire a customer continues to rise. Can you share with us what that cost is today? And maybe discuss how that's trended?

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H. Thomas Boyle, Public Storage - CFO & Senior VP [23]

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Sure. The cost has modestly increased and certainly the advertising spend is a component of it -- another component you can track in our disclosures and 10-Q is the promotional discounts that really comes in the form of the $1 for the first month rent for Public Storage, which is a great way to drive traffic to our stores. Those are the 2 large components of customer acquisition costs. So you can take a look at those in our filings.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [24]

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Okay. That's fine. And then just lastly, can you just talk about your plans to run -- I think previously was the Memorial Day sale this month in May, whether you're planning to and how discounting and promotions are sort of shaping up for the busy season in general?

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H. Thomas Boyle, Public Storage - CFO & Senior VP [25]

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Sure. So we typically do run some sales as we go through the summer months and we've seen good returns on that in the past. It's something that we'll dynamically assess as we go through the quarter and we'll update you as to where we go. In terms of promotional trends, you could see promotional dollars were down in the quarter that's really driven by volume and rate decreases, not a strategy change there. So we continue to use that dollar special to drive traffic into our stores. I would expect consistent strategies this year as last year, but, obviously, if anything changes, we'll let you know.

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Operator [26]

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Your next question comes from the line of Ronald Kamdem of Morgan Stanley.

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Ronald Kamdem, Morgan Stanley, Research Division - Research Associate [27]

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If I could go back to the marketing spend, just curious obviously, it's pretty local but is there any kind of high-level discernible themes in terms of where these dollars are going? So to set another way, is it more West Coast markets versus East Coast, maybe more supply challenge or is sort of the increase spend all across the board and hard to pick out?

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H. Thomas Boyle, Public Storage - CFO & Senior VP [28]

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Sure. In terms of where it's located geographically, the increase in spend is across-the-board. I think there are certain markets, as I highlighted, that spend is more -- increased more than others, and that's really driven by the competitive dynamic as customers are competed for on Google and other online platforms. So the overall spend costs are higher across-the-board, but it is concentrated in markets where the competitive dynamics are more intense.

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Ronald Kamdem, Morgan Stanley, Research Division - Research Associate [29]

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Okay. Other question was, I think -- I believe there was a website refresh for the company, set to be [levered] this quarter. I think the idea was hopefully it would kind of tie into your ability to market online. Maybe can you give us an update on that, and how that's been received, and what you're seeing there.

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Joseph D. Russell, Public Storage - CEO, President & Trustee [30]

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Sure. Ron, I'll start and Tom can add to this too. So yes, we delivered what I would label our generation or fifth-generation website in the first quarter. So it's a project that has gone through a variety of different testing, et cetera, as we roll it out through the entire platform. So we're pleased thus far by what we're seeing. It's going to give us additional capabilities that we've been able to add, not from a need standpoint, but from an opportunity standpoint. All indications are the tools that it's going to provide us are going to be quite commanding in a number of ways. So we're anxious to continue to roll those out as we go through the rest of this year. And Tom, you can give some additional color on it.

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H. Thomas Boyle, Public Storage - CFO & Senior VP [31]

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Yes. And I think you covered it well, Joe. I think it's built to be mobile centric as customers continue to move to transact with us on their phones as we continue to see that trend play out and really something that has played out over the last decade. And so you'll see that as you pull out the new publicstorage.com, but we're pleased with it and our team worked hard on it, and we're happy to have it delivered in the first quarter.

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Ronald Kamdem, Morgan Stanley, Research Division - Research Associate [32]

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Yes. My last question was that I think you made some interesting comments about sort of the environment and opportunities out there. Just curious on -- just thinking about lease up and lease up times. Obviously, you're in the market looking at properties and you've got a few goods delivered. How does that -- how are you guys thinking about that? How has that trended over the last year or so when you're running the pro forma? Are you assuming longer lease up times and just can you quantify that for us?

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Joseph D. Russell, Public Storage - CEO, President & Trustee [33]

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Yes. I wouldn't say there's been any shift at all. I mean, again, you go back to the fundamental way that a lease up can typically happen on a property. And frankly, it can range from anywhere from 2 to 3 years on an average basis. So not really seeing any different time frames tied to that. In certain markets where supply may be more pronounced, you may have elongated lease up or some impact from that then alternatively. Some markets that do have a fair amount of suppliers still doing quite well because there's an inherent need and the market itself may be underserved and that frankly, is the reason why we chose to develop a specific asset there in the first place.

And then another part of the mix that we have out there is -- then we've got other assets that are clearly well ahead of our expectations. And we're seeing very good traction in a number of properties that are, again, ahead from that standpoint as well. The thing that is a natural part of our business as a whole is it -- not only is it is a factor of lease up, but then it's the maturity of the lease property, property itself. And what do I mean by that? The inventory leases that are at hand take a fair amount of time to mature and stabilize because you're going to see good growth and you're going to see good factors tied to that but that time needs to mature so that again, you've got a highly stabilized asset and you're able to evaluate its ultimate success.

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H. Thomas Boyle, Public Storage - CFO & Senior VP [34]

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This is Tom. You can see that in our 2013 to 2015 development vintages that, as Joe highlighted, they leased up well and they continue to stabilize. And so you could see the growth in the quarter of 10%, 11% for that group as it continues to season. And we certainly provide that disclosure so you can evaluate the performance of those stores as well as the other development and expansion vintages that we've been active in delivering.

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Operator [35]

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

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [36]

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I guess, a number of my operating questions have been asked but I just wanted to touch on the balance sheet quickly, Tom. I mean, obviously, you guys recently did a longer-term bond issuance and historically you've used preferred to kind of fund the company again. Just trying to get a update on sort of your thought process there. You do have a couple of preferred issuances that are callable later this year. And I'm just kind of wondering what your thought processes are longer-term about using more debt?

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H. Thomas Boyle, Public Storage - CFO & Senior VP [37]

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Sure. Thanks, Steve. So we have issued both preferred and bonds throughout the year. We continue to remain committed to both markets as good financing tools. We've talked about it in the past, the preferred market is a great, long-term permanent source of capital with lots of great features including the call feature and the permanent life. With our balance sheet, we also have the ability to add incremental long-term debt to finance our external growth pipelines, both the acquisition activity as well as the development pipeline.

So we'll look to use both sources of capital going forward. You highlighted that we do have some callable preferreds outstanding. We also have some new callable preferreds later in the year that we'll evaluate. In the month of March, we did execute a preferred financing as well as a redemption that lowered our aggregate preferred cost of 5.3%, which is a continued improvement. So it's a long-winded way of saying, we like both markets and the balance sheets in great shape here today with -- if you deduct the $120 million-ish of acquisitions under contract from the $220 million of cash we had at year-end and you pro forma for the $500 million bond issuance, we're sitting on about $600 million of cash today, which gives us good liquidity to fund external growth as we get through the rest of the year.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [38]

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And then I guess, just second question about real estate taxes. I know in the MD&A section here, the 10-Q, you sort of talked about real estate taxes staying relatively consistent, up kind of about 5%. But are you just seeing any relief in any market and as you kind of look forward, when might that start to tail off of a bit?

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H. Thomas Boyle, Public Storage - CFO & Senior VP [39]

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Relief is not what I would consider what we're seeing in real estate taxes today. So we do expect property taxes to grow around 5% this year. If you look back over prior years, that's reasonably consistent with what we've seen. I do think that there's an element of catch up to cash flow earlier in the cycle associated with the real estate values that we're seeing. And so in certain markets, could we see a benefit going forward as incomes have maybe come down in some of our more supply impacted markets? It's certainly possible, but we're not seeing that in any real quantity at this point.

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Operator [40]

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Our next question comes from the line of Hong Zhang of JPMorgan.

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Hong Liang Zhang, JP Morgan Chase & Co, Research Division - Analyst [41]

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I guess a similar question on the marketing expense. This is the third quarter that you started ramping up your marketing spend. Are you seeing your competitors respond at all by increasing their marketing spend, maybe driving up the cost for the same impressions at all?

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H. Thomas Boyle, Public Storage - CFO & Senior VP [42]

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Yes, I touched on this a little bit. There's no question that the overall Internet paid search environment continues to get more competitive. So we're certainly part of that as we increased our spend and have liked what we've seen and others are doing something similar. So the competitive environment is driving cost per clicks up year-over-year. But like I said earlier, we're seeing good demand response for our brand term online, and we've continued to push there and like what we're seeing.

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Hong Liang Zhang, JP Morgan Chase & Co, Research Division - Analyst [43]

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Would you know roughly how much the cost-per-click has gone up for you guys?

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H. Thomas Boyle, Public Storage - CFO & Senior VP [44]

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Cost-per-click is up in the double digits.

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Operator [45]

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[Your next question comes from the line of Eric Frankel of Green Street.]

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Ryan Cole Burke, Green Street Advisors, LLC, Research Division - Former Analyst [46]

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This is Ryan. So just circling back sort of on the fifth-generation reinvestment program, are you able to quantify for us the total capital investment we can anticipate in '19? And maybe the number of stores that are involved in that program alone?

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Joseph D. Russell, Public Storage - CEO, President & Trustee [47]

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So again, it's a rollout that we've now been testing, say, for the last 1.5 years to 2 years. So through 2018, we began to test in a number of different markets what we call our Property of Tomorrow platform, which is taking a number of key elements from our fifth generation product and overlaying it into the existing assets. Some of it's somewhat straightforward, meaning it's enhanced signage, updated [painting] schemes. We're also optimizing things like water usage through landscaping improvements, utilities around LEDs, changing the office environment because today's world environment with our new Web Champ 2 platform. We've gone completely paperless. We don't need filing cabinets anymore. We've got more space to create a better customer environment.

So all those things have played through quite well in the properties that we've tested thus far, which totals, say, less than 75 or so assets that we tested in a number of different markets through 2018. So this year, we're mainlining the rollout with all the feedback and the reaction that we've gotten from customers, employees, et cetera. And it's starting here on the West Coast. We're likely to touch anywhere from, say, 100 to 150 properties in the next 2 to 3 quarters here in California specifically, and then we'll be rolling it into a number of different markets literally for the next few years as we touch the entire portfolio.

In 2019, the cost tied to this is plus or minus about $100 million. And it wouldn't be surprising over the next few years, we spent $0.5 billion or more as we roll this entire plan out. And we like what we're seeing so far. So the properties that have been retooled to this new standard are seeing some residual benefit in a number of ways. It's still early in that regard, but we like what we're seeing. And we think it's really another way to amplify and enhance not only the curb appeal and the brand itself that resonates incredibly well to consumers, but it matches all the things that we are doing on an online basis as well. So again, it's a program we've got a lot of focus on and we're likely to see fair amount of capital in subsequent years that is going to be dedicated to this effort.

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Ryan Cole Burke, Green Street Advisors, LLC, Research Division - Former Analyst [48]

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That's helpful color. Can you maybe translate what have you in your test markets spent on a per square foot basis? Or what do you anticipate spending on a per square foot basis?

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Joseph D. Russell, Public Storage - CEO, President & Trustee [49]

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Yes, it's too -- I wouldn't point you to that direction yet because it can vary. At some properties, it can be what I would call a lighter rebranding because it may not need as many components and then other properties that could be more thorough or we're touching a number of different components of the asset itself. So I wouldn't point you to a specific number on a per asset basis yet.

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Ryan Cole Burke, Green Street Advisors, LLC, Research Division - Former Analyst [50]

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Okay. And then I mean obviously, you have some very new assets that you recently developed and you're not going to be reinvesting in those. What is the total percentage of your portfolio that you would like touch, roughly speaking?

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Joseph D. Russell, Public Storage - CEO, President & Trustee [51]

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Well, ultimately, in its purest form, we would mainline or lift the entire portfolio to elements of again, that new standard that we're rolling out as we speak. So that's why I mentioned this could take several years. So we do have what we would characterize as 5 generations of product. So 2,400 locations, some of which have been in our hands for 30, 40-plus years back. So those may need, in some cases, heavier levels of, again, elements of the program that I talked to and some may not. But it's going to be on a case-by-case basis, the amount of enhancement that we're going to do property-to-property. So again, what we'll continue to do is moderate and choose assets that make sense to do in the early phases of the program and then we'll roll it out over time. And ultimately, at a certain point, we'll get to most of the portfolio.

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Operator [52]

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(Operator Instructions) Your next question comes from the line of Ki Bin Kim of SunTrust.

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Ian Christopher Gaule, SunTrust Robinson Humphrey, Inc., Research Division - Associate [53]

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This is Ian on with Ki Bin. I just want to go back to Shirley's line of questioning. The last couple of quarters, you've seen gains in occupancy. And I'm just curious if that's going to be a meaningful driver the next few quarters or you kind of expect that more beyond the rate side?

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H. Thomas Boyle, Public Storage - CFO & Senior VP [54]

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Sure. As we've talked about consistently, we managed for revenue and revenue per available foot, so we're not focused on either occupancy or rate. I will tell you at the end of April, we were sitting with occupancy up about 25 basis points. So we've continued to hold the occupancy gains that we saw starting with the end of the fourth quarter through April. But we're about to get into the busier summer leasing season, and we'll update you on our next call as to where we go from here.

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Ian Christopher Gaule, SunTrust Robinson Humphrey, Inc., Research Division - Associate [55]

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Okay. And then on the expense side, on-site payroll has been down the last, call it, 3 quarters. Are you feeling any pressure in any of your markets on payroll? Or should we see an uptick in payroll going forward, kind of what are your thoughts around that?

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Joseph D. Russell, Public Storage - CEO, President & Trustee [56]

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Yes. Again, part of the benefit of our rollout of Web Champ 2 at the property level has included a number of property efficiencies and optimization strategies we've been able to deploy as we've rolled Web Champ 2 throughout the system throughout 2017 and '18. And I would say going forward, and we highlight this to a degree in the Q, we're likely to see more normalized pressure and what I mean by that is, some level of increase along the lines of inflationary cost increases tied to property payroll. There's no question we're in the most commanding employment arena that we've seen over the last decade. So we're assessing that on a market-by-market basis. We've got a number of very vibrant strategies around that. We're looking for, not only cost efficiencies, but ways to make our full team as productive as possible. So we've seen a lot of good traction around that, particularly in the way that we're using the number of technology opportunities. But I would say, I would look to something more along the lines of inflationary pressure as we go forward.

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Operator [57]

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Our next question comes from the line of Andrew Rosivach of Goldman Sachs.

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Andrew Leonard Rosivach, Goldman Sachs Group Inc., Research Division - Security Analyst [58]

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It seems like industrywide revenue growth is [settling] in there, and I don't think this is just Public Storage. Even without a lot of pricing power on the front-end, it looks like the makeup has been because the in place increases are either larger or they're coming faster or there's a combination of the two. Am I right with that premise?

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H. Thomas Boyle, Public Storage - CFO & Senior VP [59]

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Well, I think we've seen good trends with existing tenants overall. I think some of that is tactics that we and others in the industry are using to attract good customers that will stay with us. I think part of that probably relates to the mix of customers that we've seen. If you look at things like housing sales in many of our markets across the country, a deceleration in housing transaction activity, which has meant fewer movers as a percentage of our customer base on the margin, all those types of things. And the reason I highlight that is movers tend to be shorter length of stay customers. All of those things have resulted in more tenants staying longer and lower move-out volumes [than] we've been reporting. That is certainly helpful to our existing tenant rate increase program. As they stay longer, they are eligible for rate increases.

I do think the other thing that's happening in some markets, as you're seeing real resilience in demand for the sector, and I highlighted earlier on the call, markets like Washington, D.C. or Chicago, which were hit by new facilities earlier in the development cycle as we're seeing real occupancy gains there which is certainly supporting revenue growth as we get through 2019. So a mix of factors, but you're right that the existing tenant piece has been helpful, both in terms of move outs as well as rate increases.

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Andrew Leonard Rosivach, Goldman Sachs Group Inc., Research Division - Security Analyst [60]

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But it doesn't sound like you've either increased the rate increases or reduced the term at which you start to increase rate, like, rather than doing a 1-year anniversary, you're now doing 6 months?

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H. Thomas Boyle, Public Storage - CFO & Senior VP [61]

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I would say we've used consistent tactics year-over-year in how we're managing our rate increases. I would say we're sending more volume this year versus last year, which is driven by the some of the factors I highlighted earlier. I would also maybe just highlight on the revenue trends. We did roll in a new same-store portfolio this quarter and those properties were all stabilized as we disclosed at the beginning of 2017 when they were rolled in. So all that operating metrics, the rates of growth, the revenue, NOI were not impacted by the rolling out of those new properties in the first quarter.

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Andrew Leonard Rosivach, Goldman Sachs Group Inc., Research Division - Security Analyst [62]

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Got it. I just -- my only concern for really the entire industry is if it gets too dependent upon rate increases, does the customer know it, right? And when does it impact the industry if you had somebody whose in place rents go up really, really fast relative to where they got in and what it could do to reputation of Storage? But it doesn't sound like that. It doesn't sound like your mix is changing.

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Joseph D. Russell, Public Storage - CEO, President & Trustee [63]

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Yes. We haven't seen anything concerning from a trend standpoint, as I've said, that behavior of that tenant base has been very solid year-to-date and really solid throughout 2018.

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Operator [64]

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Your next question comes from the line of Jonathan Hughes of Raymond James.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [65]

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Just one from me. Going back to Ryan's question on the Property of Tomorrow initiative. Joe, you mentioned signage and painting and what sounds like standard maintenance items as a part of that program. My question is how much of that $500 million spend over the next 5 years on that program is deferred CapEx, if any? I mean, this year's CapEx budget is triple the 2015 spend but square footage up -- is only up, say, 10% and they're saying a lot of that's new construction. So I'm just trying to determine if that initiative is essentially making up for underinvestment over the past few years?

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Joseph D. Russell, Public Storage - CEO, President & Trustee [66]

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Yes -- it's not. The run rate and the amount of traditional CapEx that we've been putting in the portfolio has been in that $0.50 to $0.75 per square foot range, and that's going to continue. What I'm talking about is, again, and the elements that go into the Property of Tomorrow is, again, beyond just the simple paint. And those kind of simple upgrades, it also will include additional enhancements that we're making to LED, landscaping, mechanical systems other things that are, again, longer-term good drivers relative to efficiency and utilization from a water or electrical standpoint, those kinds of things.

So it's more bent towards that. And our ongoing CapEx is a program that we'll consistently keep in place and this isn't in any way some kind of catch up for that. It's really the noted benefit of matching what we have, which is a very commanding brand that we can amplify through some of the, again, successes that we've seen through our gen 5 product as well as the testing that I mentioned that we've done over the last couple of years.

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Operator [67]

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

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [68]

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Just to go back to the balance sheet discussion, you guys addressed some of the longer term financing. But when we see some of the other larger REITs using commercial paper for the first time, just want to get your impression of maybe some alternative sources or short-term debt that would be, I guess, part 1. And then part 2, can you touch at your free cash flow expectations for the full year? You're likely more of a self funder than some of the other larger REITs. Just your thoughts there.

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H. Thomas Boyle, Public Storage - CFO & Senior VP [69]

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Sure. So the question around commercial paper, we've started to add long-term debt to our balance sheet. We have no immediate plans to add short-term debt. We really like the long-term nature of preferred as part of our balance sheet, we've got about $4 billion of that on our balance sheet and we've added 5 and 10-year debt in the public markets more recently. So we're sitting on cash right now with no plans for short-term borrowing needs.

In terms of your question around free cash flow, we disclosed in our 10-Q last night, we continue to expect something like $200 million to $250 million of retain cash flow for 2019 and that's been a reasonably stable number over the past several years.

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Operator [70]

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I will now return the call to Ryan Burke for any additional or closing comments.

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Ryan C. Burke, Public Storage - VP of Investor Services [71]

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Thank you, Lori, and thanks to you all for joining us today. We look forward to seeing many of you next month at the Nareit conference. Take care.

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Operator [72]

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Thank you for participating in the Public Storage First Quarter 2019 Earnings Conference Call. You may now disconnect.