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Edited Transcript of PSA earnings conference call or presentation 27-Feb-19 6:00pm GMT

Q4 2018 Public Storage Earnings Call

GLENDALE Mar 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Public Storage earnings conference call or presentation Wednesday, February 27, 2019 at 6:00:00pm 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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* Bennett Smedes Rose

Citigroup Inc, Research Division - Director & Analyst

* Eric Joel Frankel

Green Street Advisors, LLC, Research Division - Senior Analyst

* Jonathan Hughes

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

* Ki Bin Kim

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Michael William Mueller

JP Morgan Chase & Co, Research Division - Senior Analyst

* Ronald Kamdem

Morgan Stanley, Research Division - Research Associate

* Shirley Wu

BofA Merrill Lynch, Research Division - Research 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, and welcome to the Public Storage Fourth Quarter and Full Year 2018 Earnings 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, Maria, and good day, everyone. Thank you for joining us for the fourth quarter 2018 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 those 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, February 27, 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 press release, SEC reports and an audio webcast replay of this conference call on our website, 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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Thank you, Ryan, and thank you for joining us. We had a good quarter, and now 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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Our 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 on supply, what are your latest supply outlooks for '19 and '20? And maybe a little bit of color on the markets that are improving or are deteriorating?

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

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Okay. Sure. Good morning, Shirley. No question, for the last 2 to 3 years, we've seen a heavy amount of supply entering many markets across the United States. Statistically, and in particular, if you look at the amount of deliveries that took place since 2017, which was roughly over $4 billion, last year, just over $5 billion, our view for 2019 is it's likely to be similar to 2018 deliveries. So if you just look at those 3 years, there's no question there's been a lot of new product that's entered the market. The totality of that is -- and its full view is pretty commanding. It's about 90 million square feet, plus or minus 1,200 to 1,500 properties. So as we've talked over the last few quarters, we've been very transparent around the markets that we've seen the most impact from all the supply entering. Another part of the delivery and the complexion of these properties is something I talked about last quarter, which not only is it a heavy level of deliveries, but on average, the size of many of these properties are much bigger than they've been historically. So you've got a number of owners out in some of these markets that frankly don't have the tools or capabilities to operate them in a traditional way. So I think there's an element of both disappointment and potentially -- and ultimately some level of distress that could come from that as they learn and see the challenges of running these larger properties. So you also asked about, okay, how are we thinking about the shift. So there's a couple of good things here. One is, first of all, the markets that have seen these delivery levels, many of the markets have actually absorbed the product well, and we've been encouraged by that. It points to the resiliency of the product type itself and the depth of many of those markets, consumer behavior, all those kinds of things. But there's still a number of markets that continue to be impacted. Those include Denver, Dallas, Chicago, Charlotte, where, again, we have seen this overhang from the amount of new supply entering, and we don't see that really changing here in the near term. The good news, however, is there is a lower level of deliveries anticipated going into many of those markets going into 2019. Some of our better markets, again going into 2019, include Boston, Philadelphia, L.A., New York, Atlanta, San Francisco, Orlando. So we do see some additional product coming into Boston, for instance, New York. And again, we're going to keep our eyes wide open around the potential impact from that additional supply. The good news is the West Coast, outside of Portland, has been pretty resilient to supply additions. And again, we see very good metrics and just overall consumer and customer activity coming to those markets because we have far less new competition. So with all that said, we still feel like we're not out of, again, a heavy supply environment, but on the flip side, we continue to be encouraged by some of the things that we've seen through 2018, particularly in the fourth quarter, and how we're feeling activities kind of playing through as we begin 2019.

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Shirley Wu, BofA Merrill Lynch, Research Division - Research Analyst [4]

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Great. That's helpful. Could you talk about the street rate trends that you've actually seen in 4Q and maybe into 1Q as well?

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H. Thomas Boyle, Public Storage - CFO & Senior VP [5]

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Sure. We can talk about street rates. We generally like to talk about move-in rates more, just given their -- they have the real impact to our revenue as it's what customers actually rent from us. Street rates were down about 1.4% in the quarter. Overall, move-in rates were down about 3.5%, but I think that talking about move-in rates really masked what happened in the fourth quarter, so as we talk about the customer behavior and trends that we saw through the quarter, you really need to talk about move-in and move-out volumes as well. So as we started the fourth quarter, we were down about 110 basis points in occupancy. We closed the quarter positive 20 basis points in occupancy. And so what happened through the fourth quarter, what we saw were pretty encouraging customer trends throughout the quarter, flat move-in volumes year-over-year, which is the best quarter for move-in volumes all year. And so how did we achieve that? A combination of increased advertising spend, where we saw good customer response there as well as attracting customers with that lower move-in rate that I just highlighted. In addition to that, we benefited from what is a continued trend throughout 2018, and that is consistent sticky existing customers. So lower move-ins, again, in the fourth quarter, which drove the occupancy pickup. So overall, as we sit here today, we were encouraged by customer trends through the fourth quarter that are largely holding through the beginning part of the first quarter, and obviously, we're at the seasonally slow part of the year. So we'll need to watch how that progresses as we get into the busy season here in the next several months.

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Shirley Wu, BofA Merrill Lynch, Research Division - Research Analyst [6]

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All right. That's sounding very encouraging. Do you take that continued strength, through, I mean, through the beginning of '19 as well? Or really, was that just like a function of maybe that actual marketing spend that you mentioned?

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H. Thomas Boyle, Public Storage - CFO & Senior VP [7]

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Well, let's talk a little bit about the marketing spend. So we did increase our advertising spend 29% in the quarter. The driver of that was paid search spending. So as I've talked about on previous calls, we've incrementally spent more as we've gone through 2018, and we've been encouraged by the customer response to that spend. And what we've discovered throughout the year is the real power of the Public Storage brand online and the reception that we're receiving to that increased spend. So we've been encouraged by that as well, and we'll continue to use that tool as we get into 2019. So that was a fourth quarter -- certainly, a decision to drive traffic, and we're continuing to push a little harder on that lever to drive traffic in the first quarter of 2019 as well.

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Operator [8]

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

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Ronald Kamdem, Morgan Stanley, Research Division - Research Associate [9]

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Just sticking -- staying with expenses. Just looking at -- you came in full year around 3 2. Maybe -- obviously, you're not providing guidance, but can you just talk maybe about the big buckets, how we should think about maybe '19 and beyond? So I'm thinking property taxes growing in the 5s, on-site property, payroll. I think you touched on marketing spend as well. Just curious how you guys are thinking about that in '19 and beyond.

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H. Thomas Boyle, Public Storage - CFO & Senior VP [10]

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Yes. Sure. I would point you to the disclosure we have in our MD&A in the 10-K, which breaks out, line by line, expectations for these spend items. I think you covered it reasonably well actually, which is that property taxes we expect to continue to increase. And we expect that around 5%. And obviously, we'll update that as we go through the year, but there continues to be pressure there. On-site property manager payroll continues to be another pressure point, with the very tight labor market out there. And certainly, throughout 2018, we'll grow some efficiencies, while, at the same time, being able to increase wage rates to attract the right employees at the property level. On down the list, marketing spend, I just touched on. We expect to continue to spend online as our primary tool there to drive traffic, and we did see good response there and we're seeing a good response here in the beginning of 2019 as well.

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Ronald Kamdem, Morgan Stanley, Research Division - Research Associate [11]

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Great. And there's maybe the development, maybe a 2-part question. One is, just maybe if you can give us some color, 3 versus 6 months ago, what you're hitting on the ground in terms of development projects in terms of making their pro formas or delays being had. And the second piece of it is, going back to the opening comments about all the supply coming on and potential distress with the properties, is that an opportunity for you, guys? Do you see yourself down the road maybe trying to acquire some of those properties that are distressed?

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Joseph D. Russell, Public Storage - CEO, President & Trustee [12]

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Yes. Ronald, to start with the -- your final question, yes, I mean, that's been historically, and we would look upon that as the absolute right time to start getting much more aggressive and going out and acquiring properties in an environment where there is an elevated level of stress. What comes with that is the opportunity to buy at much better valuations that we think would potentially be the right time to again start accumulating on a much more aggressive basis. If you look at our acquisition volume, not only for 2018, but the last 2 or 3 years, we've been very disciplined around the price point at which we've decided to go ahead and acquire assets. We found some good values out in the markets, but have also shied away from the frothiness that has played through and is, in fact, still part of the market today, where, again, there's a lot of capital that still wants to come into the sector. There are pro formas out there that we think are not reasonable. I think there's a population of owners that I talked to a moment ago that are starting to see the reality very different than the expected, either returns or time lines, tied to potential lease-up and revenue stabilization on these assets. So for all those reasons, we're prepared and we've got the balance sheet ready, obviously, to go out and be very aggressive when more of that stress starts entering the market. Anecdotally, I would say, there are a few more reverse inquiries coming to us that would include some owners out there that may be now not needing pro forma and are seeing some stress points from either their lenders or maybe some of their partners or frankly are just saying, wow, this is very different than I thought it was going to be and it may be the right time to exit. So we're going to continue to track and look for those kinds of opportunities. What you saw in our quarterly numbers, which is consistent really through, obviously, 2018, is we've got a very strong and healthy development pipeline. We think that to a property, where we're out putting all of our, not only internal metrics and everything that we do from studying submarket to submarket, we've got a very good opportunity to continue to deliver brand-new generation-type product into our own ownership structure, where we can build this kind of product for, say, $120 a square foot, which, in today's environment, could trade almost on a multiple higher than that. So we are very focused and we pivoted into a vibrant development program, plus or minus 5 years ago. We see a lot of good opportunity there. We have shifted more of our efforts into our own redevelopment as well, where, again, we've got great locations, iconic opportunities to take very well-performing assets and potentially make them even bigger or again, more profitable, ultimately, by doing some kind of either redevelopment or expansion. So many of the tools and capabilities that we've learned through ground-up development are being applied to our redevelopment portfolio, which is again shifting from awaiting even more on that spectrum right now. Part of what's driving that, land costs are, in many markets, getting more expensive. There is a little bit more cost pressure relative to components of construction, whether it's steel, labor, concrete. So we're keeping a very close eye on that. But overall, we think that we'll continue to deliver very good returns with the development pipeline that we have ahead of us. And then the properties that we've put in, in the market over the last 3 or 4 years continue to do very well. They're meeting, if not exceeding expectations, and we continue to think that's a very appropriate use of our own capital and we're getting very good returns from that strategy.

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Ronald Kamdem, Morgan Stanley, Research Division - Research Associate [13]

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Great. My last question would be just looking at the end-of-period metrics, the square foot occupancy and the annual contract rents, if I'm doing the math right, that suggests that's about 1.5% revenue growth compared to the 1.2% that you did in 4Q. Just as you're sitting here today, and obviously, the commentary about the marketing spend being taken well, does it feel like 20 -- that the business is starting to stabilize a little bit and the portfolio is absorbing some of that extra supply? Or which way are the risks skewed is basically what I'm trying to get at.

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Joseph D. Russell, Public Storage - CEO, President & Trustee [14]

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Yes, yes. I'll maybe give you some color from my perspective, and Tom can add to that as well. But sitting here today compared to where we were a year ago, I would say that, yes, we have an outlook that's shifted to be more encouraged around many of the things that we're seeing, which include, again, the resiliency and the sector at large, the product type and the way it, as we know, behaves from a lease-up, fill-up standpoint. We're seeing good resiliency, and again, with many of the things that we continue to use that are unique to us for 2018, we saw some good traction, particularly in the second half of the year. So sitting here today, we feel like we're in a better place. Now going into moving and busy season, we'll see how that plays through. We're just a few weeks from that. But all things considered, we feel like we're in a better place going into that than we were a year ago. And we'll continue to see and figure out how to maneuver around the supply that continues to come onto the markets as well. So it's a little bit of a 2-edged sword, but all things considered, we're on balance, feeling more encouraged.

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H. Thomas Boyle, Public Storage - CFO & Senior VP [15]

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Yes. And I think the only thing -- I'd add a couple of things to that. One is that you have to look back several years to think about where we were at the beginning of the development cycle with occupancies north of 95%. Certainly watched in the last several years some of that occupancy be given up in some of the supply-impacted markets. And as we look at those markets today, we have been impacted in some areas. We expect to be impacted in others. And so there's more of a put and take around markets where we're seeing some improvement and markets where we're seeing deterioration based on that new supply. I think your question around the period-end math, you did the math right. The 1.3% and the 0.2% gives you 1.5% aggregate contract rent as we go into 2019. As we look at trends, since January 1, as I highlighted earlier on the call, pretty consistent. So occupancy trends have been consistent with that time period. We're up about 30 basis points in occupancy today. And contract rent continues to be impacted by rent roll-down and existing tenant rate increases, but I think that period-end math you did is right.

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Operator [16]

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Our 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 [17]

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Just first question, I guess following up on that a little bit. I was just curious on the 10-K that was filed this morning, you disclosed the move-in and move-out spread was negative 16%. So that's the widest during the cycle. And Tom, you noted that move-in rates were lower year-over-year by 3.5%. Any sense where we are in the cycle, whether you may see some stabilization in pricing for new customers? And then can you talk about how much that spread contributes to revenue growth and how we should sort of think about that spread?

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

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Sure. So let me take that piece by piece. So we did see, as I highlighted earlier in the call, rental rates for move-in customers be down 3.5%. That move-in, move-out spread that you highlighted of, call it, 16%, did deteriorate. That was a strategy to drive the move-in volume that we achieved during the quarter. So it's hard to talk about rate without volume. So I talked about the move-in volume that we achieved was the best move-in volume that we achieved throughout 2018. And so it's really a combination of both of those factors. But certainly, the -- there is rental rate pressure in many of the markets that Joe highlighted having been impacted by new supply. We're going to see some new markets enter that list, and I'm sure that we'll see some rental rate impact in those markets as we get through 2019. So I think the environment there remains a challenging one. But as I said earlier, the flip side of that is our existing tenant base continues to perform very well and move-outs were down on a volume basis. And those sticky customers afford us the ability to send rental rate increases as we get through the busy months here, and so we've been encouraged by those trends. And I think those customers are supported by the macro environment, right? Wage growth, the employment market, things like that are all contributing to the performance and behavior of our existing tenant base.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [19]

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Got it. And so, yes, you talk about, obviously, the business is seasonal and you mentioned that you drove sort of higher move-ins during the quarter. And the fourth quarter represented, on a square footage basis, just under 24% of the full year move-ins, right? So there seemed to -- which is up 100 basis points versus the prior year for the fourth quarter. So it seems like the fourth quarter this year, there was a lot less seasonality than in prior years, and you talk about the marketing spend and the positive effect that it had on move-ins. Was that it? Or was there anything more broadly that led to the higher fourth quarter rental activity that you can point to?

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H. Thomas Boyle, Public Storage - CFO & Senior VP [20]

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I think you actually -- I think you summarized it pretty well. A number of factors, and as I said, we are encouraged by the traffic we saw at our stores. And we'll see where we get to during the busy season, which will be the real litmus test as we get through 2019 as we see much more volume through the summer months and will have a big impact on our 2019 performance. So more to come there.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [21]

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Okay. Have you seen some less seasonality starting to materialize in recent quarters? Or is this the first quarter where you've sort of seen that?

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H. Thomas Boyle, Public Storage - CFO & Senior VP [22]

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Yes. I think we continue to see seasonality in the business. There's nothing different about the fourth quarter this year versus prior years from a seasonality standpoint. And there's different -- customers use storage for different reasons through different times of the year. You don't have the college students in the fourth quarter. You don't have folks that are moving to get into a new school district in the summer, in the fall. So there's going to be seasonality, and we continue to expect that 2019 will be no different there.

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Operator [23]

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

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Bennett Smedes Rose, Citigroup Inc, Research Division - Director & Analyst [24]

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I wanted to go back to -- on the expense side. You mentioned also in the 10-K that you had reduced hours on site in order to help offset some of the wage increases. And I was wondering if there is more to go there or if they're -- if you're able to maybe put in more automation perhaps and eliminate some need for employees. Or kind of how are you thinking about that part of the business?

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Joseph D. Russell, Public Storage - CEO, President & Trustee [25]

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So yes, Smedes, what we did in 2017 was put into all of our properties our Web Champ 2 system, which we talked about, to some degree, through 2018. So full year 2018, we had Web Champ 2, which, again, is our customer interface system, throughout the entire organization. There's no question, based on its design, we were able to optimize labor hours, along with training. It's a much more intuitive system. So new employees were able to come into the company on a much more efficient training program. So we saw some good traction there. And I'd say we've got a lot of that work through the system. So there may not be, going into 2019, the same level of additional benefit. But the great news is the system itself continues to evolve from a functionality standpoint and efficiency standpoint. It's all built around making the customer experience that much more efficient and timely, coupled with, again, easier to learn, use and adopt by new employees. So a lot of that traction, I think, went through the system in 2018. The thing that we'll see, which is something Tom has already talked about, is the price pressure we're seeing in labor overall is the toughest employment arena that we've seen in well over a decade. So we're looking at many ways to optimize our labor force, the size of it. But at the end of the day, many of our properties fundamentally need that key single person each and every day to run a property. And we really can't cut beyond that until we are at a point where we can do something as forward-thinking as what you're asking, is we can actually run properties without people. So we're not at that point yet. It's an interesting concept. But that's something clearly downstream that we'll have to take a fair amount of time to figure out how to put any of those kinds of opportunities into the system.

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Bennett Smedes Rose, Citigroup Inc, Research Division - Director & Analyst [26]

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Okay. And the other thing I just wanted to ask you, you also mentioned in the 10-K there were no plans to use joint venture financing or sales of property as a source of capital but I'm just wondering, I mean, it seems we keep hearing that pricing has been very sticky and relatively high, low cap rates. And is there not an opportunity maybe to sell more mature properties at very strong pricing and retain management contracts on them? Or is that just not something that you would be interested in doing to kind of jump-start a third-party platform? Or...

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Joseph D. Russell, Public Storage - CEO, President & Trustee [27]

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Well, I don't think that's a necessary component to jump-start a third-party platform. I would just tell you, from a strategic standpoint, I mean, that's something that we would continue to evaluate as we have in the past. But again, that's not, I would say, an evolving strategy. For the most part, we're very pleased with the size and the scale and ownership structure that we have with the full portfolio. And we'll continue to consider all -- other alternatives as they arise. But no, I wouldn't point you to that direction right now.

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Operator [28]

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Our next question comes from the line of Ki Bin Kim of SunTrust.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [29]

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So in the 10-K, you mentioned the average length of stay increasing. Can we talk about like what kind of magnitude you're talking about? And maybe if you can answer that differently, what percent of your customers have been there for over a year and how has that trend over the past couple of years?

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H. Thomas Boyle, Public Storage - CFO & Senior VP [30]

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Yes. What we saw, and what specifically we highlighted in the 10-K was the increased length of stay from some of the move-ins that we saw through 2018. So we saw some good traction there. Overall, the entire portfolio, the metrics are pretty consistent with what we've talked about in the past. So a little under 60% of our customers have been with us for a year. As I -- as we highlighted in the K, we've seen some modest improvement to those metrics, but overall, not a fee change at this point, but encouraging trends.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [31]

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Okay. And if 60% of customers have been there over a year, I'm assuming that's a similar pool for the eligible customers to get a rent increase letter. But what percent of that 60%, once they get a letter, actually end up rolling down? And I know it is all -- is dependent on time frame, so maybe within 3 months of getting a letter or 4 months. I'm not sure what the cutoff is, what your cutoff is. But just trying to get a sense of what the roll-down and how meaningful that can be.

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H. Thomas Boyle, Public Storage - CFO & Senior VP [32]

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I'm sorry, Ki Bin. I'm not understanding the question. Can you -- in terms of the roll-down, what roll-down are you talking about with existing tenants?

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [33]

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So my question is, basically, if 60% of customers in theory get a rent increase letter, what percent of that 60% actually ends up leaving within, call it, 4 months or so? That might...

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

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We're not giving figures around the efficacy of the existing tenant rate increase program, but that's metrics that we watch very closely. And obviously, we seek to optimize the rental income that we can charge our customers based on many factors, and certainly, the propensity to vacate thereafter is a key component to that analysis.

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Operator [35]

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(Operator Instructions) Our next question comes from the line of Eric Frankel of Green Street Advisors.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Senior Analyst [36]

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Just a broad question. I noticed that according to your 10-K, your market share and the market share of the top 5 operators of 7% and 15% respectively hasn't changed over the year. Obviously, there's been a lot more storage volume. Can you all -- can you -- do you have on hand how much, what those percentages look like with third-party management and the professionalization of that business and what that market share is if you include that?

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

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I don't have that on hand. It's something that we can get some industry data and talk about offline, but I don't have that in front of me.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Senior Analyst [38]

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Do you think it's increased or stayed the same versus last year, third-party management of the top 5 operators versus all of the U.S. stock.

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

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I don't know. We have to look at that data. I don't have it in front of me.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Senior Analyst [40]

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Okay. Do you guys have any targets of -- obviously, you're fairly sensitive to price and you think that acquisitions are still a little bit pricey today. Do you guys have a goal or target of what you think your market share should be over time?

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Joseph D. Russell, Public Storage - CEO, President & Trustee [41]

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You mean on a per market basis?

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Senior Analyst [42]

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Yes. Per market and nationally, sure.

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Joseph D. Russell, Public Storage - CEO, President & Trustee [43]

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Well, no. I mean, it's never that scientific. It's best to have one versus -- one number versus another. There's no question we, in almost every market nationally, we have commanding market share. And we see inherent benefits, whether that share is 15% or 20% or 25%, for instance. So for the most part, more share is better. One of the things that we continually look for are opportunities through our own ownership and now through our third-party management platform to grow that scale. And the scale comes through and can be very advantageous in a number of ways, not only physical presence, but obviously, all the tools that we're using in today's world relative to our marketing tactics, so the Internet, et cetera. So we constantly look for ways to optimize our share. Let's put it that way. But we do enjoy the fact that as the largest operator by a meaningful factor and across the United States and literally almost every metropolitan market, we see a lot of inherent benefits to that.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Senior Analyst [44]

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Okay. Related to market share and in controlling maybe more and more properties, your third-party management business, I guess, your 10-K disclosed you'd manage 33 third-party stores, is that correct?

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Joseph D. Russell, Public Storage - CEO, President & Trustee [45]

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Well, no. Today, in the program, we have nearly 50, okay? So the -- if you look at our program, we literally announced our entree into the third-party management business exactly a year ago. And we literally started from 0. So when we announced that a year ago, we did not have a team in place, we had designated senior leader, being Pete Panos, to basically build the business from the ground-up. And he and now his team that's fully in place have been working on that diligently over the last 12 months. So we're very pleased with the traction that we're seeing from the -- our entree into the business. We're seeing good receptivity to the components of our offering, which include, obviously, the brand itself, our operational capabilities, the ability to be part of all of our initiatives tied to our marketing prowess, et cetera and again, a very competitive fee, which also includes sharing of insurance revenues. So the offering is very compelling. We've got a backlog that continues to build. Pete and his team are now out doing much more outbound efforts. So what has taken place with our entree into the business, which I think is similar maybe to others over time, is it does take a number of quarters to kind of get a pipeline built because many of the properties that typically come into these programs are being built. So we have a healthy backlog that includes a number of those properties. And as well, we have a number of properties that have been in place that have decided to come into our platform versus either running the facilities themselves or coming off another third-party platform. So we see a lot of good traction there, and we'll continue to, I think, see good opportunities going into this year.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Senior Analyst [46]

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Okay. And I probably have a few more questions. I'll keep -- I'll just ask one last one. Just related to Shurgard Europe. I guess after the offering, you now own a 35% stake in the company. Do you foresee that increasing or decreasing, or are you seeing the same over time depending on how fast they grow?

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

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Well, the thing I would comment to, Eric, and you've kind of used it as an example, our commitment and sponsorship of PSB. I would say, we have the same view of Shurgard. We think the team's very capable. I think the IPO went really well. They've worked really hard over the last decade optimizing their portfolio, their full capabilities. We think they've got a great opportunity and platform to go forward on their own. And with that, we continue to be a key sponsor of their efforts, and we'll continue to, again, be committed to the entity as a whole. So from a specific percentage standpoint, I really am not going to talk to that. But I'll just tell you that we plan to have a very strong endorsement sponsorship of the entity.

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Operator [48]

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Our next question comes from the line of Michael Mueller of JPMorgan.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [49]

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Just a quick financing question. You called the Series Y preferred. I was just curious, what are the plans to either finance that, replace it, looking at that, looking at other preferreds, et cetera?

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H. Thomas Boyle, Public Storage - CFO & Senior VP [50]

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Sure. We did issue the redemption notice and we will redeem the Series Y 6 3/8 preferred at the end of March. That is a 6 3/8 coupon, so we viewed that as a good capital allocation decision to redeem those. We have many tools at our disposal. The financing market is pretty attractive right now, both preferred as well as the debt market, and we finished the year with $360 million in cash. So lots of tools to address that $285 million redemption at the end of the quarter, and the financing markets are good.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [51]

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Okay. But no bias at this point in terms of debt or preferred?

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H. Thomas Boyle, Public Storage - CFO & Senior VP [52]

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No.

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Operator [53]

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Our 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 [54]

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Tom, on the predictive revenue growth metric, you've said in prior calls that average occupancy is a better way to look at it than using period-end occupancy. Has that view changed? And the reason I ask is because using period-end occupancy implies worse revenue growth for the following quarter than using average occupancy in the past 3 earnings releases.

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H. Thomas Boyle, Public Storage - CFO & Senior VP [55]

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Yes. No, that's a good question. We have talked and really shifted to talking about averages being probably a better metric as we went through 2018. And the reason for that was some shifting consumer trends as we looked at vacate trends throughout the month. We've now lapped that. And so the period-end trend, particularly for the fourth quarter, given the fact that we increased occupancy on a year-over-year basis throughout the quarter, period-end is a better metric to look at than average. And so short answer is we've kind of lapped that differential and the period-end is as close to 2019 as you're going to get. And so I would point you to that as an indicator to look towards.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [56]

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Okay. And what were the -- can you just remind us, what were the changing preferences again?

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H. Thomas Boyle, Public Storage - CFO & Senior VP [57]

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We just talked customers electing to vacate more towards the end of the month, and we've talked about that was something that we liked. That allowed us to get more inventory back before the busy part of the month, where we move in a lot of customers at the end of the month than beginning of the following. So that was another encouraging customer behavior change we saw through 2018.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [58]

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Okay. And you don't think that will continue this year?

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

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It will. It's just that it happened in 2018, so we've lapped it.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [60]

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Okay. All right. And then looking at the CapEx spend, that was about $140 million last year, actually, a bit below guidance, but I understand some might have gotten shifted into 2019. But the 2019 CapEx spend guidance of $200 million suggests a 40% increase this year. Can you just give us some color on what's driving that increase?

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Joseph D. Russell, Public Storage - CEO, President & Trustee [61]

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Sure, Jonathan. So it's primarily driven by an initiative that we did a lot of testing on through 2018 that includes a number of enhancements that we're going to be delivering to our existing products. So through our development program over the last few years, we've come up with what we've labeled our generation 5 product that has a number of components and elements that we think are really well-suited to go back to our existing assets and basically use it as an opportunity to do a refresh of the physical part of the assets as well as looking at some opportunities to improve from a cost and efficiency standpoint, things like utilities, et cetera. So it includes simple things like paint, which, again, we've learned over time and done a lot of testing, that using a dominant amount of orange plays well not only for curb appeal, but lines up with a lot of things that we do on our online efforts, simple signage, some of the office environments, retooling them to make them much more customer-oriented. We have now a paperless environment with Web Champ 2. So we need fewer filing cabinets and with that, can use office space in a very different and more efficient way. And then to the efficiency side of the equation, we're doing things like internal and external LED, upgrading landscaping, so we have less water usage. We are looking at solar, so we're doing some testing on solar as we speak. So there's a number of, I think, meaningful investments that you're going to see as we use really the enhanced capabilities that we've seen and good reaction to our generation 5 product as we've delivered that new product in many markets across the United States, now into our existing portfolio. So this year, we're likely to spend, plus or minus, about $100 million on that effort. It's going to launch in many parts of the West Coast. So when you're out here towards the end of the year, for instance, at Nareit, we may have an opportunity to actually display and show some of that while a number of you are in town. So we're excited about what kind of traction that we're getting from this. We're getting very good reaction from customers and employees. And we're really excited about the overall benefits that we're going to see in the existing portfolio.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [62]

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Okay. Great. Yes I look forward to hearing more on that. And then on the -- last one, on the 383 stores and 31 million square feet that are outside of the same-store pool, I've realized a large portion of that's not stabilized, but how much do you expect to kind of roll into the same-store pool this year?

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H. Thomas Boyle, Public Storage - CFO & Senior VP [63]

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Yes. Well, we'll look at the number of properties within that pool that will be stabilized as of January 1, 2017, and would be appropriate to roll in. And when we'll make that determination, it will be based on both their occupancy as well as the rental rate and revenue growth associated with those properties as well as cost of operation. So our philosophy is to ensure that those properties that are added are stabilized versus the other properties within the market and within the market where that -- those properties are. I would expect that many of our 2016 acquisitions as well as some of our 2013 to 2015 developments will roll into the same-store pool. They will be stabilized when we roll them in, and so we won't be talking about any sort of revenue benefit associated with rolling those properties in, given the fact that they're stabilized when they're going in. And there's probably some expansions as well in the 2013 to 2015 period that are in the other category that will be rolled in as well as in the other category, there are properties impacted by natural disasters, damage, et cetera, that we'll evaluate. So I don't have a number for you at this point, but certainly, we'll be prepared to talk about that for the first quarter call.

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Operator [64]

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And thank you, ladies and gentlemen. That was our final question. I would now like to turn the floor back over to Ryan Burke for any additional or closing remarks.

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Ryan C. Burke, Public Storage - VP of Investor Services [65]

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Thank you, Maria, and thanks to all of you for joining us today. And we look forward to connecting with you in the coming weeks and months. Have a nice day.

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Operator [66]

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Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.