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Edited Transcript of PSA earnings conference call or presentation 2-Aug-18 6:00pm GMT

Q2 2018 Public Storage Earnings Call

GLENDALE Aug 15, 2018 (Thomson StreetEvents) -- Edited Transcript of Public Storage earnings conference call or presentation Thursday, August 2, 2018 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

* Joseph D. Russell

Public Storage - President

* 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 and Analyst

* Eric Joel Frankel

Green Street Advisors, LLC, Research Division - Analyst

* George Andrew Hoglund

Jefferies LLC, Research Division - Equity Research Analyst

* Hong Liang Zhang

JP Morgan Chase & Co, Research Division - Analyst

* Ian Christopher Gaule

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Juan Carlos Sanabria

BofA Merrill Lynch, Research Division - VP

* Robert Jeremy Metz

BMO Capital Markets Equity Research - Director & Analyst

* Ronald Kamdem

Morgan Stanley, Research Division - Research Associate

* Stephen Thomas Sakwa

Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity 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 Second Quarter 2018 Earnings Call. (Operator Instructions)

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

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

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Thank you, Crystal. Good morning, and good afternoon, everyone. Thank you for joining us for the second 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 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 earnings reports filed with the SEC. All forward-looking statements speak only as of today, August 2, 2018. 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 is included in our earnings release. You can find press release, SEC reports and an audio webcast replay of this conference call on our website, publicstorage.com.

With that, I will turn the call over to Joe.

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

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Thanks, Ryan, and thank you all for joining us. This quarter, we continued to see the resiliency of our business in the face of the supply pressure impacting the self-storage industry.

Before we open the call for questions, I want to point out that we have lined up the timing of our earnings release to the filing of our 10-Q and this call. We feel that our 10-Q addresses a number of questions and data points that some of you have requested. And this will ensure the full disclosure package is in everyone's hands. Our Q, particularly the MD&A section, is detailed. So please continue to look to that document as a guide to how we evaluate the status of the business.

Now I'd like to open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Juan Sanabria with Bank of America.

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [2]

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(technical difficulty)

increase in the amount of deliveries and expectations for deliveries, particularly as we think -- start to think about '19 versus '18. And is the right way to look at it, from a fundamental perspective, a 3-year rolling window, given the lease-up time on new assets in your mind?

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

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Yes, Juan. Unfortunately, I missed the very first part of your question. But if you're talking about what our outlook and view of supply, I'm looking up what the context of the question was. So yes, let me give you a little bit of color on what we see. And the -- sets of both deliveries and the timing that it would typically take places. We know, in our business, with any given delivery, there's, plus or minus, a 3-year lease-up on a per property basis. So 2017 and 2018, we expect very similar, if not elevated, levels of deliveries this year over last. Going into '19, there's some commentary and data out there that potentially points to a slowdown in deliveries. But realistically, that, to some degree, is just the way the development business works. Some of the things that can prolong or delay deliveries include timing tied to entitlement approvals or permit approvals. There could also be delays again based on any particular developer's view of market conditions, costs tied to either labor or materials, particularly steel in the case of self-storage properties. But all that said, we're still in an environment, more often than not, and markets where developers are still seeing healthy returns when they can build a property that ultimately will yield an (inaudible), say, an 8% to 9% return and potentially flip it for a 5% or 6%. And whether those development margins are more extreme or elevated at say (inaudible) or even tapered down in half, there's still fuel out there and capital that's putting development (inaudible) into the cycle. The thing that happened that we would certainly look at as a positive is with some of the potential headwinds tied to either the amount of supply hitting markets, some of the pro formas being changed, maybe some pushback from lenders and frankly just expectations to the overall returns of properties, there could be some slowdown. But too hard to see. And our view is again the amount of capital that continues to want to be placed in this sector is elevated. It's still a business that continues to produce very good returns on a property-by-property basis. And the development cycle is still with us. So with that, I really don't have a lot more specific color, other than we'll continue to track and see what we see throughout our markets going into 2019.

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [4]

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And then on street rates, if I may. Any sense or could you give us any color on what they were year-over-year in the second quarter and maybe third quarter to date? And if we step back and think you've had declining numbers for a couple of quarters at least, do you think of that as a leading indicator for where same-store revenues should eventually migrate to?

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

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Sure, this is Tom. So street rates in the quarter were down roughly 4%. As we've talked about in the past and as we disclose in the 10-Q, we view take rates or move-in rates as more meaningful. So as you saw in the 10-Q that we filed last night, the move-in rates on a per square foot basis were down 2% in the quarter. (inaudible) between first quarter and second quarter, we did lower our rates by volumes during our kickoff to summer sale. We were pleased (inaudible) response from the customer base during that (inaudible) versus prior years. Breaking the quarter down by month, April and May were down roughly 2%, so similar to the first quarter performance. And then we clearly decided to lower rates during the sale to drive customer response. On a holistic basis, looking at move-in revenue, so both the amount of space leased as well as the rate, that contract rent for all move-ins was down 8% year-over-year in the second quarter. But the flip side was that the contract rent (inaudible), so again volume and rate for move-outs, down 3.6%. And that was driven by a reduction in move-out activity. So that just continues to point to the existing customer base stickiness and stability that we've talked about. And that's continued here as we've gone through the second quarter and into the third quarter as we've sent out our existing tenant rate (inaudible). So speaking of move-ins on a volume basis, obviously trends improved because of the difference between move-in volumes and move-out volumes. So that's a good trend. The occupancy end of the quarter, down 100 basis points and down 60 basis points on average, which compares to down 90 basis points on average in the first (inaudible). So we did see some occupancy improvement through the second quarter on a sequential basis.

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Operator [6]

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

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [7]

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Joe, the comments that you just made about potential, I guess, positives to the development cycle, pro formas being changed or pushed back from lenders, are you seeing changes to pro formas? Or are you changing your pro formas at all? And then on the lending side, I guess, I'm guessing you're not in the market talking to lenders. Was that comment sort of hypothetical in nature? Is there any evidence that lenders are starting to push back or tighten up around development funding?

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Joseph D. Russell, Public Storage - President [8]

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Well, yes, Todd. There's definitely some anecdotal impressions we get through the variety of conversations that we have with a lot of groups out there. One of the things that adds to that is the kind of dialogue we're actually having on a reverse inquiry basis, where we are seeing more entitled land parcels coming to us through owners that were planning on taking a property through a development cycle and have now decided not to. So that would include circumstances like I alluded to, where again they've either shifted down their expectations from a rental rate and/or time to occupy the property. Interest rates, they haven't moved materially. But certainly, the opinion out there is that they're likely to increase. There's likely more pressure coming from interest rates, interest rate costs. And with that, I think there is some tapering down from a dialogue standpoint that again there could be either delays or intentional movement away from the level of full deliveries that statistically were predicted for 2019. I can't tell you, is it going to be down 10%, 15%? But there could be some of that in the mix. And again, with other elements at hand, again with the construction (inaudible) market-to-market around labor and (inaudible), as I mentioned, again I think there's some rethinking relative to the pool of developers that were 1 or 2 or 3 years ago just looking at everything being completely full steam ahead. They could build these properties, flip them very quickly, not worry about achieving pro formas. And now all of a sudden, there's a little bit more review and/or analysis going on, which I think holistically is very good. It's good for our overall industry and it's good market-to-market. But I couldn't tell you, it's really something that's become (inaudible) yet. So we'll have to see how this plays forward.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [9]

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Okay. And then I was wondering if you could talk about how conditions have trended through July, whether or not you can comment at all on occupancy or rent trends. And as you head into the off-peak season here and the summer winds down, any thoughts around your strategy as it pertains to discounts and promotions?

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Joseph D. Russell, Public Storage - President [10]

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Yes, sure, Tom.

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H. Thomas Boyle, Public Storage - CFO [11]

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Sure. Yes, so I would call July trends very consistent with what we saw in the second quarter both in terms of occupancy and rates. So nothing really to highlight there. I think in terms of moving through the summer, clearly we'll continue to monitor our existing tenant base and how they're accepting the rental rate increases. So far to date, they continue to demonstrate the stickiness that we've observed in the second quarter. And as it relates to pricing and promotion, that's something we obviously dynamically adjust. But we've historically continued to offer dollar special discounts through the summer period and then sprinkling in sales as well. We expect to do that similar to how we have done it over the last several years.

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Operator [12]

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

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [13]

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I realize it's hard to maybe compare or you don't maybe have a full understanding of what the peers do and maybe can't speak to operations. But there are a couple of large markets where your revenue growth does seem to be trailing behind some of your peers. And I'm just wondering if you've got any thoughts around that. I think Chicago and D.C. are 2 markets in particular where your revenue growth trails noticeably behind. And I don't know if that's new supply specifically or there's something else in those markets that was pulling your performance down.

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

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So obviously, we can begin with something that we've talked to in the past, which is the way that we pull properties in or not into same store. So there likely is some gap of performance tied to that. There could be market-to-market distinctions based on location of assets. And again, you would also need to take a look at levels of occupancies and again market-to-market, what's going on there. And then clearly, our goal has always been to maximize revenue per square foot on a per property basis. So even though in some markets, you may look at those distinctions like you've highlighted, we would also want you to take a look (inaudible) trending. And it's all reported. Again, peer-to-peer, the cash (inaudible) market that takes place across portfolios. And I think you, there, would see a distinct difference. Now you mentioned Chicago. We talked about Chicago. It's one of our toughest markets and for many reasons, not supply as much but more economic and overall migration, either out or not flowing into that particular metro area, has continued to be a tough market. So in that case, there's definitely more of a factor there. D.C., a little bit more supply coming into the market. But again as you mentioned, Chicago for us has been a market we've talked to now for several quarters. It's one of our weakest.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [15]

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Okay. So there, you might think it's a submarket differential perhaps between some of the peers and you, just kind of different parts of town maybe?

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Joseph D. Russell, Public Storage - President [16]

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That could be a component.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [17]

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Okay. And then I guess, just kind of flipping gears here maybe a little bit on the technology side. Some of your peers are doing some different things to attract tenants and to lease space. Some are sort of almost automated leasing. I mean, what are you guys doing, if any? And is there anything you can share with us about some of those programs and some of the effectiveness that you might be having?

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Joseph D. Russell, Public Storage - President [18]

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So we continue to invest and optimize all the things that we do to attract and learn about customer behavior. So there are many things that are proprietary that we continue to do that we don't talk thoroughly or transparently about. But we clearly have a number of committed initiatives that continue to enhance our ability to attract and find what we feel are good-quality customers and customers that we think suit our locations well and again lead us to being able to do many things on a per property basis. We have now fully integrated a new point-of-sale system that took us several years to develop. That was integrated and fully implemented across the company at the end of 2017. So not only is that a more vibrant system, but it's giving us much more clarity relative to the things that we can do to enhance customer experience and customer knowledge. So from a focus and technology standpoint, we continue to do a variety of things. And we continue to see good traction from our -- both investment and our techniques that comes from that.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [19]

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Okay. And lastly for me, could you just maybe speak to the third-party management business that you sort of rolled out, I guess, a couple of quarters ago and some of the traction that you may be having with existing owners in the marketplace today?

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Joseph D. Russell, Public Storage - President [20]

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Sure. So yes, Steve, just as you said, we obviously launched and made the announcement that we were going to go into the third-party management business earlier in the year. I'd say, overall, we've been very pleased with the reaction. And frankly, it's been better than expected. Pete Panos has now hired his team. So we have a team around Pete that focuses now on business development, customer relations and brand integration. Up until this point, the efforts that we've had, had been primarily tied to dealing with reverse inquiries, which have been strong and healthy. And we really haven't even started our major outbound initiatives yet, but that's coming. The point we're at right now is we have 48 signed properties in the program. And the backlog continues to grow. And if you combine that with our 26 legacy properties that we've run for several years, we've now got 74 properties in the program. What we're seeing is again a lot of the strong reaction tied to the value of our brand, the amount of consistent cash flow and revenue we do produce on a per property basis. Because I can tell you, owners are very fixated on that. They also like the scale and market knowledge that we have, market-to-market, and our ongoing capabilities again that we continue to drive through our technologies, just like you were asking. So overall, the program is off to a great start. And we're encouraged by what we're going to be able to see going forward.

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Operator [21]

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Our next question comes from the line of George Hoglund with Jefferies.

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George Andrew Hoglund, Jefferies LLC, Research Division - Equity Research Analyst [22]

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Just piggybacking off that question. Of those 48 newly signed third-party management deals, are you able to provide color on how many of those were previously managed by other third-party managers? And how many of them are just maybe new projects?

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Joseph D. Russell, Public Storage - President [23]

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Yes, George, I'll talk to maybe holistically the entire pool that we're dealing with. So not surprisingly but encouragingly, we are seeing a variety of different types of situations come to us. So it includes properties that are in development. It includes properties that are currently flagged by other operators, both public and private. And it includes operators that are just running the properties themselves. So we're seeing a good combination. And as I mentioned, this has really been without us actually going intentionally out to markets yet in an outbound way. So again, out of the gates, we've had very good, strong reaction from a good collection of different types of situations. We are pleased with the quality of the assets that are coming into the pool. And we think, based again on what we're seeing right now, we can fold them into our operational platform pretty easily. And again, that's another advantage that many of these owners look to right out of the gate once we again put the Public Storage brand on the property.

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George Andrew Hoglund, Jefferies LLC, Research Division - Equity Research Analyst [24]

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Appreciate that color. And then also going back to development, are you seeing more development migrate into the secondary markets? And if so, kind of which areas are you seeing more flow to?

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

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Yes. I really couldn't tell you, George, that there's a sea change that would lead you to say now it's (inaudible) into again either secondary or (inaudible) markets because frankly we have a very fragmented industry as a whole. And there are developers out there (inaudible) part of the country that are looking to build this type of product. So the -- I think the currents that are out there is, no question, in some of the more highly dense, urbanized markets, there's going to be more difficult entitlement situations, land is not going to be available (inaudible). Again, more headwinds that you're going to hit there, whether a storage facility can be built on a particular site because of pressure in a community relative to caps on the amount of storage products that might be already in place. Those properties typically are even going to be more expensive. But again, I wouldn't tell you there's any overall sea change in where the overall development is happening. Because again, it continues to be pronounced.

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George Andrew Hoglund, Jefferies LLC, Research Division - Equity Research Analyst [26]

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Okay. And just last one for me, on the acquisition front, are you seeing an increase in opportunities out there? And are there going to be -- or do you see more opportunities from sort of busted development projects?

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

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So the -- yes, again, this disconnect between what seller expectations and buyer pro formas or buyer expectations are, is still strong. So based on that, we're not seeing a healthy or high level of trading that's going on out there. So there really hasn't been much of a change. So cap rates, for the most part, are relatively in the same tight zone, they hover around, say, a 5% or so handle. And again, we're not really seeing a lot of volume coming into the market. Now what we've done in this environment, both last year and this year, is we continue to look at opportunities where we can buy really good properties at good values. We're able to round out our presence in a number of markets where we'd like to have more scale. More recently, this year, you've seen us do it with some of the one-off acquisitions in communities like Louisville, (inaudible), Omaha, Columbia, South Carolina. You saw in our press release, we've got 14 properties under contract (inaudible). Those 14 properties total about (inaudible), a little over 840,000 square feet. Again, same theme, part of that portfolio does -- or part of that whole group of properties does include a small portfolio in Minneapolis. But again, we're not seeing a new range or a healthy level of portfolio or volume getting traded right now.

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Operator [28]

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Our next question comes from the line of Eric Frankel with Green Street Advisors.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Analyst [29]

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I was hoping you can just touch upon your development opportunity in your own portfolio. I understand you took 4 properties out of your same-store pool presumably to enter into expansion projects. Maybe you could touch upon, given maybe that some of your sites are older and a little bit less utilized, what kind of redevelopment opportunities are available over the long term?

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

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Great. Thanks, Eric. Yes, in fact, again if you look at the Q on Page 45, we have a little bit more color on some of the activity that we have in our expansion efforts. And one of the things that we've been able to do since we started our development program in 2013 as opportunities have evolved in our own portfolio, we're starting to shift even more dollars into redevelopment and expansion. So again, on Page 45, it's actually Footnote A, you can see what we highlighted relative to some of the demolished properties that we've touched this year, which total about 665,000 square feet in rentable square footage. And over the next 18 months, we've got another 150,000 or so. So that pool, as we speak today, is a little over 800,000 square feet. So to put a little color on that and give you a view of how we look at that economically, so if you look at that 800,000 square feet on an annual basis, that generates about $8.2 million in NOI. Now we're taking that 800,000 pool property set and expanding it almost by 4 -- a little over 4x to 3.9 million square feet, okay? We're investing $364 million into those properties' expansions. And if you kind of compare the yields that we continue to see on our mainline development program, where ultimately we can get these properties conservatively into, say, an 8% or higher yield, that pool alone, once stabilized, is going to generate, instead of $8.2 million in NOI, it'll generate, if you assume a 5% -- or if you assume, say, an 8% to 10% yield, you're going to see a $55 million NOI level. So again, very strong and healthy level of continued performance and opportunity. And Eric, we've just begun to look at this. And with the amount of properties that we've got throughout many markets, we think we've got good long-term opportunities with that pool.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Analyst [31]

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Geographically, where have you found these redevelopment opportunities thus far?

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Joseph D. Russell, Public Storage - President [32]

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So it's a little bit, I wouldn't say everywhere, but we're encouraged because some of the areas that make most sense is where we can easily just again add a facility to a property without touching existing inventory or existing buildings. So in many markets, say, with some of our legacy assets, we might have extra land and/or parking area that's pretty simple to expand and convert. And then in other areas that you take, one we just finished up in Milpitas up in the Silicon Valley, again same thing, but it's an infill location. Literally, we could never buy that property again because again there's no land available in that market. And if it were to become available, it would trade at something extreme. So we've got those pockets of opportunities throughout the portfolio. So again, we're encouraged by what we can continue do long term in many of our markets.

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Operator [33]

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Our next question comes from the line of Ian Gaule with SunTrust.

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Ian Christopher Gaule, SunTrust Robinson Humphrey, Inc., Research Division - Associate [34]

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I'm here with Ki Bin. First question, on your rent rolls, in 2Q it's typically flat to slightly positive. And then 2Q last year was a little bit negative. And this year, it kind of fell off. So I'm just curious, is that something that worries you guys? And could the rent increase program that was once a tailwind now become a headwind?

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H. Thomas Boyle, Public Storage - CFO [35]

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So thanks for the question. There is some seasonality in the difference between our move-in rates and our move-out rates. And if you go back several years, you will see that seasonality play out. I think if you go back, looking back longer term, I think there was a quarter back in 2015 where we rolled up in the difference between move-ins and move-outs. But for the most part, you do see some rent roll-down for some of the reasons you highlighted. As I mentioned earlier, we did see good traction on move-ins with our reduced rate in the month of June and the end of May. And that certainly contributed to the rent roll-down increase year-over-year. But as you point out, last year, we saw rent roll-down as well. So it's a component of our revenue, which is balanced with the revenue benefit from the stickiness of our existing tenant base and the existing tenant rate increases that we do send out.

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Ian Christopher Gaule, SunTrust Robinson Humphrey, Inc., Research Division - Associate [36]

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Okay. If I look at your end-of-period occupancy, which is down about 100 bps and then contract rent was about 1.7% in the quarter, that would imply a sub-1% same-store revenue in 3Q. Is that a fair way to think of it? Like are you going to be below 1% or right around there in the back half? I'm just curious if I'm missing something.

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

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So that is a metric that we've pointed to over past calls as a sign of -- at the last day of the quarter where contract rents are and where occupancy is, so at the most recent data points. And if you look at the end-of-period occupancy (inaudible) 110 basis points in the contract rent would point to something like a 0.6% revenue in the next quarter. At the same time, we've talked about the difference between end-of-period and average occupancy, given some of the changes that we've seen in our customer move-out patterns. And so looking at an occupancy average over the quarter of 0.6%, and using that number, would point to a little north of 1% is another data point. We talked about last quarter, those same metrics pointed to 1.5% to 1.8% rental income growth. And we came in at the quarter of 1.7%. So there's historically been some correlation between that. It's not a perfect number because (inaudible) during a quarter. But it's the most data points on rent and occupancy that we've disclosed.

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Operator [38]

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Our next question comes from the line of Jeremy Metz with BMO Capital.

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Robert Jeremy Metz, BMO Capital Markets Equity Research - Director & Analyst [39]

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Tom, you just touched on the existing customer rate increases a bit and you talked about looking at the importance of take rates. But in terms of looking at revenue growth, the 1.5%, can you talk about how much is being driven by the existing customer rate increases at this point? And then any changes in the amount of increase or frequency or number of customers getting those?

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H. Thomas Boyle, Public Storage - CFO [40]

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Yes, well, the increase in the rent roll-down was certainly a negative for rental rent growth through the quarter. So the existing tenant rate increases was a meaningful portion of the revenue growth. And there's been no change from a strategy standpoint to how we send those out. As I've talked about in the past, we do send out more of those through the summer months. Rates are highest, activity in terms of backfilling, any vacates is good during this time period. So it makes a lot of sense to send out those existing tenant rate increases around this time of year. And we've seen good receptivity to those. So no changes there. But that is driving our revenue growth at this point.

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Robert Jeremy Metz, BMO Capital Markets Equity Research - Director & Analyst [41]

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Okay. And then switching to supply, your predecessors talked a lot about the impact certificate of occupancy deals were having on development activity. As you look at the market today, are you still seeing a fair amount of activity out there? And is there any insight on the pricing trends relative to cap rates you can give just in terms of what you're seeing? I know you guys obviously don't do any of those, but just wondered how aggressive folks still are being on that front.

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Joseph D. Russell, Public Storage - President [42]

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Yes, Jeremy, I think that, thematically, it's the same set of issues that I talked about before, which is there is a healthy development community out there that continues to see good returns when they're able to develop these properties. And again, if they can build them to an 8% or 9% and they can flip them, full or unoccupied, at a rent level that would yield off of full occupancy or close to it of 5% or 6%, I mean, they're going to keep doing it. But we do engage and have -- we have actually bought here and there some C/O deals. I wouldn't tell you that those are necessarily becoming more stressed. But they're out there. I think some are going to continue to come into the market, but so it's too soon yet to tell if there's any kind of overall stress that's coming with again those properties that are coming into the market.

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Robert Jeremy Metz, BMO Capital Markets Equity Research - Director & Analyst [43]

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Okay, appreciate that. And just the last one for me, I was wondering if you could just comment on the advertising and selling costs. They were down again this quarter. I know some of that (inaudible) TV spend. But I would just think with supply and the demand pressures you've talked about here that maybe we'd see you try to ramp that maybe to create more demand into the funnel. So any color you can provide on that line?

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

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No, that's a good question. So advertising was down 5% in the quarter. But as you point out, that was driven by TV spend in the prior year. Our Internet spend was up in the quarter, up 33%. That's primarily Google. And that's a combination of that landscape remaining competitive and cost-per-click moving higher as well as our pushing on that to drive volume. And that's a channel of advertising that we like. It can be very targeted and trackable and down to the property level, though there's a lot of ability to use technology and our systems to drive demand on a very granular basis. And so we've been doing that more and more. In addition, we do have an advantage online, which is our brand. And so we drive a significant amount of volume on the Internet, even away from the paid search channel, focus there remains very strong coming through channels like local maps and (inaudible). So certainly, a focus there on driving customer volume. And this is the last quarter that you'll hear us talking about TV in the prior year. So we won't have that of a reduction in (inaudible). TV is something that we continue to monitor. TV is going through transition. But we're monitoring television and television-like advertising media as potentials to drive traffic to our stores as well. But no immediate plans there.

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Operator [45]

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(Operator Instructions) And our next question comes from the line of Ronald Kamdem with Morgan Stanley.

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Ronald Kamdem, Morgan Stanley, Research Division - Research Associate [46]

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Just a couple of quick ones. Just following up on that stimulating demand question, if you can just help us understand a little bit for that incremental dollar when you're deciding between Internet spend versus reducing rates versus increasing discounts. Just if you could provide a little bit more color on what goes into each bucket and how you decide how to allocate those dollars, that would be helpful.

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H. Thomas Boyle, Public Storage - CFO [47]

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Yes, sure. So that's a pretty dynamic judgment that's made on a very local basis. And so -- and that depends on both the traffic, the characteristics of that local market and its response, both in the past and in current, to those different tools that we have in our toolkit. So I think they all talk about that at a high level. But just say that, that's a property-by-property judgment that is made through our technology and our systems. And they're certainly integrated, i.e., moving the levers between discounting, lower asking rates, by channel pricing and advertising are all different tools we have in our toolkit.

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Ronald Kamdem, Morgan Stanley, Research Division - Research Associate [48]

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Got it, that's helpful. And then if I could go back to the revenue growth expectations, I think you mentioned on (inaudible) revenue growth for the rest of the year. Just trying to understand what the upside or downside risks could be for the end of the year. Is it through rents or is it through occupancy where there's more kind of leverage to either surprise on the upside or on the downside?

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H. Thomas Boyle, Public Storage - CFO [49]

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Well, again, I think that really is a market-by-market judgment. We'll have to see how the rest of the year plays out. But there's certainly markets where we view that there's occupancy potential to improve. And there's other markets where occupancy is actually really quite healthy. You look at a Los Angeles, where we have 95% occupancy, same with San Francisco or New York. Those are places where occupancy is really quite good. And so the opportunity is probably more on a rate basis once you get into those types of occupancies. But we -- not all our markets are at 95%. So there's occupancy potential as well.

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Ronald Kamdem, Morgan Stanley, Research Division - Research Associate [50]

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Got it. And the last one for me, I saw in the Q all the markets that, in terms of supply, are dealing with new supply. I was just wondering if there's any markets that are that early on, you're seeing that there's potential signs it could have supply issues in the future.

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

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That supply could come into those markets, Ronald?

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Ronald Kamdem, Morgan Stanley, Research Division - Research Associate [52]

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That's right.

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Joseph D. Russell, Public Storage - President [53]

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Yes, I mean, I would -- there's a couple that we've talked about in the last quarter or 2. Portland, Oregon, for instance, has a number of deliveries coming in to that market. And Nashville is another market that we're keeping a close eye on. Again, a lot of vibrancy from an overall MSA standpoint but development, too. So we're tracking the announced set of deliveries, particularly in those 2 markets, and keeping a close eye on them. Portland, in particular, hasn't seen a lot of development in several years. But for a number of reasons, there are a lot of properties that again are predicted to start. Now again, it goes back to that same thing that I talked about at the beginning of the call, which is even though some of these properties are being tracked, you really don't know clearly when they're going to start until they do, so -- but Portland is definitely one that we're keeping a close eye on.

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Operator [54]

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

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Hong Liang Zhang, JP Morgan Chase & Co, Research Division - Analyst [55]

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I was just curious if you've seen any change in behavior from your peers in the third-party management space now that it sounds like you've gotten a decent amount of positive reception from just various operators.

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

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No, I mean, we're early into this, Hong. So again, we are definitely looking at the business as something that's got a lot of vibrancy. The other platforms have done well in the business. And we'll see how the entire business changes now that we're involved in it as well. But I couldn't tell you directly if we've seen anything change directly in what we hear or know so far relative to what strategies or programs that are either running or changing, so couldn't tell you that yet.

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Hong Liang Zhang, JP Morgan Chase & Co, Research Division - Analyst [57]

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Got you. And I guess, a follow-up question for me. So I guess, hypothetically, if like an operator were to come to you, just from one of your peers to you for third-party management, how long would it take to onboard and rebrand them?

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Joseph D. Russell, Public Storage - President [58]

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I'm not really sure I follow the question.

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Hong Liang Zhang, JP Morgan Chase & Co, Research Division - Analyst [59]

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I guess, assuming if I were signed up with one of your competitors for third-party management right now and I would go -- and I want to switch to Public Storage, how long will it take for me to get onboard into your system to put the Public Storage (inaudible) all that kind of stuff.

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Joseph D. Russell, Public Storage - President [60]

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Okay. Well, that's going to depend situation-by-situation. From what we understand, over time, that has been some interplay, both within the public operators and even the private operators. There are a number of private third-party operators, too. So the timing of that depends on a lot of things. It depends on the owner's desire, how quickly they would want to make a change. Again, are there implications tied to changing personnel at the properties? Again, it could take anywhere from a couple of months to several.

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Operator [61]

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Our next question comes from the line of Juan Sanabria with Bank of America.

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [62]

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Just going back to the period-end data points as a leading indicator. Could you just give us a sense of where spot occupancy is today relative to last year on a same-store basis?

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

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Yes. So spot occupancy is similar from a trend standpoint to prior year today as it was at the end of the quarter. As I highlighted, occupancy improved through the quarter. So looking at the average occupancies through the quarter, you had April and May down circa 60, 70 basis points in June, finishing down roughly 30 basis points on an average basis. And we're seeing similar in July. So occupancy trends have continued to be more favorable as we've gone through 2018.

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [64]

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Okay. And then just on the expense side, is there any offsets from what looked to be tougher comps from the second half of last year that you have in the second half of '18, that should limit the pressures from again those tough comps from last year? Or how should we think about expense growth on a same-store basis?

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H. Thomas Boyle, Public Storage - CFO [65]

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Yes, I think, looking at this quarter and going back in time, the expense line item that is likely to have the most pressure as we go through the year is property taxes. And you saw in the quarter, property taxes up 5.5%. That's an area where both state and local governments are driving increases in assessments. I would expect that to continue as we go through the year here. So we disclosed in our Q that we'd expect that to continue. I think beyond that, I think the puts and takes, clearly focused on expense management and other areas. And so we would look at expense, in general, plus or minus 3% as we go. Clearly, in the third -- in the first quarter, we were a little above that. Second quarter, we were a little bit below that, but that's a fair number.

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Operator [66]

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

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Bennett Smedes Rose, Citigroup Inc, Research Division - Director and Analyst [67]

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I just want to ask you, you received a large cash payment from Shurgard. Does that change anything around sort of acquired dividend distributions? Or does that account as part of your taxable income or that's different from a REIT distribution perspective?

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H. Thomas Boyle, Public Storage - CFO [68]

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Thanks, Smedes. So we did receive a dividend. And in terms of rationale for that dividend and the drivers there, the cash reform that was passed at the end of last year required us in 2017 to recognize income associated with our international operations, like other multinational companies. That is at an advantaged rate. So from a taxable income standpoint, there's an advantage to that recognition. But we needed to recognize that in 2017. So this cash dividend is, in effect, the cash associated with that income. And we took our 49% share and our partner took the remainder.

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Bennett Smedes Rose, Citigroup Inc, Research Division - Director and Analyst [69]

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Okay. I just wanted to ask you, too, I don't know if you have this. But when you look at the percent of supply increases in the markets that you're in, I guess, across your portfolio, I mean, do you have a sense of what your own development or expansion activities are as a percent of that total supply coming into the market? I mean, is it significant? Or is it a relatively small piece of the whole?

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Joseph D. Russell, Public Storage - President [70]

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Yes, Smedes, that's going to vary market-to-market. But again, (inaudible) the amount (inaudible) in 2017. So (inaudible) internationally around $3.5 billion. Our own development program was about (inaudible) $300 million. This year, development activity is likely to be around $4 billion. Our development platform is going to be about $400 million. So again, not a significant percentage. And the thing that we will continue to take advantage of though is we may, in certain markets, be a higher percentage of the development activity. But more often than not, that's intentional and it's a good thing, meaning we've got one of these infill sites, whether it's an owned property that we're expanding or we've been able to get ahold of a great piece of property. But we continually look at the competitive activity that's going on in any particular submarket, the competition ratio, again population dynamics, all those kinds of things. And we put a lot of analysis into the way we make those decisions to literally launch, whether it's a new development or a redevelopment property.

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Operator [71]

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At this time, there are no further questions. I will now turn the conference over to Mr. Burke.

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Ryan C. Burke, Public Storage - VP of Investor Services [72]

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Thanks, Crystal, and thanks again to all of you for joining us today. And we look forward to connecting with you in this venue again next quarter. Have a good day.

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Operator [73]

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