Former Chairman & Chief Executive Officer, Public Storage
Ron Havner, Chairman, Public Storage: Summer 2020 REIT Leadership Series
Ron Havner, Chairman of Public Storage, joins the Schack Institute for the third week of the Summer 2020 REIT Leadership ...
About Ronald Jr.
In a 2020 interview, Havner described the self-storage industry as "recession resistant, not recession proof," noting that while demand had degraded due to reduced moving and economic activity, fundamental drivers such as death, divorce, and children moving continued to support the business. He stated that the REIT model was validated in 2009 as a vehicle for consolidating commercial real estate, and he predicted another wave of private-to-public real estate consolidation. Havner also discussed Public Storage’s capital position, saying the company was sitting on $700 million in cash with no significant debt maturities and was awaiting opportunities to acquire assets as financial institutions cleansed their balance sheets. In a separate 2020 appearance, Havner commented on market efficiency, citing Warren Buffett's adage that "in the short run the market's a voting machine, in the long run it's a weighing machine," and argued that over the long term, cash flows dictate stock prices. He noted that Public Storage’s stock had risen from $29 per share in 2002 to $200 per share. Regarding Federal Reserve policy, Havner said that the central bank’s commitment to holding interest rates near zero until 2022, combined with large stimulus plans, represented "a flattener of economic activity, not a stimulant." He also recalled that Public Storage was the first REIT to issue preferred equity, in 1991, as a way to inject leverage into the company given REITs' limited ability to retain cash.
Transcript (55 segments)
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Sam Chandan0:08
Hi folks, I'm Sam Chandan, the dean of the Schack Institute of Real Estate. Welcome back to our Summer 2020 Leadership Series. We were thrilled to kick this off just a couple of weeks ago, first with Sam Zell, last week with Mike Kirby, co-founder of Green Street Advisors. Please do stay with us throughout the summer. We have a truly spectacular lineup. Next week, Hamid Mogadam from Prologis, followed by Sherry Rexroad. If you don't know Sherry, you absolutely do not want to miss insights from BlackRock. Debbie Cafaro, the chairman and CEO of Entos, who's also in a really significant leadership role for the industry working with all of our colleagues at the Real Estate Roundtable and advocating for policies at the federal level that support better outcomes for all of us in real estate. Debbie will be followed by Happ Stein and then Leslie Hale, the president and CEO of RLJ Lodging Trust. Then it continues right on into September, John Kilroy and others joining us after Labor Day. So please do stay with us. The program is really fantastic. Robin and Adam in a moment will do the formal introductions, but let me just say how excited we are to have Ron Havner, chairman of Public Storage, here with us today. For those of you who may not be familiar with the finest details of Public Storage's background, the firm was founded in 1972. It's grown into the largest self-storage company in the world, 170 million square feet of space, which also makes it one of the world's largest landlords. It's listed on the S&P 500 as well as the Financial Times Global 500, a market cap of over 33 billion dollars. Really just an amazing story and a product type that I think, as we're going to hear, is going to play a critical role as we think about real estate in the world in a post-pandemic environment. So again, thanks for joining us. We'll come back a little bit later on in today's webinar for some Q&A, but for Ron's formal introduction, let me turn it over to Adam.
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Adam2:27
Thanks, Sam, thanks very much. That was a fabulous introduction of Ron. I'm not sure there's a formal introduction I need to add to it. I'll just add a couple of details for those who don't know Ron. I think he's one of the most well-known leaders in the REIT and real estate world. We're thrilled to have you with us today, Ron. It's a pleasure, and of course it's been a pleasure to know you over the years and have a chance to work on some interesting things together around Public Storage. In addition to Public Storage, I'll just mention that Ron is the chairman of the board of PS Business Parks, which is a company that shared a common origin in a certain way but is in the suburban office market, as well as the chairman of Shurgard, which is a European self-storage enterprise that's active in, I think, seven European countries with an enterprise value of about three and a half billion dollars. Ron also serves on the board of directors of AvalonBay, which is one of the market-leading multifamily REITs with a market cap of about 22 billion dollars. So Ron has tremendous exposure, tremendous expertise, tremendous experience not only in the self-storage sector but in the real estate world generally, and obviously has been a long-time supporter and fan and attendee at our NYU Annual Real Estate M&A Conference, which we really appreciate and have enjoyed tremendously over the years, and has been active in all kinds of other industry forums and activities, including NAREIT and so forth. Ron, so thanks again for being here. Obviously we talked about it in the pregame. You are doing your company super proud with your unbelievably fabulous branding. It's a fabulous facility behind you. I love the shirt. Maybe I know we could speak for 10 hours about Public Storage, about self-storage, about REITs and all kinds of stuff, but just tell us a little bit if you have a sec. Some people may have heard it in the pregame: what you're sitting in front of, virtually speaking, so to speak.
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Ron Havner4:40
Well, this is one of our properties down in Dallas, built in the last couple years. As we were discussing, this is what we call our fifth-generation product. If you go back to the beginning of self-storage, which started in '72, our typical property had 40 or 50,000 square feet. It was row upon row, all outdoor storage, no climate control, single story. We call them 'row rows,' and that was the typical property. That's what we built, and I would say even today, over half of our portfolio consists of those kinds of properties that we've either bought or developed ourselves. We evolved. We got a little more branding. Third generation, we actually went up to two stories, and then we figured out we could go to three stories and then four stories. So this is the fifth generation here. The more iconic branding, the building is the sign. It's orange. You can see the doors inside. You just drive by, you know exactly what's in there. It's much larger. This was probably about 150,000 square feet. We've built one in Jersey City that's 280,000 square feet, the equivalent of six or seven first-generation properties. So it's been an evolution in terms of how the product has evolved and gone to more retail locations, more visible locations, and less the backwaters of the industrial parks where some of them where we started out.
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Adam6:27
Well, it looks fabulous. Thanks for showing it to us virtually there. How... I mean, there's so much we get to talk about, but maybe we start off with something that's on everybody's mind obviously, which is the current pandemic and the current business environment. How has it impacted you, and has it been better or worse than expected in terms of impact and trajectory?
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Ron Havner6:51
Sure. Well, it's kind of interesting because in March when things really heated up, we had a big surge of demand. Colleges closed, people got to put their stuff into storage. You think they're going to be there for three or four months. So we had a big surge of demand in mid-March as colleges closed, which was unusual, and we were actually raising rents. Normally we don't get our college stuff until May. And then all of a sudden it just fell off. By the end of April, or into March and into April, we were cutting rents 20%, accelerating marketing, and demand just dropped because everyone was on lockdown. But inflows stopped, but so did outflows because no one was going in and getting their stuff and moving out. Now we were considered an essential business, so we were open in all of our locations across the country. We've remained open because we are an essential business. But as April comes through, May was better than April, and then we've continued to trend more stabilized at the end of June. So I don't know. You read a lot of stuff where they say we got a flat line in July versus June, or what's going to happen because other metrics indicate that things are kind of flatlining instead of continuing to improve. So we'll see what happens. But we reacted like most companies did. We closed our corporate office at the end of March. We had two call centers that we closed at the end of March. But the technology guys did a great job, stepped up, got the call center agents, the customer service agents, the corporate staff working from home. I don't want to say it was flawless, but it was pretty well executed both from the customer side as well as the employee side.
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Adam8:53
When you talk about these impacts, obviously we live in a world now of tales of radically different cities, various kinds of property types. Retail, enclosed malls struggling to collect rent, a complete shutdown of activity, stuff like that, casinos, hotels. When you talk about the impact, what is it? Is it occupancy, or is it rent collected, is it rent levels? What kind of metrics around that have you been looking at?
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Ron Havner9:30
Yeah, well we track move-ins and move-outs every day. But relative to those businesses, we basically had no impact. I don't want to say we're recession-proof, but we're pretty recession-resistant. Across the portfolio, we've got 1.6 million customers, so they're doing different things at different times. But I think as time marches on, and the guys are going to release second quarter earnings and talk about third quarter, you'll see the recession resilience of the business. We're diversified in terms of customers, in terms of geography, and that served us well during the Global Financial Crisis, and I think it's going to continue to serve us well during this. We had a drop in business in April, people locked down, but I think overall the business is fundamentally recession-resistant. We'll see some degradation in rents, occupancy I think will hold because we'll keep up the marketing. But if you look at the industry over the last couple years, the revenue growth has been declining, not so much for fundamentals of the business because there's been a lot of new supply. And there's been a lot of new supply because it's fundamentally a great business. Return on invested capital is very good, and so it's attracted a lot of capital. It's capitalism.
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Adam10:58
Has that capital been mostly flowing into REITs like yourself and other smaller REITs in the sector, mom and pops, are there private equity firms coming in, sovereign wealth funds? What's sort of the profile of the industry as a whole and how has that been changing?
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Ron Havner11:17
Well, 20 years ago, self-storage was not considered an institutional product, and so there wasn't a lot of institutional capital in it. It was Public Storage was still the largest, and there were three or four other REITs. But most of the industry is mom and pops. In the US, there's like 50,000 storage facilities. The public REITs have 10 or 11% market share, so 90% of the market is mom and pops. Most of the development that has come into the industry in the last four or five years are regional players or mom and pops. We're the only public company developing, but most of the volume has come from the regional operators, and they've got money either from some institutional capital, some sovereign wealth funds have come into it to back those regional players. But for the most part, it's the local guys.
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Adam12:21
And I mean, all those things you were describing about Gen 5 and all your digital strategies to deal with the pandemic, is it surprising to you in a way that the penetration for the giants and all the rest of the publicly traded sector is still only 11%? Feels like you would have a huge competitive advantage with the expertise and the sizzle in your product.
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Ron Havner12:46
We do, Adam. We operate at say 94, 95. Maybe a regional operator operates at 85 or 86. But the business is fundamentally good. I mean, most storage properties get somewhere between Class B apartment rents, 60-65% operating margin, no tenant improvements, no broker commissions, pretty low obsolescence. Right, think about a garage space. It's pretty hard for the thing to go obsolete. You sweep out the space and it's ready for the next customer. So it's fundamentally a great business. Now during this cycle, there's been in some markets too much supply too fast. So you've got markets like Denver, Austin with 20-25% increases in supply in a three-year period. That's going to create indigestion for some of those developers and some of the operators. But longer term, you've got the population flows there. I think longer term it'll be just fine. We're just in a typical real estate cycle, right? It's up, everyone says build, they build, everything goes down, everyone stops building, and then it starts over again. It's an old story. It repeats itself.
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Adam14:09
One thing that people have written about a little bit and I've noticed, and love to hear your thoughts about and how it's impacted the business, is digital online advertising and Google in particular. What impact they've had in terms of how you get customers and how much it costs, and how that impacts you as a competitor versus other kinds of competitors in the industry.
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Ron Havner14:34
Yeah. If you go back in time 25 years or so, our principal means of advertising were the Yellow Pages. I'm sure that for the students they're going, 'What are Yellow Pages?' But there used to be these books called Yellow Pages, and we were in fact like the 11th largest advertiser of Yellow Pages in the country. And then we started television, and so we migrated. We don't do Yellow Pages anymore. We do very little TV. And 10 or 11 years ago we started migrating to Google, and that is our principal source of marketing. And this year we'll spend 35-40 million dollars on Google advertising. As I noted earlier, everyone wants to use this to do business. And we've seen a migration from people calling in to desktop to mobile, a continuous movement in that direction. And that's just fostered Google becoming more and more the medium by which we advertise. We bid on 50-60,000 words across the country. You know, 'storage near me,' 'self storage Miami,' 'self storage Manhattan,' etc., etc. So it is our principal means of marketing the product. Now, as you can see by the property behind me, that's another way of marketing the product. Right, the branding. And we're lucky and fortuitous that we changed the name to Public Storage in 1975. The company actually started out as Private Storage, and no one came because they thought it was private. So we were very clever, we changed the name to Public Storage. Well, here we are almost 50 years later, and the name is synonymous with the product, just like Kleenex. Which is a huge plus because 40-45% of our customers come through us without paid search because they just punch in 'Public Storage.'
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Adam16:55
All right, fabulous. So in terms of going back to that digital thing and the advertising and paying for the AdWords and Google and so forth, is it fair to say on the one hand that it kind of erodes margins because it's a more expensive, you have to pay up in order to get to the pole position? Or does it really give you a big advantage over the moms and pops, and that maybe accounts for that discrepancy in occupancy or what have you, because the person who's doing a digital search online is going to find you almost every time?
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Ron Havner17:28
They will find us. But people's decisions to use storage is kind of a three-mile business decision. You are not going to drive way down to New Jersey to store your stuff, right? Even though the rent may be one-third of what it is in Manhattan, you're not going way down into New Jersey. In LA, you're not even going across town. You're going to go within, depending on the density, a one to three mile area to store your stuff. So the local guy, a local operator, as long as he's got product there, is going to have an opportunity to show up on Google and be known because people are going to go, 'Okay, how far do I have to drive? And then what is the rate? And then what is the space size? Do you have a 10x10 or a 5x5 available for me?' So I think if I had that operating information for the entire industry, because it's mom and pops, my guess is the public companies probably operate at five, maybe even 10% higher occupancy than the local folks, more cash flow per foot. But as I said earlier, it's fundamentally a great business, so the local guy is still doing just fine.
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Adam18:50
So when you're doing that ad word, you know exactly where everybody is. And if someone is five miles away from the nearest Public Storage, you're not paying for that search result. It doesn't even show up. No, if they punch in 'Public Storage,' right, right to our website. But if they're punching in 'storage near me' or whatever, 'storage near me,' then that's probably a big term, and then that depends on where we come up in the ranking. Yeah. We'll just switch gears. There's so much we could talk about, but I'll jump to talking about Europe for a second. You've had a long, long experience now with self-storage in Europe and European customers, European markets. What's your biggest takeaway in terms of differences and similarities generally? And we will then talk about during the pandemic as well.
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Ron Havner19:42
Yeah. You know, when we got into Europe in 2006, thanks to your help, when we got into Europe in 2006, we didn't know much about it. And people had said, 'Oh, Europeans are different. They don't have as much stuff as Americans. They're not as mobile. It's a very different business. It's not going to work.' And Shurgard, who we had acquired, had struggled to fill up their properties. And what we found is that the customer in Europe is very much like the customer in the US. In fact, the length of stay in Europe is a little better. The way they come to us, we do a lot of Google advertising in Europe. We do first month for a dollar in Europe. We do annual rent increases in Europe like we do here in the US. So it's very much a similar business to the US. Different densities though. In all of Western Europe, you maybe have 1,800 to 2,000 facilities. Most are in Great Britain. So if you think of all of Western Europe as having close to the US population, there's 2,000 facilities and there's 50,000 here. So the storage per capita is vastly different than it is here. The issue in Europe, or the challenge in Europe, is product awareness. 'What is it? What do you do inside of that storage unit?' Whereas in the US, it's pretty much a ubiquitous product. People know, 'Okay, that's a storage facility.' But the customer behavior is the same. In terms of the pandemic, I would say that it's been a tale of two cities. France, Belgium, and then the UK locked down, so like the US we saw a precipitous decline in move-in and move-out activity in those three countries in March, April, and May, and then a slow, as they opened up in May and June, a resumption to a more normal level of activity. We're also in Germany, Holland, Sweden, and Denmark, and those countries have actually had an uptick in demand, and you wouldn't even know there's a pandemic. They did not go into severe lockdown, and so they're just fine.
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Adam22:09
Do you see Europe converging to the US in terms of product density or acceptance? Or you think it's a long-term proposition or really not at all?
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Ron Havner22:19
Oh yeah, I think it's a very accepted product. As I said, the customer behavior is the same. I mean, you think about the density of housing in Paris or London, and how they're building in Berlin and some of these cities. The housing is smaller and the density is greater, so the need for this product is even more. It's just not available, and it's hard to get. We don't have that here in the US. But in Paris, we'll have the garage underneath, three levels down, and that will be the facility, and above that being an apartment building. So it's different. Different makes sense.
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Adam23:07
Yeah, and in terms of regulation, I mean, have you found it? I mean, this is either the myth or the reality that more regulation, more bureaucracy, more socialism, price controls, who knows what. Is that a truth or how have you found it doing business in Europe?
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Ron Havner23:28
Well, from a planning, development, zoning standpoint, most of that is on a local basis. So Berlin is different than Paris is different than London. And even within London, you've got the council, so you've got to deal with the councilman or the MP in terms of getting your property zoned. Probably the biggest difference between Europe and the US is in Europe, I think we have six unions. Most of our employees are unionized in Europe. They're not in the US, and those are all different unions. But we have good relationships with our unions. They've been unionized since the business started over there. So we haven't had problems with things like strikes. Once in a while we get a rogue road guy, but for the most part it's operated just fine. The other thing in Europe is our employees are salaried, whereas in the US our property people are by the hour. So that's another difference, which is part of why I think demand in the business is held up in Europe is because the government basically paid everyone whether they're working or not. So whereas in the US, you've had the restaurants closed, the hotels closed, and so you've had this huge move in unemployment here in the US which has not yet occurred in Europe.
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Adam24:56
Sort of on a related topic, for those of us involved in public company corporate governance and all that kind of thing, it's been a busy few years with corporate purpose and ESG and sustainability. Has that had a big impact on you here either at PSA or PSP or other companies that you're involved with? Have you really felt that there's kind of a paradigm shift or a responsibility shift? What's the impact been?
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Ron Havner25:30
Well, you know your firm's written about it a fair amount. And I think the importance, the power of ISS and Glass Lewis is something I don't think any CEO anticipated 10 years ago. It's just changed the landscape. And a large part of it is the level of ownership by what you would call passive investors. So if I go back 25 years ago, our main investors were people like Cohen & Steers, Morgan Stanley, maybe LaSalle, Wellington, Fidelity. We knew the people there, they knew us. And not that they're still not investors, but 27% of our stock is owned by three firms: State Street and BlackRock. And they're large institutions. They have processes. They're not as in sync with the management teams. There's boxes to get checked. And even dealing with someone like ISS, you get your report and you've got 48 hours to tell them there's mistakes. Some of them they correct, some of them they don't. And then you have the recommendations that come out on directors. And now boardrooms, directors are conscious of, 'Okay, what does ISS, what does Glass Lewis think? And how is that going to impact my reelection as a director?' Which simply didn't exist 25 years ago.
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Adam27:16
So let me follow up on that sort of in two different directions. The first one is, with the decline of active managers and dedicated investors like the ones you mentioned like Cohen & Steers, who's deeply involved with the REIT sector and real estate, is the market more efficient, less efficient? Do you feel like it's hard to know if the market is pricing things correctly, or are things still working in terms of pricing and capital allocation and that sort of...
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Ron Havner27:48
Well, what is it that Buffett says? In the short run the market's a voting machine, in the long run it's a weighing machine. And so at the end of the day over the long term, the cash flows of the business are going to dictate the stock price. In the short run you can have all sorts of different things in terms of ETFs coming in and out. You know, REITs are fake, REITs are out of favor today, but tomorrow they could be in favor. So the pendulum swings back and forth in terms of different cycles, different what's hot, what's not. But in the long run, it's about cash flow. It's all about the cash flow. And so in the long run our stock will reflect that. It has reflected it. I mean we went from $29 a share in 2002 to $200 a share, so it's because of cash flow.
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Adam28:51
Right, well it's been obviously an unbelievable success story which you've been a part of I guess since 1986, right? So you've had a big part in making that happen and it's great, it's just an unbelievable story. Going back the other, so the other vector for a second, you know ESG type of stuff and sustainability. Has that been a major shift for Public Storage over the last I don't know, five, ten years? What, how has that impacted you? The ESG metrics that are deployed by investors or other customers? You know, how much of a change has there been in how you think about your sustainability and your other social impact and constituencies, stakeholders, all that kind of thing?
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Ron Havner29:45
Well, I wouldn't say it's materially altered the way we do business. What it's altered is the fact that we've got to pull the information together and report it. In fact, this week ironically we'll come out with our first ESG report, which we've never done before. But all along in our business, all of our retail supplies, our boxes and all that, are all made from recycled paper. We do recycling. Keep in mind our business buildings are pretty low impact, right? So we're not big users of energy. The last four or five years we've replaced all the lighting with LED on the outside of the properties, we're working on the inside of the properties. We're introducing solar, those kinds of things that make business sense to do, where we increase our electric consumption, we save, and there's a payback on the investment. I wouldn't say we've done much stuff in terms of, okay, well, this is we need to get this box checked for the ESG report, so let's go do this, right, when it makes no economic sense. In terms of our workforce, we probably have one of the most diverse workforces of any real estate company. I don't have the stats off the top of my head, but we have 6,000 employees, which is a lot of employees for a typical real estate company. And it's a very diverse workforce, and it really reflects the neighborhoods where we have our properties. Okay, so if we have a predominantly Hispanic neighborhood, we probably have a Hispanic property manager. An Asian neighborhood, we'll probably have an Asian property manager, etc. So our workforce is a reflection in large part of where our properties are.
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Adam31:44
On the sustainability stuff, has that been driven by, you know, you said of course as good managers of a business you're always trying to do things in an efficient sort of a way, and you've pulled it together now in terms of reporting on it. And the reporting obviously is a function of market investor demand and requirements. But if you feel you've been moved along by those same investor demands and requirements, or not to a huge extent?
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Ron Havner32:10
Well, the investor feedback is, we love your company, we love your business, but we have to report on sustainability, we have to have this, and you guys, we really need you to put a report out because we know you're probably low impact, but we need a report. And then we've had some people go, you know, we can't invest because you don't have a report. So, no, we were already on... Give you an example, we rolled out a new property software system two years ago, and it's with the idea of basically going paperless. So by the end of this year, all the files that we have, the manual leases, don't play up in the cloud, all the leases will be in the cloud, and we won't have paper at our properties. Okay, so but that was an initiative done to save on photocopiers and paper. Made economic sense to do it. Now it happens to take a number of boxes for the ESG report.
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Adam33:16
Yeah, yeah, that makes perfect sense. Let me shift gears again if you don't mind, and you know it's partly pandemic related and partly not, which is to ask a question about how you see, you see so much data in terms of where people are coming and going and all that kind of thing. You know Sam Zell, who obviously we had a couple weeks ago, he was very bullish on a long-time thesis of his 24/7 cities where people want to be. Obviously, you know, if you walk around in Midtown Manhattan where our offices are and haven't been open for months now, you know it's a ghost town. Do you think there's gonna be a long-term shift to suburban offices and living, smaller city, Louisville, Nashville, all around the country, a real redistribution of economic activity away from the big cities that have been so severely impacted by the pandemic? You think it's a short-term phenomenon?
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Ron Havner34:29
Sam, Sam definitely is, you know, big city 24/7 activity. I think Mike Kirby had a contrasting view on that. But if you just look at the stats, okay, New York shrank last year, New York City shrank last year. It grew over the last decade because I pulled these up, over the last decade it's grown 0.3%. California grew 0.1% last year and has grown a big 5% over the last decade. Okay, now let's look at Texas, up 15%, Florida up 15%, Arizona up 15%, Carolinas double digits. So it's not a new trend, it's been going on last decade. It's not new at all. And if you think about cost of living, taxes, and the ability to digitize and work from home, I mean, I don't see it slowing down.
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Adam35:43
And on the work from home front, you think that's apparent, you know, a quantum shift effectively as a result of the pandemic? I mean, all these tech companies have announced work from home till the end of the year. Zuckerberg, we talked about, moving the workforce to work from home to some extent permanently. I think that'll be a thing.
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Ron Havner36:06
I think it will be as extreme as it is now? No, I suppose I hope it's not as extreme as it is now, but the irony is, and we were talking about this earlier, business is going on just fine working from home. Our corporate office: half is there for two weeks, then they're out at home for two weeks, then the other half comes in for two weeks. Our call centers, we had two call centers, those have been work from home, and I don't see us re-establishing call centers in the traditional way. We'll probably have some people in the call center, but it will be mostly work from home call center. And then you can take that on down the road of, okay, how can you introduce machine learning, artificial intelligence into the whole class process, etc. So I think there's a permanent change which was to a certain part already taking place. I mean, we'd already been experimenting with how can we do call center from home, what's the technology, what happens with the employees, and all that. The pandemic just said, 'Adam, you're working from home.' I noticed that. There's no choice, the office is closed, and so you're working from home. So now it's like, and for our call center agents, I'm sure there are pluses and minuses, but one of the pluses is when someone didn't show up, we would have to call someone else and have them drive into the office. You got your headset, your computer at home, I call you, 'Hey Adam, you want to work four hours today?' 'Sure.' Plug in and you're doing customer service or call center. And we've done that in some locations over in Europe, like in Paris, where the properties had to be closed, so they're working from home, they're collecting rent from home. So I think it's an acceleration of trends already taking place.
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Adam38:25
So one of the questions that we like to ask people as you know is, what's your advice for people starting out? And maybe stay home, wait till someone calls you? Maybe it's a little more complicated than that, but I'd like to ask you that. And I'd like to hear maybe first if you're willing to share with us, you know, you as I think I had it right that you started at Public Storage in 1986? Yes. So you must have been about three years old then. And how did you end up there and what was the journey from there till now in terms of presiding over the 170 million square feet? Probably how many square feet were there in 86?
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Ron Havner39:07
Oh, I think we had four or five hundred properties then, which if you take 50,000, maybe I don't know, 25 million, 30 million square feet. I got to Public Storage, I came out of college at UCLA and went to work at Arthur Andersen in the audit division, did that for seven years, and then I got a call that this company Public Storage is looking for financial people. So I went out there and I became the CFO of a division, and then the CFO of another division, and within three years or so I was basically the CFO of Public Storage. And you can look at the success story of Public Storage today and say, wow, that was a very strategic, insightful process. But you've been around long enough to remember the Tax Reform Act of 86. So which Public Storage in those days was raising money in limited partnerships, and the Tax Reform Act of 86 was basically the nuclear bomb to that business. So within about three years that business of syndicating real estate in limited partnerships was essentially dead. And we went from a corporate headquarters of 1,500 to 150 over the next couple of years, really. Big shutdown. No more fundraising, development, etc. And then focused on putting the 12 or 1,300 properties that we had built or acquired in limited partnerships together, culminating with the private company Public Storage merging into a company and the Public Storage you know today became a public company. So I was a CFO, and then in 1996 I left that to start PS Business Parks, took that public in 1998. In 2002, Wayne asked me, the founder chairman, asked me to come back to Public Storage to be the CEO. Back in 2002 to be the CEO, and then retired as a CEO at the end of 2018.
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Adam41:24
So is there a lesson there for people who are just coming out of UCLA or NYU today?
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Ron Havner41:32
I adversity and big change like this tends to galvanize teams and highlight the strengths and weaknesses of leadership. And it's also for younger people in their careers an opportunity to accelerate their careers, because you're probably going to get opportunities, people are going to, there's going to be job changes, there's going to be reassignments of workloads, and it's an opportunity to really distinguish yourself versus when things are going swimmingly along and it's business as usual. Right, business as usual takes five years to get that promotion. Business is not usual, you stepped up to the plate, okay, we're gonna give you this job, we're gonna give you that job. So I think to get a job is probably a little more challenging in today's environment, but it's also an opportunistic time to really accelerate one's career.
A
Adam42:39
That's encouraging to hear that. I think it is a tough time in terms of hiring. Is PSA pretty much in the same mode as it's been? I mean, it sounds like the business is going strong, so I assume hiring is continuing in the same way.
R
Ron Havner42:59
Yep. We hire about 100 people a week. We're still developing properties, we're still buying properties, we're still buying and developing properties in Europe. So we're still going through this. One of the hallmarks of Public Storage is its fortress balance sheet. So we have net debt is about one times EBITDA for the organization, so we've got a lot of dry powder, a lot of financial flexibility, and so we're going to continue to grow right through this. As I said, the product is, I believe in the product, the product is very recession resistant, it's a good business, good return on invested capital. So we're going to keep growing, we'll get through this disruption, but we're going to keep growing.
A
Adam43:48
One last question, I think Robin will then pick up and Sam, and we've got some audience questions on the chat here. But any predictions? U shape, V shape, square root shaped, L shaped? What's the recovery?
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Ron Havner44:04
Well, I think big picture, when the Federal Reserve says interest rates are going to stay near zero until 2022, when Europe and the US are looking at trillion dollar stimulus plans, I would say it's going to be a while. It's going to be a while. I mean, it's unprecedented for the Federal Reserve to say we're holding rates at zero for several years, and that's a flattener, that's a flattener of economic activity, not a stimulant. And if you look at the since the global financial crisis, right, we've been on a kind of deflationary path, and Europe has tried to get to their target one and a half, two percent inflation rate, the Federal Reserve has tried to get to the US two percent, Japan's tried to reflate for 20 years, and now we're in an even more deflationary environment. So I would say it's going to be a while. There will be different businesses that will react differently. Certainly, Amazon and Walmart are trying to hire 150,000 people, so they'll do fine. Who knows what happens with malls or retail, student housing, how do universities open up? Student housing, you would have thought great business last year, and then my goodness, they closed universities. So it'll be different businesses will thrive and grow in this environment and others will contract.
A
Adam45:55
Well, as I said, we have a bunch of questions from the audience. Sam, Robin, do you want to chime in and present them?
S
Sam Chandan46:03
Thanks Adam, and first let me thank Ron again for joining us. And also a shout out to the team at Monmouth Real Estate Investment Corporation and Michael Landy, the CEO over there, for sponsoring this series. Enrique has been a huge supporter of SHACK throughout the year, not just the REIT center but also our scholarship and need-based financial aid programs, which are as everyone might imagine more important now than ever. We've got a lot of questions that have come in, Ron. One relates to PSA's use of preferred equity. Folks are interested if you should elaborate a little bit on your strategy there.
R
Ron Havner46:49
Sure. Yeah, we were the first REIT to issue preferred equity, I think in 1991. And we did it because REITs have limited ability to retain cash. We have to distribute out 90, 95, essentially 100% of our taxable income. So out of the depreciation, which is the only way you can retain cash, you've got to fund your principal payments, your tenant improvements, your broker commissions, and your capex. So we saw that back in the early 90s and said, we need a way to inject leverage into the company that doesn't require principal payments, and preferred stock was it. So we've been issuing it. Our first preferred, this is hard to believe, our first preferred had a 10% coupon rate. We issued one earlier this year at 4.6%. So, you know, which is still relative to the 10-year bond expensive, but it's permanent capital. And we're not really buyers or sellers of real estate, so kind of if you think of a bank asset liability match-up, we're funding permanent assets with permanent capital. And the dividends in a REIT on the preferred are tax deductible.
S
Sam Chandan48:07
It's been a fascinating tour so far, thank you. Just looking at the questions, a lot of them relate to growth in the future. You've obviously been a very successful user of M&A and acquisitions in the past. Is the pandemic an opportunity at some point to grow more? How do you move the needle given your massive scale? Can't be just one-off acquisitions. Do you use this opportunity to do something larger?
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Ron Havner48:40
You know, Robin, we will if it makes sense. If the economics are right, we will do something large. I don't have to tell you, to do M&A you have to have two consenting adults. Sometimes we did have an exception in 2006, but I generally need two consenting adults. But I think if I had to forecast the next five or seven years, I think there will be opportunities for us to deploy meaningful capital for some of these regional developers that have gotten out a little over their skis in terms of too much product in Denver or Portland or Austin. I think those opportunities will surface. We're going to continue to build ourselves. And I think operationally, as you know, Adam and I were talking earlier, this is a typical real estate cycle: build, build, build, rents start to go negative, people stop building, and guess what, rents go up and then people will start building again. I think this is my third cycle, so it's a typical real estate cycle. So I think we'll continue to grow and we'll do M&A if it makes sense.
S
Sam Chandan50:02
Okay, so, if Ron, there's been a lot of talk about disruption in different industries. What's your view on some of the emerging more tech-focused players in storage, such as MakeSpace? You know, Scott.
R
Ron Havner50:20
That business, which I'll call portable storage, we tried that in the late 90s, early 2000s. And what we found is that the cost to go pick up the goods, bring the goods back, take the goods back and forth, and the kind of facilities that you had to have made it, I'll call it very economically challenging. Very economically challenged. Because the trade-off is, if you're in Manhattan, for me to take a truck and drive from a cheap warehouse in New Jersey into Manhattan, get a guy to pick it up and then take it back out there, is very expensive. Very expensive. And so we lost in that process about $200 million. And so I call it a kind of a $200 million tuition lesson on portable storage. I haven't, you know, these guys have gotten a lot of VC money and they've talked down self storage and, you know, we're going to put these guys out of business, etc. There is a customer for portable storage, it's people like the ones on this call that are hiring customers, want someone to hire to do it. But there's a lot of people that aren't at that single level that are happy to go get a U-Haul truck and move their stuff themselves and do it at much lower cost than a portable storage.
S
Sam Chandan51:52
If I can jump in with maybe one last question before Adam wraps us up. Some folks are asking if their favorite department store will be a Public Storage location in 2021. And when you're evaluating the viability of different obsolete or challenged retail spaces for potential reuse, what are the characteristics, criteria? How much does the specific location matter? How much do the characteristics of the adjacent retail matter?
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Ron Havner52:34
Yeah, well, Sam, our criteria for acquiring or developing a property is looking at the population density in the three-mile radius, what is the growth in the three-mile radius, what are the income levels, what's the competition level in a three-mile radius. So those are the factors that we would look at in terms of deciding do we want that location or not. In terms of converting a building, it really depends on how is the building configured. Can we effectively deck it and put mezzanine in and go two-story? A lot of retail has a tremendous amount of parking. What are you going to do with all that parking? Because we don't need it to run our business. Can you repurpose it for some other reason? So I think it really depends on the location and the building configuration in terms of converting retail to self storage.
S
Sam Chandan53:32
Great, thank you. We are almost out of time. Adam, do you want to wrap it up with the last question?
A
Adam53:39
Sure, although if there are more from the audience that's fine as well. I mean, as I said at the beginning, Ron, it's fabulous to have you with us today and it's been great to chat. I don't know if there's one last word of comment that you'd like to share with us. And maybe going back to the Great Financial Crisis, we touched, you talked about the current interest rate environment. Are there lessons from the Great Financial Crisis for real estate development and leasing and different property types that you've seen reinforced in the pandemic, or has the pandemic been a new and different pattern matching exercise?
R
Ron Havner54:21
Well, the pandemic certainly is different in the sense that in the Global Financial Crisis, Vegas was not closed, malls were not closed. There was a drop in hotel occupancies as people stopped traveling, but retail centers and gaming centers did not close. I mean, Nevada shut down. Those things have never happened before. And people have been locked down. So in terms of activity, even in the Global Financial Crisis, you still go out, get in your car, and go to a restaurant. So it's been different in that sense. As I said, I think the trends that have been happening in terms of migration of people, we touched on urban centers, suburban migration of people, the decline of office usage, the challenge for retail with things like Amazon and online, those trends have probably accelerated through the pandemic, but those trends were already there. And then things like cell tower and data centers, which have been growing, have accelerated and growing. Probably the newest entrant in the last decade is single-family housing, right? That business, innovation in American Homes, was basically created out of the GFC, and they seem to be thriving. They're talking about raising rental rates versus the apartment guys who are cutting rental rates. So that business is certainly new and is thriving in this environment. And then of course there's self storage, great business, thrives in every environment. It runs in every environment. People say, 'What's going to happen to the business? Why are they building? Apartments cheaper? No. Are they building a bigger? No. Okay. Do people have as much stuff? You get more stuff, right? All you gotta do is call Amazon and you get more stuff.
A
Adam56:33
Well, we're looking forward to seeing the next chapter for PSA and PSP and SureGuard and for you. And we're looking forward to adding to some New York hotel occupancy when we do this again in 2021, in real life.
R
Ron Havner56:51
Yes, yes. So I'm looking forward to it. The dinners for the New York conference are just fantastic. You guys always have a great group of panels. Thank you to the NYU, Sam and Scott and Robin, and always great to see you.