Public Storage (PSA) 2002 Q4 法說會逐字稿

Good morning. My name is Tiffany, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Public Storage fourth quarter and year-end 2002 investor conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press star, then the number two on your telephone keypad.

Thank you. Mr. Lenkin, you may begin your conference.

Thank you, Tiffany. Good morning. Thank you for joining us for the Public Storage investors conference call.

I'm Harvey Lenkin, president and chief operating officer of the company and with me are Ron Havner (ph), our chief executive officer, John Reyes, our chief financial officer, and Marv Lotz (ph), president of our real estate group.

I will start with the obligatory forward-looking statement warning. This conference call will contain forward-looking statements. Actual results could differ materially from those set forth in these forward-looking statements, as a result of various factors including general real estate investment risks, competition, risks associated with acquisition and development activities, general economic conditions, debt financing, environmental matters, general uninsured losses and seismic activities.

For a further description of risks and uncertainties, see the company's report filed with the Securities and Exchange Commission. We disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, changing conditions or other reasons. Our remarks will be brief to allow for maximum Q&A.

I will begin the call with a summary of results for the fourth quarter of 2002, and for the full year. Just a reminder, our press release is available at our website, www.publicstorage.com, and complete financial information will be available in our 10-K which will be filed shortly with the Securities and Exchange Commission.

Thanks again for joining us. John Reyes, Marv Lotz and I will cover current operations and some of the other key elements impacting the quarter and the year. Ron Havner will then give you our outlook for 2003.

We have been in business for over 30 years. It never ceases to amaze me how much we learn each year. The lessons of 2002 clearly indicate there is a price to pay for erroneous decisions in business. We are paying the price for 2002 and will continue to pay the price into 2003 to correct the errors made last year. The timing of our mistakes has made the price that much higher. For as we made mistakes, economic conditions caused an apparent reduction in overall demand for storage services which was also coupled with a high level of new openings of many storage facilities resulting from a high level of new starts in 2001.

The price was rental activity down, rental rates down, discounts up, occupancy down. Yesterday, we reported earnings for the fourth quarter and year end 2002. To summarize, earnings per share were down 47% for the quarter and 21% for the year. On an FSO basis, per share declines were 20% for the quarter and 7% for the year. The principal difference between the two being higher depreciation, year over year attributable to acquisitions.

Our results were primarily impacted by four factors. One, a decline in same-store operating income. Two, operating losses and shut down expenses associated with our containerized storage business. Three, nominal yields on development properties and fill up, and continued dilution from build out of our development pipeline. Four, offset in part by income from the acquisition of a tenant reinsurance business and additional real estate investments during 2001 and 2002.

The loss in occupancy that started and was disclosed early in 2002 was attribute to a 2001 flawed marketing strategy, aggressive rate increases and a reduction in discounts granted. The strategy appeared to work in the first three quarters of 2001. However, during the fourth quarter of 2001 and through February of 2002, there was a rapid decline in occupancy levels. This reduction in occupancy level coincided with a reduction in call volume to our national telephone reservation center, seemingly attributable to the absence of significant promotional activity, as well as to the deteriorating general economic conditions.

In mid March 2002 in order to counter anemic demand and rental activity, we lowered rental rates and mounted an aggressive marketing and promotional campaign using television as the primary media. The campaign worked as planned. However, we terminated it prematurely, believing the usual spring and summer upturn in seasonal demand would preclude the need for media expense and discounts to new customers. We were wrong. Rental activities slowed and the negative spread of occupancy in our same-store pool widened once again to unacceptable levels.

As reported in November 2002, we reinstated a marketing and promotional program in mid August using television as the primary media to enhance moving activity and improve occupancy levels. This program was backed by promotional discounts through our phone center. The program had a positive impact upon moving activity for the balance of 2002. We shrank the negative spread in occupancy year over year from a peak of 6% at July 31, 2002, to 1.2% at year end. The program continues as we speak.

The cost of restoring our customer base has been high. With respect to our same-store pool of mini storage facilities in the fourth quarter of 2002, promotional discounts given to new tenants amounted to almost $8 million. Television media costs approximated 4.5 million dollars. Direct property and cost of managing facilities increased by 1.8 million dollars, due to increased incentives to field employees.

We've learned a lot from this experience abut our customer, about various marketing channels and about operational execution. Our hope is to build from this knowledge and enhance our competitive position in the industry. The positive is we have been successful in rebuilding our customer base and we've demonstrated that we have the tools to do that. Our current programs, which Ron will touch on later, also seem to be bearing fruit.

With that, I turn it over to John Reyes, our chief financial officer.

Thank you, Harvey.

Clearly a 20% reduction in FSO per share for the fourth quarter of 2002 versus 2001 and a 7% decrease for the full fiscal year is not something that pleases us. For the fourth quarter, the decrease of 15 cents per share can be distilled into four factors as Harvey just noted. The first item was the poor performance of our same-store facilities which resulted in a 12 cent reduction. The second element was charges with respect to our pick up and delivery operations, which resulted in four cents per share reduction. The third element was the increase of development dilution over the prior year of two cents. And finally, the acquisition of the tenant insurance business which actually had a positive impact on our FSO with a positive two cents per share. Harvey's already discussed our same-store operations so I won't go into that any further.

However, with respect to our pickup and delivery operations, during 2002, we evaluated the number of facilities in various markets. Based upon this evaluation, we decided to close 22 facilities. 12 were previously announced as part of our third quarter earnings release. The shut down costs of 3.8 million dollar were booked in the fourth quarter. This was in addition to 4.8 million of such charges reported in the third quarter, bringing in the total for all of 2002 to 8.6 million dollars of shut down costs. These costs represent two items. The first item was an asset impairment charge which effectively we were writing off the related equipment and containers of the facilities being closed and the second item was an estimate of the facility lease obligation that would be incurred after the facilities had in fact been closed. The future cash out with respect to the 8.6 million dollars of charges is estimated to be 2.4 million, representing the future lease obligations. The remaining 6.2 million relates to the write off of equipment and containers.

As of December 31, 12 of the 22 planned closures had in fact taken place. The remaining ten properties are expected to be closed by September of 2003. We expect that the remaining ten properties will continue to generate operating losses in 2003 until they're ultimately closed. These expected losses were not recorded as part of the shut down charges in 2002. In addition, a charge of 750,000 dollars was booked in the fourth quarter relating to the planned disposition of equipment that will no longer be needed. The equipment belongs to the facilities that are not those facilities being closed. Accordingly the $750,000 charge is included in our cost of operations in our containerized stores on our income statement and are not included as part of the discontinued operations. Going forward, we believe that the remaining operational facilities should have a minimal impact on our overall operating results. On the development side, over the past three years we have developed and opened for operation 4 self-storage facilities with an aggregate cost of $242 million, representing 2.9 million square feet.

In addition, over that same time period, we developed and opened 17 combination facilities with an aggregate cost of $450 million, representing 8.9 million square feet. All of the properties were in some state of fill up during 2002. But the dilution to our earnings from the fill up of these properties was approximately four cents per share in the fourth quarter of 2002 versus two cents per share for the same period in 2001. The dilution is created by the negative spread between our cost of capital, and the property's net operating income. We believe that the four cents per share dilution in the fourth quarter of 2004 may be the high water mark for two reasons. First reason is our development activity has slowed, resulting in fewer new store openings over at least the next two years. The second reason is the existing fillup projects will continue to fill up, generating higher levels of operating income.

In 2003 we were estimating we would open 19 new self-storage facilities at an aggregate cost of 141 million dollars. This will represent 1.3 million square feet. In the capital requirement, we're estimating that we'll spend approximately 110 million dollars in 2003 in our development activities, which essentially builds out our existing pipeline. With respect to our tenant insurance business, at the end of 2001, we acquired PS insurance company from the Hughes family. This company reinsures policies against losses to good storage by our tenants in our facilities. The acquisition cost were approximately 24.5 million dollars, after tax net income was approximately 2.9 million dollars for the fourth quarter, and approximately 10.5 million dollars for the full fiscal year. This represents a first-year return on our investment of approximately 43%.

Other items I'd like to touch upon on October 7th we have redeemed our J preferred stock which is approximately 150 million dollars. This redemption was financed with the proceeds from the issuance of our 7.5% series V which was issued on September 30th. At the end of this month, March of 2003, we will be redeeming our 9.2% series B preferred stock which is about 57.5 million dollars. Our balance sheet remains strong and flexible. Our attitude towards the kind of leverage we want on the balance sheet remains unchanged. Preferred stock dividends is approximately three times for all of fiscal 2002. Our FSO pay out rash ratio is 66. It's approximately 71% on an SSD basis.

I will turn the call over to Marvin Lotz, head of the real estate group.

Thanks, John.

As 2002 drew to a close, we had completed the self-storage facilities in eight states of net rentable space at a cost of $107 million. We had also acquired nine facilities from unaffiliated owners made up of 502,000 net rentable space at a cost of $30 million. During 2003, we have 38 projects in construction and are expected to begin construction generally by June 2003. These include 22 new developments, and 16 expansions to existing facilities. These 38 projects will be fully funded by the company. And have total estimated costs of land and building of approximately $200 million of which 88 million dollars has already been expended. All developments and expansions are subject to significant contingencies. 17 of the new developments are located on the major cities with a balance in California and Hawaii.

With respect to acquisitions, we have not acquired any self-storage facilities thus far in 2003. The environment is difficult. However, we are going to try to take advantage of this current favorable environment for sellers and seek to dispose of some noncore assets. An agent has been contained to represent us in this initial attempt to reposition a small position of the portfolio. If we're successful, we will have sold four facilities in Greensboro, North Carolina, and four in Knoxville, Tennessee, exiting both of these markets. Also, successful in the endeavor we may consider others.

I'll turn the balance of the presentation over to Ron Havner, chief executive officer.

Thank you, Marv.

While our operating environment is certainly challenging, our performance was not principally due to industry conditions. But in fact our own missteps. Just two short years ago, we concluded a year in which our same-store pool of properties enjoyed an average occupancy well in excess of 90%, and a decade in which our same-store pool enjoyed an average per annum in excess of 6%. Today, our competitors while not suffering the after-effects of our missteps are suffering nonetheless.

In general, the industry has seen an influx of new development over the past couple of years, including new supply from us, which has led to oversupply problems in certain markets. In general, occupancies are down rental rates are flat to down and developments including ours are taking longer to fill up. The reasons for this are many, including a recession, a tremendous boom in single-family housing, and a general lack of movement within the economy. People are staying put. In addition, our competitors are suffering from higher payroll and other operating costs such as snow removal. We have heard of a number of operators terminating new developments because of recent disappointing results and perceived market turbulence. In the long run though, this will serve us well and allow existing supply to get absorbed.

Looking ahead, we expect to show negative results versus the prior year period through at least the first quarter of 2003. This will be due to continued significant discounting, including $1 for first month promotional specials and higher advertising costs. Offset in part by slightly higher occupancies. In addition, we will continue to experience higher operating costs including snow removal, payroll, marketing property taxes and information systems, both during first quarter and for the year 2003. While we continue to experiment with various marketing channels, it appears that TV advertising with promotional discounts produces the greatest return on investment. We continue to analyze the results from all programming.

But let me give you some highlights to date. We've rented more space in first two months of this year than in any January, February period in our history. We've also had positive net absorption also never before seen in a January, February period. Our occupancy is almost 2% ahead of last year. Posted rates are now higher than the same period last year. These positives were offset with higher media and a greater level of discounts. Our operating results for Q1, 2003, will be lower than Q1, 2002. Included in our press release is analyzed revenue per available square foot. This is analogous to RevPAR in the hotel industry.

This is a key number we are tracking and takes into consideration discount, occupancies and rental rates. For the year, we averaged $9.54 a foot for our same-store pool, down 3.1%. Currently, the trend is down. I'm not going to predict our results for the year. But if we are successful, we should see improving results quarter to quarter as the year progresses. The acquisition environment is tough. This is due to today's incredibly low interest rate, the tremendous volume of private and institutional capital chasing real estate and the perceived stability of self-storage cash flows. Accordingly we anticipate selling some non-core self-storage assets during the year.

We have currently $20 million of properties on the market, with possibly another $20 million before the end of the year. With respect to development, we expect to spend about $110 million finishing our existing developments and expansions conversions. Going forward, we are targeting a 50 to 75 million dollars annual ongoing development run rate. There may be opportunities to acquire additional affiliated limited partnership interests. We have approximately $200 million of Public Storage partnerships which could potential be acquired over the next two years.

During 2002, we closed or announced plans to close 22 pickup service facilities. Our strategy is to concentrate on the remaining 33 facilities in certain select markets. We have dramatically increased prices for our transportation and power loading to improve profitably and segment this product away from our self storage product. Our goal is to have this business be able to operate on a stand-alone basis in one form or another by the end of the year. Finally, we're implementing a new property level software package called web champ, which is about 80% rolled out. This system will give us new tools with respect to understanding our customers, accelerate our ability to change prices, based on local market conditions, and improve the speed of information flow throughout our organization.

We have already begun to receive benefits from this system which has been in the development and testing phase for about the past two years. For those of you who have listened to the conference calls of PS business parks, you know we tell it the way we see it. So let me say this about the self-storage business and Public Storage in particular. The economics of this business are phenomenal and may be the best in the real estate industry. Public Storage has an incredible platform and we are very focused on optimizing its value.

With that, operator, let's open it up for questions.

At this time, I would like to remind everyone in order to ask a question, please press star and then the number one on your telephone keypad. We'll pause for a moment to compile the Q&A roster.

Our first question comes from Jim Sullivan (ph) of Green Street Advisers.

Yes. A couple of questions. Promotional discounts, can you just walk me through the form that those are typically taking and can you help me with the accounting? For example, when you show $20 million of promotional discount for full year '02, what does that mean? How is that calculated?

We'll answer the question in two parts, Jim with respect to the form it takes, it is primarily thus far been a promotional wherein the customer pays $1 for his first month's rent. Instead of the full posted rate. That is the form of the discount that we have been using. John will discuss the accounting treatment.

Jim, as a for example, that the customers rented $100 a month and he's moving in the first month, he pays $1. The discount is $99, so we would have collected $100 if he was paying full price. We only collected $1 because of the discount. Therefore, $99 is the discount, and that's how we arrived at the $20 million for full fiscal year.

Then the 100 bucks shows up in the base rental income?

It shows up as a reduction to the base income as presented on the income statement. The discount is taken in the month that the tenant moves in.

Okay.

So it's nothing on our balance sheet. You know, it's 100% taken into the income statement.

I'm kind of perplexed when I look at the fourth quarter results for your public peers, granted different portfolios. Geographically different portfolios from a quality standpoint. But your public competitors seem do okay in the fourth quarter versus you guys not doing okay. Can you help me understand maybe more broadly what's happening in your markets that might be different than what's happening in your competitor's markets?

Jim, this is Harvey.

I'm not willing no comment about my competitors, but I'll comment about and what we see in our markets. In our marketers, we have seen a continuation of reduction in incoming calls. And this might very well be some measure of the demand at a given moment in time. It gets a little muddy because now we have comparative moments in time where we are advertising versus moments in time when we're not. But nonetheless, call volume is clearly down. It will -- the amount of rental activity that we have been able to generate has been moving up as indicated by Ron's comments with respect to January and February. And with respect to the rest of the marketplace, our public competitors are really not our competitors. They are just two competitors. Our competitors are primarily the independent owner/operators throughout the country. From what we understand from examining what's going on in the marketplace, there's a little bit of suffering going on elsewhere as well as Public Storage. Our suffering has been exacerbated by the hole that we're pulling ourselves out of on a comparative year over year. That may result in the differences between the results that you have seen.

Jim, this is Ron. You know, we kind of made a decision, Harvey touched on it in his comments, that the Gap in year over year occupancy peaked in July of 2002 at about 600 basis points. And we made a decision to close that Gap. And we could -- I guess we could do it over the next couple of years, but we made the decision to close it. It's in the media and the promotional discounts to close the gap as rapidly as possible. By the end of the year, we've done a pretty good job of narrowing it from 600 basis points down to 120 and we are now in fact ahead on a comparative period where we were in 2002. And that's really what we wanted to do is get ourselves ahead of the curve on an occupancy basis going into '03. And, you know, you could see et right there in fourth quarter results, it's media and promotional discounts.

Okay. Thanks. A question on pickup and delivery. This thing has been a drag on earnings for five years. It has been a distraction to management disproportionate to the size of the business. Why not get out of this thing?

Well, we certainly cauterized the problem -- or the issue. We think the business can be profitable. As I mentioned we've repriced the product. We've really refined our operations, streamlined the number of markets that we're in. And if it's a profitable business, you know, we like to take advantage of it this year. You know, we've spent a lot of time trying to re-engineer it and we'll see what happens. John touched on the fact that going forward we don't expect it to have a material impact on our operations. So, you know, our hope is it does make money. But whatever -- it's not going to be material.

Okay. Final question, cap rates. You're finally getting into the disposition business. We saw a portfolio deal recently announced looked to us that it has an 8.5 cap attached to it. What are the cap rates for high-quality portfolios of some self-storage properties and do you think that the pricing is high relative to the underlying fundamentals which as you just described are fairly weak?

The pricing that we've seen in the open market of which --at least on the buy side, we have not been willing to participate seems to result from the low level of interest rates that private investors are able to access today. And the cap rates as we all know are in the eye of the beholder at a given moment in time. The cap rates announced on the transaction a couple days ago seem to be somewhat in line with the marketplace. What price we receive for the properties we have indicated that are up for sale right now will be dictated by the beauty of the cash flow in the eyes of the buyer. And we're -- we're new to this, so we hesitate to say where that might be. But cap rates have come down from a historic levels, and we'll wait and see what transpires in the transaction that we participate in.

Thank you.

Thank you.

Our next question comes from Ross Nussbaum (ph) of Salomon Smith Barney.

Hi, good afternoon. A couple of questions. First, can you discuss where Public Storage's rental rates are in general relative to your local competition?

We believe our facilities are priced at the market, and competitive with our competitors in each local market. That's a very big, broad statement to make sense we have over 80 markets in which we operate. There are some properties that are in all probability higher than each nearest competitor and some that might very well be lower. But on balance I suspect we are priced at the market or slightly above.

Is that a statement you could have made three, six, nine months ago or is that a recent phenomena?

Three months ago, our prices were in excess of the market and therein lies the problem that resulted at the end of the year 2001 and going on into 2002. We materially -- we significantly adjusted those posted rates. If you look in the press release there's an indication of what our posted annual rent per square foot was in 2001 versus 2002. You will see that the rates have come down from one period to the next, approximately 12%.

Are you noticing a different retention rate or length of lease with customers who are being offered the dollar first month rent? Are they staying longer?

There is a small difference between a customer who comes in under a promotional activity versus one who does not. They tend to stay slightly less period of time. The initial impact is in the first month or two of their tenancy, and as we go beyond the third, fourth and fifth months, they act pretty much the same as someone who came in under full rates.

Ross, I would add though that that is a key ingredient, and we look at that very carefully in terms of our marketing program. Because obviously if you're bringing in a customer for $1 and he only stays a month it doesn't do a lot for you. So it's something we analyze very carefully.

Well, I guess what I'm getting at is how real are the occupancy gains in terms of at some point you're going to have to slow down the promotional activity and the question becomes, you know, what then happens to occupancy? Is the occupancy being kind of falsely raised right now because of the promotions and will it fall right back once you start slowing the promotions?

The cash flows are not being falsely raised. The cash flows are real, and as John has indicated, the occupancy levels as they continue to rise will reach a point where we have to modify our marketing programs and we have not reached that point. To deal with that yet.

Is there a certain portfolio occupancy level where you step back and say, okay, it's time to start cooling things down and start looking at maximizing rental rates rather than occupancy?

We're seeking to maximize our revenue stream, not the occupancy and not the rental rates, but the revenue stream itself. And that will be done on a market by market basis when appropriate.

Okay. Ron, a question now that you're in the door, got your feet wet again, any fundamental changes that you think need to be made to the company operations going forward? Clearly a number of missteps have been made over the past, you know, 18 months.

You know, Ross, I don't have anything to elaborate here on major changes. You've seen what we're doing and I think the year will unfold and we've tried to outline for you a number of things that we're trying to do here. Really that's ail I have to say about it in terms of changes.

Okay. So you don't have any fundamental plan to make any wide sweeping changes at this point?

I think I answered your question the best I can, Ross.

Okay. Thank you.

Our next question comes from Jim Hoffman (ph) of Wellington Management Company.

Hi. Can you elaborate on your dividend policy? Historically you guys have tried to minimize the dividend pay out.

Sure, Jim this is Harvey. Our dividend policy in the past has been to not necessarily to minimize dividend pay out, but to maximize cash retention, and the two things are of course related to one another. Our dividend level at $1.80 per share per year is at a level which we believe is sustainable, and certainly supportable in the data that John indicated in his remarks with our FFO pay out ratio being in the 66% range I believe is what he said. And our FAD pay out area in the mid 70s is our best guess for the moment. Wedge our dividends is just fine where it is.

No objective to maximize cash at the expense of dividend stability?

That is -- that is correct.

Good. Thanks.

Your next question comes from Greg White (ph) of Morgan Stanley.

Hi. Good afternoon, guys. Just a couple of questions. I recognized that TV advertising costs are significantly higher in December than they are in January. But is there any way for you to give us some indication of the sort of per poundage effectiveness of the advertising and in the promotions? I mean you reported two months worth of results for the early part of this year, and you obviously got some occupancy traction. I'm sort of curious, you know, are you having to pay more to get that occupancy gain or, you know, it is similarly as effective as it was last year?

Well, Greg, this is Ron. I'll let Harvey elaborate as well. You know, it will -- when we went from a 600 basis point gap in year over year occupancy, down to 100 basis points by year end, you know, certainly the media and the discounting were working because we were basically net-net filling up the properties. Then you look at January and February which historically have been always net move out months in this business, and we're up 300 basis points -- or excuse me 30 basis points in occupancy from 84.4% to 84.7. On a comparative basis last year, we went from 85.4 to 83.2. So you have a 2.5 swing in occupancy January, February, '03 do January, February '02. So assuming the tenants stay and all that, we're hitting the rental fees in reasonably well occupied. And I would they, you know, based on everything we've analyzed so far, the media and the discounting is working.

There's another element here as well. We were buying larger amount of television in each market we were using it earlier in this game than we are today. They speak of that in terms of rating points and the amount of ratings points necessary to get our message across and achieve our results is at at a lower level today than it was three or four months ago.

Okay. In terms of the developments, if you think about the fundamentals in the individual markets where the developments are located right now, are there any that are causing you real heart burn? I mean, give us some sense of what your expectations are for in terms of privilege?

I wouldn't say there's any market more than others that are giving us more in the way of heart burn. We have heart burn with all of the markets over the last 12 months and we're trying to do away with it. Our newly developed properties have been impacted by the same activities that have negatively impacted our same-store pool. We believe that the property that we have developed are in a position to make significant occupancy gains from the -- a very low level they are right now, and add to our cash flows as the year unfolds. Because they too are benefiting probably more so on the fill up basis than are our mature properties. But there's no one particular market giving us any more heart burn. They're all giving us heartburn Greg.

Then quickly on the stock. I think John suggested that they were obviously still some more charges related to that business in the balance of this year. Can you A, give us some indication, should we expect that the order of magnitude to be similar on a sort of per facility shut down? And secondly, thinking about --I think it was Ron's comments that the quarterly results should get progressively better from this point on. When might we see the balance of those charges get taken?

Look, Greg, we have ten facilities at the end of the year that still need to be shut down. They were planning to be shut down, it will take a couple of mops because we have to move out the tenant's goods, and that's, you know, you take them back to the tenant or in some instances we're trying to move them into a self-storm facility. It's going to take us several months to do that. So the losses between -- preen that time frame and the end of the -- the beginning of this year till we ultimately shut them down aren't the losses that we will still experience. After we shut them down, there's no more losses. The lease is -- the loss on the lease has already been accrued for. So it's really just the operations that happen between the beginning of this year till when we finally shut down. We believe that with respect with these tenant facilities it will be very small in terms of how much additional loss that you would see on the facilities.

Okay. All right. That's helpful.

Our next question comes from Paul (inaudible) of Mercury Partners.

Thanks a lot. Could you talk about a level of bad debt in the quarter?

Paul, could you please speak up a little louder. We can't hear you.

Can you hear me?

That's better. Thank you.

Could you talk about the level of bad debt in the quarter and also the trends over the last two years?

Certainly. The current bad debt we referred to as delinquent tenant and the level of delinquent tenants is at levels which are historic for our business at the area of a given month, we'll have somewhere around 4.7, 4.8, 5% of the tenant base being delinquents at this moment in time with the bulk of that delinquency being in the 30-day category. And subsequently collected in the following month. The level of bad debt has come down somewhat from a prior year when we were embarked upon this broad marketing strategy that I mentioned earlier in my commentary, and that's all been gone by the boards.

Okay. And with respect to the incentives, how do they vary from property to property and market to market? If at all, or is it kind of a national pricing strategy?

Paul, this is Ron. It varies market to -- market by market. It depends on what we see in terms of the demand trends on the properties. It depends on the size of the market and the cost of the media campaign relative to the -- tour presence in the market. Certainly a market like Omaha, Nebraska where we have property we can't go on TV. LA, where we have a couple hundred properties, TV is an economically viable option in terms of driving in occupancy.

Okay. Thanks a lot.

Our next question comes from Brian Legg (ph) of Merrill Lynch.

Hi, guys. I wanted to continue to focus on discontinues and advertising. It is safe to say that they're going to continue to ramp up for at least the middle of the year and maybe peak as you get into your seasonally stronger months? Just lock at the month number from January to February you're already right at where you spent for the entire fourth quarter on the discount, but the television costs seem to be about half the pace that you spent in the fourth quarter. Can you just give us some feel for how quickly these things ramp up and if you think they will peak in the near term?

I couldn't tell you how quickly it will ramp up, but remember the more successful we are in renting storage space, the greater the amount of discounts granted because that's solely a function of the number of tenants who move in and our need for our decision to implement television advertising or maintain it and at what levels it's to be maintained will be decisions that are made each and every month as we analyze the market and decide whether or not the investment return that we would anticipate from the television marketing using a discount program associated with it provides us with sufficient return or not. So it's very difficult to anticipate when this will peak or if it will peak or anything of that nature.

Okay. Just looking historically when your occupancy rate was in the low 90% range, you said that discounts averaged about $20 million per year. Well, obviously your run rate is significantly north of that. Do you expect once you get an occupancy back to a level which you're comfortable with, maybe the high 80s that the run rate of discounts would probably be more in the order of 20 million per year?

I think that's a reasonable conclusion. We'll wait and see if in fact it turns out to be -- to be so.

Okay.

Brian, that's going to be a function also kind of overall market demand and market supply, because we can't operate in a vacuum.

Yeah.

Okay. And your share repurchase activity I believe you have 3.5 million shares left to repurchase from your old authorization. You acquired a lot of shares under 28 dollars, your stocks is not quite there right now. But any thoughts on re-accelerating your share repurchase activity now that you have had some sell-off?

No thoughts to disclose at this moment in time.

Okay. John, your cap-ex, what's the cap-ex per square foot running given that you're 71% FAD ratio?

It's about 30 cents a square foot.

Is that increasing in this environment? Do you need to spend more on cap-ex or is that just sort of --doesn't matter what the environment is like?

Brian, cap-ex has been fairly consistent at that level for many, many years. I don't expect it to be significantly different from that going forward.

Remember, Brian, we do not have any leasing commissions or TIs, other forms of real estate do have. So it's fairly consistent.

Right. The question I guess is do the beautification of a property become a competitive advantage and you can spend more on cap-ex sort of buying occupancy like some other sectors do? So you expect some of that going forward?

That's a continual activity inside of the organization, taking well located properties and making them more competitive in the marketplace. And -- but that's not part of our normal cap-ex expenditures.

Brian, you're on a good point and we are undertaking or evaluating right now five or six properties for I guess repackaging or kind of a face-lift that are extremely well located. But older properties and looking to, as you said repackage them to make them look brand new.

Okay. Can you expand upon your comments about supply in your market? And then also maybe touch on demand, whether you think that given that disposable incomes are certainly decreasing, whether the $100 price tag for the average storage unit is really going to make it difficult to ever get traction?

Well, are you looking for a macroeconomic variable to -- by which to link the demand for self-storage? I mean, the comments I made on the overall demand of self-storage I think there's a number of factors bearing on the demand on self-storage. Part of it being the economy, the uptick in housing and as well as the general malaise in the economy. And that's further exacerbated by an uptick in supply. As you know, you know, industry stats are basically not available in self-storage, so kind of what we pull together we're trying to give you our best view on things that we see in the marketplace and things that we hear in the industry and what kind of industry data we can pull together.

It's Harvey, Brian. There was an uptick in new starts in self-storage as reported by F.W. Dodge (ph) back in 2001 and 2000. Those starts were completed in the latter part of 2001 and on to 2002 and therein comes the significant increase in supply in some markets. The last report from F.W. Dodge indicated a reduction in starts as of the end of the third quarter. At an annualized rate about 28 million square feet that certainly is somewhat less than it was in the prior years. So our observations are such that these things will vary and fluctuate significantly by March but of course there's an increase in supply.

So just talking to your property managers, are they seeing -- obviously your business supply taken as a whole may not impact you, but your operating in a five to seven mile radius, are owing a whole lot of supply in general from anecdotal evidence from your property managers?

Well, other than just a general uptick in supply overall for the industry, as Harvey just mentioned, I mean, we don't have anything other -- to give you other than that.

Okay. Thank you.

Sir, we do have another question. It's a follow-up from Green Street Advisers' Mr. Jim Sullivan.

We'll take another question in from Mr. Sullivan. Thank you.

Thank you, Harvey. G&A was down year over year. Were those real cuts or did you spread expenses around?

John is almost blushing that you would ask that question.

Yeah. G&A is down. I think we mentioned that last year that we were running higher G&A than we should be running. I think our run rate for years should be 16, 17 million dollars. I think the fourth quarter is kind of reflects that.

Where were the cuts, John?

Well, we had -- we were developing a software program, not knowing how this program was going to ultimately pan out. We were writing off the cost of that software program over a period of time. And so that has gone through. We also, if you recall, had some special R&D stuff that was no longer impacting us. That was in the prior year. I think what you're seeing in Q4 is pure and clean going forward.

Thank you.

Our next question comes from John Robertson (ph) of Reese (ph).

I apologize if this is in there, but looking at capitalized interest numbers were for the quarter and the rate at which you're capitalizing that. I'm trying to compare that to the negative spread that you were talking about.

Could you say that again a little louder, please?

I'm interested in what capitalized interest was for the quarter. And the rate at which you're capitalizing.

Okay.

Capitalized interest for the quarter was approximately 1.8 million dollars. We're capitalizing at about 8%, which is kind of where with our blended kind of leverage cost of capital there.

All right. Thank you.

Our next question comes from John Sheehan (ph) of A.G. Edwards.

Thanks. Just one quick question. I'm just curious if you guys are at all concerned that the fact that you had a national TV advertising campaign last year, and promoted the discounting and promotions so heavily that maybe you've conditioned your tenants or clients to sort of expect discounts and promotions now from Public Storage and that that may be a problem to try to wean your tenants or prospective tenants off of discounting? I just wondered your thoughts on that issue.

That is always a concern. However, you know, we are not the only folks that are involved in discount activities. You see it in every market throughout the United States. From large national competitors to individual owner/operators. And you see it in virtually every consumer type industry now discounts and sales and reduction in rates and prices. And when that stops being a fact of life, assuming you have a valid service to off tore a consumer and you're competitive in the marketplace with your prices and business activity turns up, I suspect we'll be able to begin to do away with discounts to some degree or another. And as you call it, wean our customers away from that. But that's how I'd see it, John.

Sure. I guess my thought is that you're really the only one in the industry that has the muscle and the size to sort of advertise on the scale and scope that you do, and that's where my question came from. And in terms of getting people off discounts, do you hope to --do you anticipate weaning them or is it sort of cold turkey?

I guess we'll face that when we get to it, John.

Fair enough.

I would add to that, even though we're doing national --not national TV, TV in selected markets and have a -- the promotion is $1 which basically means in that market, you have to go to nearly 100% of your customers are getting the $1. The great majority of our system is not on that. And we run in a variety of markets, a variety of properties where 55, 70% of the market is allocating in and paying full price.

Fair enough. Thanks, guys.

There are no further questions at this time. Would you like to go into closing remarks?

Yes. Operator, the closing remarks is to thank the more than 150 people who signed on to this conference call, and we certainly appreciate their interest and their time and hope to chat with them again some time in the future. Thank you very much, operator.

Thank you. Thank you for joining today's conference.