Public Storage (PSA) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Public Storage fourth quarter 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. I would now like to turn the conference over to Mr. Clem Teng, Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining us for our fourth quarter earnings call. Here with me today are Ron Havner, CEO, and John Reyes, CFO. We will follow the usual format followed by a question-and-answer period. However, to allow for equal participation, we request that you ask only one question when your turn comes up and then return to the queue for any follow up questions. Before we start I want to remind you that all statements other than statements of historical fact included in this conference call are forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those projected in these statements.

These risk and other factors that could adversely affect our business and future results are described in today's earnings press release, as well in our reports filed with the Securities and Exchange Commission. All forward-looking statements speak only as of today, February 27, 2009, and we assume no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. A reconciliation to GAAP of the non-GAAP financial measures we are providing on this call is included in our earnings press release. You can find our press release, SEC reports and audio webcast replay of this conference call on our website at www.publicstorage.com. I will turn call over to John Reyes.

Thank you, Clem. Our funds from operations for the fourth quarter increased to $1.49 per share compared to $1.40 last year. The increase is primarily due to a gain of $0.21 from repurchasing our preferred stock below carrying value, partially offset by a year-over-year swing in foreign currency exchange loss of $0.18. After factoring out noncore items, our funds from operations was $1.39 in 2008 compared to $1.30 last year, representing an increase of $0.09 or 7%. This growth was primarily driven by improvements in our self-storage operations. During the fourth quarter we repurchased approximately 112 million of our preferred and equity stock for $75 million, representing an average discount of 33% to par or a stripped yield of approximately 11%. These repurchases will reduce our annual dividends and allocation of earnings with respect to these securities by approximately $8 million.

Notwithstanding these share repurchases and the payment of a special dividend to our common shareholders in December totaling $100 million, we still had approximately $700 million of cash on hand at end of December. During 2008, we retained -- our retained operating cash flow was approximately $300 million net of regular and special dividends. Earlier this month, we completed a cash tender offer to acquire up to a $400 million of our unsecured debt. We were reasonably successful and acquired approximately $110 million. As a result, our annual interest expense will be reduced by approximately $8.3 million. In Europe we had several developments. First, the arbitration that began in 2006 has finally concluded with a decision that denies our request to terminate the joint ventures early.

The decision, however, does not affect the continued operation of the joint ventures pursuant to the existing agreements. Second, the two joint venture loans mature this year. We are working with the banks to extend the maturities of the loans one to three years. We expect to finalize the extensions within the next 90 days, however, given the current credit environment we may not be successful. The loans total EUR250 million and Shurgard Europe has a 20% interest in both joint ventures. Third, our existing loans to Shurgard Europe of approximately EUR390 million has been extended through March 31, 2010 and we will continue to receive interest at 7.5% per annum. Fourth, our EUR305 million loan commitment to Shurgard Europe has also been extended through March 31, 2010.

This commitment is to provide financing to Shurgard Europe to acquire its partners interest in the joint ventures and repay the existing loans if third party financing is not available. The acquisition by Shurgard Europe is subject to Public Storage's approval. With respect to other capital requirements, our debt maturities here in the US total less than $30 million over the next two years. We do not have a development pipeline in the US, but we are expecting to spend approximately $7 million on redevelopment projects in 2009. In Europe, we have already terminated plans for future development and sites currently under construction are expected to be completed by the end of the third quarter. Estimated remaining costs are approximately $30 million. With that I will now turn it over to Ron.

Thank you, John. Our operating performance in the fourth quarter was consistent with what we began to see in October. Same-store movements were basically flat versus a year ago as a result of lower asking rents and reduced media spend. Same-store move outs were higher for the quarter by 5%. We lost 1.1% of occupancy in Q4 and ended 0.8% lower than last year. In January, we experienced further softening in demand. Move-ins were 11% higher, but these new customers are leasing at average rental rates lower than our existing customers and almost all are getting a promotional discount. January move-outs were 9% higher over the prior year. We ended the month with occupancy 0.7% lower than last year. We continue to aggressively price, promote and market our product to drive customer volume and restore occupancies.

Our advertising expense will be higher in Q1 compared to last year. We are using an advertising mix of TV, radio, and national cable, compared to spot TV last year. With lower asking rates and higher media spend, customer acquisition costs will probably be higher in the first quarter versus last year. In Europe, the operating environment is worse. Both revenue and NOI growth were negative in the fourth quarter. We have seen fewer move-ins and higher move-outs. Asking rates have been reduced to address weakening customer demand. The downward trend started in the UK and has spread across to our other European markets. Operating costs continue to be reduced, partly offset by increased marketing spend. Big picture, we are not immune to the severe economic downturns in either the US or Europe, and we don't see the operating environment getting better any time soon.

We have been taking advantage of the disruption in the capital markets by repurchasing our preferred stock and debt. We have a fortress balance sheet and we have gotten even stronger in the last 90 days as we've deleveraged by over $200 million. With respect to property acquisitions, we have seen an increase in both the quantity and quality of assets available for sale. Sellers are moving their pricing expectations in the right direction. While cap rates still have not risen to levels that clear the market, they are moving up. We think they have a ways to go, as today's cap rate may be lower tomorrow due to declining NOI. Buyers will soon start to factor in negative NOI growth into their underwriting reducing price per foot. Acceleration in acquisition activity for us will be dependent upon the capital markets and owners inability to refinance properties that have near term maturities.

Our target audience is now the banks and other financial institutions, not the owners. Overall, 2009 will be a challenging operating environment. Capital deployment may produce some portfolio growth, but we don't expect much until the latter half of the year. With that, operator, let's open it up for questions.

(Operator Instructions). Your first question comes from Jordan Sadler with KeyBanc Capital.

Hi there. Just following up, Ron, on your commentary on the investment market, could you maybe give us a little bit more color on sort of the cap rates you are seeing. You said they're not at market clearing levels, but they are up. But what are you seeing and what do you think you need to see to get excited?

Well, Jordan, it depends. It is kind of a property by property, market by market determination, what is the property, where is its location. And as I touched on, we are not really focusing on the traditional equity sellers, people putting properties on the market. We are really zeroing in on the financial institutions and some portfolios where there really isn't net equity in the property, the property is over leveraged.

Has there been a significant amount of foreclosure activity where the banks own some of these or are you thinking just buying the debt?

We haven't seen a lot of foreclosures, but as the debt comes due, whether it is this year or next year or the next two to three years, some of the stuff that we are looking at it is pretty clear it is under water. So it is really waiting for the banks to do something.

Just lastly, if all things being equal, if NOI is, let's say, falling 3% to 5% this year, would you, and there's sort of a -- I see that you purchased your preferreds this year and obviously tendered the debt. Would you rather buyback more of your preferreds at a 9% strip yield or would you buy storage properties at a 9% go in and a cap rate?

Depends on the property. I don't think you would see us buying a lot of preferreds at 9%.

Okay. Thank you.

Your next question comes from David Toti with Citi.

Good morning. It's Michael Bilerman. David is with me as well. Ron, you talked a little bit about not being immune to the economic downturn but clearly the results have held up reasonably well even given a, a downward movement. Can you just sort of reconcile some of the trending of during the quarter and during the beginning of the year related to the deterioration in the economy and how that is playing out and how you see it playing out over the course the year.

Sure, David and Michael. If you go back to our last, our third quarter conference call, we touched on the fact that at Q3 we ended the quarter with net positive absorption of about a thousand customers for that quarter. And we'd had preceding in Q2 and Q1, we'd had net positive absorption surpassing prior year. So we were feeling pretty good through Q3 and into August and early September, which is why we reduced the media spend in October. What we reported in Q3 is that in October we had seen a big acceleration in move-outs, somewhat moving as fast as the deterioration in the stock market at the time.

And so we wanted to leave investors with a picture that while Q3 was good and surpassed our expectations, we started to see severe erosion or acceleration in move-outs in October. That trend continued in November and December and I think I gave you the number for January as well. And as a result, the need to replace those move-outs, we are having to get more agressive on the rental rate side and the promotional discount side to replace those customers and hold occupancy. So it really started in October and it has continued all the way through January.

And how far below is that rate today that you are offering relative to in place.

It varies by property, by market. It is, it is.

I'm just trying to get a sense of magnitude. Your comments sound a little bit more somber relative to at least the results that are being put up and so I am just trying to piece it together a little bit.

My comments are somber relative to what?

Relative to the results that you are putting out. The results are pretty good relative to the outlook and so I am just trying to put the pieces together.

Well, there's a lag effect. So on a normal run rate basis, we are replacing 7% to 8% of our tenants each month. So, as you start to have erosion and the street rates come down, you don't see that all in, in immediately the whole portfolio doesn't come down, it is a lag effect. So I would expect Q1 revenue to be lower than Q4 because the rental rates, the asking rental rates are lower and the promotional discounts are higher. We will continue to be aggressive in that regard as long as necessary until really the move-outs slow down and we get some stabilization in the portfolio in terms of occupancy.

Okay. Thank you. We will requeue up.

Your next question cops from Jay Habermann with Goldman Sachs.

Good morning. Ron, your comments about extending the commitment to provide the loans in Europe, I am just curious there if that obligation, obviously, is exercised in the future does that mean your appetite for either large scale distressed transactions is diminished simply you won't have the capacity. Can you give us a sense there of will you be looking maybe at buying back debt and perhaps smaller deals in the future?

What -- is your question if the commitment to Europe gets exercised, will that preclude us from doing other things?

Yes.

No.

So would you look at, for example, the short R-type transaction in the past and consider using stock or would you -- ?

That's a bit of a, an extreme. But the -- no, I mean we have significant financial capacity here. The deleveraging, we have a -- we are sitting on $600 million or $700 million of cash. We have got a $300 million credit facility and we internally generate about $100 million a quarter. So, there are less opportunities for us at the moment than there is capital. And that is without really raising any new capital.

So you are still, still looking for the returns that you said that, likely in the double digit.

Yes, we are still looking. We have a crew out looking all the time. We have looked at over $0.5 billion of mortgages in the last 90 days.

Okay. Thanks.

Your next question comes from Michael Knott with Green Street Advisors.

Hi, guys. Ron, I am wondering if you are seeing the length of stay shorten at all and does that affect your willingness to use the, the dollar discount? Are people still staying longer than they think they will?

Hi Michael. This is John. New tenants look like they're staying about as long as they have in the past. The move-outs that we are seeing, again, the large uptick that we are seeing are mostly our longer term tenants that are moving out at a more rapid pace than they had in the past. But the new people coming in seem to still be sticking around as long as they did before. Now that could change, but based on the data that we are seeing so far, they seem to be sticking around relatively the same time frame.

Can you just remind us what that figure is and then what your overall portfolio average is?

New tenant typically stays around eight to ten months, Our overall portfolio has been with us something like 34 months, 34 to 36 months.

Thank you.

Your next question comes from Michael Mueller with JPMorgan.

Yes. Hi. I think, Ron, going back to the January 31 data point you threw out, I think you said occupancy was down 70 or 80 basis points, did you also say that the, I guess, the in place rent per square foot was now negative year-over-year because I think your 12/31 data point was still showing it up like 70 bips.

No. I didn't touch on that. Mike, I said that the asking rates for new customers in January were, we were asking, our street rates were lower than what our in place rents were during January.

Okay. Okay. Thank you.

Your next question comes from Jeff Donnelly with Wachovia.

Hi, guys. A question about how you are thinking about pricing strategy particularly now when your competitors are arguably weakened by their financial leverage. Are you setting pricing now to maximize your own revenues and profitability or instead is there an opportunity here to maybe pursue a pricing strategy where you are focused more on taking market share, even though that may mean you are not maximizing rents?

That's a good question. On, right now we are in mode of trying to hold our occupancies, Jeff. So, we are trying to price to keep the occupancies similar to last year. We believe, obviously, demand for self-storage has declined quite a bit. So the prize shrunk. So in order for us to get a bigger piece of the pie than we were getting before, we have had to, to cut rates as well as offer more promotional discounts. That doesn't mean that we are not focused on trying to maximize revenues. They kind of almost -- they go hand in hand, but I think in this environment right now, we are really trying to hold our ground on the occupancy and the long-term, we think that benefits us the best.

Do you have a sense that maybe you have been able to cut rates more or you have cut rates more than some of your competitors out there.

I know that it is possible that we have probably done that in some of the markets. But likewise, in other markets we may not be below our competitors. It really depends, Jeff. It is really a localized market by market type of thing. I know for sure we are below on many properties and I know we are higher on other properties. It really depends.

Thank you, guys.

Your next question comes from Mark Biffert with Oppenheimer.

Good afternoon. Ron, I was wondering if you could comment on the performance in Europe in terms of the, you noted they had negative NOI growth, I am just wondering how you expect that to perform, whether it will accelerate more than in the US next year and what's the likelihood that they might have to draw on that line that you guys have set aside?

Well, the -- let me try to unbundle your question. The operating performance for Europe same-store properties was negative in Q4, as I touched on. The growth rate was negative, that doesn't mean the operating cash flow was negative. We are still producing, I think, on the same-store basis, $50 million, $60 million of NOI in that portfolio. So, while we expect -- given Q4 you would expect kind of a negative, some kind of negative NOI growth into 2009, but still substantial positive cash flow. The credit facility or the stand by credit facility between Public Storage and Shurgard Europe is solely for the acquisition of the two joint venture interests not to fund day-to-day operations. They don't need that. They are generating plenty of positive cash flow.

Okay. Thanks.

Your next question comes from Lou Taylor with Deutsche bank.

Thanks, good morning, guys. Just back to the pricing question for a second. Ron, can you just talk about how sensitive are your customers in terms of is it better to hold rates and promote very hard, or is it better to do low rates, or is it all about the discounted promotion?

Well, we think kind of, are very sensitive to rates. So cutting rates we do get, we do see the uptick in the volume. But I could tell you that the uptick that we are seeing though, it does not offset some of the decreases in rents that we have seen. For example, if we cut 10% that doesn't necessarily translate into the fact that we get maybe a 10% increase in volume. I mean we are in a very difficult operating environment, as Ron touched upon. The trends are negative. We are pulling out all of the stops right now to maintain occupancy. To the extent that we can find areas of opportunity to raise pricing, we will do that. But for the moment right now, there's not a whole lot of opportunities that we have seen to do that. So we have got our rate set very conservative levels right now and we have got our discounting wide open. A real problem right now that we are experience is not really the move-ins so much as it's the move-out volume that's going on within the portfolio. That's much more difficult for us to control at the moment.

Okay. Can you help us understand the media spend a little bit better. In your Q3 call in November you mentioned that you were going to ramp it up, but the spend in Q4 didn't look like it -- it was clearly down. When does that media spend ramp, either going to occur or has it occurred already?

Well, no I think in Q3, Lou, I touched on the fact that media spend was down in September and was going to be down in October, so I expected Q4 media spend to be down year-over-year. That was a, quite frankly, a tactical error on our part because we made the media decision for October in the first part of September when we were looking at August numbers when things were much better. So if we had it to do over, we would not have reduced the media spend in October. For the first quarter, we are obviously through January, through February and the commitments have been made for March. So we clearly see that the first, Q1 2009 media spend will be up versus first quarter 2008.

Great. Thank you.

Your next question comes from Michael Salinsky with RBC Capital Markets.

Good afternoon. You touched upon advertising, could you touch upon your G&A expectations? What is a normalized run rate just given how low that was in the fourth quarter. And also what your thoughts are for real estate taxes next year?

First touching on the G&A, the fourth quarter was unusually low for us. We would, we would estimate that our G&A would probably be somewhere in the neighborhood of 8 to 10 million a quarter, so clearly the fourth quarter was an unusual blip down from that. As for property taxes, currently we are estimating that our property tax increase is probably going to be about 3.5% to 4% in 2009.

Okay. That's helpful. Thank you.

(Operator Instructions). Your next question comes from Tayo Okusanya with UBS.

Good morning. Just again focusing on the operating expenses, could you explain why the property taxes were much lower in fourth quarter, or historically lower in fourth quarter versus other quarters and do we expect it to kind of ramp back up to what we typically see in the first three quarters of the year?

Yes. Tayo, our property taxes typically always ramp down in the fourth quarter. If you look at our press release, there's a table on page five which outlines quarter by quarter property taxes along with other items on it.

Right.

And you will see that in 2007, 2008 you can see that our property taxes always ramp down on a sequential basis versus Q3. What we have always told people is you really can't do sequential kind of forecast for us with respect to property taxes because they bounce around. We do tax estimates during the year and when we get to the fourth quarter, it gives us an opportunity now that we have got most of the tax bills in to make adjustments accordingly.

Okay.

And you could see that the adjustments typically are sequential ramped down during that time frame. Again, just given the last caller, we gave them the 3.5% to 4% ramp up. If you were doing a quarter by quarter analysis for us, I would just apply that type of inflation across the board based upon what you see our 2008 numbers are in the press release table.

Got it. And then just one other quick question, are there any areas of your operating expenses in '09 that you feel there might still be opportunities to kind of cut back say to have fairly decent bottom-line numbers.

Well, Tayo, this is Ron.

Hi, Ron.

We are always looking for ways to economize to get more efficient in our business. Obviously in this environment, it increases our scrutiny on all expense levels. I think the payroll you will see some efficiency there. I don't think it will go negative, but it will be a pretty modest increase in, in 2009. John touched on property taxes, utilities, if you can guess the price of oil, that is your indicator there, we have no idea. Generally I would guess 3% to 5%. R&M will pre -- in part predicated by snow, especially in Q1 and in Q4. So, that is a big factor. Normal R&M we have been beefing up our maintenance CapEx the last couple of years. So I would expect some savings in that area this year. I think that covers the bulk of it. Advertising and media are the swing items. And that ties into what John talked about in terms of promotional discounts and pricing and is kind of the third lever, the third spigot that we have got wide open to drive customer volume. So that one is more of a function of what is, what are the customer volumes that we need in any period of time?

Very helpful. Thank you.

Your next question comes from Paula Poskon with Robert W. Baird.

Thank you. Just to follow-up on Mike Salinsky's question on G&A, can you just review for us why the fourth quarter was abnormally low? Was it analogous to year-end true ups or was there something else going on.

Paula, it was exactly that. He had a couple true ups that we had over accrued for some items during the year and trued them up.

Okay. And then could you also give me a little bit more color on the accounting change on the ancillary operating, the ancillary income and operating expenses? This quarter it was a boost to expenses, but I think last quarter, as I recall, it was a benefit.

That bounces around a lot. And Paula, it is primarily with respect to our tenant reinsurance business, where we book accruals for estimated customer loses for unasserted claims. Depending on where we think those estimates might be, it could cause some lumpiness in the expenses.

So is that again analogous to have some year-end true ups.

Yes. Well we look at everything every quarter, but in this particular one we had one item that popped out on us and we felt it was best to accrue for it, which resulted in increased expenses during the quarter.

That's all I have. Thank you.

Your next question is from Jordan Sadler with KeyBanc Capital.

Hi, this is Todd Thomas. Can you characterize some of your major markets and talk about which are performing better or worse and specifically can you quantify any benefit from hurricane Ike in Texas.

I would say if you just kind of go around the map of the areas that we are struggling in, the most difficult markets that we are struggling in still Florida is very difficult for us. The Orlando, Miami, Tampa markets where we have properties. We also have them in Jacksonville. Very difficult markets and they have -- Florida has been difficult for the past at last two year now. The Atlanta, the Carolinas, it is all that southeast market is very difficult for us. Northeast seems to be holding up very well, Texas very well. Starting to see a little softening kind of in the Midwest in the, I think, the St. Louis up into Chicago areas. The Pacific Northwest, which was very strong for us over the past couple of years, is also softening quite a bit.

California. California is where we are seeing the bulk of our, our move-out activity, particularly here in Los Angeles and San Francisco. But nonetheless, I think they're still kind of holding up from a revenue standpoint, but we we are starting to see more and more weakness there. In terms of during the quarter, Denver was a strong market. Houston, San Francisco, New York was strong for us, Chicago was strong, but the trends in all of them are showing weakness. So, how much longer they continue to be strong it remains to be seen.

With the Houston performance, one of your peers saw a pretty significant growth in Houston, was it surprisingly strong like Katrina, did Ike do for your Houston portfolio what it did for the Florida (multiple speakers).

Definitely, Ike helped. Did it help like what we saw in Florida? No. But it was definite benefit. There's no doubt.

Okay.

You will see it in the K, Jordan. I think we will breakdown by market in the K. And Houston was, I think, for the quarter up 4% plus, which is a pretty good growth rate for Houston. So it definitely benefited from the hurricane.

What are -- any thoughts around on some of your peers here trading at implied cap rates in the mid 11% range?

Jordan, I have no thoughts that I can express publicly.

Okay. Thank you.

Your next question comes from Jay Habermann with Goldman Sachs.

Hi. Just want to follow up on this share repurchase, are you guys buying back stock year-to-date or have you been doing so?

We disclosed in the press release that we have not done any common stock buybacks year-to-date.

Okay. Just curious, just given where it is trading now would you be willing to step up at this point?

It is something we look at all the time.

Okay. And then also you made the comment, I think, on redevelopment and development obviously reducing spend. I mean would you anticipate, just given the cycle and where we are, you just won't be allocating much in the way of development over the next couple of years.

I think I touched on last call and I would say reiterate that even more is why would you build when it is pretty clear that when the market opens or even today on transactions you can buy below replacement cost. So, to me, I don't know why anyone would be developing today, and we followed that, that thesis with basically terminating development in Europe and we didn't have much of a program here in the US, but we have terminated that and we have even slowed down on our repackagings here in the US.

You said some money for redevelopment, could you repeat that amount.

I think it was $7 million here in the US.

Thank you.

And then Shurgard Europe has about $30 million or so to spend to complete its development build out there.

Thanks.

Your next question comes from Michael Knott with Green Street Advisors.

Hi, guys, I am wondering if you can compare and contrast a little bit how this downturn and fundamentals feels to you compared to what you went through last time, if you can just comment on that.

Well, Michael, I would say, and I don't want to get on a speech here about the economy and all of its nuances, but I don't think most people have seen an economic environment like this where you have massive disruption both in the base level economy and the tremendous disruption in the capital markets, which is permeating absolutely everything. These move-outs that we are experiencing, especially from the longer term tenants, people are coming in that have been with us for years and going, you know, I -- we got laid off, we have got to go through the budget , our investment portfolio is down something, and we are going through the budget and we have got a, we have got to move out of this space and and we have got to downsize this space. And that's, that's pretty unusual. So, I would say this is nothing like what, what has been typically experienced by us before.

Having said that, I will say that I believe, which I consistently believe, I think self-storage will weather this economic environment better than any other product type. We have got the levers here at Public Storage to control or influence demand and volumes into our product space. We don't have tenant improvements. We don't have broker commissions. We are not going to be giving away two years of free rent to get customers in the door. So I think this business will fair better than any other kind of real estate in this economic

Okay. And then last time, in the downturn last time I think you guys had two full years of negative same-store comps, arguably there were some self-inflicted wounds last time on some pricing strategies, as I recall. But I would think you are better positioned today just in terms of operations than last time, but you think the economy and fundamentals are worse. Would you expect some more results as compared to before, maybe a couple of years of negative same-store?

Well, I can't predict that, but I can tell you that I think, yes, we are much better positioned today than we were in that period of time. For one, we have a completely different operating system, WebChamp. We have a pricing group that we didn't have. Our operational group is totally on top of the delinquencies and collections. The field organization is, is rock solid shape. And then our pricing and marketing strategies are better coordinated than they were with the self-inflicted, as you said, marketing program payment in arrears. So I think we will, we are in very good shape, feel very good about the pricing, marketing and operating team in terms of being prepared for operating environment.

Okay, guys, thanks.

Your next question comes from Michael Mueller with JPMorgan.

Already answered, thanks.

Your next question comes from Mark Biffert from Oppenheimer.

Ron, just added to what you mentioned about tenants moving out due to affordability concerns, what are you hearing from your small business tenants and their pull outs of space?

Same thing, business contracted, business gone. I mean, especially down in Florida you had -- someone asked about the hurricanes earlier. That created a tremendous amount of business activity in terms of rebuilding homes, rebuilding offices, repairs and all that. And there were a lot of small to mid-size businesses that benefited from that for several years and then the housing boom even accelerated it. So you've had a lot of those kind of customers just simply go out of business. They're gone. Now with any economic downturn, right, there's people getting laid off, fired who are starting businesses so that is a plus. But it is the same kind of thing that you would expect, people going out of business they have to liquidate and move their stuff out.

Okay. Specifically, have you heard anything from retailers that might use your space as like an inventory room or something like that in terms of them pulling out?

Well, in a lot of cases we are a cheap substitute for retail space. It is better to keep your stuff in a mini warehouse property than it is to take additional space in a mall or a shopping center.

Okay.

There is no doubt as retailers contract, as those tenants move out, that does impact us.

Okay. Thanks.

Your next question comes from Michael Salinsky with RBC Capital Market.

Hi, John, could you talk about delinquency trends during the quarter and also with regard to renewal increases, do you plan to push renewal increases this year and if so to what magnitude relative to past years?

Michael, on the delinquency, delinquency's about the same as what we have been seeing now for the past several years. It is actually come down from -- the trends have been down there. We also monitor what we call delinquent sales, the sales of when people don't pay us and we sale their goods to collect. That's also relatively the same as it has been in the prior year. So we are not seeing really an uptake in that. I think people are just if they can't afford us, they're actually just moving out. As for renewals or increases to existing tenants, we are monitoring that as we go. So we have made no specific plans as to what we are going to do and we will just monitor that as we move forward. And see how it goes and see what types of increases we give out, to what degree we give them out, what markets might get them. Some markets may not get them, some might get them. It is really going to depend and we are just monitoring that on a day-to-day basis right now.

Thank you.

Your next question comes from Jordan Sadler with KeyBanc Capital.

I was just trying to reconcile, your commentary seems a little bit more maybe sober, maybe just negative than we have heard out of your peers. Is it because of the size of your portfolio, or is it -- any thoughts on that?

Jordan, I haven't listened to the calls of the other self-storage operators. Typically we tend to be a little more -- our comments tend to be a little more sobering and I think you touched on it, realistic. Part of that has to do with we don't need capital. We have the systems and kind of the realtime data to, I think, give you a pretty good picture on what we see happening. What they are seeing happening and how they characterize it, I can't comment on.

Where do you think occupancy could dip in the bottom of this cycle, dip to, in a portfolio like yours?

Well you've got to step back a second and the numbers you are looking at for Q4 and the number I gave you for January, what were we 87%, 88%, 89%. Those are seasonal lows, okay. So, besides the economic downturn hitting, really impacting us in Q4 and into January, that is also the seasonal off peak business period for our type of operation. So, I think a better barometer of, okay how, how bad is it going to be for self-storage is we have to get through August and see kind of ,how the rental season plays out, how many people move, transferring all that kind of stuff and the school kids to really see, okay, how is the business going to play out during the summer.

Thanks.

Your final question comes from Michael Knott with Green Street Advisors.

Hi, guys, the loan to Shurgard Europe that is due about a year from now, about $550 million, how should we think about that? Is it likely to be repaid if credit market conditions stay as they are now through a refinancing or should we think about that as likely to be extended or would you consider swapping it back for equity? How should we think about that.

Right now, Michael our intent is to get that loan refinanced. We are stopping development activity in Europe and even though NOI growth was negative in Q4 and maybe soft in '09, I think the second half of '09 and into '10 we will see some robust cash flows out of Shurgard Europe and we think we are reasonably well positioned to refinance that loan, if there's any kind of bank market over there in Europe to enable us to do that.

So given where you stand today (multiple speakers).

Right now our intent is we have got to get the joint venture loans redone, as John Reyes talked about, and that's going to take 90 to 120 days and then kind of the next project in the Q, really starting Q3 this year, is the intercompany loan between Public Storage and Shurgard.

Okay. And then my last question if I may, given the arbitration ruling, can you just characterize the relationship with the joint venture partner and how we should think about how long those ventures continue on for and just how you are thinking about it generally?

I think the first one by its term ends this year.

Michael, the first joint venture, either party can trigger an exit strategy, notwithstanding the fact that the arbitration has been completed. First off, the relationship between us is still a very good relationship. The properties may have not have performed and filled up as quickly as they would have liked them to have, but in any event it is what it is. But JV 1, which is the first 138 properties, either side can trigger and exit at any time now. JV 2, that exit strategy, that exit actually provisions comes into play, I think, in May or June of this year.

Okay. Thanks.

There are no further questions. Are there any closing remarks.

Yes. I want to thank everybody for attending our conference call this morning. And we will talk to you next quarter. Thanks. Bye.

Thank you. This does conclude today's conference call. You may now disconnect.