Public Storage (PSA) 2009 Q2 法說會逐字稿

Good afternoon. My name is Lynn, and I will be your conference operator today. At this time, I would like to welcome everyone to the Public Storage second quarter 2009 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.

Mr. Clem Teng, Vice President of Investor Relations, you may begin your conference.

Good morning, and thank you for joining us today for our second 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 facts included in this conference call, are forward-looking statements. These forward-looking statement are subject to a number of risks and uncertainties that could cause actual results to differ materially from those projected in these statements.

These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from thos projected in these statements. These risks and other factors that could adversely affect our business and future results are described in today's earnings press release, as well as in our reports filed with the Securities and Exchange Commission. All forward-looking statements speak only as of today, August 7, 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 and SEC reports in the audio webcast replay of this conference call on our website at www.publicstorage.com.

Now I will turn it over to John Reyes.

Thank you. For the second quarter, our core FFO per share was $1.25, which was the same as last year. The quarter was primarily impacted by several items. Same store net operating income was lower by $8.5 million, which was partially offset by the growth in our non-same store properties of $3 million. Income from Europe was lower by $4 million. This was caused by reduced operations combined with the lower exchange rate when converting Euros to dollars. Interest earned on our cash balances were lower by $3 million. This was primarily caused by reduced cash balances combined with substantially lower interest rates.

Interest expense and preferred dividends in the aggregate were lower by $8 million. This reduction was primarily due to our repurchases of debt and preferred securities that occurred in the fourth quarter of last year, and into the first quarter this year. And finally, our tenant insurance business improved by $2.5 million. Our balance sheet continues to be a fortress. Debt to total capitalization is only 3%. We have about $600 million of cash on hand, which by the way, exceeds our entire debt balance by $60 million.

Our fixed charge coverage ratio is now in excess of four times, meaning our operating cash flow is less leveraged. A place you want to be when your earnings are under pressure. Further, putting our coverage ratio into perspective, we could issue up to $2 billion of additional preferred stock, and still maintain a strong coverage ratio of three times. Notwithstanding the pressure on our operations, we continue to retain a significant amount of our operating cash flow.

During the second quarter alone, we retained approximately $100 million, or about 51% of our funds available for distribution. In Europe we had a couple of new developments. In the second quarter, the JV1 loan with a balance of EUR112 million was extended through May 2012. Earlier this year the JV2 loan, with a balance of EUR121 million was extended to July 2010. Recall that Shurgard Europe owns a 20% ownership in the JVs, and we own 49% of Shurgard Europe. On our conference call in May, we indicated that the JV partner in JV1 gave us their exit notice, indicating their desire to sell their interest in the JV. In June the partner withdrew its notice.

With that, I will turn it over to Ron.

Thank you, John. Our operating performance in the second quarter continued to be impacted by the current economic environment. In the US, our same-store movements were 1% lower versus a year ago, despite aggressively lowering asking rates, and increasing promotional discounts. After asking rates continued to be lower than last year by about 10%, but above in-place rates. Same store move-outs stabilized in the quarter, and were lower by 1%. Overall we had 3% higher net absorption versus last year.

Our best performing markets were New York and Houston, while the downturn has negatively impacted most of our markets, the worst performing were in the Southeast, starting in Charlotte, North Carolina, down through Miami, Florida. During the second quarter, our media expense was lower than last year, primarily from reducing our newspaper, radio, and spot cable programs. Our customary acquisition costs decreased to $165 per customer, versus $182 last year, due to lower media costs and lower promotional discounts. This compares to average move-in rates of $111 this year versus $125 last year.

In July, demand improved modestly versus last year. Move-ins were up 1% and move-out were lower by 2%. We ended July with square-foot occupancy of 90.7%, versus 91.5% last year. The percentage of new customers receiving promotional discounts was 96%, up 4%. Going into Q3, we expect the decline in year-over-year revenue growth to accelerate. In addition, you will recall we had very low media spending Q3 last year, which in hindsight was an error. This year we are significantly expanding our media spend in Q3 by over $1.5 million.

In Europe, the operating environment continues to be challenging across all markets. For the second quarter, same-store NOI growth was negative 11%. We reduced asking rates and increased promotional discounts and media spend to drive customer traffic. Between March and June, the year-over-year occupancy gap narrowed by 1.6%, so we were reasonably successful.

In July, the same store occupancies surpassed last year to 87.4%. Asking rates were about the same as last year, and 5% higher than the in-place rates. Going into Q3, media spend should be flat to down versus prior year, and the rate of decline in revenues should begin to moderate.

With respect to capital deployment, we remain patient. A combination of declining property NOIs, higher cap rates, a tougher and limited bank debt market, and a closed CMBS market, have created the perfect storm for owners of real estate. Accordingly REITs with access to public equity and debt markets, are at a distinct competitive advantage.

In the self-storage industry, the top five owners, all public, have less than 10% of the industry's 55,000 facilities. Over 90% of the industry is owned by those with limited or no access to capital. In other words, we are in a target rich environment. While there are more conversations about potential transactions today, actual activity is still very low.

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

(Operator Instructions). We will pause for a moment to compile the Q&A roster. Your first question comes from David Toti with Citigroup.

Good morning, guys, Michael Bilerman is here with me, too. Relative to Shurgard Europe and the transaction that occurred relative to your ownership position, do you believe there is any danger of an impairment given the NOI decline trajectory, either to the investment or any of the securities related to the investment?

David, hi. This is John, no. We don't. It is still cash flowing very positive. Either on an EBITDA basis, or even subsequent to backing out the debt services, by the way the bulk of the debt service is Public Storage debt. So we have no impairment charge. We don't expect to have impairment charge. So the answer to your question is no.

Great. As a follow-up to that topic, can you provide any discussion around why the JV partner withdrew the exit notice?

We don't know.

Okay. Great. Thanks.

Your next question comes from Todd Thomas with Keybanc Capital.

Jordan Sadler here with Todd. Ron, just curious on your capital deployment plans, it sounds like you are being patient. Are you blinking at all on the cap rate? Previously you were looking for 10%-plus cap rates I think?

Am I blinking on the cap rate, you mean have I lowered our targets?

Right.

Jordan, in this environment, cap rate is important, but declining NOIs, I would say price per pound, or per square foot, is possibly a more relevant metric.

Where would you want to be relative to price per pound? What is currently replacement costs?

Well, as you know, price per pound or per square foot varies across the country. So if you are in Kansas City, it is $50 a foot. And if you are in the boroughs of New York it can be anywhere between $150 and $200 a foot. So it really a function of what are the rental rates, and so with the declining NOIs and increased cap rates, limited capital, I think you are in an environment where certainly development makes no sense, and assets when they really start trading, I am reasonably confident they will trade at a reasonable discount to replacement costs.

Thanks.

Your next question comes from Jay Habermann with Goldman Sachs.

Good morning, everyone. Just following up on the last question. Where do you think you can issue preferreds today? I assume that is significantly different versus March. And if so, I guess that would then change the return expectation?

Well, I don't know that it will change return expectations, but Jay --

Just willingness to be able to purchase it perhaps below 12% cap rates?

Let me answer the preferred question. At the end of March, our secondaries were trading at about 8.25. Today our secondaries are trading somewhere in the neighborhood of about 7.5. And although it is difficult for bankers to tell us what a new preferred could be issued at, because one hasn't been done, at least in the REIT space in quite some time now, we would like to think that probably we are about 50 basis points behind on where our existing preferred is at. So maybe low 8s, or something like that right now.

Okay. Thank you.

Your next question comes from Mark Biffert with Oppenheimer.

Good afternoon. Ron, I was wondering if you could talk a little about specific markets, where you are seeing the distress in terms of NOI declines that might create those opportunities? And maybe, in terms of timing, is it end of this year, beginning of next year, when you think the opportunities might start to arise?

Is your question, what are the market trends, or --?

Kind of both, which markets are you seeing the greatest declines that you think might create acquisition opportunities? And then specifically when you look at California, I am interested on Prop 13 if that get revised, what the increase in property taxes might do to valuations as as well there?

Okay, well I will just kind of top 20 markets we had two markets positive revenue growth, New York and Houston. And so that is kind of at the top. If you start at the bottom, Charlotte had close to a 10% year-over-year revenue decline. Then you move to Atlanta which is about 7. And then it kind of skews up to you have got Tampa, Florida, Seattle, Portland, Phoenix, Orlando, Philadelphia, Miami, Detroit, LA came in at about 3. The blend was I think 3.5. Then you have got Sacramento, Minneapolis, Chicago, San Francisco, Dallas, Washington, and Denver had a modest decline. So that is kind of from the bottom 20 across the country.

In terms of opportunities because we have a national platform, we can take advantage of wherever it presents itself. Whether it is in Charlotte or New York or Houston or Detroit, Philly, whatever. So our targets are really quality properties, quality location, in that submarket that is additive to the franchise value. We are not sitting here going, okay, Charlotte has the worst NOI or revenue growth so we are just going to really concentrate on Charlotte. That is not the way we function. Our focus is national in scope. Does that address your question?

Yes. Would you expect though, to see opportunity in those markets come to the surface quicker just simply because they are declining maybe at a faster rate? And so the owners might be in greater distress than you find more opportunities in those markets?

Yes. Well I think, it doesn't matter whether it is self-storage or apartments or retail kind of all real estate is in declining NOI mode. So yes, the pain varies across the country, but there is a fair amount of pain across the entire platform, across the entire country.

I think the trigger point for opportunities is not so much market specific as owner specific, and what their financial characteristics are on their properties, at what point they bought, whether they have a construction loan that is rolling. They can't get refinanced. Whether they have got a property that is not filling up, how levered they are, what their personal capital situation is. That is going to be and that is what we are seeing is more a determinate of properties coming to market, versus kind of a broad market specific kind of thing.

Okay. Then just following on with Prop 13, I am just interested in your view on what you think the state of California might do in regards to Prop 13?

I think getting a change on Prop 13 passed, in my personal opinion, it is very unlikely, and I base that in part because we had an initiative earlier in the year in California, to raise taxes and increase spending and all that, and the voters resoundingly voted down all additional tax spending initiatives. The impact however, I could be wrong, and if it were to go pass, and there were to be a change of property taxes, it obviously would have an adverse impact on real estate values.

Okay. Thanks.

Your next question comes from Ross Nussbaum with UBS.

Yes, good morning.

Hi, Ross.

Ron, I am looking at some accumulated data here that suggests that there is, give or take about $1.3 billion of self-storage facilities listed for sale today. I am sure you have seen the same report I am probably looking at. Is that roughly right, or is there more or less out there on the market right now?

Ross, I have not seen the report you are looking at. And the guys that have seen the report that you are probably looking at are not in the room here, so I can't really answer your question.

Okay. Let me ask it a different way then because I am sure the portfolios that are on the market are being brought to your attention. Is there anything meaningful for sale today of size?

Well, there are some things that are of size and of quality under stress. Actually quite meaningful sites that are under stress. And so you kind of have to let those cards play out. Keep in mind, and I think this is true for real estate in general, the poorer performing properties, the poorer located properties suffer the first, and they will kind of be the first to fall.

Okay.

An A location run properly even if it is overleverred is going to be later kind of in the process to come to market, than a delocation in a demarket that is overleverred, because its NOI is going to crumble faster and deteriorate.

Okay. Finally, given the way your stock has performed here, how does that change your opinion of using your stock as a currency to pursue your expansion goals for the Company?

Well, Ross, how do I answer this? There is more than the stock price to evaluate. You have got to look at what we are giving up, in terms of the stock and versus what we are getting. And so in considering using the stock, we have to consider what we think the intrinsic value of Public Storage is, its earnings capacity, its leverage, its ability to generate capital, its franchise versus what we would be issuing that stock, acquiring where we issued the stock.

Thank you.

Your next question comes from Ki Bin Kim with Macquarie.

Thank you. In terms of your market strategy and where you want to acquire assets, could you just comment on your line of thinking, and are the markets that are in trouble now like Florida, what type of market do you want to buy when it is cheap, or do you still think there is trouble ahead, and staying clear from them?

I am sorry, Ki. I am not quite sure I follow your question. Is it similar to the previous question on markets that are under stress, are they more opportunities?

Yes, exactly.

Well, again, stepping back, I think the opportunities, kind of the first things on the block are the inferior properties in inferior locations, okay. So those are the first things that have kind of come to the block. Because they are going to perform the worst, and the better properties are going to come to the market, and because they will be operating better, later kind of in the process.

Certainly an owner that doesn't need to sell is not going to put his property on the market today. In terms of where opportunities are, we look across the country at all times, New York is positive, but we are still interested in properties in New York. Charlotte is very negative, and we are still interested in opportunities in Charlotte. But it has got to be the right property, the right location.

Does that address what you are asking?

Yes, it does, thank you.

Okay.

Just a second question, how has the deal pipeline changed from first quarter until now? Has it increased, and if you comment on the pricing you have seen, the changes.

Yes. Well actual transaction activity is fairly low. The last report I looked at I think we have looked at like $1.5 billion of either properties or mortgages so far this year. So we have not only the properties that are kind of on the market, but we have also been, we have got a variety of people working with lenders to dig up, find properties that are potentially overleverred, and may be at the point of foreclosure. So we have got two lists, two processes going on right now. So it is accelerating, a dollar amount I can't give you, but it is accelerating. As I said in my comments, there are more conversations, still not a lot of activity, but a lot more conversation than there was last quarter.

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

Good afternoon. Ron, over the past couple of years since you did the Shurgard transaction, you have had a significant benefit from lower costs. My question relates to how much is there left to cut in costs? And also, other during the next up cycle, are many of these costs sustainable essentially?

Well, Mike, I think if you look at our kind of our key costs, we may have touched on this in a quarter or two ago. Payroll is kind of flat year-over-year. I would expect whatever kind of wage inflation we get nationally to kind of work its way into the payroll numbers. We are doing some things on payroll that will hopefully contain it. But in fact during the inflation property taxes 3% to 4% a year, you have property, NOIs are declining. But we are seeing jurisdictions raise the marginal rate. So my guess would be that is still going to be 3% to 4%. Advertising is always the big swing item in our numbers. Depending on what is happening.

It is a seasonal expense because we do more in the second and third quarters than we do in the first, and we do virtually none in the fourth quarters. Advertising, we are doing more this year, but advertising rates are lower. But that is always a swing item. R&M, we have been able to do some stuff. We put a lot of capital into the properties the last four or five years, so we are benefiting from some of that, as well as rebidding a lot of contracts. We are actually getting pricing down.

And in other expenses, we have been able to squeeze some stuff. But again, long term, I would use the rate of inflation. So that is kind of by category. In term of the benefits from the Shurgard merger, I think we touched Q4 last year or Q1 this year that we have gotten whatever expense benefits we are going to get out of the Shurgard merger. Does that address your question?

That does a great job, actually.

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

Ron, can you give us some anecdotes of some of the stuff you are seeing on the stressed side in term of what lenders are offering, and are they more or less willing to take marks than they had been before? What is your sense there?

Well, the simple answer, Michael, is the fact that we haven't done anything that would indicate that they are not willing to take mark. So actual activity would indicate, no, there is no more inclination to take the hit, or write down the loan, than there was last quarter. Are there more loans, is there more volume in aggregate? Yes, but there is still not a lot of activity.

Did we expect to see anything that you would do, on the lender side as opposed to actually buying properties?

I can't predict. Because we are looking at both pools. Both with lenders, and then in the market, where properties come to market.

And then if I can ask one more quick question, John, are you seeing shorter customer stays?

With respect to new incoming customers, Mike? I think we are seeing them stay, their stay is extending slightly longer than we had experienced in the past.

Okay. Thank you.

Michael, the move-out ratios are down slightly, have been trending down slightly, which would indicate a longer duration of customers.

Your next question comes from Ryan Meliker with Morgan Stanley.

Hello, guys. I just had a quick question with regards to if you can give us some color on how you are competing in your civic markets, some of your competitors, particularly some of the private guys that maybe don't have the same cost structure as you. And might have a significantly higher level of debt.

Do you have any idea where their occupancy levels are relative to yours? Are you seeing a significant level of distress where they might be coming out, trying to discount significantly heavy to try to attract more occupancy? Any color you can add on some of those private guys, I know make up a large component of your competitive set, would be appreciated. Thanks a lot.

Well, I will have John address our overall pricing strategies and promotional discounts, kind of the way we operate. But I think if you could drive around most markets in the country, or a lot of markets, and the ones that are under real stress like in the Carolinas or Florida, and you can see some of the local guys have two months free, three months free, I have seen up to four months free, 50% off. So they are using basically variations of what our kind of bread and butter is, the dollar special, the first month for a dollar.

They have got banners up with variations on that first month for a dollar or rate. When you go in and shop some of these guys, one place that sticks out in my mind is a local guy gets up in the morning, gets on the internet, shops all the competitors in a three-mile radius, and sets his or her rates below those, and that is kind of the sales pitch to the customer. Obviously our operating people are very cognizant of that, and so we have to do a better job of selling and servicing the customer when they walk in.

And the operating matrix that I see and go through every month, our people are doing a better job of closing the sales, and getting that customer in the door. We can sit here and do marketing strategies and pricing vat gee, but if we can't execute at the store level, or in the call center it doesn't really matter. So our operating people are doing a better job of that. John, do you want to touch on kind of how we set the pricing?

Yes. Typically we don't price off of what our competitors do. We typically price of off what we are seeing in terms of demand drivers that are coming into our system. One thing we do know is that starting in May through most of July, we had ratcheted up our rental rates, and that was in response to our occupancies, as well as the demand coming into our system.

One of the things that we did notice is that when typically competitors follow suit with us, this time around, they did not. And I think you probably heard one of our public competitors mention that Public Storage had I think 'spiked our rates' which in fact, we did raise our rates. Notwithstanding the fact that our rates were still below last year, we did ratchet up our rates during a time when we thought we had more move-in velocity, and were able to garner higher rates.

So I think competitors are not following suit as much as they used to. I don't know why. I can only speculate on that. But we still are really just pricing off of what we see in demand drivers and inquiries into our system. And we will continue to do that as we move forward.

(Operator Instructions). You do have a follow-up question with David Toti from Citigroup.

I don't know if Mark Good is there, but I was curious how Mark is doing in terms of what his initial assessment was coming into the role, especially given his background? What was the early plan if there was one, and are there any initiatives relative to RMS and technology, and/or changes to the call center? I guess I am just curious as to what he has been doing since joining the Company?

Since he joined the Company he has been working, and to really answer your question, it would be quite a long answer. Mark is not here, but I am sure if you came out to Glendale, he would be happy to sit down and visit with you.

I will do that. I have been to your office, and it is a fun trip.

Okay.

Thank you.

Your next question comes from Michael Mueller with JPMorgan.

Ron, you made a prior comment about mortgages. And just to clarify a little bit, would you actually buy mortgages and hold them if there wasn't a shot at getting to the real estate directly? And if so, I mean, are you seeing pools of mortgages where it is actually, it makes sense in terms of size?

Most of what we have been looking at, Mike, is bank debt. But we would look at mortgages, we are not going to morph into some kind of mortgage REIT. It would be Buy to Own, not Buy to Lend. So that would be our strategy.

We have looked at CMBS pools with some self-storage in them, but the problems that we have is they usually come, in fact all of the ones that we looked at come along with a whole variety of other things. Whether it is retail, malls, hotels, that we really have no interest in. So we have shied away from those, because really we are interested in the self-storage stuff.

Okay. Second question, you mentioned some other property types. It seems like what has come up on some of the conference calls this quarter and some of the retail names, specifically the strip center guys, talked about late payments, collections, like a pickup in bad debts as you went through the quarter. I know you guys switched a few years ago from payments in arrears, but did you see any trends in terms of bad debts if you would, picking up as you went through the second quarter?

No. I will tell you an interesting, because we were going through this the other day. Our delinquent tenant sales are running about the same as last year, in terms of absolute numbers. Our receivables may be up 0.1 point. But upon sale of tenant goods, we are actually receiving more money than we did last year.

And what we have been able to discern from that, is there are more people at our tenant good auctions than there were in previous years, in previous times, because there are people that have gotten laid off, and this is what they are doing. They're buying stuff out of self-storage, and putting it on eBay or thrift shops, or flea markets, or whatever. So our actual cash from tenant auctions is up from last year.

Your next question comes from Jay Habermann with Goldman Sachs.

Hey, just a follow-up. Switching back to Europe, can you update us on the timing of the repayment of the loan to Shurgard Europe? And as we think about 2010, should we expect that to get repaid, or would you consider extending?

Jay, this is John. That loan is due on March 31, 2010. Our team in Europe is currently in the process of looking for refinancing that loan. With the expectation that the loan will be repaid by March of 2010.

Okay. And separately, did you mention, Ron, that new rents are 10% below the rents of last year?

Yes.

Okay. And can you update us, as well, are you giving rent reductions to any existing tenants or customers?

Yes.

Okay.

Somewhere in the middle? Well, no. You got two different questions. our asking rates for new customers are --

10% --

are approximately 10% below last year. Our asking rents to new customers are higher than our existing in-place rents. And then to a very small percentage of the customers during the year, it has got to be less than 3,000 or 4,000, we have given rate reductions.

Okay. Thank you.

Your next question comes from Todd Thomas with Keybanc Capital.

Hi. Given the accelerating decline that you are experiencing this year in 2009, where do you think self-storage NOI goes in 2010, do you think it still declines?

Well, all other things being equal, the comps should be easier. But in term of what is going to happen in 2010, that is a long ways off. Do you have any? John has no comment either.

When you think about like demand and fundamentals, is it your sense that they have sort of bottomed given what you have seen in your portfolio?

Well, I would step back and go to, if you recall our Q3 last year call, our year-end call this year, one of the things that was very disconcerting for us, is the big spike in move-out rates. The percentage of customers moving out was very troubling. And it is one thing in terms of managing the move-ins, and you can do that through pricing, and television, promotional discounts. But move-outs are very hard to control.

To give you some idea, and these are year-over-year percentage changes. October move-outs were up 3.7%. November was up 6.8. December up 3.3, and then January was up 9.1% year-over-year. February 2.6. And then March and April were kind of even with last year, and then May, June, July, were about 2% below last year.

So the move-out ratio has slowed, and actually gone negative to where, to touch on a comment John Reyes made earlier, that customers are staying longer. So that is a very good sign that customers stay longer, because that means they are worth more, as well as we have better ability to manage our occupancy, because we have got more levers to pull to get customers in the door on the front end. Does that help you?

Yes, it does. It does. Thank you.

Okay.

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

My questions have been answered, thank you.

The next question comes from Michael Knott with Green Street Advisor.

Can you give us some color on how you are thinking about any distress you may be seeing in Europe, and would you consider allocating more capital over there, I guess through the joint venture that you have, and could that actually happen structurally?

Michael, yes. Europe has, last count I looked at, 1,500 to 1,800 facilities, so relative to the 50,000+ here in the US, it is a much smaller market opportunity set, as well as the concentration of facilities over there. I think the top five or six operators have 40 or 45% share of the market, so there are fewer, and it is more concentrated than it is in the US.

But we are looking at opportunities. We do consider opportunities. And with our partner, New York Common, I think if there were the right opportunities they would be amenable to putting up their share of the capital, to take advantage of that opportunity set. The current focus, though in terms of capital with respect to Shurgard Europe, I should emphasize is really refinishing the intercompany loan between Shurgard Europe and Public Storage, not on garnering capital for acquisitions.

Okay. And then John, ostensibly with the equity stock being a pretty high coupon piece of paper when that becomes callable next year, I would assume that you will probably redeem that. Would you just comment on, would you use your cash, or do you feel like the preferred market, the coupon rates available to you are not low enough? I think you said maybe 7.5% or 8%. How do you view that from I guess a long-term cost of capital perspective?

Well, I think touched on all the right points, Michael. It is a higher cost of capital, relative to some other forms of capital we have access to. But we will cross that bridge whether we get there. It is a decision to be made by our Board of Trustees, as to what we do with that particular security.

Ron, could you just reiterate what you said about media spending in the second half of '09? Clearly the '08 numbers were very low, but I didn't catch the number that you gave?

Sure. For Q3 which is July through September, we expect media spend to be $1.5 million to $2 million higher than last year. Going into Q4, Q4 is typically a very light media spend. We generally don't do TV, except maybe a week in November, and Thanksgiving through December we don't do any television. So my guess is Q4 media spend will be comparable to last year.

Okay. So those are pretty big sequential declines from the first half of the year, right? Is that correlated with the improvement in the move-out rates?

Well, hold on a second. Let me get my media spend chart here. Yes, Q1 our total spend was, and this is internet, yellow pages, and television, I think it ends up on different line items in the income statement. But this is the way I look at it. Q1 is the highest at 13 million plus change. Q2 came in at about 12. And Q3 will come in somewhere around $8 million. Q4 last year was about $5 million.

Why does the media spend go that way? Well, Q4 we have done media before. We have tried television in November and December. And A) it is more expensive because of all the retailers advertising during that period of time, and, B) people are not outside moving their stuff around. So we basically don't do it.

And then we had a ramp-up in February and then into the moving season. Historically July/August have been low advertising months because we are full, so we don't have a lot of space to sell. Our occupancies are peaking, and so we kind of sit here and go, what are we advertising for if there is not a lot of space to sell. This year we have more space to sell. And it is a more competitive market, so we are stepping up the media spend.

Okay. And then my last question if you don't mind. A lot of your competitors in the public market run much lower occupancy rates than you do. Can you just maybe pitch everyone, as to why your strategy works best for you, in terms of focusing on occupancy?

Well, it is really simple, a lot simpler than it looks in terms of, it is hard to send rental rate increases to empty buildings. So you have got to have tenants to go send rent rates to, and empty doesn't generate cash flow. The higher the occupancy, the higher the cash flow, the higher the utilization rate. Remember we are in a fixed asset business. So utilization rate is kind of the name of the game. I think some of the other public companies are finding that there is more to television and media spending than meets the eye. It is expensive.

We have been doing it for close to 20 years. We have made lots and lots of mistakes, and I will tell you, we make mistakes every quarter, picking markets, and it doesn't work. But there is a lot more to it than meets the eye. And I would say that is one of our distinct competitive advantages, as well as what we do on the internet, and the number of words and the bidding we are able to use on the internet to help drive customer volume, along with our phone center.

So occupancy is the game. I think John Reyes has explained that a couple of times, in terms of you have got two variables, volume and price. And we set the fries clear the market so we can get the volume. And overall, our real objective at the end of the day is to drive revenue per available foot. That is really what we are trying to manage. But we have got to set the price to clear the market to get the occupancy.

Right. Thank you, appreciate it.

Your next question is a follow-up question from Ki Bin Kim with Macquarie.

You mentioned that your street rates went up, spiked up during this quarter, could you just give a quick run down of where the street rates were and today? I think today you said 111?

I think I said our street rates are about , well, let me make sure I understand what you mean by street rates. Are you asking for what we are asking new customers to pay, or what our in place

No, new customers.

New customers are approximately 10% below last year. But it varies by market, Ki.

Right. But how does that compare to last quarter?

Ki, let me see if I can answer your question. Ron and I look at it a little bit differently. I look at it on a square-foot basis. But let me give you the change, the year-over-year changes. In January, we were down 12%. February, down 11%. March we were down about 14%. April we were down about 13.5%. May was about 9%. June, about 8.6%. Does that help you out?

Yes, it does. Thanks. Second part, could you just comment on your expenses. It looks like they moved down a bit this quarter. Is that sustainable, besides the media and ad spending in terms of like repair and utility costs, how much further can the expenses go down going forward?

Well rather than go through all of that again, someone else asked that question, and I kind of broke it down by line item.

I might have missed that one.

Right. So I kind of went through line by line all of the various expense items.

Sorry. I will look at the transcript, thank you.

Okay.

Your final question comes from Ryan Meliker from Morgan Stanley.

Quick follow-up. You talked about rising pricing and raising rates in May and June relative to your competitors. And you are sitting at around 90% occupancy. I wanted to know what it would take to remove the dollar promotion, or if that is just not even going to happen any time you can see at all? Thanks.

Ryan, this is John. I don't see that, that is not in the cards, at least not in this operating environment. If we remove the dollar, we would have to cut our rates a lot further to hold occupancy. So until we start seeing an improvement in overall demand in the self-storage industry, and feeling a lot more confident about the stabilization of our occupancy and rates, I don't see the dollar coming off at least in the near term.

Having said that, Ryan, we monitor it all the time. And so when property are 'full' or when we are in the fill-up season, especially around college properties, and those kinds of things, we will turn off the dollar for periods of time in those selected properties, or those selected markets. So it is a property-by-property, even space-by-space management of the promotional discount, not just, okay, here is everything is $1, or everything is 50% off.

At this time, there are no further questions. I would like to turn the floor back to Mr. Tang for any closing remarks.

Okay. Appreciate everybody's interest for our quarter here. And thank you for all your questions. And we look forward to talking to you next quarter. Have a good day.

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