Public Storage (PSA) 2009 Q3 法說會逐字稿

Good afternoon. My name is Christy, and I will be your conference operator today. At this time I would like to welcome everyone to the Public Storage third 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. I would now like to turn the call over to Clem Tang, Vice President of Investor Relations. Please go ahead, sir.

Good morning and thank you for joining us for our third quarter earnings call. 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, 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 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 risks and other factors that could adversely affect our business in 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, November 6th, 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 and 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 an audio webcast replay of this conference call on our website at www.publicstorage.com. Now I will turn it over to John Reyes.

For the third quarter we reported net income of $1.03 per share compared to $0.42 last year. This significant increase was principally caused by two items. The first was related to the SureGuard Europe loan. During the third quarter this year we recorded a foreign currency exchange gain of $21 million as compared to a loss of $53 million last year, representing a year-over-year swing of $74 million or $0.44 per share. The second item was related to our investment in PS Business Parks. In August PS Business Parks issued shares of their common stock in a public offering which reduced our equity ownership in PS Business Parks form 46% to 41%. As a result of applying the provisions of EITF 8-6 to this transaction, we recorded a gain of approximately $30 million or $0.18 per share. Neither of these two items, however, is reflected in our core funds from operations.

For the quarter, our core FFO per share was $1.30 compared to $1.37 last year, representing a decline of 5%. Significant swing items during the quarter included same-store net operating income was lower by $16 million, which was partially offset by the growth in our non same-store properties of $2 million. Interest earned on our cash balances was lower by $4 million due to lower interest rates. Interest expense and preferred dividends in the aggregate were lower by $8 million due to earlier repurchases and our ancillary businesses improved by $3 million.

During the third quarter, we retained approximately $113 million, about 55% of our funds available for distribution. Through September 30th, we retained approximately $306 million, or about 52% of our funds available for distribution. Our cash balances continued to build awaiting suitable investments. In Europe we have been exploring several alternatives for SureGuard Europe to obtain financing to repay the EUR391 million loan to Public Storage that matured -- matures on March 31, 2010, after an extensive solicitation of European bank markets it became apparent to us and our partners that SureGuard Europe would be better positioned as we extend the Public Storage loan. Accordingly, the loan was extended by and additional three years to March 31, 2013. In addition, the interest rate was increased to 9% effective November 1st of this year. With that I will now turn it over to Ron.

Thank you, John. Our operating performance for the third quarter reflects the general trends of reduced economic activity and price sensitive customers. In the US, our same store movements were 1% lower versus a year ago despite asking rates of about 10% lower than last year and $1.3 million higher media spend. Same-store moveouts were lower by 2%. We had 8% higher net absorption versus last year, and year-over-year GAAP narrowed by 30 basis points. Our best performing mark were New York and Houston where we generated positive revenue growth. The worst performing mark continued to be in the southeast starting in Charlotte, North Carolina down through Miami, Florida. The west coast markets were also soft. Before I discuss the trends we're seeing in October, let me review where we were a year ago.

Last year, move-outs began to accelerate in October, concurrent with a financial crisis and continued through year end. To offset this move-out trend we significantly reduced asking rates in Q4. Move-ins improved but not enough to offset the move-outs, and our occupancies declined above seasonal trends. This October was a different story. While move-ins were lower, move-outs were also lower, and we had higher net absorption. We ended October with year-over-year occupancy GAAP of just 40 basis points as compared to 70 basis points in quarter end. Asking rates were about 3% lower than last year and 4% below inflates. We continued to experience rent roll down but at a slower pace.

In Europe, the operating environment continued to improve. In the third quarter the revenue decline moderated and we began to regain pricing power. Asking rates were 2% higher than last year and 6% higher than in place rents. Same store NOI declined 7%. In October, same-store occupancy surpassed last year to 87%. Asking rates were 5% higher than last year, a 7% higher than in-place rates. Going into Q4 we expect top-line revenue trends will continue to improve.

The acquisition environment continues to be challenging. We remain active across all our markets, meeting with owners and lenders. Lenders seem reluctant to deal with problem loans despite declining property NOIs and higher cap rates, resulting in anemic transaction volume. This scenario is likely to continue given new regulations allowing banks to classify loans as performing, even if the underlying property value has fallen below the loan amount. These regulations are designed the encourage restructuring of problem commercial mortgages rather than foreclosure. Ultimately some form of de-leveraging will be required, and that is when opportunities will arise. We will remain patient and disciplined. With that operator, let's open it up for questions.

Thank you. (Operator Instructions) And your first question comes from Jay Habermann of Goldman Sachs.

Good morning everyone. Ron, just a question on the cash balance, which continues to grow at this point. I guess from your comments it just sounds like the opportunities, at least for investing at this point, are probably a ways off, if I had to characterize that correctly. Can you give us a sense of perhaps near-term uses? Do you think debt pay down makes sense at this point for other uses of capital?

Jay, there's a couple of things. On the debt pay down, most of the mortgages that we have in place are in CMBSs and would require pretty significant prepayment penalties. Earlier in the year we did a debt tender offer on the unsecured debt, and I think we garnered about $110 million, $120 million. And that was when the bond markets were far more turbulent than they are today. I doubt if we would get much of a reception for bond tender. You will also recall earlier in the year we repurchased in Q4 and Q1 about 500 million or so of preferred stock and preferred units, and I think that opportunity has also disappeared. On the acquisition front -- so in terms of doing something on the balance sheet I think those opportunities are pretty nonexistent.

In terms of acquisitions, while I think the market is a ways off in terms of really accelerating and we're not seeing a lot of transactions close what we are seeing is an increased number of conversations with people, and an uptick in kind of opportunities being presented to us, vis-a-vis where we were earlier in the year. So I'm cautiously optimistic.

Where do you see cap rates at the present?

They're all over the board, because of the limited transaction volume. If you wanted to kind of a matric, I'd say somewhere between eight and ten on stabilized cash flows, depending on location, and asset quality.

Okay, thank you.

Your next question comes from Ryan Meliker of Morgan Stanley.

Question on same-store margins. I was hoping you could help me understand. Looks like you've done a great job yet again in curtailing your rev pass drop-off through to [false closure] of your gross margins. I'm wondering, maybe you could give us color on the differences between your US same-store facilities versus the Sureguard Europe same-store facilities where it seems like the flow-through is becoming much more impactful over there, where I think this quarter they saw -- in Europe you saw a 3.5% drop in margin on a 3.1% drop in rev pass and in the US 5.2% in rev pass and only a 9% margins. And we saw something similar last quarter where your [numbers] were a little bit worse. What are the different dynamics that help justify those things or are there different things you're doing in the US that maybe you can take over to Europe with Sureguard and help salvage some of that margin erosion? Thanks.

Ryan, there's a couple of big picture things between the US and Europe that you need to keep in mind. First is, both in the US and Europe, we've accelerated advertising and promotion, but I think if you look at that the year to date numbers, in Europe we're up close to 50% or 60%, where as in the US, it's pretty nominal increase. In Q3 we had a big increase in the US, but year to date, as I said, we're about the same. Europe also does not have the scale that we have in the US. They're in seven countries with 200 or so properties. And as know we've got 2,000 properties here in the US. So just the whole scale and efficiency of management is not quite the same in Europe as it is here in the US. On a stabilized basis, taking out advertising, I think you can look at Europe to do somewhere 60 plus percent margins. It varies by quarter. And that's a dramatic improvement from where they were three years ago. Steven [Detalinar] and his team have done an exceptional job of taking costs out of the business and rationalizing it. But I don't think we're going get much past 60% to 63% in Europe, and certainly not until we gain significant pricing power. Does that address your question?

Yes, I think it answers most of it, and basically because of smaller scale there's a little bit more operating leverage in the European business in that your US business.

Minor -- a million dollars of up tick in advertising in Europe has a much bigger impact on the operating margins there than does it here in the US.

Great, thanks a lot.

Your next question comes from Mark Biffert of Oppenheimer.

Ron, from your comments on traffic improving into October, I guess I'm just wondering if you think the use of your concessions will probably pull back again, and does that imply that we could potentially see, or have we seen a trough in same-store NOI, or are you not ready to predict that, and probably see more downside over the next couple quarters?

Mark, let me kind of touch on -- make sure I communicated properly on what we're seeing. On the move-in side for Q3, our move-ins were actually about 1% lower despite lower asking rates of close to 10%, and a $1.3 million higher media spend. We were in about 100 marks on media, 100 market weeks this year in Q3 on television versus about 60, 65 last year. So despite lower rates, higher media spend, our move-ins were essentially flat. Going into October, move-ins were actually 4% lower than last year. So really where we're making it up in the move-outs, which are down fairly substantially from last year, and my guess is they will be down in November and December as well. So us and I think most of the other operators that have reported are benefiting from reduced move-outs, not necessarily from a whole bunch more move-ins. Pricing is still pretty competitive, and customers are extremely price sensitive. I think everyone will benefit on that through Q4 and possibly into Q1, but really the key to 2010 is getting the move-in line moving ahead of last year. So why I think it's going to look gin Q4, I'm -- I think it's a little premature to call a bottom yet.

So the positive economic trends that you're seeing, how long does that typically take to work itself through to positive move-ins into your portfolio have you seen?

Well, for us, we've got a little bit of an apples and bananas comparison in Q4 because of all the financial turmoil in Q4. Q1 is a seasonally low activity period so it's really going to be into Q2, Q3 before we see really how the customer is going to behave and what kind of pricing power we have into 2010.

Thanks a lot.

Your next question comes from Christy McElroy of UBS.

Good morning. We're obviously in a much different world today than we were a year ago, and arguably in the next phase of the cycle. As you start to think about your approach to he media advertising, marketing and promotions ahead of the spring leasing season, will your strategy change at all versus a year ago, and given that your occupancies have remained relatively high, do you see greater pricing power as that spring demand ramps up?

Christy, I think it's a little early to call that. As I said, I think everyone is benefiting from reduced move-outs, not necessarily higher move-ins or greater pricing power on the move-in side. And we're going into the Q4 and early Q1 are kind of the seasonal lows for the business. And pricing is down, is always down seasonally in Q4 and Q1, vis-a-vis the summer months, so I think we're going to have to wait for February, March, April next year to really see thou customer is behaving in the seasonal upturn environment.

It seems like you started to ramp up your ad spend a little bit earlier last year. Would you say that this year you'll probably do the same thing?

Yes. While we've been able to hold occupancies and we're closing that occupancy gap year-over-year, I think we're going to continue to be aggressive on the media spend until we both see an up tick in the move-in volume and regain a little more pricing power.

Thank you.

Your next question comes from Todd Thomas of Keybanc Capital.

Hi, it's Jordan Sadler here with Todd. Any insight you can offer, Ron, maybe on the move-outs and sort of the slowdown there? Anything that's changed, mindset of the existing tenant?

Hi, Jordan, this is John. There's nothing, I don't think, no insight that we can give you as to why it's slowing down. I think last year was the anomaly. This year is pretty much acting at a more normalized level of move-outs, and hence on a year-over-year comparison we're much better off, and that should continue, because last year the move-outs I think continued, and even accelerated a little bit through to January, February of this current year so we should have good comps against that. The other thing I would like to point out, how people focus on move-ins, move-in volume, and what the rates of move ins are, our move-ins have been relatively flat but on lower rates. On the move-out, occupancy and revenue growth on a relative basis is that our move-outs are moving out at a much slower pace as Ron has indicated and they're also moving out at a rate that is much less than last year, which is about 10% below last year. So we're actually benefiting on a rev path basis as we move forward from just the move-out activity. One, on volume being lower. And two, the rate also being lower in terms of the price that they're moving out at.

What are you doing to, in terms of in place rents or in place tenants? Are you still raising rents?

No. To existing tenants?

Yes.

We have not raised rents to existing tenants since, I believe, July, and we probably will not even start thinking about it until probably March or April of 2010.

Which would basically be an anniversary?

Yes. Pretty much. And, that kind of -- those time frames are consistent with what we've been doing for the past couple years. We typically do not send rental rate increasing letters after August and in through most of the first quarter of the following year.

Okay, thank you.

Your next question comes from David Toti of Citigroup.

Hi. Michael Bilerman is here with me as well. Couple questions on the loan to Sureguard and the extension, could you talk us through how the new rate was set, how that was determined to be market and how the negotiations went in the context of you being a joint venture partner, essentially?

Well, New York Common is our joint venture partner in the -- in Sureguard Europe. They own 51%, we own 49%. So you have two parties negotiating the rate. We looked at what we thought the market was, they looked at the market was, and we kind of arrived at the 9%. Two independent parties. I don't have much more to add to the than that.

Thanks.

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

Sticking along the same line there, you extended a loan on the Sureguard as of 2013 and yet last quarter you extended loan maturities only one and two years. Is that reflective of your expectations for the European market overall, and is the plan still to spin that off eventually down the road interest a separate public entity?

Mike, I'm not sure I'm following you in terms of the loan extensions, one or two years. The loan extensions for last quarter, last two quarters that we've been talking are in the joint ventures, not on the loan between Public Storage and Sureguard Europe.

Yes, they were pushed out. You pushed out the your loan to Sureguard overall to 2013, but you only extended the debt maturities in those two joint ventures out a year and two years. I was just wondering if that's kind of reflective of what you expect for the market and the ability to spin that off.

Michael, no, it's not really. There's two joint ventures. Each have their own loan. One of the joint ventures, joint venture two, the extension was already a provision in the existing loan document, which Sureguard Europe had, or the joint venture had an option to extend that loan one additional year. So that was why that one only went out one year. The other one went out, I think it was two years, with a one year option. So essentially a three-year extension, and that was -- although the same loan syndicate, it was new loan that was put into place. So our extension of using a three-year loan really wasn't reflective of what was going on in those joint ventures and it was just reflective of Public Storage and our partner thought was a reasonable time frame to give Sureguard Europe as much financial flexibility as it needed to continue on its path of growth.

Thank you.

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

Hi, Ron or John, one of your competitors noted that they had increased pricing on a sequential basis when normal seasonal patterns dictate the opposite. Have you seen any of that in your own portfolio? Have you felt comfortable sounds like probably not.

Michael, are you talking about increased market trends on a sequential basis?

Street rate, thank you.

We did also increase our street rate from the first quarter into the second quarter, just like we normally do, into the third quarter, it came back down versus the second quarter, but that again is fairly normal if you look over the past -- I'm looking at three years and that same trend continues to happen. So there's nothing -- there's no news there, I guess. I don't know what the story is behind that.

Is the issue, Michael, sequential Q4 to Q3 that the street rates are moving up in Q4 vis-a-vis Q3?

That and also just curious about Q3 versus Q2. The same seasonal pattern would take place in Q4 to Q3, right?

Yes, normally our rates are the highest in Q2, and they essential peak in the month of July. And then from July on, they typically start moving down until it kind of bottoms out, generally in December, January, and then that process starts all over again.

Right. So you didn't see any change from that normal pattern this year?

The only change we saw was maybe the steepness the growth. So this year it wasn't as steep of growth as we had seen in maybe the past couple of years. And also so far we haven't seen the drop -- the decline, I guess, the rate of decline that we experienced in the past couple of years, either. As we're moving in from September to October.

And then can I also ask what impact you think healthcare legislation would have on your employee costs?

From what we've been able to garner, Michael, and there's all sorts of bills floating around, but we have a pretty comprehensive medical plan for the field employees that we already offer. We have for the last couple years. And from everything we've been able to tell that should have no impact -- the legislation should have no impact on us as we currently understand it. Because of our kind of comprehensive medical plan for the field.

Thank you.

Your next question comes from Ross Nussbaum of UBS.

Ron, I'm curious to talk about the acquisition environment and as it relates to your balance sheet and your strategy. As I look at the competitive landscape, I'm staring at three publicly traded competitors who traded eight and a half to nine and a half cap rates. Given the strength of your balance sheet, the cash you've got today, what's preventing from you going out, buying them, blowing out most of the employees, taking the synergies, painting the doors orange and calling it a day?

I can't answer that question really. Do you have another question?

Well, I think to me it's the big question, because as we think about growth of the Company over the next 12 to 36 months, for a 15 plus billion dollar company to grow buying one-off properties isn't quite going to get you there. So maybe the broader question is how does a $15 billion self-storage company grow more than low single digits given the leverage profile of the Company today?

Well, I think if you step back and look at the industry, Ross, there's 55,000 plus self-storage facilities in the US. We have less than 5% share. So while it may be obvious to look at a public competitor who has 200 to 400 facilities, there is plenty of opportunity out there in the self-storage market. The big picture, or the big object obstacle is getting sellers motivated to sell, and if you have equity in your property, this is probably not the opportune time to sell. But there's other things that trigger or motivate people to sell assets. Then you have the debt, and as you know, there's, over the next five years, a trillion dollars or so of commercial debt coming due, both in banks and insurance companies and CMBS, and I think that will provide us a fair amount of opportunity as those loans either get refinanced or reequityized or sellers -- the banks are forced to sell them or the people who own them are forced to sell them. So I think there's plenty of opportunity other than what you articulated. Having said that, we're always looking and always think about opportunities in a wide variety of areas in the self-storage business.

(Operator Instructions) Your next question comes from Mark Mueller of JPMorgan.

Hi, it's Mike. Ron, I think you said, and I may have missed some of this that October asking rents were down 3% year-over-year at the end of October. Can you tell us what that number was at the end of September, or the end of the third quarter, September 30, and maybe another way to look at it, the stat you put in your press release about in the-place rents being down 5% at 9/30, can you tell us what that was at October 31?

Mike, at the end of September, I guess I thought the mark to market was about 11 -- excuse me, our rate, market rates were down about 11% versus, I think the three and a half that you had mentioned at the end of October. And really, it was this year, from September to the end of October, we did after decline, but last year the decline was much greater from the end of September to the end of October, so that's what narrowed the spread.

So 11 to three and a half?

That's correct.

Okay. And do you have that comparable, the 5.0% number, the 5% number in place?

The in place number versus last year?

Yes, I do. Just one second, Mike.

Thanks.

Yes, it stands at about -- it was about 4.8, Mike.

Okay. Thank you.

You're welcome.

Your next question comes from Jay Habermann of Goldman Sachs.

Hey, back again. Just a question on the margins. You talked about obviously expense control. As you look out to next year, if you think that the top line will remain under pressure, or could remain under pressure, is there much left in terms of expense control that you can implement?

Jay, we're always working and thinking about ways to kind of improve our operating efficiency, and I would say there's always those opportunities. In the big scheme of things, whatever we come up with, because the big controlables are really labor and maybe some utilities, will probably be offset by property taxes. As you know, municipalities are under pressure to raise money, and so I think we will continue to see pressure on the property taxes. The big swing items in the expense for next year will be advertising, and I think Christy or someone already asked the question, kind of what's our outlook for advertising next year. And I would not expect to see a big reduction or any dramatic change, at least through Q2. If rental activity is strong and we have pricing power, then I would expect to see some change in our advertising mix possibly going into Q3 and Q4, but I think we're going to come out pretty strong in Q1 and Q2.

And just one more question. The 4% gap between your in-place rents and market, at what point does that widen out and you become more concerned?

More concerned?

I mean driving higher move-outs versus the rate you've seen thus far.

Right now, Jay, it's down -- our scheduled rents are below our market rents by about 3.5%. So I'm trying to understand your question of how it drives move-outs. Usually when we get concerned about that is because it's the other way around. We're driving market rents a lot higher than what in the place are, and people might get concerned that way. If you're saying, our market rates get below in the-place rents that existing tenant base says, I want to lower my rates, or otherwise I'm going move out. Is that the question you're kind of alluding to?

So at this point you are seeing your in-places below market?

Our in-place is below market. But let me tell you this. In January through the end of March that negative spread was down about 10%. And, yes, we did have some issues with tenants, existing tenants, who were concerned that they were obviously paying a contract rate greater than what new tenants were coming in. We didn't see like a mass exodus out the door. We saw move-out volumes start to slowdown during that time frame.

Okay. But even competitors offering the two months free and other sort of incentives at this point.

We have that to deal with all the time, and that's really reflective more in the move-in volume in terms of how our product is priced and what promotional specials we offer, vis-a-vis the competition doesn't really impact move-out volume.

Okay, thank you.

Your next question comes from David Toti of Citigroup.

Ron, it's Michael Bilerman. Question going back to the investment side of it. You used the word suitable investments for the Company in your opening remarks. Clearly with the cash balance you have and the free cash flow, $400 million a year, it's almost 3% of your market cap. There's obviously a lot of investment capability building within the Company. I was wondering if could you expand a little bit on what you define as suitable.

Well, we want high high-quality real estate in markets -- the major metropolitan markets where there's people, there's density of population, there's generally economic growth rising -- stable and rising incomes. We want well located facilities, as I said, that are well constructed, preferably on main streets that have high traffic counts and an absence of dense competition around them. And overall, in the scheme that are complimentary to our franchise where we don't want to add a property that may have some of those characteristics but where we already have existing assets.

And you want all that at north of a 10 cap.

That would be great if we could get it north of a 10 cap. As I said early, I think the pricing is going to be somewhere between 8% and 10%.

Hi, Ron this is David Toti again. Just going back to the loan question, if you're getting 9% on the loan would you then entertain loans to other public or private operators where could you get a 9 to 10 yield on just the type of properties that you were essentially talking about?

The big picture thing that you need to keep in mind with Sureguard Europe is we own 49% of the Company, and we have a significant say in terms of how the business is run, we partner with Steven over there. So it's a little different than making a loan to a third party where we don't have control over the assets, or influence over the asset.

Great. Thanks for the detail.

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

Thank you very much. Could you shed a little light on what is happening with the pricing of Internet search engine?

Sure. Our cost per click has gone up fairly substantially since April, but you need to think about a little different than just pure cost per click because it really depends on where you're bidding. Are you bidding for a number one spot, a number two spot, or a number three spot in the paid search. So someone could double their cost per click if they went from a number three position to a number one position, because obvious one costs more. So we've been a little more tactical in our positioning on the web in terms of our positioning, and that has driven up our cost per click. But on a cost per move in it's up about 15% to 18%, where as the cost per click is probably up almost 75%.

Thanks, I appreciate. Then just more broadly, as you look out to the next leasing season next summer, what markets do you think will you remain most concerned about and conversely where, do you think the best improvement is going to be?

Florida has been at the bottom of the performance metrics for a couple of years now. So I'm hoping 2010 would be a resurgence in Florida and a stabilization in the southeast. Hopefully California also stabilizes, which would be a tremendous benefit to us. The Midwest over the last year, year and a half, has been pretty steady Eddy, and on a relative basis is outperformed most of the coastal marks. Other than the northeast. So I'm hoping California and the northwest stabilizes and probably see an uptick in the Florida markets.

And the ones you remain most concerned about?

Well, I think on a relative basis, if Florida and the west coast improve on a relative basis, the Midwest will underperform.

Thanks very much, appreciate it.

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

Ron, in talking with the banks, beginning of the year across all sectors it seemed like it was very difficult to get them to do anything. Yet right now we're hearing that they're starting to free up a little bit more. Are you starting to see any kind of wavering in the banks, maybe looking to possibly sell some assets at distressed prices? And also what's the interest right now from private capital in the space relative to the beginning of the year?

Well, as I touched on, Michael, we've not seen a lot of motivated activity from the banking sector, neither has anyone else, by the way. The banks, in talking to a number of banks, they are simply -- they're not at this juncture highly motivated to move a lot of distressed or underwater commercial loans. They seem to be spending more time on -- I think the phrase is blend and extend or blend and pretend. So we haven't seen a lot of movement in the banking sector. The word is that next year will be different rent, and so we'll see. Obviously with change in the regulatory situation where banks can hold loans as performing, even though the collateral is below the loan amount is not a positive in terms of motivating them to move nonperforming loans off of their books.

Okay, and the interest from private capital in the space, has that changed year over year?

We haven't seen or heard of a lot of activity in terms of private capital coming into the space.

Finally, in the past you provided kind of a sense as to how much you have looked at year to date in terms of new product. Could you give us an update where that stands year to date?

Michael, I don't have that number with me, but we continue to look across all markets, and as I touched on, I think the activity, the conversational levels and a number of conversations we were having is much greater than it was, say, in Q1 and Q2. So we're seeing the up tick in conversations, and assets people are talking about doing something with.

Thank you.

Your next question comes from Michael Mueller of JPMorgan.

Going back to Europe again, for you extending it, was the issue there, was it pricing in the market, or that volume that dollar size of loan wasn't available? Second part of that is how are they perceiving this loan? Are they actively still going out even though you made the extension, and trying to get financing, where if they got it in three months or six months it would get repaid, or is the mentality, this is in place for a few years, we don't have to worry about, so it's just going to sit there for some time?

Mike this is John. Answering the first part of your question, it wasn't pricing as much as it was the volume. We didn't feel that we would get any -- get close to generating enough of a loan or loans, I should say, plural, to repay the Public Storage loan. In addition to that, the covenants that banks were asking for were a bit onerous and restrictive to the liquidity of Sureguard Europe, and we decided to collectively with our partner and the management team in Sureguard Europe that it probably was best if Public Storage would extend the loan.

As for continuing to search for financing, currently they are not really doing that right now because they've just basically stopped doing that, so we or going to have to wait for a period of time and see how they have the capital markets develop over the next several years. Until then, they've got three years to pay off the loan.

Okay, great, thanks.

Your next question comes from Ki Kim of Macquarie.

Just to touch back on your acquisition comments. Could you comment on the actual deal value of self storage properties we've seen in the past couple months?

Ki, no, I think Michael asked that question. I don't have that number with he me. But it's higher than it was at the end of Q2, and as I touched on, we're seeing increased levels of conversations and properties that people are talking about selling.

And is that mostly from the owners or from the banks?

Mainly from owners.

Got it. And if there's -- if the lack of deal activity, let's say, continues for the next couple quarters, does that make you rethink your strategy about what is suitable for Public Storage? Maybe will you go into more secondary markets if the pricing is right?

Well, Ki, we're in 38 states, so there's not many markets that we're not in, and in most of the markets where we are in, there's always opportunities. There's quality assets that we would like to acquire. Certainly there's other markets like Omaha, Nebraska where we have one property. If a nice portfolio came for sale in Omaha we'd probably look that. That but there's plenty of stuff here in Los Angeles, New York, Miami, Orlando, Houston, Dallas that we would like to acquire.

Okay, thank you very much.

And your final question comes from Michael Knott of Green Street Advisers.

I was going ask a related question to what was just asked. I was going to mention that earlier you had said there's something like 55,000 facilities across the country, and implying a pretty wide opportunity set, but then also you rattled off a pretty stringent list of attributes that you look for, and rightly so. So I guess my question is, how much of that 55,000 facility count is really something that would be attractive to you? Is it a pretty small subset?

Well, Michael, I don't have an exact count of how many facilities meet those criteria. But if you just want to slice the industry in half, that's, what, 27,500, and slice it again, it's 12,000. Take 10% of that, that's 1,000 facilities. That's 50% growth. So I think there's a fair amount of opportunity set.

That contrasts with Europe, where in western Europe we have somewhere between 1,000 and 1,200 facilities, and out of that there's maybe, other than the two public competitors, Big Yellow and Safe Store other than that probably only a couple hundred facilities, if that, that meet the criteria, because a lot of that space over there is older industrial or converted office buildings. It's really not purpose-built product.

And then, last question, you mentioned you're going to remain patient, and you had also mentioned sort of a five-year window of accelerating debt maturities in the commercial hit business. How long will your patience extend with respect to your cash balance? If we're sitting here a year from now and you still haven't had any acquisition opportunities, will you still remain patient? We feel pressured to maybe pay out some of that cash as a special, or how do you think about how you should -- how we should think about your patience and how long that will play out?

Well, in the big picture of things, I think getting trigger happy on capital allocation can sometimes cause serious damage to a company. And I think we've witnessed that over the last 18 months, where companies have gone for growth versus quality, or they haven't had their balance sheet in order when they've pursued growth. So I think we'll -- I'm confident we'll remain patient and disciplined. With respect to the dividend, we've historically had a policy of paying out what is required to meet our REIT requirement and our taxable income, and I don't see anything changing in that regard with respect to our dividend. I would also say opportunities arise in different places. If you look at the last year, we've, as I said, we've purchased $450 million, $500 million of preferred and debt, and that was an opportunity that 18 months ago we weren't even thinking about. So opportunities will arise from time to time, so we want to be prepared for them, even if we can't see them in the immediate horizon.

Okay, and I'm actually going to ask one more question. Apologies.

That's okay.

Can you just outline for us your thought process with respect to participating, even though the amount was small, in the PSB offering, given the very different business line that they're in?

Well, We've had a long-term investment in PS Business Parks. It's been a very, very good investment for us. And we wanted to help, Business Parks in terms of their capital raise. We see a lot of opportunity in the commercial real-estate market, office industrial space over the next -- over the near term and the long term so we wanted to participate in that, and it helped them be successful in that offering. Business Parks also manages a couple million square feet of commercial space that is still owned by Public Storage, so there's more to the relationship than just having a diversification of cash flow.

Thanks.

And your next question is from David Toti of Citigroup.

Just when you thought it ended. Just on the dividend, is there anything -- I didn't know if any of the gains that were generated, either foreign exchange or the PSB gain does that trigger anything on a distribution basis in terms of higher taxable net?

Dave, this is John. No, it doesn't. It's just pure GAAP accounting. There's been no true realization of a sale or that foreign currency gain that would require -- that flows through our taxable income that would require a dividend.

So at 220 you're still well above the minimum, or is there any pressure to have that increased?

We monitor that constantly, David, and when the time comes that we have to increase it, that's a decision that our board of directors makes.

It's actually Michael speaking.

I'm sorry, Michael.

That's Okay. Last one, John, in your opening comments, you talked about going out to the markets for the Sureguard loan, and I think, Ron, you talked about how you had sat down with two parties and negotiated a fair rate at 9% to reflect market. I guess, where was market in terms of proceeds level and did you think about potentially getting in a new loan to reduce your outstanding to the venture? I mean, was that an option that you considered, or was there just no financing what so ever available at any reasonable cost for the venture?

Well, Michael, I will start the answer, then I will let John finish up here. The Sureguard Europe -- first of all, in Europe, it's very difficult to get a pan European loan. So what we were looking at is kind of a country by country bank syndicate from Great Britain to France to Holland, Germany. So we needed to go country by country with different loan pools. And kind of working our way through that, the aggregate was not going to come up to the, as John touched on, the 390 million Euros. It was also going to leave the Company in a place where it had virtually no financial flexibility with the cash being used to either pay interest or pay down principal on the loan, and here we're in an environment where there's in all likelihood great potential acquisition opportunities, although the pool is limited, but great potential acquisition opportunities, and so we and our partner decided, hey, we want Sureguard Europe to have financial flexibility here in this environment and not be significantly constrained. You want to add anything?

I don't have anything to add to that.

And that's what drove you to go three years rather than any shorter term to have the Company not have this stress on them for the next few years?

Absolutely, Michael. Our loan is not requiring principal amortization, so they're able to retain that cash to use for acquisition opportunities, where as the loans that were on the table required a significant amount of amortization, and with basically, require the bulk of their cash flow to be used, as Ron mentioned, to service the debt.

Is there any fees that we should be aware of, that either Public Storage will receive in the fourth quarter for redoing the loan, or any costs associated with the process that will flow through the P&L?

Public Storage did not charge any fees to extend the loan. There were some costs that were incurred, but I would say they're rather minimal costs by the Sureguard entity.

Last question, one of the JV loans, and I may have missed this, said May 12 last quarter, but now it went back to May 11. The first JV loan, the 110 million Euro loan said it was extended to May 12th, last quarter, and now it says due May 11th.

I think with the way the loan is written, maybe it's just how we disclosed it, Michael, it's a two-year loan with a one-year optional extension. So I think we might have got a little tripped up on the true maturity date there.

So it's an 2011 maturity -- it's a 2010 maturity extended to 2011 with another to 2012?

Two years until 11. 2011 with one year to 2012.

Right. So last quarter you said it's now due May 12 was the extra year, but this press release you talked about 2011, but they could go to 2012?

They could go to 2012.

Thank you.

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

Sorry, one last question. Ron, as you think about the next couple years in the business, presumably if the economy does eventually get back on track, how do you feel about robustness of a potential pricing and fundamentals recovery this time compared to what the industry has seen in the past, obviously well the consumer being burdened with balance sheet troubles, et cetera, et cetera?

Well, Michael I would say big picture, there's two things. One, demand for our product is driven generally by life events, and I think ourselves, as well as the other industry participants, would class this as a recession resistant business, maybe not recession-proof. And that recession resistance has to do with people are having children, they're dying, the kids were moving home, the kids are moving back. Unfortunately, instead of moving into new homes they're moving out through foreclosure. So that activity is going on each and every day. And if you look at the US over the next couple of years, in many of the markets where we operate, there's anticipated to be positive population growth, and that's great for our business in terms of we need people, and we need activity in those market places. So fundamentally, there will continue to be growth, growth in demand, and pricing power for our business.

One thing to kind of touch on your point about the consumer and being strained and using money to pay down debt versus consumable goods, that may reduce home activity, that may reduce the level of discretionary spending. That also generates activity which is a positive for our business. And so that slice of the business, what we call the movers, may have permanently shrunk or shrunk 40% or 50%, and that will take a piece out of the business and kind of moderate the robustness of pricing and activity that we'll have in the coming years.

Okay, thanks for your thoughts.

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

Yes. I want to appreciate everybody's questions on the call today's call and for participating, and we'll see many of you next week in Phoenix at NAREIT. Until then have a good afternoon and a good weekend.

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