Public Storage (PSA) 2010 Q2 法說會逐字稿

Good afternoon. My name is Wes, and I will be your conference operator today. At this time I would like to welcome everyone to the Public Storage second quarter 2010 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 will now turn the conference over to Mr. Clem Teng, Director of Investor Relations. Please go ahead, sir.

Good morning and thank you joining us 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 session, 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, let me 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 risks and other factors that could adversely affect our business and future results are described in the today's earnings press release, as well as in our reports filed with the Securities & Exchange Commission. All forward-looking statements speak only as of today, August 6, 2010, 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 with a non-GAAP financial measures we're 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.

Thank you, Clem. Our core FFO per share was $1.27, compared to $1.25 last year representing an increase of 2%. Core FFO per share excludes the impact of foreign currency exchange gains and losses, EITF D-42 charges for redeeming our preferred securities and due diligence costs related to our acquisition activity. Our core FFO during the quarter was impacted by the redepletion of our equity stock, improved operations from both Shurgard Europe and our non-stabilized assets in the US, partially offset by reduced operations and our same store properties. The redemption of $205 million of our equity stock during the quarter resulted in a $5 million increase in our FFO as distributions to these shareholders were eliminated. Notwithstanding a currency conversion rate that was 6.5% lower than last year, due to a stronger dollar, FFO from Shurgard Europe increased by $2 million. This increase was primarily due to improved property operations, which Ron will discuss in a moment.

Operations with respect to our portfolio of 94 non-stabilized facilities increased by $3 million. Included in this number is $1.5 million generated by the 31 facilities that were acquired during the quarter. Partially offsetting these items is a $3 million decline in our same store net operating income. The declines in our year-over-year same store revenue and NOI continued to moderate sequentially in the second quarter as compared to the first quarter and the fourth quarter of last year. On a year-over-year basis revenues declined 0.2% in the second quarter, compared to a 2.2% decline in the first quarter and a 3.8% decline in the fourth quarter. NOI declined 1.5% in the second quarter, compared to a decline of 3% in the first quarter and a 3.4% decline in the fourth quarter.

During the quarter we were able to put approximately $338 million of cash to work. $205 million to redeem our equity stock, $118 million to acquire facilities, and together with a net proceeds from a new preferred series, $15 million to redeem one of our existing preferred series. In the second quarter we retained approximately $48 million of our operating cash flow. As June 30, 2010, our cash and marketable securities totaled about $570 million. In July our Shurgard Europe team completed the refinancing of the EUR115 million JV loan. The new loans maturity date is July 2013. Shurgard Europe has a 20% interest in the joint venture. With that I will now turn it over to Ron.

Thank you, John. Our domestic same store properties continued to improve. Occupancy traded higher year-over-year ending the second quarter at 91.8%, about 1.2% higher than last year. Both occupancy and in place rents were higher in July than prior year. Asking or street rates were above last year and have been higher since March. Our year-over-year revenue for available quick growth, or REVPAF growth, was positive in June and July, the first positive month since December 2008. There is a large gap in revenue growth rates between various markets.

The Northeast led by New York, Philadelphia, and Washington, DC, Baltimore had positive revenue growth rates between 2% and 5% during the quarter. Los Angeles, our largest market, was down 2% and the entire West Coast was negative. The Southeast markets continued to be our worst with Charlotte at a negative 4.4% growth rate. However, the West Coast and Southeast markets both improved more than the Northeast during the second quarter. In the second quarter we decreased spot TV by by 30% resulting in lower media spend. Our customer acquisition costs were also 2% lower primarily due to a 3% higher move-in volume. Going into the third quarter, we expect the media spend to be lower than last year.

In Europe same store operating trends continue to improve. Higher asking rents were offset by lower occupancy leading to a 2% revenue growth. Net operating income grew by 8% in the second quarter due primarily to higher revenues and significantly lower advertising cost. Similar to the US there was a wide variance in growth rates between the various European markets. Most markets were positive, between 2% and 7%, led by Sweden. The only negative growth rate market was the Netherlands, down 6%. During the second quarter we completed the acquisition of 31 properties consisting of approximately two million square feet for $200 million. We are currently under contract to acquire seven lender owned properties for approximately $27 million for 400,000 square feet. With that, Operator, let's open it up for questions.

(Operator Instructions. Your next question comes from Smedes Rose of KBW.

Hi. It is KBW. I was just wondering if you could just talk about the change in move-ins versus move-outs, and any kind of changes you were seeing in the length of stay, across your portfolio?

Hi, Smedes. This is John. Length of stay, as best we could tell, is pretty much trending the same way it has historically. So, we haven't seen any real change in that particular, and I am talking about new tenants coming in and how long they stay after move-in.

In terms of move-ins, our move-ins were relatively strong during the quarter, and we're continuing to see pretty good move-in activity with it and we are able to get higher rates with that. Move-outs, during the first quarter our move-outs were substantially below last year, but during the second quarter it pretty much got back into line with last year. So, move-outs I would say are more at a normalized level to what we have historically seen. I know in the past couple of conference calls we have talked about how move-out activity had ramped up quite a bit a year ago, and then they ramped down over the past I would say over the past six months, but in the second quarter of this year we're back to more normalized levels.

Okay, so it sounds like overall trends are kind of in line with what you would expect seasonally?

Generally, yes, that's correct.

Okay. Thank you.

You're welcome.

Your next question comes from Eric Wolf of Citi.

Thanks. Michael is also on the line with me. As you mentioned in your remarks, you're generating about $50 million a quarter in cash flow above your dividends. You have about $50 million cash on balance sheet, so I guess I am just wondering, now that you have repurchased your preferreds, what's looking like the best investment opportunity for you right now?

I would say continued acquisitions. As I touched on, we did $200 million in Q2, have another $27 million in the hopper under contract at Q3, and we are looking at a variety of things, but I think the acquisition opportunities are our best source of capital deployment.

Got you. And I guess how do you think about the acquisition environment right now? We have heard sort of mixed commentary from your peers, some noting that it is looking a lot better, think they're getting a better value right now and people are more inclined to sell, while others are saying that it is -- people are still holding back and they are two or three years away from getting a good value. What are you seeing and how much opportunity do you expect over the next couple of months?

Well, I think we have two sets -- if you can look at the stuff that we bought, we have two different groups. The A American portfolio was from an owner, a long established owner that decided to sell. It was not a distressed sale, by any means, and so they just decided to exit the business, and I think there is more people in that camp today than there were a year or two years ago.

And the second group of sellers are financial institutions that have foreclosed upon properties. And if you look at the seven deals that are under contract and the one property we did in Q2 in Atlanta, those were all lender foreclosed upon transactions. All at what I would consider, substantially below replacement costs, which is another reason why I think acquisitions are the best source of capital deployment.

Got you. Thank you.

Your next question comes from David Toti of FBR Capital Markets.

Hi, guys. Ron, I have a question for you. Given that we're through maybe the worst of the credit crisis in the last couple of years, has your strategy relative to debt versus preferred financing changed at all?

No.

How do you think about the spread between the costs of those capital over time in the context of today's environment?

Same as we always have.

Can you review that with us?

Well, if you look at the preferred, there is always gaps in time when debt is cheaper than preferred, and we're certainly at one of those junctures, but we think in the long run the preferred is a very economical source of capital when you consider all the -- both interest rate risks, the refinancing risks, the fact that we can call the preferred after five years, and the fact that the dividends are tax deductible. All of those features combined, we think, makes the preferred a lower cost of capital in the long run than debt.

Great. Thank you.

I think it certainly was validated in the financial crisis because there is a number of people that had a lot of leverage that had to sell a lot of equity at extremely low prices, substantially below NAV, to remediate or fix their balance sheets.

Your next question comes from Christy McElroy of UBS.

Hi, good morning, guys Just looking at your realized annual rent per occupied square foot and the decline from Q1 to Q2. With the exception of 2009, it seems like in past years that number would typically stay flat or go up a little bit sequentially, but it also seemed like occupancy went up a little bit more than normal and that was reflected in your rev path. So, the question is, was that Q2 realized rent number influenced by a greater amount of leasing in the quarter and free rent in the quarter, such that you will see the benefit of all of that leasing as the free rent burns off next quarter?

Christy, that's a pretty darn good observation. Yes, it's more discounting going on in the quarter for two reasons. One, we had more move-in activity, and the second reason is our rental rates were higher, so both the volume and a rate difference that flows through. We take the three month hit, the first month as the tenant moves in. We don't amortize it out over a period of time.

Yes, we did -- you're absolutely right. The realized rent per square foot did drop down. It also dropped down last year, but we also tightened up the year-over-year gap, so in the first quarter our realized rent was down about 3%. That gap narrowed in the second quarter, down to about 1.5%, so not only did we pick up occupancy, we also narrowed the gap on the realized rent, too.

Great. Thank you.

You're welcome.

Your next question comes from Dave Bragg of ISI.

Hi, good morning to you. Just a follow-up to Eric's question on the acquisitions. Could you help us understand the cap rates on those two buckets, the A American portfolio and the more recent deals. And then second, on the more recent deals, could you give us the occupancy rate at which they are currently?

I think the occupancy rates on the stuff that's under contract is anywhere between 30% and 75%, 80%, and so your cap rates are, so to speak, all over the board from zero to probably 7% or 8%. I would say, which I have said in prior quarters, that in this environment where you should look at it is more of a price per pound kind of transaction versus a cap rate, certainly an initial cap rate.

We think the longer term trend once the properties are stabilized, operated under the public storage system will move probably somewhere between the eight and 10, if not north of that yield on the investment. But one of the properties we have today under contract is in Hawaii that we're buying at $80, $85 a foot, which is by any measure substantially below replacement cost. So, I think that's really the way you need to look at it is, big discount to replacement cost, upon stabilization somewhere between 8% and 10%.

Okay. Thank you.

Your next question comes from Todd Thomas of KeyBanc Capital Markets.

Hi. Good afternoon. I am on with Jordan Sadler as well. Sticking with acquisitions, bigger picture, though. Ron, I was just wondering, are there certain markets where you're interested in increasing your market share specifically, and also what would you say your market share is in your top five markets today?

Well, the second question I can't answer off the top of my head, so I can't give you that today or right now. In terms of markets where we're interested in acquiring, I think if you look at what we have been doing, we're always interested in acquiring properties in the markets where we currently operate that fit, kind of fit into the portfolio, and don't create a lot of cannibalization. So, high quality properties, visible locations, acquisitions below replacement cost, kind of fill in the marketplace where we currently operate. So, whether it is Atlanta, Miami, LA, San Francisco, we're open to all of that. Certainly the A American acquisition 30 properties or 28 properties here in LA, that's already our largest market. We're by far the largest operator here, so we were happy to increase our share in this large diversified market.

Okay, thanks.

Your next question comes from David Harris of Gleacher & Company.

Hi. Ron, you made reference to the good performance from Shurgard Europe, and looking back first quarter the performance also strong as well. It seems a little counterintuitive. Are you grabbing market share or is the environment not as dire as we have been reading about?

Well, the market share question is a little challenging because there is such a dichotomy in those markets in Europe where we operate. You take Denmark and Sweden, and we're north of 80% share, very few if any competition, whereas in London it is a much different situation, and we're the third or fourth largest operator. So, the competitive level is much different across the European markets. Overall, as reflected in the results, I think Europe is doing a solid job.

The market -- the one market where we're having trouble is the Netherlands, and that's a function for us of both we put a lot of product into that market over the last couple of years, several other operators put a fair amount of product into that market. And then we've had some operational issues as well, which have since been corrected, but that's been a challenge for us as well.

Overall, Sweden, Denmark, Germany, France, posting great numbers, as I touched on. Netherlands soft, as I explained, and then London is probably the most competitive market because there is the most number of facilities there.

Does that answer your question?

Yes, thank you.

Your next question is from Ki Bin Kim of Macquarie.

Yes. Thank you. Just had a couple quick questions regarding your pricing strategy. First, could you give some detail on what percent of your customers received rent increase letters this Summer, and if you can, if you give timing on that, if it was June 30, maybe see more impact next quarter versus earlier in the quarter?

Ki, I don't know the percentage off the top of my head that did receive. It is probably somewhere in the neighborhood of 30% to 40%, and I am guessing. The increased letters that the bulk of them go out or are effective dates in May and then it kind of ratchets down from there through June, July, and usually the last batch has already been out for an effective date in August. So, it gets smaller as we move into August, so the bulk of it is reflected as of May 1. That's about all I can really tell you at this time.

So when you send out these letters, do they have one month to -- do you give them a notice period? Where if -- .

Yes. We give them a 30 day notice period, at least a 30 day notice period. So when I say effective May, those folks who had an effective May 1 increase, they actually got their letters at least 30 days before that point in time, so beginning of April.

Okay. That's helpful. The second part of my question, looks like your occupancy picked up pretty well this quarter, and when I compare your results to EXR that has, I would consider, a similar portfolio, could you just give some color on your pricing strategy, and if it changed at all on this time around versus in the prior period. And I guess ultimately if you think maybe you can push rates high enough?

Well, our pricing strategy hasn't changed. It has been the same, as we've discussed in the past. We price the product based upon the demand that's coming in at the moment, and we look at demand based upon our walk-in activity, the activity in our call center and the activity on our website. So depending on what those three channels are telling us, we will adjust our pricing either up or down or adjust the discounting, either increasing the dollar specials or decreasing them depending on what demand is telling us. Nothing has changed on that front, Ki.

I would just add one thing to try to address what I think you're trying to figure out there, and that is there is two factors to portfolio performance. One is the asset quality and two is the location. As I touched on in my comments, there is a fairly wide variation between geographic locations with, as I said, the southeast, Charlotte, down 4.4%, and then you take a market like Baltimore, Maryland, Washington DC, up 5% plus, so pretty big gaps depending on where the property is located.

Got you. Thank you.

Your next question comes from Jay Habermann of Goldman Sachs.

Good morning, everyone. Could you talk a bit about media spend. You said reducing it in the third quarter I guess versus the prior year, and I am just wondering, as you look at some of your weaker markets such as LA or the southeast as you touched on, do you anticipate sustaining the same level of spending there?

Jay, a couple of things that we have. When you look at the Q2 occupancy, ending occupancy and take that into July, in a number of markets we're, so to speak, sold out of space. Okay? So when you look at a 91% and on space basis 92% plus occupancy, that's a portfolio as a whole, and as I touched on, you have some fairly big discrepancies in the market, so you take a market like Charlotte or Atlanta that may be at 88% and a market like New York or Baltimore that may be 94% or 95%. So it simply makes no sense to do television in some of those markets because we have no space to sell, and that's pretty true in LA and San Francisco.

Having said that, there is a big surge in move-outs, generally the last week of August, first of September because the college kids go out and people stop moving, and so we have positioned our TV in Q3 really for that period of time, end of August, first of September, and with that we'll take advantage of the August television rates. As you noted, it's an election year so television rates will be up dramatically in September and October, and so we don't plan to be on television. It doesn't make sense in terms of relative to both the amount of space we think we'll have to sell during that period and the cost of television during those periods to be on TV this year.

Okay. Fair enough. Just felt like it was a substantial drop from the pace of thus far in the first half of the year.

It is. Keep in mind we have been working for 18 months to restore our occupancies, and we have substantially achieved that here in Q2, so as we do that, we dial back the television simply because it doesn't make economic sense in most markets because we don't have space to sell.

Great. Thanks.

Your next question comes from Michael Salinsky of RBC Capital.

Ron, just a quick question on operations. You talked about the second quarter. Did you give July trends and how that played out relative to the second quarter?

I gave -- I think I touched on July occupancy and in-place rents being higher than last year.

Okay. Is that above, though, trends in the second quarter? Have you seen an acceleration throughout or no?

I believe in the press release, your June 30 in-place rents were below last year, and so they moved above at the end of July.

Okay. That's all for me. Thanks.

Your next question comes from Michael Mueller of JPMorgan.

Hi. Two questions here. First of all, I know you try to maximize revenues as opposed to just focusing on price or occupancy, but when you look at Europe, it seems like the occupancy of that portfolio has tended over time to be in the mid-to upper 80%, where the domestic portfolio has been, call it very low 90%. Is Europe just a market that's generally going to start with an eight when you start to think about occupancy?

And secondly, on the acquisition side, can you talk about, for example, is anything changing in terms of either the volume, pricing, availability of the stuff you're looking at, whether it is coming from banks or the private sellers?

Europe's occupancy, what you see on their same store is, A, weighted down by the Netherlands, which I already touched on so I won't go through that again. And two, they did some pricing, I'll call them experiments, in the first quarter of the year, which led to higher rates but lower occupancies, and I think you will see Europe move more in line with an optimizing the occupancy and dialing back the rates a little bit here in the second half of the year, still driving overall revenue growth as you noted, but Netherlands is a big weight. These are our largest or second largest in the portfolio, so it is a big weight, and so it is driving the overall average occupancy you see down in that.

But I think Europe over time, and if you go back two years ago, it got in the 90%s, and I think you will see that again. Although we're coming out of the rental season.

Your second question had to do with acquisitions and volumes.

Yes. Volume and pricing. Basically, the question again was, for what you're seeing, are you seeing more product than you were say a couple of quarters ago? Does the pricing look any more attractive? What are the trends in terms of what you're seeing there?

Well, I think the volume in the big picture of things is up substantially this year versus last year. The banks, we have seven properties under contract that are all lender foreclosed assets, so the banks are starting to move product through their system having foreclosed upon it, where as last year we saw basically none of that. This year we're starting to see more of it.

And then what we're seeing is also more lower -- there is a fair amount of low quality stuff, but there is also higher quality stuff coming to market, whereas last year from, especially from lender group, we saw nothing either low or high quality assets. So, volume is up. Quality I would say is up. And the amount of product coming from banks is up.

Okay. Great. Thank you.

Your next question comes from Andrew Fenton of Credit Suisse.

Good morning. My questions were answered. Thanks.

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

Thank you. Good afternoon, everyone. Just one big picture question, Ron. One of your peers commented that they think there is an embedded benefit to storage from the declining -- continuing to decline home ownership rate, in that renters tend to move more frequently than homeowners. Do you agree with that assessment, would that be particularly true in your markets?

I have no idea on what basis whoever said that made that assertion. Generally our -- this is a three-mile business. Okay? Do all sorts of pin studies, it is a three-mile business. If you have a bunch of apartments around you, you have apartment renters. If you have a bunch of homeowners, you have homeowners renting, and if you're in a commercial area you have a bunch of commercial businesses, so your tenant base tends to be more commercial than home ownership.

I would say relative to ownership, home ownership versus renting, if you look at the apartment guys, our trends in terms of strong markets, weak markets, those kinds of things, the couple that I've studied tend to trend along those same lines in terms of the -- what you are seeing from the apartment REITs versus our operating results. So, to the -- I think those -- for the apartment guys, job growth and personal income spend is a key determinant in what's happening with the apartments.

Thanks very much.

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

Hi. Ron, I was just curious to get your take on how the Spring rental season ultimately shaped up relative to your expectations going into it, and then also just wanted to ask about the 92 -- almost 92% ending occupancy at the end of the quarter. Is that getting to a level where you can start to push rates a lot more, obviously that occupancy rate is a lot higher than it was at the end of 2Q 2009.

I will let John address the rate issue. Overall, I think this rental season was better than we anticipated, period. We have done better and business was better and our pricing power was better than we anticipated.

In terms of being able to push rates -- .

Michael, as we're moving into August, I would say we kept our rates relatively high. I think let me touch on something Ron said, I too was fairly surprised by how strong the rental season was. And in hindsight, I wish we were a little more aggressive on our rental rate increase letters, but it is what it is. As we stand today, we're still highly occupied, we're probably going to be actually be more conservative on our rates as we move forward because we're getting to August, which is a big move out month. And so our goal is going to be to try to hold on to the occupancy as best as possible because, as Ron also touched on, we're going to have reduced media spend. So, in some respects we're going to try to offset that reduced media spend to the extent that we need to by keeping prices more conservative as we move into the end of the third quarter and into the fourth quarter.

Got it. Thank you.

Your next question is from Christy McElroy of UBS.

Hi, guys, it is Ross here with Christy. A couple quick questions. On the acquisitions you have teed up, the seven properties under contract, do you happen to have the square footage of those offhand?

Gross is about 400,000 square feet, Ross.

So you're basically paying a little under $70 a foot for those?

Yes.

So here is where I am going with this question, so the California acquisition was give or take about $100 a foot. The one-off you did in Atlanta was a little over $50 a foot. This one, which is a little geographically diversified, is $68 a foot. When you talk about price per pound, given that we're just starting to see transactions in the marketplace again, how do you think about what the right price per pound is, since I have just seen a range of $50 to $100 a foot?

Ross, I would say that's a function of where we think we can take rates, where the property is today, and kind of how much effort it is we think it is going to be to get the properties stabilized and what we can ultimately achieve. The $67 a foot, $70 a foot blended that you noted on the seven properties that we have under contract, those prices per foot range from $31 to about $105, a couple in California, one's in Berkeley, California, right next door to our existing property. It is physically next door, it is a property where we have substantially high rates, it is 94% occupied, and so filling this property up is what you would call a slam dunk.

We have another property in Illinois at $31 a foot, it is in a sub-market where we have that will be a little more challenging but we think we will do it at decent rates. And then we have as wave illustration a property in Hawaii, Hawaii has come on the rebound here this year, but for the last three years has been an extremely tough market, and there is a fair amount of product in that market. So, we're coming into that at about $85, $88 a foot, we think we'll do pretty well on it, but Hawaii will be a little more challenging to fill up certainly than the one in Berkeley.

Is there any consistency in terms of what you view the discount to replacement cost as?

Not -- no, not really. Each one is such a different opportunity. It is hard to give you kind of a cart blanche macro answer to overall how we're looking at transactions other than discounts, replacement cost, at the end of the day trying to achieve a conservative 8% to 10% yield, we hope we'll do better than that, but if we're below replacement cost, it is a high quality asset that fits within the portfolio. We're not cannibalizing. We're a buyer.

Okay, the related question is A American, if I am looking at the industry rankings correctly, was give or take the ninth largest operator in the country, and you just gobbled them up. In terms of how you think about growing the Company going forward, is there any concern on your front that you're going to be spending a whole lot of time nickel and diming your way towards a big acquisition number, as opposed to doing $50 million, $100 million, $200 million deals?

Not sure I understand the question.

Maybe from -- I guess the question is relative to your cash flow, and given the small size of self storage properties, and given the fact that it is such a fragmented industry, do you feel like your average transaction volumes going forward are going to be these one-off $4 million deals and $10 million, $20 million deals as opposed to bigger fish?

It really varies, Ross. One of the transactions where we're taking down five properties was part of a 20 property package that was put on the market by the lenders. We weren't interested in the other 14, 15 properties. We only ended up taking five of the entire group. So it was a larger transaction. We just weren't interested in the other assets.

The other two properties, the one in Illinois and the one in New Orleans, were individual bank foreclosures, as was the one we did in Atlanta, so I think it will be varied by situation. There is certainly regional operators, as you touched on, A American, that have 10, 20, 50 properties in their portfolio, and those are certainly possibilities in terms of transaction volume.

As you noted, the industry, there is not a lot of players once you get past the A Americans that have very large portfolios, so we'll just kind of work our way through it whether onesies or twosies or 20 or 30 at a time.

Thanks.

(Operator Instructions). Our next question comes from David Harris of Gleacher and Company.

Thanks. Back again. John, I have a question for you. Forgive me if you touched upon this. The repairs and maintenance have been trending up over last quarter and first half of the year. Is that a trend that we should anticipate in being in place for the back half of the year, or is it some kind of one-off weather related stuff that was inflated the numbers for the first six months?

Part of what is in the repairs and maintenance is our snow removal cost, and that was up, I think, in the same store about $1.5 million to $2 million year-over-year. That's part of what you're seeing. The other thing you're seeing is that we are taking care of a lot of our repairs and maintenance issues earlier in the season this year versus last year. So I think what you will see as we get to the latter half of this year, which we have already started, you will start to see the repairs and maintenance costs come down, so that trend that you're seeing in the first half will not continue into the second half.

Did you think the current heat wave is having much of an impact on that line?

It could be on -- with respect to the air conditioning units being run quite a bit.

Right.

Yes, it definitely is having an impact because we are burning them out or having to replace them or maintain them more often than what we have seen maybe in the past.

That sort of triggers the question, sorry if this is a sort of a follow-on, but are you seeing demand increase for air conditioning given the whole country seems to be 10 degrees hotter than it ordinarily is?

We're not adding units to facilities, but we're certainly making sure that the ones that we have are working.

You see more pricing power?

Yes. What we call climate controlled units have always had more pricing power to them, I want so say in the neighborhood of 10% to 15% more than a non-climate controlled unit.

Great. Okay. Thank you.

Our final question comes from Michael Salinsky of RBC Capital.

Just a question on transactions. You talked a lot about acquisitions. You had shut down development and redevelopment going into the downturn. Is there any thoughts to maybe building back up a little bit on the redevelopment front, given the rent trends you're seeing right now, as well as the age of the portfolio?

Yes. Maybe we miscommunicated. Redevelopment is still undergoing. We have at any point in time five to 10 projects under way at any one time, so we're still continuing along those lines.

Okay.

The development, no, we don't have any development program. But the redevelopment we have and we're going to continue doing that.

Is there a -- .

Great way to add value to the portfolio.

Is there a thought to ramp that up, though, over the next 12 to 18 months, or is that five to eight property trend you're comfortable with at this point?

It kind of -- redevelopment is a function of both, what are the rates in the marketplace, what do we have available, do we have buildings that can be demised and the property redensified, what are the trends in the marketplace, can we fill the space up. And then if you decide to take down a building, you have to kind of factor in the lost rent into what you're going to make on the redevelopment. And then once you get all of that stuff done, you still have to go down and get the zoning and through the planning process to get the redevelopment approved to be able to do it. So, there is a long -- fairly long lead time both to figure out what the opportunity is, does it make economic sense given the trends in the marketplace, and then to get the planning and the zoning approved.

Okay. Thank you.

Our next question comes from Christy McElroy of UBS.

Hi, Ron, it is Ross again. I might have missed this. Are all of your acquisition efforts focused on the US at this point or are you looking at Europe or elsewhere?

No. We have actually acquired two properties in Europe over -- one in December and I think the other in March or April, Ross, that were both bank foreclosures as well, so we are looking for acquisitions in Europe, as well as in the US.

How does pricing in terms of your stabilized yield expectations differ on those properties?

They don't.

So you would equate the economic and political, et cetera, risks as equivalent to the US at this stage?

Well, that's a big question, Ross. I will just keep it simplified. We're trying to deploy capital in a value-enhancing manner in Europe the same way we are in the US.

Thank you.

At this time, I am showing no further questions. I will turn the conference back to Mr. Teng for any closing remarks.

I want to thank everybody for joining us on the call this morning, and we look forward to talking to you next quarter. Have a good day.

Ladies and gentlemen, that concludes the Public Storage second quarter 2010 earnings conference call. We appreciate your time. You may now disconnect.