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Public Storage, Inc. (NYSE:PSA)

Q1 2009 Earnings Call

May 8, 2009 1:00 pm ET

Executives

Ron Havner - Vice Chairman, Chief Executive Officer & President

John Reyes - Senior Vice President & Chief Financial Officer

Clem Teng - Vice President of Investor Relations

Analysts

Mark Biffert – Oppenheimer and Company

Michael Bilerman - Citi

Jay Habermann - Goldman Sachs

Unidentified Analyst

Jordan Sadler - KeyBanc Capital

Michael Salinsky – RBC Capital Markets

Jeff Donnelly - Wachovia

Michael Mueller - JP Morgan

Michael Knott – Green Street Advisor

Lindsay Yao – Robert W. Baird

Todd Thomas – Keybanc Capital Markets

Operator

Welcome to the Public Storage first quarter 2009 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator Instructions). I would now like to turn the conference over to Mr. Clem Teng, Vice President of Investor Relations.

Clem Teng

Good morning and thank you for joining us for our first quarter earnings call. Here with me today are Ron Havner, CEO and John Reyes, our 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 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 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, May 8, 2009, and we assume no obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. A reconciliation to GAAP of the non-GAAP financial measures we are providing on this call is included in our earnings press release. You can find our press release, SEC reports, and audio webcast replay of this conference call on our website at www.publicstorage.com.

I’ll turn it over to John Reyes.

John Reyes

As indicated in our press release, our core FFO per share was $1.16 for the first quarter 2009, which is the same as last year for the two reasons. The first and most obvious reason is that our overall property operations were flat. Our same-store operations were down about $4 million, but this was offset by the growth in our non-stabilized facilities. The second reason is due to our investment in Shurgard Europe. Shurgard’s contribution to our funds from operations in the first quarter of 2009 was $15 million lower as compared to last year. This reduction is primarily due to our reduced ownership interest. Recall that at the end of the first quarter of last year, we sold 51% of our interest in Shurgard Europe for approximately $600 million. We were able to offset approximately $11 million of this $15 million reduction through a combination of interest earned on our loan to Shurgard and by investing approximately $360 million of the $600 million over the past 6 months. These investments included repurchasing some of our debt and preferred securities and thereby reducing interest expense and preferred dividend.

During the first quarter of 2009, we retained approximately $100 million of our operating cash flow or about 51% of our funds available for distribution. At the end of March, we had approximately $500 million of cash on hand. During the first quarter, we discontinued our truck rental operations and incurred cost to terminate truck leases and wind down businesses of approximately $3.5 million. The truck rental business is accounted for as discontinued operations in our income statement.

With respect to Shurgard Europe’s financing situation, last quarter we indicated that the two joint venture loans were maturing in 2009, and we were working with the banks to extend the maturities of these loans. During the first quarter, the maturity of one of these loans was extended to July 2010. With respect to the other loan, all the banks in the syndicate have now approved the terms to extend the loan for two additional years. We should complete the documentation within the next 30 days. Shurgard Europe has a 20% ownership in these JVs.

In March, the joint venture partner gave its exit notice with respect to JV1. There are specific exit procedures to be followed pursuant to the JV agreement, and we have 90 days to respond. We are currently evaluating our options.

With that, I’ll now turn it over to Ron.

Ron Havner

Our operating performance in the fist quarter was consistent with the trends we began seeing in October of last year. Our same-store movements 3% higher versus a year ago as we aggressive lowered asking rents and increased media spend. Same-store move-outs were also higher for the quarter by 4%. Overall, we lost 0.9% of occupancy in Q1 and ended the quarter down 1.1% versus last year.

Our best performing markets were in the Northeast and Houston, while our worst performing markets were in the Southeast starting in Charlotte, North Carolina, down through Miami, Florida. In April, demand was soft versus prior year but results were better. Move-ins were 2.5% higher compared to last year, and move-outs were basically flat, an improvement from the first quarter.

We ended April with square foot occupancy of 89%, versus 90% last year, and closed the year over year occupancy gap by 10 basis points. We continue to aggressively price, promote, and market our product to drive customer volume and restore occupancy. We expect that our advertising expense in the second quarter will be modestly lower compared to last year.

We will be using spot TV as we did last year, but reduce our newspaper and radio programs. The percentage of customers receiving promotional discounts was higher than last year, and that won’t change until occupancies are restored.

Shurgard Europe reported negative NOI growth of 12% in the first quarter as a result of reduced street rent, higher promotional discounts, and increased media spend. Our pricing and promotional activities appear to be working as we have positive absorption in the first quarter versus negative absorption last year. We expect negative NOI comps for the next couple of quarters.

With respect to capital deployment, we continued to take advantage of the disruption in financial markets and repurchase preferred stock and debt. Since November last year, we have de-leveraged by about $500 million, generating a net gain of about $120 million. Our leverage is now about 25% of total capitalization.

PS Business Parks has also deleveraged its balance sheet by repurchasing $100 million par value preferred securities generating a gain of over $30 million, further enhancing the value of our 46% equity ownership. An additional bonus is the gains related to our preferred repurchases are tax free. Given the recent recovery in the preferred market, this may have been a once in a lifetime opportunity.

Not much has changed with respect to property acquisitions. Lenders are granting borrowers extensions or the loans have not yet reached maturity. We have looked at over $1 billion of loans. Overall, market transaction volume is nominal. Meanwhile property values continue to decline due to deteriorating operating environment and increasing cap rates. We remain patient.

While the near-term operating environment is challenging, we are very exciting about long-term opportunities for well-capitalized public real estate companies. This is like déjà vu. The capital markets and operating environment are very similar to ’91-’92, and we think there will be significant vale creation opportunities in the next couple of years.

With that, operator, I’d like to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Mark Biffert – Oppenheimer.

Mark Biffert - Oppenheimer

I was wondering if you could talk a little bit about the preferred partnership unit buybacks, and you had said that that would be a once-in-a-lifetime opportunity when you did it. Who were the sellers of those shares, and can you a little bit about why they were trading at such large discounts?

John Reyes

We bought it from one seller—an institution, who is the original buyer of the units, I can’t remember how long ago it was when we first sold them the units, but nonetheless, suffice to say, they felt like they needed to see liquidity, were willing to sell at a price that we were willing to buy, and we consummated the transaction.

Ron Havner

All of our preferred transactions were really negotiated separately with various institutions—some closed end funds, some third party institutions, and it really depended on where the preferreds were trading at that price or comparable preferreds and their liquidity needs.

Operator

Your next question comes from the line of Michael Bilerman – Citi.

Michael Bilerman - Citi

Continuing a little bit on the preferred, the preferreds are perpetual in nature and carried a coupon of about 6.4%. You were able to buy them back at about 9.5% investment yield, but I am curious Ron about your comments related to deleveraging today to about 25% and treating the preferreds, I guess, as debt in that calculation even though they are perpetual in nature. How do you think about what will be the investment opportunities on the horizon at some point? It sounds like comparing it to the early ‘90s of getting excited for that, and taking out a slug while I know you have all the free cash flow and sitting on cash, but taking out a piece of the cap structure that was priced at 6.4% which while it produced a nice gain of getting it, I’m not sure that’s going to be replicable in the future if we’re in this cap rate environment, and so I’m just trying to think about how you put everything together in terms of spending this capital and then also where you think leverage is shake out over time.

Ron Havner

You may have computed a 9.5% blend, I am not sure. In there was one preferred, $25 million, that we redeemed that had a 6.5% coupon that had a put on it, so that really just became due this year.

Michael Bilerman - Citi

If you exclude it, it’s about 10%.

Ron Havner

If you take the purchases since November through February, the weighted average is over 10 because none of them were below 10, and we did some at 11 and 12, so kind of look at it as the ability to deploy capital, deleverage the balance sheet, get a discount on a purchase in a tax-free manner, so that was really the math, and our belief that in the long run we’ll be able to issue preferred at substantially below the double digit yield, which we did not anticipate that within 45 to 60 days, our preferred would be trading down to 8.5% coupon. We just looked at it as a great opportunity to both delever the balance sheet in a very tax efficient manner and generate a double digit return on the capital.

In terms of returns going forward on self storage facilities, it’s kind of like a moving train in the sense that NOIs are going down, so today’s 8 cap rate may be tomorrow’s 10 cap rate. I think we’ll be able to over the next couple of years acquire some high quality properties at very attractive yields. What those are, I can’t predict in terms of an NOI basis, but I think it’ll be far more attractive capital deployment opportunities than what has existed for the last 3 or 4 years when capital was abundant.

Michael Bilerman - Citi

In terms of the leverage, you specifically mentioned deleveraging in your comments of buying back the preferreds. How do you think about where you go from there?

Ron Havner

If our preferreds were trading back above 12 and 13, we’d buy them all day and go down to zero leverage if that opportunity existed.

Operator

Your next question comes from the line of Jay Habermann - Goldman Sachs.

Jay Habermann - Goldman Sachs

Your stock’s trading at an implied cap rate probably in the upper 8’s or close to 9%. I know you’ve talked about looking for opportunities probably in the 10 to 13 range, and you’ve been discussing this over the last couple of calls, but are you just not seeing any opportunities as you look both at public companies as well as private opportunities?

Ron Havner

It’s really a question of what are the opportunities to step into a transaction, are there enough quality assets or are they of lower quality than we want and really waiting for the pricing. The pricing is coming towards us, so I really see no reason to be real aggressive at this juncture.

Jay Habermann - Goldman Sachs

Taking your point of view then, you’re expecting trends to get significantly worse in the balance of the year?

Ron Havner

I think all the public self-storage companies have reported. The results speak for themselves.

Jay Habermann - Goldman Sachs

But I am just saying in terms of the economy stabilizing in the latter half, you’re not expecting much of an improvement anytime soon?

Ron Havner

I’m not an economist. I have no macroeconomic forecasting experience. I work here day to day, and like I said, I think you can look at the results of ourselves and some of the other guys and see the trends.

Operator

Your next question comes from the line of [Kee Benkem of Macquarie].

Unidentified Analyst

Could you give a quick update on your average street rate in your portfolio from March, April, and May?

John Reyes

Our average street rates although we’ve been holding them relatively constant, they’re quite a behind our street rates from last year. In fact, they probably expanded the declines, so we’re below double-digits, somewhere around 13% below last year, and we’ve been kind of hanging in that direction.

Operator

Your next question comes from the line of Jordan Sadler - KeyBanc Capital.

Jordan Sadler - KeyBanc Capital

Responding to one of your other comments about all the industry that’s public has reported at this point, there were some that indicated that they would seem to be a glimmer of hope at the end of April and into May, although some didn’t that at all, and that leads me to believe that they didn’t see any improvement whatsoever, and I was just trying to get a sense of what you guys were feeling even though you said you saw an uptick in occupancy, are the other metrics encouraging or discouraging given that it’s the leasing season.

Ron Havner

Let me try to frame up the question in terms of our business here a little bit, and then if I didn’t answer it, come back on it. In self-storage business, rental season really starts February-March. January sometimes is a net positive month, but February-March, it starts to get positive absorption, so we’re in the thick of it right now. So due to the customer flows, there is uptick in activity sequentially generally February to March, March to April, April to May, May to June. After June, the season is essentially you’ve got what you’ve got, and it’s net outflows for the balance of the year. So when someone is asking is May better than April or is April better than March, of course it is because it’s the rental season. The question I think you’re trying to ask is is it better than it was last year, which is kind of the indicator for us and that should be your focus in terms of where the flows are and where the business is, and we had a better April this year than we did last year. We’ve been declining since of October of last year. March, as I said, we were 1.1% behind last year. We closed that gap in April, but that was not free. We spent more on advertising in Q1 than we did last year, and as John just indicated, the rental street rates are behind last year, and the number of customers getting promotional discounts are higher than last year. So big picture, I would say we are taking share in the market place. The stream of customers is there and we are taking share given the trends that I’ve seen from some of the other guys and what’s happening in our portfolio on a year over year basis.

Jordan Sadler - KeyBanc Capital

On the concessions, you continue the concession at a higher level. Have you changed the type of concession or is it first month free or first month for a dollar still?

John Reyes

Jordan, it’s still the dollar special for the first month. The amount of concessions and we’re talking about the number of people who move in, the percentage of them that are getting concessions, we have a higher percentage in April than we did last year, so I want to say about 90% of the move in volume in April got the dollar special. That compares to about 85% last year.

Jordan Sadler - KeyBanc Capital

And the market share statistic that you cited, you said was going up. Ron, do you get that because your close ratio is rising?

Ronald Havner

No, if you look at our year over year occupancy trends versus the other people, SSDS or whoever, I think they threw out the industry is down 5 or 6%. You look at the other guys what’s happening, where they are sequentially March to March, April to April, and the gap is expanding, not narrowing.

Operator

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

Michael Salinsky – RBC Capital Markets

John, question for you. Can you talk about specific trends as it relates to commercial as well residential and also what you are anticipating in terms of renewal increases, whether you expect to push those at all this year, and if so, what degree do you expect to push those?

John Reyes

We really don’t track residential versus commercial, so I can’t comment on that. I just don’t know because we don’t look at that. In terms of increases to the existing tenant base, normally we start sending increases out with effective days of March, and we go from March into probably July-August before we stop, so each month we’ll send out a new tranche of increases to tenants who haven’t gotten them, and typically we’ll only send increases out to people who have been here at least a year. This year, we did not send out increases in the month of March or April, but we did send out an increase with an effective date this past May 1st, so increase in terms of rates, rates are about consistent with what we normally do, somewhere in the neighborhood of about 5% on average.

Michael Salinsky – RBC Capital Markets

Any other trends you have noticed maybe with credit payment?

John Reyes

We had seen that I think last year that there was an uptake in credit card payments. People using credit cards or plastic, I should say, could be debit cards, to pay their bill, but we have not seen any more movement from where it had upticked to.

Operator

Your next question comes from the line of Jeff Donnelly with Wachovia Capital Markets.

Jeff Donnelly – Wachovia Capital Markets

I have a two part question on revenue. First part, given the financial stress your competition is likely facing, have you considered an even more aggressive pricing strategy to take market share here in the US or are we seeing that already out of you?

John Reyes

You’re seeing it I think.

Jeff Donnelly – Wachovia Capital Markets

Concerning Shurgard Europe, the year over year same-store revenue, you mentioned some of this in your comments, dropped 4.5% which is a little steeper by decline in the 2% we saw last quarter. Do you think that because storage is relatively a newer concept in Europe and they too are in recession that we’ll continue to see this year over year decline in Europe, or will it accelerate from this point or do you think we’ll be holding around these types of declines?

Ronald Havner

Actually we have seen basically Europe improving. Last year, we came into the year, things were very good. We’re probably a little aggressive on rates, rental rate increases to customers. Our occupancies were 88 or 89%, and so we felt very good, and that really hung until April or May of last year. We were doing quite well and things really slowed down, and we started gapping backwards year over year, I think, in the third quarter of last year. My guess is that started to bottom out because if I look at the trends month by month, if you take the 94 same-store property, January year over year, we were backwards 4.7%, February, we were backwards 3.2, March backwards 2.4, and April backwards 1.4%, so we are closing that year over year gap in Europe. They’ve lowered street rates not as much as we have had to do here in the states, but we’ve lowered street rates, and they really cranked up the media spend, and you can see that in the expense line there in terms of the year over year advertising expense. So I think Steven and the team have done a good job with the pricing. They spent a lot of time over here getting up to speed on the pricing, and I think they’ve done a good job, and the marketing programs are working as well.

Jeff Donnelly – Wachovia Capital Markets

Does that mean that the NOI declines could moderate a little bit as we go through the year then?

Ronald Havner

I think we are going to have negative comps for the next couple of quarters. I don’t want to go so far as to say what they are going to be because I really can’t tell you what the advertising spend is going to be.

Operator

Your next question comes from the line of Michael Mueller with J.P. Morgan.

Michael Mueller with J.P. Morgan

Ron, you gave out the occupancy, the press release had it year over year and April 30th, the gap was closing a little bit. March 30th, the in place rent mark to market stat was minus 2.1%. If you would roll forward to April 30th where you gave us the occupancy number, is that number similar to that Q1, is it a little lower or is that gap closing as well?

Ronald Havner

I don’t have that number with me, Mike, but my guess would be it would be lower because as John touched on it if the asking rates are lower, you’ve got a little bit of rent roll down on the in place rent.

John Reyes

Mike, I have the number. It’s slightly lower.

Operator

Your next question comes from the line of Michael Knott with Green Street Advisor.

Michael Knott – Green Street Advisor

You touched upon the street rate, year over year change, and touching on the last question, how does the street rate currently compare to the in place number?

John Reyes

We have a negative spread on the surface. It’s backwards about a little 4%, but that’s as of yesterday, so that changes constantly because as we move further into the busy season, our rates will continue to rise, albeit still behind last year, but as they rise, that mark to market spread will start narrowing, and then it widens again when we get into the fourth quarter as we start reducing rates again, so it really bumps around throughout the period of time. I don’t know that you can take a lot of comfort from where it’s now. That is roughly a little over 4% whereas at the end of March, it was close to 10%.

Michael Knott – Green Street Advisor

You are taking negative numbers there, right?

John Reyes

Absolutely.

Operator

(Operator Instructions) Your next question comes from the line of Lindsay Yao with Robert W. Baird.

Lindsay Yao – Robert W. Baird

On the last call, you said that on a normal run rate, you replace roughly 7 to 8% of your tenancy to month. Have you seen that change at all?

Ronald Havner

As I mentioned, we saw in April move-ins were up 2.5%, move-outs were basically flat, and we actually had an uptick in net absorption for the month better than last year, so we have natural flow move out, 8%. We did better at replacing them in April than we did last year.

Operator

The next question is a followup question from the line of Mark Biffert with Oppenheimer & Co.

Mark Biffert – Oppenheimer & Co

John, you mentioned that you guys are currently evaluating, I think you said you had 90 days to evaluate the partnership buyout in Europe. I’m just wondering if you can talk a little bit about how that will be evaluated in terms of valuation for the assets and what the options are for you guys and whether you are likely to buy the assets or to work to sell the assets?

John Reyes

At the end of the day, we’d love to own the assets, but it would have to be at the right price, and we’re currently evaluating our options. I couldn’t even tell you what the value of the assets is because we’re just getting started in that process.

Mark Biffert – Oppenheimer & Co

In the European market, have you seen any assets trade that would give any kind of indication as to what that is?

Ronald Havner

Not really, and I would say there’s just a couple of portfolios over in Europe that actually one in particular that I would say would be of comparable quality to Shurgard. These were also properties that we built ourselves, so I’d call them state of the art, latest generation facilities. The only other comparable portfolio I would say that’s over in Europe is Big Yellow, so whatever trades have happened would not be of comparable quality, but the activity in Europe is bad, if not worse than it is here in the States.

Mark Biffert – Oppenheimer & Co

Ron before when you were talking, you weren’t seeing much in the US. When you look at the Europe, are the opportunities or the quality of the assets better in Europe than they are in terms of the opportunities you are seeing in the US, and that might be an area where you might look to invest instead of here?

Ronald Havner

Opportunities are cropping up in Europe, but in the big picture of things, keep in mind there’s only like 1500 facilities in Europe, 300 to 400 are in Great Britain. The balance is spread across the continent, and there are some great assets, but there are a lot of cats and dogs. We’re being patient in Europe as well, and we’ll bide our time over there.

Operator

The next question is a followup question from the line of Jonathan Habermann with Goldman Sachs.

Jonathan Habermann – Goldman Sachs

Just following up on the comment that you guys sent out rent increases for tenants that have been in your portfolio for sometime, as you start to receive some push back or do you anticipate you might receive some push back, are you going to rethink that strategy and just maintain rents and cut rates, and I guess following on that, can you comment a bit on Florida, California, maybe New York metro, what you’re seeing there?

Ronald Havner

On the rental rate increases, Jay, as John alluded to, I think we skipped one or two months here at the beginning of the season, and we’re carefully monitoring customer behavior after getting the rental rate increases this year. So far we think it’s going okay, but we’re carefully monitoring that. So the rates that we’ve sent out, we’ve been a little more conservative this year, and again we are monitoring the behavior. Your second question was?

Jay Habermann – Goldman Sachs

In terms of some of the markets where in the past you’ve seen challenges, you mentioned Florida again being difficult, but California and New York City and areas like that?

Ronald Havner

New York we are doing pretty good in. Rates are down a little bit, but they are not as backwards, and we had a pretty good quarter in Northern California.

John Reyes

San Francisco has been fairly stable for the most part, not knocking the doors off by any means. Southern California, particularly Los Angeles, has been a little more difficult. What we are experiencing here and had been for quite some time was move out activity had really upticked. We had talked about that in the fourth quarter, and I believe, into the first quarter we had seen a significant uptick here in the Los Angeles area in terms of move-out activity. Los Angeles is a market that we were very aggressive at cutting rental rates and I mean very aggressive. We got the move-in volume from that. Our occupancies currently in Los Angeles are touching 90%, but the move-out volume still higher than last year, and we have no pricing power in the market, and as you know Los Angeles is our biggest market in the portfolio.

Operator

The next question is a followup question from the line of Todd Thomas with Keybanc Capital Markets.

Todd Thomas – Keybanc Capital Markets

With regards to the media and advertising spending, how did the benefit that you received in driving traffic and occupancies stack up against your expectations and what you would have anticipated?

Ronald Havner

That’s the question that the great marketing wizards of the world cannot answer, not only us but any company. What we do see is when we do marketing, we see an uptake in the call and the internet volume, net move-ins, and when we do advertise in the prior year but the not the current year, we see a decline in the phone calls, the internet, and net move-ins. We have some various formulas and things that we look at to determine do we think it makes sense or doesn’t it, and overall I’d have say to in the first quarter it made sense, and we did reasonably well with the media.

Todd Thomas – Keybanc Capital Markets

You’ve said in the past that advertising has been a great lever to pole in order to drive occupancy. Against your expectations before the campaign began, I was just wondering if you got the expected benefit. Was traffic up overall?

Ronald Havner

It was. We did okay, but you got to remember we’re in a pretty challenging operating environment, so despite media, we still had the lower rates and increased the level of promotional discounts, and we’re continuing that into Q2 as well, so it was positive. We think we did better than if we had not spent the media money, so overall we thought it was a worthwhile investment, but it was not able to arrest the pricing decline and the increase in the promotional discount.

Operator

The next question is a followup question from the line of Michael Salinsky of RBC Capital Market.

Michael Salinsky – RBC Capital Market

You talked about revenues a quite a bit. On the expense front over the past several quarters, you definitely benefited from a lot of cost reductions in a number of areas. Obviously you mentioned advertising will be flat to slightly down in the second quarter. Can you touch also upon what your expectations are for other areas that can be reduced or are you starting to push up against cost reduction areas right now that you can’t trim that much more out of?

Ronald Havner

Property taxes, I think we said last quarter we expect 3 to 5 for the year. Payroll is down or flat year over year. I think we’ll be able to keep that flat to very modest increase. Media, as I touched on Q2, I expect it to be pretty flat relative to last year. Utilities, oil is down, so maybe we should do better than last year’s utility’s bills, but that I don’t. R&M, we’re doing a good job controlling that, and put a lot of capital into the properties over the last couple of years, so my guess would be we would continue 3 to 5% down year over year. Phone center, we’ve got some efficiencies going there. We’ll probably continue to go down. I don’t know if we will get double digit, but we’ll go down. Insurance, we’ve renewed, so we’ll do 10 to 15% down. Other cost to management, that’s supervisor, personnel, office expenses, the support structure, payroll, HR—we have been doing some things there, so my guess is we’ll be flat to slightly down year over year.

Operator

The next question is a followup question from the line of Michael Knott – Green Street Advisors.

Michael Knott – Green Street Advisors

John, can you comment on trends you are seeing on the bad debt side?

John Reyes

Surprisingly, we are not seeing any of the negative trends on the bad debt. Bad debt is consistent with what we have been seeing in the past. In terms of when sell delinquent tenants stuff to pay for bad debt, the number of those sales has not picked up, so we are not anything there. I think what’s happening Michael is people are just moving out. When they can’t pay the rent, they see it coming, and hence they’re moving out, and that’s why we had seen this uptake and move out activity.

Michael Knott – Green Street Advisors

Are you seeing a shift in the proportion of your tenants that are sticky long term versus those that are just there for a very short duration?

John Reyes

One of the things that we’re noticing and it’s still kind of happening is that our longer term tenants are still moving out at slightly higher rate than they have in the past. The fourth quarter was quite an uptake. That has kind of slowed down, but the newer tenants seem to be staying, at least so far, they are staying a little bit longer than we had seen in the past. That’s very premature, but nonetheless over the past, I would say, 2 to 3 months, we’re seeing the newer tenants probably sticking around, and may be that’s due because our rental rates are down, and maybe that’s helping them in their decision to stay a little bit longer.

Operator

The next question is a followup question from the line of [Kee Benkem of Macquarie].

Unidentified Analyst

To followup on your previous comments about market performance, it seems like with your Southeast being tough and Los Angeles being tough as well, are we not seeing the kind of benefit from dislocation from people moving in and out of homes or downsizing from foreclosed homes to apartments?

Ronald Havner

When customers move in, they don’t tell us. We don’t track surveys whether they been foreclosed upon or those kinds of things. I think it’s very interesting what’s going on in the marketplace. The Northeast being as strong as it is given the dislocation and the financial markets. The Southeast, Florida, has been soft for, it’s been a couple of years now. The rate of decline is slower. The Carolinas and Atlanta have just become a train wreck. The rates are backwards far more than the averages, and so the Southeast is a mess. I was reading somewhere the other day Georgia has got the greatest number of banks that have been taken over by the FDIC, so the economy down there is just in shambles. There’s a whole bunch of things going on in LA but the big picture I would say the import/export business is a big driver here, and that’s way off from prior years, so as you see the world economy going up and the import/export stuff picking up, I would say that would be a plus for the LA markets.

Unidentified Analyst

To follow up on that, so if you are in a tough market already, do decreasing rental rates help out significantly or do customers kind of see it as a binary event, and it doesn’t really have a huge impact?

Ronald Havner

Well, there are few customers out there, but I think you could look at industry data and the other operators in the business and see the rates. I don’t know the pricing strategy of the other guys, but the rates that we are doing is working. We are holding our occupancies and actually we’re improving year over year, so I would say rates and advertising and promotional discounts work.

Operator

The next question is a followup question from the line of Michael Knott with Green Street Advisors.

Michael Knott – Green Street Advisors

Can you just provide a little more color on the being patient strategy, obviously that’s the right thing to do, but how are you thinking about what the opportunities are going to be over the next couple of years? There are some of your peers today that are seeing that the sun seems to be shining again, and do you feel like that’s true? Do you think that it’s going to become more plentiful and maybe come down in price a little bit? Do you feel like there’s going to be opportunities for you guys in the next couple years or will this turn around and maybe the opportunities that we may have thought would there won’t be?

Ronald Havner

First, I don’t think we have any peers, but you are going to get me commenting about other guys, and so I don’t really want to do that. I think we’ve painted since October a pretty sobering outlook for the business. I think with John’s articulating rates and what we are doing on promotional discounts, we would have to conclude it’s a pretty sobering outlook. The positive is we’re getting the customers, people are moving. They are using storage space. That’s a fantastic thing. If you listen to PSB’s conference call, on the commercial side, the large tenants have gone. They’re just gone in terms of the commercial customers on the office space, and the retail guys have their problems as well, so in the big picture, I think the self story stuff will do better than average during the downturn, but the near-term operating environment is pretty challenging. With declining NOIs, it’s what are you buying and where is the bottom on thing and where are things going to level off.

Operator

At this time, we have no further questions. I would now like to turn the floor back to Mr. Teng for any additional or closing remarks.

Clem Teng

Thank you all for participating on our conference call this morning, and we will be talking to you next quarter.

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Source: Public Storage, Inc. Q1 2009 Earnings Call Transcript
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