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Executives

Clem Teng - Vice President of Investor Relations

Ron Havner - Vice Chairman, Chief Executive Officer, President

John Reyes - Senior Vice President, Chief Financial Officer

Analysts

Analyst for Michael Bilerman - Citi

Todd Thomas and Jordan Sadler - KeyBanc Capital

Jay Habermann - Goldman Sachs

Mark Biffert – Oppenheimer and Company

Ross Nussbaum – UBS

Ki Kim – Macquarie Research

Michael Salinsky – RBC Capital Markets

Michael Knott – Green Street Advisor

Ryan [Miliker] – Morgan Stanley

Michael Mueller - JP Morgan

Todd Thomas – Keybanc Capital Markets

Public Storage, Inc. (PSA) Q2 2009 Earnings Call August 7, 2009 1:00 PM ET

Operator

Welcome to the Public Storage second quarter 2009 earnings conference call. (Operator Instructions). Mr. Clem Teng, Vice President of Investor Relations, you may begin your conference.

Clem Teng

Good morning and thank you for joining us for our second 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, August 7, 2009, and we assume no obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. A reconciliation to GAAP of the non-GAAP financial measures we are providing on this call is included in our earnings press release. You can find our press release, SEC reports, and audio webcast replay of this conference call on our website at www.publicstorage.com.

Now I will turn it over to John Reyes.

John Reyes

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

Interest earned on the cash balances were lower by $3 million. This was primarily caused by reduced cash balances combined with substantially lower interest rates. Interest expense and preferred dividends in aggregate were lower by $8 million. This reduction was primarily due to our repurchases of debt to preferred securities that occurred in the fourth quarter of last year and into the first quarter of this year. Finally, our tenant insurance business has improved by $2.5 million.

Our balance sheet continues to be a fortress. Debt to total capitalization was only 3%. We have about $600 million of cash on hand, which by the way exceeds our entire debt balance by $60 million. Our fixed charge coverage ratio is now in excess of four times, meaning our operating cash flow is less leveraged, a place you want to be when your earnings are under pressure. Further, putting our coverage ratio into perspective we could issue up to $2 billion of additional preferred stock and still maintain a strong coverage ratio of three times.

Notwithstanding the pressure on our operations, we continue to retain a significant amount of our operating cash flow. During our second quarter alone we retained approximately $100 million or 51% of our funds available for distribution.

In Europe we had a couple of new developments. In the second quarter the JV-1 loan with a balance of 112 million Euros was extended through May 2012. Earlier this year the JV-2 loan with a balance of 121 million Euros was extended to July of 2010. Recall that Shurgard Europe owns 20% ownership in the JV and we own 49% of Shurgard Europe.

On our conference call in May we indicated that the JV partner in JV-I gave us their exit notice, indicating their desire to sell their interest in JV. In June the partner withdrew its notice.

With that I will turn it over to Ron.

Ron Havner

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

Our best performing markets were New York and Houston. While the downturn is negatively impacting most of our markets the worst performing were in the Southeast starting in Charlotte, North Carolina down through Miami, Florida.

During the second quarter our media expense was lower than last year primarily by lowering our newspaper, radio and spot cable programs. Our customer acquisition costs decreased to $165 per customer versus $182 last year due to lower media costs and lower promotional discounts. This compares to average move in rates of $111 this year versus $125 last year.

In July demand improved modestly versus last year. Move -ins were up 4% and move outs were lower by 2%. We ended July with square foot occupancy of 90.7% versus 91.5% last year. The percentage of new customers receiving promotional discounts was 96%, up 4%.

Going in to Q3 we expect the decline in year-over-year revenue growth to accelerate. In addition, you will recall we had very low media spend in Q3 last year which in hindsight was an error. This year we are significantly expanding our media spend in Q3 by over $1.5 million.

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

In July the same store occupancy surpassed last year to 87.4%. Asking rates were about the same as last year and 5% higher than in place rates.

Going into Q3 media spend should be flat to down versus last year and the rate of decline in revenues should begin to moderate. With respect to capital deployment we remain patient. The combination of declining property NOI’s, higher cap rates, a tougher and limited bank debt market and a closed CMBS market have created the perfect storm for owners of real estate. Accordingly, REITs with access to public equity and debt markets are at a distinct competitive advantage.

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

With that, operator, let’s open it up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Analyst for Michael Bilerman – Citi.

Analyst for Michael Bilerman - Citi

Relative to Shurgard Europe and the transaction that occurred relative to your ownership position, do you believe there is any gain driven impairment given the NOI decline trajectory either to the investment or to any of the securities related to the investment?

John Reyes

No we don’t. It is still cash flowing very positive either on an EBITDA basis or even subsequent to backing out the debt service. By the way a bulk of the debt is Public Storage service debt. We have no impairment charge. We don’t expect to have an impairment charge. The answer to your question is no.

Analyst for Michael Bilerman - Citi

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

Ron Havner

We don’t know.

Operator

The next question comes from the line of Todd Thomas and Jordan Sadler - KeyBanc Capital.

Todd Thomas and Jordan Sadler - KeyBanc Capital

Just curious on your capital deployment plans. You are being patient. Are you blinking at all on the cap rate? Previously you were looking for 10+% cap rate.

Ron Havner

Am I blinking? You mean have I lowered our target?

Todd Thomas and Jordan Sadler - KeyBanc Capital

Right.

Ron Havner

In this environment cap rate is important but with declining NOI I would say price per pound or per square foot is possibly a more relevant matrix.

Todd Thomas and Jordan Sadler - KeyBanc Capital

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

Ron Havner

Price per pound or price per square foot varies across the country. If you are in Kansas City it is $50 a foot. If you are in the Burroughs of New York it can be anywhere from $150 to $400 a foot. It is a function of whatever rental rate. So with the declining NOI, increased cap rate and limited capital I think you are in an environment where certainly development makes no sense. Assets when they really start trading I am reasonably confident they will trade at a reasonable discount to replacement costs.

Operator

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

Jay Habermann - Goldman Sachs

Just following up on the last question, where do you think you can issue preferred’s today? I assume that is significantly different versus March. If so, I guess that would then change the return expectation?

Ron Havner

I don’t know if it will change return expectations.

Jay Habermann - Goldman Sachs

Just willingness to purchase at perhaps the low 12% cap rates.

Ron Havner

Let me answer the preferred question. At the end of March our secondaries were trading at about 8.25%. Today our secondaries are trading at about 7.5%. Although it is difficult for bankers to tell us what the new preferred could be issued at because one hasn’t been done at least in the REIT space in quite some time now. We would like to think that probably we are about 50 basis points behind our existing preferred debt. Maybe low 8’s or something like that right now.

Operator

The next question comes from the line of Mark Biffert – Oppenheimer and Company

Mark Biffert – Oppenheimer and Company

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

Ron Havner

Is your question what are the market trends?

Mark Biffert – Oppenheimer and Company

Kind of both. Which markets are you seeing the greatest declines that you think might create acquisition opportunities? Specifically when you look at even California I am just interested in your view on Prop 13 if that gets revised what the increase in property taxes might do to valuations as well there.

Ron Havner

Well I will just kind of go, top 20 markets we had two markets with positive revenue growth in New York and Houston. That is kind of at the top. If you start at the bottom, Charlotte had close to a 10% year-over-year revenue decline. Atlanta was about 7%. Then it skews up to Tampa, Florida, Seattle, Portland, Phoenix, Orland, Philadelphia, Miami, Detroit. L.A. came in at about 3%. The blend was I think about 3.5%. Then you have Sacramento, Minneapolis, Chicago, San Francisco, Dallas, Washington and Denver had a modest decline. That is from the bottom 20 across the country. In terms of opportunity because we have a national platform we can take advantage wherever it presents itself whether it is in Charlotte or New York or Houston or Detroit. Whatever.

So our targets are really quality properties, quality location and in some markets it is additive to the franchise value. We are not sitting here saying okay Charlotte has the worst NOI or revenue growth so we are just going to really concentrate on Charlotte. That is not the way we function. Our focus is national in scope. Does that address your question?

Mark Biffert – Oppenheimer and Company

Would you expect to see opportunities in those markets come to the surface quicker just simply because they are declining at a faster rate and so the owners might be in greater distress and you find more opportunities in those markets?

Ron Havner

I think you have seen it doesn’t matter if it is self-storage, apartments or retail have all relocated in declining NOI mode. The pain varies across the country but there is a fair amount of pain across the higher platform across the entire country. I think the trigger point for opportunities is not so much market specific as owner specific and what their financial characteristics are on their properties.

At what point they bought, whether they have a construction loan that is rolling, they can’t get refinanced, whether they have a property that is not filling up, how levered they are, what their personal capital situation is. That is what we are seeing is more of a determinant of properties coming to the market versus a broad market specific kind of thing.

Mark Biffert – Oppenheimer and Company

Following on that Prop 13 I am interested in your view on what you think the State of California might do in regards to Prop 13?

Ron Havner

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

Operator

The next question comes from the line of Ross Nussbaum – UBS

Ross Nussbaum – UBS

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

Ron Havner

I have not seen the report you are looking at. The guys who have seen the report you are looking at are not in the room here so I can’t really answer your question.

Ross Nussbaum – UBS

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

Ron Havner

There are some things of size and quality under stress, actually quite meaningful size that are under stress. You kind of have to let those cards play out. Keep in mind, and I think this is probably true for real estate in general, the poor performing properties, the poorer located properties suffer first. They will kind of be the first to fall.

So an A location run properly even if it is over-levered is going to be later in the process to come to market than a D location in a D market that is over-levered because its NOI is going to crumble faster and deteriorate.

Ross Nussbaum – UBS

Given the way your stock has performed here, how does that change your opinion of using your stock as a currency to pursue your expansion goals for the company?

Ron Havner

Well, how do I answer this? There is more than the stock price to evaluate. You have to look at what we are giving up in terms of the stock versus what we are getting. In considering to use the stock we have to consider what we think the intrinsic value of Public Storage is, is there any capacity to leverage, its ability to generate capital, its franchise versus what we would be issuing that stock according to when we issued the stock.

Operator

The next question comes from the line of Ki Kim – Macquarie Research.

Ki Kim – Macquarie Research

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

Ron Havner

I’m sorry, I’m not quite sure I follow your question. Is it similar to the previous question on markets that are under stress? Are there more opportunity?

Ki Kim – Macquarie Research

Exactly.

Ron Havner

Again stepping back, I think the opportunities of the first thing in the block are the inferior properties in inferior locations. Those are the first things that kind of come to the block because they are going to perform the worst. The better properties are going to come to the market and because they will be operating better later in the process. Certainly an owner that doesn’t need to sell is not going to put his property on the market today.

In terms of where opportunities are, we look across the country at all times. New York is positive but we are still interested in properties in New York. Charlotte is very negative and we are still interested in opportunities in Charlotte but it has to be the right property in the right location.

Does that address what you are asking?

Ki Kim – Macquarie Research

How has the deal pipeline changed from first quarter until now? Has it increased? If you could comment on the pricing scene changes?

Ron Havner

Actual transaction activity is fairly low. The last report I looked at I think we looked at like $1.5 billion of either properties or mortgages so far this year. So not only the properties that are on the market but we also have a variety of people working with lenders to dig up properties that are particularly over-levered and maybe at the point of foreclosure. So we have got two lists and two processes going on right now. It is accelerating. A dollar amount I can’t give you but it is accelerating. As I said in my comments there is more conversation. Still not a lot of activity but a lot more conversation than there was last year.

Operator

The next question comes from the line of Michael Salinsky – RBC Capital Markets

Michael Salinsky – RBC Capital Markets

Over the past couple of years since you did the Shurgard transaction you have had a significant benefit from lower costs. How much is there left to cut in costs? Also, during the next up cycle are many of these costs sustainable essentially?

Ron Havner

I think if you look at our key costs we may have touched on this a quarter or two ago. Payroll is kind of flat year-over-year. I would expect whatever kind of wage inflation we get nationally to kind of work its way into the payroll numbers. We are doing some things on payroll that will hopefully contain the impact during inflation. Property taxes, 3-4% a year. Property NOI’s are declining but we are seeing jurisdictions raise in marginal rate. My guess would be that is still going to be 3-4%.

Advertising is always the big swing item in our numbers depending on what is happening. It is a seasonal expense because we do more in the second and third quarter than we do in the first and we do virtually none in the fourth quarter. Advertising we are doing more this year but advertising rates are lower. That is always a swing item.

R&M we have been able to do some stuff. We put a bunch of capital into properties over the last four or five years so we are benefitting from some of that as well as rebidding a lot of contracts so we are actually getting some pricing down. Then other expenses we have been able to squeeze some stuff but again, long term I would use the rate of inflation.

So that is kind of by category. In terms of the benefit of the Shurgard merger, I think we touched on Q4 last year and first quarter of this year we have kind of gotten whatever expense benefits we are going to get out of the Shurgard merger.

Does that address your question?

Operator

The next question comes from the line of Michael Knott – Green Street Advisor

Michael Knott – Green Street Advisor

Can you just give us some anecdotes of some of the stuff you are seeing on the distressed side in terms of what lenders are offering? Are they more or less willing to take marks than they had been before? What is your sense there?

Ron Havner

The simple answer is the fact we haven’t done anything would indicate that they are not willing to take marks. Actual activity would indicate there is no more inclination to take the hit or write down the loan than there was last quarter. Are there more loans or is there more volume in aggregate? Yes. But there is still not a lot of activity.

Michael Knott – Green Street Advisor

Should we expect to see anything you do be on the lender side as opposed to actually buying properties?

Ron Havner

I can’t predict because we are looking at both pools. Both with lenders and in the market where properties come to the market.

Michael Knott – Green Street Advisor

Are you seeing shorter customer stays?

John Reyes

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

Ron Havner

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

Operator

The next question comes from the line of Ryan [Miliker] – Morgan Stanley.

Ryan [Miliker] – Morgan Stanley

With regard to if you can give us some color on how you are competing in your specific markets versus your competitors, particularly some of the private guys that don’t have the same cost structure as you and might have a significantly higher level of debt. Do you have any idea where their occupancy levels are relative to yours? Are you seeing any significant level of distress where they might be coming out trying to discount significantly heavier to try to attract more occupancy? Any color you can add on some of those private guys who I know make up a large component of your competitive set would be appreciated.

Ron Havner

I will have John address our overall pricing strategies and promotional discounts and kind of the way we operate. I think if you drive around most of the markets around the country, or a lot of markets, and the ones that are under real stress like in the Carolina’s or Florida, you can see some of the local guys have two months free. Three months free. I have seen up to four months free. 50% off. They are using basically variations of what our kind of bread and butter is with the $1 special or first month for $1. They have got banners up with variations on that first month for $1 or rate.

When you go in and shop some of these guys, one place that sticks out in my mind is a local guy who gets up in the morning, gets out on the Internet, shops all of the competitors within a three mile radius and sets his or her rates below those. That is kind of their sales pitch to the customer.

Obviously our operating people are very cognizant of that and so we have to do a better job of selling and servicing the customer when they walk in. The operating matrix I see and go through every month our people are doing a better job of closing the sales and getting that customer in the door. We can sit here and do marketing strategies and pricing strategies but if we can’t execute at the store level or the call center it doesn’t really matter. Our operating people are doing a better job of that.

John do you want to touch on kind of how we set the pricing?

John Reyes

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

One of the things we did notice was that when typically competitors follow suit with us. This time around they did not. I think you have probably heard one of our public competitors mention that Public Storage had “spiked our rates.” In fact, we did raise our rates, notwithstanding the fact that our rates were still below last year. We did ratchet up our rates during a time when we felt we had more move in velocity and we were able to garner higher rates.

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

Operator

The next question comes from the line of Analyst for Michael Bilerman – Citi.

Analyst for Michael Bilerman - Citi

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

Ron Havner

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

Operator

The next question comes from the line of Michael Mueller - JP Morgan

Michael Mueller - JP Morgan

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

Ron Havner

Most of what we have been looking at is bank debt. We would look at mortgages. We are not going to morph into some kind of mortgage REIT. It would be buy to own, not buy to lend. That would kind of be our strategy. We have looked at CMBS pools with some self-storage in them but the problem that we have is they usually come, in fact all of the ones we have looked at come along with a whole variety of other things whether it is retail, malls, hotels, that we really have no interest in. So we have shied away from those because we are interested in the self-storage stuff.

Michael Mueller - JP Morgan

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

Ron Havner

No. I will tell you an interesting…we were going through this the other day. Our delinquent tenant sales are running about the same as last year in terms of [inaudible] numbers. Our receivables may be up one-tenth of a point but upon sale of tenant goods we are actually receiving more money than we did last year. What we have been able to discern from that is there are more people at our auctions, that are attending our auctions, than they were in previous years and previous times because there is people who have gotten laid off and this is what they are doing. They are buying stuff out of self-storage and putting it on EBay or thrift shops or flea markets or whatever. Our actual cash from tenant auctions is up from last year.

Operator

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

Jay Habermann - Goldman Sachs

Switching back to Europe can you update us on the timing of the repayment of the loan to Shurgard Europe? As we think about 2010 should we expect that to get repaid or would you consider extending?

John Reyes

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

Jay Habermann - Goldman Sachs

Separately, did you mention that new rents are 10% below the rents of last year?

Ron Havner

Yes.

Jay Habermann - Goldman Sachs

Can you update us as well, are you giving rent reductions to any existing tenants or customers?

Ron Havner

Yes.

Jay Habermann - Goldman Sachs

Somewhere in the middle?

Ron Havner

Well no. You have two different things. Our asking rates for new customers are approximately 10% below last year. Our asking rents to new customers are higher than our existing, in place rents. Then to a very small percentage of customers during the year, it has to be less than 3-4,000 we have given a rate reduction to.

Operator

The next question comes from the line of Todd Thomas – Keybanc Capital Markets

Todd Thomas – Keybanc Capital Markets

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

Ron Havner

Well, all things being equal the comps should be easier. In terms of what is going to happen in 2010 that is a long way off.

John has no comment either.

Todd Thomas – Keybanc Capital Markets

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

Ron Havner

I step back and go to if you recall our Q3 last year call and our year-end call this year one of the things that was very disconcerting for us is the big spike in move out rates. The percentage of customers moving out was very troubling. It is one thing in terms of managing the move ins and you can do that through pricing, television and promotional discounts but move outs are very hard to control. To give you some idea, these are year-over-year percentage changes, October move outs were up 3.7%. November was up 6.8%. December was up 3.3%. January was up 9.1% year-over-year. February up 2.6%. March and April were kind of even with last year. May/June/July were about 2% below last year.

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

Does that help you?

Operator

The next question comes from the line of Michael Knott – Green Street Advisor

Michael Knott – Green Street Advisor

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

Ron Havner

Keep in mind Europe has at last count 1,500 to 1,800 facilities. Relative to the 50,000+ facilities we have here in the U.S. it is a much smaller market opportunity set. As well as the concentration of facilities over there, I think the top 5-6 operators have 40-45% share of the market. It is fewer and more concentrated than it is here in the U.S.

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

Michael Knott – Green Street Advisor

Ostensibly with the equity stock being pretty a pretty high coupon piece of paper, when that becomes probably next year I would assume you would probably redeem that. Would you just comment on would you use your cash or do you think the preferred market coupon rate that is available to you now is low enough, I think you said maybe 7.5-8%. How do you view that from a long-term cost of capital perspective?

John Reyes

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

Michael Knott – Green Street Advisor

Can you just reiterate what you said about media spending in the second half of 2009? Clearly the 2008 numbers are very low. I didn’t catch the number you gave.

Ron Havner

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

Michael Knott – Green Street Advisor

So those are pretty big sequential declines from the first half of the year right? Has that correlated with the improvement in the move out rates?

Ron Havner

Q1 our total spend was, and this is Internet, Yellow Pages and television and I think it ends up as different line items in the income statement, but this is the way I look at it. Q1 the highest was at $13 million plus change. Q2 came in at about $12 million. Q3 will come in somewhere around $8 million. Q4 last year was about $5 million. Why does the media spend go that way? Q4 we have done media before. We have tried television in November and December. It is more expensive because of all the retailers advertising during that period of time and people are not outside moving their stuff around. We basically don’t do it. We kind of ramp up in February and into the moving season.

Historically July and August has been a low advertising month because we are full so we don’t have a lot of space to sell. Our occupancies are peaking and we kind of sit here and go what are we advertising for if there is not a lot of space to sell. This year we have more space to sell and it is a more competitive market so we are stepping up the media spend.

Michael Knott – Green Street Advisor

A lot of your competitors in the public market run much lower occupancy rates than you do. Can you maybe pitch everyone as to why your strategy works best for you in terms of focusing on occupancy?

Ron Havner

It is really a lot simpler than it looks. It is hard to raise rental rate increases to empty buildings. You have to have tenants to go through the rate increases. Empty buildings don’t generate cash flow. The higher the occupancy the higher the cash flow and the higher utilization rate. Remember we are in a fixed asset business so utilization rate is the name of the game. I think some of the other public companies are finding there is more to television and media spending than meets the eye. It is expensive. We have been doing it for close to 20 years. We have made lots and lots of mistakes. I tell you we make mistakes every quarter picking markets and it doesn’t work.

There is a lot more to it than meets the eye. I would say that is one of our distinct competitive advantages as well as what we do on the Internet and the number of words and bidding we are able to use on the Internet to help drive customer volume along with our phone center.

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

Operator

The next question comes from the line of Ki Kim – Macquarie Research.

Ki Kim – Macquarie Research

You mentioned your street rate kind of spiked up or moved up this quarter. Can you just give a quick rundown of where your street rates were in the first quarter and today? I think today you said about $111.

Ron Havner

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

Ki Kim – Macquarie Research

New customers.

Ron Havner

New customers are approximately 10% below last year but it varies by market.

Ki Kim – Macquarie Research

How does that compare to the last quarter?

John Reyes

Let me see if I can answer your question. I don’t know about the $111. Ron and I look at it a little bit differently. I look at it on a per foot basis. Let me just give you the year-over-year changes. In January we were down 12%. February we were down 11%. March we were down about 14%. April we were down about 13.5%. May was about 9%. June was about 8.6%.

Does that help you out?

Ki Kim – Macquarie Research

Yes it does. Could you just comment on your expenses? It looked like it moved down a bit this quarter. Is that sustainable? Media and ad spending and in terms of repair and utility costs up? How much further can expenses go down?

Ron Havner

Rather than go through all that again. Someone else kind of asked that question. I kind of broke it down by line item.

Ki Kim – Macquarie Research

I missed that one.

Ron Havner

I went through line by line the various expense items.

Operator

The next question comes from the line of Ryan [Miliker] – Morgan Stanley.

Ryan [Miliker] – Morgan Stanley

You talked about your pricing and the fact you raised rates in May and June relative to your competitors and you are sitting at around 90% occupancy. I wanted to know what it would take to renew the $1 promotion or if that is just not going to happen any time you can see at all?

John Reyes

That is not in the cards or at least not in this operating environment. If we were to do the $1 we would have to cut our rates a lot further to move occupancy. Until we start seeing an improvement in overall demand in the self-storage industry and feeling a lot more confident about the stabilization of our occupancy and rates I don’t see the $1 coming up in the near term.

Ron Havner

Having said that, we monitor it all the time until the properties are “full” or when we are in the fill up season especially in our college properties and those kinds of things. We will turn off the $1 for periods of time in those selected properties or those selected markets. It is a property by property or even space by space management of the promotional discount, not just here is $1 or everything is 50% off.

Operator

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

Clem Teng

We appreciate everybody’s interest for our quarter. Thank you for all your questions. We look forward to talking to you next quarter. Have a good day.

Operator

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

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Source: Public Storage, Inc. Q2 2009 Earnings Call Transcript
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