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Public Storage (NYSE:PSA)

Q3 2010 Earnings Call Transcript

November 5, 2010 1:00 pm ET

Executives

Clemente Teng – IR

John Reyes – SVP and CFO

Ron Havner – Vice Chairman, CEO and President

David Doll – SVP

Analysts

Jay Habermann – Goldman Sachs

Jordan Sadler – Keybanc Capital Markets

Eric Wolfe – Citi

David Harris – Gleacher

Paul Adornato – BMO Capital Markets

Michael Salinsky – RBC Capital Markets

Mike Mueller – JP Morgan

Paula Poskon – Robert W. Baird

Ross Nussbaum – UBS

Todd Thomas – KeyBanc Capital Markets

Michael Bilerman – Citi

Smedes Rose – Keefe, Bruyette & Woods

Operator

Good afternoon. My name is Jacky and I will be your conference operator today. At this time I would like to welcome everyone to the Public Storage third 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. Mr. Teng. Your may begin your conference.

Clemente Teng

Thank you, Jacky. Good morning to you all and thank you for joining us for our third quarter earnings call. With me today are Ron Havner, CEO and John Reyes, CFO. We will follow the usual format followed by a question and answer period, however to allow for equal participation we request that you ask only one question when your turn comes up 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 the 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, November 5, 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 of the non-GAAP financial measures we’re providing on this call is included on 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'll turn it over to John Reyes.

John Reyes

Thank you, Clem. As outlined in our press release our core FFO per share was $1.35 compared to $1.30 last year representing an increase of $0.05 per share or 3.8%. Two items principally drove this growth the redemption of our equity stock and property acquisitions. In the second quarter, we redeemed $205 million of our equity stock. This eliminated $5 million of quarterly distributions to the shareholders and resulted in a corresponding increase in FFO to our common shareholders of $0.03 per share.

During the first nine months of 2010 we acquired 38 facilities for approximately $225 million. Net operating income for these facilities totaled $3.7 million in the quarter. Or $3.1 million after netting out related interest expense on the loans that we assumed to acquire these facilities. On a net basis this resulted in an increase in FFO of $0.02 per share.

Our same-store net operating income increased by 600,000 this is the first positive growth since the fourth quarter of 2008. FFO from our investment in Shurgard Europe decrease by approximately 700,000, this reduction was principally caused by currency loss of $1.8 million as the conversion ratio of euros to dollars was 10% lower than last year due to a stronger dollar.

We retained approximately $70 million of our operating cash flow during the quarter. At September 30, 2010 our cash and marketable securities totaled $615 million. During October, we had three capital transactions. On October 7, we issued $125 million of our 6.5% series P preferred stock. In connection with this issuance, we called for redemption our 7% and 8% series B preferred security for approximately $109 million. This he redemption happened today.

Also in October 25, we repurchased all of our 7.25% series J preferred partnership unit for approximately $100 million. These preferred units were otherwise redeemable in May 2011. We expect to record EITF D-42 charges of approximately $4 million or $0.02 per share related to these securities in the fourth quarter. These capital transactions will improve our ongoing annual FFO by approximately $0.04 per share.

With that I will now turn it over to Ron.

Ron Havner

Thank you, John. As we said on our last conference call, our pricing strategy this quarter was to be conservative on rental rates in order to accelerate move-in volumes as we come out of the prime rental season.

Our objective is to enter 2011 at a higher occupancy level than 2010. Our strategy worked and we had an exceptional quarter with respect to rental activity. Move-in volumes accelerated nicely and we rented 15,000 more units this quarter versus the third quarter last year for about 57% increase. This was offset in part by 6,000 more move-outs resulting in 9,000 additional customers.

As a result, the spread in year-over-year occupancy increased to 1.7% at September 30th from 1.1% at June 30th. For October, both occupancy and in place rents were higher than the prior year. Asking or street rents were above last year during Q3 as they have been for most of the year.

In our 20 largest markets achieved positive year-over-year revenue growth in the third quarter compared to only six in the second quarter. The Washington, D.C. Baltimore market led the country at 4.7% in Q3 followed by New York at 4.5%. Los Angeles, our largest market was down only 0.7% compared to a negative 2.1% in the second quarter. Even Florida and Georgia markets also improved from a negative 1.4% in Q2 to a positive 0.1% in Q3.

Charlotte, our worst market over the past two years, grew by 0.2% versus the negative 4.4% in the second quarter. In the third quarter, we decreased by 20% resulting in lower media advertising costs. Our net customer acquisition costs were 13% lower due to higher move-in volume and higher rental rates. Going into the fourth quarter we expect the media spend will be lower than last year.

We plan to continue our current strategy of conservative rental rates and high promotional discounts for the balance of Q4. In Europe, same-store top-line growth continued to improve. Higher asking rates were offset by lower occupancy leads to 1% revenue growth. Net operating income declined by about 2% due primarily to higher advertising and payroll expenses.

There is a wide variance in NOI growth rates between the European markets. Two markets were positive while the remaining markets were negative. Year-to-date through September, we've acquired 38 properties with about $2.4 million square feet for approximately $225 million, just over $90 a square foot.

We currently have an additional four properties under contract in Ohio, New Jersey and Florida, totaling about 300,000 square feet at a purchase price of around $14 million. Property sales volume activity has accelerated nicely in 2010 versus 2009. Private owners and banks are selling properties in the prospective buyers are plentiful. We anticipate the volume of activity will continue to grow into 2011.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Jay Habermann with Goldman Sachs.

Jay Habermann – Goldman Sachs

Good morning, guys. Ron, to the question on acquisitions you mentioned the pipeline increasing here a little bit. Can you give us a sense, are you seeing better pricing? I guess, are sellers becoming more reasonable and maybe give us some sense of the types of returns that you're seeing today?

Ron Havner

Well, I have David Doll here with me. So I will let him give you a little more color, but big picture, the level of activity and the volume of product being brought to market this year is significantly higher than last year and we continue to see the pace of volume increase quarter after quarter.

As I've touched on before, I mean we're looking at somewhere on a stabilized basis somewhere between 7.5, 9 or 8 and 10 somewhere in that range depending on the property in the market, but several of the properties that we’re acquiring, in fact, three out of the four that we're buying this quarter are such low occupancy levels that they're not even breaking even.

So some of the product that's coming to market, especially the foreclosure stuff, is not really – it's not an NOI purchase or a yield purchase. It's really, as I've said before, price per pound. Dave, anything to add?

David Doll

Sure, Jay. As it relates to where is pricing at, we're seeing today more short sales coming out of private owners trying to resolve bank debt that they have. As a result, a number of transactions that we're currently looking at are transactions that we've seen over the past two, three years and pricing is still coming down.

Jay Habermann – Goldman Sachs

How do you guys think about buying versus replacement cost?

David Doll

Well, we always look at replacement cost and several of the properties, especially the foreclosure properties are significantly below replacement cost.

Jay Habermann – Goldman Sachs

Okay. Thank you.

Operator

Your next question comes from the line of Todd Thomas with Keybanc Capital Markets.

Jordan Sadler – Keybanc Capital Markets

Good morning. It's Jordan Sadler here with Todd. I just wanted to delve into the occupancy strategy a little bit. Could you maybe just expound on why it is – I know that you have a strategy of managing to a higher occupancy generally, but like you said, you're up 170 year-over-year at the end of September, headed into 4Q. I know it's the slower season. But is it – and you said you're going to be conservative on rents and continue to have high promos. Is that a function of lower traffic or expectation of lower traffic or what are you seeing?

Ron Havner

Well, Jordan we price to drive the volume, so in a fairly competitive marketplace, where most of the competition has dollar specials for the first month or even dollar specials for the first two months to drive that volume, you've got to be pretty competitive in terms of price and promotional discount. Does that help you?

Jordan Sadler – Keybanc Capital Markets

So your promotional discounts are they changing or you're still doing sort of the dollar?

Ron Havner

We're still doing the dollar, but the percentage of customers coming and taking the dollar is higher and the number of properties we have on the dollar is higher than last year. Even though last year was also a very competitive marketplace, we're still above last year.

Jordan Sadler – Keybanc Capital Markets

And are you trying to manage to a occupancy rate that's a little bit higher than where you had been historically, maybe in the slow season?

John Reyes

Yeah. I think, we obviously are – our occupancies are 1.7% higher at the end of September and they continue to be about that much higher through the end of October. So that is our strategy to get higher occupancies and we will price and discount accordingly to maintain those occupancies.

Ron Havner

Or drive them. You know, Jordan, even though the 1.7% is great and it's a big improvement and we had great move in volume this quarter at 15,000 plus we're still 100 basis points short of our peak in '04 and '05 in terms of what we averaged in Q3 of those years.

Jordan Sadler – Keybanc Capital Markets

And just as a reminder, where do you feel that – at what level of occupancy do you feel that you're maximizing revenue? Ordinarily.

John Reyes

I don't know what you mean by ordinarily, but I guess if you're 100% occupied at great rates – that no…

Jordan Sadler – Keybanc Capital Markets

I mean balancing occupancy and rate. Where do you feel that you have the most – what is the best combination from the occupancy standpoint?

John Reyes

Well, obviously, I'm going to tell you where occupancies currently are, probably close to the occupancy optimized level. I'm sure everybody else thinks theirs is the most optimized, but I can't respond to other folks there’s occupancy levels other than our own and our own strategy and I believe that our strategy, for us, is the right strategy with our type of portfolio.

Jordan Sadler – Keybanc Capital Markets

Okay. I'll hop back in the queue. Thank you.

Ron Havner

Okay. Thanks, Jordan.

Operator

Your next question comes from the line of Eric Wolfe with Citi.

Eric Wolfe – Citi

Thanks. Michael is also on the line with me. One of your peers commented that customers are generally staying longer. I was just wondering if you are seeing this as well and if it gives you confidence that you've cleared out the more discretionary type customers and can begin pushing rates a little harder on your current ones?

John Reyes

In general, I would say that our customers appear to be staying longer also. When you look at the aging of our tenants in terms of how long they've been with us, existing tenant base and I can tell you that the aging of the tenant base, looking at September 30th versus September 30th of last year, we have a much better aged tenant base, meaning that they are staying longer, those that are staying longer, my definition is longer than a year, so higher percentage of our tenant base at the end of September of this year is here past a full year, versus last year.

Ron Havner

So that sets up to your point, Eric. That sets up a better situation in terms of rental rate increases going into next year with respect to more customers are susceptible or would receive he a rental rate increase next year versus what we gave out this year.

Eric Wolfe – Citi

So that does enter the equation as far as trying to decide how you are going to raise rents for certain types of customers, it's just the overall length of stay that they've been there?

Ron Havner

Well, if our – I think we've touched on it before. We generally don't give rental rate increases to people that have been here less than a year. So if the population of customers here in our portfolio, A, in aggregate is higher because of greater occupancy and two, has been here longer, then the aggregate volume of rental rate increases will be greater year-over-year. And that's – I can tell you that's part of our thinking in terms of driving volumes, customer volumes into the portfolio, so that We'll have a greater population of customers to whom we can give a rental rate increase next year.

Eric Wolfe – Citi

Gotcha. And just to follow up on your comment about purchasing assets with lower occupancies that are not yet quite at breakeven, I was just wondering if you could talk about whether your preference today is to buy already fully leased assets or if you're seeing a greater opportunity among, sort of, underutilized assets and you can, kind of, come in and work your magic and what the opportunity set looks like there?

Ron Havner

To be honest, I think it’s fantastic buying these assets at significantly below replacement costs. We certainly couldn't build them for that. This third quarter we closed on a property in Hawaii at $90 a foot. The last property we built in the Hawaii was north of $200 a foot. We are getting San Francisco at $100 a foot. We bought a property in New Orleans at $35 – those are numbers that are so far below replacement cost, it’s just great. And will create a lot of value at those purchase prices and so we'll take the fill-up risk. We know the markets, we know the sub markets. We're not at all concerned about that. So these are great transactions in terms of a price per pound. I just wish there were more of them.

Eric Wolfe – Citi

Right. And then just one last quick question. Could you tell us where your rates are now versus market rates? Just trying to get a sense for how far above or below your rates are versus your direct competitors in your markets.

Ron Havner

Our market rates are in place rates by – not by much. I think we're about 2% higher on market versus in place, which is a little bit better than where we were last year at this same time. I think we were actually below last year. Market rents were below in-place rents.

Eric Wolfe – Citi

Thank you.

Operator

Your next question comes from the line of David Harris with Gleacher.

David Harris – Gleacher

Hi. Somehow I have to learn how to count my questions. I'll ask my one question. Humorously, I guess, this is a bit short in some quarters. If we look at the principal payments on the euro loan, Ron is it formulaic in terms of the way that you will you get paid back or is it completely discretionary?

Ron Havner

The term of the loan is – it has a maturity of March 2013, but Shurgard Europe can repay that loan, or portions of that loan, at any time. But, once it's repaid it can't be re-borrowed. Does that help you?

David Harris – Gleacher

No. Well, I am still a little confused, if I may. You will repay $12 million of principal payment in the quarter, it says.

Ron Havner

Yes.

David Harris – Gleacher

Then it goes on in the press release to talk about future payments will be dependent on cash flow. My question is, is there any way that we can estimate how fast that's going to be paid down on a future basis, or is it just something that we just – it's hard for us as outsiders to get a handle on.

Ron Havner

It's very difficult to tell, because they do retain cash that they can use to pay down our debt. It's discretionary, however, because they could also use that cash for other activities such as an acquisition opportunity that they may have. So, depending on what the future holds with respect to acquisitions or their expansion, also they could use it for expansions, they can actually hold on to the cash and use that.

David Harris – Gleacher

When we talk of they…

Ron Havner

That’s Shurgard, Europe.

David Harris – Gleacher

I understand that, but you are part of that decision making process, aren't you?

Ron Havner

We are – the managing partner there, but with that said, our goal still is to grow the company, Shurgard Europe and if they do have acquisitions – or growth opportunities, we're happy to keep the cash in the entity and let them use that to grow their business.

David Harris – Gleacher

Okay. Great. Thank you.

Operator

Your next question comes from the line of Paul Adornato with BMO Capital Markets.

Paul Adornato – BMO Capital Markets

Yeah. Thanks. On Shurgard Europe, again, it looks like two properties fell out of the same-store pool because they're no longer stabilized. Could you talk about what your definition of stabilized is?

John Reyes

Hey, Paul, this is John. The two properties that did fall out, they fell out because we are beginning to expand those properties, so using them in the same-store pool, the comps are going to be distorted. So we took them out of the same-store pool so that what you are looking at the 91 facilities are the same kind of – same square footage that they had before for the most part and they're apples-to-apples kind of comparison and not distorted by any expansion activities going on.

Paul Adornato – BMO Capital Markets

Okay. And what about those expansions? How well were the properties performing that prompted you to expand them?

Ron Havner

Paul, generally we do this on our better occupied properties, both here in the US and in Europe and so we can do a space mix change or in Europe we have several properties that were not fully built out or where we have excess land and we can add additional units. So that's in many cases that's what we've done. And so on these two properties, they were fairly well occupied and so we are expanding them to increase the rentable square footage there at the property.

Paul Adornato – BMO Capital Markets

Okay. Thank you.

Operator

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

Michael Salinsky – RBC Capital Markets

Hi, good afternoon. Ron, I know you talked about the occupancy in this discount strategy but you have also been able to push occupancy quite up this year. As you look ahead to next year, what point or maybe what environment do you feel confident in switching more towards a rate strategy to continue to push revenues higher?

John Reyes

Hi, Mike, this is actually John. That would kind of be our strategy, what you're referring to. If we get these occupancies can be maintained and stabilized and obviously we'll feel a lot more confident in pushing rental rates to our existing tenant base. And I had mentioned John on my quarterly call last quarter that I regretted that I felt I was too conservative on rental rate increases to the existing tenants and part of that is the data that we were looking at, the historical trends and still didn't give us confidence at that point in time to be more aggressive. I think if the data continues to hold, from what we've seen in the third quarter and so far into the fourth quarter, we'll feel a lot more confident sending out not only more rental rate increases, but maybe at higher increases. But that remains to be seen.

Michael Salinsky – RBC Capital Markets

So it's not an economic-specific, it's more company specific and operational specific? Right?

John Reyes

I can't – when you say that, I am not really sure what you mean by that but I can't speak for the strategies of the other companies. I can only speak with respect to our strategies.

Michael Salinsky – RBC Capital Markets

No, I was asking more so for PSA, if it was just – you felt comfortable pushing, based upon the trends you're seeing in the portfolio, as opposed to what you're seeing in the overall economy?

Ron Havner

Well, Mike, when we're looking at kind of real-time data in terms of what is the move-in volume and what price does it take to generate that move-in volume that kind of gives us a real picture in terms of volume versus rate. So, coming in here to Q3, in last quarter, John said that we were going to be in a conservative on rates and aggressive on promotional discounts, as we came out of the rental season to drive rental activity and, in fact, that's what happened with the 15,000 plus more move-ins.

We're going to continue that into Q4 and probably going into the first part of Q1, so that when we come into the rental season next year we're at a higher occupancy level and that's also the time when we send out the rental rate increases. So, as someone asked earlier, our population of one-year plus tenants is greater. Our overall customer volume is greater and so that leads to a greater group of people that will receive rental rate increases.

Michael Salinsky – RBC Capital Markets

Thank you.

Operator

Your next question comes from the line of Mike Mueller with JP Morgan.

Mike Mueller – JP Morgan

Hi. With the question going back to the comment about seeing increasing pace of product coming to the market can you talk about whether that's more one-offs coming from the banks, foreclosures, or are you beginning to see portfolios, whether they're small packages or bigger, but just more portfolio activity as well?

Dave Doll

Hi, Mike. This is Dave Doll. There has been in the last half of the year, there's been a significant amount of bank debt or bank REO being brought to the marketplace, but there are smaller portfolios floating out in the marketplace at this point in time for preliminary pricing.

Mike Mueller – JP Morgan

Okay. And has the pace of that stopped over the past couple of quarters picked up, or has it just been what it's been?

Dave Doll

It has been picking up in the second half of the year.

Mike Mueller – JP Morgan

Okay. Thank you.

Operator

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

Paula Poskon – Robert W. Baird

Thank you. Just to follow up on that last question, could you give a little more color about how you are sourcing the deals that you are seeing? Are they more marked, more directly sourced? What level of quality of the assets you are seeing and what portion might you be walking away from because the bidding is too fervent?

Ron Havner

Paula, as in all cycles, early in the cycle you tend to see some of the weaker product coming to the marketplace. And while there has been good assets tied up among problem portfolio, not every property that comes to market is something that we're going to chase, simply for the purpose of acquisitions. And so, quality is there. Quality is there pricing-wise, I think the pricing band in the purchase price, or the offers that are going out are staying in a smaller margin of activity, at least from what we are understanding there are differences between buyers that are being successful is not so much price as it is terms and conditions of closing.

Paula Poskon – Robert W. Baird

Okay. Thank you very much.

Operator

Your next question comes from the line of Ross Nussbaum with UBS.

Ross Nussbaum – UBS

Hi, guys good morning. Ron, I am trying to reconcile a couple of things. It sounds like you feel good that you've had a pickup in demand in the third quarter from second quarter and things look like they continue to bid into October and I'm trying to reconcile that against the data that was coming out of self-storage data services and one of your peers where it looked like move-ins for the industry were roughly flattish year-over-year. So do you attribute your improved results to stealing of market share, or do you believe that inherently underlying demand for self-storage has improved above and beyond perhaps some of the move-in numbers that we have seen elsewhere?

Ron Havner

Well Ross, I don't have any data to tell you whether aggregate demand is up or not. Looking at what was reported by some of the other public guys, I would say we are taking market share and I would say we are taking market share in part because we've got great people on the ground and two, our pricing and discounting strategy, as we've touched on before.

Ross Nussbaum – UBS

Are you worried at all about the ability to continue to steal market share, or do you feel like you need, at some point, here to see a pickup inherently in industry demand to continue the trends you've seen of late?

Ron Havner

Well, I think what we've been able to demonstrate is that we are able to take share, especially if you look at the occupancy gap between our portfolio and some of the other public guys, in terms of just the wide occupancy gap and the fact that we've been able to really accelerate movement volumes Q3 this year versus last year. In terms of what we're trying to do for the portfolio and I don't want to repeat myself, but we are really trying to set ourselves up next year for a robust level of annual rate increases to customers and a higher year-over-year occupancy level. Those are two things that I think will generate better than average top-line growth for us next year.

Ross Nussbaum – UBS

Thanks. I'll get back in the queue.

Operator

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

Jay Habermann – Goldman Sachs

Hey, guys, good morning again. Just following up on the acquisitions front, I guess Ron, how much time are you spending on non-U.S. opportunities? Are you looking at Europe, or is that an investment that you made that you think maybe the returns just aren't there?

Ron Havner

No, Jay, we've got a good team over there – real-estate guys, the real estate group is headed up by a guy named Stephan Nelson who has been with us 13, 14 years. He's out combing the market. Keep in mind the market place over Europe 1300, 1400 facilities, a lot of them not purpose-built product. So the opportunity set is far less in Europe than it is here in the US. But we are looking. In the past year we've bought two properties in Shurgard Europe, one in London and one in, I think, Holland, both bankrupt operators. So we bought them out of bankruptcy. But we are continuing to look and we think that the long-term growth potential in Europe is fantastic.

Jay Habermann – Goldman Sachs

Thank you.

Operator

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

Todd Thomas – KeyBanc Capital Markets

Hi, Ron. To your comments on Florida and Georgia, what is it that's happening in the southeast that's causing improvements? Is it a function of increased demand in those markets, or is it that conditions have formed a bottom after a couple of years, that there's just a marginal improvement taking place?

Ron Havner

My guess it's the latter, because we've – the southeast is just tough and very tough for the last 12, 18 months and so we are coming up against comps that are easier and there has been some stabilization in the marketplace in terms of demand.

Todd Thomas – KeyBanc Capital Markets

So, with what you have seen there now in the last two quarters in the southeast and all the data that you have today would you expect things, kind of, continue running the course that they are on? Would you expect to be sending out rent increase letters next spring?

Ron Havner

Yes. You know I touched on Charlotte, this quarter grew actually 0.2% and I know that probably doesn’t sound like very much, but I think a year ago Charlotte was down a 11% or 12% year-over-year revenue growth.

So from my perspective, that’s just a huge positive improvement. Florida, depending on which market you’re in and Orlando, Tampa have been extremely tough. So the fact that they're moving towards the positive or turning positive is just a great thing in terms of our portfolio and the amount of product we've got down there in the southeast.

Todd Thomas – KeyBanc Capital Markets

Okay. Thank you.

Operator

Your next question comes from the line of David Harris with Gleacher.

David Harris – Gleacher

Hi, again. Hey, Ron, I don't know if you'd be prepared to comment about future dividend policy and if not specifically, I wonder if could you just remind us whether the recent rounds of dividend increases that you've posted have been prompted by – because you had to because of the taxable income issue.

Ron Havner

Sure. Our dividend increases this year, there were two, were entirely precipitated by increases in our taxable income. I think our first one was from – as we touched on earlier in the year, was conservative, because our outlook was pretty conservative, but as the rental season tack off, that precipitated the second increase.

So we are basically distributing our taxable income today and so to the extent we have increases in taxable income in future periods. My guess is that we’ll precipitate a dividend increase.

Operator

Thank you. Your next question comes from the line of Eric Wolfe with Citi.

Michael Bilerman – Citi

Yeah, it’s Michael Bilerman here. Ron, I want to just come back to Europe for a second, because I think there's really two opportunities, right? One, buying out New York Common and consolidating more of what you own already, but probably the bigger opportunity is as you look at the public companies over there and an opportunity for more M&A-like transactions and really enlarging the platform and maybe that's sort of the route that you're thinking about. I'm just curious how you put it all together.

Ron Havner

Well, Michael, that's a pretty loaded question there.

Michael Bilerman – Citi

Would you expect anything else?

Ron Havner

I really can't touch on any M&A activity in Europe. And in terms of buying out New York Common, I don't see that. There are long-term investors with us. They're our partner. I think you may be thinking not New York Common, but we have the two joint ventures that are held by an institutional fund, JV1, JV2, that we've touched on, where the agreements are such that either party can trigger the exit provisions. Maybe that's what you're thinking of versus New York Common.

Michael Bilerman – Citi

Yeah. Well, I guess from both perspectives.

Roy Havner

The two joint ventures have about 72 properties, 200 million, 210 million euro of debt and an equity value somewhere between probably 100 and 150 million euros. So acquisition of the two joint ventures would be a 350 million euro kind of transaction.

Michael Bilerman – Citi

And is that something you can trigger that at any point?

Roy Havner

Either party can trigger the exit provisions, yes.

Michael Bilerman – Citi

And I guess is that – I guess as you say that you're excited about Europe, is that something that we should, as we think about your liquidity and ability to put capital?

Roy Havner

It's certainly a big opportunity to deploy capital. And we're mindful of that and we view that as a potential opportunity over the next 12 to 24 months.

Michael Bilerman – Citi

And I guess while you can't comment about the public M&A, given that it's part of your DNA, that's something we should think about as well in terms of expanding platform?

Roy Havner

I'm not going to go there in terms of the public M&A, Michael. Sorry.

Michael Bilerman – Citi

All right.

Roy Havner

Thanks.

Operator

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

Michael Salinsky – RBC

I apologize if I miss this. But did you mention October trends for the portfolio?

Roy Havner

They were comparable to last year. Move-ins and move-outs were about the same as last year.

Michael Salinsky – RBC

Okay. Thank you.

Operator

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

Mike Mueller – J.P. Morgan

Yeah, hi. Just a quick one on same-store expenses. Repair and maintenance has been trending fairly high over the past couple quarters. Could you just talk about – remind us what's driving that up and kind of when you see that comping better?

Roy Havner

Sure, Mike. Couple of things. First of all, R&M in '09 was a little below trend line, if you looked at the last three or four years, R&M runs about $0.36, $0.37 a foot. Last year was 33 and this year we are running at 38. So there's probably some stuff that is being made up from '09 into '010. In addition, we had pretty severe weather conditions across the country, whether it was snow in the Northeast, the heat wave in the Southeast or the rains in the West Coast that led to higher HVAC and roof repairs. So my guess is Q4, probably be up somewhere around a million, million and a half. But my guess is 2011 will get down to a more normalized level.

Mike Mueller – J.P. Morgan

Okay. Okay. Great. Thank you.

Operator

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

Paula Poskon – Robert W. Baird

Thanks. Late charges and administrative fees were up year-over-year. What are you seeing in terms of delinquencies, bad debt expense, et cetera?

Ron Havner

Paula, our delinquency is up. I want to say 3.7 to 4 or 5%, still below 5% but up from where it was last year. But most of that increase in admin and late fees is due to the higher move-in volumes, because when a customer moves in, they pay us an admin fee so when you have 15,000 more move-ins that precipitates more move admin fees.

Paula Poskon – Robert W. Baird

Okay. Thanks. And then what are you hearing just kind of broadly, anecdotally from your small business customers?

Ron Havner

I've touched on this before. We really don't track our business versus non-business customers, so I can't tell you in terms of what they're doing. A better barometer of small business customers would probably be PS Business Parks because I think their average tenant size is 1500, 2,000 square feet. So they've got a good pulse on that.

Paula Poskon – Robert W. Baird

Okay. And then finally, given where the debt pricing is in this environment, why you continue to issue preferreds?

John Reyes

Are you suggesting we should issue debt, Paula?

Paula Poskon – Robert W. Baird

I'm just asking the question in terms of your capital choices.

John Reyes

Well, we haven't – well, we did assume a lot of debt, if you recall, on the property acquisitions. We actually assumed $133 million of debt. We paid off 50 million of it. But the preferred has been our strategy since I think the day I almost walked in the door 20 years ago here. We aren't going to change our spots. We like the preferred securities and we're going to continue to use preferred as our leverage of choice as we continue to move forward.

John Reyes

So does that mean you will continue. I'm sorry.

Ron Havner

Paula, if you go back to the third quarter call of 2008, after Lehman melted down, I think I stated in that conference call, if you didn't understand why we use preferred, that environment really kind of explains it all.

Paula Poskon – Robert W. Baird

You did indeed. I remember it well. But related to that, the fact that you're continuing to issue – to raise capital, given the cash that you have available and your line of credit available, should we read into that that you think there, the growth opportunities are going to continue to become even more robust?

John Reyes

Paula, when we issued the preferreds, in each case we issued it to essentially take out another – redeem an existing preferred and lower our cost of capital, thereby kind of preserving our cash.

So, yes, we are preserving our cash because we do believe there's going to be quite a bit of acquisition opportunities, albeit. Maybe they haven't quite been as robust as we had hoped that they would be, but we still believe that over the course of hopefully the next 12 months they will be more robust. And I think David kind of touched upon what he's seeing in the market so we are preserving our cash for opportunities.

Paula Poskon – Robert W. Baird

That's all I have. Thank you.

Operator

Thank you. Your next question comes from the line of Ross Nussbaum with UBS.

Ross Nussbaum – UBS

Yeah, hi. I'm still laughing from the hundred million of debt being a lot, but – for a $21 billion company, but, nevertheless, can we talk about your direct property payroll? I don't know if I missed this. It was up 5% year-over-year and I'm trying to get my arms around, did you actually give that much of a raise to your property level employees?

Ron Havner

Yeah, Ross. I know you probably think it's uncharacteristic of us or me, but the property level people did a great job in Q3. One of their incentives is occupancy and they did a great job and so almost all of that increase is due to incentive bonuses to property-level personnel. Up close to a million dollars in Q3 and it was also up in Q2.

Ross Nussbaum – UBS

And as we think about your property taxes going forward, what are you – are you seeing upward pressure, downward pressure and what kind of success are you having?

John Reyes

Ross, we are seeing, I would say I guess downward pressure to use your term. We – initially, when we started off the year we were thinking our increase for the full year would be about 3.5% and we basically accrued property taxes through the first two quarters, that 3.5%. We have since revised our both year-over-year increase to about 2.5%. So we dropped it by a full percentage point.

And what we're seeing is that assessed values are coming down quite a bit. They're somewhat offset by increased tax rate, but on a net-net basis, the amount of increase that we were expecting at the beginning of the year is certainly not materializing and it is possible that we could see further decline as we move into the fourth quarter. There's a couple of states that we have yet to really get a good feel for, particularly Illinois and more particular the Cook County properties we have in the Chicago area, could result in further decreases in property taxes in the fourth quarter, from what we originally were estimating.

Ross Nussbaum – UBS

So did you – Did do a full reversal of that over accrual in the third quarter, such that there's a one-time benefit in that property tax number

John Reyes

There is. We spread it out for a full year. So, no, we didn't take all of it in the third quarter, Ross.

Ross Nussbaum – UBS

So you're going to spread it out over the next year so that this number – well, sounds like a reasonable run rate, but going lower.

John Reyes

The run rate, for example, for Q4, we probably will see maybe an increase of about 1.5% – 1% to 1.5%.

Ross Nussbaum – UBS

So you're feeling pretty good about your margins if you've got your revenues moving in the right direction and your taxes are moving lower, advertising is moving lower, you feel good that the margins are quickly moving in the right direction?

Ron Havner

I think that's the way the math works, yeah.

Ross Nussbaum – UBS

Thanks.

Operator

Your next question comes from the line of David Harris with Gleacher.

David Harris – Gleacher

I'm good. Thanks so much.

Operator

Your final question comes from the line of Smedes Rose with Keefe, Bruyette & Woods.

Smedes Rose – Keefe, Bruyette & Woods

Hi. Thanks. I just wanted to ask you – I assume on the supply front that new supply is probably fairly low but given that this industry, I think in retrospect is it's probably a lot more resilient than people had thought it would be, kind of at the onset of this recession. Would you expect construction lending and therefore supply to maybe come back faster than you would have thought maybe a year ago?

It seems that acquisition financing is coming back. It's not really an issue for you, but, other companies are getting access to buy properties and typically construction lending I think follows. What’s sort of your thoughts on that?

David Doll

This is David again. I don't anticipate that we will see construction lending coming back in the near-term future. Different than may many other real-estate products where we've got no pre-leasing going into a build situation, very difficult for banks at this point in time to put debt on our type of product. So I don't see the supply ticking up for at least the next 24 or 36 months.

Ron Havner

Smedes, on a relative basis new supply is way down from what it was in '06, '07, in terms of coming on-line. The CMBS market is still pretty – I don't want to call it dead, but it's pretty anemic. And most of the lending that we're seeing being done is on cash flow, not development, not fill-up. So lenders want real cash flow, real coverage ratios, very little, if any, in terms of new development lending. I think the guys that extra space chronicled the woes of trying to get development loans over the past year. So we don't see any – very little of any development lending going on.

Smedes Rose – Keefe, Bruyette & Woods

That's great. Thank you.

Operator

That was our final question. I will now turn the call back over to management for any closing remarks.

Ron Havner

Okay. I want to thank everybody for participating on our third quarter call this morning and have a good afternoon and we'll see many of you or hear from you next quarter or see many of you at the NAREIT conference in a couple of weeks. Thank you.

Operator

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

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