Public Storage (PSA) Q2 2010 Earnings Report, Transcript and Summary

Good afternoon. My name is Wes and I will be your conference operator today. At this time, I would like to welcome everyone to the Public Storage second quarter 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions). Thank you. I will now turn the conference over to Mr. Clem Teng, Director of Investor Relations. Please go ahead, sir.

Good morning, and thank you for joining us for our second quarter earnings call. Here with me today are Ron Havner, CEO, and John Reyes, CFO. We’ll 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. Our forward-looking statement speak only as of today August 6, 2010, and we assume no obligation to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise. A reconciliation to GAAP for the non-GAAP financial measures that we are providing on this call is included in our earnings press release. You can find our press release, SEC reports, and an audio webcast replay of this conference call on our Web site at www.publicstorage.com. Now I’ll turn it over to John Reyes.

Thank you Clem. Our core FFO per share was $1.27 compared to $1.25 last year representing an increase of 2%. Core FFO per share excludes the impact of foreign currency exchange gains and losses, EITF D-42 charges from redeeming our preferred securities and due diligence costs related to our acquisition activity. Our core FFO during the quarter was impacted by the redemption of our equity stock, improved operations from both Shurgard Europe and our non-stabilized assets in the U.S., partially offset by reduced operations in our Same Store properties. The redemption of 205 million of our equity stock during the quarter resulted in a $5 million increase in our FFO as distributions to these shareholders were eliminated. Notwithstanding the currency conversion rate that was 6.5% lower than last year due to a stronger dollar, FFO from Shurgard Europe increased by $2 million. This increase was primarily due to improved property operations, which Ron will discuss in a moment. Operations with respect to our portfolio of 94 non-stabilized facilities increased by 3 million. Included in this number is 1.5 million generated by the 31 facilities that were acquired during the quarter. Partially offsetting these items is a $3 million decline in our Same Store net operating income. The declines in our year-over-year Same Store revenue and NOI continue to moderate sequentially in the second quarter as compared to the first quarter and the fourth quarter of last year. On a year-over-year basis, revenues declined 0.2% in the second quarter compared to a 2.2% decline in the first quarter and a 3.8% decline in the fourth quarter. NOI declined 1.5% in the second quarter compared to a decline of 3% in the first quarter and a 3.4% decline in the fourth quarter. During the quarter, we were able to put approximately $338 million of cash to work, $205 million to redeem our equity stock and $118 million to acquire facilities and together with the net proceeds from a new preferred series $15 million to redeem one of our existing preferred series. In the second quarter, we retained approximately $48 million of our operating cash flow. At June 30, 2010, our cash and marketable securities totaled about $570 million. In July our Shurgard Europe team completed the refinancing of the €115 million JV loans. The new loan’s maturity date is July 2013. Shurgard Europe has a 20% interest in the joint venture. With that I will now turn it over to Ron.

Thank you, John. Our domestic Same Store properties continued to improve. Occupancy traded higher year-over-year ending the second quarter at 91.8% about 1.2% higher than last year. Both occupancy and in-place rents were higher in July than prior year. Asking or street rates were above last year and have been higher since March. Our year-over-year revenue per available foot growth or REVPAF growth was positive in June and July, the first positive month since December 2008. There is a large gap in revenue growth rates between various markets. The Northeast led by New York, Philadelphia and Washington DC, Baltimore had positive revenue growth rates of between 2% and 5% during the quarter. Los Angeles our largest market was down 2% and the entire West Coast was negative. The Southeast markets continue to be our worst with Charlotte at a negative 4.4% growth rate. However the West Coast and Southeast markets, both improved more than the Northeast during the second quarter. In the second quarter, we decreased spot TV by about 30% resulting in lower media spend. Our customer acquisition costs were also 2% lower primarily due to a 3% higher move-in volume. Going into the third quarter, we expect the media spend to be lower than last year. In Europe, Same Store operating trends continue to improve. Higher asking rents were offset by lower occupancy leading to a 2% revenue growth. Net operating income grew by 8% in the second quarter, due primarily to higher revenues and significantly lower advertising costs. Similar to the U.S., there was a wide variance in growth rates between the various European markets. Most markets were positive between 2% and 7%, led by Sweden. The only negative growth rate market was the Netherlands, down 6%. During the second quarter, we completed the acquisition of 31 properties, consisting of approximately 2 million square feet for $200 million. We are currently under contract to acquire seven lender-owned properties for approximately $27 million or 400,000 square feet. With that, operator, let’s open it up for questions.

(Operator instructions) Our first question comes from Smedes Rose of KBW. Smedes Rose – KBW: I was just wondering if you could just talk about the change in move-ins versus move-outs and any kind of changes you’re seeing in the length of stay, across your portfolio.

Length of stay, the best we could tell, is pretty much trending the same way it has historically, so we haven’t seen any real change in that particularly, and I am talking about new tenants coming in and how long they stay after the move-in. In terms of move-ins, our move-ins were relatively stronger in the quarter and we’re continuing to see pretty good move-in activity with that and we’re able to get higher rates with that. Move-outs, during the first quarter, our move-outs were substantially below last year, but during the second quarter, it pretty much got back into line with last year, so throughout move-outs, I’d say, are more at a normalized level to what we historically have seen. I know in the past couple of conference calls, we’ve talked about how move-out activity has ramped up quite a bit a year ago and then they ramped down, I would say, over the past six months, but in the second quarter of this year, we’re back to more normalized levels. Smedes Rose – KBW: So it sounds like overall trends were kind of in line with what you would expect seasonally?

Generally, yes, that’s correct.

Your next question comes from Eric Wolfe of Citi. Eric Wolfe – Citi: Michael is also on the line with me. As you mentioned in your remarks, you’re generating about $50 million a quarter in cash flow, but your dividends and the EBITDA – $50 million of cash on balance sheet, so I guess I’m just wondering now that you’ve repurchased your preferreds, what’s looking like the best investment opportunity for you right now?

I would say continued acquisitions. As I touched on we did $200 million in Q2. We’ve got another $27 million in Hopper on a contract in Q3, and we were looking at a variety of things, but I think the acquisition opportunities are best source of capital deployment. Eric Wolfe – Citi: I guess how do you think about the acquisition environment right now? I mean we heard sort of mixed commentary from your peers on some noting that it’s looking a lot better, I think they are getting a better value right now and people are more inclined to sell, while there’s a saying that people are still holding back and they are two or three years away from getting good value. What do you have seen and how much opportunity you expect over the next couple of months?

Well, I think we’ve got two sets. If you can look at the set that we’ve filed, we’ve got two different groups. The A-American portfolio was from an owner, a long established owner that decided to sell. It was not a distressed sale by any means, and so they just decided to exit the business, and I think there are more people on that camp today than they were a year or two years ago. The second group of sellers are financial institutions that have foreclosed upon properties, and if you look at the seven deals that on the contract and the one property we did in Q2 in Atlanta, those were all lender foreclosed upon transactions, all at, what I would consider, substantially below replacement cost, which is another reason why I think acquisitions are the best source of capital deployment.

Your next question comes from David Toti of FBR Capital Markets. David Toti – FBR Capital Markets: Ron, I have a question for you. Given that we’re through maybe the worst of the credit crisis in the last couple of years, has your strategy relative to debt versus preferred financing changed there at all?

No. David Toti – FBR Capital Markets: How do you think about the spread between the costs of those capital over time in the context with today’s environment?

Same as we always have. David Toti – FBR Capital Markets: Can you review that with us?

Well, if you look at the preferred, there is always gaps in time when debt is cheaper than preferred and we are certainly at one of those junctures, but we think in the long run preferred is a very economical source of capital when you consider all the, both interest rate risk, the refinancing risk, the fact that we can call the preferred after five years, and the fact that the dividends are tax deductibles, all those features combined we think makes the preferred a lower cost of capital in the long run than debt. I think, it certainly was validated in the financial crisis because there is a number of people that had a lot of leverage that had to sell a lot of equity at extremely low prices substantially below NAV to remediate or fix their balance sheet.

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

Christy, that’s a pretty darn good observation. Yes, there’s more discounting going on in the quarter for two reasons. One, we had more moving activity and the second reason is our rental rates were higher, so both the volume and rate difference that flows through, we take the three-month hit. The first month as the tenant moves in we don’t amortize it out over a period of time. So yes, you are absolutely right. The realized rent per square foot did drop down. It also dropped down last year, but we also tightened up the year-over-year gap. So in the first quarter, our realized rent was down about 3%. That gap narrowed in the second quarter, down to about 1.5%. So, not only did we take up occupancy, we also narrowed the gap on the realized rent too.

Your next question comes from Dave Bragg of ISI. Dave Bragg – ISI: Just to follow-up to Eric’s questions on the acquisitions. Could you help us understand the cap rates on those two buckets, the A-American portfolio in the more recent deals? And then second, on the more recent deals, could you give us the occupancy rate at which they are currently?

I think the occupancy rates on the stuff that’s under contract is anywhere between 30% and 75%, 80%, and so your cap rates are so to speak all over the board from zero to probably seven or eight. I would say, which I’ve said in the prior quarters, that in this environment, were you should look at it is more of a price per pound transaction versus a cap rate, certainly in the initial cap rate. We think the longer-term trends, once the properties are stabilized operated under the Public Storage system, will move probably somewhere between the 8% and 10%, if not north of that, yield on the investments, but like one of the properties we have today under contract is in Hawaii that we’re buying at $80, $85 a foot, which is by any measure substantially below replacement cost. So I think that’s really the way you need to look at it is big discount to replacement costs upon stabilization somewhere between 8% and 10%.

Your next question comes from Todd Thomas of KeyBanc Capital Market. Todd Thomas – KeyBanc Capital Markets: I am on with Jordan Sadler as well. Sticking with acquisitions, bigger picture though, Ron, I was just wondering are there certain markets where you are interested in increasing your market share specifically and also what would you say your market share is in your top five markets today?

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

Your next question comes from David Harris of Gleacher & Company. David Harris – Gleacher & Company: Ron, you made a reference to the good performance from Shurgard Europe and looking back the first quarter, the performance also was strong as well. It seems a little counterintuitive, are you grabbing market share or is the environment not as good dire as we’ve been reading about?

Well, the market share question is a little challenging, because there is such a dichotomy in those markets in Europe where we operate. You take Denmark and Sweden, in other words, north of 80% share, because there’s very few of any competition whereas in London, it’s a much different situation and we’re the third or fourth largest operator. So the competitive level is much different across the European market. Overall, as reflected in the results, I think Europe’s doing a solid job. The one market where we are having trouble is the Netherlands and we’ve put a lot of product into that market over the last couple of years, several other operators put a fair amount of product into that market and then we’ve had some operational issues as well, which have since been corrected, but that’s been a challenge for us as well. Overall, Sweden, Denmark, Germany, France posting great numbers, as I touched on; Denmark or Netherlands is soft as I explained and then London is probably the most competitive market because there is the most number of facilities there.

Your next question comes from Ki Bin Kim of Macquarie. Ki Bin Kim – Macquarie: Just had a couple quick questions regarding your pricing strategy. First, could you give some detail on what percent of your customers receive Rent Increase Letter for the summer and if you can give the timing on that if it was June 30, maybe would have seen more of an impact next quarter versus earlier in the quarter?

I don’t know the percentage off the top of my head that did receive and it’s probably somewhere in the neighborhood of 30% to 40% I’m guessing. The increase letters, the bulk of them go out, our effective date is in May and then it kind of ratchets down from there through June, July and usually the last batch has already been out for an effective date in August. So it gets smaller as we move into August. So the bulk of it is reflected as of May 1, and that’s about all I can really tell you at this time. Ki Bin Kim – Macquarie: So when you sent out these letters do you give them like a notice period, where if they want…?

Yes, we give them a 30-day notice period, at least a 30-day notice period, so when I say effective May those folks who had an effective May 1 increase, they actually got their letters at least 30 days before that waiting time, so at the beginning of the April. Ki Bin Kim – Macquarie: The second part of my question it looks like your occupancy picked up pretty well this quarter and when I compare your results to EXR that has I would consider a similar property portfolio, could you just give some color on your pricing strategy and if it changed at all this time around versus prior periods and I guess ultimately if you think maybe you can push rates high now?

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

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

Your next question comes from Jay Habermann of Goldman Sachs. Jay Habermann – Goldman Sachs: Could you talk a little bit about media spend, you said reducing it in the third quarter I guess versus the prior year? I am just wondering, as you look at some of your weaker markets, such as LA or the Southeast as you touched on, do you anticipate sustaining the same level of spending there.

Jay, couple of things that we have. When you look at the Q2 ending occupancy and kind of take that into July, in a number of markets we’re so to speak, sold out of space. When you look at 91% and on space basis 92% plus occupancy, that’s a portfolio as a whole, and as I touched on, you’ve got some fairly big discrepancies in the markets, so you take the market like Charlotte or Atlanta that maybe at 88%, and a market like New York or Baltimore that maybe 94%, 95%. So it simply makes no sense to do television in some of those markets, because we have no space to sell, and that’s pretty true in LA and San Francisco. Having said that, there is a big surge in move-outs generally in the last week of August versus September because the college kids go out and people start moving, and so we’ve positioned our TV in Q3 really for that period of time, end of August versus September, and with that, we’ll take advantage of the August television rates. As you know, this has been an election year, so television rates will be up dramatically in September and October, and so we don’t plan to be on television. It doesn’t makes sense relative to both the amount of space that we think we’ll have to sell during that period and the cost of television during those periods to be on TV this year. Jay Habermann – Goldman Sachs: It just felt like there was a substantial drop thus far in the first half of the year.

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

Your next question comes from Michael Salinsky of RBC Capital Markets. Michael Salinsky – RBC Capital Markets: Ron, just a quick question on operations. You talked about the second quarter, did you give July trends, and how that played out relative to second quarter?

I think I touched on July occupancy and in-place rents being higher than last year. Michael Salinsky – RBC Capital Markets: Is that above low trends in the second quarter? Maybe you’ve seen an acceleration throughout or no?

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

Your next question comes from Michael Mueller of JPMorgan. Michael Mueller – JPMorgan: Two questions here. First of all, I know you try to maximize revenues as opposed to just focusing on price or occupancy, but when you look at Europe, it seems like the occupancy in that portfolio is tended over time to be in the mid-to-upper 80s where the domestic portfolio has been very low 90s. Is Europe just the market that’s generally going to start within 8, when you start to think about occupancy? Secondly on the acquisition side, can you talk about, for example, is anything changing in terms of either the volume, pricing availability of the stuff you are looking at, whether it’s coming from banks or the private sellers?

What you see on their Same Sores is, A, weighted down by the Netherlands, which I already touched on, so I won’t go through that again, and two, they did some pricing, I’ll call them, experiments in the first quarter of the year, which led to higher rates, but lower occupancy. I think you’ll see Europe move more in line with optimizing the occupancy and dialing back the rates a little bit here in the second half of the year, still driving overall revenue growth as you noted. But Netherlands is a big weight. It is our largest or second largest in the portfolio, so it’s a big weight, and so which is driving the overall average occupancy you see down in that. But I think Europe over a time and if you go back two years ago, it’s got in the 90s and I think you’ll see that again, although we’re coming out of the rental season. Your second question had to do with acquisitions and volumes? Michael Mueller – JPMorgan: Yes, volume and pricing. Basically the question again was from what you are seeing are you seeing more product than you were say a couple of quarters ago and does the pricing look any more attractive? I mean, what are the trends in terms of what you’re seeing there?

I think the volume in the big picture of things is up substantially this year versus last year. We’ve got seven properties under contract that are all lender foreclosed assets. So the banks are starting to move product through their system having foreclosed upon it whereas last year, we saw basically none of that. This year we’re starting to see more of it and there is a fair amount of low-quality stuff, but there is also higher quality stuff coming to market whereas last year, especially from lender group we saw nothing either low or high-quality assets. So volumes up, quality I would say is up and the amount of product coming from banks is up.

Your next question comes from Paula Poskon of Robert W. Baird. Paula Poskon – Robert W. Baird: Just one big picture question, Ron. One of your peers commented that I think there is embedded benefit to storage from the continuing to decline homeownership rate and that rent retention they’re just more frequently than homeowners. Do you agree with that assessment, would that be particularly true in your markets?

I have no idea on what basis whoever said that made that assertion. Generally, look this is a three-mile business okay. Do all sorts of studies it is a three-mile business. If you have a bunch of apartments around you, you got apartment renters. If you have bunch of homeowners, you have homeowners renting, and if you are in a commercial area, you have a bunch of commercial businesses. So your tenant base tends to be more commercial than homeownership. I would say relative to homeownership versus renting, if you look at the apartment guys, our trends in terms of strong markets, weak markets, those kinds of things, the couple that I’ve studied tend to trend along the same line in terms of what you are seeing from the apartment REITs versus our operating results. So I think those for the apartment guys, job growth and personal income then is a key determinant in what’s happening with the apartment.

Your next question comes from Michael Knott of Green Street Advisors. Michael Knott – Green Street Advisors: Ron, I was just curious to get your take on sort of how the spring rental season ultimately shaped up, relative to your expectations going into it? And then also wanted to ask you about the 92%, almost 92% ending occupancy at the end of the quarter, is that getting to a level where you can start to push rates a lot more, obviously that occupancy rate is a lot higher than it was at the end of 2Q ‘09.

Well, I’ll let John address the rate issue. Overall, I think this rental season was better than we anticipated. I mean we have done better and the business was better and our pricing power was better than we anticipated. In terms of being able to push rates?

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

Your next question comes from Christy McElroy of UBS. Ross Nussbaum – UBS: It’s Ross here with Christy. Couple of quick questions, on the acquisitions you have teed up the seven properties on the contract, do you happen to have the square footage of those off hand?

Gross is about 400,000 square feet, Ross. Ross Nussbaum – UBS: So you’re basically paying a little under $70 a foot for those?

Yes. Ross Nussbaum – UBS: So here is I guess where I am going with this question. So the California acquisition was give or take about $100 a foot, the one off you did in Atlanta was a little over $50 a foot. This one which is a little geographically diversified is $68 a foot, when you talk about price per pound given that we’re just starting to see transactions in the market place again, how do you think about what the rate price per pound is, since I’ve just seen a range of $50 to $100 a foot?

You know, Ross, I would say that’s a function of where we think we can take rates, where the property is today and kind of how much effort it is, we think is going to be to get the property stabilized and what we can ultimately achieve. The $67 a foot, $70 a foot blended that you noted on seven properties that we have under contract, those prices per foot range from $31 to about $105 couple in California, one is in Berkeley, California, right next door to our existing property. I mean it is physically next door, it’s a property where we have substantially high rates, it’s 94% occupied and so filling this property up is what you would call slam dunk. We have another property in Illinois at $31 a foot. It’s in a submarket where we have that that will be a little more challenging, but we think we’ll do it at decent rates. And then we have wave illustration of property in Hawaii. Hawaii has come on the rebound here this year, but for the last three years it has been an extremely tough market, and there is a fair amount of product in that market. So we’re coming into that at about $85, $88 a foot. We think we’ll do pretty well on it, but Hawaii will be a little more challenging to fill up certainly than the one in Berkeley. Ross Nussbaum – UBS: Is there any consistency in terms of what you view as a discount to replacement cost as?

No, not really. Each one is such a different opportunity, it’s hard to give you kind of carte blanche macro answer to overall how we’re looking at transactions other than discount to replacement cost. At the end of the day trying to achieve a conservative 8% to 10% yield, we hope we’ll do better than that. But if we’re below the replacement cost, it it’s a high quality assets it fits within the portfolio, we are not cannibalizing. We’re a buyer. Ross Nussbaum – UBS: The related question is A-American if I’m looking at the industry rankings correctly, it was give or take the ninth largest operator in the country and you just gobbled them up. In terms of how you think about growing the Company going forward, is there any concern on your front that you’re going to be spending a whole lot of time nickel and dimming your way towards the big acquisition number as opposed to doing $50 million, $100 million, $200 million deals?

I’m not sure I understand the question? Ross Nussbaum – UBS: I guess, the question is relative to your cash flow and given the small size of self-storage properties and given the fact that it’s such a fragmented industry. Do you feel like your average transaction volumes going forward are going to be these one off $4 million deals and $10 or $20 million deals as opposed to bigger fish?

It really varies, Ross. One of the transactions where we’re taking down five properties was part of a 20-property package that was put on the market by the lenders. We weren’t interested in the other 14, 15 properties, we only ended up taking five of the entire group. So, with the larger transaction, we just weren’t interested in other assets. The other two properties, the one in Illinois and the one in New Orleans, were individual bank foreclosures as was the one we did in Atlanta. So, I think it will be varied by situation. There are certainly regional operators as you touched on A-American that have 10, 20, 50 properties in their portfolio and those are certainly possibilities in terms of transaction volume. As you noted, the industry there is not a lot of players once you get passed the A-American that have very large portfolios, so we just kind of work our way through whether its onesies or twosies or 20 or 30 at a time.

Your next question comes from David Harris of Gleacher & Company. David Harris – Gleacher & Company: John, I’ve got a question for you, and forgive me if you touched upon this. The repairs and maintenance have been trending over last quarter and first half of the year. Is that a trend that we should anticipate being in place for the back half of the year or is there some kind of a one-off weather-related stuff that was inflated the numbers for the first six months?

Part of what’s in the repairs and maintenance is our snow removal costs and that was up I think in the Same Store about a $1.5 million to $2 million year-over-year. That’s part of what you’re seeing. The other thing you are seeing is we are taking care of a lot of our repairs and maintenance issues earlier in the season this year versus last year. So I think, what you’ll see is as we get to latter half of this year, which we’ve already started. You’ll start to see the repairs and maintenance costs come down. So that trend that you’re seeing in the first half will not continue into the second half. David Harris – Gleacher & Company: Do you think the current heat wave is having much of an impact on that line?

It could be on with respect to the air conditioning units being run quite a bit. Yes, it definitely is having an impact because now they’re burning amount or having to replace them or maintain them more often than what we’ve seen maybe in the past. David Harris – Gleacher & Company: But that sort of trigger the question; one of it is sort of a follow on, but are you seeing demand increase for air conditioning versus the whole country seems to be 10 degrees hotter than it ordinarily is?

We’re not adding units to facilities, but we’re certainly making sure that the ones that we have are working. David Harris – Gleacher & Company: You’re seeing more pricing power?

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

Your next question comes from Michael Salinsky of RBC Capital. Michael Salinsky – RBC Capital Markets: Just a question on the transactions. You talked a lot about acquisitions. You’d shut down development and redevelopment going into the downturn, is there any thoughts to maybe pulling back up a little bit on the redevelopment front, given the rent trends you’re seeing right now as well as the age of the portfolio?

Yes. Maybe we miscommunicated. Redevelopment is still undergoing. We have at any point in time five to 10 projects underway at any one time. So we’re still continuing along those lines. The development, no, we don’t have any development program, but the redevelopment we have and we’re going to continue doing that. It’s a great way to add value to the portfolio. Michael Salinsky – RBC Capital Markets: Is there a thought to ramp that up though over the next 12 to 18 months, or is that five-day property trend you’ve comfortable with at this point?

Redevelopment is a function of both what are the rates in the marketplace, what do we have available, do we have buildings that can be demised and the property redensified, what are the trends in the marketplace, can we fill the space up. And then if you decide to take down a building, you’ve got kind of (inaudible) into what you are going to make on the redevelopment. And then once you get all that stuff done, you still have to go down and get the zoning and through the planning process to get the redevelopment approved to be able to do it. So there’s a long, fairly long lead time both to figure out what the opportunity is. It doesn’t make economic sense given the trends in the marketplace and then to get the planning and the zoning approved.

Our next question comes from Christy McElroy of UBS. Ross Nussbaum – UBS: Hi, Ron, it’s Ross again. I might have missed this. Are all of your acquisition efforts focused on the U.S. at this point, or are you looking at Europe or elsewhere?

No. We’ve actually acquired two properties in Europe, one in December and I think the other in March or April, Ross, that were both bank foreclosures as well. So we are looking for acquisitions in Europe, as well as in the U.S. Ross Nussbaum – UBS: How does pricing in terms of your stabilized yield expectations differ on those properties?

They don’t. Ross Nussbaum – UBS: So you would equate the economic and political, et cetera, risks as equivalent to the U.S. at this stage?

Well that’s a big question, Ross. I’ll just keep it simplified we’re trying to deploy capital in a value-enhancing manner in Europe the same way we are in the U.S.

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

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

Ladies and gentlemen that concludes the Public Storage Second Quarter 2010 Earnings Conference Call. We appreciate your time. You may now disconnect.