Public Storage (PSA) 2003 Q2 法說會逐字稿

Good morning and afternoon ladies and gentlemen and thank you for standing by. Welcome to the Shurgard Storage second quarter earnings conference call. At this time all participants are in a listen-only mode. Following the presentation instructions will be given for the question and answer session. If you require assistance please press the star followed by the zero for an operator. The conference is being recorded Thursday August 7, 2003. At this time I would like to turn the presentation over to Jeffrey Szorik. Please go ahead.

Welcome everyone and thank you for joining us today on Shurgard Storage Center's second quarter analyst call. Speaking on today's call will be Chuck Barbo, Chairman and CEO of Shurgard; Dave Grant, President and Chief Operating Officer of Shurgard; Harrell Beck, Chief Financial Officer of Shurgard; and Bruno Rockoflow, President of Shurgard Europe. After each speaker makes some brief prepared remarks we will take your questions.

Just as a reminder the following discussion includes forward-looking statements, Shurgard Storage Centers actual results may differ materially from projected results. Additional information concerning the factors that may cause such a difference are included in the 2002 10-KA filed with the Securities and Exchange Commission in May 2003 and in our 10-Q that will be filed later today. Just a note on the filing of 10-Q- Edgar is having difficulty with their internet filing system, that 10-Q should be filed any moment but we're waiting for them to resolve their technical problems. Please give your attention to Chuck Barbo.

Thanks, Jeff, hello, everybody. The second quarter results indicate that Shurgard is healthy and performed just as we expected during the second quarter. The domestic same-store NOI was essentially flat, which is what we expected and there still is a battle for customers out there. But we are converting customer inquiries into customers and increasing the closing ratio on that, so that is good as well.

Most of the modest performance gains came from the continuing lease-up of the newest stores in the same-store pool. And the European results tended to be very strong. Our business is performing according to plan. As you know, Shurgard now owns approximately 81% of Shurgard in Europe. That is really, really good news. Most of you have heard from me many, many times about my excitement about us being in Europe; and the terrific opportunities there, so I won't bore you with the same statistics that I give you most of the time, but just to say that I am personally very, very excited about the opportunity in Europe. It will be an unbelievable growth engine for us.

Of the remaining approximately 19% ownership, Fremont Capital owns about 12.5% and we fully expect that Fremont will continue to be a partner for a couple three more years. There should be an anticipated exit then sometime in the future because they're not planning on being in forever. We are very happy with them as partners and we expect to get their interest at some point in time in the future, but nothing to report at this time and probably be a couple years before we do. The other remaining interest is owned by employees in Europe and by the original partners, the Fogleberg family and we fully expect to acquire their interests sometime in the next few months or -- out in next year sometime.

The the reason for wanting to do that, of course, is I want to continue to own larger parts of Europe, but we also think it's appropriate for people on both sides of the pond to own the same currency; so it would be very wise for us to not have ownership in the separate vehicles like Europe. So you can expect that at some time in the future we will be doing something there.

Also then we purchased all of the TROL properties. That was about $200 million in new stores in the quarter.

We closed on the Minnesota acquisition on the last day of the quarter and the really important point about these acquisitions including Europe -- excuse me -- is that we have now have embedded growth in our balance sheet and in our company associated with a lease-up of these development assets in the United States and Europe. Essentially what we have done, is converted about 20% of the entire balance sheet into the development point. So we expect to have a very positive impact on bottom line growth for the next few years out of that.

Our capital strategy has gone according to plan. And I'm really pleased to point out that as of this week, Dave Grant is now the President of Shurgard, he is here in the United States. He is probably wishing that he was back in Europe, since they are having a heat wave. In eight years they never had a heat wave when he was there. I'm really happy to have him here and turn it over to Dave.

Thanks, Chuck it is great to actually be here. And as much as I enjoy the sunny weather when it comes up, 95 degrees in London is not a place you want to be, so Seattle is just fine for now. I don't have a lot of comments today. Obviously having just landed here on the ground. I just thought I'd pass on a few thoughts. As most of you know that have been on previous calls, I officially turned my responsibilities for President of Shurgard Europe over to Bruno Rockoflow back on the 1st of January. So I thought I would fill you in a little bit on what I've been doing the last 7 months.

Predominantly during the period of time I have stayed in Europe and focused on continuing to work with the European team and Bruno as we go through the transition. I will continue to work closely with Bruno for several reasons as we go forward. Obviously Europe is going to be an important strategic growth area for us, as Chuck mentioned. But also I think, you know, there will be a lot of opportunities for the European and U.S. groups to combine and consolidate some of the types of activities we do as one company over time; and this will be a top priority for both Bruno and I do examine those types of options as we go forward.

But also during that time frame, this past seven months I began about three or four months ago to spend time getting reacquainted with our U.S. portfolio. As many of you know, I left the U.S. system here back in the end of 1995 and we only had about 250 stores in the U.S. at that time and today we are getting close to 500 so I had a lot of catching up to do. It has been a great opportunity, frankly, for me to get reconnected with the people out in the field here and I have not certainly toured all of the stores, but I've covered many of the areas and certainly pleased with what I have seen. Comforting to see we continue to keep a very strong, well diversified portfolio; but I also do see some very interesting and exciting opportunities within this portfolio, and some our assets go back 20-25 years. And we have, I believe, some interesting opportunities to increase the utilization in some of these properties or upgrade them and that will certainly be part of some of the discussions that I have with Chuck and the executive team as we go forward; and certainly we'll be examining all the different processes that we have got going on over here as well as what I mentioned in Europe.

So l'm very excited for this opportunity and look forward to getting going it. Obviously being the new kid here on the block, I really am not prepared to go through the quarterly results discussion. I will certainly, in future calls be actively involved in that, but I am going to turn the discussion now over to Harrell to let him take us through that, Harrell.

Thanks, Dave. And hello everyone. Today I'm really going to focus my comments on what we saw happen with respect to the company's second quarter operating and financial highlights. I think we have been extremely active over the course of the last 90-120 days in the capital markets, so I think much of what I will say will really be a repeat of probably what you have already heard and what we have talked about, you know, very recently.

From an operating standpoint, again, if I was to look at the second quarter I would say is really played out as we discussed, both as recently as a couple months ago as well as what we saw and were thinking at the end of the first quarter. We continued to see stabilization in the business but it continues to be a very difficult operating environment. We had thought going into the year that it was going to be a difficult year, we thought there would be little growth and we continue to see that in the business.

One of our goals at the beginning of the year was to try to maintain our rate structure; at the same time what we wanted do to do is build occupancy. I think we were spot on. Both in the first quarter and in the second quarter with respect to that. Our occupancies as you may remember, we were up about 130 basis points in the same-store portfolio. That has grown to about 200 basis points so on a year-over-year basis our occupancies are up now 200 basis points. And again, the other thing I think that was important and was certainly a key for us; was that while we were building occupancy we wanted to maintain the integrity of our rate structure and I think we did a great job of that as well.

If you look sequentially, from the first quarter our average rates were about $11.74 a square foot. Not only were we able to maintain that, but we were able to increase that to $11.89 a square foot for the entire same-store port portfolio. So that was down a little by the on a year-over-year basis. And again, was what we had expected to happen. We continued to see a little bit in the second quarter, some softening in demand.

I think if you looked at our first quarter operating results from a demand perspective; in terms of calls either coming in to our call center or what we're seeing at the stores in terms of new inquiries, we were see essentially flat on a year-over-year basis and in the first quarter we saw it decline slightly. Into the second quarter I think we were down about 3-4% in terms of new demand coming in to the stores. We really were able to offset that by having higher closing ratios. Our closing ratios actually increased about 10%. And we also significantly reduced abandonment calls receiving at sales centers, so they went from about 12% of our total sales volume to about 2%.

I think the important thing about that is we were able to both increase the closing ratio, as well as, decrease the abandonment ratio really by working with our sales folks; and it was not a function or a result of any either marketing specials that we were doing in the field, or any significant increase in discounts at our stores. Again, for the quarter, we were able to increase occupancies 200 basis points. Really maintain our rates, and as a result our over all revenues on our same-store portfolio was up about 1% and that translated into an increase in NOI, after indirects and leaseholds up about a half a percent.

The one thing that was a little surprising in the quarter, our expenses were at the high end of what we thought they were going to come in at. We had said that we expected our expenses to run in the 4-6, 5-6% range and they actually came in at about 6.4 on a direct basis. The real reason for that was some repair and maintenance costs. Part of that is timing and really represents a significant amount of R & M that we did back in the northeast, in terms of trying to help spruce up and improve the curb appeal at our stores in the difficult operating environment.

I think the one thing that's really important to understand, and I'll talk about this a couple times, and that is some of the comments that Chuck made about this embedded growth that we have in the balance sheet now as a result of the transactions that we have done. The first part of that is really talks about when you look at the same store pool is, the same-store pool encompasses about 360 properties. In that, we have what I will refer to as new same-stores so those are properties that we put into that comparison at the beginning of 2003. So those stores we're still going through lease-up through 2003 and that is -- and that represents about 25 or 30 stores and that is really where we are seeing all the growth come from in the same-store pool.

If you look at just those new stores, just the new stores that we have, that we added to the same-store pool, occupancies on a quarter-over-quarter basis are up about 1200 basis points. Up about 1600 basis points on a year-to-date basis. And more importantly, I think revenues and NOI are up for the quarter about $800,000 in revenues and NOI is up about $600,000 so just at our current run rate that represents about $2.5 million of additional NOI. Additionally, those stores today if you look at them for the second quarter we are about 75% occupied so we fully expect those stores to lease up in to the mid 80s which is consistent with our over all pool.

And by going from kind of the 75% to the 85% there is probably another, you know, on a run rate basis you are talking about $2 million of increased cash flow or increased NOI in the properties. In terms of the second half of 2003 from an outlook standpoint, there's really no change from what we discussed previously. We still expect revenues to grow in the kind of 1-3% range. I think in the second quarter we were up a little over 1%. We still expect our same-store expenses in the 4-6% range. Translating into same-store NOI growth of some where between 0 or flat and up 2%.

From an operating standpoint if I was going recap some of the highlights or the key points is first one is that clearly we are seeing recovery in the business, although it is very, very weak. It is still very competitive out there and, you know, we see that in all of markets that we are in today.

The second point is that we have been able to increase and build our occupancies at the same time we have been able to maintain the integrity of our rate structure and that is on a collected basis.

And the third point is that even with this modest growth in our portfolio, and given the current economic environment that we are in and operating environment that we are in, we still think that there is embedded growth in this portfolio because of the properties that we have in there that are still going lease-up even with the weak fundamentals today.

Let me talk about what we did during the quarter from a portfolio standpoint and capital transactions. As we have said since late last year we were going to take steps to significantly simplify the company's capital structure and to strengthen the balance sheet. I'm happen to report that we have accomplished most all those goals today, and this will allow us again to continue to capitalize on some of the embedded growth that we have now through the development of a number of properties.

But we did at the beginning of June we closed -- acquired 36 properties from our TROL. That was about $165 million dollars, 25 of those are open and 11 still under development and about $30 million of money to be spent to complete the development of those projects so those all should be up and running, open by the end of this year. All of those properties now are on our balance sheet and they are fully consolidated in our financial statements as of the end of the second quarter, so the June 30 balance sheet that you have incorporates all of that. There are no properties left in the TROL.

Second thing is we have monetized our European investment and did acquire through the course of the second quarter and just subsequent to the end of the second quarter we have now inquired three of the four institutional partners so our total interest in Europe has gone from about 7% at beginning of the quarter to 80% today. The total cost was about $300 million.

The one point that I want to make and I think it is important is that from an accounting standpoint Europe and the European venture will be shown on an equity basis for accounting purposes. We do not fully control that, so from the accounting perspective we are not able to consolidate that, however we have provided kind of a full balance sheet and full P&L in our 10-Q for the European operations. The other thank Chuck had mentioned, we did close on the Minnesota acquisition at the end of the second quarter. The one thing that we have left to do is that we still have a number of unconsolidated joint ventures and all of those are -- we have 30 of them.

Of that, 28 of those 30 unconsolidated joint ventures will be consolidated beginning in the third quarter. This will really have no impact on net income or FFO and they really relate to joint ventures that we have done with our Florida and Tennessee partners. But what we will do is gross up the balance sheet and gross up the P&L. Our total assets will go up on a gross basis. There is total assets about $102 million in those joint ventures, and debt of about $68 million and revenues of about $6.5 million. So beginning with the third quarter 10-Q you will see all of those properties fully consolidated as well.

Now, again, just to reiterate what Chuck had said. As a result of all of the transactions and simplifying our story and strengthening the balance sheet, we have really transformed about 20% of our balance sheet into development or lease-up properties that will mature really over the course of the next two, two and a half to three years. This includes both the properties that we brought on balance sheet from the TROL as well as our ownership interest in Europe. Today these properties generate little cash flow, but now that that all of the costs have been incurred and they're on the balance sheet as these properties lease-up it will continue to accelerate growth in both NOI and cash flow for the company even in this difficult operating environment.

One comment I want to make with respect to FFO and net income. I think that many of you have seen our release this morning, we reported FFO of 64 cents a share compared to 62 cents for the prior quarter, second quarter of 2002. One thing thing that you will notice in there, there is an impairment charge of about $1.7 million related to a property in Texas. That cost we -- was included in G&A. That has been added back to FFO and we added that back as a result of discussions with NAREIT and clarifications that the SEC has made actually in the course of the last two years in that in order to show kind of non-GAAP financial information we need to be in compliance with current definition of the NAREIT white paper in FFO. So we added that back.

The other point I would make and you have seen this in some other releases but has to do with the Emerging Issues Task Fund number 42 and the calculation of EPS and FFO when a company redeems preferred stock. As I understand it that that is a proposal and is yet to be adopted by FASB, but assuming that it is adopted this would result in a decrease, will not result in a decrease in net income. What it would do is impact our reported EPS and FFO per share by about 6 cents for 2002. Because we did redeem a preferred- $50 million preferred in 2002. And again, if these changes are adopted by FASB we will reflect this change in the 2002 financial statements when we file our third quarter 10-Q.

Real quickly, moving to the balance sheet, total assets at the end of the quarter were about $1.9 billion. Gross assets $2.2 billion. We had total debt of about $960 million, debt in preferred $1.1 billion. Total debt to gross assets at the end of the quarter was about 44%. And if you look at debt in preferred to total assets, we are right at about 50%. Our interest coverage for the quarter was 3 times and on a fixed charge basis our coverage levels were about 2.5 times for the quarter. Those are my comments. I will now turn it over to Bruno and let him talk about Europe.

Thank you Harrell, good morning to everyone, as you already know, the second quarter has been impacted by major events for Shurgard Europe from the change of ownership to the creation of the new development financing tool, the first is Lemmington venture to the open of the 100th store in the UK and many other operational actions. The change of ownership from -- to 6.7% at the end of June and 80.6% at the end of July has been largely explained by Harrell. If it does greatly clarify the overall structure that governs Europe and fortify the resulting requirements, it does not translate into significant operational adjustments for Europe.

Even if we expect greater synergies between the two companies in the future, as mentioned by Dave. Regarding the establishment of the 28 joint venture with First Islamic Bank to finance the acquisition and development of our new properties. This has contributed to an additional revenue of $3.8 million representing the 7% of the cost of the 15 properties recently acquired and transferred to the joint venture company. Out these 15 properties only three are opened and they are low stream of revenues as well as expenses at this stage. They do not impact significantly our quarter two profit-and-loss statements when we consolidate them on the 20% basis.

We are organized for the future reports to better isolate the impact of the joint properties and the consolidation of our financial report. As far as the operation side of the European company is concerned, these properties are and will remain anyway managed as any other properties in the portfolio by the countries operational structure. In conjunction with the joint venture creation we have also finalized in the second quarter the raising of the debt facility we needed.

The second quarter has seen the opening of our 100th store in the UK, southwest of London, at a major cross road that makes the store highly visible to heavy traffic. We actually opened four new stores during this quarter. One in France, one in Sweden and one in Denmark; on top of the UK site. We are still online with our development schedules and are maintaining our 25 sites opening goals for the year.

Currently indeed 15 stores are under construction and some are about to get construction permits. Estimated completed costs of these projects are within forecast and that means no over run is expected from the construction management. Finally, our pipeline of potential sites for 2004 looks encouraging at this stage. With Germany and France our major countries in terms of expansions being very promising. As mentioned to you during the last quarter conference as with the focus of the European management on sales and marketing activities through various initiatives that are in the process of being implemented after proper consumer evaluations.

The review of the store office and its layout efficiency to provide a better service to our customers is a good example of the latest initiatives that are currently being implemented. Efforts, as mentioned to you already, have also been specifically made on people and more specifically in terms of training. For example our capacity to integrate new people has been greatly improved by the European implementation of a more friendly computer software that handles customer registration.

In terms of organization, the company in Europe has about 410 employees at the end of June with around 30 new recruitments since last quarter. Germany is now finalizing the implementation of the required central structure and all the countries have also geared up their in-training personnel to take charge of the stores to be open in the second part of the year. The European management team has finally been reinforced with the recruitment of the original director for south Europe in charge of France for the time being and probably being covering in the future the expansion plan in south of Europe.

Operationally speaking, the quarter has seen a very healthy increase of the company customer's base by plus 32% since June last year and we ended the month of June with a portfolio of about 40,000 active clients. In terms of operational financial results. Same-store data shows year-over-year good increases in revenue and NOI of plus 6.7% and plus 4.1% respectively. If we exclude from the 47 same-store properties the negative impact of the 11 Swedish properties included in the pool, the performance increases to 9.9% and 11.1% respectively.

The drop in performance in Sweden is due to three issues. The evolution of the general Swedish economy that it has a impacted demand, the opening of several of our new stores in the market that has temporarily diluted demand in our older stores, and underperformance of the management team. To address the performance issue in Sweden, I have, and we have with the local team significantly reduced the amount of the development program and the Scandinavian development team is now predominantly focusing on the more underserved Copenhagen market.

And we have also made changes in the Swedish operational management team. We are finally increased marketing actions and personal training efforts. I believe, at this stage, that these actions will generate improvement in the performance of the older Swedish stores over the coming quarters and add up increase in the over all expansion plan and development of the Europe entity. Thank you for your attention. Jeff, back to you.

Thank you, Bruno. We're ready to take calls from our listeners.

At this time we will be begin the Q&A session. If you would like to ask a question press the star one on your phone. To decline from the polling process press the star followed by the two. You will hear a three tone prompt acknowledging your selection. Your questions will be polled in the order received. If you are using speaker equipment please lift the hand set before pressing the numbers. One moment, please, for the first question. The first question is from Jim Sullivan. State the company affiliation followed by the question.

Jim Sullivan from Green Street. Harrell, if I heard your correctly, the lease-up properties domestically picked up 1600 basis points year-over-year is that right.

That is correct for the full year so that is a January through June. So January of 2003 to June of 2003.

Can you help me understand the contrast between your lease-up properties domestically and the lease-up properties in Europe. When I look at European same-store results you picked up 100 basis points in the oldest most seasoned portfolio properties. Why is the discrepancy in the lease-up pace so vast between the domestic and European assets?

I think there is a couple of reasons. Number one, you know, when you look at our lease-up properties in the U.S, these properties we are always trying to balance rate and occupancy. And so if you look at, you know, the occupancies are up 1600 basis points, it is also a function of awareness in the markets. Where as in Europe it's a brand new concept. We think that the customers are very, very similar to what we see in the United States,.

In the U.S. I think what we fight is competition. There is no market that we are in today that isn't very, very competitive in the U.S. In Europe, I think what we are fighting and what we battle with is really more of awareness issues. We think that -- and so for us what we need to do is make sure that the product becomes -- our customers become aware of the product.

Again, I think that you need to kind of look at that portfolio of same-stores that we have in Europe and look at the impact that Sweden has had on those; and I think if you exclude the impact of the Swedish stores certainly the performance of the European stores I think are pretty consistent with ours. Not -- again, what we try to do is not necessarily focus on occupancy exclusive of rates.

We're always trying to manage, to maximize the rates, or you know maybe what people would think of as REVPAR and in the U.S. our rates; when you look at the rates in the U.S. on the same-store pool or on those kind of call it new same-stores I think our rates have actually gone down a little bit.

Where as in Europe we still don't know the density or the level of demand that you have and so we are still trying to figure out kind of the equilibrium point and so we continue to experiment in those markets in terms of what the customers are willing to pay in those particular markets.

How much of the 47 same-store properties in Europe are in Sweden?

I think that was 11, wasn't it?

11, yes.

I think, Jim, this is Dave that's the main take away to your question I would emphasize out of Harrell's comments, it is a much smaller pool than the U.S. pool so it's more susceptible to some of the individual movements and no question Sweden was experiencing more of that cannibalization as Bruno described. Where we're actually getting a drawn draft on occupancies and that is a little bit- unfortunately the tradeoff when you are trying to get up to an economical size in a market at a relatively quick pace you will experience that.

Can you quantify how bad things were in Sweden, maybe from an occupancy stand point? Where were you a year ago, where were you this quarter?

Bruno, I don't know if you have that.

In fact, the occupancy has been if you exclude Sweden we grow by 3% instead of 1%. And from 73 to 77%. And Sweden -- so Sweden average occupancy is lower than the rest of Europe and has been stable during the quarter so that is basically the impact.

And given the experience in the European same-store pool do you still think that 85-87% is a stabilized occupancy or are there structural issues in Europe?

We have not changed this target as being the normal occupancy rate at this stage. 85 should be -- we should be between 80-85.

Jim, this is Chuck. Some of those stores in Sweden were at in the high 90s but then we go into the neighborhood about four miles away and put another store and, yes, in the short run that negatively impacted them but in the long run they're all going to do be doing just fine. Great stores wonderfully located. Just a matter of getting enough awareness about the product out there, same problem we had in the United States in the early years. And now, of course, we own that market because the Europeans are less likely to go in and be entrepreneurial.

If Sweden were the 51st state in the United States by now we would have 40 or 50 more competitors there because some young entrepreneur would say that looks like a heck of an opportunity. Over there, all the sudden, everybody now will stay out of Sweden because they see that Shurgard owns that market so in the long run I'm not worried about that at all.

You have been pushing the wrench in Europe at a pretty hefty pace and I'm confused by the low occupancy combined with fairly high rental rate growth. Can you just help me understand the strategy?

Well, Bruno, do you want to comment to that?

Go ahead, Dave.

I think the problem, Jim is a couple of things. You know, under the same-store definition as we have talked in the past once a store has been open two years as of January it is into the pool, so you got a fair mix of some that have been around quite a few years and some that have only been around two and a half years and they are definitely in the rent-up process and have not hit the 85 target you are talking about; and where we would typically be very conservative holding rates back for the obvious reason of trying to push growth.

At the same time you view stores in the same pool that continue to do very well and allow us to push rates. If you remember from a call a quarter ago, one of the things that I pointed out that we did learn from this experimentation that was part of the impact on rent-up, is any time you build a store you're targeting two things. The over all square feet that you're offering as well as the number of units.

So if a typical store in the U.S. has 65,000 feet of space, very typically you may end up with a mix of units that gives you 600 customers. We were targeting a fairly similar approach when we started in Europe and in the various markets and what we have consistently found is that the actual size that customers are taking of units in most of these European cities is a smaller size. As I mentioned before, it is a two edged sword. One is that means you're ending up with more customers going into a store of 65,000 feet before it is full so that takes longer as a result, but on the other hand, you you're ending up with a higher rate per square foot.

We get a typically get a 5 by 5 at a much higher rate per foot than a large 10 by 20 or 10 by 30. On top of that compounding that trend is, you know, obviously Europe has experienced the same kind of economic issues and in some ways more so than the U.S., and where we have seen it hit most was on the commercial tenants. They were the ones we saw actively consolidating where they would have ten, twelve units in a site and cut back to maybe only three or four or come out all together. So that's even driving your average unit size down a little further which causes the average rate you're getting to accidentally, if you want to call it that, float up based on the residential group continuing to stay strong. So it shouldn't be interpreted as our actively pushing rates and then causing occupancy issues. It is more of a mixing and change in who the tenant makeup is along with the storage being at different stages of success.

Okay. And my final question, Harrell, I think you said about 10% of your domestic same-store pools were properties in lease-up. If you stripped those out and look at other 90% what would the same-store NOI growth have been?

Same-store NOI growth if you go to the second quarter was down about 2%.

Thank you.

On the kind of call it the old same-stores if you will.

Thanks.

Just kind of what we thought the beginning of the year. We thought that the growth was coming from the kind of the new.

Okay.

Thank you, sir. Our next question comes from Ross Nausbaum. State your company affiliation followed by your question.

Smith Barney. First question is for Harrell. On your balance sheet you're showing a $20 million loan to shareholders that didn't appear before. What is that?

As part of the Minnesota transaction that we closed on June 30th we ended up issuing unregistered stock to those shareholders, to the owners of those properties. They're now shareholders in the company. And what we did is we assumed $20 million of some mortgage debt and in return and exchange for that we received a $20 million note from them that is secured by the stock.

So when the stock is registered, which we expect to happen over the course of the next, you know, probably 90 days, then essentially the note will be -- the note receivable will be repaid by, you know offsetting the debt. So it goes away.

Another accounting issue. Can you address what is going on with the hedge that has caused I guess the losses to flow through your income statement the last couple quarters and what is going happen going forward?

I will. We not -- we still have the hedge in place. I think from an economic standpoint effective. We have not had a chance to get back and look at redesignating that. That is still kind of our plan and our goal and I would expect to have it done this quarter.

In terms of the impact on the third quarter number can you give us a guess as to what you think that will be?

I'll tell you what, can you tell me what will happen to interest rates? I'm sorry. No, it's really hard. I think that to the extent that rates have gone back up, and in more of that on the longer end, I think than on the short end; but to the extent that rates have even on the short end have started to go back up a little bit, if it was in place for the whole third quarter it would have a positive impact.

Turning back to Europe for a second. Can you address or I'm not sure who this is to, why the same property expenses were up 11.5%.

Basically this is two fold. One is marketing expenses and two is store training and store improvements, in terms of type of people we have increased I mean we have given additional payroll to have better people for the new stores increased quality of people. The marketing expense I am referring to are expenses that have been injected in what we called the a couple of difficult stores in a couple of countries where we want to really evaluate and appreciate if we can, accelerate the occupancy of all of the stores. So it is kind of experiment we are doing to evaluate some marketing action at this stage but will be expanded to Europe if they are successful.

Okay. And I guess Dave or Harrell, can you address the promotions that you're offering in the U.S. as well as in Europe?

Ross, this is Harrell, I can certainly address promotions that we have in the U.S. You know, essentially we offer two different types of promotions. We either have a half month off or a full month off. And kind of monitor that on obviously not on a monthly basis, but a quarterly basis. And if you look at where we were last year, last year for the first quarter -- for the whole year last year, our specials really represented about or we were offering specials to about 10% of our new customer base.

So as new customers come in essentially one out of ten would get some form of promotional special whether it was a half month off or the full month off. For the first quarter and the second quarter of this year, that is up slightly. It is up -- last year we were at you know 10-12% and this year in the first half of the year we're running about 12-13% so it is up some. But not dramatically. And of course to the extent that those discounts or promotional specials are offered to our customers, that is reflected in the obviously in the first month's rent and translates into our collected rate per square foot.

And in Europe any thoughts there?

You want some kind of ideas on the promotions, right?

Correct.

Again, it varied from market to market. We don't have the challenges or the same issues to promotions purposes in Europe, as you understand the competition is different; and does not exist in most markets so the marketing or promotions actions are basically oriented towards awareness. We have less than 1% awareness in saturation activities in Europe where the U.S. I understand the awareness is 95%.

So most our promotions and actions are geared towards awareness. And we do a very different range of actions depending on the markets. It goes from radios in France in the last quarter to specific advertisements in yellow pages in some markets to ad in the newspapers, local newspapers for Belgium for example. So it's a very different range and evaluate different actions from market to market but all geared to awareness improvement.

Are you offering any free rent like you do in the U.S?

We don't need because of the status of the competition at this stage to think about price discount and this is not Europe at this stage. Again, no competitions, we are -- it is all about getting the consumer to know about the product. Now, that means it doesn't reflect on the short-term basis maybe a couple of adjustments locally, by store but it is and eventually if there is a competitor but it is nothing at all like the U.S. in terms of price discount and price management. We are in unknown type of consumer awareness at this stage.

Okay. Final question. Harrell, can you address your floating rate debt exposure and what the plans are there going forward?

Sure, Ross. At the end of the quarter, domestically we had about $298 million in our line of credit. Of that, through the equity offering that we did in July, excess proceeds we had about $80 million and those proceeds were obviously applied to the line of credit so our balance today on the line of credit is around $220--$225 million. I think that we will look to do something on a permanent basis with that line of credit towards the end of this year or the first part of next year.

We have two different maturities, one maturity that comes up in I think it is the end of the first quarter or beginning of the second quarter of next year, a $50 million senior unsecured maturity. We also have a preferred that we have the right to call at the end of this year, and so I think any permanent financing of those for both line of credit we'll try take into account these other few issues, if you will.

And your debt in Europe is floating as well, is that correct?

The debt in Europe, we have a 300 million Euro line of credit and it is swapped to fixed through the end of 2004, that is when or 2003, excuse me. That is when that facility matures. We have an option to extend that, our option that we could extend it for a year. And so Patrick, the CFO over there will be here next week and we will be talking about different strategies in terms of how we want to look to refinance that.

Thank you.

Thank you, sir. The next question comes from Brian Legg. State your company affiliation followed by your question.

Merrill Lynch & Co. Looking at your properties I would assume that the lease-up process is longer in Europe than maybe you thought. Is it the lease-up process really four years? And can you break out your same-store pool in terms of occupancy for the properties that are 2-4 years old and the ones that are over four years and also yield on costs?

Well, Brian, this is Dave, I think we have disclosed already if- I can't remember if it's in the press release or certainly in the Q- that the portfolio combined is yielding 11% on its current occupancy of the 74% blend. I don't think I have got right at hand the actual breakdown group by group by year. But, you know, the occupancy question, you know, again you can't generalize it.

When we first moved into some markets in France and the Netherlands in particular we had complete rent-ups in periods of 12 months, 14 months so we got some examples of spectacular demand uptake but you are looking at one store coming into a city like Rotterdam of a couple million people. Then when we bring in other stores into Rotterdam there is a natural destabilization of the occupancy where it may get knocked down to 80, 82% for a period of time.

You have a lot of dynamics going on in the process and it would be a mistake to perceive that each one of these stores is on a linear march that has brought them to 74% as of this point in time. We have also got on the other end, as Bruno mentioned some isolated stores where the market is not reacting at all and a chronic occupancy problem where a store stalls at 60% which is why he is throwing an attack plan to see what can we do to jump start those.

So we can easily talk about what is going on in an individual market or what is going on in an individual store and frankly our range of experience is very similar to the U.S. with the only exception being on average a few more customers per store so it naturally takes longer to rent-up. And what you are seeing is the dynamics in the very small pool of us continuing to build the markets out to economic sizes.

You know, let me throw in one idea here, Bruno. What we are experiencing in Europe is exactly what we experienced in the early days in the United States. And when the business in the United States has been in relative equilibrium for 30 years. When there were 5,000 stores in the entire United States, our operating results were similar to what they are today. When they were 20 they were similar. New there's 40 or 50,000 stores in the United States, an entirely different situation. So what we are experiencing in Europe is precisely what we experienced before in the United States and it is -- and I suspect it will continue to be that way.

Dave, you talked about that you opened a store that maybe -- that would be four miles away from one store that is doing well. Why wouldn't you spread them out more through the city?

Well, partly, you got to remember, Brian, is that the fundamental difference in cities in Europe versus the U.S. is European cities are very highly compact. They're more like your Bostons and New Yorks and they don't have the normal spread of sprawling suburbs that you get when you go from Dallas out to Plano and over to Ft. Worth, so where you place your stores has to be kind of strategically around a circle and kind of in a concentric process.

So four miles, which is not an unusual distance for to use in the U.S. If you go four miles in London or Rotterdam you are covering hundreds of thousands of people and population. So by any metric we would ever use it as prudent distance to consider.

And obviously, if we had our wish we would always have one property at one end of the city and the second one comes at the far other end of the city and they don't always come in that sequence but we do map out every city we go to and break it down into sub zones and make sure that we are only going after properties we think will be complementary so you will get some of the destabilizing that can occur. The only other thing I would mention. I'm not going to kid you for a second. Europe is not a booming economy right now. We would certainly prefer to have Europe booming. There is no question that impacts us just like it impacts the U.S.

I think that the impact on us is far less mainly because as Bruno said we don't have the level of competition and we have the constant growing awareness and word of mouth. We've up to 40,000 customers and you've got out of that group, 3,000 are moving out every month and another three or four thousand moving in. So you are getting a lot of help spreading our name through awareness and that is what has been helping us offset the economic issues that the U.S. group feels.

And talked about the corporate side being pretty weak. What percentage of your tenant base of 40,000 people would be the corporate use and what would it be in the U.S.?

U.S. typically.

Typically.

Go ahead, Bruno.

No, the base is 70-30. 70% residential and probably 30% commercial people.

As a reference, Brian, that is about 5-10% points higher than the U.S. relationship. So the commercial customer at this stage in our life is a more important component of the mix over there than here in the U.S.

Okay. Thank you.

Thank you, sir. The next question comes from David Copp. Please state the company affiliation.

R&B Capital, here with Jay Leupp as well. You talked a bit about the level of concessions and promotions that you are offering had trended up year-over-year. As you look at July data are you seeing that trend up sequentially month over month and I guess what I'm really trying to get at is where you see the level of concessions going in the next couple of quarters?

This is Harrell, I don't know that I mean from a forecast standpoint, you know, we are expecting the level of concessions to be consistent with what we have seen through the first half of the year. The more important part of the equation for us is looking at overall revenue growth. I mean you're always always trying to balance rates and occupancy.

It is not just a goal to get to 85 or 90% occupancy at the expense of rates and so again I think what we will do is we will look at demand coming in to the front end, we will look at our overall occupancies that we have, you know, within a store. And then break that down further to not only within a store but within a particular size class. And so based on the demand for a particular size, based on that availability, that is how we determine or set our pricing strategy.

That is all done at the local level. It is all done you know on a very decentralized basis but just a very dynamic process and it changes quite frankly month to month based upon demand volumes coming in to the store on the front end.

Got you. Then you mentioned that the demand in Europe has been, you know, potentially skewed more towards the smaller spaces than you initially planned. Are you finding that you're often having to circle back around to some of these recently developed properties and reconfigure the properties to be more dense in the smaller spaces as opposed to the larger ones?

Go ahead, Bruno.

Go ahead, Dave.

You know, I think that a couple comments I would make on that. When we first started in Belgium, what we found was that the average unit size our customers were taking was surprisingly similar in size to the U.S. So that was kind of what gave us the initial confidence we were on the right track.

It was only as we moved into the other markets that we really started to notice a consistently smaller size and absolutely we not only adjusted downward our unit mix in these existing stores, which as I say is the negatives you get more customers and the positive is a much better rate per foot and also cut down the average size of the new projects we were building to adjust for that. The only thing as I was mentioning that has compounded that is that with some erosion in the commercial side of the business over the last, you know, 9-12 months, you know, the commercial account typically takes a larger average size than the residential. So that just aggravates temporarily the way things look in a given store, you know, we fully expect that the economy starts to pick back up we will definitely pick up on the commercial side.

By the way, the commercial aspect in Europe but you get commercial key decreases. It is basically in a market like Sweden that you have this type of when I look at France for example the commercial part of the business is booming that the stage.

That is good to know that.

Depends on the country then.

Absolutely.

The other point I was going to make about kind of average unit sizes is, we find if you go to the real urban parts of the United States that our averaging sizes are very typical to what.

Smaller as well.

What we are seeing in Europe in the larger cities. I mean New York, Los Angeles, Chicago, again the very urban sites you look at those downtown kinds of locations that we have and typical sizes will probably be 70, 80 square feet.

That is exactly right.

Very similar.

And then one final followup without spending a lot of time on it could you just quickly run us through the three strongest and weakest U.S. markets?

Sure. Our strongest markets two strongest markets this is on a during the second quarter I think we had Orlando, our Indianapolis St. Louis market and Virginia Beach were all the strongest markets both from a revenue perspective as well as from an NOI perspective all three of those markets were up in double digits. Indianapolis and St. Louis which is a small market for us but year-over-year the NOI growth was about 20%.

Our two weakest markets are in northern California and in Chicago and both of those markets -- Chicago on a from a revenue perspective was down about 5% but NOIs were up about 4% because we have had significant reductions in kind of operating expenses there. Northern California the revenues were down about 3.5% and NOI was down about 7%.

Okay. Great. Thanks, guys.

Thank you, sir. The next question comes from Scott Bowshay. State your company affiliation follow with your question.

Deutsche Bank. Question on Europe. What was the dollar amount of corporate G&A in the second quarter?

Hold on one second, Scott and I can get that for you.

Okay.

We did as part of our 10-Q put in a full balance sheet and P&L. The G&A in Europe for the second quarter -- well, excuse me. We -- it's all lumped together in operating, but the total operating expenses in Europe were about $17.7 million compared to about $8.5 for the same quarter last year.

One of the things that you need to be mindful of is because of the new joint venture that we have put in place all of our development costs rather than being capitalized directly to our projects are now going to start running through the P&L. It will be offset by higher fees and revenues that we get and we will start as we go forward breaking out the difference between from an operating standpoint what is G&A or operating versus what is development.

Okay. If you take some of the overhead, I know this was in the first quarter Q and I will look for it in the second quarter but if you take some of that G&A and allocate it back to the NOI say if the same-store pool, how do you -- when you look at the 11% returns that is on an NOI basis?

NOI after leasehold.

Okay. But that is before allocation of overhead. If you just simply, you got 47 properties out of 100 allocated say half the G&A back, you know, wouldn't that have a fairly dramatic impact on the returns that you are looking at?

Sure, no question about it.

Okay.

Again, I think the important thing to remember is that internally when we look at these projects and allocate costs to them we will put in what we think is a standard or consistent level of call it management. We use the 6% fee there. We are not in Europe to build 100 properties. Anybody that thinks that that is all we are going to do there is really missing what we believe the opportunity to be there.

We have put together a company over there and an infrastructure over there to significantly grow the platform that we have over there. We think there is a tremendous amount of value in that platform. We think that we can significantly increase the number of stores without having to increase the overhead to manage those stores very dramatically. We are in 7 countries today and full operating teams in all of those countries. We just entered Germany this year. We have the development teams in place as well as the operating teams in place because those stores are coming online or will come online in the third quarter.

And so when you look at G&A. If you were just to allocate to those properties a fixed, you know, overhead cost, 6% it would knock the yield down about another point. If you look at the detail of our information that we put in the Q and if you look at it over the course of the last two or three years we do go through and allocate kind of the indirect operating expenses to our same-store and new store portfolio. What you will see there is that our -- the cost of that -- the cost to manage that portfolio on a year-over-year basis is coming down dramatically because we're able to, in essence take a fixed overhead cost and spread it over more and more properties as that platform continues to grow.

Okay. That is helpful. So you're looking potentially at say doubling the portfolio here in maybe the not too distant future and really getting this thing down to a more manageable allocated level.

It is a very expensive proposition to go to Europe. We have full development teams in all seven markets that we are in and we believe we are the dominant players in Europe. We have built 100 properties to date. Essentially all of them are ground up developments and we have local real estate experts in all these markets. For somebody to come in and do that, I'm not saying it is impossible but it is a very long arduous process to get there.

We have been in Europe since 1995. We have spent the first three or four years understanding the markets and building the right infrastructure first. If you go back and look historically at what we have done. In the first 3 or 4 years we built very few properties because what we were focusing on is, obviously making sure that the product was getting accepted and then as important or maybe more important make sure we had the right infrastructure and right people there.

They have great real estate people in Europe. There aren't a lot of great real estate people in Europe that understood self-storage so that is kind of what we brought to the table or certainly what Dave brought over to Europe and so we have kind of married that now and now what you see over the last couple of years that we have been growing the platform at some where around 25-28 stores a year and that is certainly our goal as we go forward because we think there are tremendous opportunities over there. Certainly, you know much greater than in the U.S. Even though it there are still tremendous opportunities here.

Okay. That's helpful, thank you.

Yep.

Thank you, sir. Ladies and gentlemen if there are additional questions at this time please prase the star followed by the one on the push button phone. As a reminder if you are using speaker equipment, pick up the hand set before pushing the numbers. One moment please for the next question. Management at this time we have no further questions. Please make any further statement.

Thank you very much Andrew and thank you everyone for joining us on the second quarter conference call. A real quick note for those of you looking for the 10-Q. We understand that Edgar has resolved their technological problems and it is filed and should be available for you. Thank you very much we will talk to you at the end of next quarter.

Ladies and gentlemen, this will conclude today's teleconference presentation. Thank you for participating in the second quarter conference call. At this time we will conclude and you may now disconnect.