Public Storage (PSA) 2003 Q3 法說會逐字稿

Welcome to the Shurgard Storage Centers' third-quarter earnings conference call. At this time, all participants' lines have been placed in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. (CALLER INSTRUCTIONS) As a reminder, today's conference is being recorded, Tuesday, November 11, 2003. At this time, I would like to turn the presentation over to Jeff Szorik.

Welcome and thank you for joining us today on the Shurgard Storage Centers' third-quarter analyst call. Speaking on today's call will be Chuck Barbo, Chairman and CEO of Shurgard; Dave Grant, President and Chief Operating Officer; and Harrell Beck, Senior Vice President and Chief Financial Officer. Our speakers will take about 15 to 20 minutes to present their prepared remarks; then we will answer your questions. In addition to our three speakers, Bruno Roqueplo, President of Shurgard Europe, and Steve Tyler, Shurgard's Senior Vice President of Operations, are also on the call and available to answer questions.

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 our 2002 10-KA filed with the Securities and Exchange Commission in May of 2003. Now please give your attention to Chuck Barbo.

Hello, everybody. Our same-store NOI growth continues to improve at a modest rate. We are pleased with the 2.5 percent year-over-year growth, but cautious about predicting what this will mean for the future. Our business continues to enjoy a relative stability compared to the other real estate sectors, and as I spend time out in the field, I sort of sense that things have turned around. There's quite a bit of optimism out there, so I think we are back on track.

I would like to also mention that we do have substantial embedded growth in our balance sheet. As we discussed when we were out meeting people in the last few months, quite a large part of our balance sheet is invested in assets that will continue to contribute to our bottom line with each successive quarter. We have already made the investments, both in Europe and in the United States, in about 100 stores that are involved in lease-up, so that -- as these stores lease up, we will continue to realize benefits on top of the improving results from our same-store group.

As far as our portfolio, we do have some older stores and we are taking a look at redeveloping some of these stores and bringing them up to the class of what we're building currently. Also, we are looking at whether it makes sense maybe to enter into what seems to be a pretty hot real estate market now and sell some of these assets, both in the United States and in Europe. The market is showing a lot of interest in stable cash flows and we may be looking into that as a possible way of getting access to more capital. Dave, I'll turn it over to you.

Thanks, Chuck. Good morning, everybody. This is my first opportunity to address the group as President for the Company, and what I will try to cover today briefly is some highlights for both the U.S. and Europe. Chuck mentioned several key priority areas for the Company, and I really see my role as not only focusing on those elements but making sure from an execution standpoint we are hitting as close to all cylinders as possible. What I would like to do is kind of go through each of those areas and point out a couple of additional highlights.

As Chuck mentioned, we were pleased with our same-store results for the U.S. We were seeing some encouraging trends from that. But I think if you dig a little deeper into the numbers, we have to be -- continue to be cautious, because reality is the demand levels we are seeing through inquiries in our store during the third quarter this year compared to a year ago were still down. Not significantly, but they were down. Really, I think credit for our results for this quarter really go to Steve and his team out in the field, because they clearly got more than their fair share of the demand we were seeing, as our closing rates were up over the prior year. I think part of that is due to some of the focus they have had on phone training skills and on some of their judicious use of marketing discounts. As you know, we typically focus our discounts strategies on a market-by-market basis. We've continued with a trend of roughly providing discounts to about one out of every five transactions that we close, and that was the pattern for this past quarter.

I also think the initiative of being open on Sundays, which was an element we started about nine months ago, is definitely paying off. Clearly, that has helped I think contribute to our closing rates. One other element that I do also think -- and really it is partly due to the nature of the times we are in, is that we have seen a slowdown in our actual moveout rates. And while I think we'd all like to take credit for being great at slowing moveout rate down, I think it is really more due to the phenomenon of when you are in a slower economy and where you see slower moving rates, you also tend to see a similar situation in the moveout rates moving down as well. So I think all those things helped to contribute to a decent quarter. Clearly for me, focusing on our gross margin, balancing with Steve the expense strategies we use, the rate management and discount policies and trying to move occupancies will be a balancing act that we will stay highly focused on in the quarters ahead.

If I turn over to Europe in the meantime, obviously gross margin is just as important there. We have, frankly, been continuing to live with an economy in Europe that is even further behind than what we're seeing in the U.S. in the way of recovery. We had good same-store operating results for the quarter, with NOI with up over 11 percent, but frankly, we had hoped we could have gotten more movement on our occupancy. That has stayed stubbornly down in the mid-70s. In response to some of the analysts' questions from the prior call, we decided to include a more significantly expanded look at the portfolio, because like anything, the overall mass of 47 stores tells one thing, but as you look into the details by country, I think you see quite a different level of things going on.

The five countries that we have same-store pool components in, three of the markets actually performed very well for us this past quarter. France continues to be a real leading engine for our group, where we have a lot of development activity going on currently. As you look at these tables, you can see that they were experiencing almost 18 percent NOI growth over the period of a year ago. Also saw good results in the United Kingdom and the Netherlands. Where we really were held back were, frankly, our two oldest sets of portfolios, where we started in Belgium and in Sweden, which was the second market we've gone into. On a prior call, we talked about Sweden being an area where we were really challenged by the economy; but along with that, frankly, some of building that we had done had definitely impacted some of our older stores. I think Bruno and his team have done a great job of getting in there and really working the rate management and marketing, and as you can see from the numbers, we have started to turn the occupancy around through some pretty aggressive rate management there, and expense control on the other side. But we have not seeing signs that the Swedish economy is coming out yet, but clearly, I think we've done a good job of getting that ship of properties turned around. And as I will talk a little bit later, we have cut way back, obviously, on our expansion in the Swedish market to allow these stores to mature.

The other one is the Belgian market, where, frankly, we have had great results year-over-year for a long time. This is our oldest pool. And they have stalled and in some cases lost some ground, as you can see, a little erosion in the occupancy there. So I won't say the Belgian economy is in nearly as difficult a shape as Sweden, because it is not, but it is just a case where we will have to carefully balance rate management against occupancy gain. But (technical difficulty) highlights of what I would see out of the pool there. Clearly, Bruno's focus is on the being able to drive and gain those last 10 percentage points in occupancy for this pool. We have already got fairly decent gross margins, given the very high rate structures that are in Europe. No question, our ability to finish closing that gap over the next year through some of the sales and marketing initiatives that he has talked about on previous calls will help that even further.

If we move out of the same-store group and talk about Chuck's second point, which was on the embedded growth opportunity, there is just no question, a lot of my focus and the Company's focus will be harvesting the opportunities that are already on our balance sheet. We have close to 100 stores that are in various stages of rent-up, not in the same-store pool, or will be coming online in the fourth quarter. We've got about 35 of those in the U.S. We're seeing good progress there. I think the most interesting note, I would say, is that the vintages, when you break them down '01 ,'02, and '03, '01 in particular was a tough year for us in property performance for those stores that came online. And while I think we have made good strides to get those coming around, we have seen a marked improvement in the stores that were released in '02 and this year, '03.

As a point of interest, the '01 stores are just south of about a 6 percent yield, about 5.5 percent yield rate contributing to the portfolio currently. But the '02 stores have already passed that group by and are already north of 7 percent, and so I think thanks again to Steve's group for really getting hyper-focused on pre-leasing and pre-marketing activities to give these stores a pop out of the blocks, plus, frankly, some tightened up underwriting standards, have all kind of contributed to getting those kind of results.

So if I look at Europe, similar story. There obviously the percentages are significantly different -- 47 stores in the same-store pool, but we've got over 50 now that are in the new and rent-up category. This group is also showing good progress. Again, we would all be happier if we were seeing the speed of rent-up as we get into the second year, picking up pace, and Bruno's group is focused on similar initiatives to what I described for the same-store pool. We're still seeing a very good contribution to the overall (indiscernible) group. The same-store pool, if you look back in the first quarter, you'd see they contributed about 10 million in revenue to the Company. And the news stories added about another 30, 40 percent on top of that -- about 4 million. As you move into Q2 and Q3, you see, even though the same-store pool continues to grow, you're seeing a significant gain out of the new stores. We picked up about one million over Q1 and Q2 and another million in Q3, bringing that to being more like about a 55 percent contribution on revenue. So no question that keeping our focus on accelerating these rent-ups will have the biggest impact for us as go into next year.

A final point I want to cover is really on the portfolio management, maybe talking a little bit about the development side versus redevelopment. As I'd mentioned I think on the prior call, as part of my retraining exercise over the last six months, I have visited all of our key markets, met with our key field personnel and have toured about 250 out of the 500 stores that we have in operation, and no question, it reaffirmed to me what a great portfolio we have got. And not just that -- I think frankly we have some great opportunities. I've mentioned before, we've got some properties that are 20, 25 years old now, and clearly, there is upside potential in many of them. We have identified as many as 75 to 80 stores that we feel in the portfolio could really, either through better use of the land that we have or just upgrading the property, could make additional positive contributions to the portfolio. So we will continue in the U.S. to keep a very modest growth level on new development, similar to what we have done this year, where we expect to open about 15 stores in total. It is about what we expect for next year. And most of our focus will be on this redevelopment initiative.

And when you look at the situation in Europe, again, we continue to see good buying opportunities. The flip side obviously of difficult economic times is we're not finding near the competition we did even one year, 18 months (technical difficulty) sites, and that has allowed us to continue to find good sites in most markets. We will be shifting -- even though we will do roughly the same volume of stores -- around 25 next year, similar to what we have done last year and what we expect to do this year -- our focus will shift predominantly to the major markets, being Germany, a new country we've just entered, France, and the UK. You will see us scale back significantly in our smaller markets, where we have already got a good platform established now -- the Netherlands, Sweden, and Belgium.

And finally, I guess my last comment would be on echoing what Chuck has said is on same-store portfolio, we did do a couple of dispositions this quarter of stores. We have done some in the past, but those have really been for strategic reasons, where we were in markets that we were not able to get a good economically efficient platform or just did not feel we could make good use out of the property. But we are going to take a more active look at really recycling some portfolios of stable properties that we think there may be some good market opportunity to take advantage of. So those will be certainly some of the areas that I will be focused on in this year coming ahead, and I am going to turn it over to Harrell now and let him cover some of the capital highlights.

Thanks, Dave and hello, everyone. I will just spend -- going to make a few brief comments with respect to the Company's third quarter financial highlights. The first two points are really talked about before. I think the first one is is we had been committed to -- really at the start of last year -- the end of last year to really significantly (technical difficulty) story in our balance sheet. I think we have demonstrated that through the first three quarters of this year. And all of the capital transaction that we had previously talked about have really been completed now, and we continue to simplify our story in the balance sheet. And it really, as both Dave and Chuck have pointed out, as a result of these capital transactions, we have really transformed about 15 to 20 percent of the balance sheet into development and lease-up properties that -- to lease up and mature over the next couple of years.

As part of simplifying our story in the balance sheet, one of the other things that we are committed to is to continue to refine our disclosure. You saw a little bit of that in the press release we had this time, trying to give you a little bit more color and information with respect to some of our European properties. We will be doing much more of that in the future, and internally, we are committed to significantly redraft disclosure and with respect to the MD&A and 10-K for 2003. The other thing that we have talked about in the past, we had anticipated that as a result of the adoption of FIN 46 that we would be consolidating in the third quarter our unconsolidated joint ventures. I think as many of you know, FIN 46 was delayed until the end of the year, and as a result, we have not consolidated those unconsolidated partnerships, so on our balance sheet, they're still shown as unconsolidated investments. Had we consolidated those for the third quarter, there really would be no impact on either net income or FFO. By consolidating these partnerships, it would simply gross up our balance sheet and P&L. Total assets for these joint ventures is approximately $110 million pre-depreciation. Those partnerships have mortgaged debt of about $70 million and revenues for the third quarter in those partnerships were just under $4 million.

FFO on a per-share basis was 68 cents, and that compares to 56 cents for the third quarter of 2002. We have adjusted both our quarter and year-to-date 2002 numbers to reflect the adoption of EITF 42, which has to do, as I think all of you know, with the redemption of preferred stocks. So we have now deducted that from both our earnings-per-share and FFO per share. On a year-to-date basis, FFO was $1.95 and that compares to $1.81. The one point I wanted to make about the year-to-date numbers is that during the third quarter, I think NAREIT clarified its position with respect to impairment losses. As I think many of you remember during the second quarter, we had an impairment loss on one of our properties in Texas that we had excluded from FFO. As a result of the clarification from NAREIT, those charges are not to be deducted, so in our year-to-date numbers, we have not added back that impairment loss.

With respect to the fourth quarter of 2003 and our outlook, I think as you saw, our FFO guidance for the fourth quarter we expect to be between 60 and 65 cents. Really no significant changes or any changes to the assumptions that we have previously given you with respect to guidance. We expect our same-store revenue growth to be in the 1 to 3 percent range; same-store expenses for the full year in the 4 to 6 percent range; and our same-store NOI for the full year will probably be somewhere between flat and up 1 percent, and for the fourth quarter, we would expect that to be somewhere between 1 and 2 percent for the fourth quarter. Again, full-year guidance would be the 255 to 260, which is consistent with the guidance that we have given in the past. We have again adjusted that to reflect not adding back the impairment cost (ph).

Moving quickly to the balance sheet, total assets at the end of the quarter, just under $2 billion. On a gross basis before depreciation, we were about $2.3 billion, and a couple of statistics. Debt to gross assets at the end of the quarter was about 41 percent and debt to total market cap was about 35 percent. If you add in our preferreds -- both debt and preferreds to total assets, it was approximately 47 percent. And debt and preferred to total market cap was about 41 percent.

Interest coverage for the quarter was approximately 3.5 times. If you looked at our unsecured interest coverage, unsecured interest coverage was running about 3.8 times, and our fixed charge coverage was about 2.8 times. We have talked about before some of our debt maturities, the line of credit. We had about 240 million outstanding on the line of credit as of the end of the third quarter. Again, I think consistent with some of the comments that we made last quarter, we will look to (technical difficulty) on a permanent basis sometime in the first half of '04; and again, as we have said previously, we do have a preferred that is callable that we are evaluating, as well as a debt maturity of $50 million that comes up in the second quarter of 2004.

The other significant debt maturity that we have is our line of credit in Europe -- it's a $300 million line of credit. And we have given notice to extend this facility, which we have the option to do, and we have given notice while we continue to evaluate the various refinancing options that we have with respect to that facility. And that is the end of our prepared remarks. Operator, we are ready for questions.

Thank you, sir. (CALLER INSTRUCTIONS) Brian Legg.

Harrell, can you talk us through why the range is 60 to 65 -- what's the decline from the 68 cents in the third quarter to the fourth quarter?

Part of that is just seasonality. I will tell you that, I think from our perspective, the third quarter from an operating standpoint came in stronger than we had anticipated, clearly. Again, I think just to reiterate some of Dave's comments, I think we were very pleased with the job that Steve and his group have done. And quite frankly, in the fourth quarter, we are still projecting somewhere between 1 and 2 percent. So again, it is a -- the operating environment is still very challenging and so we are trying to be cautious.

In that seasonality, do you just lose some occupancy? Is that -- ?

Absolutely. Historically, I think if you went back and looked both from an occupancy standpoint and from an NOI standpoint just kind of on a sequentially quarter-over-quarter, we would expect to lose -- or you would see, I think, 1 to 2 percent occupancy kind of decline, which is pretty typical from a seasonality standpoint.

David, I read your -- in the portfolio management section of this press release, I sort of read this as though you might be contemplating doing the ProLogis funds model. And then in your comments, you talked about maybe disposing some of your assets. Are you thinking about creating joint ventures with your -- or funds with some of your stabilized assets, and can you sort of talk through the financial implications? Because obviously, you will be selling down assets, which would be dilutive.

Brian, I won't try to specifically comment exactly whether it mimics a ProLogis model or not. That's a fairly complicated model that we don't have time on the call to go back through. But to your point, I think we talked a quarter or two ago about why we had done the joint venture, the first Crescent joint venture. And we had found in the development market in Europe at that time that there was strong demand for our product on a development basis, and we felt that because we could get appreciated returns on the capital we were investing in that joint venture versus what we found the market was willing to coinvest with us, that is why we pursued it.

We would certainly take a look at a variety of options, but certainly following the same guiding principle of with stable properties, that if we do find the demand for stable portfolios is what we think it is and we can achieve a good, strong yield off recycling the capital, whether it is in a joint venture or some other version of the sale, we are going to pursue it. If we think it will net-net for the shareholders make the right move.

Is this likely to happen both in the U.S. and Europe, as you've implied?

Let me put it this way. We are going to aggressively look in both markets, both at our U.S. and European portfolio. Obviously, this is nothing that we are going to commit that we are going to do. We are going to commit to evaluate it. And if we find that what the demand is in either place to be what we would feel is appropriate, we will go after it.

And turning to Europe, do you attribute the stalling of -- I know your occupancies increased year-over-year by about 200 basis points, but it looks like the rents didn't move. Are you worried that maybe the appropriate stabilized occupancy in Europe is really in the mid-70s and not the mid-80s, like it is the U.S., just given that it is a different product type there?

It's a fair question. Partly why I put in these kind of blowup schedules is because when you just get the information on the combination of five countries together, it really doesn't tell a very clear picture. So I would refer back to the press release on both the country breakout as well as the vintage breakout, and it will give you a better sense of the movements. But I actually went back and checked, and we had had, in that same-store pool of 47 stores, we have had about 27 of those stores already achieve occupancies well north of 85 percent at one time during their life. So we have more than enough evidence that we can fill a store up. Obviously, you have to look at -- and several of those have come back down below those levels -- in Sweden in particular, Belgium to lesser degree.

Partly economic, but as I mentioned before, we have brought a fair amount of property online into some of these markets and we have robbed Peter to pay Paul in some cases. So that is why it becomes a bit of a distorted picture. A couple things I would point out that may be helpful on that table. If you look at France, for instance, we had a 6 percent occupancy gain on the 11 French stores in the same pool. They are over 80 percent combined. And they had almost an 18 percent gain on NOI. They moved rates 4 percent. And we saw some reasonable gains in occupancy in the UK and some upward movement on rates.

But no question, we have to react to what is in front of us. The same adage holds true, that if you lower rates, you will increase occupancy. And part of what Bruno and his team are experimenting with is where is the appropriate edge on that, as we balance not putting ourselves in a spot where existing customers feel new customers are getting too good a deal and want the same thing. There's all those kind of issues to deal with. But to answer your question, no. I see no reason to expect our stores in Europe, all things being equal and supply demand balanced, to not be able to achieve a fully stabilized 85 to 90 percent occupancy.

Along those lines -- and do appreciate the new disclosure; it's very helpful. It does seem like, though, if you do the yield calculations on your last page here, that your oldest properties, the properties that you're saying -- the markets that you're saying you are having a problem with -- certainly are producing a higher yield than the newer properties. And again, I know you gain more occupancy. But if you compare the 2000 versus the 99 and before, you're getting -- the 99 before, you're getting a 13.6 percent yield (technical difficulty) 11.2 percent yield. Was it just a lot cheaper to build in those markets?

See, there you've got to be able not to mix two sets of data. On one hand, I am crying in my beer, so to speak, that Sweden and Belgium are down, but that is relative to the same quarter of a year ago. As I mentioned at the beginning of the call, Sweden and Belgium are our oldest markets, so they have had the longest time to build yield and gain, and clearly have gotten some very great gains. But if you look just year-over-year relationship, they have given some of that back in the last 12 months.

This is Chuck. I'd raise one additional point. This is exactly the same kind of experience we experienced in the early days in the United States. We went from a period of just a few thousand stores to a period of -- to maybe 50,000 storage properties in the United States -- nobody knows for sure. And all during that period of time, it was relative stability between supply and demand. We had these kind of fluctuations going on all the time. And you could have easily made the same point 25 years ago in United States, that there was no more market left, because it was sort of stalling out a little bit. But they didn't stall out, and we continued to build and the industry continued to build. The same sort of thing is happening in Europe. The awareness factor of our product in Europe is probably lower than 5 percent, and so people can't use you as a solution to a problem if they don't know about you. So we would fully expect Europe to act very much like the United States, has always acted throughout its history.

Okay. Thank you.

Paul Adornato.

You talked about a potential source of cash, that being a joint venture or some form of disposition of properties. And then you also mentioned that you were considering perhaps renovating 75 to 80 stores. I was wondering if you could put some dollars behind the renovations and give us an order of magnitude and how you expect to finance that?

This is Dave. Let me address the question on the redevelopment. The way we came to that group of stores is I had asked our regional vice presidents to do a complete inventory of everything they had and come back with those properties that they felt really could benefit economically from making significant improvements. And that is how we came up to the list. Here is two things that are going to happen. They are going to go focus on those. They will find that some of those 75 stores, they either cannot get a permit to do what they want or economically it turns out for whatever reason to be unfeasible to get done what we would like to get done. So we may come back to a smaller amount of upgrade that could occur. So you have to handicap that pool of 75 to 80 stores downwards some amount that I really wouldn't venture a guess on, but those would be the dynamics going on around that.

Then it's spread over time. These are not all going to be done in the first year. This is a group that has been targeted to be done over the next several years. So you would be really talking that some of these properties would only have work of 3, $4000 done to them; in some cases they may be a couple million. We have quite a few stores in some parts of our system that are unusually small -- 20, 25,000 feet. And as you know in the storage industry, we tend to hit the sweet spot on margin and economic efficiencies in the 60,000 foot range. So where we have identified areas that we can add on space to do that, we will certainly pursue it. And there you'll start to see some more significant costs -- 1 million, 1.5 million. Hopefully that gives you some sense, but it really won't in our mind present a huge capital challenge.

So any significant timing differences between raising funds and using funds next year?

I'll let Harrell come back on that one.

I don't think so. We have our credit facility, we have capacity of up to $360 million. And so, historically what we have done is financed our developments or acquisitions on the line of credit. And the run rate that we are currently at, we should be somewhere in the 13, 14, 15 properties this year in terms of total new developments coming out of the ground. And as we have said in the past, that run rate is going to be pretty consistent going forward, whether it is developments or redevelopments. So I don't think that there is any significant timing issues with respect to raising of the capital or investing of it.

Okay, thank you.

Patrick Letag (ph).

Actually, all my questions have been answered. Thank you.

Ross Nussbaum.

Starting with Europe, can you talk about what you're seeing in terms of new supply growth from competitors? Is there anybody new in the market, or is it just the same old folks?

Actually, it is kind of a mixed message. You have seen a reshuffling of the deck in that Access, who was our largest competitor, was partially owned by Security Capital and later taken over by GE. They have been actively marketing parts of their portfolio. They, I think, recently have sold or announced they have sold a chunk of their UK properties. And they have certainly stopped all development that we are aware of in France as they go through some reorganizing or rethinking of things. We have seen a general cutback in developments. We, as I told you, have seen a slow up in our rent-up process. It has hit our competitors, frankly, harder, and their capital raising ability has certainly been more limited, and not only have we seen that with Access, but several others. Big Yellow, who had made a run over into France about a year or so ago wanted to expand out of the London market over to there, and stayed there about six months, decided it wasn't for them, and pulled out.

You saw the sale of the second largest Dutch operator go to a consortium. They had about eight or nine properties there. I think it is called -- the name will come to me. A lot of these guys are using the last name of "box" -- Easy Box and City Box, I guess is what this one was. I get them confused at times. They sold out most of their interest to a group from Merrill Lynch and another opportunity fund. Safestore also did a sellout to a group as well. They're one of the more midsized UK operators. So there has been a lot of changing of hands of properties. We have continued, as we always do, to look at the opportunities that they have presented, have not found that we have been able to economically afford them in each of those cases.

So that's what has been kind of going on in the ownership side. As I say, really development-wise, we have seen a real lessening of pressure in pretty much all of the markets over the last 18 months, which has certainly in most markets made it a little easier for us.

Where have cap rates been on these sales in terms of Safestore and this Dutch operator you talked about?

You know, I'm reluctant to give you one, because it will be so misleading. In both Safestores' case, as well as City Box, you have a whole combination of empty stores, partially full stores, and a few stabilized stores. So you are really having to go into a lot of pro forma machinations to really back into how somebody would have justified the cap rate. All I can tell you is you have a pretty good sense of how we underwrite. In some cases, we made a pretty aggressive run at trying to acquire them. We did make a run at City Box; we did look closely at the Safestore deal, and we could not afford it. So you can take that, I guess, as my best evidence of where those really were going in.

Is it easier to approach it maybe from a price per square foot basis?

Probably would be. To be honest, to go back and do some number grinding myself on that one. I don't have that right at my fingertips. You've got quite a few leased properties that were in the Safestore portfolio that would throw that off even further. Similar also with the portfolio from Access; they had a fair number of those as well. But we could certainly get that if you would like.

One good point to put on about the Access thing is that that is a fund that was put up by Security Capital as a European property fund, and they have sold all of their European -- they owned 30 percent of it and then GE inherited that 30 percent. And so it is not like they decided there is anything wrong with the self-storage business in Europe. They have just liquidated their entire portfolio of all the properties in Europe and actually the ones that they have left, the last remaining ones, are the self-storage properties.

Following upon Europe, can you discuss what kind of marketing initiatives you have underway to help you get that last 10 percent of occupancy on the same-store pool and to increase awareness of the product?

Don't tell Bruno it's 10 percent. I'm looking for 15. Bruno, I'll let you answer that question.

Basically, we are looking at a source of new businesses to come in. When you study what has been done in terms of sales and marketing in your Europe, this has been geared to, how we say, short-term and residential type of business. And we have many, many other type of business we should be targeting to -- B to B businesses, e-commerce, Web initiatives. So we are increasing the number of marketing initiatives we are taking over businesses at the residential short-term type of businesses in Europe. This is coming from an -- with an extensive consumer research we did in all markets that shows that our promotional tools, marketing tools, were geared to only one major target, and we are now diversification -- we are starting a diversification of our commercial and (indiscernible) search.

One of the initials that will be in place for 2004, again, is a salesforce dedicated to business-to-business type of actions. Up to now, we were unable to sell to major -- what I call the key accounts in Europe. And with the density of our network, this is becoming more and more a real potential source of revenues and additional benefit. The Web, we have just launched a Web test in the UK market and we will extend it as well in 2004. This Web will be geared to increase sales, allow customers to access their data and other information and (indiscernible) services as such.

That's two initiatives. There is also local initiatives. We are targeting what I call the difficult stores, the ones that have not been performing as we wanted to. We targeted this year five stores. Three of them are now very, very good shape as far as the (indiscernible) level is concerned. Next year, there will be five to ten stores that will be also targeted as with local initiatives and to just to make sure that they are getting back on track, with a lot of local initiatives within the local community as such. That is about it. That is all the question.

Final question, Chuck, direct this one to you. Can you give us a vague idea of what you're thinking in terms of the magnitude of joint ventures or dispositions you're thinking about doing over the next 12 months?

I really can't because we're just in the exploratory stage now. We anticipate talking to some -- when we have been talking to European investors particularly about the possibility of being in our development joint ventures, we are seeing a lot of interest on their part for stabilized cash flows. So we thought, well, let's test it out. Let's see -- let's get some of our stable properties and put them into a group. And so we anticipate having some of those conversations with those capital sources.

Some of those people have indicated an interest in also the possibility of acquiring stabilized cash flows in the United States and having us continue to manage them, have them continue to be under our umbrella. So we are really very early in that phase of investigating, so I really cannot comment on how much that might be at this time.

Chuck, it is Jon Litt. I might have missed this, but if you do do it, what are you going to do with the money? And I'm not sure that there's a great need other than for development.

In Europe -- the opportunity in Europe is to develop as fast as we can and as much as we can.

But if you sold in the U.S., you'd be then taking the money and investing more in Europe?

I don't know. Again, Jon, it is really too early to tell. It really depends on the magnitude. It depends on how it goes. And I don't see a general selling off of our assets in the United States by any means. So it would just be general corporate purposes, is the old catchall phrase for all of these kinds of things. But we do see continued opportunities for development in the United States. They are very selective today compared to where they were years and years ago.

And we see some, as Dave pointed out and as I have pointed out, there are some real opportunities for redevelopment and upgrading of stores, which, if you can get a rate of return on that that is equal to or greater then developing new stores, then that accomplishes two things. It gets a rate of return for the investors, plus it upgrades the stores and makes the brand more equal throughout the United States. So we are not looking at upgrading these things and not getting a rate of return on them. And so, we would be using capital in that way to upgrade stores and then to continue to build. Obviously, in the next year and for the foreseeable future, we're going to be building more brand-new stores in Europe than we are in the United States.

I guess what I'm trying to get a sense of is how do you think about the dilution associated with the selling? Clearly if you sell (multiple speakers) it's a great time to be selling -- maybe you should take advantage of it. But is it delevering, thinking that there might be great buying opportunities in the future or would there be distributions to shareholders or stock buybacks?

I just don't know, and you're right. It is a problem. When you take a look at selling existing properties that are cash flowing, that is dilutive if you take that money (technical difficulty). That all has to be balanced out.

I think, Chuck, part of the balance is and part the (technical difficulty) have to be convinced that we are getting -- we are finding capital sources that have a demand for that kind of asset, that is high enough to justify this kind of move. Our perception is that that demand may be there, and that's why we feel we need to test it. And obviously, we have lots of work to do in evaluating what the impacts of an ultimate sale or joint venture might have.

And one of the things I would also point out, as you know, we did do a couple of large acquisitions recently. The Morningstar transaction, about a year and a half ago. The Minnesota Mini was just a quarter ago. And if you look at our numbers -- you didn't comment about this, but you can see in our indirects and even a component of our direct costs, we saw a reduction in what we call our pool account costs that was pretty good-sized due to the benefit of just spreading from these economies of scale onto those acquisitions. And so all of those things have to be taken into account -- is there a way you can continue to leverage your network at the same time you try to match the highest investor demand for the investment.

Also, John, there's all kinds of anecdotal evidence -- real evidence in United States, that cap rates are down substantially. And there is anecdotal evidence in Europe in all real estate classes, everybody tells us that there is about a 200 basis points difference between cap rates in Europe and cap rates in the United States. We don't know if that is true in the self-storage business or not, but it is probably worth testing it out.

Ross, I don't know if I interrupted you or anything.

No, that's it. Thank you.

Jim Sullivan.

It's actually Michael Mahere at Greenstreet with just a couple quick questions. Table 13, we appreciate the new disclosure. Just one question. We were wondering why the indirects are excluded and if it is possible that that (technical difficulty) included going forward, so that it can tie back to the aggregate NOI after indirect and lease holds?

Michael, we can certainly look at doing that. I think with the indirects, that is kind of a peanut butter spreading process that does not have a real specific orientation to one group of stores or another. We're taking our total common costs as defined in the notes there and based on a number of months open, spreading that out, and so it is just a mechanical function. We can certainly do that, but if you take an extrapolation for the pool of how that impacts yield, you can pretty well apply a similar deduct for that across any one of the ones you're looking at. But we will certainly take a look that.

And then in regards to looking at disposing of U.S. properties, where are you seeing U.S. cash rates, both magnitude and then any specific numbers you might have in terms of ranges that you've seen?

The funny thing is, we have talked for probably the better part of five or six quarters, and not me specifically, because I was listening more from the European side at that time, about the fact we were finding it very difficult to find acquisitions, and we kept thinking of ourselves as being very aggressive and going after some of these and not even coming in second place. We were coming in fourth and fifth. We have the advantage, when you bring in a pool of stores, to be able to spread out these kind of operating costs over a wider network. So I guess when you bang your head against a wall long enough, you start to go, well, maybe we should be looking at the other side of the coin. So that is -- it is hard for us to really know where the cap rates are going to be. You've got to look at a specific group of stores. You have to see whether they're fully stabilized. Quite often, when the group gets sold, you've got some that are in the 70 percent, they're not the full level, so it is a real hard question to try and put a number to.

Sure, one more question. Can you speak to G&A increases? It seems that it's accelerating on a third-quarter versus year-to-date basis. Can you just walk me through that really quick?

I can have Harrell elaborate on that.

Sure. A couple of things that I would point out. Included in the third-quarter G&A is -- we have a number of out parcels or land parcels that we will look to spin off and sell. So as we went through and evaluated those this quarter and actually took a reserve against those of about $6000. So that runs through the G&A line. The other component that was significant, both on a quarterly basis and year-to-date basis, is legal costs are up. I would say it's about -- on a year-to-date basis, about $400,000 as a result of various class-action suits.

Okay, and the write-down on the land, that was $600,000?

Yes, it was about $6000. This land that is held for sale.

Okay, I've got you. Just quickly, is Morningstar included in the same-store?

No, Morningstar is included in the -- is a new store.

When will that start being included?

Based on our current definition, it would be concluded I believe beginning in January of 2004.

Okay, thank you.

Arthur Hurley.

Could you just expand a little bit more on the discounts that you are offering. And I think you mentioned that you find yourself offering discounts in one of five transactions that you closed, if I heard that correctly. Could you expand on where it was that you were finding you needed that?

I will turn this over to Steve Tyler and let him give you some more detail on that.

That is correct. Approximately one out of five transactions we give a concession to our customers, and those concessions basically fall into two different categories -- first full month free and half off first full month. Pretty consistently each quarter, they range anywhere from 18 to 22 percent. We basically apply them in different parts of the country, depending upon where our occupancy is low. Currently it comes to mind that Northern California, which is one of our more challenged markets, we are using quite a few of these specials. So -- but from quarter to quarter, basically it stays relatively within that range that I mentioned -- 18 to 22 percent.

So you're finding that it is regional and then even on a year-over-year basis, you would say that is pretty consistent?

It is pretty consistent --that's correct. It only varies a couple of points. Again, where we apply the discounts and in terms of what part of the country, it does vary, depending upon where we're experiencing occupancy issues.

And how about promotional costs. What do they do on a year-over-year basis?

In terms of marketing? Generally, they pretty much also stay typically flat year-over-year. There is not a significant variance. I think in our overall marketing cost what we're seeing is the benefit of our size growing. We are able to spread out those costs, and therefore in total marketing, we're actually down. Our sales center is able to leverage off of the additional stores, and of course, those costs related to picking up additional stores are lower, so we enjoy that benefit. But pretty much on a local marketing basis, again, it is pretty consistent from quarter to quarter. It varies depending upon where we have issues of either new stores or current stores that are occupancy challenged.

And your largest competitor, to remain unnamed, basically obviously has increased promotions and discounts pretty significantly, and when you look at their occupancy numbers, they went from a level that is pretty similar to yours last year to up call it 600 basis points versus what yours is right now. Have you looked at potentially increasing the promotions, increasing discounts to gain that occupancy and the costs associated with it and its reward?

I think in a general sense, as I mentioned before, to us it is a three-ring circus. Part of it is, how do you manage the rates, the discounts, as a trade-off to occupancy; but also looking at how much additional money you spend on marketing to get there. And so to us, we've got pretty high focus on what is our gross margin. And of course, if we are able to move our occupancies up 5 points and not give away much at all in rates, absolutely we're interested in making that kind of thing happen. But this business is not a regional business. It is not a national business. It is barely a market business. It is a neighborhood business, and I can go into any market in the country -- and I will show you some of our stores that are absolutely screaming because of their local supply/demand imbalance, and others in some fairly good markets, a good property, that are struggling, just because of the same thing in reverse. And so, just given where we are as a Company and what strategy we find works best for us, is to really (technical difficulty) our marketing strategy right to the individual store. That's kind of the way we have been for years, and we have always had our local field teams with a lot of their power and authority to set rates and manage that overall revenue gain, and that is pretty much the way we would continue to look at it.

What would you consider to be an optimal occupancy when you're looking at margins? Obviously something less than 100 percent, but --

100 is not bad. The only probably we find is, as Chuck will often say, once you start to get north of 90 percent, typically you start to run out of unit sizes that obviously you want to start pushing the rates on to try to gain something back. Sometimes you can be in a situation where you've got -- you're full on 20 different products -- and again remember these are different sizes, they're climate, they're not climate, outside, inside -- and sometimes you'll have a section of stuff that is doing very poorly. So you're getting very good rate movement maybe on many sections of your property and very poor on something else.

So again, we would certainly want to try to push toward 90 percent as much of the time as we could, but in our mind, we can only sacrifice so much on discounts. If we discount too much, we do see our moveout rate move up. If we start to move our board rates down, believe me, your existing tenants begin to pick up on that and they say I would like some of that too. So there is a lot of that kind of dynamic that you have to think through. So don't misunderstand me. We're not trying to tell you that we're thrilled to be at 86 percent and that's where we want to stay. This is just what we have been able to achieve so far in balancing those three different components out.

Thank you, that is very helpful.

Gentleman, at this time we have no further questions. Please continue with any further statements.

Absent any additional questions, I think we're wrapped up for the day. We look forward to speaking to you again in a few months.

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