Public Storage (PSA) 2003 Q4 法說會逐字稿

Good afternoon. My name is Holly and I will be your conference facilitator. At this time, I would like to welcome everyone to the Public Storage Incorporated fourth quarter and year-end 2003 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone key pad. If you would like to withdraw your question, press star, then the number two on your telephone key pad. Thank you. Mr. Lenkin, you may begin your conference.

Thank you. Good afternoon and thank you for joining us for the Public Storage investors conference call. I'm Todd Andrews Controller of Public Storage and with me are Ron Havner, Chief Executive Officer of the Company; Harvey Lenkin, the President and Chief Operating Officer; and John Reyes, our Chief Financial Officer.

I will start with the forward-looking statement warning. This conference will contain forward-looking statements. Actual results could differ materially from those set forth in these forward-looking statements as a result of various factors, including general real estate investment risks, competition, risks associated with acquisition and development activities, general economic conditions, debt financing, environmental matters, general uninsured losses, and seismic activities.

For a further description of risks and uncertainties, see the Company's reports filed with the Securities and Exchange Commission. We disclaim any obligation to update or revise any forward-looking statements whether as a result of new information, changing conditions, or other reasons.

Harvey will begin the call with a summary of results for the fourth quarter of 2003. Just a reminder, our press release and an audio webcast replay of this conference call are available at our web site, www.publicstorage.com. And complete financial information will be available in our 10-K which will be filed shortly with the Securities and Exchange Commission.

I will now turn the call over to Harvey Lenkin.

Thank you, Todd. Good afternoon and thanks again for joining us. John Reyes and I will cover current operations and some of the other key elements impacting the quarter and the full-year 2003. Ron Havner will then give you his review of the year and our outlook for 2004.

Much has changed in the 32 years we have been in the self-storage business. Many things have not. One element of our business has not changed. The need of consumers to have access to well-located, quality facilities, operated by well-trained and caring personnel, offering storage spaces to suit their needs, at a fair competitive price. The various elements of this all-encompassing need were the focal point of our energy during 2003. The focus continues.

Focusing on customers' needs helped us reverse the negative trends reported to you a year ago. Tools utilized in this effort were our people at all levels, our locations, our systems, particularly Web Champ, our call centers, our brand name, Public Storage, and our financial strength. During 2003, we have rented more space, collected more rent, and most importantly, satisfied more customers than ever before.

To summarize the numbers, fully diluted net income per share for 2003 was $1.28. Up 12.3% compared to 2002. The fourth quarter was 30 cents per share, up 50% compared to 2002. On an FFO basis, per share, we posted a 4.9% increase to $2.81 per share for the full year, and a 13.3% increase to 68 cents per share for the fourth quarter. This was our third consecutive quarterly increase over the prior year.

This quarter was different from others reported for 2003. Our same-store pool of 1,252 mature facilities was the primary contributor to FFO growth. Same-store net operating income increased over the prior period by 5.9%, with total rental income increasing 6.2%. Total cost of operations was up 6.7%, our first single-digit change in this category in many quarters. Promotional discounts given in the quarter were $12.9 million. Sequentially flat and some 63% higher than discounts given in the fourth quarter of the prior year.

The investment in marketing and promotional discounts is starting to show demonstrable positive results. Net rental activity assisted by discounts during this seasonally low period for our business, resulted in average occupancy for the fourth quarter of 90.6%. 6.5% higher than the fourth quarter of 2002. We ended the quarter at 89.6% compared to 84.4% at December, 2002. January, 2004, occupancy levels were 89.7%, compared to 85% in the prior year.

We continue to monitor rental and vacate activity, adjust rental rates and promotional activity, seeking every opportunity to increase revenue while maintaining high occupancy levels and market share. With respect to our 10 largest markets, occupancies were higher than at the same time last year. Occupancies at December 31, 2003, ranged from a high of 91.1%, to a low of 87.6%, with an average of 89.5%. Our same-store portfolio of self-storage facilities has demonstrated improving metrics which are beginning to result in modest growth in revenue and net operating income. Stay tuned.

During the fourth quarter of 2003, we opened four new developments having an aggregate cost of approximately $39.5 million. This brings the totals for 2003 to 14 new developments opened with an aggregate cost of approximately $107 million. For the fourth quarter, we had 63 self-storage facilities in various stages of fill-up. These facilities have an aggregate development cost of approximately $375 million. And generated net operating income of $4.6 million for the quarter. Representing an annualized return of only 5%. Our expectation is that our returns will be much higher than the 5%. Therefore, this area has room for significant improvement and is an important part of our growth plan for 2004.

During the first quarter of 2004, we expect to open four additional self-storage facilities with an estimated cost of $37 million. These four facilities are located in southern California, northern California, Hawaii, and Massachusetts. As of December 31, there were 38 facilities in our construction pipeline. 13 new developments, and 25 facilities undergoing expansion, conversion, or rehabilitation. Completion dates are expected over the next 12 to 24 months. Remaining construction costs of approximately $87 million with respect to these facilities will be funded by the Company.

The latest report of self-storage construction starts for the quarter ending December 31, 2003, showed a drop of almost 55% year over year, and was down 31% compared to the third quarter. The annualized pace of less than 9.6 million square feet is down to an eight-year low and is well below the pace of the three-year period ended 2002.

With respect to the continuing operation of our containerized storage facilities, the results of the fourth quarter continue to be encouraging. While revenues were nominally lower as a result of some November promotional activities, expenses were down significantly compared to last year, resulting in a year-over-year increase in net operating income of almost $2.2 million. Full-year NOI was $13 million, compared to $6.7 million for 2002. Taking the results of our discontinued operations into account, net income was $2.5 million, versus a loss of $10.1 million for 2002. Further consolidation occurred during the quarter bringing the total number of operational facilities to 24.

Our continued focus will be on the elements of customers' need, mentioned early in this call. Well located quality facilities, well-trained and caring personnel, storage spaces to suit consumer needs, fair, competitive prices.

Let me now turn the call over to John.

Thank you, Harvey. First I would like to mention that included in our press release are schedules that will assist you in reconciling our GAAP net income to our funds from operations, and to our funds available for distribution.

For the fourth quarter of 2003, our reported FFO was 68 cents per share, versus 60 cents for the same period last year, representing an increase of 13.3%. There are three non-operational areas that negatively impacted our FFO per share during the quarter. The first area was the application of EITF D-42 relating to the redemption of preferred stock. In December of 2003, we called for redemption, our Series K preferred stock, and ultimately redeemed the securities in January of 2004. We applied the provisions of EITF D-42 at the December call date, rather than the actual redemption date in January. This resulted in a reduction to our FFO of approximately 3 cents per share for the fourth quarter.

The second area has to do with employee stock-based compensation. Over the past several years, we have granted both stock options and restricted stock to our employees. During the fourth quarter, we experienced higher costs in the form of stock options and restricted stock expense, as well as higher payroll taxes relating to options that were exercised. These costs totaled $1.4 million in the fourth quarter of 2003, as compared to only $85,000 for the same period of 2002.

In addition, during the fourth quarter, our weighted average common shares outstanding increased by approximately 2.4 million shares, as compared to the same period in 2002, related to stock-based compensation. This increase was due to share issuances and a higher common share price. The combination of higher expense which is included in our G&A, and higher weighted average share count, caused by the stock options, resulted in approximately 2 cents of dilution to our FFO per share during the fourth quarter of 2003.

The third non-operational area was the issuance of approximately $253 million of preferred stock during the fourth quarter. Our intended use of the net proceeds from the issuance is to fund the redemption of two series of preferred stock during the first quarter of 2004. During the quarter, the net proceeds from these issuances are nominal interest income, relative to the dividend requirement. This difference resulted in approximately 2 cents of dilution to our FFO of common share.

From an operational standpoint, things were positive. Improved same-store operating results versus last year, contributed 5 cents of FFO per share. Incremental earnings from our newly-developed facilities contributed 3 cents. The reduction in costs related to closing nonstrategic pickup and delivery facilities contributed 2 cents. Better results from our ancillary operations including pickup and deliveries ongoing operations contributed 2 cents. The benefit from the redemption of higher rate preferred stock in prior periods added 2 cents.

During the fourth quarter, we had approximately $5.5 million of gains from the sale of five self-storage facilities. These gains improved our GAAP earnings per share but had no impact on FFO per share, because we exclude these gains from our FFO calculation. Although we had a positive year-over-year improvement from our newly-developed facilities of three cents per share, the operating results are still not sufficient to cover the estimated cost of capital to construct these assets.

Our estimate of the amount of dilution caused by these newly-developed facilities during the fourth quarter of 2003 was approximately 3 cents per share, as compared to 4 cents for the same quarter of 2002. We expect that the quarterly dilution from our development activities will be approximately 4 cents per share.

During the fourth quarter of 2003, we decided to close three additional pickup and delivery facilities. Shut down costs related to these facilities were approximately $1.2 million, or 1 cent per common share. Although we do have approximately $76 million of debt outstanding as of December 31, interest expense for the fourth quarter of 2003 was nil. Interest incurred on our debt was entirely capitalized during the quarter in connection with our development activities. Interest expense should continue to be nominal in 2004.

Capitalized interest was approximately $1.6 million for the fourth quarter of 2003. Compared to $1.9 million for the same period in 2002. For 2004, our scheduled principal amortization is approximately $41 million with approximately $28 million being repaid during the first half of the year. We will be redeeming our 8.25% Series L preferred stock, $115 million on March 10. The funds necessary for this redemption were raised during the fourth quarter of 2003. We have two additional series of preferred stock that are callable at our option, during the latter half of the third quarter, these two series aggregate approximately $86 million with a blended rate of approximately 9%.

On January 2 of this year, we issued our 6.85% Series Y preferred stock raising $40 million. On February 25, we priced 100 million of our 6.25% Series V preferred stock which is scheduled to close on March 5. It is anticipated that the use of proceeds from these two offerings will be used to fund debt repayment and the future redemptions of higher rate preferred stock.

The issuance of these two series in 2004, combined with the issuance of our Series W and Series X during the fourth quarter of 2003, will have a continuing dilutive impact on our earnings during 2004. The redemption of Series K will also have a negative impact on our earnings per share in the first quarter of 2004, due to the accounting pursuant to EITF D-42. Our estimate of this impact is approximately 3 cents per share.

Similarly, the impact in the third quarter from potential preferred stock redemptions would also be about 3 cents per share. In 2005, we have an additional 400 million of 9.6% preferred stock which we can redeem. Depending on our outlook for interest rates, we may prefund these redemptions in 2004.

In January, 2004, we entered into a joint venture with an institutional investor for the purpose of acquiring up to 125 million of existing self-storage properties. Eventually will be funded entirely with equity consisting of 30% from the Company, and 70% from the institutional investor. The venture has a nine month investment period.

Lastly during 2003, we have issued 2.7 million shares of our common shock raising net proceeds of approximately $68 million in connection with the exercise of employee stock options. We expect that our employees will continue to exercise their vested stock options during 2004, and that such exercises may be dilutive to our earnings.

With that, I will now turn it over to Ron.

Thank you, John. 2003 was the year of back to basics for our company. Significant emphasis on the customer. We have made adjustments in our procedures, our systems, our marketing efforts, and personnel in an effort to become more nimble and responsive to our customers and the changing competitive environment. Our operating results are starting to reflect these initiatives.

We continue to make progress in growing cash flow attributable to our common shareholders. Funds available for distribution or reinvestment improved by $18 million or 29% compared to the fourth quarter of 2002. Our third straight quarterly improvement. For the full year, cash flow attributable to our common shareholders increased $23 million or 7%. Improvement for the fourth quarter came primarily from our self-storage and pickup service businesses.

As expected, the seasonal downturn in our rental activity occurred in the fourth quarter. We rented 147,000 spaces, compared to the third quarter's 176,000 spaces, but significantly more than last year's 129,000 spaces. Move-outs were also higher, primarily as a result of a larger tenant base. So far this year, move-ins continue ahead of last year's pace, but at a much smaller percentage growth than in 2003. This is primarily due to higher occupancies and higher rates.

Positive growth in RevPAR for our same-store group of properties was 5.8% for the quarter, and 1.6% for the year. This growth was driven by three factors. First, a dramatic increase in promotional incentives, $51 million in 2003, up from $20 million in 2002, and $5 million in 2001. These incentives took the form of primarily $1 for the first month specials, but we also used 50% off of the first month and selected discounts for long-term customers. During the year, we confirmed that aggressive promotional discounts are a very effective tool to drive customer traffic.

We also expanded promotional discounts to walk-in customers in addition to those making reservations through our call centers. Since walk-ins make up nearly 50% of our customer volume, we experienced a near doubling of discounts from this change alone. In addition, we used promotional discounting during the entire year of 2003, versus just five months in 2002. While promotional discounts are effective at driving customer volume, it has a dramatically diminishing benefit once the property is sold out of space.

Second, television and media increased in both dollars and consistency of promotions. During 2003, we advertised on either radio or television a total of 341 weeks across 22 local markets. This compares to 127 weeks and 12 local markets, plus 15 weeks of national cable for 2002. During the past two years, we reinforced the concept that media, combined with the promotional specials, has an immediate and meaningful impact on customer volume. Media, without a promotional special, is very challenging to measure in the short-run. Similar to promotional discounts, there are diminishing returns to media, once a property is sold out of space.

Finally, during 2003, we experimented with various pricing programs, including extreme rate reductions, premium pricing, two-tier pricing based on length of stay and multi-tiered pricing based on volume. We also moved direct control of product pricing to local operating management. We have recognized that our pricing behavior is quickly replicated by many of our local competitors. Accordingly, this is an area where we will need to become more nimble and creative.

These three programs, promotional discount, media, and pricing, combined with changes in our operating personnel, led to a dramatic increase in customer volume. Put this in perspective, in 2003, we moved 646,000 customers into our same-store pool of properties. A 20% increase from last year. In 2003, we gained 32,000 net customers. This was our first positive absorption year in the last four. Having started the year with close to 100,000 spaces available, we're nearly $1 billion dollars of assets producing no returns, these rentals have set the stage for meaningful earnings growth in 2004.

Customer acquisition costs continue to increase and we're the highest in the Company's history in 2003. Both in absolute dollar amount, and per new customer. In recent years, the Company has incurred $70 to $95 per new customer on acquisition costs, primarily in the form of media, phone center, yellow pages, and promotional discounts. In 2003, customer acquisition costs were nearly $83 million for our same-store pool of properties, or about $125 per new customer. Primarily due to the significant increase in promotional discounts. We do not expect any meaningful reduction in this number in the near term. However, we are squarely focused on it, and recognize a significant opportunity.

Positive trends in revenue growth in 2003 and into 2004, have been and will continue to be moderated by expense growth. Cost of operations in our same-store pool increased 6.7% in the fourth quarter, and 10.5% for the year. Expense increases were across the board, but primarily concentrated in customer acquisition costs, personnel, and repairs and maintenance.

These expense increases are related to our objectives of driving operational excellence through first, expansion of our hiring, training and retention programs, to improve the caliber of our operating personnel, retaining and motivating our best and brightest and improving customer service levels through proper staffing. Total hours increased approximately 5%, and we initiated a restricted stock incentive program for field management personnel.

R&M expenses increased in 2003, and will continue to increase in 2004 as will maintenance capital expenditures. We are striving to have a competitive product, in rent-ready condition, at all times which provides good value to our customers. All of the key growth metrics with respect to our self-storage operations are positive. RevPAR, occupancy and schedule rents combined with moderating expense growth. We are differently positioned today than we were a year ago.

On other matters, our investment in PS Business Parks continues to perform above our expectations. At year end the market value of our 44% equity interest was approximately $525 million. During the year, PSB expanded its portfolio by over 4 million square feet or 30% to 18.3 million rentable square feet. Our investment continues to grow in value.

We also recently announced an addition to our management team. John Graul joined us as President of Self-Storage Operations. John comes to us after an exceptional 22-year career with McDonald's having started as a store manager and rising to Vice President overseeing 650 stores and $1.2 billion of sales, as well as real estate acquisitions, developments dispositions, and rehabilitations in his markets.

The similarities between McDonald's and Public Storage are astounding. In fact, in 1986, Harvey wrote an article for the self-storage industry's leading trade journal comparing the two companies and commenting that we are in the consumer business selling storage burgers. It only took us 18 years to hire a McDonald's executive.

Last year, we stated that to compete effectively in our business and prosper, we needed to achieve operational excellence with a customer centric focus. A business operation that focuses on customer preferences, services and value. We identified what has become known as the 3 P's, people, product and pricing. Our customers want value and we provide it through quality product, exceptional service, and competitive pricing. The process of achieving operational excellence is ongoing, and evolving. We made much progress in 2003. Which has positioned us well for 2004. We believe our continuing focus on the 3 P's will enable us to deliver good value to our customers, and above average return to our owners. With that, operator, let's open it up for questions.

At this time, I would like to remind everyone, if you would like to ask a question, press star, then the number one on your telephone key pad. We will pause for just a moment to compile the Q&A roster. Your first question is from Ross Nussbaum of Smith Barney.

Hi, good afternoon, everyone. Ron, my first question is, what was the impetus for hiring a new president of operations?

Well, first, we didn't have one. I had taken responsibility for overseeing the operations, so we needed a president of self-storage operations.

That's how Ron completed his training.

Maybe the question is, Harvey, how does this change your role at all?

Not really. I am not and have not been involved in the day to day mini-storage operations for approximately 12 years. Certainly, I'm involved, but not to the extent that John will be involved, and that Ron was involved in this past year, as we completed his training course. So my role will not change.

Okay. I know you guys talked about the drop in new construction. Can you talk about what you expect to see in your markets as a result of that decline? I would expect that you are going to have less competitive pressures.

I suspect that is so. And, I can't really forecast what might happen, nor would I even attempt to, but it certainly -- if true, and I believe it is ostensibly true, will lessen competitive pressures, but not really for the moment, but later on this year, at the earliest, and on into 2005, it all bodes quite well for us.

Can you walk us through what your best and worst markets were in terms of same-store and OI [ph] growth fourth quarter?

No, we don't really have that information. However, in the K, which will be filed in the next few weeks, I guess, it will have our largest markets, and you can certainly get a flavor for what is going on looking at that.

Okay. And my final question is, can you discuss the nature of the loan to PS Business Parks and why that was made?

Sure. I would be happy to do that, Ross. And the loan to PS Business Parks to facilitate their purchase of a large Miami business parks, which is an extraordinarily, we believe, favorable transaction for them, we essentially made a bridge loan to them to facilitate closing of the transaction prior to year-end. They had access, they being PS Business Parks, had access to a line and a commitment from a major bank but choice to place the loan with us because it was at a lower rate, and it also gave Public Storage an opportunity to earn a higher rate on its excess cash for the very short period of time that the loan was outstanding. So it was sort of a win-win situation for both organizations. The loan has already been repaid. And it is a fait accompli.

Do you expect to be doing any other transactions with PSB over the next year or two?

I have no expectation that we will or we won't. And just keep in mind if someone were to construe it was a very favorable thing for PS Business Parks, that's, excuse my language, lovely because remember we own 44% of PS Business Parks.

Thank you.

You're welcome.

Your next question from Greg White of Morgan Stanley.

Good evening, guys. Can you maybe -- Ron, you gave some numbers in terms of, I think it was sort of weeks of TV advertising and markets. I'm just curious, can you reconcile for us, I know you started the whole sort of promo concessions advertising program much more aggressively in the second half of '02, so I'm trying to reconcile how much in terms of say either TV weeks or whatever, or markets you did in the fourth quarter of '03 versus the fourth quarter of '02? Obviously, there is a seasonality there. I know advertising costs come down sequentially into the fourth quarter, but I'm trying to think of it year over year and trying to sort of put it into place.

Greg, in terms of number of markets, in the fourth quarter '03 versus '02, my guess is it is not materially different in terms of number of markets. There were fewer markets in the fourth quarter. But the biggest thing is in the fourth quarter of '02, we were advertising in five major markets, at a weighting of 450 points for several months, whereas our weighting in the fourth quarter of 2003 was at a weighting of 300 points. And it is more than 50% increase in pricing when you go from 300 to 450 points.

Okay. So I mean again, I have to confess, I'm a novice when it comes to sort of buying TV advertising, but I mean it is fair to say that you did advertise more on TV in the fourth quarter of '03, versus '02?

No, we advertised less in the fourth quarter of '03 than in the fourth quarter of '02.

About 38% less, I think is the number.

Less dollars, there was less weighting, and there was slightly fewer markets.

And the press release that we put out late yesterday afternoon showed the difference in expenditures during the fourth quarter of '02, with $4,200,000, in the fourth quarter of '03, it was $1.1 million.

The other thing, Greg, is the '02 advertising did not have any promotional special associated with it. Whereas the fourth quarter of '03 did.

Okay. So the effectiveness was significantly greater in '03 than in '02?

We believe so.

Okay. So that maybe leads me to my next point. Obviously, you have achieved the objective in terms of driving occupancy up, but, Ron, I think you or Harvey said that sort of there was going to be a potential slow down in the pickup of those facilities that occupancy is already sort of gone up in, what you may be expecting '04 to be better, you certainly foreshadow that in a number of your comments, where does that come from? Is it from the facilitates that are -- I am trying to dove tail that. You're projecting better '04, but you're suggesting that some of these facilities when they get full, you get a whole lot less impact from the promos and the advertising.

Greg, you really have to differentiate the comments with respect to getting a significant effect in occupancy levels or rental activity and getting a significant effect from that which is very important and that is namely the revenue flows.

Okay.

When we're sitting at lower levels of occupancy, the use of media and the use of promotional activity is far more effective than when you have you reached the stabilized level of occupancy, we will say in the low 90s. Primarily because we are running out of inventory. We're running out of space to rent to people.

Right.

So the media use and promotional use is less effective. But do keep in mind the velocity of our business is such that we vacate in the course of the normal month, depending on which month it is during the year, seven, eight, nine percent of our tenant base. In our same store pool, that adds up to 45,000, 55,000, 65,000 spaces every month, must be replaced in order to stay full. Or stay at that occupancy level.

So you will not see a diminution of activity in the media side and on the promotional side. Maybe some changes in that kind of activity, but in order for us to continue to keep the large market share which we believe we currently have, it is our intent, at least for the moment, to go forward in that vein. I will let Ron comment for a moment maybe about the revenue stream which is beginning to show some positive signs of movement.

Well, Greg, first of all, we're starting the year 520 basis points higher in occupancy than last year. Okay? So that's -- A, we have less space to sell.

Right.

But it is rented. I mean that's the positive thing. And we don't have to spend a dollar to go get it. The promotions, the investment in the media and the promotional discounts has been made. So that will be positive, similar to my comment of we had a 100,000 spaces at the beginning of last year, we had net absorption of 32,000 last year, and that has set the stage for meaningful earnings growth, that billion dollars of real estate is going to start -- part of it is going to start generating a return.

Second part is, as your properties get full, whatever you consider full, 94, 95% occupancy, that pickup in customer volume both for media and promotional discounts is unnecessary. You're full. That's a monitoring and a management process that we go through here in terms of anticipating what our customer volume is going to be, and dialing the discounts and the media accordingly.

So is it fair to say that while you intend to continue at the advertising and the promos, the focus now is more on driving rents as opposed to occupancy in some markets?

It has always been all three.

With the net result of it all is the revenue stream.

Okay.

But you can't achieve the revenue stream -- we could not have achieved the revenue stream without first causing occupancy levels to reach a point where we would have some pricing power, and be able to manipulate the pieces that we have in our puzzle to begin to drive the revenue stream, and it looks like for the moment anyway, it showed up in the fourth quarter.

Okay. And then just one last question. On the joint venture that you agreed to enter into in January, John, did I hear you say nine months of timing on that?

Yeah, we basically have nine months to identify investment opportunities, and present them to our partner, to get into the joint venture, so the deal was put to ink at the beginning of January, so we have until the end of September. And maybe we could be extended but nine months was what was agreed to initially.

So you identify what is in the first nine months and then you act on it soon after that, is that appropriate?

Hopefully we can act on it within the nine months, too.

Okay. I appreciate it. Thanks a lot, guys.

Thank you. Any additional questions, operator?

Yes, you have a question from Nora Creedon of Goldman Sachs.

Thank you. Hi, Nora.

Hi, Harvey. Harvey, maybe this question is for you, just on that occupancy issue and the discounts and promotions, I know it is hard because you don't know -- you know you're going to keep losing some amount of tenants per month, but is there some kind of rule of thumb we can think about where occupancy may have to be for some period of time before discounting to be rolled back.

No rule of thumb. That's looked at on a property-by-property, market-by-market analysis during the course of our business activities. And I can't give you a rule of thumb. But certainly, when you run out of space, you would like not to have to use promotional activity or any kind of media. However, a given property in a market may be such that there are other properties in that market that have not achieved that high level of occupancy. So the marketing activity goes on and that's a very big benefit we have inside of our telephone reservation system, where in we can direct consumers who call for space at one place and if we're out of space, we usually can refer them to another facility of ours that is relatively nearby and can suit their needs.

Okay. And, John, on the joint venture, is there a fee structure that we can think about associated with making those acquisitions next month or --

Nora, could you repeat that, please?

Sorry. Just on the joint venture, is there a fee structure that we should think about, just as you get the acquisitions done that you could earn fees or anything like that?

Well, the only fee that we will get in terms of just kind of operational fees, we don't get an acquisition fee or anything like that. The only fee that we will get to the extent that [inaudible] acquired is a management fee. And that's something that we've always collected from our partners, our management fee, and that's the only [inaudible] involved here.

Okay. And any info on where you're looking for those properties, what types of properties or -- ?

The investor would like a diversified portfolio spread across the country in the major metropolitan areas that we do business. No specific geographic area.

Okay. And then just lastly, on the PSB investment, just given how well that's done for you, do you have any change in your intentions there, given how well the stock has done? Or no?

Intentions?

Just intentions with respect to your investment.

Our intentions are to enjoy the benefits that flow out of our ownership.

Okay. Fair enough. Thanks, guys.

You're welcome. Thank you. How are we doing, Holly?

Yes. You now have a question from Mike muller of J.P. Morgan.

Hi, Mike.

Hi. Two questions. First, are you going to be passing through rental increases to existing customers this spring?

We have done that continually when the opportunity presented itself during the course of 2003, and we will take advantage of those opportunities going into 2004 as best we can see.

Okay. Is that generally front-end loaded heading into the higher season or is it pretty much throughout the year.

It happens pretty much throughout the year, in moderate amounts.

Okay. And second question, for John, I think I missed this, but when were you talking about potentially refinancing some of the 2005 preferreds early, did you say how much you could potentially refinance early?

You used the term prefund. You didn't say refinance early.

Okay. Prefund.

I didn't say how much, Mike. Obviously, we have the rating agencies that we deal with, and consulting with them, we would reach a number, but I can't tell you the whole $400 million, but I think that we can come to somewhere pretty close to at least halfway, if not more, to prefund. And it also depends, Mike, on when we go about doing it, whether it is the latter part of the year, maybe throughout the year, we raise additional capital to take that out. The $400 million for the most part, about $285 million of that is callable in the first quarter, at the end of the first quarter of 2005. So we're approaching -- about a year out right now from the bulk of it.

And would that basically be restructuring and extending or --?

That would be just like we would go out and issue today, we would issue today with the full intent of calling and redeeming it 100%. No restructure. Nothing of that nature.

But at that time, so you would have extra preferred on the books, short term?

Well, prefunded.

Yes. Yes.

Prefunded, okay. We'd be sitting with extra preferred -- Oh, prefunded, okay. Gotcha. I'm sorry. Okay.

Obviously, Mike, in our recent coupon of 6.25% you're looking at, what, 315, 340 basis points spread. That is pretty attractive.

Sure.

And while it may cause some short-term pain, a long-term gain is quite significant.

Okay. Great. Thanks.

Thank you, Mike.

Your next question is from Brian Legg of Merrill Lynch.

Hi, Brian.

Hi, guys. You talked about that you might be backing off promotions in select stores, are you also doing it by unit type, so in other words, if you're pretty filled up by five-by-ten, in a store, across a market, do you start not giving the $1 discount to five-by-tens?

Somehow, Brian, this question fell into to my lap. Let me start -- we have been experimenting with a lot of different types of pricing schemes, as Ron kind of pointed out, and we do look at occupancy, and many times, what we have done, is we have scaled back the level of discounting. We've been usually looking at it on a property level as opposed to a unit level, unit occupancy. So if a property reaches a certain threshold, high occupancy level, we will either turn off the discounting all together, or we will go to what we call 50% off the first month. Or something in between.

We also look at pricing, whether we have at that point some pricing power, so we look at what the market rates are, what the move-in trend has been. As well as what the existing tenants are currently paying. So we look at a lot of different variables to determine how we go about either reducing promotions, or increasing pricing, or both.

Okay. And how about giving, instead of the first month, the second month, it makes sense, I would assume at this time that if you could get someone to stick around, if you gave them a second month off, today, they would be coming out of their unit and your seasonally stronger period. Are you playing around with that promotion?

We're not playing around with the second month free promotion. We have kicked it around internally. I think we've even tested it at some point in time. What we found out is it is not just as effective as a dollar special. We just don't get as much move-in activity on a relative basis. So, it is something we can do. We are well aware of that type of program. We've done it before. But it is not right now something that we are currently doing.

And when you do your $1 promotion, have you through Web Champ, have you been able to figure out the length of stay on average for someone who takes $1 discount versus someone who, I guess it is hard now to find your portfolio, who doesn't have a dollar discount?

We do track the length of stay of our tenants. We can tell the length of the stay of the $1 special guy, versus a not, what we call a nonpromoted guy. We now have various other promotions going on, so we track those folks as well. We can track it by month of move-in. So we're analyzing whether tenants who move in in January, are better tenants in terms of length of stay than a tenant that moves in in August. So we're analyzing all that right now, Brian.

Do you have a number right now, or you don't have a real number? I'm just curious if they are staying as long as someone without a discount.

Brian, this is Ron. On average, the $1 special customer stays a little less than the full-price customer. But I mean --

It is still economical, right?

Absolutely.

Because we get more of them.

Let me also add, Brian, one of my comments was that this pricing and media programs are an area where we expect to become a little more nimble and creative in 2004. While the $1 special, $1 off, has worked very effectively, not exactly the all-time creative program, and so I expect a little more creativity and nimbleness in these two areas in 2004.

Harvey, and looking at your occupancy, the drop-off from the October 31 to January 31, the 91.7%, to 89.7%, is that a normal seasonal drop-off? Or would you say that's less than a normal seasonal drop-off?

I believe it to be a normal seasonal drop-off. And as indicated by the gross rental activity, in the quarter, versus the prior quarter, is entirely within the realm of -- actually, it is a little better than I anticipated.

Okay. And last question, can you put some color around your expected increases in the repair and maintenance, it was 44% on a same-store basis this past quarter, and also, what your Capex spending per foot, what the increase has gone from what, to what it is now?

Well, the Capex for 2003, if you go back to the schedule here, I don't think year over year it is materially different between periods. But we do expect it to increase in 2004 vis-a-vis 2003. Back here, we spent $30 million in 2003, and $27 million in 2002. So that's about a 10% increase. And we would expect it to be higher in 2004. And I don't have -- I'm not going to give you an exact number in that regard. Similarly, last call, we told you that you should expect R&M expenses to increase. Will they increase at a 44% rate, which is the fourth quarter of '03, versus '02? My guess is no, it will not be that high. But it will be higher.

Okay. Thank you.

Your next question is from Ross Nussbaum of Smith Barney.

Hi, it is John Litt. Couple of questions.

Hi, John.

Hi, guys. I'm pretty sure I missed this. Did you make some comments about your plans for TV advertising and general advertising for '04 and how that is going to vary from '03?

We indicated that we will continue along this path. We didn't make any projections or estimates as to what dollar volume will be, other than we believe that we're on the correct path and we will continue to be on that correct path until we find a reason to get off.

So when you say along this path, so let's say whatever the fourth quarter run rate was, I'm not asking you to give me a specific number, but there is no expectation that you are going to really make any radical changes here?

Well, John, I think if you look at Fred's [ph] release here, in January, our media cost, January of '04, media cost were $1.1 million, versus $461,000 in January of '03. So we picked up media cost in January of this year, vis-a-vis last year. And we did advertise in more markets in January of this year, versus January of last year.

And the same kind of concept on promotion. The current pace is kind of the pace -- I mean you're going to try to pull it back if you can, but you're going to -- in all likelihood, if the market conditions stay where they are, you are going to keep the current pace?

I can't say that we would keep the current pace, John. All we can say is we will keep the appropriate pace relative to our occupancy level and the activity that we see. Don't take a quarter and annualize it, John.

I know and I'm not doing that. My question is, what happened a year ago, and maybe a year and a half ago, is there was some radical changes in your TV advertising program or your promotion program and that had really big impacts on the volatility of your reported results. And so I was just trying to get a sense of -- if you see anything like that on the horizon?

Well, we don't see anything on the horizon. We are in a room without windows right now.

John, we are -- try to help you a little bit, discounts go up with an increase in move-in activity. As well as an increase in rates. Both move-in activity and rates are higher this year than last year. That's a good thing in the long-run. More move-ins, higher rates. But it is a bad thing in that month because, quote, your discounts are a greater number. And if there was kind of a theme of '03 that we tried to communicate to people, we probably didn't do a very good job, but was that, in the month of the move-in, there is this discount, but it should benefit if the tenant stays future revenue.

Part of what we're seeing in the fourth quarter of '03, versus '02 is, higher occupancy level, more customers in, paying rent, yes, it is still a high level of discounts, but you're starting with a much-higher occupied base. We're going into January of this year, 550 basis points higher occupied than we did last. And those customers are paying rent. The discounts are higher, which means we're taking our occupancy up as well.

Moving on to the joint venture, my question is, why do a joint venture, if the acquisition opportunities are out there, why not do it all for yourself?

We thought the joint venture capital was attractively priced capital.

As was the joint venture capital of the last two joint ventures we've done. Those happened to be development activities. This is an acquisition activity. And as Ron indicated, the cost of capital is what drives our desire to participate in these kinds of things.

What's the cost of capital in the joint venture?

You would have to go through a major computation to do it. And I think that -- will the document --

John, this is John Reyes. The document will be filed along with our 10-K and it is all spelled out in that.

I guess the inference is that it is better than your cost of equity, or CSA cost of capital.

It would be better than our blended cost of capital.

Right. Thanks, guys.

Thank you.

Your next question is from Charles Fitzgerald of High Rise Capital.

John asked my question. Thanks.

Okay. Thank you, Charles.

Again if you would like to ask a question, you may press star then the number one on your telephone key pad. At this time, there are no further questions.

Thank you very much, operator. I guess we can close -- are you going to close the call now?

Yes. Thank you for participating in today's conference call. You may now disconnect.

Thank you.