Public Storage (PSA) 2004 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. And welcome to the Shurgard Storage 2nd quarter earnings conference call. At this time all participants are in a listen-only mode. Following today's presentation instructions will be given for the question and answer session. If anyone needs assistance at any time during the conference, please press the star, followed by the zero. As a reminder this conference is being recorded today, Monday, August 16, 2004. I would like to turn the conference over to Harrell Beck, the Treasurer and Chief Investment Officer Please go ahead, sir.

Thank you, Eileen. Good afternoon, everyone. And thank you for joining us for the Shurgard Storage Centers 2nd quarter 2004 earnings call. With me on the call today are Chuck Barbo, our Chairman and CEO, Dave Grant, President and Chief Operating Officer, Steve Tyler, Senior Vice President of Retail Services and Bruno Roqueplo, our President of Shurgard Europe. Dev Ghose, our CFO, is traveling and is not able to join us on the call today. Before we start I want to remind everyone that the statements made on this call concerning the beliefs, expectations, intentions, future events, future performance, business prospects, business strategy and guidance for 2004 constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act and are based on various assumptions. If any of these assumptions are not satisfied or proved to be incorrect, actual results may differ materially from those indicated in the forward-looking statements. For a discussion of additional risks and other factors that could affect these forward-looking statements and Shurgard's financial performance, please see our annual report on form 10-K for the year ended December 31, 2003 filed with the SEC on May 17, 2004 and our 2nd quarter 10-Q for 2004 filed with the SEC on August 13, 2004. Now, I would like to turn the call over to Dave.

Thanks, Harrell Hi, everybody. I'm actually not with the group in Seattle doing the call today. I'm actually down in one of our stores in Austin, Texas. I'm just beginning a tour of stores through our Midwest and southern markets and will go the rest of this week so this happened to be the best spot to take the call from at this time so I will do my best in the Q&A session but I may have to turn some items over to Harrell back in Seattle. At any rate, we, as in our last call will try and keep our prepared remarks brief and try to focus more of the time on Q&A but I will go through a few highlights. First of all, we were obviously pleased to get a quarterly report issued on time. This is still had to use the extension period unfortunately but this will give us something to shoot for for next period. We did also have some additional time, I apologize that we weren't able to get it out before the end of Friday because I know a lot of you guys were gone but we were taking out a little extra time to obviously get out our amended Q for the 1st quarter. Just briefly about that, the error that we adjusted the our 1st quarter for related to overstating our liability to our minority partners in Europe. This is the first time we have consolidated in the First Shurgard joint venture under FIN46 and their share of a derivative interest hedge loss we had improperly included in the earnings statement and it should have been and was corrected to be included in the other comprehensive income section of our balance sheet. As I said, in addition to that, the minorities our liability to minority in the balance sheet was overstated so the net effect on net worth is we had underreported our shareholders net worth by $700,000 approximately. Normally in the past we would just not have really focused on going through a restatement kind of a process but in this new day and age where the materiality threshold is definitely lower and clearly for us it is very important that we be as accurate and transparent as we can be and when we make errors and discover errors we're going to correct them, it is as simple as that when they approach at all materiality.

So sorry to put you guys through it but we are as an accounting group we put a lot of money and resources at upgrading this to a world-class level but we're still work in progress and it is going to be the next 12-18 months as we adopt all of the systems from Sarbanes-Oxley guidance and other aspects and fully getting people in place to get there but we're making great progress and we will definitely get there. Moving on to the core business. I think as a part of that we continue to -- continue to improve our focus. The Storage to Go business is now fully behind us. We have acquired another partner, the Parko group out of Europe which increased our ownership in Europe from about 85 to about 87%. This happened just after the quarter end which now leaves us with just one partner, the Fremont group as partners with us in Europe and with us having a little over 87% of the total there. And while our G&A costs are continuing to moderate and come down they will continue to be a bit lumpy as we go through this -- few quarters ahead as we fully digest and gear up for the Sarbanes-Oxley internal control compliance. If I look at our FFO progress as we had predicted we made very good progress compared to certainly last year. Where our FFO is up about 31% to about a total of $24 million plus for the quarter. That was also -- that FFO level was up about 46% over the prior quarter. One other thing I would point out to remind everybody as you all know we are a much different looking company now that we did fully consolidate Europe. Partly that is obviously to do with the accounting rules of FIN46 but also we're a much larger owner of our European operations in total now than we were a year ago. And if you may recall about a year ago we did a fairly good sized common stock offering to help us to finance our purchase in Europe and so while our FFO is definitely up dramatically over a year ago we also have to look at it on a FFO per share basis because we do have more shares outstanding but it is nice to see that even on a per share basis FFO for the quarter was ahead -- was up to 53 cents from about 51.5.

If we look at the results for the same stores they were strong in both the U.S. and Europe. In particular in the U.S. we had good results on both the revenue and expense line. Europe was good -- better on the revenue line. The expenses were up somewhat more than they were the year before. U.S. stores were up in revenue about a little under 5%. About 4.7. And that continues a trend we had from the 1st quarter if you may recall this group of stores had shown an increase in revenue of about 3.7% over the year before. So we have continued to see gains there's mainly coming pretty balanced from both occupancy and average rates inching up. And while the -- this growth is very broad in its appearance across virtually all markets of our close to 30-some markets we only had three markets that were actually negative year-over-year or quarter-over-quarter. Those markets were Denver, Maryland and Houston. And as I say, all of the rest of the markets were even or ahead and led by markets that had actually been the lowest performance in the previous year. Tennessee, Florida stores and Indianapolis stores. And while I think that is very encouraging we continue to be tepid about what that really means for market demand in general. We continue to see inquiry levels remaining basically flat from one year to the next. That certainly can't be something to point to as a basis for the occupancy growth. The main beneficiary we have had of continued improvement as we have said in prior calls on our closing rates for inquiries we have got I do think inquiry recording in our business is a bit more art than science so I'm always a little bit suspect as to how much you can read into that but one statistic that very clearly continued to stay down and go further down is our move-out ratio.

As you know typically as an industry, the storage business you see in a stabilized store on average a move-out rate of 8% a month of your customers and we have been noticing over the last several quarters and then reporting that on the calls that we have seen that rate continuously declining which is obviously another way to gain occupancy percentage and this was the same for this quarter again where in the 2nd quarter our average move-out rate dipped down to about 6.5% for the quarter compared to about 7 from quarter 2 from the year before so that continues to be a positive contribution to the situation. And our discounts pretty much holding even. About 25% of our sales are getting a discount of some sort of either half off a first month or getting the first month for free or some combination like that. On the expense side we did manage to see pretty good control across the board. Real estate taxes were definitely helped by a bit of a rebate that we got on several of the stores that came through in the quarter. We have been actively protesting quite a few of these and started to see some good results there and obviously that along with the rate increase is what helped to contribute to the NOI gain on the 8%. On the newer U.S. stores we're also seeing encouraging news. We are clearly not opening as many stores. We have been more selective in that process the last 18-24 months but the ones we been opening in the last year in particular have shown good, strong occupancy rates right out of the block which is certainly encouraging. On the Europe side of the 72 stores we have got in the same-store pool, remember we've got 101 stores in Europe that we own outright in the group called Shurgard Europe. Subsequent growth that we've done since then we've been doing predominantly through a joint venture called First Shurgard of which we own 20% of that. Of these 100 stores, roughly, well, 72 are in the same-store pool. They continue to show good revenue gain. Q1 as you may remember, was up about 10.6% from the year before and Q2 is up 10.7 from the year before. But that did not drop as much to the bottom line on we had about an 8% lift on expenses from several categories contributing to that. I don't believe those in particular are going to be ongoing.

There will definitely be some ups and downs along the ways but nothing particular to read into that. On the flipside, we continue to gain benefits from the economy to scale out of the European group. As you can see, our indirects continue to drop which is what contributed to the overall net being up in NOI after indirects by 26%. In particular as I look across Europe, I think that it continues to be different results in different markets depending on the supply demand balance. We are very pleased with what we are seeing in France in general. Good strong growth both in the new stores as well as on a same-store pool. UK stores in general have been doing well, especially given some of the competition that has come in over the past couple years and in particular our newest stores opened in the last 12 months have done very, very well. And again the main one that we -- as a country continue to focus our energy on is the Netherlands. Clearly some overcapacity both contributed by us in the last 18 months of openings plus a few competitors that caused us to back off the gas there. We don't expect to open any new stores there this year and we will be very focused just on helping to accelerate the occupancy in the group we have got. And just like Sweden which has already shown good rebound from being in a similar situation the year before, I expect we will start to see some improvements and results as we go into next year. On the development side we continue to focus on balanced moves with regard to the portfolio. We have cut back on the development as I mentioned. In the U.S. -- we did open one store in the U.S. We opened two in Europe during the quarter. We did acquire one store in North Carolina and as most of you know we did complete the sale of four properties that strategically didn't fit our grouping down in southern California. Some of you asked about the gain that we reported on that.

If you remember we sold the properties for about $19 million and recorded a gain of approximately $12 million. The gain predepreciation on that group of properties would be closer to $10 million. There is about $2 million of accumulated depreciation that was involved with those properties. As far as the continuing forward we will continue to cautiously build in the select markets in the U.S. We will keep a fairly balanced pace as well in the neighborhood of the 20-25 store run rate for Europe. We will continue to moderate certain markets where we see the overcapacity get to the point like we described in the Netherlands and accelerate in others. And we will continue to focus on selective sales opportunities. We have another several properties that are in various stages of sale and which we have already announced closing in the 3rd quarter. At any rate, pleased with the progress that we are showing and I'm done with my prepared remarks at this point and happy to take questions.

Thank you, sir. Ladies and gentlemen, at this time we will begin the question and answer session. If you have a question, please press the star, followed by the one on your push button phone. If you would like to decline from the polling process, press the star, followed by the two. If you are using speaker equipment you will need to lift the handset before pressing the numbers. One moment, please, for the first question. Our first question comes from Jordan Sadler with Smith Barney. Please go ahead.

Good afternoon.

Hi, Jordan.

Hi. I guess just first looking at, you know, the restatement of 1Q FFO and then 2Q FFO coming at 53 cents so at the first half you're at 89 cents. Your original guidance you provided last quarter was $2.20 to $2.35 so to hit the low end it looks like you have got to do something like $1.31 in the next two quarters or so which is 62 cents a share. Where does that -- I mean you basically have to pick up 9 cents on a sequential basis relative to the 2nd quarter. Where does that come from? Are there any one-time items that I'm missing or is that purely occupancy pickup?

Well, it's going to be a few things. First of all, you're coming into the busiest quarter for our industry traditionally, Q3, and so naturally there is an expectation you're going to get some additional cash flow lift just from that aspect and that's both in the U.S. and Europe. Although the seasonality is stronger in the U.S. Second item is we continue to have a large group of our stores going through the rentup process which are part of the new store pool that we obviously expect to continue to contribute with occupancy gains as we move forward and the third is that we continue to expect to see some moderation in our G&A and some of our overhead costs that maybe have more of a one-time flavor to it. And while admittedly that's the least -- the most difficult piece to accurately forecast as you're working your way through some of these things that the consulting that goes on with our internal control systems et cetera, but its' basically from a combination of those three.

And you mentioned G&A. I think in your guidance was also that you expected it to be up 20% basically year-over-year if you took out the Shurgard to go charge you took in the 1st quarter but that seems a little unrealistic at this point.

Well, as I said, it is going to be hard to predict and I really don't want to get into being any more fine tuned about it than that. You know, you've got things going in opposite directions. Obviously as we hire people like we've done throughout the 1st half, their costs are actually going up because obviously they start to annualize as opposed to being there for part of a quarter or part of a month you have got them there for a full quarter. And those are offset by obviously what we expect to be a decline on some of the other costs that we incurred Q1 and even some obviously into Q2. But again, these are charges that are not part of our structured long-term run rate and, you know, quite frankly we will be continuing to hone our G&A costs for many quarters into the future as we, you know, people get in place into certain things and really start running certain new aspects of the control systems we're going to be constantly looking for ways to fine tune and improve and gain back some of the efficiencies you have seen us gain up in the operating cost side of the business over the past year. So it is admittedly not a science that the point. Next couple of quarters.

Something you'll whittle away at rather than a one-time thing.

Sure. If you go back and look at how strong our expense controls have been up in the operating section of the business and those are all examples where we've done restructuring that we started to do in this past year and rearranging what people are where. Things like more aggressive on real estate tax challenges. We've gotten -- we've switched some of our utility cost strategies where we have gone to a more competitive utility provider that started to show benefits to us and things like that so absolutely while this is kind of a lumpy process to go through as you adjust to these system requirements it by no means doesn't mean that we expect to gain benefits in efficiencies long-term.

I just want to come back to one of your comments about, you know, the businesses or at least the presentation is a bit different than it historically has been because of the consolidation of Europe. Could you maybe give us some feel for what FFO would look like this year, rather, without Europe in it?

Well, you know, I have had a couple people ask if we could do that and we kind of wrestled around with it and we backed off trying to get that specific because you got to decide just what amount of capital and weighting of capital you would allocate to Europe. The best things I can provide people guidance on to kind of do their own math on it is in a couple spots. One is obviously back in the footnotes we've got a full financial statement for Europe and obviously you can start by looking at some of the key pieces of that and you can obviously see the depreciation. You know we owned 85% of it and then we eliminate the intercompany interest charges that there are relating to the intercompany bond that Shurgard provides to them which are all clearly identified. And I think another place you can look is if you go to the MDA discussion we've actually tried to go and strip away -- do a reconciliation of earnings from Q2 of last year to Q2 of this year just to give you some sense of the swings and we identified a component in there for Europe that we think is a meaningful element. We will continue -- I realize it is important for people to try as get as good a breakdown and dissection of this thing as we can. We are also wrestling with currency things. If you look go at Europe for the 1st quarter's same-store results they look almost flat compared to 2nd quarter. Well, the reality is by basic accounting we apply the exchange rates that are in effect for the average for that quarter and they were a higher exchange rate in Q1 versus Q2 and if you strip those out you find that really NOI was up 2.25% from one quarter to the next. So there's a lot of things we're wrestling with of how do we make it easier for you guys to kind of get a grip on those things and we will continue to try to evaluate it but we just didn't feel at this point we could give a meaningful and fair breakout of FFO without a lot of assumptions so that would be where I would urge you to evaluate it.

Okay. And lastly more of a technical question. Could you maybe -- how much was capitalized interest in the quarter and year-to-date? Maybe capitalized overhead as well?

I don't know. Harrell, do you remember that off the top of your head?

Yea, just trying to -- the capitalized interest costs were fairly nominal.

Only about a half a million, wasn't it?

Yea, even less than half a million. I think it was less than half a million.

For the year-to-date I think he was mentioning.

I'm going to say 200, couple hundred thousand dollars. 200, $300,000.

That was Q2.

Yea, Q2. For the 2nd quarter.

Yeah. And other components of overhead capitalized I would really have to go back and look at the different pieces that go in there. I don't know that off the top of my head.

Good enough. I'll follow up later. Thank you.

Okay, Jordan.

Our next question comes from Paul Ornato with Maxtor Financial. Please go ahead.

Thank is very much.

Hi, Paul.

A few questions related to Europe. First, maybe you could provide an update on the competitive environment in Europe, how it evolved over time? I know when you initially enter new markets you're often the first and only storage operator. How does that evolve over two, three or four years?

Well, obviously it depends on the market. For instance, you have got when we entered the Netherlands there was really only one other small competitor. And to their surprise and to our surprise we found the dutch market very strong in its uptake of storage and that got us very intrigued and we geared up quickly to take advantage of that and what we saw in the real estate conditions. But unfortunately word gets around and others find out about it as well and you have to look at the psyche of the business environment. Again, in the case of the Netherlands they tend to be a reasonably entrepreneurial group, the Dutch are, and so we would find several small operators pop up over a fairly short period of time in and around the major cities in the Ramstead area. And you go to other places like we were in Belgium we are far and away the largest operator there today and part of that is the demand is not as strong as it is in the Netherlands. But also, it is not as entrepreneurial a environment. There hasn't been as much attempts at small groups coming out and attempting it on their own depends a couple bit on those things. In general we have seen a fairly rapid expansion in Italy in several markets there. In Spain to a little bit of a lesser extent and that is because of the real estate market is still very hot in Spain. UK has continued to be strong, that's where you see the most active acquisition and groups buying each other out. As you know, Mentmore Abbey, which was one much the biggest operators there was merged and bought out by a group called Safe Store just a short time ago. And that continues a pace, and I think part of it is the language barrier. A lot of the Americans that get involved are just more comfortable dealing in the UK environment and so it is all over the map.

Okay. And also, how do you handle phone inquiries in Europe? Does it make sense to have a centralized answering system there?

No, not yet. We certainly go through the math on that but obviously we haven't got near the number of stores that we have in the U.S. and the other issue is the language barrier in that you need to be able to handle in the area of 7 or 8 languages just to accommodate the different types of calls that might be coming into a centralized base. Not that that can't be done. It is just A, not economically logical to do that the point. And two, the competition is such that it is not a key needed weapon at this point. We do have call rollover within each city group where they will be shared by the different stores. That's as far as we have taken it so far.

Finally, do you use incentives to the same extent that you do in the U.S.? Are they a good occupancy tool in Europe?

Bruno, are you there?

Yes.

Paul's question I think was when we're using incentives in the U.S. to help with moveins what it your --

You mean store managers incentives, yes.

Well, the incentives, well, I think in this framing would be like discounts or I'm sorry Paul, maybe I didn't understand your question.

Free rent, other incentives to new customers coming in.

Giving discounts and that kind of thing.

Generally in Europe we don't have the discount methodology approach in the U.S. because the competition, once again does not enforce that. The most used this type of discount is a 15 days rebate or, you know a month's rebate so that is the kind of discounts we are practicing for newcomers but discount is very limited in Europe as such. We also organize during the past year free boxes or gifts, moving packs for incentives to newcomers but the discount structure is not the preferred route in Europe at this stage.

Thank you.

Our next question comes from Michael Knott with Green Street Advisors. Please go ahead.

Hi, guys.

Hi, Mike.

A couple quick questions. First, Dave or Bruno, just focusing on the group of 47 properties in Europe that have been open the longest. First, if you can talk about why France was had such -- much better currency gains than the other groups? And then also, perhaps this is just coincidence, but I was curious that in that same group France was the only country that had declining rental rates versus the prior year. I'm wondering why not import that strategy to other countries to try to get better occupancy gains?

Well, I think a couple of things. You will see that while we don't actively pursue specialty discounts as the prior caller had asked about there is no question that the higher you raise the price, the fewer people that will ultimately take the rental whether they've got a competitive option or not. Finding where that balance is is very, obviously, sensitive market by market and store by store and there is no question we have experimented in backing off of rates in other markets like Sweden in particular and places where we are not getting the push on occupancy that we would like to see. As you know, the average that we've got for the same-store pool is sitting around 75% and we definitely want to help boost that up. We just have to be careful not to give so much of it away to try and do that that we really hurt our rate structures in general or cause existing tenants to have a problem with the fact that we're charging significantly less to a newcomer coming in. So you know, those are some of the things that you definitely have to contain. But on top of that we have seen good results in France and I think obviously we have got a much larger market to spread our growth around. You are dealing with 60 million people in France and we are now in 5 or 6 major markets from Lille to Leon, greater, greater Paris, the Cote Disure, Marseilles, et cetera where you're dealing in the Netherlands of say 15 million people and obviously you can upset the balance there quicker than the geography the size of France. But I have to say, you know, quite candidly we can blame a lot of things, the economy or cannibalization or whatever. But the end of the day, it is about people and we've got a great team in France. Bruno did a super job of training his successor when he came in behind me. France was the country that he took on as his kind of laboratory. And clearly brought a lot of his retail experience to bear there. And has done a good job of bringing in his successor behind him. And we are in the process of making management changes in the Netherlands and have made them in the past in Sweden as we mentioned four or five quarters ago in order to get improved results. There is no question we need a stronger, higher level of dutch leadership in place to really hit on the cylinders that we know we can achieve. The Netherlands has got far and away the lowest unemployment rate. It's down around 3%. And as a result, you need to compete extra hard to get top quality people. And we have got upside opportunity there. Bruno is all over that and that along with rate strategies and backing off on the pace of development are all part of what it takes to bring a group back in line.

That group in France is close to the 85% mark, do you think that some of these other groups can get there eventually?

Yeah, as I mentioned before, if you go through the grouping of the same-stores in every other country we have had many, many stores in each country that have blown well past 85 into the middle upper 90s so it is a case of you can take a group of stores and if you analyze the individual pieces you see some have moved ahead very nicely, 5, 6, 7 percentage points in occupancy and some other store got hit by competition and lost 10, 15 points and all of a sudden your average gets to be a real mixed bag. We have got still stores in the Netherlands today that are north of 90% and we've had them in the UK and Sweden and right on through the list. So there is no doubt as we go through these temporary disconnects between awareness which is obviously what generates your fundamental demand, that will be overcome and awareness will continue to build and as long as supply is brought on at a moderate pace against that you will definitely see that happen again.

This is Chuck, I want to point out one thing also. This pattern we are seeing in Europe today is precisely the pattern we saw in the United States 30 years ago in all the markets. The exact type of growth where you get when you have low awareness of a product you get some success early and then you bring more stores online and then some of those that did really well do a little less well, and then -- but overall in the length of the history of the industry, they have all done very well.

And for new development, stores that you're bringing online now, what are you guys baking into your projections, your own internal underwriting for in terms of how long it takes to get to what you guys consider stabilized occupancy in the the U.S.?

Well, we've pushed U.S. run rate. We have typically been using 24 months and pushed that out to 36 months in our underwriting and oh, I would say probably about 10, 12 months ago now.

That is for Europe I mean?

I'm sorry. I thought you said U.S. In Europe, Bruno, what would you say? It's in that same neighborhood or where would you put it at?

For -- I would say 27-32 months.

I think it goes out even further on the top end but depending on the size of the store, Mike, one of the things that we mentioned in our previous call that we found was that the average European store even though it was the same size in square feet that we target in the U.S., their average unit size that a customer was taking was a fair amount smaller. Instead of taking say, 110 feet they were only taking maybe 80 feet. Which doesn't seem like a big deal but when you need to sell up the same square feet, it takes more customers or more units. And units or customer count is what really drives your rentup rate. It's not the square footage size of the project. And so that is something we changed in our underwriting in Europe back about, oh, 18 months ago, really pushing to go to a smaller, targeted customer count in order to shorten back up the rentup time.

500 you need.

Targeting more 500, which is frankly very close to what a typical U.S. store does and many of these European stores have been getting up to the 700, 750 mark.

Just one last quick question and I'll give up the floor. I was curious that the R&M line for the European same store was up quite a bit and that also it was a higher percentage of revenue than domestic pool? I was just curious if that was something one-time or given that these stores are typically newer than your same store pool in the U.S., I was kind of curious. Also the revenues are lower in Europe right now, but --

Well, obviously the revenue piece in Europe you've got part of that when you do the percentage comparisons is you're 10 full basis points different in occupancy which obviously throws that comparison off to some degree.

A huge number year-over-year, so I'm just curious.

It can be -- R&M can be a pretty sporadic thing and you are -- you know, some of of our older stores are now coming around for their first fairly significant shots of R*M. But you know, you get a bit of a holiday in the first few years but our first stores opened up back in '95 so some of them are now getting -- approaching that ten year mark so you will have some fluctuations like that that can occur from time to time.

Okay. Thank you, gentlemen.

Our next question comes from Scott O'Shea with Deutsche Banc. Please go ahead.

Yes, thank you. I was wondering if you would comment on your policy on capitalized interest? What does that end on a facility? How many -- is there a specific time frame from project completion?

Well, once the store is completed you stop capitalizing interest.

Okay. So as soon as it's ready to go, you stop the -- the 200 to 300K number seems kind of low given all the development in Europe. Does that include anything for Europe?

No, I'm sorry. That was a U.S. number.

Domestic. In total it is about a half million dollars.

Okay, so that would include Europe. Does that include First Shurgard as well over there?

It would --

What would the consolidated number be if you look at the consolidated portfolio what would the consolidated number be?

That's what I'm saying. The consolidated capitalized interest, both domestic and Europe so when you look at Europe, you're counting Shurgard Europe plus the joint ventures that we consolidate. About a half million dollars.

And would that be roughly a million for the 1st half or something like that?

Yes.

Roughly. Okay. That's great, thank you.

Our next question comes from Charles Fitzgerald with High Rise Capital. Please go ahead.

I wanted to just follow up with Jordan's question. I might have missed part of the answer but your range that you gave in the 1st quarter of 220, 235 are you still comfortable with that number?

We'll we're not in any position to make any changes to that adjustment or to that range. We put out that range about four or five weeks ago and we certainly have no further modifications to make to it at this point.

Okay. And so the property operations for this quarter were around what you expected, is that a fair statement?

Oh, yeah, I think that that definitely would be the case.

Okay. All right. Then my next question is based upon your filing status currently and everything are you able to issue debt securities? Do you have any problem with doing that now?

We're current. Harrell, I will let you describe that.

Sure. We can't issue off the shelf but we can certainly do it through it private place. Which is the way we have done it previously.

Why can't you issue off the shelf and when might that be changed?

I believe the rule to issue off the shelf is that you have to be timely filed for a period of like 12 months so since we were delinquent in the 1st quarter, it would run from essentially from the 1st quarter.

What is the company's policy about floating rate debt exposure?

I think we have typically tried to maintain or look at some kind of a balance between fixed and floating of something to the extent of 80-20. Somewhere in that neighborhood. We're certainly above that.

Okay. Dave mentioned that you were looking at some more asset sales. Reading through your Q, I think you sold two properties subsequent to the quarter and you also had several million of helper sale assets. Is the helper sale related to those two properties?

I'm pretty sure that those are the same. There may be one extra one kicking around in there. I'd have to go back and look at the details. That's where they go to. That's correct, Charles.

And you said there might be additional sales? Any kind of size you would quantify?

No, as I said before we are actively looking through our portfolio and did that starting about nine months ago and that any properties that kind of working from the bottom up if you will that we are not strategically fitting in with our long-range plans we are fair game to consider. But in considering a property individually for sale is one thing. It is only going to be sold if it is getting a price target that we think makes sense to do and so trying to forecast or be more specific, you know, just wouldn't be appropriate.

Could you talk about what cap rates are today? I know there has been a lot of transactions recently including one of your competitors going public and a few portfolios trading. Can you just talk about where you think cap rates are for an average property that might be in your portfolio?

I think that is kind of like asking how long is a piece of string because everybody seems to have a different point of view how to compute or calculate a cap rate. If you look at our trailing NOI for the four properties we sold and I think I mentioned this on the prior call that was the four California properties and these are definitely older stores. And these are not -- they are certainly well outside of any of the markets we operate in and obviously local competitors can certainly in some cases do better with those kind of properties than we can. But that was about an 8.25 cap, but if you are a buyer you are looking at a different set of ratios than just taking my trailing NOI and applying that to the purchase price because you have to go through a formula adjustment to that and one of the key ones is on real estate taxes. Those properties or any properties once they transact will go through reassessment and somewhere within the one or two years out there will be usually a significant uplift in real estate taxes for the properties. And so any buyer when they're figuring out their cap rate or putting that type of a computation into it that obviously impacts their numbers. I have been seeing some down in the sevens and some up into the eight and a half range so I think trying to hit an average is difficult but certainly there is an awful lot of repetitive activity around the 8% number.

Could you talk about European cap rates since there really haven't been any transactions in Europe what you think they may trade at if they ever trade and can you discuss why perhaps the company wouldn't choose to sell a couple assets to see what the value is and test the market to see whether or not development continues to make sense and if the returns are worth the risk?

Well, there's several questions in there. There have been properties trade hands over there and without being intimately familiar with all of them, I can tell you that they certainly were going at what seemed to us to be very low competitive cap rates and so I have certainly got every sense that they would be every bit as competitive if not more so than the U.S. based on the one that has been announced and the information that has been available. And you know, as we've said before we're not adverse to selling properties in Europe. If we get the right circumstances and the right yield we would definitely pursue that kind of an opportunity.

What would the -- not to pin you down or anything but generally what is the right sort of circumstances or yield?

You're exactly right. You won't be pinning me down. That's just too complex to answer on this kind of a situation, Charles.

All right.

Charles, this is Chuck. There is another factor there, too, is that we are really building a real high quality portfolio of properties over there and as I have spoken to you several times we're now building them through these joint ventures which are profitable to us and our partners hope that they are profitable to them as well. My guess is that when the end of those joint ventures takes place we probably will not be the buyers of those properties because everybody tells us and we see some evidence of this that there are significantly lower cap rates in Europe in all real estate classes and if that is the case it would be hard for us to take our capital structure of this company and compete for those properties. We probably would maintain an interest in them and will continue to manage them for sure. They'll be part of our brand extension efforts but for to us be the ones that are actually buying them outright probably won't happen.

All right. One last question on Europe just revolving around operations. Indirect expenses as a percent of revenue is 12% currently for the 1st six months of the year which is, you know, much higher than the U.S. which is 4.7 or like a third-party management contract which would be 6% or so. What sort of size do you need to get to get that number more towards the 6% number and how might you achieve that and just sort of plans for that number?

Bruno, how would you respond to that?

Bruno?

You have to forgive Bruno. It's about 2:00 in the morning there.

Can you hear me now?

We can hear you.

Okay. Well, you know the answer. You gave me about two years to come down to a comparable number, Dave. No, I'm -- I'm confident that within two to three years we should be much more in line with what the indirect or the expenses are in the U.S. market. Without having additional countries to be opened. I mean this will be on the joint platform as such. So a two to three years' achievement with probably, you know, a number of properties that would have been 60 -- 50 to 60 additional properties within these two to three years. That is the target is about.

This is Chuck again. With all due respect to by Bruno and Dave and their attempts to get them down there exactly at the same point, it is going to be a little difficult because we have all the language issues and the various different country issues as well so there is some built in cost structures in Europe that we don't have in the United States that we will always have over there. The goal is to get it close.

What I would add though, Chuck, is because it is always good for us to have high expectations of our management is that it is true. It is naturally more expensive to operate in Europe than in the U.S. just as Chuck said. The only counterbalancing to that that we expect to see over time is when you describe expenses as a percent of revenue your rate structures in Europe as I said today are on average 50% higher than they are on the average U.S. and costs are really not 50% higher to operate so I think there is every reason to believe that as you continue to grow the system and as the stores fill up to a more mature level of the 80-85% occupancy you will see that kind of that move in that direction.

Yep. I think to give it more operational flavor, the first steps we have to concentrate and put Europe IT systems in place. We have now fully completed the centralization of IT. We are now getting into more centralized resources in terms of development and management of real estate as well and finance group is getting into some kind of Europe synergies as well so there is obviously operational directions to practically achieve a better ratio than what was done in the past where everything was geared towards development so you had to have a local platform and we are now getting into achieving much more synergies because of the existing platform and the knowledge we have already built up in each country as such. We are able to centralize and get these efficiencies in operationally speaking.

Great, thanks.

You bet.

Ladies and gentlemen, if there are any additional questions please press the star, followed by the one at this time. As a reminder if you are using speaker equipment you will need to lift the handset before pressing the numbers. We do have a follow-up from Scott O'Shea. Please go ahead with your question.

Do you have an update on the refinancing plans for the European debt as well as your own bank line? Just a sense of timing there?

Harrell, do you want to handle that?

Sure. We are as I think you know, Scott, our European credit facility matures at end of 2004. So we have been actively working on a refinance of that. And would expect to have something announced with respect to that refinancing in the near future. Our domestic credit facility which is $360 million revolver terms in the beginning of 2005 and so we are in the process now of that we have filed our 2nd quarter Q timely of looking to refinance or how we will go about refinancing that piece of the debt as well as extend and renegotiate our existing credit facility.

Okay. Great. Last question here would be with the radiancies. Any sense of timing for resolving with S&P and Fitch? Are you getting back to stable with those shops?

Well, I think that I would say that we certainly have been in contact with them and they are in the process -- you know, having just filed their 2nd quarter Q I'm sure that they will be looking at and reviewing that information and then, you know, probably coming out, you know, I would expect in the near future with their outlook.

Looks great. That's helpful. Thank you.

Our next question is also a follow-up from Michael Knott. Please go ahead with your question.

Hey guys. One quick question following up on Chuck's comment on Charles Fitzgerald's question about when Chuck said that probably not going to be able to buy out those properties for Shurgard from Europe. Just curious that the inferences there has been a lot of value creation there. I'm just curious why if there's a lot of value creation there why we haven't -- why you need a partner and why not just reharvest the value creation for the shareholders?

I think what Chuck was saying is that our attitude will be as these properties mature we will be looking for a takeout capital sources that there be the most interested in paying the highest prices from them and Chuck is speculating, he's not sure we as a REIT will find that that is the best use of our money. I'll use an extreme if we find somebody that wants to pay a 2 cap for these properties and we decide that's great, let's be on the selling side not on the buying side, you know, and that's our first and foremost interest is to make sure we maximize that opportunity as it arises. As far as harvesting the opportunities, you know, as we've said all along, we believe we are harvesting a good advantageous relationship in joint venturing these developments. We do bring in partners that are good, solid, reliable partners and obviously as the properties perform we get more than our share of investments. We have a preferred promote. Once we cross 12% we go from a effectively a 20% ownership of the cash flow to 40% and also get reimbursement obviously for development costs and management and asset management that help to fray those overheads. So, you know, we think these are -- the amount of money that we are putting in on behalf of the REIT gives good value creation for us.

One other point I would make to that and that is there is another thing we're trying to do here and that is brand extend as fast as we can in Europe. By having joint ventures we get to build five times as many stores as we would be able to with the same amount of capital, and our internal rate of return on our interest on these stores is going to be greater for us than it would be if we owned the whole thing outright because of what Dave just talked about. So it's a twin win. Not only do we get greater rate of return on our invested capital, but we get brand extension much faster and we get to create market concentrations and market control at a much faster rate.

Okay. Thank you.

I'm showing we have no further questions at this time.

Thank you, operator. Thanks, everybody.

Ladies and gentlemen, this concludes the Shurgard Storage 2nd quarter earnings conference call. If you would like to listen to a replay of today's conference you may dial 1 (800) 405-2236 or you may dial (303) 590-3000 and enter the access number of 11004282. Once again, if you would like to listen to a replay of today's conference, you may dial 1 (800) 405-2236 or you may dial 1(303) 590-3000 and enter the access number of 11004282. Thank you for participating. You may now disconnect.