Public Storage (PSA) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Shurgard Storage Centers' third-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. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded today, November 10th of 2004. I would now like to turn the conference over to Mr. Dev Ghose, Chief Financial Officer.

Thank you. Good morning and good afternoon. Thank you for joining us for Shurgard Storage Centers' third-quarter 2004 earnings conference call. My name is Dev Ghose. I recently joined the company as CFO. With me on the earnings call today are Chuck Barbo, Chairman and Chief Executive Officer; Dave Grant, President and Chief Operating Officer; Harrell Beck, Executive Vice President and Chief Investment Officer; Steve Tyler, Senior Vice President of Retail Sales; Bruno Roqueplo, President of Shurgard Europe; and Stuart Blackie, Manager, Capital Markets. A special welcome for Stuart. He has recently joined us from Shurgard Europe, where he spent the last couple of years.

Before we start I wanted to read the required statement, which is, the statements made on this call concerning the beliefs, expectations, intentions, future events, future performance, business prospects, and business strategy and earnings guidance for 2004 and beyond constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act and are based on several assumptions. If any of these assumptions are not satisfied or prove to be incorrect, actual results could 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 Shurgard's annual report on Form 10-K for the year ended December 31, 2003, filed with the SEC on May 17, 2004, and the third-quarter 10-Q for 2004, filed on November 9, 2004. I would now like to turn the call over to Mr. Grant.

Thanks, Dev. Hello, everybody. I appreciate you joining us for the call today. We feel we have made good, solid progress this past quarter on all the key fronts the Company is focused on; themes you have heard us talk about in the past, the working of our existing portfolio, the focus on continued growth in that portfolio, and the repositioning of the Company to handle those growth opportunities.

So during the call today, we will plan on touching on some of the highlights in each of those areas, and then obviously close with a question-and-answer session. And before we jump into that, I am going to ask Dev to recap for you some of the net earnings and FFO highlights.

Thanks, Dave. For the quarter, net income is up to 18.2 million from 12.5 million, which is about 45 percent over the third quarter of last year. Excluding gains on real estate, net income is up 10.8 percent. Secondly, income from continuing operations was up almost 16 percent from the prior year and over 67 percent from the prior quarter. Thirdly, income from storage center operations was down slightly from prior year, but depreciation was up about 7 million, reflecting the consolidation of Shurgard Europe. Compared to the second quarter, the third quarter is actually up 12.6 percent.

Next, FFO improved on a per-share basis from 58 cents per share to 63 cents per share, an increase of 8.6 percent over the prior year -- I'm sorry, from the prior quarter. FFO improved from the second quarter from 53 cents per share, which is an increase of 18.9 percent. Our FFO for the year is -- we have provided new guidance of 2.13 to $2.16 per share. This new projection is based on the operating performance for the year, which is better than expected. However, there are three items that we identified in our press release that are going the other way.

Firstly, we have higher-than-projected costs for Sarbanes-Oxley consulting and internal resource costs. These costs have been incurred to upgrade our control systems. Secondly, higher auditor adaptation (ph) and audit costs. And thirdly, higher dead deal costs in Europe. As a result, our revised projection of $2.13 to $2.16 per share incorporates approximately 13 cents per share for the three items I just discussed.

Thanks, Dev. Why don't we start first by going through some of the highlights on the portfolio side of the business? As we have stated over the past couple of calls, we have taken advantage of the current market conditions to focus on selectively selling off stores in the U.S. that we feel are nonstrategic in nature. We have continued with that program in Q3, selling off two stores. I know you are all interested in cap rates, which can always be in the eye of the beholder, but in the case of these two stores, one of these stores had trailing yield to us, at least on the sales price basis, of 7 percent, and the other 8.5 percent. We will continue to selectively focus on this strategy for the foreseeable future.

Additionally, we will aggressively continue to rework, reassess the rest of our portfolio. As you know we have got a lot of older properties that have, in our mind, good upside potential. We tried to accelerate our ability to take advantage of those opportunities when we realigned our field group last year, putting more direct power in the hands of our regional vice presidents to focus not only on the operating but the real estate side of the business. That is definitely generating some good opportunities for us.

We currently have about 18 of our existing portfolio either in active redevelopment or in the early stages of the feasibility process, and we are very encouraged by what we are seeing, and we will continue on this program in the future and as we see results coming back from this, we will keep you posted.

On the growth side of the business, starting with the U.S., we continue to be selective on both new developments. We continue to find good, although not large, volumes of opportunities. We continue to do some work directly ourselves, some with our development partners we have on the East Coast and Southern California. During the quarter, we opened two new stores and we actually also acquired a store. As we have mentioned in the past, when we find an opportunity in adding stores that fit accretively into our system or where we feel we can have an impact, we will still acquire in this market. The store in question that we acquired was for a yield rate of around -- cap rate of around 9 percent, in this case, in the Carolinas.

And on top of that we also have been looking at our joint venture relationships as additional places for further investments. As previously announced at the beginning of this quarter, we entered into an agreement to buy out our partner in what is known as the Chase portfolio, which is a group of about 21 stores where we will acquire the 80 percent interest of that group close to the end of the year.

Moving over to Europe, we continue with our program of steady development growth in our existing markets there, which are scattered over about seven countries. We opened four stores in Europe this past quarter. As we mentioned, though, in the press release, we are expecting that the total number of openings will fall well short of our typical run rate of 20 to 25 stores a year, which is what we have been doing the last few years. We actually only expect we will open a total of about 12 stores this year.

And as indicated in the press release, there's three different sources of reason for that. Some is where in some of the markets where we felt the oversupply had gotten too high on a temporary basis, particularly the Netherlands, where we have had weak operating results over this past year; we have backed off on development pace there.

In some cases, we've been unable to get permits. We've been relatively successful in the past, but as we, in some areas, move into some of the higher degree of difficulty areas, that risk of getting rejected can increase. We had a few of those happen to us this past year.

And finally, some of these same areas where we are still expecting permits or have gotten them just take longer. And we have about seven properties that we had anticipated opening this year in Europe that are actually going to roll into the early part of next year; so, again, partly due to some delays. Partly actually some materials delays where shortages of steel and cement have slowed the start-up process. We expect that we will return up to a fairly normal historical opening rate as we go into next year.

On top of that, we actually acquired a store in Europe this year. We are very excited about it. It is a downtown London store. For any of you who know those markets at all, very difficult area to penetrate. We had an opportunity to buy a store very near the Holland Park area in the South Kensington/Notting Hill district. Many of you will be blown away by the cost per foot, and believe me, I can understand. This property is only about 38,000 feet. It is pretty full occupancy, around 95 percent.

But everything is relative, and as you know, our average rates in the U.S. are around $12 a foot rental rates, and this property is throwing off currently about $55 a foot in rental rate, almost 4.5 times higher. And obviously fits with the corresponding increased cost per foot.

Our going-in cap rate on this on a pure as-is, where-is basis, is about a 7.5 percent. We see a fair amount of upside, though, beyond that for a couple of reasons. Besides the difficulty of getting into that kind of an area, the rates on this property, believe it or not, are below significantly inferior competitors serving the same market, which we feel very comfortable we can hit.

But probably most importantly is this is a small project and we have identified a way to get additional expanded space that will increase the property size by about 30 percent, so we are very excited about that. And as we've said before, we have never been shy about buying properties in Europe. It's just that historically there's been not a lot of those opportunities, and certainly not at prices and we thought made sense. This certainly is an exception to that rule and we will continue to keep an eye out for those, because obviously over time there will be more acquisition opportunities that come up.

As you also probably noticed, our joint venture partner opted to take the second phase of equity support for what we call Shurgard Europe II, or Second Shurgard. This financing, coupled with our first joint venture, now gives us the capacity to build up to around 175 total stores in Europe. We are currently at about 129, so that will provide us with the sources we need pretty well through mid-2006.

If I switch you over to the property performance side, again I think we had a very solid quarter. U.S. same-store results continued to show improvement over the same period the year before. Revenues trending upward again, about 4.7 percent -- combination of modest both rates and occupancy gains. The NOI was up around 4 percent after our indirect costs. That was dampened a bit by somewhat higher costs than the prior year. In particular, we had some nonrecurring reduction in costs that we disclosed in the prior quarter of '03 that exaggerated that. We are also expensing our Yellow Pages now on a basically as-we-go basis that can make some of our marketing expenses a little more lumpy from quarter-to-quarter.

On Europe, also good results for the three months -- for the third quarter, we had about a 9.6 percent increase in revenues, good gains in occupancy -- about 4.5, 5 percent. In particular, we are seeing the French properties getting up into what we consider to be the more normal stabilized range, in the mid-80s; and continued modest growth in rates accompanying them. Overall, NOI is up approximately 11 percent due to fairly good expense control.

If I can give a little color behind that, I think in general, we are seeing across the U.S. market reasonably steady, solid improvement in revenues mirrored in the overall pool. As we mentioned in the call, we continued to suffer from an oversupply situation in the Chicago markets, where we are actually still in a negative trend. Overall demand continues to appear steady. Our move-out ratios continue to stay on the relatively low side. Closing ratios continue to stay on the higher side, as we reported in prior periods. And our need to discount has continued to stay at a fairly constant, modest level of around 20 percent of the transactions that we do. A little more trend (ph). Our prediction, based on we've seen through October, is that this trend has continued, and that's basically how we see the fourth quarter playing out.

Putting a little more color onto the European markets, in particular, the UK, France and Belgium have had strong performance on their same-store and some of the newer stores, particularly in the UK. Swedish and Denmark are markets that have suffered in the past and that are starting to show a good, solid recovery. Our weaker markets are the Netherlands due to the oversupply that we had mentioned before, that we expect to start to see a rebound as we go into next year. Germany, we are also struggling a bit behind our early expectations, which is obviously the problem we would face every time we go into a new market, is the building of awareness with new stores. And obviously, all the stores we have in Germany are in the new-store category, as we have been operating there for only about 12 months now.

Probably the most exciting part of the property performance side of the business is the embedded growth we now have in the business, in particular given our large acquisition of the stake in Europe this past year. And as we point out in the press release, over 25 percent of our portfolio is now in the new-store category and is 114 stores of the total. And this group, the 25 percent only contributed 6 percent to the total NOI generated by the company for this quarter. But that is an improvement, obviously, over Q2 where we had done a little better than 3 percent out of this group. So naturally, as you could imagine, this is a high focus for us to continue to put emphasis and energy on rent-up speed.

We have seen some very innovative localized marketing strategies deployed by our teams in the U.S. in particular to accelerate new store rent-up speeds and we have been pleased with the improvements we're seeing in the more recent openings we've got. Similar approach as well in Europe.

Final comment I would make on property issues, there's been a lot of talk about hurricane damage and related problems in Florida. We do have an ownership interest in about 29 stores in the Florida markets -- Orlando, Tampa, and South Florida, the Miami/Fort Lauderdale area. We were impacted by the hurricanes, but thankfully, the damage was fairly minimal. It appears that our estimate in our last press release of 400,000, we will actually underrun that when all is said and done. So we were lucky. Obviously, we had great teams on the ground there to help deal with tenant issues that did arise and I can't say enough about the work they did to keep the issues as small as they have been.

Those are some of the highlights I wanted to point out on the property performance and the portfolio. And I'm going to hand it back over to Dev and to Harrell to talk a little bit more about some of the capital and other moves made during the quarter.

In terms of new capital, we completed during the quarter or just after the quarter a major EUR325 bond offering that fixes our rate for the next seven years and reduces the Company's exposure to floating rate debt quite dramatically from the 40 percent area to the 17 percent area.

In addition, as Dave mentioned before, Crescent Capital confirmed taking the second tranche of Second Shurgard, which means that our development funding in Europe is done through middle of 2006 and will enable us to get up to 11 of about 175 stores.

Lastly, we see recent tax law changes for REITs being helpful to us due to the relaxation of taxes on foreign investors in our business. We had a number of foreign investors come into the Company for the first time last year, and with the recent bond offering in Europe, generated significant interest in the business, and we hope for more of that.

A couple of other points that I would like to make in terms of infrastructure and so forth, we have added a number of people to our finance and accounting group. We have recently hired a corporate controller as well. What we are trying to do is use the people, have great people, and improve our processes so that we speed up accuracy and timeliness of our reporting.

Thanks, Dev. That's all of the prepared remarks we have at this point. So operator, we're ready to turn it over to questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) Ross Nussbaum with Banc of America Securities.

It's Christy McElroy here with Ross. You reduced the high end of your guidance by about 19 cents. You mentioned that 13 cents of that was for costs listed in the press release. Can you walk us through what was the other 6 cents?

I think we were working off the midsize of the range. If we took the midpoint, it was about 2.27, and that's where the 13 cents would bring you into the midpoint of the current range.

But from the 2.35 to the 2.16.

I don't know that we can mathematically walk back through each of those pieces. There's a lot of elements of our business that, whether it can be exchange rates or -- if you go back through the original press release, G&A run rates, obviously, the Sarbanes, the rate we are deploying capital and the upside potential performance on properties, all those things could factor into an upper side of that range. So I think if you want to really get your arms around it, in the most meaningful way, I would work off midpoint to midpoint and that's how we've described the variances to you.

Okay. So there have been no real changes in core expectations?

I think as Dev mentioned, our core results are on the higher side of our estimate. And while there's other minor things going all different directions in addition to that, the big takeaways that impacted us were those three areas -- very candidly, applying and complying with Sarbanes-Oxley is a new journey for everybody, and when you have to comply in eight countries, as we have to, both on your internal data control systems as well as all of your paper bookkeeping processes, it is just a journey.

And then on top of that, you're not only working with the consultants that help to design the systems; you have your independent accountants that play a separate role, which is having to ultimately attest to those in ensuring that they agree with that. So it's quite a large group working it. And that is definitely the biggest part of the mix from our standpoint. And the other part was obviously the store openings in Europe were not up to the speed that we mentioned that makes up the balance of that.

Okay. You said that you expect openings in Europe to return to normalized levels in '05. Does that mean that you don't anticipate the entitlement issues and the material shortages to continue into '05 that you've been seeing?

Well, I think we are at the moment starting to see an easing on the material shortages and pricing stabilizing. Obviously, depending on what China is doing at any given moment can make that go better or worse. There's no question that we will continue to focus on parts of the market that are some of the higher degree of difficulty areas -- same thing we do in the U.S. Because when you can get into central Paris and central London, it's, believe me, worth the fight, so to speak. So there is no question that that will continue to be a risk that, as developers, we will take on.

But I think the part that will return to normal is we did back off the Netherlands. We've made more of a shift into some of the French and UK markets, and so I think that you'll see that element of our run rate come back to normal. But in a development business, there is no question you'll always be dealing with the vagaries of time and risk.

Going back to the oversupply issues that you're seeing in the Netherlands, is that a function of the markets that you're in there? And looking back, would you have done anything differently there to have avoided the issues?

No. And as we've said before, it's heavily self-inflicted, so we know exactly where the competitors are coming online and when. So we can't say we were surprised. What is the ultimate $1 million question when you going to any market is how fast the awareness will spread. And obviously, you weren't on the calls a couple, three years ago when we were doing our first stores in the Netherlands. But when we would open up a store in Rotterdam, we would be full in 12 months. But it's one store serving the entire city and you get people coming for 8, 10, 15 miles away, which is way outside the normal bounds of what we would expect customers to do.

But we have to get up to efficient operating platforms as well, which is why we would not, in hindsight, change the speed at which we developed. You’ve got your infrastructure there. You’ve got your sites. We know what a good network should look like. We now have at about 30 stores in the Netherlands a good, efficient system to work off of, so it does allow us, as we see that we have softer speed as a result of it, it does allow us to back off the pace and redirect some of our Dutch and Belgian resources back into helping the German team and allowing that to catch up.

Christy, this is Chuck. One other point I would have to make here that this is precisely the pattern we saw 30 years ago and forever in the United States markets. When we opened up new markets years and years ago in the United States, the awareness was very slow, and so you have to be a little bit (ph) careful about how fast you build out stores in new markets. But after a very short period of time, all those stores fill up and you're very, very happy that you have them. So this is not something that we are surprised about or that we're even concerned about.

One other point I would add is that when you look at the markets over there, a big part of what you look at is country-by-country. Obviously, we get way more flexibility about how we deploy our development teams in countries like France, the UK, and Germany. You're talking about populations of 60 million in the UK and in France and about 82 million in Germany. So in the smaller markets, Belgium at 10 million, the Netherlands 15, Sweden at 10, these markets you do have to be a little more sensitive. You don't have as many options, and that is why we backed off of Sweden a year ago, and we have already started to see a spring back in performance there. So the bigger markets will, in general, allow us to manage that issue a little better.

Okay, great. Thanks.

Jordan Sadler with Smith Barney.

I just wanted to drill down a little bit. I understand obviously your core is doing much better, and the reason for the lower is really all G&A related at this point. What is a good run rate for G&A for you going forward? This year, it looks like it will be up 50, 60 percent year-over-year. Should that drop off substantially?

Remember that this year related to last year, we have absorbed G&A costs in Europe, which have added about $6 million year-over-year. We also have in G&A the write-off of the STG costs. That is sort of one time. And then looking forward, we think in G&A we have about $2 million to $3 million of onetime costs related to new systems, related to Sarbanes-Oxley, that will drop off, burn off, over a one- to three-year period.

So is a $6 million number a good number to use going forward? It was about 6.2 million of G&A this quarter.

Well, I think the annualized rate is around 29 million. And embedded in that number is the STG costs, as well as the onetime element that I talked about, which is 2 to 3 million. So if you back those out, I think that might be a good run rate.

Right, but there were also some option expensing for Dave that was opposed to go away as well.

But that again would be one time in nature. You're absolutely right.

Was that another one million or two?

That was (multiple speakers) 1.2 million.

So you think it is a 25, $27 million run rate is the right number?

Could I add a couple things? I think it is fine for Dev to point out very clear elements of G&A that we expect are going to burn off. Obviously, it's only over time we will know what we can get our running rate on audit fees and Sarbanes attestation to get down to and we do expect it will continue to just naturally improve beyond even the structural pieces.

A couple other things you got to keep in mind. Remember we convert our G&A costs in Europe from euros to dollars every quarter. The euro has gone back up again from Q2 to Q3. If you were looking at a G&A increase between Q2 and Q3, part of it is purely the conversion rate that shows up when applied against those overhead numbers. So that is one thing that we have to keep in mind.

Our expectation is that as we now have absorbed Europe, we will begin to aggressively work on a program over time of integration of their overhead platforms and ours, and it's not something that is going to wake up tomorrow and we are all of a sudden one big efficient company. But in the areas of capital raising, in the areas of internal control of computer technology systems and some marketing areas, over the years ahead, we will work to reduce our combined overhead costs just through those natural synergies.

So it will be definitely a moving picture, but those will be some of the areas that will have the most impact one way or the other.

I guess the G&A has been ramping up pretty steadily the past several quarters, if not years. And the question is at what point do we have a good run rate to use in figuring out what's going to happen in the future? It sounds like you're having trouble keeping up with it yourself. Do you feel that this quarter's run rate is high or is it too soon to really tell?

Well, we think that this quarter's run rate is unusually high for the fact that we're spending an inordinate amount of money on setting up the structures and systems to comply with Sarbanes. And that is what Dev is referring to that we definitely expect will burn off. But on the other hand, we have to also invest some structural cost, as he said, to make sure we have a world-class accounting and finance function that can properly respond to all the challenges and opportunities of operating a global company.

So it may be another couple of quarters of high G&A numbers?

Oh, yes. I don't want to imply that you're going to see us go to next quarter and it's going to drop off the shelf. Our expectation is that you will see us continue to steadily work that down for the reasons that I have described.

You slowed down your European development in part to catch your breath and make sure everything gets on track, and now you're going to start ramping it up again. Is that correct?

In selective markets like in the Netherlands, one of the nice things we've got with our Benelux team, they are capable of actively working in our markets in both the Netherlands, in Belgium, and in Germany, where they help assist our German team. So basically what we do is shift their emphasis, depending on where we see obviously the opportunities, and also where we, in reverse, want to give a rest to the growth in a given market.

So if you were to go to the Netherlands today, you would see all of the zones that we've targeted, sites that we have interest in pursuing. We know where we want to go, and as we see the timing to be better, we will come back in and start to add one or two more stores in, say, the Netherlands. But it's not like an immediate return to seven or eight stores a year, like we did to get the Dutch group up and running in the first place.

Do you have a sense in the next 12, 18 months of how many stores you'll be opening?

I think we will go back, as I said, next year to somewhere in the range of 25 openings again. And part of that, candidly, will have -- as you know, we typically have had -- the majority of our openings have tended to come in the latter half of the year, just based on the cycle we've got out. But we're actually going to have a fair number that will open in the first half next year, which are some of these what we call rollovers -- about seven stores that got delayed beyond our expectations. So collectively, we're guessing around 25.

And then you had mentioned some additional capital sources for funding the European program. I missed part of that. Can you just run through that again?

We have, as you know, two development joint ventures in Europe. One is First Shurgard. The other is Second. And on the Second Shurgard, which was very similar to the first one, there was an option that our equity partner had to increase, if you will, the equity injection to the amount that they in fact did exercise in September. So all we were saying is that those two joint ventures collectively have the financing, both debt and equity, capacity in place to bring us up to a total of about 175 stores. We're at 129 now, so.

So that will carry you through probably (multiple speakers).

So that will carry us through, from a forward commitment standpoint, about mid-2006.

And there was no change to the terms of that financing?

No. The debt financing was similar, but we did do it with a different bank. SocGen was the first one and Royal Bank of Scotland was the second one.

I think Jordan had some follow-ups.

I just wanted to follow up on Jon's European questions. And I know there's been a little bit of delay here. I was just curious what that does in terms of stabilization expectations, or at least stabilization periods. You were previously saying, I think, 33 to 36 months it had gone up to as high as. Has that stretched a little longer now?

Again, it's kind like how long is a piece of string. It depends very much on the given market and the given store. When is it coming open? Is it coming open and coming into the busy season or is it going into the fall? As I mentioned before, our new stores in the UK are doing extremely well and are on a pace that is probably down in the 24 month range.

Stores that we brought into the Netherlands over this past year, where we opened a slug of them in '03, have been slower. They have been more in this 30, 36 month kind of rent-up process. It doesn't mean that that won't accelerate or slow down depending on the exact market and store you're talking about, but --

Is stabilized in Europe the same as stabilized here? I'm just looking at this chart in terms of the opened in 2000 and before, everything except for France is below 80 percent occupancy, mid to high 70s, I guess. When would you expect those to roll over to sort of stabilized levels?

Well, what you've got going on is many of those stores in the older group had actually filled up to 85, 90 percent. And we do use the same kind of underwriting in Europe as we do in the U.S. But as we added new stores into markets in Sweden, into the Netherlands, into Belgium, many of those stores slid backwards 10, 15 points in occupancy. So you get a very mixed picture. It is not as if the entire group is moving in lockstep a little at a time. Many of those stores that got first to the post have given back tenants, frankly, that had originally come to them from way outside their natural markets, which is typically what's going to happen when you fill out a city.

We expect a pattern at the end of the day that will be fairly similar to the U.S., where 10 to 20 minute drive time is what is going to be your natural customer boundaries, once awareness is up to expectable -- stabilized levels. But in the meantime, you will have volatility when you start plopping sites in around a given town.

You have been paring assets -- I am just moving over to your dispositions a little bit -- so you have been evaluating the portfolio domestically and have sold either ones that are noncore or underperforming or you just don't want anymore. Have you done the same sort of analysis for Europe and considered selling anything there yet?

I think you always, in the back of your mind, would say that you would. But because we are very -- I am not going to tell you that every site we did in Europe was perfect and we'd do it again. There are some that we wish we hadn't, and it is not because of an awareness issue or cannibalization. We just didn't pick a good site. But still, all that being said, we're very comfortable with the portfolio we've got there, and even some of the worst performers are cured with time. So none of those would fit that mark (ph).

You wouldn't be marketing any of those for sale yet?

No, I wouldn't see that in the foreseeable future.

Lastly, just on the securitization that you got done -- or the bond offering, rather, in Europe. Was there an appraisal associated with that by the lenders?

Basically, year in and year out, our lenders have always used the same appraisals to -- appraisers, appraisal firm to go out and appraise properties for their purposes. And the underwriting group that did the bond offering used the same group, and they appraised the properties. I think the loan-to-value ratio was a little north of 50 percent. And I think the cap rates obviously vary depending on the property, the market. You have everything from downtown London to out in a suburb of Malmo, Sweden. I think the range they had was like 7.5 to 10, something like that.

On the appraisal -- I lost my question. I'll come back to you off-line. I think Jon has one more.

Just one more on the concessions. You said you are providing concessions on only 20 percent of the portfolio today, is that right?

This is concessions, Jonathan, on U.S. customers. And it is the percentage of transactions that we complete, which can vary widely from store to store and market to market. But on average, 20 percent of our transactions this past quarter involved a discount of either 50 percent off first month or 100 percent off first month, or some variation of that. And that has been pretty typical of what we have been seeing these past four or five quarters.

Jay Leupp with RBC Capital Market.

Here with Bret Johnson. Occupancy in Europe, 76 percent in the same-store portfolio, pretty good sized difference from the mid-80s in the U.S. Can you talk a little bit about the reasons for the differences in occupancy and why it's so much lower in Europe on a stabilized basis, when I know you often talk about how undersupplied the European market is?

Well, I think a lot of our comments to that question would be very much along the lines of the question that was just asked. The basics are a combination of things, and that has to do with the speed that we and in some cases others have brought supply into the various submarkets. We have plenty of evidence of stores in virtually every market that we are in that have rented up at a very brisk pace to full occupancy.

So this is not a fundamental business issue. It is more a case of as you grow the business rapidly to get to economies of scale, you will naturally impact some of those earlier stores that had filled up and they will flip backwards; and we have examples again of that in every market that we are in. So really, you have to balance how fast stores are coming into a market versus the general speed of awareness building.

Awareness in the United States today is pushing 100 percent. But I remember back in 1985 when I joined the Company and the awareness levels -- people who had used or even heard of it were a fraction of that. And that is very much the pattern we're going through in Europe today.

In the United States in the same-store results, you had a 7.3 percent drop in marketing costs. Can you talk about the reasons for that and is this at all reflective -- this is actually for the nine months -- is at all reflective of just generally a strengthening U.S. market or are other some other factors at work that you could tell us about?

You have a few mixed pieces going on. Because you will actually see our marketing costs were up for Q3 over the Q3 last year.

Yes, I was looking at the nine months.

A couple things to think about. First of all, because of how we account for Yellow Pages -- books are coming out at all random different times and we take a full charge for those whenever they come out, so that makes marketing naturally a bit lumpy from quarter to quarter and even year-over-year comparison. But in general, our marketing costs have come down because, as we'd mentioned coming into the beginning of the year, we have restructured our approach to marketing. We have changed our sales force. We've cut back on that group. We've gone to a much more targeted, focused marketing strategy that has allowed us to cut those costs.

And also our call center has been able to merge in. We used to have two call centers going. One was for our business sales group separate from the regular group. We have merged those together and experienced a significant cost savings on that at the beginning of the year. So those are some of the bits and pieces that have contributed to that general reduction. But we are still very aggressively applying marketing tactics on a very localized basis, especially to new stores and rent-ups.

Also, can you talk some about your hedging strategy with respect to the European operations and what you've done so far and what you plan to do going forward, and if we're going to be expecting to see a significant foreign exchange gains and losses each quarter in 2005?

I’m going to turn that over to Harrell.

Hi, Jay. All of the debt financings that we have under the terms of the debt agreements, to the extent that we are operating in non-euro countries, then we are required to hedge the currency. With respect to currency issues between the United States and, say, the euro, we do not hedge that. So you would continue to see fluctuations in our P&L, I think, as we go forward with respect to movements in currency between the dollar and the euro.

We have not, as you know, repatriated any earnings or cash flow from Europe, and it is not our expectation that we would do that certainly in the near future. To the extent that as a Company we made the decision to start doing that, then I think you would see us enter into more forward contracts in terms of trying to hedge that. But we view certainly the investment we've made in Europe as permanent (ph) investment.

This relates more to your U.S. portfolio, the last question here. Given the high-quality nature of your U.S. assets and the fact that we're in a very low cap rate environment for these types of properties, do you have any plans to accelerate asset sales of maybe properties that would not be in your most attractive markets? And why or why not would you be doing that in the next, say, four or five quarters?

This is Dave again. I think that, in general, a lot of the power that we have as a Company is in the system and the collection of assets. Unlike a lot of real estate types, storage, your ability to operate in groups of 10, 15, 20 stores in a given market gives you a definite cost advantage over competitors operating individual stores. So we have a high focus on maintaining those groups relatively intact.

Our focus on sale is more on properties that we feel are either in markets that we just don't expect to get to economies of scale and we would rather exit or a property that we just consider fundamentally nonstrategic or flawed from our standpoint that we prefer not to continue to operate. And so we very much are very proud of the portfolio we have got. So I would characterize this at best as selective pruning that we will continue to do and nothing more than that.

Thank you.

Paul Adornato with Maxcor Financial.

In the places where you did not get permits, would you say that there is local resistance growing to the self-storage product or why were those permits denied?

Thankfully, no. It is not a resistance to the use per se. The main thing -- in the U.S., as you are obviously alluding to, there is heavy resistance to storage properties pretty much anywhere you go. That is just the nature of the beast and partly because of what these things used to look like back about 20, 30 years ago. We get very little objection in Europe on a use basis. The problem is more where we want to go, you are typically going -- they didn't even have zoning for self-storage. It was not a contemplated use, just like we had in the U.S. in the old days.

So the bet is more whether or not an individual jurisdiction is willing to allow you to convert what was considered to be the allowed use to what we want to do. And they're very sensitive about employment in Europe, and as you know, in a self-storage property, you are not employing a lot of people, so that can be a basis on which they say they are not willing to make a rezone. So it could be any kind of variety of things. But as I say, in general, we have had very, very good luck with our teams there. It has been a product that has been well accepted.

Okay. And you like to compare Europe to the U.S. of 30 years ago. The U.S. obviously has evolved into a very fractured market, with a lot of mom-and-pop operators. Do you see that happening in Europe or will it be a small number of savvy operators?

Paul, this is Chuck. You never know for sure, but my guess is that when we look back in 30 years, we will see a few very large companies being predominant in most of the markets. What has driven it in the United States is a lot of local entrepreneurs who have access to financing through community banks and savings and loans. And in Europe, there are fewer entrepreneurs as a percentage of the population, and the community bank system and savings and loan system doesn't exist. So I would guess that you're going to see just a lot more concentration of ownership.

The thing I would add to that is I mentioned that the permitting environment we found to be favorable to us over there. You should not mistake that as a low barrier to entry, because you're dealing with a whole different city structure in Europe than typically in the U.S. They are high-density, centric cities, similar to our northeast coast cities. They are harder to penetrate, and as a result, you're looking at doing a lot of high-rise, new construction rebuild that we're very comfortable doing.

But that is not the type of thing a one-start, beginning operator is willing to take on. They are usually forced to go -- in fact, there are very few people that do new build in Europe today. They are forced to go use an existing shed or warehouse at best. So to really get where you need to get, you've got to have good financing behind you and a pretty good infrastructure, and that will definitely, as Chuck said, put more concentration in fewer operators' hands.

Finally, Dev, I apologize if I missed this. But could you break down the 13 cent change in guidance between those three items?

I think we're just going to talk in concept about those three. Don't know that we're going to break it out any further than that. Just keep it in those three elements.

Okay, thank you.

Michael Knott with Green Street Advisors.

Question on the London acquisition. First of all, Dave, I missed when you said the occupancy percentage.

It is in the low 90s, Michael.

How old was that building and who operated it? Was it just a one-off operator?

It is a one-off operator, exactly. And it was a pre-existing building that has been around for quite some time, and it was converted into a storage use. And I apologize -- I don't remember off the top of my head when, but it has been around about ten years, I think, as a storage operation.

Okay, that's fine. And help me -- I was a little surprised with the cap rate. That seemed a little high to me, so I would appreciate any comments you have on that. And then also if you can help me understand why the rents seem to be much higher there than what you're UK portfolio generates.

You say you think the cap rate was too high at 7.5?

I was just surprised. It seemed high to me -- to your credit.

I guess that's how we will describe it, because I certainly promise you I wouldn't sell it for that. I think that part of what you're seeing in the rent is very much what happens anywhere in the U.S. Remember a lot of our stores in London started out around the M-25 and we have slowly worked our way in as we've gotten better access to closer-in markets. But we have nothing this close in, and as I say, there are a couple stores that go way back to the early days where you will see even significantly higher rates than this, but you are talking Chelsea, you are talking Mayfair, places that are ground zero for any kind of rents. And that is why you see this being on the higher end compared to most of the average of our UK portfolio.

That is helpful, thanks. One last question going back to the loan-to-value on the European financing. You give the book value of those assets that are associated with that. Can you give us the undepreciated book value? I am sure there has not been a lot of depreciation, but --

I don't know if I have got that off the top of my head, to be honest, because we have got to separate out the joint venture ones. We could certainly get that off-line for you.

I would appreciate it.

No problem.

That's all, thank you.

Chris Brown (ph) of Banc of America Securities.

Real quick just with that mortgage financing, where does that leave you? I do not know which number you have, but with respect to unencumbered assets or unencumbered NOI?

Hi, Chris. It's Harrell. Well, I guess the way I would -- if you look at the portfolio and the way it has been segregated out, we have substantially all of our domestic assets are unencumbered. So of the -- I want to say 500 and change that we have in the United States, there is probably about 50 of those, 60 of them that are probably encumbered and the balance of those are unencumbered. All of the properties that we have in Europe are encumbered assets.

With the exception of the one property in London.

Do you have an asset value or NOI roughly percent?

I do, Chris. I can get that for you off-line. As just a matter of course it's part of our quarterly compliance certificate that we have to fill out.

That's fine. I'll follow up with that. Next, it looks like -- I mean, obviously, that was a nice transaction doing that mortgage financing in Europe to reduce your floating-rate debt. Where does that leave you domestically? I know you've talked in the past about -- you still have pretty good big draws in your domestic bank line and you have that term loan out?

We have, between our domestic credit facility and a term loan that we have, I want to say it's probably somewhere in the neighborhood of $340 million, $350 million on our facility. I think that clearly the focus has been to get the European financing done and completed. So as you say, we were very, very pleased with certainly the reception that we had and the response from the fixed-income investors over there.

Having said that, I think the focus now will be to move forward in an orderly way and to look at different options that we have in terms of refinancing both the credit facility and the term loan that we have.

That's great, thanks a lot.

(OPERATOR INSTRUCTIONS) A follow-up from Jordan Sadler.

Dave, could you just walk through maybe your expectations in terms of the rate of lease-up for Europe going forward, how we should think about the same stores as well as the new stores? I know it has been decent. There's been some slowdown in some areas, but year-over-year, it looks like up 500 basis points or so on the same-store. Is that a good number to use for next year?

Jordan, let me do this. I have had Bruno on the line and I haven't really given him a chance to respond on anything. Bruno, can you hear me?

Yes, I can hear you.

Maybe if you heard Jordan's question about your view about expectation for lease-up on the portfolio going into next year. Do you have any thoughts you would want to share with us?

Again, it all depends on the markets -- France, UK, Belgium, (indiscernible) on the good pace that we experimented in 2004. Shurgard in Denmark, as you know, they have been progressing nicely since last year, where we had some bad performances, and I expect that next year would show additional growth there. The main question would be about the German and the Netherlands markets, where the (indiscernible) is difficult to get. Probably yes, 5 percent growth for next year seems to be a reasonable number at this stage. We are finalizing budget, but globally looks like it could be a good target for next year.

Okay, and just my follow-up from before on the bond offering was, was there a guarantee provided to the issuer at all, by Shurgard?

No, there was no guarantee provided.

Okay, and what was the average rates on the floater? I think it was 200 over Europe, but what was the average rate during the quarter?

And then we, of course, hedged it, so the way to think about it is an all-in rate of 5.5 percent on the offering, on the complete offering.

That includes offerings costs, hedge, cap.

And the old rate was 300, -- 3 percent, rather?

In the low 4 percent range. So looking at 125 basis points area kind of increase.

Was that factored into your original guidance, that you would refi that?

Yes.

Gentlemen, there are no further questions at this time. Please continue with any concluding comments.

We have no further remarks at this time. Thank you all for joining the call. We appreciate it. Have a good day.

Thank you. Ladies and gentlemen, this concludes the Shurgard Storage Centers' third-quarter earnings release conference call. If you would like to listen to a replay of today's conference call, please dial 303-590-3000 or 1-800-405-2236, followed by the pass code 11014166. (OPERATOR INSTRUCTIONS) Thank you and you may now disconnect.