Public Storage (PSA) 2005 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Shurgard Storage fourth quarter 2005 earnings release conference call. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded, Tuesday, March 21st, 2006.

Now I liked to turn the conference over to Mr. Dev Ghose, Chief Financial Officer. Please go ahead, sir.

Thank you, Operator. Good morning, good afternoon and a very late good evening to those joining us from Europe. Thank you for joining us for Shurgard Storage Centers' fourth quarter 2005 earnings conference call. I'm Dev Ghose, CFO for the Company. With me on the earnings call today are Dave Grant, President and CEO, Harrell Beck, Executive Vice President and Chief Investment Officer, and Steven De Tollenaere, Managing Director for Shurgard Europe.

Before we start, I will read the required forward looking statements. The statement made on this call concerning the beliefs, expectations, intentions, future events, future performance, business prospects, and business strategy 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 31st, 2005 which we filed with the SEC yesterday.

Our comments today will be focused primarily on our operating results for 2005. We will not be discussing any prospective information for 2006, or the recently announced planned merger of Shurgard Storage Centers, Inc. with Public Storage.

So yesterday we reported our results for 2005, for the fourth quarter of 2005 revenues were 125 million, an increase of 11% over the fourth quarter of 2004. For the year ended December 31st, 2005 revenues for the Company totaled 483 million, an increase of 14% over revenues for 2004. This is due primarily to higher rental rates for our domestic stores, higher occupancy in our European stores and growth in a number of stores in our system. We reported net income to common shareholders of 2.5 million, or $0.05 per share for the fourth quarter of 2005, compared to 3.6 million or $0.08 per share for the fourth quarter of 2004. For the year ended December 31st, 2005 the Company reported a net loss to common shareholders of 494,000 or $0.01 per share compared to net income to common shareholders of 33.1 million or $0.72 per share for the year ended December 31st, 2004.

Funds from operations attributable to common shareholders for the fourth quarter of 2005 were 23.9 million, or $0.50 per share, compared to 25.2 million or $0.53 per share in the fourth quarter of 2004. FFO attributable to common shareholders for the year ended December 31st, 2005 was 68.5 million or $1.44 per share compared to 96.3 million or $2.07 per share for 2004. While income from operations for 2005 increased by 26% or 21.8 million, which is $0.47 per share, this increase was negated by interest expense increases of 28.-- 23.8 million or $0.51 per share due to higher borrowing for the purchase of the Fremont interest in Europe and the funding of 2005 acquisition development projects.

Also higher interest rates on our variable rate debt and fixed rate debt costs in Europe. Also due to fluctuations in foreign currency exchange losses -- exchange rates, pardon me, between 2005 and 2004 resulting in a net negative swing of 15.9 million or $0.34 per share due primarily to the requirement to record foreign currency gains and losses before June 30th. And lastly due to costs related to our exploration of strategic alternatives which culminated in the announcement on March 7th, these costs totaled 13.8 million or $0.30 per share.

Our FFO for the quarter was approximately $0.06 below our prior guidance. Note, however, that our guidance was before the costs of strategic alternatives, approximately $0.025 per share. And also before taking into account the incurring of an additional $0.02 for our European structuring costs and also some derivative losses and some minor European tax expense.

With regard to our capital and liquidity situation, as of December 31st, 2005 we had availability of approximately 117 million under our U.S. bank line, and approximately 137 million under our second Shurgard joint venture development bank line, which is allocated to new European development projects.

I am pleased to report that our auditors Price Waterhouse Coopers have just completed their audit of the Company for 2005, and have issued an unqualified audit opinion both for the Company's results for 2005 and on Management's assessment of internal controls over financial reporting. We are extremely pleased with this clean socks opinion. This has been an all consuming effort on the part of the finance and accounting group and our technology group and many others in the Company, and we feel very good about the team that has been assembled and the processes that have been implemented. What was wonderful was while this effort continued, our business focus here in the U.S. and in Europe churned out consistently improving and great operating numbers. Dave Grant, our CEO, will speak more to our operations. So without further due I'd like to turn the call over to Dave.

Thanks, Dev. And good morning and good afternoon to everybody. As Dev mentioned, the purpose of this call is to provide some elaboration on our fourth quarter operating results for Shurgard. We will not be providing guidance for projections for 2006 and although we will also not be discussing or taking questions on the merger -- proposed merger announced last week with Public Storage, I will say that the two Management teams are now fully engaged in the integration analysis and are preparing a proxy statement to be filed with the SEC. I'd also like to take this occasion to specifically thank our employees throughout the U.S. and Europe who have done such an outstanding job this past year on moving our business forward during such distracting times. They have a right to be proud of what they've achieved and I'll go through now with you some of those highlights.

Let me start with our store portfolio. In particular, our same-store portfolio. Of our 633 stores in the global portfolio, 537 or 85% of those are considered stable and are therefore included in our same-store pool analysis. This group of stores, 18% of which are in Europe, generated revenues for the fourth quarter of 2005 of approximately $109 million, which exceeded fourth quarter for 2004 by about 8.6% and NOI after indirect costs improved for that period by about 13.5% to a level of about 63 million.

To be a little more specific, looking at the U.S. portion of that portfolio. Revenue growth for this same-store pool has continued to accelerate throughout this year. The quarter for growth over the prior year was up 7.1% and that was versus an average of 6.4%. These gains as the year has moved on have become more rate driven in nature and less occupancy driven, even though we did have a one point gain in occupancy for the fourth quarter where the pool of stores moved from about 85% to an 86% occupancy. But clearly the rate growth which was up about 5.2% was the main driver and rates for the quarter were at an average of $12.38 per foot.

Although most all of our markets contributed to this growth across the country, our strongest performing markets were in the Southeast and in California. Really only two weaker markets that had marginally declining revenues from the prior year were Detroit and Houston. NOI for the U.S. stores after indirects was up 7.8% for the quarter and for the year was up 5% over the prior year. In general, the revenue trend that we've seen throughout the year and the fourth quarter has continued through the first two months of the year into 2006.

Now, turning over to Europe where we have 96 stores in this same-store pool they also turned in another solid quarter and closing off a very good year. They generated revenues that were 14% higher than the previous year. And this revenue growth was virtually all driven off of occupancy, where at this time last year the occupancy was an average for the quarter of about 74% and for this year we averaged for this group about 83%.

Rates, as you may remember, from prior calls where we had seen a modest decline occurring in exchange for these occupancy gains actually firmed up in the quarter and slowed -- showed a modest improvement and really it's -- that's just an average, because obviously in those markets and in those stores and in those size categories, where we are in the high 80s, low 90% occupancy we're definitely able to make good movement on our rates. The particular average rate that we're now getting in Europe is about $22.19 a share.

Although all countries turn in positive revenue growth over the prior quarter, the Netherlands and Scandinavia in particular turned in the biggest gains followed by France. NOI after indirects was up almost 42% for the quarter and that's thanks to both reductions in direct store operating expense and indirect store operating expense over the prior year. And clearly the restructuring activities and cost containment initiatives that we've announced last summer after acquiring the Fremont interest are paying off and being reflected in these reductions.

This improvement in results also is contributing to our European entity going FFO positive for the first time during the fourth quarter of this past year. And finally revenue for the year was up 12.5% over the prior year and NOI was up for the same-store group 26.5%.

So the U.S. we continue to see solid trends in demand in most of our European markets continuing through the first couple months of 2006. Scandinavia, France and the Netherlands are showing strong demand. Belgium and the UK are what I would call somewhat softer but , but solid. Germany, our newest market, is still in experimental stage for us. We as you know have slowed down our growth there, as we experiment with the different combinations of rate and occupancy strategies, and we will continue to do that until we're comfortable that we're finding the right balance. This is very similar to the experience that we had in Belgium in our early days starting in Brussels.

I'd like to turn over briefly to our real estate investment activities. We continue to be committed to growing and grooming our portfolio. We do continue to have a fairly large percentage of our portfolio dedicated to the new store group, meaning those that are in some form of rent up or recently acquired. This group represents about 19% of the overall costs of our portfolio. It generated only about 4% of our NOI for the fourth quarter.

During the quarter, we opened one store in the US and another eight stores in Europe. And for the year, Shurgard opened 17 stores, three of which were in the U.S. and 14 in Europe. In general, we've been very pleased with the early rent up trends of most all of these stores. In particular, you may remember us talking about declining rent up speeds that we are experiencing in the U.S. back two or three years ago, and we've continued to see positive recovery for our newer stores opened in the last 18 to 24 months, with speeds picking back up to what we would consider more traditional rates.

On the acquisition disposition side we acquired 10 stores in the U.S. during the year and disposed of five others that we felt did not meet our long-term strategic needs. And we will in the U.S. continue to focus efforts and energy on our redevelopment initiative for our older stores where we continue to find early results very encouraging. As you may recall, this is where we have either upgraded, retrofitted, changed non-climate control space to climate control space, various ways of improving the performance of the portfolio.

And finally, subsequent to year end we have announced in January the acquisition of a top quality chain of nine stores in France known as Box Avenue. Most of these stores are in the central Paris region, which gives our already market leading position of 23 stores a solid boost. And this will further help our brand image and our management of overhead costs.

Finally, I'd like to make a comment, financial reporting is not an area I normally would comment about on the calls, but I need to point out that with the filing of this 10K we were able to not only complete our 2000 fox--2005 excuse me, socks internal control assessment on time, we were also able to conclude that we no longer had material weaknesses within the internal control systems. Further, our auditors, PWC, Price Waterhouse Coopers concurred. And this was a concerted effort, as Dev said, by people throughout the organization that were involved in helping us get this process back on the rails. And I -- I believe that beside the obvious benefits of recovering this position, I also think that it will help our integration in the pending merger, just go that much smoother, so I want to congratulate Dev and his entire team. So those are my prepared comments and with that Operator we'd like to turn it back over to you for questions.

Thank you, sir. Ladies and gentlemen at this time we will begin the question and answer session. [OPERATOR INSTRUCTIONS] First question comes from Jon Litt with Citigroup. Please go ahead.

Hi. It's Craig Melcher here with Jon Litt and [John Stuart].

Hi.

How are you doing? My first question is just on Europe. Where -- where do you think rental rates are compared to where you think they'll be on a stabilized level given that you've backed off on the rental rate increases in '05?

Well, I won't try to speculate as to where they're going to go in any given town or any given store, but I think there's a good table in our press release. It's table 11. And it refers in there to the occupancy breakdown, not only the average for the year in 2005 but also where we ended up the year, and it'll give you a pretty good look into where you may expect rate movement sooner rather than later. As we state there, that in Sweden, where we've got 20 stores, they ended the year, and remember that's our downtime of the year at 87% occupancy, so did Denmark. France is at 84.

So those are places where, in general, I would expect to see pricing power be more quickly returning and already is, obviously, returned to them during the year. Sweden's rates had already started to move up in that fourth quarter, couple percentage points. Other markets, like the Netherlands where we are still -- even though we made great strides during the year in the quarter, we still were at about 78% with that group at the end, so you would expect a more modest growth in rates there for a period of time.

And on the acquisition, in the France acquisition in January.

Yes.

What was the Cap rate on that deal?

Well, the Cap rate's a little hard to sort your way through because this combination of stores was -- was part stores that had recently opened. Part that were halfway filled up. And a few that had actually stabilized. So suffice to say that we're very comfortable that in renting these up and incorporating them into our more efficient operating platform that we'll get good solid returns from them. And I can point out that the cost per foot -- the average cost per foot for the chain is almost exactly what our average cost per foot for new construction has been. So we feel it's a good solid investment for us. And our joint venture partner.

Where do you think the ultimate yield on that deal will be relative to fewer developing assets ground up in France?

Well, it's hard to say. We certainly think that it will produce yields that could be easily as competitive as what we get off of our developments, and the interesting thing is the very first investments we did in France back in 1997, were the acquisition of three stores that were in a fairly similar position. One was close to full and two that really just started out, and we'd hoped we would get up into the 11 or so percent range, 10% and today they're cumulatively well north of 20%. And partly some of those central Paris stores in particular have just way outperformed our original projection on rate. So we aren't expecting to hit to a certain number and then just stop, we hope that it will continue beyond the normal expected targets.

And in 2005 your total advertising costs were $18 million. That was mostly the Yellow Pages. How would that break out between Europe and the U.S.?

Europe actually is a significantly higher rate. It's probably about 10 million out of that total.

Okay.

The balance being U.S. That's all marketing.

Right. And the last question I have is just on your, the capital structure. Beyond the line of credit, is there any debt that is prepayable without a penalty?

Dev, I'll look to you on that one.

We have an amount in the bank plan and then the amount in the chase variable rate line which is about 60 -- 60 million.

Well, there's no penalty. Our entire 325 million Euro line or bond, if you will, in -- in Europe is not got any prepayment penalties either.

Thank you.

Thank you. Our next question comes from Ross Nessbaum with Banc of America. Please go ahead.

Hi, Dave. Good morning.

Hi, Ross.

A couple questions for you. First on the European development side. I think you said you've got five under construction now, is that right?

Sounds about right. I don't have it right in front of me but that sounds about right.

Can you talk about what I guess is currently in the permitting process that was targeted to be started in '06?

Well, we've got significantly more than one year's production in the pipeline. But our expectations are -- and we'd said it on a prior call. Our expectation is that we'll open up somewhere a similar number to maybe as high as 17 or 18 stores this year in Europe and obviously the -- the investment in the nine French Box Avenue stores also went to this joint venture. But, so our pipeline is in pretty good shape to deliver at that level this year.

So it doesn't sound like the merger with Public Storage is going to be interrupting the pace of the development activities?

Well, obviously I'm not going to make any comments or speculation about postmerger what the priorities would be. I think everybody realizes we have obligations to our joint venture partners that we fully intend to fulfill. But other than that, I really wouldn't try to speculate.

Are there any put options within that joint venture upon a change in control of -- of the parent entity?

Yes, there are standard in the change of control. Our partner could at their option elect to -- not a put, it basically is a trigger that is our standard part of the agreement that normally would become either partner's option after four years. Either one could raise their hand and ask to have a selling process start that begins a cascading of right of first refusal to Shurgard and then back and forth and ultimately a sale of the properties at market price if it came to that.

And when did that four year process begin-- separate for each of the two joint ventures?

I think it's about April or May of -- oh, gosh. It'll be about April or May of 2007 I think it is. And the next one's about a year behind that.

Okay. And then can you just generally comment -- I don't know if you want to take this one or not, on what you're seeing in terms of new supply growth across Europe right now from your competition? How much -- how much new supply is coming online over the next year or two beyond what you guys are building?

Yes, I -- I'll take part of the question. I mean, I won't try to speculate what's going to come online over the next couple of years. We continued to see new competition to varying degrees in our markets. I think the most competitive market has been and continues to be the UK where the product started first and where you've really got two of the most significant other developers, which is one is Safe Store, which is really the second largest operator now in all of Europe with about 85 stores between the UK and France.

And then you've got [Bea gello], which is another big developer with around 40 or so stores but they're all UK at this time. So -- but I don't -- I frankly feel that the competition from ourself, which we've mentioned on prior calls, of us adding supply into our markets at a certain pace is the thing we tend to spend the most time focusing on. And that certainly has played a part in the recovery of our occupancies and in particular in the Netherlands where we backed off of the pedal. So we're not, per se, seeing increases in competition that have concerned us at this point.

Okay. Thank you. It's been a pleasure working with all of you.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS] Our next question comes from Michael Knott with Green Street Advisors. Please go ahead.

Hi, guys. I was wondering if you can comment on supply trends for the U.S.? New supply, sorry.

I think there's no doubt, Michael, there continues to be new supply coming online but I don't feel we've got any real change in our view from the prior quarter where we feel that the supply in general has been moderate. And that's partly availability of capital but it's candidly the biggest driver or governor in our mind is the lack of availability of great sites.

One of the great things about these older portfolios is they've had -- they originally when they were built, they were built at the edge of a suburb where land was pretty easy and cheap to get. Today though they're completely surrounded and in many cases impossible to really get in and compete with. So it's partly how much is coming online and where it's coming and -- certainly in markets where you are exposed to easier zoning and a lot of land, parts of Texas and certainly parts of Phoenix. That'll always be a bigger concern. But in general, the supply side we feel has stayed pretty much in check as we said in the prior quarter.

And in round numbers, can you comment on what portion of your domestic portfolio might be a candidate for the redevelopment that you mentioned?

Yes, when we did our original assessment of roughly the 450, 500 properties, approximately a third of those properties we identified as being logical targets for redevelopment. That could mean they have unusually large amounts of excess land or that the buildings are occupying lots of land, or clearly didn't have climate control in markets that we thought they could use it, plus some other types of initiatives. Now, that's where you start and obviously feasibility has to play in. Because as you know our approach on redevelopments is we expect that they be underwritten using the same return standards as a new development in the neighborhood of 11, 11.5% cash-on-cash stabilized yield for the incremental costs.

So obviously every one of those opportunities has to go through that filter. We had originally projected and that's our most recent information to give, that we would dedicate about 20 million a year toward those activities. And I don't really have anything new to add beyond that.

Thank you.

[OPERATOR INSTRUCTIONS] And gentlemen at this time I show no further questions.

Well, thank you very much, Operator. Appreciate everybody being on the call. Bye bye.

Thank you. Ladies and gentlemen, this concludes the Shurgard Storage fourth quarter 2005 earnings release conference call. If you'd like to listen to the replay of today's conference, you may dial 303-590-3000 or 1-800-405-2236 and you will need to enter the access code of 11056860 followed by the pound sign. Once again that access code is 11056860 followed by the pound sign. Thank you for participating in today's conference. [OPERATOR INSTRUCTIONS]