Public Storage (PSA) 2006 Q3 法說會逐字稿

Welcome to the Public Storage's third quarter earnings conference call.

Today's call is being recorded and will be available later for replay. The dial in number is 877-519-4471, and enter the pin number of 7941438.

[OPERATOR INSTRUCTIONS]

It is now my pleasure to turn the floor over to Mr. Clem Teng, Vice President of Investor Services. Sir, you may begin.

Good morning and thank you for joining us for our third quarter earnings call.

Here with me today are Ron Havner, CEO, and John Reyes, CFO. We will follow the usual format, followed by a question and answer period. However, to allow for equal participation, we request that you ask only one question when your turn comes and return to the queue for any follow-up questions.

Before we begin, I will provide the forward-looking statements warning. All statements other than statements of historical fact included in this conference call are forward-looking statements. All forward-looking statements speak only as of the date of this conference call and Public Storage undertakes no obligation to update or revise any forward-looking statement whether as a result of new information, future event, or otherwise except as required by law.

These forward-looking statements are subject to a number of risks and uncertainties, many of are beyond Public Storage's control that could cause actual results to differ materially from those set forth in or implied by such forward-looking statements. In addition to the risk and uncertainties of ordinary business operation, the forward-looking statements of Public Storage made on this conference call are also subject to among others the Shurgard merger and the difficulties encountered in integrating Public Storage and Shurgard, the inability to realize or delays in realizing expected results from the merger, any unanticipated operating costs, the risks associated with international operations, and the affect of general local economic and real estate condition.

Additional information about risks and uncertainties that could adversely affect Public Storage's forward-looking statements are described in the Company's reports filed with the Securities and Exchange Commission, including our 2005 annual report on Form 10K, our current reports on Form 8K and our other SEC filings after the 2005 10K. We will also provide certain non-GAAP financial measures. A reconciliation to GAAP of these non-GAAP financial measures is included in our press release which can be found at our website at www.publicstorage.com.

In addition, we've included certain pro forma information in our earnings release. Pro forma information does not purport to represent actual results for the period presented or project results for any future period. As a reminder, our press release and an audio webcast replay of this conference call are available at our website and complete financial information will be available in our third quarter Form 10Q, which will be filed shortly with the Security a nd Exchange Commission.

Now I'll turn it over to John Reyes.

Thank you, Clem.

For the quarter we reported a net loss of $0.04 per common share compared to net income of $0.62 per common share for the same period last year. Our funds from operations were also significantly lower at $0.77 per share for the quarter versus $0.97 for the same period last year. The current quarter operating metrics were negatively impacted by several unique or non-core items that occurred during the quarter.

During the quarter, we incurred merger-related costs totaling $18.1 million which reduced income and FFO by $0.12 per share. As a result of terminating certain development projects, we expensed previously capitalized costs of $9.3 million, reducing income and FFO per share by $0.06

During the quarter, we terminated a contract and incurred termination fees of $2.2 million reducing income and FFO per share by $0.02. We called for redemption of approximately 654 million of preferred securities, and as a result, had EITF D42, allocations that totalled $22 million reducing income and FFO per share by $0.15.

In addition, further affecting our income per common share was the amortization of intangible assets that we acquired in the Shurgard merger. Amortization expense totalled $51 million for the partial quarter since we completed the merger. Reducing income by $0.35 per common share.

The intangible asset acquired which totalled $483 million relates to the value assigned to the in place tenant base within the Shurgard portfolio. Due to the nature of a self-storage tenant, amortization of this intangible will be rapid. Amortization expense for the fourth quarter is expected to be approximately $95 million.

For 2007, the amortization is expected to be approximately $195 million and will be front-end loaded in the first two quarters. Our funds from operations after adjusting for the items just discussed were $1.12 per share for the third quarter compared to $0.98 per share in 2005, representing an increase of $0.14 or 14.3%.

The increase was driven primarily from the continued improvement in our same store operations has contributed $0.07 per share for the quarter, the continued improvement of our newly developed and acquired facilities added $0.04 per share, and the impact from higher interest income, the refinancing of higher rate preferred securities and improved ancillary operations combined to provide the remaining $0.03 per share improvement.

Our same store facilities continued their strong operating performance. Revenues for these stores grew by 6.1% for the quarter, driven primarily by an increase in rental rates. Our occupancy level remained fairly stable on average for the quarter requiring less television advertising and promotional activities than the same quarter of last year.

Operating expenses increased by 5% for the quarter. Our payroll expense was higher by 10% compared to the third quarter of last year. The absence of a workers' compensation reserve adjustment recorded last year and higher wage rates were the cause for the year-over-year increase. Repairs and maintenance costs were also higher by 10%. We expect both of these trends to continue into the fourth quarter. Overall, the net operating income for same stores increased by a solid 6.6%.

As I mentioned earlier during the third quarter, we incurred merger integration costs totaling $18.1 million. Such costs include legal, accounting, employee retention and incentives, along with cost required to wind down the Shurgard corporate office. We expect to incur an additional $15 to $20 million of merger integration cost in the fourth quarter.

Our balance sheet remains strong with one of the most conservative capital structures in the REIT industry, despite increasing debt by approximately 1.3 billion as a result of the Shurgard merger, debt to total capitalization was only 8% at the end of September. Combined debt plus preferred was 25% of total capitalization. During 2006, we raised just over 1.4 billion in capital for the issuance of preferred securities having a blended cost of capital of 7.2%.

The net proceeds from these capital raising activities were used to fund the cash requirements of the Shurgard merger totaling approximately $850 million, primarily to repay Shurgard's bank debt and preferred stock, net proceeds were also used to fund the acquisition of minority interest in two Shurgard joint venture partnerships totaling $62 million, and finally $510 million of the net proceeds were used to redeem our 8% Series R preferred stock in late September.

For the year through September, we also generated $132 million of retained cash compared to $155 million for the same period a year ago. The reduction is due to some of the unique charges impacting our funds from operations that I discussed earlier combined with increased capital expenditures.

In the fourth quarter, we have the opportunity to call for redemption our two series of preferred stock totaling 302 million that have a weighted average coupon of 7.6%. If called TNTFD 42 charges associated with these redemptions will be about $10 million or $0.06 per share. No decision has been made yet to redeem some or all of these securities. Also in early January of 2007, we plan to refinance approximately 400 million of European mortgage notes.

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

Thank you, John.

We had another good quarter and achieved solid operating results. Our management team remains focussed on our business and successfully integrating the Shurgard merger according to our plan. Let me review a few highlights. With respect to Public Storage's same store group of property, a key metric of our progress, revenue per available square foot grew by 6.1% to $11.43 per square foot, primarily due to growth in realized rent.

This is the highest growth in four years. In place rents at the end of September 2006 were higher by 5.1%. During the third quarter, we focussed our media programs on 22 markets versus 30 last year. This resulted in a lower media spin and lower move ins of about 7,000 customers into the Public Storage same store group of property.

Our customer acquisition costs, which consisted of the yellow pages, media, promotional discounts, and our national call center decreased to $145.00 per customer versus $153.00 last year. When applied against the higher rental rate and administrative fee, net customer acquisition costs improved by over $19.00 per customer.

Our Public Storage same store portfolio consists of 1,266 properties. John and I have already reviewed this performance for this quarter which makes up about 55% of our total net rentable square feet. The balance of our portfolio consists of Shurgard's same store properties, the European same store properties and all others primarily recent acquisitions and development property.

These three groups make up about 45% of our portfolio or about 900 properties. At September 30th, their combining occupancies were about 600 basis points lower than our Public Storage same store property. It should be clear that one of our key objectives is to close this occupancy GAAP which should result in this group producing higher overall NOI growth going forward than the Public Storage same store group of property.

In fact, during the fourth quarter, we have significantly expanded our domestic pricing, promotional, and media programming. We currently plan to advertise in 45 markets versus 28 last year and do national cable. Media costs will more than double in the fourth quarter versus last year's spend rate.

We expect that the Public Storage same store rev pass growth will moderate as a result of these activities. We supplied pro forma third quarter operating results for the Shurgard portfolio in our earnings release.

The Shurgard domestic same store revenue growth was about 3.5%. Cost of operations increased 1.3%, resulting in an increase in net operating income for the quarter of 4.9%. For the European stores, same store revenues increased by 12.2%, operating expenses declined by 4.5% resulting in an increase in net operating income of 31%.

The number of properties included in each of these same store groups has been reduced to conform to our definition of same stores. The European same store properties NOI growth of over 30% significantly exceeded our expectation. The same store portfolio's about 90% occupied as of October 31st.

The European team is executing well and selectively adopting various operating strategies we use in the U.S. and incorporating them into their operating model. In addition, we are leveraging our buying power and expertise to reduce costs.

The integration of Shurgard's domestic portfolio is proceeding according to plan. On the night of the merger, we successfully installed Webchamp, Public Storage's realtime property system at all U.S. properties. As a result, the Shurgard properties were quickly integrated into our national call center and website.

Additionally, we were able to monitor and set rates for each property using our centralized pricing process and benefit from the use of our promotional and national media activity. We've installed temporary signage to the domestic Shurgard portfolio.

Through the end of October, we have completed store interior conversion and installed permanent Public Storage exterior signage on about 65% of the property. The remaining 35% is anticipated to be completed by the end of the year. Total costs are expected to be about $20 million, most of which will be capitalized.

Shurgard's corporate staff has been reduced from about 150 to 40 today with most of the remaining staff leaving over the next 6 months. We expect Public Storage's annual G&A will increase in the $3 to $5 million range, most of which will be attributal to the European operation. This is about a $30 million reduction from Shurgard's 2005 level. There will be additional benefits from integrating the field, marketing, and call center operations.

Beginning in January 2007, all field personnel will be under a revised Public Storage compensation and benefit plan. The cost savings from implementing the new plan along with a more efficient staffing mix are expected to be in excess of $5 million.

Marketing costs, exclusive of media will be lower as a result of combining yellow page advertising and terminating Shurgard's marketing program. There'll be approximately $5 million in savings that we'll phase in over the next year. Additionally, media costs will be allocated over more properties resulting in a lower cost per property.

Our existing Glendale call center--in addition to our existing Glendale call center, we have retained Shurgard's Arizona call center. Over time, we will migrate more staff to the Arizona facility as we experience turnover in Glendale.

With lower wage rates and comparable head counts , we should be able to realize in excess of $1 million in annual savings beginning in the first quarter of 2007. There will be other efficiencies in various areas such as property and general liability insurance. Some of them realized and others will phase in over the next year.

With regard to the European business unit, we have accelerated the process begun earlier by the European management team of reducing the cost structure to be consistent with the current size and scope of operations. We have also reduced the level of development activity going forward and begun the process to restructure the joint venture partnerships. This will enhance our financial flexibility, simplify the ownership, and further improve our cost structure.

European real estate and support staff has gone from about 200 people in mid-2005 to just under 150 today, and is expected to decline by another 10% over the next year. This equates to over $5 million in cost savings some of which were previously capitalized.

There are challenges with a merger this large. We were reasonably well prepared for the integration and have successfully completed several steps toward achieving the potential benefits from this transaction. Our operating and executive management teams have worked double duty this year to sustain our ongoing strong performance and prepare us for and to successfully integrate Shurgard's U.S. property. The European team has also adapted well, and is focussed on delivering superior operating results.

With that, operator, let's open it up for questions.

Thank you.

[OPERATOR INSTRUCTIONS]

Your first question comes from Jonathan Litt with Citigroup. Please go ahead.

Hi, it's Craig Melcher here with John. I was just trying to get a better handle on the sequential change in FFO excluding the adjustment. In the third quarter it was $1.12 and the second quarter it was $1.01. Typically in the past few years you've seen an increase 2Q to 3Q, but this is quite a bit greater than normal. Can you explain what's going on there and how much of that, if any, is related to Shurgard?

This is John Reyes. Most of that is, well, I should say all of that is related to Public Storage.

There was no accretion or dilution as a result of the Shurgard merger on the core operations at this point in time.. We only had the portfolio for slightly over a month. So we haven't really had an opportunity to really work with the portfolio.

I'd say the good news is it was not dilutive, but I would not say that any of the accretion was due to Shurgard. So all of it was due to our properties filling up, most of the development acquisition stuff that we have is doing quite nicely in their fill up process and the same store facilities for the third quarter performed much better than they did in the second quarter. So it's all in our core assets as well as our development and acquisition activities.

Okay. And the second question is the G&A that you quoted the $3 to $5 million increase, I think that was less than what--

You need to get back into the queue.

Okay. Thanks.

Thank you your next question is from Christine McElroy with Banc of America Securities.

Hi, I'm here with Ross Nussbaum as well. Sorry if I missed this in your prepared remarks, but can you give us a sense for what drove the 120 bit decline in your quarter and same store occupancy year-over-year, and was it related at all to any specific geographical areas?

Okay. Well let me make -- are you asking specifically, what markets performed well or didn't perform well in the quarter?

I'm just wondering what drove that 120 bit decline? Some of your peers have talked about Florida being weak?

Hi, Christi, this is John. Just to go through the markets real quick.

Our Florida markets are weaker than they had been in the past, but they are some of our stronger markets, and I attribute that to mostly to--we didn't have any hurricanes really going through Florida this year. The past two years, there was some significant hurricanes going through that caused significant demand for self-storage use, and that didn't happen this year.

Notwithstanding that, the year to year growth in Florida markets is still very strong for our portfolio. With respect to the reduction in occupancy in our same store group of properties that you referred to, part of that is due to the fact that when we've integrated the Shurgard portfolio immediately into our call center and our website.

And as a result of that, we have a significant amount of additional vacant space to sell because of the spreads in occupancy that the Shurgard portfolio brought to ours. And so, what that has done is a lot of the demand has shifted to some degree into the Shurgard portfolio. And it's helped to fill up their properties somewhat to the dismay of putting pressure on the occupancies of our same store facilities.

In fact, I think if you look at the numbers, we had vacant space just prior to the merger of about 60--excuse me, about 84 million vacant spaces in our domestic arena and as a result of putting the Shurgard properties into it, we increased the set by about 50%, so taking it up to about 120,000 units that were vacant.

So we've got a lot of vacant space, we're filling it up. It's taking a little bit of steam out of our same store facilities. But we're filling up this Shurgard stuff. And that's--our debt reduction should stabilize in the fourth quarter. As we continue our marketing programs and promotional programs that Ron spoke about on his conference call.

Great, that's helpful, John, thank you.

Thank you. Your next question is from Lou Taylor, Deutsche Bank. Please go ahead.

Thanks, good morning.

Ron can you talk a little bit about your media strategy in terms of why in Q3 you went to 22 markets versus 30 a year ago, and then the plan to ramp to 45 markets. Just explain your strategy a little bit if you could.

Sure, Lou. Two things. During the third quarter, we were substantially full. I mean if you looked at a variety of markets, I think we peaked in July or August at over 92.5% in the same store properties.

So we were essentially sold out of space. So we were--there was no point in media advertising because we were full. That, as John just alluded to as we've moved into the fourth quarter, we have a lot more product to sell. Especially in the non-source store--in the non-same store group of property.

And we're working hard to get that group of properties filled up, close that 600 basis point occupancy gap and drive the overall portfolio occupancy to that comparable to our same store group of properties. And it's quite a large portfolio, if you think about 900 properties in the non-same store group, that's one or two public competitors.

Great. Thank you.

Thank you. Your next question is coming from Mark Differt with Goldman Sachs, please go ahead.

Hey, guys. My question is related to Europe. Looking at the growth rates, you had significant growth in the quarter. And I'm just wondering how much more upside is there to making improvements in the operations and in their--how they drive their revenues over there?

Well, simply I'll say, I hope a lot. The European team has, as I touched on quickly, grasped on to some of our promotional and pricing strategies, they've developed some of their own. And as I touched on their occupancy here at the end of October are just around 90%, which I think is exceptional. So I'm--I think--I hope there's a lot more up side in that group of properties.

So do you think you can see possibly 10-20% more NOI growth?

I'm not going to forecast.

Okay. Thanks.

Thank you, your next question is coming from Michael Knott with Green Street Advisors, please go ahead.

Hi Green Street.

Ron, can you talk a little bit about the synergy numbers you sort of gave in sort of different pieces there? Are those generally better than you expected, or is it about as you expected? Obviously you'd given the G&A synergy numbers before and the proxies, etc., but can you just comment on how that's shaping up relative to your expectations going in?

Well, in terms of the corporate G&A, I would say it's not materially different than what we expected. In terms of the operational cost savings from say the field personnel, the phone center and some of the other costs, they are better than we anticipated.

The yellow pages, we didn't have an idea at the time we negotiated the transaction, we didn't have that level of detailed information. But we kind of ball parked it. So that's not significantly different. I think what's important is that in structuring the transaction we did not price in or count on a lot of synergies going forward.

Thanks.

Thank you. Your next question is coming from Michael Mueller with JP Morgan, please go ahead.

Yes, hi. With respect to the CapEx, the resigning CapEx that you were talking about. Can you give us an idea of how much that was incurred through the end of the third quarter, and I know you said it was predominantly going to be CapEx as opposed to operating expenses, but can you ballpark how much? Is it three quarters or half or all of it?

Well, about 65% of it's been done to date, Mike, in terms of the bills to date my guess is it's 4 or 5 million spent to date. It's just a guess. The bulk of it will hit in the fourth quarter.

Okay. And the bulk of it--pretty much all of it safe to say is going to be below the line capitalized?

Yes.

Okay. Thanks.

Thank you, your next question is coming from Jeff Donnelly with Wachovia Securities. Please go ahead.

Good morning, guys. I recognize it's still early since you've taken control of the Shurgard portfolio, but can you quantify the magnitude of any observations you have in the [mealed] management anomalies between the Shurgard and PSA properties particularly in markets where you overlap specifically where pricing or occupancy of one cluster of assets is meaningfully lower than another?

I'll attempt to answer your question. Not sure I understand it.

But there were a number of markets and even flood markets where we have properties that are literally across the street or even side by side where we were competing against each other. And there are--as we've gone through their portfolio, our portfolio and compared pricing, I'll tell you it's all over the board, it's a mixed bag, and then in some instances our pricing's much higher, and some instances their's is much higher, the Shurgard portfolio is higher, and in many instances we're right on top of each other.

I wouldn't want to give you any impression or draw any conclusions that pricing's going to change--that their pricing was significantly below ours or above ours. I think it is a mixed bag, and overall we're probably about the same.

You have to--I think to amplify that. The pricing strategy--I wouldn't say there was a pricing strategy. Pricing in the Shurgard operation was very decentralized and very localized.

Complete opposite of the way we run it where we have a centralized pricing group and the prices in the promotional discounts are set here centrally by a 5 or 6 person team. Where it's very--very disperse in the Shurgard system.

That's helpful, thank you.

Thank you. You have a follow-up question coming from Christi McElroy with Bank of America Securities.

Hey, it's actually Ross here with Christi.

Ron, can you help me understand, I thought I heard you say that you're planning on reducing development starts in Europe? What's the game plan there considering the same store numbers are so strong and the development yields have been so high? And then the second part of that question is when you say restructuring your JV over there, do you mean that you're just going to buy out your partner's interest?

Well, Ross, we've given--I think we filed an 8K that we've given notice to terminate the joint venture and how that takes place is--it's still an evolving thing, we've had meetings with them, and so that's currently under discussion so I don't want to forecast how that will happen or even if it will happen. But that's currently under discussion and the Shurgard JV partner.

The development at Shurgard over the last couple of years has been driven primarily by the need to develop or build out the two joint ventures that they put in place, and my current estimate is that the second joint venture will be substantially completed by later next year and so we are looking to see how we want to position and capitalize Europe for an ongoing growth plan--kind of post joint venture. We do not want to continue with the joint venture structures because they're rather cumbersome, complex, and expensive to operate.

Thank you. Your next question is coming from Lou Taylor with Deutsche Bank. Please go ahead.

Thanks. Ron, as you look at the combined portfolio now. Do you think it'll change the seasonality of the overall portfolio vis-a-vis your historical seasonality?

No.

I'm sorry, no?

No.

Okay. Thank you.

Thank you.

[OPERATOR INSTRUCTIONS]

Your next question is coming from Michael Knott with Green Street advisors. Please go ahead.

Hey, guys, can you give us a sense as to how Europe's non-same store properties faired? We're used to seeing obviously a bigger same store pool with Shurgard's disclosure. So any comments there would be helpful.

They're filling up, Mike. My understanding is that they're filling up better than historically they have filled up. But properties in the fill-up process, it's a little hard to extrapolate into the future of what exactly will happen and how fast. So there's--they're operating according to plan or a little better than planned, but that's about as far as I'll go.

Thanks.

Next question is a follow-up question from Mark Differt with Goldman Sachs. Please go ahead.

Yes, John I had a question related to your expectations to double your media spend in Q4. Into '07, how do you plan on continuing that spend? Is it until you lease up the Shurgard portfolio to PSA's current level, or is it just going to be something that's consistently going out?

Well, the media spending is--kind of step back and say how do we do it? The media spending is a function of where we need additional volume, and given the 900 properties that you know 5 to 600 basis points full occupancy, it's pretty much everywhere and that's why we're doing national cable.

The media programs are used in conjunction with the pricing of promotion programs. So we will apply them and use them in those markets where it is necessary to close that occupancy gap. As I stated earlier, our objective is, yes to get the combined portfolio up to where we have historically enjoyed our same store occupancies in the 91-92% annual average occupancy.

That is our objective and we will continue with our program until that really is achieved. How many markets though will depend on how fast we're able to drive it in that particular market.

As far as timing goes, how long--how far out do you think that timing would be to actually lease up that portfolio?

It would be great if we got it done by the end of this quarter. But it really depends on a whole bunch of things. So I'm not--I can't tell you what it's going to be in the first quarter or the second quarter of next year.

Okay.

Thank you. And your next question coming from Rick Murray with Raymond James.. Please go ahead.

Hi, Ron. I was curious if you could give us a sense for how your markets in both California and Arizona are performing?

Rick, this is John. The Arizona market has been on fire for a couple years now. Phoenix and Tucson, and they're continuing to perform very well.

California, which for us us mostly San Francisco and Los Angeles which happened to be our two largest markets in the overall portfolio have been performing very well and have been for sometime now. San Francisco's probably performing a little bit better than Los Angeles is currently. But they're both performing like I said very well and hopefully they'll continue to do so.

And, I guess you haven't seen any change in that performance?

Well, San Francisco has shown improvement over, I would say the past year. Los Angeles was very, very strong and is cooling off a little bit. But it's still--we reported a 6% NOI growth, Los Angeles was right there at that average.

San Francisco's also coming off a little easier comps, post dot com, there was major out migration out of the bay area and for San Francisco, a couple years ago I would say was [ellagerate], and so it's got--the market up there is growing and very stable and so we're seeing quite nice positive traction, but it's also coming off easier comps from last year.

Okay. Thank you.

Thank you. Your next question is coming from Michael Mueller with JP Morgan, please go ahead.

Yes, hi. Real quick. In terms of presentation questions, maybe I can squeak two in here. One, just wondering if when you file the 10Q, do you plan on putting the historical, same store results in for Shurgard under your definition?

In our 10Q, Mike? Yes we'll have similar disclosure that we put into the press release.

Okay, so basically what you have in Q3 you'll probably take it back the last couple of quarters?

No, we will not.

Okay. Okay. And just tied into that, is it a good ballpark assumption that the same store polls if you're looking at the Shurgard portfolio is roughly 75% to 80% of all the consolidated?

If you're looking at the NOI, the revenues expense, etc., in the same store polls for domestic and overseas, that it's probably about 75% or 80% of the overall Shurgard portfolio?

Oh, the Shurgard portfolio?

Yes.

When we purchased Shurgard there's 487 domestic properties, 160 European properties. Same store portfolio for the domestic part of Shurgard was--is at 383 properties and then the European same stores is 96. So I apologize, you'll have to do the math.

Okay.

The other thing, Mike, is on the balance of the Shurgard Europe, the 60 stores over there. A number of them are in fill-up and our ownership interest is about 20%.

Okay. Okay. Great. Thanks.

Thank you your next question is coming from Christopher Pike with Merrill Lynch. Please go ahead.

Good morning, Ron. I understand that you're still considering your options in Europe, but is an IPO of some or a majority of those assets a possibility, and if so, what benefits would that provide PSA versus, or compared to an outright sale of some or all of those assets?

That's a lot of forecasting that I'm not prepared to do here.

Thank you. Your next question is coming from Jeff Donnelly with Wachovia Securities. Please go ahead.

Just a follow-up to an earlier comment. The $3 to $5 million increment in G&A that you see in going forward, does that include the $1 million benefit of cost savings in relocation call center operations?

No, we--the call center is in if you go to our press release, we have that down in a separate line item. That's in cost of operation.

Okay.

G&A is the executive teams, the auditors and that kind of stuff.

Okay, thank you.

A question coming from Christine McElroy with Bank of America Securities, please go ahead.

Hey, Ron, Ross Nussbaum again.

A question relating to morale of the Shurgard property level employees, I guess in two parts. One, how would you describe their morale given that the way you operate the business is obviously a little different than Shurgard has in the past, and the second part of that is with respect to your comment on savings in terms of new, I believe you said new compensation or benefit plans.

Are you suggesting that the Shurgard employees are going to be paying a higher percentage of their insurance and benefits going forward? Or is it just there are synergies and just having them join your cheaper plan?

I think that was three questions, for the record, Ross. Let me kind of step back.

Upon the merger we did a significant amount of training with the Shurgard personnel hoping to retain as many as possible. We have experienced, my guess is 15% to 20% turnover in that staff in the last 60 days.

There will be changes to the compensation and benefit plans both for the Public Storage personnel and for the Shurgard personnel, and that's why I said there's a combined Public Storage new compensation plan.

It is much different than the previous Shurgard plan, and what will happen as a result of that, I'm not capable of forecasting. As for the field personnel and their morale and attitude, I've been to a number of properties and it would be what you would expect.

Some people are quickly grasped in this Public Storage system, they like the Webchamp system, they have gravitated to kind of our operating model, and my guess is that they will be great long-term employees here. And there's other people that like the Shurgard model and are not going to want to continue with Public Storage.

How that pans out over time, I really can't say. We'll have a better picture of it come the end of the year, February--our February-March call because we will have rolled out the plan and be able to give you more clarity on exactly how the impact of the new compensation plans.

Can I just follow up to that real quick and ask if--are you suggesting that Shurgard employees are going to be taking a pay cut from what they had before?

I'm not--I think I've said that it's a different plan. There are savings associated with it and we'll give you greater clarity come February-March.

Thank you.

Thank you. You have a follow-up question coming from Michael Knott with Green Street Advisors. Please go ahead.

Hey, guys. Can you just give a little more color on the development termination in the contract issue?

Sure, Mike, we--I think there's about 150 projects that were cancelled resulting in about a $9, $9.5 million charge. Out of that $9.5 million, about $2.5 million related to Public Storage properties primarily repackaging projects where we evaluated what is the go-forward yield on capital.

The complexities associated with getting the zoning, and we said these are not going to work so we wrote those off. The others are most of them relate to Shurgard domestic, just over $4 million and the balance relate to the Shurgard Europe, about $2.5 million. So in total about 150 projects were terminated.

The contract cancellation has to do with our cell towers. And one of the things that we picked up in the merger was 3 or 4 people on the Shurgard side that do that--do the leasing of the cell towers, we had outsourced it with a broker and so far on picking up that team, which is very good, we terminated the contract on the cell towers with the broker and we will be doing that internally going forward.

Okay. Thank you.

Thank you. Your next question is coming from Michael Mueller with JP Morgan, please go ahead.

Hi, last question. John, can you just recap the European debt refinancing, the 400 million? I'm not sure if you said what the timing of that was and just what's the rate on that debt?

Mike, the timing will be in the early part of January. The debt is basically what I would term their CNBS financing that encumbers their wholly owned assets, it's about Euro 325 million. The rate is a variable rate, I think it's about 5%, Shurgard has hedged it to about 4%, roughly. And we plan on refinancing that out as soon as we can, which the earliest date we can do that, as I said is early January.

Okay. Great.

Thank you. Your next question is coming from Jeff Donnelly with Wachovia Securities, please go ahead.

Ron, can you just talk about where self-storage development yields are in Europe today, and then maybe about recent trends, traditional pricing metrics you've observed on self-storage property transactions here in the U.S. and Europe?

Well, I would tell you that development yields from what I've seen, and mind you I've only had three or four months of "experience" on Europe, is not materially different than the U.S.

Something I've said for a long time is that while the European model--the European market has much less competition in it, vis-a-vis the U.S. in terms of self-storage space per capita, what the flip side of that is customer knowledge of the product is much less. And so when you dial it down to exactly how many people understand and know how to use the product, it's a small, small--much smaller group than here in the U.S.

So the challenges are different, but they're still there. So overall, we've not seen--I've not seen materially different yields between the U.S. and Europe. With regard to rate, I'm not sure--is your question is the rental rate growth better in Europe than in the U.S.?

No, I was actually more interested in things like cap rates here observing or price per square foot just what you've seen here in the U.S. and also what you've been seeing in Europe of late?

Well it really depends on the market. If you go to Brussels, it's a-trying to think euros to dollars here, it's a $12 to $15 run rate. Market if you go into downtown Paris, you've got rates comparable to Hawaii or some of the burrows of New York.

You go to Germany, that's somewhere close to Dallas or Houston. So it depends on what markets in Europe you're comparing. London and Paris have the best rental rate in Europe and those rates are comparable to some of the best higher rental--highest rental rate markets here in the U.S.

And other markets and Shurgard's only--we only have properties there in and around Dusseldorf, but those rates are comparable to more of the Midwest or more suburban markets. So you see averages in the press release, but the disparity is just as great in Europe as it is here in the U.S.

I'm sorry, maybe I wasn't clear. I was actually asking about cap rates you were seeing on property transactions.

Oh, well, interest rates in Europe on the continent are a little lower than they are here in the U.S. So the cap rates are a little more aggressive, but there's not a lot of product being bought and sold in Europe as there is in U.S. The U.S. is a far more liquid market. So I would say the market data here in the U.S. is a little more reliable than Europe.

Has there been much change here domestically?

Okay, we're on to our third question. So you've got to get back into the queue.

Thank you, your final question comes from Lou Taylor with Deutsche Bank. Please go ahead.

Yes, thanks. Can you just, John, expand a little on the European refinancing, do you think you'll deal with fixed rate, floating rate, dollars or euros just expand on that a little bit if you could?

I'll tell you, Lou, we're still exploring all that. The alternatives of financing that piece of paper out, we haven't yet settled on what avenue we're going to march down with respect to refinancing. All I can tell you is we definitely are going to refinance it at that point in time.

Okay. Thank you.

Thank you. There are no further questions at this time. I would like to turn the floor over to Mr. Clem Teng for any additional or closing remarks.

I want to thank everybody for attending our call this morning. We'll see many of you next week, at the NAREIT conference in San Francisco. If not we'll talk to you next quarter. Thanks.

Thank you, and this does conclude today's teleconference. Today's call will be available later for replay. The dial in number is 877-519-4471 and enter the pin number of 7941438. Please disconnect your lines at this time and have a wonderful day.