Public Storage (PSA) 2006 Q4 法說會逐字稿

Good day. My name is [Jackie], and I will be your conference operator today. At this time I would like to welcome everyone to the Public Storage fourth quarter and year end 2006 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. [OPERATORS INSTRUCTIONS] Thank you.

It is now my pleasure to turn the floor over to your host, Clem Teng, Vice President of Investor Relations. Sir, you may begin your conference.

Good morning and thank you for joining us for our fourth quarter earnings call. Here with me today are Ron Havner, CEO, John Reyes, CFO, and John Graul, President of Self-Storage Operations. 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 up and then return to the queue for any follow-up questions. Before we begin I will provide the forward-looking statement warnings.

All statements other than statements of historical facts 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 events or otherwise such as required by law. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond Public Storage's control that could cause actual results to differ materially from those set forth in or applied by such forward-looking statements.

In addition to the risks and uncertainties of ordinary business operations the forward-looking statements of Public Storage made on this conference call are also subject to, among others, 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 risk associated with international operations and the effect of general and local economic and real estate conditions. 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 2006 annual report on form 10-K our current reports on 8-K and our other SEC filings after the 2006 10-K, which will be filed shortly. We will also provide certain non-GAAP financial measures. The reconciliation to GAAP or these non-GAAP financial measures is included in our press release which can be found at our web site at www.Public Storage.com. As a reminder our press release and audio web cast replay of this conference call are available at our web site.

Now I'll turn it over to John Reyes.

Thank you, Clem. For the quarter we reported a net loss of $0.48 per common share as compared to net income of $0.51 per common share for the same period last year. Our funds from operations were also lower at $0.89 per share for the quarter versus $0.96 per share for the same period last year.

The current quarter operating results were negatively impacted by several items. We incurred merger costs of 24 million reducing income and FFO by $0.14 per share, we terminated development projects in Europe and wrote off costs totaling approximately $1 million, reducing income and FFO by $0.01 per share. We called for redemption two series of preferred securities that resulted in EITF D-42 allocations of $10 million, reducing income and FFO by $0.06 per share. We recognized a foreign exchange and derivative gain of approximately 4 million, increasing income and FFO by $0.03 per share and we had an impairment charge that decreased income and FFO by $0.01 per share.

In addition further affecting our income per common share but not our FFO per share was the amortization of intangible assets that we acquired in the Shurgard merger. Amortization expense totaled 125 million for the quarter reducing income by $0.74 per common share. The intangible asset acquired of 584 million relates to the value assigned to the in-place tenant base within the Shurgard portfolio. Due to the nature of the self-storage tenant amortization of this intangible will be rapid. For the last half of 2006 we recorded 176 million of amortization expense and expect to record an additional 243 million in 2007, which will be front end loaded in the first two quarters.

Our funds from operations, after adjusting to these items just discussed, were $1.08 per share as compared to $1.02 per share in 2005, representing an increase of $0.06 or 5.9%. This increase was driven primarily from the continued improvement of our same store operations which contributed $0.03 per share, and the continued improvement of our newly developed and acquired facilities that added $0.02 per share. Revenue growth in our same store facilities moderated during the fourth quarter. Same store revenues grew by 3.4% compared to 6.1% in the third quarter of 2006. This moderation was due to reductions in occupancy levels as well as rental rates.

We started the fourth quarter 110 basis points behind in occupancy as compared to last year. Through the quarter, we reduced that gap to 70 basis points. This was achieved primarily through more aggressive pricing and increased marketing. Our operating expenses increased by 4.3% for the quarter primarily due to increased marketing. Same store advertising and promotion expenses were higher by$1.4 million or 24%, as a result of significantly expanded media and promotional programs. We expect that this trend will continue into the first half of 2007.

During the fourth quarter we incurred merger costs of approximately 24 million. This was higher than the 15 to 20 million we had estimated last quarter due to higher severance and incentive expenses. In 2007 we expect these costs will be less than 5 million though June of 2007.

With respect to our balance sheet, in the fourth quarter we called for redemption two series of our preferred stock totaling 302 million. These redemptions took place in mid January and mid February of 2007.

In early January 2007 we prepaid debt totaling 433 million. This debt was secured by substantially all of our wholly owned assets in Europe. To fund this repayment of these European notes, we used a bridge loan of 300 million which was fully drawn at year end.

On January 9, 2007 we issued 500 million of preferred securities at an annual rate of 6 5/8%. The net proceeds of this offering were used to fund the redemption of the two series of preferred securities along with prepaying the bridge loan. The remaining debt in Europe of approximately 290 million relates solely to the joint venture properties in which we have a 20% equity interest, but is consolidated for financial reporting purposes. In January we submitted to arbitration our notice to terminate the joint ventures after being unable to reach a satisfactory resolution with our joint venture partner. We are currently evaluating various financing opportunities in Europe to position Europe for long-term growth, including exploring the possibility of an initial public offering.

With that I will now turn it over to Ron.

Thank you, John. Our management team continues to successfully execute our integration plans for the Shurgard merger. In both Europe and the U.S. we have affected significant cost reductions and are now beginning to drive revenue growth. We have also restored our financial flexibility, having refinanced or retired approximately $1.1 billion of debt since the merger, and refinanced another $1.1 billion of high coupon preferred in the past year. Let me review our progress and opportunities with respect to our domestic and European operations.

With respect to the domestic operations, we had four objectives. First, combine our corporate offices and reduce G&A costs. Shurgard's corporate staff has been reduced from about 150 at the time of the merger to about 20 today. The remaining corporate staff is expected to terminate by April 30th. We expect to add less than 10 people to the Public Storage corporate staff as a result of the merger. Overall the combined company's G&A should be about $5 million higher than Public Storage's historical run rate, resulting in well over $25 million in annual savings.

Second, we wanted to migrate the Shurgard's properties on to our operating platforms and rebrand them. Almost immediately after consummating the merger in late August, the Shurgard's properties were converted onto our centralized operating system [webcam] . Public Storage signage has been installed at all but a handful of Shurgard's properties. We will continue to improve Public Storage branding at these sites in 2007.

The third objective was to reduce operating costs and eliminate redundancy. We hired about 1,100 Shurgard field employees at the close of the merger in August. But over the last five months, approximately 600 have decided to leave the Company. We were prepared for this turnover and quickly accelerated our recruiting efforts, adding about 1,000 property personnel. New employees were hired at the lower 2007 targeted wage rates. We also implemented a single compensation and benefit plan for all field personnel effective January 1. Annual cost savings from this new plan, along with more efficient staffing mix, are expected to be in excess of $5 million.

We continue to expect a $5 million reduction in our marketing costs, exclusive of median internet advertising as a result of combining Yellow Page advertising and terminating Shurgard's marketing program. We have begun shifting call center employees from our Glendale to our Arizona facility. Annual savings should be approximately $1 million as a result of lower wage rates.

The fourth objective is to drive Shurgard's property occupancies to the 91 to 92% level, historically experienced by Public Storage's same store portfolio. Our marketing and pricing programs have begun to have a positive effect of improving the occupancy of Shurgard's same store properties. At the close of the merger in August, occupancy in this property grew about 85.5% or 200 basis points behind the prior year. We are now at 86.4%, or about 300 basis points ahead of the prior year, with higher in-place rents.

Looking at the domestic operations as a whole, now that they are combined, we have a huge opportunity. Our domestic business generated about $1.5 billion in annualized revenues with an average occupancy of about 87% during the fourth quarter. This is well below our historical levels of 91 to 92% occupancy for the Public Storage same store group of properties.

However, revenue growth will take longer to see than expense reductions. Generally, when we are driving customer volume we are aggressive with pricing, promotional discounts and marketing. It has been our experience that it is often difficult to see the benefits of these programs in the short-term, as promotional discounts and marketing expense adversely affect earnings in the month the customer moves in.

In addition, about 30% of our customers move in and move out within 90 days. So it takes some time to achieve a stabilized customer base. We started this process in September, and have continued into the first quarter. My best guess is that it will take us most of the rental season to achieve a stabilized customer base in the U.S.

Now moving to our European operations. Our objectives here were to bring the cost structure in line with the current size of the operating platform, and to share marketing and pricing strategies used in our domestic business to drive occupancy and revenue growth. The European support staff, which consists of all operations management and support functions, real estate and corporate staff, has been reduced from about 185 at the beginning of 2006 to about 135 today. We anticipate it will decline by another 15 or so people over the balance of 2007.

Property level payroll will be lower as a result of eliminating or modifying certain property level incentive plans. Marketing costs are expected to be lower as a result of centralization of all programs and the elimination of ineffective projects. In addition, media purchasing has been centralized to the same vendor that we use for our domestic programs. We have also leveraged our combined buying power and expertise to reduce costs in such areas as property and casualty insurance. We expect a total annual savings from all of these programs will be in the 4 to $6 million range for the European same store properties.

With respect to revenues, European same store property occupancies were 89% during the fourth quarter, the highest in their history. Going into 2007, occupancies are 7% higher than last year, with just over 4% higher in-place rents. Europe has achieved this with modest promotional discounts and better marketing of pricing programs. These programs are also benefiting the development properties which are in [fill-up]. Overall, Europe is positioned for solid growth in 2007 with improved financial flexibility.

In summary, 2006 was a year of tremendous challenges and achievements, as a result we are very excited about the enhanced opportunities to generate meaningful growth to shareholder value in 2007.

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

Thank you. [OPERATOR INSTRUCTIONS] Your first question is from Jonathan Litt of Citigroup.

Hi. I'ts Craig Melcher here with John. Could you talk a little about the potential IPO process and where you are in that? Maybe the type of structure you will look at and the interest that you look to maintain in the venture?

Craig, this is Ron. We are still in the exploratory stages of how to best position Europe for long-term sustainable growth. The opportunity in Europe, as we've said before, is more of a development opportunity rather than an acquisition opportunity. And we think Europe should be funded principally with European capital. Our favorite structure, which we know well and has worked well for us, is the kind of structure that we have with respect to PS Business Parks. Where it is a public vehicle and we have a significant equity interest. But that is our favorite. It is not necessarily what we will end up with, but we are very familiar with that structure and like it a lot.

It seems as though there is a lot of upside still from the nonstabilized assets in Europe. Would you wait for that to get more stabilized? It seems like if you do something right now whether it is public or some sort of a private financing arrangement that you would potentially be leaving something on the table.

John, you're right. We probably might be a little more if we got the assets stabilized. But keep in mind the development properties or [inaudible] properties are in a joint venture and we only have a 20% equity interest in that. So relative to the aggregate value of the European portfolio it is a smaller piece. It gets consolidated in our financial statements for GAAP accounting purposes but in terms of our real equity interest, it's about -- well, we only own about 20% of it.

Thank you.

Thank you. Your next question is Christine McElroy of Banc Of America Securities.

Good morning, I'm here with Russ Nussbaum as well. With regard to your $175 million redevelopment pipeline over the next two years, can you comment on average forecasted yields on this project? And to review the 100 million a year development spending as a good future pace for Public Storage in the U.S.? Or is some of this a pipe -- some of the pipeline a backlog of opportunities within the Shurgard portfolio?

Well, Christine, a lot of questions there. Let me try to give you a big picture. The redevelopment, development pipeline really consists of opportunities where we go into and look at certain markets, certain properties within those markets and see what we can do to enhance the competitiveness of the particular property, and/or where we have extra land or where we have space configure ration that can be changed or r we can redensify the property. We have in the system today 2,000 properties, with probably an average age of 18 to 20 years. So you can see that this is an ongoing almost life long project, as I remind the real estate guys and the construction guys that are undertaking this. If you do 30 to 40 a year, it will take you 20 years to get through and it will be time to start all over again.

We don't have an annual target amount in terms of what we're going to spend on that, whether it's 100 or $200 million, it is really what is the opportunity, and then you run into zoning and configuration problems and all that. In terms of targeted yield, we don't have per se a targeted yield. In some cases the repackaging of the property, adding a new office, doesn't necessarily do anything to the both yield on the capital. But enhances the competitive position of the property. In a number of projects where we are building out what used to be parking spaces, we can achieve yields of 30 to 40% on the capital. But those are few and far between. On average, I would give you a range of somewhere between 7 and 10%.

Is a portion of that renovation or is it all redevelopment?

It's both.

What would you say is the renovation portion?

Varies by project.

Okay. Thank you.

Thank you. Your next question is from Christopher Pike of Merrill Lynch.

Good morning. Ron, I guess if you tick back through the supplemental going back four or five quarters and you look at the trends in both same store revenue growth, REVPAF and revenue per occupied square foot, you can start to glean some type of decrescendo in those trends, especially if you look sequentially Q4 of last year to Q1 of last year. Are you guys forecasting continued moderation, if you will, albeit's still, relatively robust growth going forward in terms of these trends? If we could have some color there?

Well, I'm not, when you go back four or five quarters, I'm not sure what you are looking at or trying to anticipate. I think what I -- I said in the script and kind of the big picture is, if you look at the domestic operations, combined, we are at a run rate of about 1.5 billion in rental revenues. And that portfolio, the entire domestic portfolio, ran about 87% occupancy in the fourth quarter. So if you compare that to the historical same store occupancies that we have experienced in the Public Storage portfolio, between 91 and 92%, you can see that there is a potential uplift in occupancies between 87 and whether you want to use 90, 91, 92%. In addition, once you achieve that level, or from our perspective as we achieve that, we also regain or enhance our pricing power. And promotional discounts tend to moderate.

However, the point or the process of getting from 87 to 91% or 92, whatever you want to pick, does not happen overnight. Because the month the customer moves in, you have both higher marketing expenses and with the $1 special on the rent, you don't have any rental revenue. So that's -- that's kind of what I'm outlining for you in terms of that's the opportunity we see on the revenue side here in the U.S.

So from a fundamental perspective in your words, we haven't really hit a peak in your ability to either A, raise occupancy, or push rates?

I'm really focused on the opportunity that we have here. I'm not commenting on the macroeconomic conditions of the self storage industry. Having said that, I think if you look at some of the competitors that have reported and the industry information that we see, as a business it's fundamentally quite sound.

Thank you.

Thank you. Your next question is from David Toti of Lehman Brothers.

Good morning. Just a quick question on operating costs. The utility expenses and insurance expenses were both -- had pretty high growth. Is that something you expected to see continued forward going into 07?

Well, utility expenses have, for the last year or two, have been subject to the vagaries of the oil market and oil prices have moderated, and we are paying a little more attention here on our side to utility costs. So my hope is that they moderate a little bit. But again, they are subject to the vagaries of the oil market. With respect to property and casualty insurance, as we touched on last year, we had a significant increase in that primarily due to the hurricanes of the previous two years. And the insurance companies reflected that in the '06 premiums. Our property and casualty policies are coming up for renewal here at the end of March, renews April 1. And from what we've been told, premium growth will be modest if not flat this year. But again, that will be subject to the renewal on April 1.

Okay. Thank you.

Thank you. Your next question is from Jonathan Habermann of Goldman Sachs.

Good morning. Here with Mark Biffert as well. Can you just sort of comment on the sort of weakened housing market if that is having any impact at all on your pricing? And how you look in terms of rent growth this year versus what you had, say, last year?

Good morning, Jonathan, this is John. It is tough for us to tell how that has impacted us. We have experienced some markets, some higher demand than normal and in others the demand is down. I'll give you some for examples. In Florida demand is down, I believe primarily because last year, especially 2005 and 2004 demand was somewhat enhanced because of hurricane activities. In 2006 we didn't have those activities, so the demand in the Florida markets has trended downward, as has our occupancies and our rental growth. Is that because of housing or because of the hurricane? I think it is mostly because of the hurricane. Throughout the country --

How about California?

California, the San Francisco market has been relative stable and strong here in southern California we have been probably slightly under pressure. We have been working on that by increased marketing, discounting, as well as pricing promotions to still maintain occupancy levels here in Los Angeles. But we have had to give away a little more promotions and reducing pricing from the levels that we were enjoying in prior years. But I think what we are seeing is more of a stabilization now than we had in the past quarter.

So again, we don't know is it housing or is it other things? Because here, in even Los Angeles, most of our properties are located in very highly populated segments of Los Angeles. We are not out on the outskirts where all the housing is actually being built. So I doubt if those people moving out to Riverside or out in the [inaudible] Valley are using our storage facilities in the greater Los Angeles area. So again, it is difficult for us to tell what the cause and the effect is.

Thanks.

Thank you. Your next question is from Jeff Donnelly of Wachovia Securities.

Good morning. Question I guess for Ron and John. Can you tell me what your dividend payout was in 2006 as a percentage of your taxable net income? And Ron what your expectation is as it relates to the magnitude and timing of dividend increases in '07?

What was the percentage of taxable income?

We are distributing our taxable income.

Yes.

Our policy is to distribute the minimum amount required to maintain our REIT status. So, effectively we are distributing our taxable income for the most part. And with respect to 2007?

Yes.

We are going to redistribute our taxable income.

Thanks, guys.

Thank you. Your next question is from Ross Nussbaum of Banc Of America Securities.

Hi, guys. Good morning. Ron, I just popped open my old Shurgard model and was just thinking about your comments on the potential IPO in Europe. From at least six months ago we had a value adescribed to Shurgard Europe north of 2 billion of gross asset value. I'm just thinking out loud. If you were to sell a reasonable stake in that entity to the public, we could be talking about $1 billion plus of potential proceeds back to PSA. What do you do with all that money?

You are way down the road, here, Ross. And I'm not familiar with your model. So, I really don't want to go down that route in terms of kind of forecasting how much money we could potentially get or how our ownership will be structured.

Can we just hypothetically talk about assuming that you do get some capital back from whatever you are thinking about doing over there, given that you don't have any debt to repay, what do you -- what do you think you do with that money? Do you give it back to shareholders? Do you keep it and reinvest it?

We will do things, as hopefully I think we have demonstrated that we've done, that continues to drive shareholder value.

Okay.

Thank you. Your next question is from Michael Knott of Green Street Advisors.

Morning, guys. My question relates to the joint venture partners in Europe. How critical is -- is your pursuit of trying to buyout their stakes relative to what you plan to do with [Europe] IPO et cetera? Are they not on board with that process? Is that sort of the way we can put the puzzle together?

You know, Michael, I don't want to -- to me they are two different issues. There -- this arbitration process that we are going through right now with them will not impact our ability to find a capital solution for Europe. Maybe that answers your question. The -- we hope to come to a satisfactory conclusion with the joint venture partner without having to go all the way through the arbitration process. But if that's what we have to do, that's what we're going to do. But it doesn't impact our ability to find a long-term capital solution for Europe.

Thanks.

Thank you. Your next question is from Michael Mueller of JPMorgan.

Hi. Just a quick question on G&A. Even when you strip out the merger integration charges in the quarter, the $24 million, it looks like the balance of the G&A was about $10 million. And that's notedly above the run rate you were talking about. Just wondering if you can give us more insight in terms of what's in there, it looks like there may have been $0.01 or so due to some write-off. But, can you kind of walk us through that?

Mike, let me try to walk you through for the year, the whole year. Because I think it's easier to do that. We reported G&A for the full fiscal year this year of 84 million versus last year of 21 million. So we were up 63 million. Of that 63, 44 million was merger costs. 7million was development write-offs that we reported in the third quarter. 2million was cancelled contracts that we reported in the third quarter, and then 10 million of that was G&A that game over from Europe. If you factor all that out we are basically flat on G&A year over year. Getting to Ron's comment earlier, we kind of think that the G&A in Europe will probably add another 5 million -- 5 to $6 million of G&A on to our run rate, which again, after you strip out all of these kind of miscellaneous things that are nonrecurring, that will put us somewhere in the neighborhood of about 26, 27 million which is about $5 million from what had before [inaudible].

Okay. So it normalizes in Q1 again?

Well, we still have, we mentioned we still have some additional merger-related costs that will be coming through. The bulk of which will be coming through in probably [due time]. In total we think that the merger costs for the whole fiscal 2007 will be about something less than 5 million.

Okay. Thanks.

Thank you. [OPERATOR INSTRUCTIONS] You next question is from Paul Adornato of BMO Capital Market.

Hi. I was wondering if you could tell us what your best and worst case scenario is for resolving the European arbitration both in terms of timing and outcome?

I really can't, Paul.

Okay. Thank you.

Thank you. Your next question David Toti of Lehman Brothers.

Hi. Just a quick question, relative to your increased efforts on advertising and promotion and trying to boost occupancy, where are your highest expectations in terms of top-line growth on a regional basis? And which markets, conversely, would you consider to be relatively weak going forward?

Well, I think we're going to file the 10-K here in a day or two, which will give you a breakdown by market. And I would direct you to those markets that have the lowest occupancy that pose the greatest opportunity in terms of top-line revenue growth.

Thank you.

Thank you. Your next question from Jonathan Habermann of Goldman Sachs.

Hey guys. Mark Biffert here. Quick on the redemption and preferred and debt redemption charges. Do you know what those will be for the first half of '07? Or for the full year of '07?

Well, the two redemption that we did in one in January and one in February, those charges were reported in the fourth quarter of '06. So those are already behind us and will not show up in '07. We do have a series of preferred that is redeemable in September of this year. And I think it's about [175ish] million. Just a ballpark take 3% of that and that is roughly what the EITF charge would be. With respect to the debt, most of the debt that we have been retiring is a comparable rate debt, so we are able to get out of that debt without seeing -- make whole payments so there really isn't anything there to discuss.

Okay. Thanks.

Thank you. Your next question is from Michael Knott of Green Street Advisors.

Question on margins. Now that Europe has closer to what we think of as stabilized occupancy levels the margin there in the fourth quarter was about 58%, which is about 10 percentage points below your stabilized U.S. portfolio. Obviously, it is a smaller pool there so costs are spread over fewer stores. But what's your expectation as to how high that margin can go relative to high 60s in the U.S.?

Well, Michael, I'd -- you're kind of starting with the kind of the -- I'm looking here at the press release. The Q4 run rate. I think the margins in there are about 58%, 57.9%. If you go back through the comments, my comments on Europe, we have some -- we anticipate some additional cost savings into the same store pool going into 2007, combined with the fact that Europe, on the same store pool, is starting out 2007 at 89.1% occupancy versus 82.2 last year. With about 4% higher rental rates in place. So you can exstrapulate, in terms of what you anticipate top-line growth will be, and then put some of those cost savings that I touched on, onto the cost side, and you'll probably get a different set of margins and a different set of gaps between the U.S. and Europe.

Thanks.

Thank you. Your next question from David Cohen of Morgan Stanley.

Good morning. Ron, you spoke about 600 of the Shurgard facility managers leaving, which you said didn't surprise you. But seems surprisingly high out of 1,100, especially given your comments on the prior quarters that most of them had -- that there was not an unusual amount of people leaving. Can you just talk about, I mean, have they all left already? How many have you -- have you already replaced all of them? And any of the other operational risks that you see as a result of that?

I'll answer it two ways in terms of what we've done. And then we've got we are fortunate to have John Graul here. So I'll let him touch on kind of the operational aspects. I think in the comments I said we started out with about 1,100 people and we have back-filled about 1,000. So in terms of staffing we have pretty much replaced those that have departed. But in terms of kind where we stand on staffing and what's going on let me turn it over to John, here.

We have -- good morning. We currently have about 4300 property management level people. Of those, we have less than 100 openings now for those positions. As Ron mentioned in the prepared remarks, the recruiting effort has been very effective. We did lose a fair number of people, 600. We were able to improve the fill time, however, with the recruiters who are now on board and we have really stabilized the -- the amount of openings we have to under 100 on a weekly basis. So it is not a significant impact right now to our operations. And with the recruiters in place, we have been able to maintain that and not really affect our operations from just a pure opening standpoint. It did affect us, of course, in coming to bring people in and train them and do all those things. Which does have an impact on operations in the short-term. But we really believe that the worst of that is now behind us, and we look forward to the rental season of being having some very good stability and trained people at the properties.

How long did it take to train a new person?

On average it is about 30 days at a property level. And for a district manager, we spend about three months in the training process. So for the property level about 30 days.

Okay. Thank you.

Thank you. Your next question is from Paul Puryear of Raymond James.

Thanks. Good morning, guys. Ron, is there any chance, as you have converted these properties to the Public Storage format, and changed the signage in these markets, that you've actually diluted your core performance -- core performance at least initially here?

Not sure, Paul, I understand in terms of, by putting a Public Storage sign on a Shurgard property, how that would dilute. In the broad broader sense, there is a number of Shurgard properties in the same sub-markets, I can think of half a dozen that are right across the street from our property. So when, in terms of driving customer volume, those customers that are calling in those sub-markets, calling into the phone room or looking at the internet, they've got two Public Storage properties to shop from instead of one. So in that case, you've seen some of the, quote, canabilization, or diversion of customers into the Shurgard portfolio, visa vi, the Public Storage property.

You don't -- you don't see that as significant?

Well I mean, you see a little bit of it in the Public Storage same store property growth moderating in Q4 to about 3.5% top line versus 5 plus in Q3.

Okay. Thank you.

Thank you. Your next question is from Michael Knott of Green Street Advisors.

Hey, guys. I was just wondering if you can just comment on the development picture, obviously, the expansions and conversions are attractive capital allocation opportunities. But can you just talk about why you have chosen to not pursue any ground-up development? And also remind us of your land bank and how much you could build if you chose to do so?

Well, a couple of things. Michael, the big picture, in terms of development, we had a somewhat robust development pipeline in Public Storage for several years, which tended to moderate down through the end of 2005, mid 2006. With the Shurgard merger, we have directed a lot of our development personnel on to focusing on asset management, rebranding, repackaging the properties, doing the office things. There is about 25, 26 properties that are virtually contiguous, where we've got them looking at how we can put those properties together and make them one. We have kind of taken the real estate development team and redirected them in the short run over to asset management.

Having said that, I think there's still 5 or 7 properties in the pipeline being developed, most of which are related to -- that we took over from Shurgard. Over in Europe we have 8 to 10 properties that I think will come on stream this year. 100 million plus in development, principally in the joint -- actually, almost all of it in the joint ventures, which will fill out those joint venture development commitments.

In terms of a land bank here at Public Storage it is de minimus, and it's really de minimus relative to our [site]. And again, we -- you go back in time we took the development built it out, we've taken the pick up and delivery facilities converted those to self-storage and now the development team is focused on aggressive asset management. The other thing is a back drop to all development is steel and cement and those kind of prices have been going through the roof, along with stiff competition from retailers and apartment guys for land. So it's been very, very hard for ground-up development [in pencil].

Just to follow-up quickly if I may, what do you think replacement cost is for sort of a current multi-story type of build, obviously, land will differ but maybe just the hard costs?

The typical in-fill property that we -- if you want to go as a typical in-fill property, you can go anywhere between100 to 150 a foot. The property we constructed in Hawaii, that opened mid last year, had land costs of $150 a foot and the building costs, you get into the 6-story, 1,400-unit building is about 120 to 130 a foot [inaudible] of all in. If you go into the burroughs of New York you are not dealing with a scrape, you basically have to take an existing building and redo it, and easily going to be north of $100 a foot to do that. And that's contrast with, if you are out in suburbia, and doing single-story products, you can probably get away with somewhere between 50 and $60 a foot.

Thanks.

Thank you. Your next question is from Christopher Pike of Merrill Lynch.

I want to just back track in terms of your comments earlier to make sure I've got all the numbers here. From a G&A perspective it is a $5 million run rate delta from current -- from historical levels which you are assuming is a $25 million savings year over year, right? And then I think you also talked about $5 million reduction in -- in costs relating to marketing efforts. A $1 million reduction with respect to the call center, right? And then there was another 5 million slug there. I think I missed that.

It really relates to at the property level.

Okay.

The changes in the compensation and benefit plan.

Okay.

That's for the domestic program.

So at the end of the day, would it be simpler just to assume, I don't know, at some point in time midway through the second -- or midway through the third quarter that you guys moved down to a normalized expense margin in, I don't know, 31, 32% range?

I don't know what your 31, 32% range is. But I think you've got all the numbers, so you can put that into your model or calculator there and I think you'll get to the right place.

Okay. Thanks a lot.

Thank you. Your next question is from Michael Mueller of JPMorgan.

Hi. One other question. Where did CapEx pencil out -- nonexpense CapEx pencil out in '06? And what is the expectation for '07?

Mike, in the press release, in the very, I believe in the next to the last page of the press release. Capital expenditures for the year were about 66 million.

Okay.

That excluded though the CapEx that we put into putting any signage on the Shurgard properties which would add another about 13 million for that.

Okay. And heading into '07 what is the expectation there?

Well the expectation in '07 it will be in our ND&A and our 10-K which will be filed either today or tomorrow. But it is ballpark 60 to 70 million, roughly.

Okay. Thanks.

Thank you. Your final -- excuse me, your next question is from David Cohen of Morgan Stanley.

You guys talked about you are being a lot more aggressive on pricing and promotions. Can you just put some color on that, in terms of if you have a PSA fully leased asset and a Shurgard asset that's average occupancy of 85% right near each other, how much less will their rent be or how much -- how low are you prepared to go on the rents on that Shurgard asset? And how much more in promotions are you giving at those two assets?

I would say David they are about comparable right now. Otherwise we're just shifting from our left pocket to our right pocket. There is no doubt we are trying to build the Shurgard property, but at the same time, it is a balancing act between not losing, in the situation you pointed out, which we do have a lot of that. We don't want to lose occupancy either on our same store portfolios. We are trying to get the customer. We are trying to give the customers what they want, put them into one of the facilities. We really don't care which one. But at the same time we are trying to keep the rates relatively stable between the two, as well as with the promotions. Otherwise we are just kind of kidding ourselves there.

Thank you.

Final question is from Paul Adornato of BMO Capital Markets.

Thanks. Have you noticed any change in the acquisition environment in the U.S.? And where do you see cap rates these days?

Paul, in terms of cap rates, and the environment, I think there is plenty of money out there. In terms of acquisition capital or joint venture capital, the money is not any problem and it really depends on the particular buyer's agenda. We are per se not cap rate buyers. I think in the press release it refers to a property in Hawaii that we are planning on acquiring. That property today, is, I think I want to say, 25 to 30% occupied. So it's earnings yield or cap rate today is somewhere between 0 and 1%, but it's a great property and a particular sub-market where we are not located in Hawaii. And I think it's very attractive. So when it achieves a stabilized yield it will be somewhere between 7 and 10%.

Okay. Thank you.

Thank you. There are no further questions. I would now like to turn the floor back to Clem Tang for any closing remarks.

Okay. I appreciate everybody attending our fourth quarter conference call and we'll talk to you next quarter. Thank you.