Public Storage (PSA) 2013 Q3 法說會逐字稿

Good morning, 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 third-quarter 2013 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 session. (Operator Instructions). Thank you. I would now like to turn the call over to Clem Teng. Mr. Teng, please go ahead.

Good morning and thank you for joining us for our third-quarter earnings call. Here with me today are Ron Havner and John Reyes. All statements other than statements of historical facts included in this conference call are forward-looking statements subject to a number of risks and uncertainties that could cause actual results to differ materially from those projected in these statements.

These risks and other factors that could adversely affect our business and future results are described in today's earnings press release and in our reports filed with the SEC. All forward-looking statements speak only as of today, November 1, 2013, and we assume no obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

A reconciliation to GAAP of the non-GAAP financial measures we are providing on this call is included in our earnings press release. You can find our press release, SEC report and an audio webcast replay of this conference call on our website at www.PublicStorage.com. Now I will turn the call over to Ron Havner.

Thank you, Clem. I think we had a pretty good quarter, Q3, and so we are going to go straight to Q&A.

(Operator Instructions). Ki Bin Kim, SunTrust.

It looks like you caught the operator off guard a little bit going straight to Q&A. But first question -- regarding your acquisitions, it seems like obviously you have made a bit of a change in strategy over the past couple quarters. I was wondering if you could provide some color on the pricing for the different buckets you are buying. And maybe on top of that, wrap it around how the quality of the assets you are buying compares to the typical acquisitions you made in the past.

I think prior to this year, a lot of the stuff that we were buying would be what I would call distressed. We were buying foreclosed assets and we were buying assets principally from sellers in distress. There were a few marketed deals, but that was most of what we were acquiring.

This year, we have seen more product come to market, higher quality product, product that we were interested in buying in the markets and in the quality. And so, really it's the market that has changed, really not so much our strategy.

And how about on pricing?

Well, the pricing varies -- are you talking price per foot?

More on cap rate.

The cap rates range anywhere from I'd say 0% to 8%. One property we acquired in September was just opened. It was still under construction when we put it under contract, so it opened at 0%. And we've got some other properties that are part of portfolios in what I would call secondary markets that probably have an 8% or a 9% cap rate.

Would you mind quoting an average?

You know what, Ki, why don't we try to limit it to one question or so and then if you'd like to ask some more, why don't you hop back in queue, okay?

All right, thanks.

Shahzeb Zakaria, Macquarie.

Thank you for taking my question. So with regards to your funding strategy for the new acquisitions, how are you thinking about equity and debt? And how comfortable are you with maximizing say the balance on your credit facility and let it stay there for a quarter or two? So if you could just provide some additional color around that that would be great.

I think page 4 of the press release we've got a commentary in there. We have a variety of possibilities to finance our acquisition and development activities, whether it's common equity, debt, some combination of both, one or all in our retained cash flow. So that's really what you should look for in terms of how we are going to fund these acquisitions in development.

Sure, I read that. I was just interested in knowing a little bit more about the preferred market. But thank you for the color.

Todd Thomas, Keybanc Capital Markets.

Good morning. Jordan Sadler is here with me as well. I just wanted to switch over to the operating environment. I was just wondering if you could talk about discounting and concessions a bit. And maybe -- curious if you can help quantify how much free rent you gave away this quarter and sort of discuss where we are in the cycle for reducing discounts and concessions. Just trying to understand how much juice is there left to squeeze sort of on the discounting front.

Todd, this is John. During the third quarter in our same stores, we gave away about $23 million of discounts (technical difficulty).

(Operator Instructions). You may resume.

Todd, this is John again. We got cut off. I apologize for that. We gave away about $23 million of discounts during the quarter. This quarter, this past quarter compared to about $25 million last year. That's about an 8% reduction. Year to date, the reduction was about 10.5%, so the reduction has narrowed somewhat. Overall, year to date, we gave away about $60 million versus about $67 million last year.

So the number is still very large and we are continuing to work on discounting reducing discounts. Albeit I think the year-over-year reductions will probably narrow a little bit as we move forward.

And where does sort of that stack up relative to the lowest number that you've ever seen in the portfolio's history, maybe on a percentage basis would be helpful?

I don't know the answer to that. It will vary because the amount of discounts is also predicated upon our rental rates. If we gave the same number of tenants -- let's just say we gave 100 tenants a discount this year and 100 last year, but our rates were up 10%, roughly our discounts would be up 10%.

So it's really a function of not only what our rental rates are, but how many tenants receive discounts. So that really varies and over time, since our rates have somewhat climbed, we are naturally probably going to be higher than historically. But I don't know that for a fact because I don't have that data in front of us.

Okay, thank you.

Ross Nussbaum, UBS

Ron, can you talk about occupancy, number one? Where was it at October 31?

It was on a square foot basis 93.2%.

Okay. And then question number two, when I look at your ending occupancy at September 30, compare that to where was at the end of the second quarter, if my numbers are right, it was down about 130 bps, and obviously that's or seasonal move outs. If I look at those same numbers last year, I'm looking at about a 60 basis point decline from the end of Q2 to end of Q3.

So if my numbers are in the right ballpark it would suggest that you had a little more occupancy slippage this year and I'm wondering was that anticipated because you were pushing rents a little harder? Was it unanticipated? can you talk about that and how it relates going forward to your strategy on rate and discounting?

Ross, this is John. The numbers you've rattled off are correct. The primary cause I'd attribute that to is that we had increased our Street rates and therefore our move-in rates were up about 5% versus last year. So that's going to put pressure on the level of move-ins that are coming in. And you couple that with the fact that we gave away less discounts; I mentioned 8% less discounts.

So higher rates, lower discounts resulted in slightly less move-in volume and therefore some slippage in occupancies. That's just the way we manage our revenue growth, so it could be in occupancies, could be in rates, could be an discounts, could be in rate increases to existing tenants. So there are all different levers that we are massaging and pulling and one thing you've just noted is that one lever has slipped but other levers have gone the other way.

Okay, I will get back in the queue. Thanks.

Jeff Spector, Merrill Lynch

Thank you. Ron, could you add some additional color on your comments about the marketplace changing on acquisitions? And what do you see going forward I guess as we enter 2014?

Like a couple of the transactions that we've consummated this year and one of the ones that we've got in the hopper were off-market deals. In one case the seller came to us. They had -- the pricing was right for them. Their view of the outlook for the business was right and so they brought their portfolio to market. We didn't really see a lot -- we have not seen that really since the A-American acquisition in 2010. So that's what I was kind of referring to in terms of the market changing.

Okay, thank you. Then if I can just ask one follow-up. Can you talk about new supply in your markets, what are you seeing from developers?

Sure, sure. I would say construction or new development is more of a conversation than it was two years ago, especially in places like the self storage association conventions. People are talking about development whereas two years ago no one even -- it wasn't even in anyone's vocabulary. So there's an uptick in conversation.

I would say conversation to action in terms of what we are seeing in the markets with new product coming out of the ground, it's pretty light. There is construction. The markets that come to mind are New York and Texas, but not really at any material level.

We do have a development pipeline. I think we have -- what have we got here -- we've got six or eight properties, new properties under development. So even relative -- while we are trying to get started in ramped up relative to our size in the marketplace it's pretty nascent.

Great, thank you.

Michael Mueller, JPMorgan

Two quick ones. First of all, what was the occupancy level on the three pools of assets that you acquired in Q3 and are closing in Q4?

The occupancy at the time of acquisition?

Yes.

Well, it kind of varies. I think one was about 85, one was 78. One had properties that were just developed, on a blend basis probably about 50%.

Okay. And then secondly, just switching gears for a second, it looks like your partner is buying 50%, 51% of the loan. What was the trigger for that to happen and what's the timing?

Well, they have always had the option to take their share of the loan. So it's really their decision, their timing in terms of deciding that they wanted to take their 51% of the loan. They are going through the process right now lining up the capital. And so, our anticipation is that they will fund that sometime in the fourth quarter.

Okay, okay, great, thanks.

Tom Lesnick, Robert W Baird

I'm standing in for Paula. Turning back to development and expansion, of the $188 million, how much is development and how much is expansion respectively? And what are the stabilized yield projections on each?

Well, I think we've got about -- development we've got -- let's see, about $75 million is development and the balance is redevelopment. And I would say the stabilized yields, our target on the development is somewhere between $9 [million] and $10 million and the redevelopment is going to be North of probably $11 million.

It's a little apples and bananas because the redevelopment, obviously we -- in many cases we already have the land or we are acquiring the land next to an existing facility, so you would expect the yields to be higher.

All right great. And then could you add a little color or talk about how active you were in the land acquisition process in 3Q?

You mean how many properties, how many land parcels we bought?

Yes.

Two or three.

Okay. That's all I've got. Thank you.

Michael Salinsky, RBC Capital Markets

Good afternoon. Just to go back to the transactions you guys announced. Can you talk about pricing relative to replacement cost? And then just in terms of acquisitions historically, how much upside have you typically been able to generate in terms of margins within the first year just from introducing them to the PSA operating platform?

I would say they vary anywhere from probably 70% of replacement cost to 130%, 150% of replacement cost depending on the property, the location, the market. And our ability to drive returns occupancy varies, but, as you can see here, the portfolio at the end of the quarter was 93%, 94% occupied. That is 600, 700 basis points above most people and so I kind of use that as a barometer.

Okay, thank you much.

Michael Bilerman, Citi.

Great, thank you. Ron, just wanted to come back to the capital side of things and certainly the comment about potentially raising common equity. PSA hasn't raised -- done a deal, direct deal since 2001, 2.1 million shares at $24. That's a long time ago. You certainly issued equity to Shurgard in 2006 when the stock was at $85.

I guess when you think about all the options, you have been very hesitant to issue your equity. You treat it as very precious. You've always thought about the long-term cost of equity versus preferred and those things crossing. The preferred market today, your preferreds are trading at about a 6.5% yield. A sister company did a preferred at 5%. I'm just trying to marry everything up as to how you think about those two and how you think about common equity in this landscape.

Well, Michael, I don't have much to add to your commentary in terms of the way we have thought about things. We've always thought about it in terms of the long-term value of our equity, where the puck is going, not where it is today, not immediate per se FFO accretion. We consider our equity very precious, as you said. So I have nothing to add to what you said about that. And I think you are dead on.

With respect to the preferred market, you recall we did about $700 million, $720 million of preferreds this year at 5.20%. That market has basically shut down. There are some deals out there that some of the banks, in fact your bank did one -- different structure, 10-year fixed then going to floating. We have looked at that, it's not really attractive to us.

So from our perspective, the traditional preferred market, which we will continue to use as a funding source, has for the moment shut down due to in part I guess the uncertainties as to the timing of quantitative easing and what's going to happen there.

Right. What I'm trying to get a sense of is has your mindset changed at all on equity? You talk about potentially raising common equity. I guess is your first thing, okay, you'll get the cash from your partners in Shurgard. Would you draw the line and do a term loan before doing a larger common equity issuance?

I'm just trying to get your mindset. You clearly have articulated the potential to do common equity, but your history suggests that that really has never been done. You are probably the only company that has fewer shares today or flat shares in the REIT industry yet has grown tremendously. So I am trying to put that into perspective.

I really have nothing to add. We still think of common equity and our common shares exactly the way as you described. We do have -- we are looking at leverage in terms of debt. But as we put in the press release, we are looking at common equity, we are looking at leverage and then we're also looking at retained cash flow. And yes, as you've said, we do anticipate that we will get about $200 million plus from our partner in Shurgard Europe.

And then just as a follow-up, just on the $1.1 billion, just because it is a dramatic size relative to $11 billion to $12 billion of assets on the balance sheet, what is that average yield going in by the end of the year? And what would your forecasted yield, just in aggregate on the $1.1 billion, be as we think about how that translates into your earnings growth just given the size relative to the base? This is a dramatic change for the Company relative to the last six and a half years.

Michael, as I touched on earlier, I think the yields are from 0% to 8% or 9% going in and we hope next year we make a lot more money on those assets.

Ron, can you at least give an average? 0% to 8% is a pretty wide range.

You know what, Michael, I think you probably ought to get back in the queue.

Okay, thank you.

Todd Stender, Wells Fargo.

Thanks, guys. Just along those same lines of using equity, are you using OP units at all when making acquisitions?

We have not to date, Todd. It doesn't mean we won't, but we have not to date.

Okay, thanks. And just really at this point in the cycle, what growth rates do you generally assume in your acquisition underwriting, just considering where we are in the self storage cycle on stuff you've been acquiring and then the stuff that you plan on closing in December?

I will give you an example. When you look at new properties with zero occupancy, obviously their growth rate on a rate change is going to be very high because they are filling up. And if you have a property that's already at 92[%] its growth rate is going to be much lower than that in zero occupied property. But I will give you a little illustration of what we have seen over the last year, year and a half.

Last year, we bought a couple properties in Hawaii. We paid up for those. I think we probably paid 120% to 130% of replacement costs and we underwrote them with a very -- I say very aggressive pretty low cap rate and we are already about 100 basis points above that cap rate a year after we acquired it. Both properties we thought would take 18 to 24 months to fill up and they are about 96% occupied today.

So in terms of where we are in the cycle and what we are seeing, for the most part, we are seeing faster fill ups, better rates, greater acceleration of the fill-up than we are underwriting. And probably the best example of that is our Gerard property that we opened up in June, first of June this year. We finished construction at the end of September. It's 3,900 units there in the Bronx and we are already 41% occupied, 1,600 units as of yesterday.

I can tell you our underwriting had nowhere near that level of fill up. So to fill up -- rent out 1,600 units in four months in our system is unheard-of. So it somewhat typifies what we are seeing, better fill-up, better rates on a number of acquisitions and, as I touched on, on this Gerard property.

That's helpful. Thanks, Ron.

Michael Knott, Green Street Advisors.

Ron or John, curious to ask about your realized rents. It looked like they had picked up this quarter on a year-over-year basis. And just curious how much room you think there is for that metric to continue accelerating in 2014. I think in the last cycle you peaked at about 5% year-over-year growth on realized rents. And I know you've said before that you thought that was (technical difficulty).

Hello?

Can you guys hear me?

Yes, we can hear you Mike.

Did you hear any of my question? I apologize.

We did. I don't know that we heard the end of it. But on realized rents, Michael, I think going forward most of our revenue growth is going to be built off of realized rents or rental rates vis-a-vis occupancy. Because our occupancies are pretty darn high right now and it's going to be extremely difficult to continue to push them further.

So we are going to work on realized rents as we go forward. I can't tell you what I think they are going to be next year because I simply don't know. But we are going to continue pushing straight rates, reducing discounts as I mentioned earlier, and hopefully we'll be successful in continuing to grow the revenues.

Would it be logical to infer of that if last cycle was five and it was restrained by the Shurgard merger and filling up their space that it should be better than that this cycle?

Again, I don't know because I have no idea what the cycle is going to -- how that all pans out, Michael.

But we hope it'll be more than five, Michael and we are working towards that.

Okay, thanks. And if that all just counts as my first question I'd like to ask one more if I could. Curious, Ron, on the comment on the 150% of replacement cost, just curious how that compares to some of your prior activity, just curious how you got comfortable with that because I know you are a died in the wool value investor and just curious how you thought about that and why that passed your test.

I am a died in the wool value investor; you are correct, Michael. I touched on a couple properties we bought in Hawaii where we paid above replacement cost and some of the stuff we acquired this year certainly fits that bill. In part it has to do with you look at what a piece of land costs and then what it takes to build a building.

But what's hard to put in the equation in terms of a straight up replacement cost analysis is the, A, ability to find land in that particular market upon which you can actually build self storage where they are zoning and the ability to do that.

So Hawaii certainly fit that bill. It is very, very hard to get fee simple ownership of land in Hawaii and very, very difficult to get zoning. And so those couple of properties, which we viewed as A properties and A submarkets, we were willing to pay above replacement cost because of the difficulty of developing those properties.

Another example here closer to home would be Pasadena, California which has had a moratorium on self storage for 10, 12 years. If a property were to come for sale in Pasadena California, a market that is growing where we are 94%, 95% occupied, would we be willing to pay above replacement cost -- what it costs traditionally to buy the land and build a building? Yes, we would because that is a very, very high barrier to market where you'll probably enjoy above average occupancy and above average rates.

Thanks. They won't have a moratorium on self storage floats in the parade though after this year will they?

Touche.

RJ Milligan, Raymond James & Associates.

Good morning. You guys were obviously very active on the acquisition front for the first couple quarters or the second and third quarter, as well as going into the fourth quarter. Based on where you guys are underwriting properties today, the amount of product coming to market, whether or not there are large portfolios out there still and I guess seller pricing expectations, as we look into 2014, would you expect the acquisition pace to continue, accelerate, decelerate, any color there?

We have got Dave Doll here who does all the heavy lifting here on the acquisitions in development, so I have him give you his 2014 outlook.

Thank you, Ron. I will pull my crystal ball out. But RJ that's a tough one. These things aren't sitting on a shelf available for acquisition. And so, from time to time when opportunities become available we become more active. But I don't see -- I can't tell you that 2014 will be better or worse than 2013. Clearly more product has come to the market in the last six or seven months than we've seen in a number of years. So if it does come available we will continue to be active, but will have to wait and see.

RJ, we have a director on our Board, a guy named Ron Spogli who is in the private equity business, and he was commenting to me yesterday that here in the private equity business as pricing hit this certain level more product, more companies, better companies come to market. And that's his experience in the private equity business. And I would say that's so far been the experience we've seen in the second half of this year. So more likely than not my guess is we'll continue to see that into 2014.

Thank you. And for the $430 million under contract for the fourth quarter, is that a large portfolio or is that smaller one-offs?

It's a large one and a couple one-offs.

Thank you very much, guys.

Todd Thomas, Keybanc Capital Markets.

Thanks. Just a quick follow-up sort of on the acquisitions here. Ron, you mentioned -- you talked about private equity. I was just wondering -- we've heard that there are some larger investors looking to break into the industry. I was just wondering how you view that, how you think about the competitive landscape on the acquisition side, whether you welcome that or -- just maybe if you could talk about the sort of competitive landscape a bit.

Well it is competitive. I don't know that I would like anymore entrants. We have plenty of competition from the other public companies. I guess in an ideal world we would be the only buyer, that would be nirvana for me, but that's not the case. There's a fair amount of capital in there -- out there.

And it really doesn't surprise me that other non-industry participants are looking at this industry, because the fundamentals are very good. There's really an absence of new supply in any meaningful degree. Interest rates are low, financing is available and the operating fundamentals of the business are quite good right now.

Okay and then just one more. Was just curious how much, if at all, the broader economy plays into your decisions to invest. I'm just kind of wondering if you can share with us whether Public Storage has a view on long-term interest rates, inflation and/or maybe economic growth.

That's way beyond my pay grade.

Okay.

Tayo Okusanya, Jefferies.

Good morning, everyone. I just was hoping you could make a couple of comments about operating expenses and where you expect trends to go going forward. Year to date, same-store OpEx is down 1%, but just for the quarter in particular it was up 1.5% because of property taxes. So just kind of curious going forward where you think that all kind of shakes out.

This is Ron and I will let John talk about property taxes specifically, but what we've said consistently is you should expect expense growth of 2% to 3%, kind of in line with inflation. This year's expenses as well as last years have benefited from some reduction in R&M where we've done a few thanks to control our R&M a little better, but mainly on the advertising side. And the big reduction there is the elimination of Yellow Pages.

So with respect to Yellow Pages, in particular you should see another fourth quarter benefit as well as an absence of television. So advertising and selling expenses in Q4 will probably be down $1.5 million to $2 million. With respect to property taxes, John, do you want to give some color?

Yes, in terms of property taxes, and you see that in the third quarter we had a much larger increase than we had experienced in the first six months of the year. And that's primarily due to receiving some unexpected high bills in a couple of counties, one of which was in Texas, Harris County where we have our Houston properties where bills came in about 13% higher than last year.

So we were seeing many municipalities become very aggressive on not only assessed values but also on rates. And we vigorously fight the assessed values but it's hard to fight the rate side of the equation. So what you are seeing in the third order is a makeup increase. We think that the full-year will be about 5.5% year-over-year increase on property taxes. So lower than the 7.2% in the third quarter.

The 7.2% includes an adjustment to try to bring up and make up for the first half of the year where the accrual was cumulatively at 4%. On a go forward basis, I would say that property taxes is probably one of the expenses that I most worry about because, again, municipalities are looking for revenue and they are getting very aggressive. I can't predict what we think next year will be, but my guess is it's at least going to be 5% if not more.

That's very helpful, thank you.

Ross Nussbaum, UBS.

John, a real quick one first. Remind me what the rate is on the note receivable over in Europe.

Gosh, how could you forget it? It's 9%.

Thank you. Number two, Ron, I want to go back to the acquisition yield which we still don't really know, but let me see if I can get to it this way. I think what everybody's trying to figure out is how much upside exists vis-a-vis the revenue line. So can you give us a sense in your first year of ownership of this $1 billion-ish that you just bought, how much of a percentage increase are you expecting in the NOI from those properties?

I probably could, Ross, but, as I touched on, 0% to 8%, the percentage increase in the NOI on the newly constructed property is going to be much greater than it is on a property that's already at 7% or 8%.

And to help you I think we put in the -- I don't know if it's in -- it's not the press release but I know we do in the 10-Q, we break out by year our acquisitions, our costs, the NOI on the acquisitions and how they have filled up over a period of time. And I would direct you that a pretty good barometer of what you should look for in 2014/2015.

There will be a little more development in the mix, so there will be greater revenue growth than the stuff we bought in 2010 and 2011. But I would use that is a pretty good barometer. And in that table you have what we paid for it and what the occupancy changes are and what the rental rate changes are and how we are able to drive that over a period of time.

Keep in mind that historically when we take over a property that is below our system average, which is 93% to 94%, we are usually more aggressive out-of-the-box on rental rates driving customer volume into that property. So you should expect to see that as well on these acquisitions.

Okay, thank you.

Michael Bilerman, Citi.

Well, I guess I won't drive home the 0% to 8% to an average then. But I did have a question on debt. Equity is simple. As we think about debt, what is your preference as you think about raising that capital? You have your $300 million line of credit which obviously you can tap, but that won't be enough to fund all the deals that you have.

So would you do a term loan, a floating-rate term loan, swap it for five years? Or would you contemplate doing a debut unsecured issuance? And then what's your mindset if you were to do that? Would you go just 10-year or would you go 30? I'm just curious how you think about the debt side in terms of raising debt capital.

Michael, we are looking at a variety of options. Everything is basically -- pretty much what you touched on, whether it's an expansion of the credit facility, a term loan from the bank or some kind of unsecured debt offering. So we are kind of looking at the whole menu there with respect to debt.

And I guess what's your preference in terms of running the capital structure? What's your -- put aside immediate cost, but how do you think -- is this going to be a shift if you do -- is there a mentality shift in the Company, the current preferred market that you said is closed? Has this changed the way that you are thinking about the longer-term capital structure and how are those conversations going?

Not really to the extent that we do some kind of debt offering; I would just view it as another tool in the tool kit versus a change in strategy. If the preferred market were open today that's probably where we would be. And permanent capital, long-term capital, which has been our strategy for the last 22 to 23 years, has not changed at all.

When should we expect some resolution to these capital raises? Obviously with the deals closing in December I've got to assume that a transaction should be eminent. But I'm just trying to think about when we should hear about potential capital.

Yes, probably sometime here in the fourth quarter.

Okay, thank you.

Mike Mueller, JPMorgan.

That was my question. I tried to get out of the queue. Thanks.

Michael Knott, Green Street Advisors.

I did just want to reiterate the earlier comments, the 0% to 8% range does feel awfully wide. I do wish you guys could at least give us maybe a range within even 100 basis points so you're not giving an exact number out to all the people that are really trying to -- in the private market trying to figure out what you are doing.

But it would be helpful to get some more color from -- not for your public market constituents. But I did want to ask, what are your -- what's sort of the range of capital that you need that you are thinking about raising?

I think if you take our quarter end cash balance, anticipate the repayment of the Shurgard Europe loan, and some retained cash flow, probably somewhere between $400 million and $500 million or [five].

Yes, what I would tell you though, Michael, that's the mean. That doesn't necessarily mean that that's how much we would raise. We could raise more than that. We could raise less than that. Depending on what we do with our line of credit too.

Thanks. And then is there anything in terms of the European outlook that you think is worth sharing that's new or different? Is it sort of the same as it has been?

No, actually I'm glad you asked that, Michael. Europe had a pretty good quarter. The occupancy spreads -- it has been running below prior years. We have been running -- let's see, June, we ended at 81.3% versus 83.8% last year, so we were down 2.5% year-over-year and that spread narrowed at the end of September. Our occupancy was 82.7% versus 83.3%, so we narrowed it down to 0.6%. So we had a nice improvement in Europe in Q3 in terms of occupancy.

We are still backwards in terms of NOI. Recall in October of last year we reduced the rental rates to existing tenants in London by 20% for the VAT. So my anticipation is that coming into Q4 we won't have that year-over-year negative rent roll down in London and hopefully we will actually turn positive on the revenue line in Q4.

Across most markets in Europe in the third quarter on a sequential basis we improved occupancy year-over-year anywhere from 0.7% to 3.5% in Holland. So my gut is Europe's bottomed and either bumping along the bottom or on the uptick.

Yes, thanks for that. Does that make you more open-minded about further capital allocation opportunities on that side of the Atlantic Ocean?

Yes, Europe generates -- I don't know, they've been using their capital the last four or five years to amortize debt. We've really brought the debt down over there. The capital allocation from here to there is somewhat limited because we have a partner, so if we put in money the other partner has to put in 51%. So I would look to Europe to start to expand in 2014 but at a limited pace.

Thanks.

Michael Salinsky, RBC Capital Markets.

Thanks again. John, just a couple quarters ago you talked about being a leader in the market in terms of pricing and your peers not capitulating. Can you talk about where you stand right now in the decision to accelerate rate growth a little bit in the quarter?

We are continuing to push straight rates, as I mentioned earlier, to the extent that we continue to hold our occupancy. Ross had pointed out that our occupancies had -- growth had narrowed year-over-year during the third quarter. So we don't really want to lose occupancy, so we are kind of monitoring and turning the dials to increase the rates while not losing occupancy, reducing discounts while not losing the occupancy.

So we are trying to be aggressive. It's important to get the Street rates up. It's important I think for the industry to get the Street rates up. And I'd certainly like to see us, as well as the whole industry, start moving Street rates up, particularly since occupancies are so high.

But with that said, all we can do is what we can do here at Public Storage and that's what we are doing and I think most of the industry is starting to get a little more aggressive on Street rates, but we'll see how that translates as we move forward into 2014.

That growth you saw in the third quarter, did that continue in October?

It did for the most part, yes. We continued to do the same strategies into October and hopefully we can continue that through the remainder of this quarter.

Thank you much.

Michael Knott, Green Street Advisors.

A quick one. I think earlier on the call, Ron, you said the occupancy at October 31 was 93.2%. What was at the year before?

It was 92.2%.

So I guess your occupancy gap year-over-year fell from 140 basis points I think to 100 basis points at the end of October. Does that sound about right?

Yes. And again, I wouldn't read too much into that, Michael, because I don't want to say we could easily, but all I have to do is turn to our pricing guys and say adjust rental rates and discounts and our occupancies will go back up. So occupancies is one part of the equation of revenue and revenue growth. There's other parts to it.

Right, thank you.

That was our final question. Now I would like to turn the floor back over to Clem Teng for any additional or closing remarks.

I want to thank everybody for your interest today in our third-quarter results and we'll be speaking to you next quarter. Thank you.

Thank you. This concludes today's conference call. You may now disconnect.