Filed by Public Storage, Inc.
Pursuant to Rule 165 and Rule 425(a) under the
United States Securities Act of 1933, as amended
Subject Company: Shurgard Storage Centers, Inc.
Commission File No. 001-11455
Date: October 28, 2005
Public Storage conducted its third quarter of 2005 earnings conference call on
Friday, October 28, 2005. A replay of the call is accessible on Public Storage's
Internet website or by calling (800) 642-1687 through November 28, 2005. A
transcript of the call is provided below.
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PUBLIC STORAGE INC.
MODERATOR: CLEM TENG
OCTOBER 28, 2005
9:00 AM PT
Operator: Good afternoon. My name is (Lawana) and I will be your conference
facilitator. At this time I would like to welcome everyone to the
Public Storage Third Quarter 2005 Earnings conference call.
All lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question and answer
session. If you would like to ask a question during this time,
simply press star then the number 1 on your telephone keypad. If
you'd like to withdraw your question, press star then the number 2
on your telephone keypad. Thank you. Mr. Teng, you may begin your
conference.
Clem Teng: Good morning and thank you for joining us for our third
quarter earnings call. Here today are Ron Havner, CEO, John Reyes,
CFO, John Graul, President of Self-storage Operations and David
Doll, President of Real Estate 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 would like to provide the forward-looking
statement warning. All statements other than statement of
historical facts included in this conference call are
forward-looking statements. 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 implied by such
forward-looking statements. All forward-looking statements speak
only as of the morning of October 28, 2005, the date of this
conference call.
Public Storage undertakes no obligation to update or revise any
forward-looking statement whether the result of new information,
future events or otherwise. 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 the following risks and uncertainties: the costs
associated with pursuing a potential transaction with Shurgard, the
risk that no transaction with Shurgard occurs, the risks associated
with Public Storage's ability to successfully integrate the
operations of Shurgard, if a transaction is consummated, and
assumptions with respect to the benefit to be realized from a
potential transaction with Shurgard, future revenues of Shurgard
and Public Storage, the expected performance of Shurgard and Public
Storage and the expected cash flows of Shurgard and Public Storage.
Additional information about risks and uncertainties that could
adversely effect Public Storage's forward looking statement are
described in the company's reports filed with the Securities &
Exchange Commission, including our 2004 Annual Report on Form 10K,
subsequent Form 10Qs and other filings after the 2004 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. A slide presentation on our proposal to
Shurgard can also be found at our Web site.
As a reminder, our press release and the audio web cast replay of
this conference call are available at our website, and complete
financial information will be available in our third quarter 10Q,
which will be filed shortly with the Security & Exchange
Commission. Now I will turn it over to John Reyes.
John Reyes: Thank you Clem. As reported yesterday, we achieved solid third
quarter operating results. Our funds from operations increased to
97 cents per share compared to 76 cents per share in the same
quarter last year, representing an increase of 21 cents or 28%.
The 21 cent increase was the result of both core and non-core
operating activities.
The non-core activities which included the impact from applying
EITS topic D42, gains from the sale of non-real estate assets used
by our containerized storage business, and the impact from
hurricane damages, contributed 4 cents in the aggregate to our
growth. These items are outlined in the table included in our press
release for additional clarification.
Our core business activities contributed 17 cents of growth during
the quarter driven primarily from improved in-store operations
which contributed 7 cents, newly acquired and developed facilities
that added 3 cents, the benefit from refinancing higher rate
preferred securities added 2 cents, and greater interest income on
cash balances resulting from a higher interest rate environment
provided 2 cents.
Our same store facilities continued their strong operating
performance. Revenues for the pool grew by 4.9% driven primarily by
higher rental rates, partially offset by slightly lower occupancy.
The growth in our operating expense moderated to only a 2% increase
for the quarter. Keep in mind that our reported cost of operations
includes all related costs of operating our facilities, both direct
as well as indirect costs. Net operating income increased a solid
6.4%, as our gross margins improved to 67.6% for the quarter
compared to 66.7 in the same quarter of 2004.
With respect to the balance of our self storage assets, which
consists of development and acquisition properties, revenues for
the quarter increased to $37 million compared to $23 million in the
third quarter of 2004. Net operating income before depreciation
rose to $24 million for the quarter compared to $14 million for the
same period last year, much of this growth coming from our 2004 and
2005 acquisitions.
From a balance sheet perspective, we continue to maintain our
strong financial position. Our fixed charge ratio continues to
improve. For the first nine months of 2005, the ratio was a solid
3.5 times, giving us plenty of financial flexibility.
Our cash balance at September 30 was over $500 million. We expect
to use these funds to acquire additional self-storage facilities,
repay debt, fund development activities and redeem our 8.6% Series
Q preferred issue for $173 million.
The related EITS topic D42 charge with respect to the redemption of
the Series Q will be approximately $5.6 million and will be
recorded during the fourth quarter of 2005.
With regard to our capital raising activities, on October 23 and
August 23 - excuse me, August 23 and October 3, we issued a
combined $250 million of our 6.45% Series F preferred stock. This
is the third preferred series we have issued this year, bringing
our year-to-date total to approximately $526 million.
For the first nine months of this year, total distributions paid to
our common shareholders was approximately 54% of funds available
for distribution -- an improvement from 65% for the same period
last year. As a result, our retained operating cash flow increased
significantly to approximately $155 million for the first nine
months of 2005 compared to $91 million for the same period last
year.
During the second half of 2006 we have the opportunity to redeem
$650 million of preferred stock having a weighted average rate of
approximately 8%. We may seek to pre-fund these redemptions by
issuing preferred securities ahead of these redemption dates. Such
issuances will have a negative impact on our earnings until the
proceeds are ultimately used to redeem the higher rate preferred
stock.
As mentioned last quarter, we had the opportunity to acquire an
interest in our development JV from the institutional investor. We
completed this acquisition in August paying $41 million and
bringing our interest up to 67% in this JV. Our Chairman, Mr.
Hughes, owns the remaining interest in the JV. We have notified him
that we are terminating the partnership effective November 17 and
we will be acquiring his interest in the JV in accordance with the
partnership agreement. Mr. Hughes' interest in the partnership has
been classified as debt on our balance sheet.
We also acquired the remaining minority interest in several large
institutional partnerships during the year. As a result of these
transactions, the minority interest in income on our income
statement was lower in the third quarter and will further be
reduced in the fourth quarter. With that, let me turn it over to
John Graul.
John Graul: Thank you John. As you know, the Southeastern United States has
experienced three major hurricanes in the past few months. Many
of our properties in South Florida, Alabama, Texas and Louisiana
incurred damage that required a range of repairs as disclosed in
more detail in our press release.
However, with our disaster plan in place, we were able to respond
quickly after both Katrina and Rita and get most of the damaged
properties back online in a short period of time. The only
exception is in New Orleans where five of our eight properties have
been reopened. One is undergoing repairs and will reopen shortly,
and the other two without power remain closed.
Since those two were in standing water for several weeks, we are
performing a complete assessment of the integrity of those
structures. No final decisions will be made until that assessment
is complete and until we know more about the evolving
infrastructure repairs and development plans for New Orleans. In
any case, we have business interruption insurance should those two
properties need to remain closed for an extended time.
We are currently assessing damage from the most recent hurricane
Wilma, to our properties in South Florida. We do not expect to have
damage estimates for several weeks.
Next, I'd like to provide an overview of this quarter's operating
expenses. We continue to place strong emphasis on cost controls and
as John mentioned earlier, our same store operating expenses
reflect a modest 2% increase over the same quarter last year.
Payroll is our largest operating and expense and it declined by 1%
over the prior year. Although we did incur higher payroll hours
than last year, the entire costs were more than offset by lower
worker's compensation costs as a result of improved claims
management and an expanded safety program.
Our property insurance expenses were lower in large part because of
improved cost controls and a somewhat softer insurance market. This
will likely change next year as hurricane losses start being
reflected in insurance premiums.
The telephone reservation center also experienced lower cost
compared to a year ago. We are close to reaching a stabilized
expense level and do not expect much reduction, if any, going
forward.
R&M expense was slightly lower this quarter and basically flat for
the nine months. Recently completed asset plans for all of our
properties will enable us to better manage future cap ex and R&M
expenditures.
With these plans now being implemented, we would expect to see a
moderate increase in both cap ex as well as R&M in the fourth
quarter and going forward into next year.
Finally, I would like to review occupancy levels in our largest
states. For the ten states with the greatest concentration of
Public Storage same store faculties, the average occupancy for the
third quarter was 91.7% with a range of 94.4% at the high end and
90% at the low end. This compares to 91.9% for the average last
year with a range of 93.8% to 90.6%. In terms of occupancy, Florida
was the strongest and New Jersey was the weakest. Now let me turn
it over to David Doll.
David Doll: Good morning. Let me start by covering our acquisition activity.
During the quarter we acquired seven properties located in
Georgia, Florida and North Carolina. These acquisitions had an
aggregate cost of approximately $42 million and added 549,000 net
rentable square feet to the portfolio. Initial occupancy of these
properties ranged from 62% to 89%. One of our key investment
criteria is to find properties with acquisition costs that are
generally at or within 20% of replacement cost, which has been
achieved in these transactions.
We had an acquisition pipeline at the end of the quarter that
included 11 properties. Subsequent to September 30, we consummated
the purchase of 6 properties in the Florida, New York and
California markets. These properties added 504,000 net rentable
square feet of space at a total cost of $69 million.
As of October 26, we are under contract but have yet to acquire
five additional properties located in Florida, New York, Illinois
and California. Completing these five acquisitions will add 385,000
net rentable square feet to our portfolio at a total cost of
approximately $64 million including the assumption of debt on one
of these properties totaling $4.8 million.
Now moving on to our development activities, during the third
quarter we completed four projects with 286,000 net rentable square
feet at an aggregate cost of approximately $10 million. These four
projects included one newly developed facility and the conversion
of three former pickup and delivery properties into new storage
facilities.
During the fourth quarter we are anticipating the completion of
eight projects which will include new property developments, the
conversions of former pickup and delivery properties and projects
that have been repackaged. These projects will add 440,000 net
rentable square feet to the system.
At September 30, our development pipeline contained 57 projects
totaling $291 million and consisted of new property developments,
the conversion of the remaining pickup and delivery facilities and
our expansions and repackaging. This development pipeline will be
fully funded by us over the next 24 months and should add 3.8
million net rentable square feet to our portfolio.
We expect that both our development and acquisition facilities will
continue to provide growth in the quarters to come as these
properties reach stabilized occupancy levels as well as stabilized
market rental rates.
Included in our unstabilized pool of properties at quarter-end were
66 acquisition facilities representing 4.6 million net rentable
square feet. These properties generated a third quarter NOI yield
of 6.7% on costs of $384 million. We also had 67 development and
conversion facilities representing 5.5 million net rentable square
feet, which generated a third quarter NOI yield of 7.5% on costs of
$523 million. With that I will now turn the call over to Ron.
Ronald
Havner: Thank you David. We had another good quarter. Our continued focus
on the three Ps -- People, Product, and Pricing -- is producing
substantial cash flow growth for our shareholders. From our
operational excellence, to capital deployment and balance sheet
management, our people are focused and executing. Yet there is much
to be done. We continue to examine how we operate to improve
customer value and enhance our competitive position. We are
squarely focused on creating long-term shareholder value.
Our operating results for the quarter were better than expected.
While occupancy was down 20 basis points, average realized rents
were up 4.6%, giving us growth in revenue per available square foot
-- or REVPAF -- of 4.5% to $10.77 per square foot, inclusive of
discounts. We expect this trend to continue as in-place rents at
the end of September were $12.83 a square foot, up 5.2% from the
end of September '04, and a 1.7% increase since June.
For our same store group of properties, we had move-ins of 156,000
customers during the quarter compared to 164,000 last year, about a
5% decline. Move-outs at 165,000 were basically equal to last year.
Net-net, we lost 9,000 customers during the quarter versus none
last year. Our acquisition cost per customer for the quarter were
higher at $152 compared to $138 last year as a result of higher
media spends, promotional discounts, and fewer move-ins.
We targeted our promotional programs toward higher value customers,
which resulted in lower move-in volumes despite the higher media
spend. Improved move-out ratios in September and October would
indicate that we were moderately successful. Going into the fourth
quarter we would expect the same level of media spend as last year.
Our operating expense growth was more moderate than anticipated.
This will change next year and return to a 3 to 5% range, excluding
media. Media expenditures will continue to be volatile.
Finally, with respect to the recent announcement by Shurgard that
it is instituting a process to sell the company, we are pleased by
the decision made by Shurgard's board of directors, and we look
forward to participating in a prompt, fair, and efficient process.
We will not be taking any questions about our potential transaction
with Shurgard on today's call. However, we are happy to take
questions regarding our operating results for the quarter. To that,
thank you and Operator let's open it up for questions.
Operator: At this time I would like to remind everyone in order to ask a
question please press star then the number 1 on your telephone
keypad. We'll pause for a just a moment to compile the Q&A roster.
Your first question comes from Brian Legg, Merrill Lynch.
Brian Legg: I'll throw it out there and see if you answer it, but have you
talked to Shurgard about potentially opening their books to you
all?
Ronald
Havner: Brian we're not going to take any questions regarding Shurgard.
Brian Legg: Got you. Okay I'll move on. Just looking at your portfolio,
your operating results are clearly better than any of your peers.
Can you give us a sense for acquisitions in the past couple of
years -- how you've been able to perform in those acquisitions
versus the going-in cap rate? Have you been able to move the needle
maybe 100 basis points from the prior operators?
Ronald
Havner: Well I think David gave you some metrics in terms of volume of
acquisition and the yields for the quarter. We buy properties in
the acquisition arena that are both unstabilized, freshly
developed, newly developed, with zero occupancy, as well as buying
some more mature properties with higher occupancy levels. So the
going-in yield is anywhere from zero or negative to 6 or 7%
generally, sometimes 8%.
Overall we're very happy with our acquisition results. We've got
them acquired at reasonably attractive prices relative to
replacement cost. And I'd say given what's happened to steel and
cement, we're probably at or below replacement
cost. So we're happy with our acquisition results and they're
performing -- I would say -- on average better than we anticipated.
Brian Legg: I guess my question is more for the stabilized properties. If
you acquired them at the, you know, say the 6 to 7%, have you been
able to squeeze more juice out of those because you're just a
better operator or you're more efficient with your advertising and
so forth to, you know, move it from a 6% going-in acquisition to a
7%?
John Reyes: Hey Brian this is John.
Brian Legg: Okay.
John Reyes: Yes we have been able to move and we're able to move both the - the
occupancy even on a, you know, other folks' definition of
stabilized and ours is - maybe different. Ours operate at higher
stabilized occupancy levels. But we have been able to move the
volume or the occupancy. And in probably most instances, we've also
been able to move the rental rates also. So we've been getting both
rate variance positive as well as volume variances.
Brian Legg: And can you sort of quantify the impact from when you...
Ronald
Havner: Brian?
Brian Legg: Yes.
Ronald
Havner: One question.
Brian Legg: Sure.
Ronald
Havner: Back in the queue please.
Brian Legg: Okay. Thank you.
Operator: Your next question comes from Greg Whyte, Morgan Stanley.
Greg Whyte: Hi. Good afternoon guys. You gave a lot of color on
some specific assets in these various sort of hurricane markets.
Could you just help us understand [inaudible] business interruption
and I'm sure you insure the physical assets, but can you help us
understand what the negative impact is to FFO from these storms?
John Reyes: Greg we do have business interruption...
Greg Whyte: Right.
John Reyes: ...insurance. We haven't recorded any income with respect to that.
It's all still kind of being, you know, figured out. But I think if
you look at it, you know, with respect to the New Orleans
properties, worst case -- I think we -- for the first six months,
all eight properties generated about $2 million of NOI. So you
annualize that, that's $4 million. And on 128 million shares you're
talking about 3 cents a year, scorched earth. And clearly, we're
not in that situation.
Greg Whyte: Right.
John Reyes: It's just not that significant of an impact to the company.
Greg Whyte: John, I mean what about Wilma? I mean you cited significantly
more assets in that market and clearly it wasn't as destructive
but the interruptions may be there.
John Graul: This is John Graul. Let me give you a quick update of what we
know at this point. First, Orlando and Tampa are both open and
operating. The affected areas are really in Miami -- from West Palm
County through Broward County is our heaviest damage. The biggest
issue in Miami is -- as you all know -- is power. We have teams of
-- right now -- of our facility service managers along with our
operations group going through the properties doing temporary
repairs to the facilities and also assessing damage.
Our biggest priority is to get the facilities open as quickly as we
can to our customers. We do not anticipate any structural-- long
term structural damage that's going to take a long time to repair.
This is wind damage -- it's roofs, it's doors, signs, those kinds
of things, which, as soon as we can get contractors in on those
properties we'll get them opened. And as soon as the power returns,
we'll get them open to our customers as quickly as we can.
Greg Whyte: Okay thanks.
Operator: Your next question comes from Eric Rothman, Wachovia Securities.
Eric
Rothman: Yes I was curious, the press mentions that you'd acquired the
third party's institutional investors interest in PC--PSAC, I'm
curious how it was that that price was determined and what the
rationale behind the acquisition was.
John Reyes: Eric this is John. That was a partnership that we formed back in
1999, in a development partnership. It built about--I think about
22 properties and Public Storage was one of the partners. And
there was another partnership that was the other partner. That
other partnership had as its partners an institutional investor
as well as Wayne Hughes.
We were reaching the end of the, basically the end of the
partnership, which is year six, which would be November of this
year. And we decided to negotiate a transaction to get the
institutional investor out early, which is what we did. And then
we'll be taking Wayne's interest out in November, and the
partnership will then basically terminate. We will own all 22 of
the properties at that point in time.
Eric
Rothman: At what type of yield did you buy that?
John Reyes: Well if you look at our-- the annualized net operating
income for the past months on those 22 properties and the cost,
assuming the cost is at $41 million plus $65 million we paid Wayne,
the annualized yield is about 10.5%.
Eric
Rothman: Ten five you said.
John Reyes: Yes.
Eric
Rothman: Great. Thank you very much.
Operator: Your next question comes from Michael Knott, Green Street
Advisors.
Michael
Knott: Hey guys. I have a question on Shurgard. I'm just kidding. Can you
just remind us on the redevelopment and the repackages, sort of
what the all-in cost is and sort of what your IRR expectations are
for those properties? We can see from the press release that the
incremental cost for this quarter was $30 to $40 bucks. Can you
help us understand what the all-in cost is?
Ronald
Havner: Michael, let me try to bifurcate it into two groups. One
repackaging or redevelopment opportunity is the conversion of the
former pick-up and delivery facility. In almost every case, we have
a large warehouse facility that essentially we go in and add two to
three levels of self-storage -- it's enclosed, we can generally
climate control it. Sometimes we have to change the parking. And
that generally costs $30 to $40 a net rentable square foot. That is
by our most efficient redevelopment or expansion program.
And the yields on that, because we have an existing property right
in that store, they tend to fill up a little faster, not a lot of
incremental operating management costs. We're known in the market
place, and so the yields on those are quite attractive on the
margin. Now that doesn't consider the already sunk cost we have in
the warehouse building, but on the margin to add product at $30 to
$40 a foot when you're getting $12 plus of rent, it's a good deal.
The other kind of repackagings we have are where we will take an
older facility and generally sometimes demise one, two, or three
buildings, maybe go multi-story, depending on the zoning that we
can get in the area, adjust the parking, generally tear down an
office and add a retail store operation to it. Those repackaging
costs or redevelopment costs have both generally a lost income
component associated with the demised building, as well as the
incremental new construction cost.
The numbers that David gives on that are really the net additional
square footage that we add to the system. So we may demise 40,000
or 20,000 and add another 70,000 to the property, giving us 100,000
plus. The yields on that will range anywhere from, you know,
probably 5 or 6 up to 12 or 15, depending on the amount of space
demised at the period of time, how much we can change the density,
those kinds of things.
And part of our consideration in that -- when you think about the
lower yield -- is what are we doing to the competitive position of
the property and are making cap expenditures that may need to be
done in the long term anyway. So there's both a yield component to
it as well as a competitive positioning aspect to the property.
Michael
Knott: Okay thanks.
Operator: Your next question comes from Jay Leupp, RBC Capital Markets.
Jay Leupp: Hi. Good morning -- here with Brett Johnson. Could you comment
on advertising and marketing, both dollars you expect to spend
going forward in the wake of your seasonal peak in occupancy
this quarter and what the strategy's going to look like in 2006?
And then on the redevelopment fund, maybe talk a little bit about
what you think the potential is in your portfolio annually for the
next, say three to five years.
Ronald
Havner: Well that's a clever way to get two questions.
Jay Leupp: I had to be creative Ron.
Ronald
Havner: But, with respect to the media I think we touched on it, that we
expect our fourth quarter media spend to be about the same as the
fourth quarter of last year. If you recall, last year in October,
we essentially had no media spend because of the election. We
were on media in October of this year. Right now, we expect a
more moderate spend in November vis-a-vis last year and December
will be December.
Going into next year, the media will continue to be a volatile
component in our expense line, and that has to do with a whole
variety of things, both in terms of sometimes we use media in
markets where we have large acquisitions or development properties
coming online, and adapting to competitive competition, alternative
programs that we may use tied into our pricing strategies and
promotional discount strategies.
So it's a very hard item to predict. But it's all geared towards
driving the revenue per available square foot number. So it's a
coordinated program between pricing, promotional discount and
media.
With respect to the redevelopment pipeline, if you think about our
portfolio, which probably has--I don't know what the average age is
today--but it's probably at least 15 years and there's probably
500 to 800 properties that could undertake some form of
redevelopment or packaging, anywhere from a new storefront to a
more expansive redevelopment as I just explained in the previous
question.
So if you take 500 to 800 facilities, you could see that we have a
lot of work ahead of us. And the site people and the construction
people have lots to keep them busy for a long time.
Jay Leupp: Thanks Ron.
Operator: Your next question comes from Jeff Donnelly, Wachovia Securities.
Jeff
Donnelly: Good morning out there guys. I'm just curious, this is the first
period in some time where your same store occupancy comped down.
In the past few years when that happened, the following quarters
were actually fairly weak.
I'm just curious, do you anticipate seeing negative comps in
quarterly occupancy numbers in future quarters and how strong is
your ability right now to continue to drive pricing at this point?
Ronald
Havner: Well Jeff, I think we touched on the fact that in place rents
at quarter-end were in excess of 5% higher than the same period
last year September over September. And as we've talked about on
previous calls our focus here is driving revenue per available
square foot. That means we will take more volatility in the
occupancy number. We'll take volatility in the media spend as we
move -- as we try to drive that number.
So you just can't look at occupancy. You have to look at occupancy.
You have to look at rental rates, the volume of promotional
discounts, and is that revenue per available square foot number
moving in a positive direction?
Jeff
Donnelly: Thanks, I just wanted to clarify that.
Operator: Your next question comes from Paul Adornato, Harris Nesbitt.
Paul
Adornato: Hi, thanks. I was wondering, I actually was noticing in the same
store section that the expense related to the telephone
reservation center decreased pretty substantially, 19.7%, which
might be greater than would be expected given the portfolio growth.
So I was wondering if you could talk about the performance of the
telephone answering center with respect to their efficiency,
ability to close sales, etc. given presumably the higher Internet
and telephone.
Ronald
Havner: Okay. Well, Paul, we talked at the beginning of the year that we
anticipated a decline in the cost of the telephone reservation
center. And that really had to
do with the fact that we were taking our pickup and delivery
service out of our call center and doing direct sales with the
pickup and delivery team directly to their customers and we would
no longer be selling that product in our national reservation
center, the telephone center.
That resulted in a headcount reduction of close to 100 people that
was phased in over the course of 2004. And so what you're seeing,
is kind of the year-over-year comp as that phase-in took place in
2004 and was fully completed by the first quarter of 2005.
The efficacy of the phone center is fantastic. We have a great team
down there. They're more focused and their operating metrics are
with respect to self storage better than they were a year ago. So
the cost decline or the efficacy of that group has improved as
their focus has narrowed.
The point of bringing that up in terms of John Graul's comments is
that you should not expect a 20% decline in year over year costs
going forward for much longer.
Paul
Adornato: Okay, thank you.
Operator: Your next question comes from Kristen Brown, Deutsche Bank.
Kristen
Brown: Hi. If you had the opportunity to do a big acquisition, would
you consider adding leverage to your balance sheet?
Ronald
Havner: That's a roundabout way of asking about Shurgard and I'm going
to pass on that.
Kristen
Brown: Okay, thanks.
Operator: Your next question comes from Brian Legg, Merrill Lynch.
Brian Legg: John, I just wanted to clarify on your advertising and promotion,
the accounting, when you recognize the costs for Yellow Pages. Is
there a lot of seasonality in that?
John Reyes: Is there a lot of seasonality? Yellow Pages, we basically expense
as being as we do this, Brian. In terms of seasonality, on a
year over year comparison it should be very consistent, but
sequential quarters it will vary. It just really depends on when
the books renew and when we sign up for them.
Brian Legg: When would that hit? The fourth quarter?
John Reyes: Well the fourth quarter has typically been a little bit higher
than the other quarters, but it happens throughout the year,
Brian.
Brian Legg: Okay, great. Thank you.
Operator: Your next question comes from Greg Whyte, Morgan Stanley.
Greg Whyte: Just a question for John maybe, I guess two parts. When you think
about the preferred refinancing, John: a, do you guys have a
restriction like many others that they can only be refinanced with
either more preferred or equity; and b, if that is the case, given
where rates are today for new issuance, and given where the cost of
your 8% is in part of next year, how far in advance could you
"raise cash" to refinance when you do the math?
John Reyes: The answer to that first question is we do not have a restriction
on that you've indicated. We can redeem with any means that we
need, so that's not a -- we don't have that restriction.
Greg Whyte: Okay.
John Reyes: In terms of when we issue [inaudible -- audio difficulties].
Greg Whyte: Well I guess it's just two lines across, John, at some point,
I mean, from a dilution versus accretion on the interest cost
savings.
John Reyes: And it's not perfect science either. I mean, we have no idea
what rates are going to be, you know, in September of '06. And so
we can go out now and secure a 100 basis point spread now probably,
but we run the risk that rates don't move up and now we've suffered
a dilution until that point in time.
So we're going to kind of pick and choose our battle as we go and
we'll issue some here and there. I don't see us blowing out the
whole thing at one time but we're continuing to watch the markets
and we'll continue to watch what rates are doing.
Greg Whyte: Okay, great. Thanks a lot.
Operator: Your next question comes from Jeff Donnelly, Wachovia Securities.
Jeff
Donnelly: I'm surprised I cycled back so fast. John, other income was
running well ahead of usual levels. What was the reason behind
that, and do you expect that will continue? And if I can, I guess,
squeak in a follow-up maybe under the radar, if you guys were to
own shares in Shurgard, is that where we would find the accounting
for the dividend?
I didn't ask if you owned them.
Ronald
Havner: The big up tic in the other income would principally be due to
the higher rates on cash.
John Reyes: It's interest income, Jeff. There's another piece that happens
is our retail truck rental, you know, our retail sales, locks and
boxes as well as truck rentals was up quite a bit too. So it's
really interest from higher rates that we're investing our cash
balances at, as well as improvement in our locks and boxes and
truck rental business.
Jeff
Donnelly: Should I think of that as a run rate going forward then?
John Reyes: I mean, the interest income is going to vary, depending on our
cash balances, and we hope to get our, you know, excess of cash
balances invested in acquisitions that David Doll talked about,
development. We're going to take out the Wayne Hughes' interest
next month. You know, that's $65 million. We're going to call our
Series Q preferred $173 million in January.
So it's going to fluctuate. It's going to depend on what interest
rate environments continue to do as well as what our cash balances
look like.
Jeff
Donnelly: Great. Thanks guys.
Operator: Your next question comes from Michael Mueller, JP Morgan.
Michael
Mueller: Hi. I think John mentioned when you were talking about
markets, that New Jersey was the weakest, larger market. I was
just wondering is there any specific dynamic that's happening
there or is it just a relative issue?
Ronald
Havner: I'd say it's more of a relative issue.
Michael
Mueller: Okay. Thanks.
Operator: Again, if you would like to ask a question, please press star then
the number 1 on your telephone keypad. You now have a follow up
question from the line of Jay Leupp, RBC Capital Markets.
Jay Leupp: Hi, for 2006 does your business plan contemplate offshore
expansions to Asia, Australia or perhaps Europe, and how much
research have you done on those markets?
Ronald
Havner: Jay, if it does, we can't talk about it right now.
Jay Leupp: Thanks.
Operator: Thank you. At this time there are no further questions.
Ronald
Havner: Okay, thank you all for attending the call.
Operator: Thank you. This concludes today's Public Storage Third Quarter
2005 Earnings conference call. You may now disconnect.
END