Public Storage (PSA) Q3 2013 Earnings Report, Transcript and Summary

Clemente Teng - Vice President of Investor Services Ronald L. Havner - Chairman, Chief Executive Officer and President Edward John Reyes - Chief Financial Officer, Principal Accounting Officer and Senior Vice President David F. Doll - Senior Vice President and President of Real Estate Group

Ki Bin Kim - SunTrust Robinson Humphrey, Inc., Research Division Shahzeb Zakaria - Macquarie Research Todd M. Thomas - KeyBanc Capital Markets Inc., Research Division Ross T. Nussbaum - UBS Investment Bank, Research Division Jordan Sadler - KeyBanc Capital Markets Inc., Research Division Jeffrey Spector - BofA Merrill Lynch, Research Division Michael W. Mueller - JP Morgan Chase & Co, Research Division Thomas J. Lesnick - Robert W. Baird & Co. Incorporated, Research Division Michael J. Salinsky - RBC Capital Markets, LLC, Research Division Michael Bilerman - Citigroup Inc, Research Division Todd Stender - Wells Fargo Securities, LLC, Research Division Michael Knott - Green Street Advisors, Inc., Research Division R.J. Milligan - Raymond James & Associates, Inc., Research Division Omotayo T. Okusanya - Jefferies LLC, Research Division

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. [Operator Instructions] 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 reports and the audio webcast replay of this conference call on our website at www.publicstorage.com. Now, I'll turn the call over to Ron Havner.

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

[Operator Instructions] And our first question comes the line of Ki Bin Kim with SunTrust.

The first question, regarding your acquisitions, it seems like, obviously, you guys have made a bit of a change in strategy over the past couple of quarters. I was wondering if you could provide some color on the pricing, sort of different buckets you're buying, and maybe on top of that wrap [ph] it around how the quality of assets you're buying compares to the typical acquisitions you made in the past.

Ki, this is Ron. 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've 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's 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 rates.

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.

You mind providing an average?

You know what, Ki, why don't you -- 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 get -- hop back in queue, okay?

Your next question comes from the line of Shahzeb Zakaria with Macquarie.

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 1 quarter or 2? So if you could just provide some additional color around that, that would be great.

Shahzeb, yes, this is Ron. 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, and our retained cash flow. So that's really what you should look for in terms of how we're going to fund these acquisitions and 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.

Our next question comes from the line of Todd Thomas with Keybanc Capital Markets.

Jordan Sadler is here with me as well. I just wanted to switch over to sort of 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 [Audio Gap]

[Technical Difficulty]

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 continue to work on reducing discounts. Albeit, I think, the year-over-year reductions will probably narrow a little bit as we move forward.

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

No, I don't know the answer to that. And it will vary because the amount of discounts is also predicated upon our rental rate. So 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%. So 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 received discounts. So that really varies and over time, since our rates have somewhat climbed, we're 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.

Our next question comes the line of Ross Nussbaum with 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 it was at the end of the second quarter, if my numbers are right, it was down about 130 bps. And obviously, that's your 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?

Yes, Ross, this is John. Yes, I mean, 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. And look, that's just the way we kind of manage our revenue growth. So it could be in occupancies, it could be in rates, it could be in discounts, could be in rate increases to existing tenants. So they're all different levers that we're kind of massaging and pulling. And one thing you've just noted is that one lever has slipped, but the other levers have gone the other way.

Our next question comes from the line of Jeff Spector with Merrill Lynch.

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?

Sure. Well, 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. And 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. And then if I could just ask one follow-up. Can you talk about new supply in your markets? What are you seeing from developers?

Sure. I would say construction or new development is more of a conversation than it was 2 years ago, especially in places like the self-storage association conventions. People are talking about development, whereas 2 years ago, no one even -- it wasn't even in anyone's vocabulary. So yes, there's an uptick in conversation. I would say, conversation to action in terms of what we're seeing in the markets with new product coming out of the ground, it's pretty light. There is construction. The markets 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 do we got here, we got 6 or 8 properties -- new properties under development. So even relative -- while we're trying to get started and ramped up relative to our size in the marketplace, it's pretty nascent.

Our next question comes from the line of Mike Mueller with JPMorgan. Michael W. Mueller - JP Morgan Chase & Co, Research Division: Two quick ones. First of all, what was the occupancy levels on the 3 pools that you -- pools of assets that you acquired in Q3 and are closing in Q4?

The occupancy at the time of acquisitions? Michael W. Mueller - JP Morgan Chase & Co, Research Division: Yes.

Well, it kind of varies. I think one was about 85, one was 78, one had properties that were just developed. On a blended basis, probably about 50%. Michael W. Mueller - JP Morgan Chase & Co, Research Division: Okay. And then secondly, just switching gears for a second. It looks like your partner's buying 50%, 51% of the loan. What was the trigger for that to happen and what's the timing?

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

Our next question comes from the line of Tom Lesnick with Robert W. Baird. Thomas J. Lesnick - Robert W. Baird & Co. Incorporated, Research Division: 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 deals, our target on the development is somewhere between 9 and 10, and the redevelopment's going to be north of probably 11. It's a little apples and bananas because the redevelopment, obviously, we've -- in many cases, we already have the land or we're acquiring the land next to an existing facility. So you would expect the yields to be higher. Thomas J. Lesnick - Robert W. Baird & Co. Incorporated, Research Division: 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? Thomas J. Lesnick - Robert W. Baird & Co. Incorporated, Research Division: Yes.

Oh, 2 or 3.

Our next question comes from the line of Michael Salinsky with RBC Capital Markets.

Just to go back to the transactions you guys announced. Can you talk about pricing on 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 putting -- from introducing them to the PSA operating platform?

Yes, Mike, I would say they vary anywhere from probably 70% of replacement costs to 130%, 150% of replacement costs 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's 600, 700 basis points above most people. And so I kind of use that as a barometer.

Our next question comes from the line of Michael Bilerman with Citi.

Ron, just want to come back to sort of 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 '06 when the stock was at $85. I guess, when you sort of think about all the options, you've been very hesitant to issue your equity. You've treated 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 2 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've thought about things. We've always thought about it in terms of the long-term value of our equity, kind of 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 really -- I have nothing to add to what you said about that, and I think you're 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's some deals out there that have -- some of the banks, in fact your bank did one, different structure, 10-year fixed then going to floating. We've 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, is, for the moment, kind of shut down due to, in part, I guess, the uncertainty as to the timing of quantitative easing [ph] 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're probably the only company that has fewer shares today or flat shares in the REIT industry, yet has grown tremendously. So I'm 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're looking at leverage in terms of debt. But as we put in the press release, we're looking at common equity, we're looking at leverage and then we're also looking at retained cash flow. And yet, as you've said, we do anticipate that we'll get about $200-million-plus from our partner in Shurgard Europe.

Okay. And then just as a follow-up, just on the $1.1 billion, just because it is a dramatic size relative to $11 billion, $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 6.5 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.

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

Our next question comes from the line of Todd Stender with Wells Fargo.

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. And just really at this point in the cycle, what growth rates do you generally assume in your acquisition underwriting? Just kind of 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?

Well, I'll give you an example. When you look at new properties with 0 occupancy, obviously, their growth rate is going to -- on a rate change is going to be very high because they're filling up. And if you have a property that's already at 92, its growth rate is going to be much lower than that 0-occupied property. But I'll give you a little illustration of what we have seen over the last 1 year, 1.5 years. Last year, we bought a couple of properties in Hawaii. We paid up for those, I think we probably paid 120%, 130% of replacement costs. And we underwrote them with a very, I'd say, very aggressive -- a pretty low cap rate. And we're 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're about 96% occupied today. So in terms of where we are in the cycle and what we're seeing, for the most part, we're seeing faster fill-ups, better rates, greater acceleration of the fill-up than we're underwriting. And probably, the best example of that is our Gerard property that we opened up in June, 1st of June this year. We finished construction at the end of September. It's 3,900 units there in the Bronx. And we're already 41% occupied, 1,600 units as of the end of -- as of yesterday. I can tell you, we had -- our underwriting had nowhere near that level of fill-up. So to fill up, rent out 1,600 units in 4 months in our system is unheard of. So it somewhat typifies what we're seeing, better fill up, better rates on a number of acquisitions, and as I touched on, on the Gerard property.

Our next question comes from the line of Michael Knott with Green Street Advisors.

Ron or John, curious to ask about your realized rents. It looked like they 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, that was...

We may have lost him. [Technical Difficulty]

On realized rents, Michael, I think going forward, most of our revenue growth is going to be built off of realized rents, our rental rates, vis-à-vis occupancy because we -- 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're going to be next year because I simply don't know. But we're going to continue pushing street rates, reducing discounts as I've mentioned earlier, and hopefully we'll be successful in continuing to grow the revenues.

Would it be logical to infer that if last cycle was 5 and it was restrained by the Shurgard merger and filling up their space, that should be better than that this cycle?

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

But we hope it'll be more than 5, Michael. And we're working toward that.

I'd like to ask one more, if I could. Curious, Ron, on the comment on the 150% of replacement costs. Just curious how that compares to some of your prior activity. Just curious how you got comfortable with that because I know you're a dyed-in-the-wool value investor, and just curious how you thought about that and why that sort of passed your test.

I am a dyed-in-the-wool value investor, you're correct, Michael. The -- I touched on a couple of properties we bought in Hawaii and where we paid above replacement costs. And some of the stuff we've acquired this year certainly fits that bill. And in part, it has to do with you can 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 there's 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 in 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're 94%, 95% occupied, will we be willing to pay above replacement costs, what it cost traditionally to buy the land and build a building? Yes, we would, because that is a very, very high barrier to market where you probably enjoy above-average occupancy and above-average rates.

Our next question comes from the line of R.J. Milligan with Raymond James and Associates. R.J. Milligan - Raymond James & Associates, Inc., Research Division: You guys, obviously, were very active on the acquisition front for the first couple of quarters -- or the second and third quarter. So whilst 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's large portfolios out there still, and I guess, seller pricing expectations, as we look into '14, would you expect the acquisition pace to continue, accelerate, decelerate, any color there?

We got Dave Doll here who does all the heavy lifting here on the acquisitions and developments. So I'll have him give you his 2014 outlook.

Thank you, Ron. I'll pull my crystal ball out. But, R.J., 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 '14 will be better or worse than '13. Clearly, more product has come to the market in the last 6, 7 months than we've seen in a number of years. So if it does come available, we'll continue to be active. We will have to wait and see.

R.J., we have a director on our board, a guy named Ron Spogli, who's in the private equity business. And he was commenting to me yesterday that here in the private equity business, as pricing hits a 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. R.J. Milligan - Raymond James & Associates, Inc., Research Division: And for the $430 million under contracts 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.

Our next question comes from the line of Todd Thomas with Keybanc Capital Markets.

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 sort of 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 sort of welcome that or -- just maybe you could just talk about the sort of competitive landscape a bit?

Well, it is competitive. I don't know that I would like any more entrants. I've-- 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's 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 mean, 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.

Our next question comes from the line of Tayo Okusanya with Jefferies.

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 was 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?

Yes, Tayo, this is Ron, and I'll 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 year's, have benefited from some reduction in R&M where we've done a few things to kind of 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, and as well as an absence of television. So advertising and selling expenses in Q4 will probably be down, I don't know, $1.5 million to $2 million. With respect to property taxes, John, you want to give some color?

Yes. In terms of property taxes, you see that in the third quarter we had a much larger increase than we had experienced in the first 6 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 are seeing many municipalities become very aggressive on not only assessment -- 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're seeing in the third quarter is kind of 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'm most worried 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.

Our next question comes from the line of Ross Nussbaum with UBS.

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

Ross, how could you forget it, it's 9%.

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-à-vis the revenue line. So can you give us a sense in your first year of ownership of this billion-ish that you just bought, how much of a percentage increase are you expecting in the NOI from those properties?

No, I -- 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 kind of help you, I think we put in the -- I don't know if it's in the -- it's not in 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 as that's a pretty good barometer of what you should look for kind of in 2014, 2015. There'll be a little more development in the mix, so there'll be kind of greater revenue growth than the stuff we bought in 2010, 2011. But I would use that as a pretty good barometer. And in that table, you have kind of what we paid for and what the occupancy changes are and what the rental rate changes are, and how we're 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%, 94%, we're 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.

Our next question comes from the line of Michael Bilerman with 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 sort of 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 5 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.

Yes, Michael, we're 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 -- kind of a term loan from the bank or some kind of unsecured debt offering. So we're kind of looking at the whole menu there with respect to debt.

Then I guess what's your preference in terms of running the capital structure, what's your -- put aside immediate costs, but how do you think -- I mean, is this going to be a shift if you do -- is there a mentality shift in the company? The current preferred market as 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 kind of another tool in the toolkit versus a change in strategy. Or 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, 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 got to assume that a transaction should be imminent. But I'm just trying to think about when we should hear about potential capital.

Yes, you'll probably -- sometime here in the fourth quarter.

Our next question comes from the line of Mike Mueller with JPMorgan. Michael W. Mueller - JP Morgan Chase & Co, Research Division: That was my question. I tried to get out of the queue.

Our next question comes from the line of Michael Knott with 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 the exact number out to all the people that are really trying to -- in the private market, trying to figure out what you're doing, but it would be helpful to get some more color from -- 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're thinking about raising?

Well, 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 5 5 [ph].

Yes, what I would tell you though, Michael, that's the need. 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. It's depending on what we do with our line of credit, too.

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's been?

No, actually, I'm glad you asked that, Michael. Europe had a pretty good quarter. The occupancy spread, it's been running below prior years. We've been running, let's see, June, we ended at 81.3% versus 83.8% last year. So we're down 2.5% year-over-year. And that spread narrowed at the end of September. The -- 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're 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.

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

Yes. Europe generates -- they're amortized -- they've been using their capital last 4, 5 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.

Our final question comes from the line of Michael Salinsky with RBC Capital Markets.

John, just a couple of quarters ago you talked about being a leader in the market in terms of pricing and that 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 street rates, as I mentioned earlier, to the extent that we continue to hold our occupancies. Ross had pointed out that our occupancies had -- our growth had narrowed year-over-year during the third quarter. So we don't really want to lose occupancy. So we're kind of monitoring and turning the dials to increase the rates while not losing occupancy. Reducing discounts while not losing occupancy. So we're 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're 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 continue to do the same strategies into the -- well into October. And hopefully, we can continue that through the remainder of this quarter.

Our next question comes from the line of Michael Knott with 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 it 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. Is that -- that sounds about right?

Yes. Again, I wouldn't read too much into that, Michael, because we've been -- 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 occupancy is just one part of the equation of revenue and revenue growth. It's -- there's other parts to it.

That was our final question. Now, I'd 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.