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Public Storage (NYSE:PSA)

Q3 2007 Earnings Call

November 9, 2007 12:00 pm ET

Executives

Clem Teng - Investor Relations

Ron Havner - Chief Executive Officer

John Reyes - Chief Financial Officer

Analysts

Craig Melcher - Citigroup

Christy McElroy - Banc of America

Lou Taylor - Deutsche Bank

Mark Biffert - Goldman Sachs

David Cohen - Morgan Stanley

Chris Pike - Merrill Lynch

Michael Knott - Green Street Advisors

Michael Mueller - JPMorgan

Lou Taylor - Deutsche Bank

Mark Biffert - Goldman Sachs

Michael Knott - Green Street Advisors

David Cohen - Morgan Stanley

Operator

Good afternoon. My name is Melissa and I'll be yourconference operator today. At this time I'd like to welcome everyone to thePublic Storage Third Quarter 2007 Earnings Conference Call. All lines have beenplaced on mute to prevent any background noise. After the speakers' remarksthere will be a question-and-answer period (Operator Instructions).

Thank you. It is now my pleasure to turn the phone over toyour host, Clem Teng. Sir, you may begin your conference.

Clem Teng

Good morning and thank you for joining us for our thirdquarter earnings call. Here with me today are Ron Havner, CEO, and John Reyes,CFO. We will follow the usual format followed by a question-and-answer period.

However, to allow for equal participation we ask requestthat you ask only one question when your turn comes up and then return to thequeue for any follow-up questions. Before we get started I want to remind youthat all statements other than statements of historical facts included in thisconference call are forward-looking statements.

These forward-looking statements are subject to a number ofrisks and uncertainties, many of which are beyond our control that could causeactual results to differ materially from those projected in these statements.

In addition to the risk and uncertainties of ordinarybusiness operations these forward-looking statements are subject to, amongother factors, the effect of general and local and real estate conditions,risks related to acquisitions, and risks associated with internationaloperations.

These and other factors that could adversely affect ourbusiness and future results are described in today's earnings press release aswell as in reports filed by Public Storage with the Securities and ExchangeCommission, including our 2006 annual report on Form 10-Q and subsequentreports on Form 10-Q and Form 8-K.

All forward-looking statements speak as of today November 9,2007. We undertake no obligation up to update or revise any forward-lookingstatements, whether as a result of new information, future events or otherwise.

During today's call we will also provide certain non-GAAPfinancial measures. The reconciliation to GAAP for these non-GAAP financialmeasures was included in our earnings press release. You can find our pressrelease, SEC reports and our audio webcast replay of this conference call onour website at www.publicstorage.com.

I'll turn it over to John Reyes.

John Reyes

Thank you, Clem. For the third quarter we reported fundsfrom operations of $1.43 per share versus $0.77 last year. As indicated in ourpress release there were several non-core items that impacted the numbers forboth quarters.

Notable for the current quarter was the recognition of alarge foreign currency exchange gain, which increased our funds from operationsby approximately $30.4 million or $0.18 per share. We are various intercompanyloans between Public Storage and our European subsidiary, which totaled €389million or $556 million as of September 30th.

Some of these loans were preexisting at the time of theShurgard merger but the bulk of the loans were funded at the beginning of thisyear to prepay debt totaling €325 million. In order to keep the currency revshere in the U.S. and not in Shurgard Europe we denominated the loans in Euros.

Further we have not hedged our exposure to the fluctuationin exchange rates. During the third quarter the Euro rose by 6% relative to thedollar resulting in a currency exchange gain. We also had similar gains totally$10 million in the first half of 2007.

Our European business is expected to refinance this debt inthe next 12 to 24 months at which time any gain will be realized based upon theexchange rate then in effect. After adjusting for all non-core items in eachperiod our FFO per share was $1.27 versus $1.12 in 2006, representing anincrease of 13.4%.

Driving this growth are improvements in our domestic samestores, our European same stores, our non-established properties and ourancillary businesses. With respect to our same stores, revenue growth moderatedto 1.7% for the third quarter.

This increase was due to a 2.7% increase in rental ratespartially offset by a reduction in occupancies. The modest growth in revenuestems in part from aggressive pricing and promotional programs to acceleratenet customer move in and improve overall portfolio occupancy.

Operating expenses for the same stores roses by 1.5%primarily from higher property taxes and advertising expenses that werepartially offset by lower property insurance and payroll costs. Advertisingexpenses increased approximately $1.8 million as a result of our continuedpromotional programs.

Property insurance was lower, as we benefited from a softerinsurance market due to the absence of hurricane activities.

Payroll declined because of improved labor management and anabsence of extra staff in anticipation of the Shurgard merger last year. Netoperating income for our same stores increased by 1.8% and our operating marginremains stable at 68%. With respect to the Shurgard same stores revenuesincreased by 6.3% in the third quarter compared to the same period last year.

This increase was primarily driven by higher occupanciesthat averaged 89.4% compared to 84.8% a year ago. The Shurgard same stores alsobenefited from our ability to raise rates as occupancy levels improved. As withthe Public Storage same stores we are seeing improved mark-to-market spreadsthat position us well for future revenue growth.

Operating expenses for the Shurgard same stores decreased by7.9%. This decline was due to significantly lower payroll costs associated withwage rate roll-down in connection with our new field compensation plans. Netoperating margin for these properties roses by 14.4% and operating marginsimproved to 68.5%. Our general and administrative expenses declined to $11.4million for the quarter compared with $36.2 million for the same period lastyear.

Included in G&A were $1.3 million in costs associatedwith expenses of cancelled development projects. In the third quarter of lastyear we had incurred a total of $29.6 million in costs associated with theShurgard merger, including fees to terminate certain contracts and theexpensing of cancelled development projects.

From a balance sheet perspective we continue to be in asolid position. Debt represented $1 billion, or only 5% of our totalcapitalization, and preferred securities totaled $3.8 billion, or 21% of totalcapitalization. Our capital commitments over the next 12 months are estimatedto be approximately $320 million, principally to fund our developmentactivities and debt amortization.

We currently have $170 million of cash in the bank. Inaddition we are retaining a significant amount of our operating cash flow. Forthe third quarter distributions paid to our common shareholders wereapproximately 44% of our funds available for distribution. Retained cash flowwas $107 million for the third quarter alone and $271 million for the firstnine months of 2007.

Finally as a reminder, we are in a seasonal business andexperience net move outs, lower occupancy and lower marginal rental rates inthe fourth quarter. Our third quarter is our seasonally peak. Please keep thisin mind, especially for those of you who are forecasting our earnings for thefourth quarter using a sequential methodology.

Before I turn it over to Ron I'd like you all to know todayis a very special day for Ron. Ron gets to add another candle to the birthdaycake today, bringing the total to 50. So please join me in telling Ron happybirthday.

Ron Havner

Thank you, John. Thank you, John. We're in a challengingoperating environment, whether due to housing, recession, increased supplies,or competitors trying to adopt our pricing strategies. Regardless we continueto do reasonably well and are gearing up for a dynamic 2008. Before I get intothe trends we are seeing let me give you the overall picture of our sources ofearnings.

Consolidated funds from operations, before minorityinterest, preferred dividends, interest income and G&A. What I wouldconsider operating earnings, was about $315 million for the quarter. With thatabout $160 million, or half, came from the Public Storage same stores, $47million, or about 15% came from the Shurgard same stores, and $21 million or 7%came from the European same stores.

Another $60 million, or about 20% came from ournon-same-store properties, both in the U.S. and in Europe. The balance is fromour commercial properties, including our investment in PS Business Parks andour ancillary businesses.

And while our Public Storage same stores are certainly thebest indicator of organic growth in the business, they are much less adeterminant of our growth rate than they were two years ago. For overall ourdomestic portfolio occupancy ended the third quarter at 88.2%, 40 basis pointshigher than last year.

In-place rents were also higher by 2.7% and NOI improved by6.8%. So, we have higher occupancies and higher rents than a year ago and weare in rent roll-up. Promotional discounts have been higher this year versuslast year but will be more comparable in the fourth quarter and going into the2008.

On the domestic front it is really a tale of two citiesbetween the Public Storage same stores and the Shurgard same stores. For thePublic Storage same stores revenue growth is moderate at 1.7%, the same as thesecond quarter. Our revenue growth has been trending down since the merger lastyear but I think we may be bottoming out.

We may see some acceleration of revenue growth in thequarters ahead due to easier comparisons and better overall pricing. However,we are in a challenging operating environment and it may be awhile before weget back to 5%-plus top-line growth.

Operating expense growth was held in check, primarily fromlower payroll costs. We expect this benefit will continue into the fourthquarter but will be less favorable in 2008. Advertising costs should be morefavorable in the fourth quarter and into 2008, as our spending is expected tobe more comparable period to period versus the significant increase inadvertising in 2007 versus 2006.

It is a different story for the Shurgard same stores. Forthe quarter revenue growth accelerated to 6.3% primarily from higher occupancy.This is the highest growth rate since completing the merger and almost doubledthe growth rate of 3.3% from the first quarter of 2007. Operating expensescontinue to decline primarily from lower payroll costs.

For the fourth quarter, we expect relatively strong revenuegrowth due to higher year-over-year occupancies and rates. Operating expensesshould continue to decline but not at the levels just experienced.

For 2008, we anticipate that the period-over-periodoccupancy and revenue growth will moderate and operating expenses will be morecomparable to the Public Storage properties.

In Europe our management team simply shot the lights out.The organizational and operational changes we affected last year and therelentless focus on cost and sales resulted in another exceptional quarter.

Same Stores revenues increased by 10% and net operatingincome grew by 27%. Similar to the U.S. with occupancy stabilized about 90%,market rates have been increased further, improving the spreads betweenin-place and market rents.

The properties also benefited from excellent expense controlresulting in negative expense growth through the quarter that drove operatingmargins to just over 63%, a record high

For the fourth quarter, we expect that European same storeswill continue to post above average NOI growth due to higher year-over-yearoccupancies, better pricing and an improved cost structure along, with thebenefits from centralized marketing and pricing.

For 2008, we expect that NOI will be stronger due to thelarge spread between asking and in-place rents and continued cost controls.

Last let me touch on capital allocation opportunities.During the month leading up to the recent changes in the capital markets, theuse of cheap aggressive debt instruments was artificially impacting the marketsfor storage facilities.

During the first six months of this year, Public Storageselectively acquired five properties while we and many of the more traditionalbuyers watched deals close at prices we did not understand.

The changes in the capital markets have significantlyimpacted how transitions are financed and the prices that buyers are nowwilling to pay. Highly leveraged financing based on forward-looking lease-upsand stabilized income projections is now scarce. Artificial valuations arebeing corrected and sellers are either out of the market and repricing FFOsbased on NOI growth and replacement cost.

In addition, quality properties in high-barrier markets stillcommand premiums, while there is a dirth of activity in secondary the marketsand SEA Properties. We will continue to monitor the markets for opportunitiesto deploy capital and will remain disciplined in our capital allocations.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is coming fromJonathan Litt with Citigroup. Please go ahead.

Craig Melcher - Citigroup

Hi, it's Craig Melcher here with Jon. Just wanted to get anupdate on your plan, longer-term plans for Europe. Are you still, is an IPOstill what your long-term goal is there or have you revisited that given thestrength you've been experiencing?

John Reyes

Craig, this is John. Long term, we still believe that an IPOfor Shurgard is the best course of action to position the company for muchaccelerated growth going into the future. Right now, as you know, the capitalmarkets in Europe are just as bad, if not worse than they are here in the U.S.

So trying to do an IPO in this market is certainly just outof the question at this time. So we will sit and wait and continue to enjoy thebenefits of the operations of Shurgard Europe.

Operator

Thank you. Your next question is coming from Christy McElroywith Banc of America. Please go ahead.

Christy McElroy - Banc of America

Hi, good morning, guys. Just going back to capitalallocation, can you provide some color on your cancelled development projects?Were there any overall macroeconomic trends that caused to you cancel theseprojects such that you're slowing your development spending at all, or was itmore one-off instances, it's not related to any change in strategy?

Ron Havner

Yes, Christy, the cancelled development properties I thinkare about half Europe, half U.S. In Europe it's a couple of properties, onewhere we've been working on a long time that we ended up losing, another inParis where we did a fair amount of work and then it's just not feasible tomove forward. Paris is very challenging.

In the U.S. they were repackages not ground-up developmentsand, again, we were going through the entitlement process, rezoning processthat we typically have to do for a repackage. Probably spent a little moremoney than we should have, but got into it and the conditions that the citieswere imposing just didn't make the projects economically feasible any more todo the repackage, so we abandoned them. But there’s no change in our strategyor anything like that.

Christy McElroy - Banc of America

Thank you.

Operator

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

Lou Taylor - Deutsche Bank

Thanks, good morning, and happy birthday, Ron. Ron, can yougive a little color on the Shurgard revenue growth in terms of how areretention rates running and how does length of stay compare to maybe markets orproperties where you haven't been as promotional?

Ron Havner

Well, I have John amplify this since he runs pricing. Butthe analysis that we've done and all the data that I've seen you could prettywell stack the portfolios on top of each other in terms of customer duration,churn rate, all the typical matrix that one looks at in a portfolio. As youknow, when you as we've communicated before.

When you're a fill-up mode and certainly the Shurgardproperties we had higher move-ins, higher growth in occupancy during the firstthree to six months of that you have a higher churn rate as you build in theoccupancy, so it will be awhile before we really get them stabilized. But on aportfolio basis it looks almost the same as Public Storage.

John Reyes

I don't have anything to add to that. That's exactly right.It's the same operating metrics that we've seen in our legacy properties.

Operator

Thank you. Your next question is coming from Mark Biffertfrom Goldman Sachs. Please go ahead.

Mark Biffert - Goldman Sachs

Hi, guys. John or Ron, just had a question on your markets,what you're seeing, where you're seeing the greatest revenue growth and whatmarkets do you continue to discount due to weakness in fundamentals or markettrends?

John Reyes

Well, the markets that we are seeing the most strength inour portfolio is basically the Seattle, Portland, the Pacific Northwest. TheMidwest is doing very well for us. Some of the our largest markets, such as LosAngeles and San Francisco, are starting to perk up. Where we're struggling themost is in Florida and some of the northeastern markets going up to the D.C.markets, Philadelphia, Baltimore and even Atlanta has been weak for us.

I forgot the other part of your question but, in terms ofdiscounting, bottom line is we discount across the whole country. We justcannot buy property if it just really depends on the discounting. It depends onoccupancy, the way the inventory is moving or not moving we'll discount. Thebottom line is we will continue to do discounting because we believe it works.

The dollar special works. We're going to continue to do it.We think the operating results that you see in the Shurgard portfolio bearsthat out. And also even in Europe, Europe adopted the one Euro special and youcan see the results that they have enjoyed over the past couple quarters. So wewill continue to discount.

Mark Biffert - Goldman Sachs

Great, thanks.

Operator

Thank you. Your next question is coming from David Cohenwith Morgan Stanley. Please go ahead.

David Cohen - Morgan Stanley

Good afternoon. So, Ron, your margins on the Shurgardportfolio now basically reached PSAs levels. I'm curious do you think you aredone with the cost synergies at this point? How much further do you think youcan increase them?

And just secondly, you previously talked about a revenueenhancement opportunity, as well, from the merger. Are you guys at all workingon that as well and what are the prospects so far?

Ron Havner

Well, I'll start with the revenue and then work on theexpense side. I think on the revenue enhancement, starting this quarterShurgard same store is up 6 plus percent and over in Europe up over 10%. So, Ithink that's pretty good revenue enhancement and the outlook is pretty good inthat arena.

And as John just touched on, both portfolios, we've combinedthem or introduced in Europe a similar pricing and promotional strategy and Ithink the results speak for themselves.

On the cost side as I touched on, in Q4 you're going to seethe continued benefit to the wage rate roll-down in the Shurgard same storesand that will dissipate going into next year. Advertising growth will be morecomparable going into '08 versus '07.

And I think, we've got another quarter or two to flush outthe yellow pages. There was $3 million to $5 million in savings in yellow pagesand that's got another quarter or two as the phone books roll through to flushthrough the P&L.

There's a whole bunch of smaller items. We've got managementoffices to consolidate. That takes awhile and that'll be working through.Obviously, with the high churn in the Shurgard employees post merger ourrecruiting, hiring costs, we're at an accelerated pace.

That has moderated. We down to a little more normalized runrate in terms of hiring. How much that is I don't know, but you should some ofthose benefits. R&M in the Shurgard portfolios was very high this year;trying to get some properties up to our standards and that should moderategoing into next year a little bit as well.

And you've got little things like the phones, the telephonesin the Shurgard properties are about $100, $150 more a month than they run inour properties, so you have to go through and identify the phone lines, deletethe phone lines, and that's a year to a year and a half project.

So there's little things like that, combined with, I'm surethere's some things on the expense side that'll go up, such as property taxesand those kinds of things. There's still some more stuff but it's not the bigstuff that we identified. You'll see most of that flush through by the end of2007.

David Cohen - Morgan Stanley

Thank you.

Operator

Thank you. Your next question is coming from Chris Pike withMerrill Lynch. Please go ahead.

Chris Pike - Merrill Lynch

Good morning. Ron, I guess if I ask you how your birthday'sgoing so far does that count as a question?

Ron Havner

How you doing, Chris?

Chris Pike - Merrill Lynch

I'm okay. I guess maybe for you or John, back to Lou'squestion regarding retention, maybe I missed this in the release but can youguys talk about what type of rental rate-ups you are seeing in those units thatyou're retaining at these longer durations, they're greater than five or six orseven months, whatever that break-even point from that perspective is when youstart to make money. What kind of rental rate-ups are you seeing on theretention side?

John Reyes

Sorry, Chris, Ron and I are looking at each other trying tounderstand your question.

Chris Pike - Merrill Lynch

I'm trying to think through. I guess talking to Clem in thepast, it's not until some point in time until you burn off the 113 and I'm justwondering, after you get to that sweet spot in that retention period, are youstarting to see really significant rental rate-ups in those renewals?

John Reyes

Let me see if I can answer your question if I understand itright. We do not raise rents generally to our tenants but once a year. So let'sjust say I'm a new tenant and I move in, I get the dollar special. We generallywill not raise the rent to me or any other tenant until they've been here atleast one year.

So there isn't, they've been here seven months and we'regoing to up their rent, so to speak. That doesn't happen generally here. So, wedo it once a year. We generally raise our rents to our existing tenants duringthe period usually commencing in March through June, which we believe is themost opportune time to raise rents for our tenants.

We generally do not raise rents to tenants in the fourthquarter because our experience has been very negative when we do that. So,Chris, I'm not sure that that answers your question.

Chris Pike - Merrill Lynch

It does and maybe I will just follow-up to get some furtherclarification off line. Thanks a lot, guys.

John Reyes

Okay.

Operator

Thank you. Your next question is coming from Michael Knottwith Green Street Advisors. Please go ahead.

Michael Knott - Green Street Advisors

Hey, guys. Hey, Ron, I'm wondering if you can just provide alittle more color on your comment that it's a challenging operatingenvironment. Is I recall last quarter it seemed to be the case that the housingmarket and all that wasn't affecting too much. What sort of changed in the lastthree months and is it lower occupancy at 9/30 compared to last year? What'scoloring that perspective? Thanks.

Ron Havner

Yes. I don't know, Michael, that my view of the market perse is changed. I will tell you psychologically I always feel better in June andJuly when we are 91%, 92% occupied than I do in October when we are 89%occupied.

But I think my comments are just straight out preempting thequestion of what is the impact of housing that we typically get each quarter.The 40,000 foot view, I believe the economy's slowed; housing, all the changesin the capital markets the last five or six months. And I would believe thatit's having some impact on demand for all businesses, including ours. How much,I don't know.

It is hard to delineate between, quote, bad housing marketsand good housing markets. I was reading the script of Bobby Toll on the housingmarkets and how he was grading them and one of the worst markets was Minnesotaand we're doing great in Minnesota.

So, it's a little hard for us to correlate but I'm sure it'shaving some impact for us in Florida, some impact for us in Vegas, but how muchI don't know.

Michael Knott - Green Street Advisors

Thanks.

Operator

(Operator Instructions) Your next question is coming fromMichael Mueller with J.P. Morgan. Please go ahead.

Michael Mueller - JPMorgan

Hi, a question about Europe's margins. They're still runninga lot higher than where they were but still call it about 500 basis pointsbelow the U. S. Is there any structural reason why the margins will remain notablylower than the U.S. over time or do you think they'll gravitate to where youoperate in the U.S.?

Ron Havner

Well, all of the things being equal, Mike, there's a plus inEurope and a minus. Our European operations at this time do not have anywherenear the scale in markets that we have in the U.S. I mean, they just don't.

And markets such Seattle, Dallas, Houston, LA, where we havehuge scale it drives efficiencies in the management, in the yellow pages, inour advertising, just a whole variety of things and then the overall scale ofthe business in totality. That in Europe, though, is offset by much higherrates. The blended rate in Europe I think rev path for Europe was $24.50 a footin Q3. That's almost double the rental rate in the rev path in the U.S.

So, in markets where your rental rates are much highertypically your margins are much better. And here in the U.S., and it's the samein the Europe when you go between Belgium and London, but here in the U.S. ouroperating margins in Hawaii are far better than they are in Kansas because inHawaii the rent's $3 a foot and in Kansas it's $0.50 per foot and you have thefixed costs of payroll and property taxes, et cetera.

So, higher rent per foot lead to better operating margins.In Europe that's offset by lack of scale and then kind of a base level higheroperating cost structure in terms of personnel and few other things. In thelong run will Europe get to 68%? That's a possibility. They actually hadscalability; my guess would be they would even have a chance going above theU.S. just because of the higher rental rates.

Michael Mueller - JPMorgan

Okay. Thanks.

Operator

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

Lou Taylor - Deutsche Bank

Thanks. Ron, in terms of the European loan that you've gotthere, you're giving guidance of repaying 12 to 24 months out. Why wait thatlong and why wouldn't you do something say, within the next 12 months?

John Reyes

Lou, this is John. We could do something but the capitalmarkets again are in flux in Europe. This is not an opportune time to be doingthat. We will do it when the opportunity is there, but at the current timeframewe simply don't have enough visibility as to when we will do that at this time.

But I think is certainly, as soon as we want to get ourmoney back into the states, but again it's really a capital market drivenevent.

Lou Taylor - Deutsche Bank

Thank you.

Operator

Thank you. Your next question is coming from Mark Biffertwith Goldman Sachs. Please go ahead.

Mark Biffert - Goldman Sachs

Hi, guys. Related to the $107 million in cash flow that youguys are throwing off, I'm just wondering as you look to the future in terms ofacquisition bonds or doing acquisitions versus maybe doing share repurchases,do you have a preference there?

Ron Havner

Mark, we're always evaluated debt opportunity acquisitionsversus share repurchases versus development. So, I mean that we're looking atthat all the time and we are in a fortunate position that we have the financialflexibility to pretty much take advantage of whichever opportunity we think isbest or several opportunities at the same time. Yes, we're looking at it allthe time.

Mark Biffert - Goldman Sachs

Thanks.

Operator

Thank you. Your next question is coming from Michael Knottwith Green Street Advisors. Please go ahead.

Michael Knott - Green Street Advisors

Hey, guys. This is decision to refinance Europe at somepoint imply a much longer time until an IPO is completed or does it reflectsomething you may have learned from the IPO process over the summer that maybegetting paid back from the offering isn't as appealing structurally over there?

Ron Havner

No, no, we want those it's easier today, Michael, the loanfrom -- as to Shurgard, Europe, let's step back in time. Why did we make theloan? As John said, there was a loan there existing at the time of the mergerand then we advanced money into Europe to pay off about €350 million ofmortgage debt encumbering the wholly owned properties.

The properties were under leveraged and we wanted to cleanup that financing in preparation for the IPO. In connection with the IPO, theplan was post IPO to go out and refinance that, establish a separate creditfacility in Shurgard Europe with European lenders to funds their operation onan ongoing basis. That is still the plan.

The thing that's held it up at this juncture is, A., thecapital event combined with the banking market in Europe is equally aschallenged as it is in the U.S. It's not that we couldn't get financing, it'sjust we'll probably get better rates and terms if we wait a little bit.

John Reyes

But, Michael, the inter-company loan was not a structuralflaw in the IPO, it was not a reason why the IPO was not successful, so we haveno reason to believe that continuing to have the inter-company loan wouldprevent us from doing an IPO if the opportunity arose.

Michael Knott - Green Street Advisors

Thanks.

Operator

Thank you. Your next question is coming from David Cohenwith Morgan Stanley. Please go ahead.

David Cohen - Morgan Stanley

Hey, you guys obviously have the financial flexibility to doacquisitions. I guess my question is, operationally are you far enough along onthe Shurgard integration to even do a larger portfolio acquisition at thispoint in time?

Ron Havner

Well, John Graul's sitting here at the other end of thetable and he runs operations and he's nodding his head, bring it on. No, as Itouched on I think at the end of last quarter and I'll reiterate again hear, wedid have a lot of changes in the personnel, both at the regional, the districtand property levels. That started really stabilizing in July and August and weare really at kind of a normal run-rate.

The merger provided us great opportunity to re-examine ourwhole hiring, recruiting processes and I'm really excited about the people sideof it. From a systems standpoint, you'll recall that at the time we did theShurgard merger, the evening the deal was approved everything was on to oursystem so that's never really been an issue and I think over the last yearwe've demonstrated our ability to quickly integrate portfolios into ourpricing, promotional, internet and media programs as well. So, yes, we'restabilized and on back to normal kind of operating basis.

David Cohen - Morgan Stanley

Thanks.

Operator

Thank you. There appear to be no further questions. I wouldlike to turn the floor back over to Clem Teng for any closing remarks.

Clem Teng

I'd like to thank everybody for participating on the calltoday. We'll see many of you next week at the Navy conference in Las Vegas. Ifnot then we'll talk to you next quarter. Thanks.

Operator

Thank you. This concludes today's Public Storage thirdquarter 2007 earnings conference call. You may now disconnect.

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