UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DCD.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, ~~2004~~ 2005

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file number 0-11455

SHURGARD STORAGE CENTERS, INC.

(Exact name of registrant as specified in its charter)


Washington		91-1603837
(State of organization)		(IRS Employer Identification No.)

1155 Valley Street, Suite 400, Seattle, Washington 98109

(Address of principal executive offices) (Zip code)

Registrant’s telephone number, including area code: (206) 624-8100

Securities registered pursuant to Section 12(b) of the Act:


Title of each class		Name of each exchange on which registered
Class A Common Stock, par value $.001 per share		New York Stock Exchange
Preferred Share Purchase Rights		New York Stock Exchange
8.7% Series C Cumulative Redeemable Preferred Stock, par value $.001 per share		New York Stock Exchange
8.75% Series D Cumulative Redeemable Preferred Stock, par value $.001 per share		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act). Yes ¨ No x

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer ~~(as~~or ~~defined~~a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). ~~Yes x No ¨~~ (Check one):

~~Aggregate~~Large ~~market~~accelerated ~~value~~filer ofx ~~voting~~Accelerated ~~stock~~Filer ~~held~~¨ byNon-accelerated ~~nonaffiliates~~filer ~~of the registrant, based on the closing price of the registrant’s common stock, as of June 30, 2004: $1,663,202,258~~ ¨

~~Class~~Indicate Aby ~~Common~~check ~~Stock,~~mark ~~par value~~whether ~~$.001~~the ~~per~~registrant ~~share,~~is ~~outstanding~~a shell company (as ofdefined ~~March~~in 1,Rule ~~2005:~~12b-2 ~~46,649,730~~of ~~shares~~the Exchange Act). Yes ¨ No x

~~Documents~~Aggregate ~~incorporated~~market ~~by reference: Portions~~value of ~~the~~voting ~~registrant~~stock ~~definitive~~held ~~proxy statement for the 2005 annual meeting of shareholders are incorporated~~ by ~~reference~~non-affiliates ~~in Part III~~ of ~~this Form 10-K. The definitive proxy statement will be filed with~~ the ~~Securities~~registrant, ~~and~~based ~~Exchange~~on ~~Commission within 120 days after~~ the ~~end~~closing price of the ~~fiscal~~registrant’s ~~year~~common tostock, ~~which~~as ~~this~~of June 30, ~~report~~2005: ~~relates.~~$2,081,240,221

Class A Common Stock, par value $.001 per share, 47,073,810 shares outstanding as of March 8, 2006.

Documents incorporated by reference: None.

TABLE OF CONTENTS

PART I
Item 1—Business		1
Item 2—Properties		15
Item 1A—Risk Factors		9
Item 3—Legal Proceedings		19
Item 1B—Unresolved Staff Comments		17
Item 4—Submission of Matters to a Vote of Security Holders		20
Item 2—Properties		17
Item 3—Legal Proceedings		20
Item 4—Submission of Matters to a Vote of Security Holders		21
PART II
Item 5—Market for the Registrant’s Common Equity and Related Stockholder Matters		2122
Item 6—Selected Financial Data		2223
Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations		2324
OVERVIEW		2324
CRITICAL ACCOUNTING POLICIES AND ESTIMATES		2527
RESULTS OF OPERATIONS		2831
SEGMENT ANALYSIS		3436
FUNDS FROM OPERATIONS		52
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES		5253
OFF BALANCE SHEET TRANSACTIONS.		5758
Item 7A—Qualitative and Quantitative Disclosures about Market Risk		58
Item 8—Financial Statements and Supplementary Data		5960
Item 9—Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		5960
Item 9A—Controls and Procedures		5960
Item 9B—Other Information		6261
PART III
Item 10—Directors and Executive Officers of the Registrant		6362
Item 11—Executive Compensation		6366
Item 12—Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		6370
Item 13 —Certain Relationships and Related Transactions		6472
Item 14—Principal Accountant Fees and Services		6474
PART IV
Item 15—Exhibits, Financial Statement Schedules and Reports on Form 8-K		65
Item 15—Exhibits, Financial Statement Schedules		75
SIGNATURES		7482
Item 8—Financial Statements and Supplementary Data		F-1
Financial Statement Schedule		F-4849

PART I

Item 1—Business

Overview

This annual report on Form 10-K contains forward-looking statements within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and in Section 21F of the Securities Exchange Act of 1934 as amended. The statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of these terms or other similar terminology. These statements are only predictions. Forward-looking statements, including statements regarding our recently announced proposed merger with Public Storage, Inc. (Public Storage) discussed below, such as efficiencies, cost savings, market profile and financial strength, and the competitive ability and position of the combined company, are inherently uncertain. Our actual results may differ significantly from our expectations due to uncertainties, including the risk that:

• ~~changes~~we inor ~~economic~~Public ~~conditions~~Storage inmay ~~the~~encounter ~~markets~~difficulties in ~~which~~completing weour ~~operate,~~proposed merger and~~/or~~ ~~competition~~integrating ~~from~~the ~~new~~two ~~self~~companies; ~~storage facilities~~ or ~~other~~we ~~storage alternatives,~~ may ~~cause~~fail ~~rent~~ to ~~decline~~obtain ~~and~~approval ~~may~~of ~~cause~~the ~~occupancy~~transaction ~~rates~~by toour ~~drop,~~shareholders or ~~may~~to ~~cause~~satisfy ~~delays~~other inclosing ~~rent~~conditions upto ofthe ~~newly developed properties~~transaction;

•

changes in economic conditions in the markets in which we operate, and/or competition from new self-storage facilities or other storage alternatives may cause rent to decline and may cause occupancy rates to drop, or may cause delays in rent-up of newly developed properties;

•

new developments could be delayed or reduced by zoning and permitting requirements outside of our control, increased competition for desirable sites, construction delays due to weather, unforeseen site conditions, labor shortages, personnel turnover or scheduling problems with contractors, subcontractors or suppliers;

•

we may experience increases in the cost of labor, taxes, marketing and other operating and construction expenses;

•

tax law changes may change the taxability of future income;

• increases in interest rates may increase the cost of refinancing long -term debt;

•

our alternatives for funding our business plan may be impaired by economic uncertainty due to the impact of war or terrorism;

• Shurgard Self Storage SCA, our wholly-owned European ~~joint~~subsidiary ~~venture~~that ~~in which~~ we ~~hold an 87.23% ownership interest and which we~~ refer to as Shurgard Europe, may be adversely affected if it is unable to ~~complete~~find ~~funding~~adequate ofsites ~~its~~to ~~development~~complete ~~joint~~the ~~ventures~~targeted ~~and~~number ~~maintain~~of ~~compliance~~developments ~~with~~in its ~~debt~~Second ~~covenants;~~Shurgard ~~and~~joint venture;

•

we may not maintain compliance with our debt covenants; and

•

we may be adversely affected by legislation or changes in regulations.

~~Other~~The proposed merger and other factors that could affect our financial results are described below and in Item 1A 1Risk ~~(Business)~~Factors of this annual report on Form 10-K. Forward-looking statements are based on estimates as of the date of this report. We ~~disclaim~~do ~~any~~not ~~obligation~~intend to publicly release the results of any revisions to these forward-looking statements reflecting new estimates, events or circumstances after the date of this report.

Shurgard Storage Centers, Inc. (we, our, the Company or Shurgard) is an equity real estate investment trust, or REIT, that develops, acquires, invests in, operates and manages self -storage centers and related operations in the United States and Europe. Our self -storage centers offer easily accessible storage space for personal and business uses. We are one of the largest owners and operators of self -storage centers in the United States and the largest owner in Europe. As of December 31, ~~2004~~2005, we operated a network of ~~633~~646 storage centers containing approximately 40 million net rentable square feet located throughout the United States and in Europe.

We were incorporated in Delaware on July 23, 1993 and began operations through the consolidation on March 1, 1994 of 17 publicly held real estate limited partnerships that were sponsored by Shurgard Incorporated. Shurgard Incorporated together with its predecessors have operated a self storage business since 1972. On March 24, 1995, Shurgard Incorporated merged with and into Shurgard Storage Centers, Inc. and we became self-administered and self-managed. In May 1997, we reincorporated in the state of Washington. We have elected to

We were incorporated in Delaware on July 23, 1993, and began operations through the consolidation on March 1, 1994 of 17 publicly held real estate limited partnerships that were sponsored by Shurgard Incorporated. Shurgard Incorporated together with its predecessors have operated a self-storage business since 1972. On March 24, 1995, Shurgard Incorporated merged with and into Shurgard Storage Centers, Inc. and we became self-administered and self-managed. In May 1997, we reincorporated in the state of Washington. On March 6, 2006, we entered into an Agreement and Plan of Merger with Public Storage, Inc., which agreement is further described below and in our current report on Form 8-K dated March 7, 2006. We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended. To the extent that we continue to qualify as a REIT, we will not be subject to U.S. federal and state income tax, with certain limited exceptions, on the taxable income that is distributed to our shareholders.

Our investment objective is to ~~increase~~realize shareholder value through:

• continued improvement in the performance of our portfolio as measured by year -over -year increases in ~~net~~Net ~~operating~~Operating ~~income~~Income (NOI);

• acquisition of additional self -storage properties;

• development of new storage centers; and

• redevelopment or expansion of selected properties~~, and~~.

•We ~~sales~~believe ofthe ~~properties~~geographic ~~when~~diversification weof ~~believe~~our ~~market~~portfolio ~~conditions~~and ~~warrant~~our oroperating ~~where~~economies aof ~~property~~scale nowill ~~longer~~enhance ~~fits~~our inability ~~our~~to ~~strategic~~achieve ~~plans~~this objective.

WeShurgard ~~believe~~currently ~~our~~has ~~access~~four reportable segments: Domestic Same Store and New Store and European Same Store and New Store. Same Store includes those stores acquired prior to ~~capital,~~January 1 of the ~~geographic~~prior ~~diversification~~year and developed properties operating for two full years as of January 1 of the current year. New Store represents those storage centers recently acquired or developed for which performance is measured primarily based on original investment expectations. We evaluate the performance of all storage centers on the same basis regardless of our ownership ~~portfolio,~~interest ~~and~~in the property. We believe NOI is a meaningful measure of operating ~~economies~~performance as a supplement to net income because we rely on NOI for purposes of ~~scale~~making ~~will~~decisions ~~enhance~~with ~~our~~respect ~~ability~~to resource allocations, current property values, segment performance, and comparing period-to-period ~~achieve~~and ~~this~~market-to-market ~~objective~~property operating results. A summary of revenues, ~~consolidated~~ NOI and ~~total~~storage center assets for each of our segments for the years ended December 31, ~~2004~~2005, ~~2003~~2004 and ~~2002~~2003 is set forth in Note 20 23 to our consolidated financial statements included elsewhere in this report and is incorporated by reference.

Business Strategy

Our mission is to ~~become~~be the global leader in storage products and services and to ensure satisfaction and value for our customers through security, quality and innovation. Our strategy in the United States and Europe involves an emphasis on customer service and satisfaction, portfolio management, storage center development and acquisitions and property management systems.

~~Customer~~Proposed ~~Service~~Merger ~~and~~with ~~Satisfaction~~Public Storage

~~Our~~On ~~customer~~March 6, ~~service~~2006, we entered into an Agreement and ~~satisfaction~~Plan ~~strategy~~of ~~focused~~Merger (Merger onAgreement), ~~training~~with ~~and~~Public ~~developing~~Storage, ~~store~~Inc. ~~employees~~(Public Storage), ~~locating~~that contemplates a merger whereby we will be merged with and into a subsidiary of Public Storage. Each outstanding share of our ~~stores~~common instock ~~convenient,~~will ~~easy~~be converted into the right to ~~access~~receive ~~locations~~0.82 of a fully paid and non-assessable share of Public Storage common stock. In connection with this transaction, ~~providing~~we ~~security~~expect ~~for~~to redeem each series of our ~~self~~outstanding ~~storage~~preferred ~~centers~~stock ~~and~~in ~~devoting~~accordance ~~resources~~with toits ~~grow~~terms. Public Storage will assume approximately $1.8 billion of our ~~self~~debt. ~~storage~~Holders ~~business~~of Shurgard’s stock options, restricted stock units and shares of restricted stock will receive, subject to ~~promote~~adjustments, ~~the~~options ~~Shurgard~~exercisable ~~brand~~for shares of Public Storage common stock, restricted stock units and restricted shares of Public Storage common stock, respectively.

Quality Employees. We view the quality of customers’ interaction with employees as critical to our long-term success. Accordingly, we emphasize customer service and teamwork in our employee training programs. Through our focus on training, personnel development and decentralized decision-making, we believe we attract well-qualified, highly motivated employees who are committed to providing superior levels of customer service.

Convenient and Secure Storage Centers. Our storage centers are easily accessible, offer a range of storage products and services for customer convenience and emphasize security and product quality. We believe our strategy of offering high-quality, convenient storage centers strengthens our Shurgard brand image, attracts and retains customers and enables us to achieve and maintain premium rents.

• Store Location and Hours. Our storage centers are generally located in major metropolitan areas along retail and high-traffic corridors for easy customer access and often have significant road frontage for high visibility. Although hours vary from storage center to storage center, customers can generally access their individual units between 6 a.m. and 9 p.m. seven days a week.

• One-Stop Convenience and Services. Most of our storage centers have retail services and offer a range of storage products and ancillary services, including supplies such as packing materials, locks and boxes, as well as services such as storage center tenant insurance referrals, moving company referrals and truck rentals that we believe conveniently and efficiently address customers’ storage needs. In addition, a number of our storage centers offer temperature-controlled storage space.

•Our ~~Property~~board ~~Security.~~of Wedirectors ~~use~~and athe ~~variety~~board of ~~measures~~directors atof ~~our~~Public ~~storage~~Storage ~~centers,~~have asapproved ~~appropriate,~~the toMerger ~~enhance security~~Agreement. The ~~Such~~proposed ~~measures~~merger ~~may~~is ~~include,~~subject ~~among~~to ~~others,~~our ~~on-site~~shareholders’ ~~personnel~~approval, ~~electronic~~Public ~~devices~~Storage’s ~~such~~shareholders’ asapproval ~~intrusion~~of ~~and~~the ~~fire~~issuance ~~alarms,~~of ~~access~~shares ~~controls,~~of ~~video~~Public ~~and~~Storage ~~intercom~~stock surveillance devices, individual unit alarms, fencing and lighting. We assign each customer a designated personal identification number for use in connection with a computerized gate access system. Each access is automatically logged into a computer database. In addition to ~~those~~be ~~discussed~~used ~~directly~~as ~~above,~~merger weconsideration ~~have developed~~ and ~~plan~~other tocustomary ~~continue~~closing ~~to improve our package of security controls, including software, video and interactive communication~~conditions.

•We ~~Capital~~have ~~Expenditures~~made ~~and~~certain ~~Maintenance.~~representations Weand ~~invest~~warranties ~~capital~~in tothe Merger ~~improve~~Agreement ~~our~~and ~~properties~~have ~~consistent~~agreed ~~with~~to ~~our~~certain ~~commitment~~covenants, toincluding, ~~maintain~~among ~~attractive~~others and ~~secure~~subject ~~self~~to ~~storage~~certain ~~centers~~exceptions, ~~which~~to ~~enables~~permit usour board of directors to ~~pursue~~comply awith ~~premium~~its ~~pricing~~fiduciary ~~strategy.~~duties, Inand ~~addition~~not to solicit, ~~capital~~negotiate, ~~expenditures~~provide ~~for~~information ~~consistent~~in ~~signage~~furtherance of, ~~and~~approve, ~~color~~recommend ~~scheme~~or ~~among~~enter ~~our~~into ~~properties~~any ~~strengthen~~other ~~our~~acquisition ~~brand~~proposal ~~image~~(as defined in the Merger Agreement).

~~Marketing~~This ~~and~~description ~~Sales. We~~of ~~train~~certain ~~storage center~~terms ~~managers~~of inthe ~~fundamental~~Merger ~~sales~~Agreement ~~and~~does ~~customer~~not ~~service~~purport ~~skills~~ to ~~elicit~~be ~~customer~~complete ~~needs~~ and ~~turn~~is ~~prospects~~qualified ~~into customers. We also have a national sales and customer service center~~ in ~~the~~its ~~United~~entirety ~~States~~by toreference ~~field telephone calls from current and prospective customers. Employees at our U.S. sales center are able~~ to ~~lease space at~~ the ~~storage~~full ~~center~~text of ~~most convenient to~~ the ~~customer.~~Merger WeAgreement, ~~have~~a ~~implemented~~copy ~~additional~~of ~~sales~~which ~~and~~is ~~marketing~~filed ~~programs~~with ~~to broaden~~ our ~~distribution~~current ~~channels,~~report ~~such~~on asForm ~~a website for our enhanced e~~8-~~commerce~~K ~~business~~dated March 7, ~~business directed marketing and an expanded direct sales force in selected markets~~2006.

•Customer ~~Market~~Service ~~Research. We maintain an extensive market research database on our primary markets~~ and ~~closely~~Satisfaction track occupancy levels, rental rates and other operational data for competing self storage properties within these markets. We have conducted focus group research and telephone surveys, and use customer comment cards to identify the primary considerations in customers’ self storage choices and satisfaction so that we can better attract and service customers.

•Our ~~Market~~customer ~~Share.~~service Weand ~~employ~~satisfaction ~~various~~strategy ~~means~~focused toon ~~increase~~training ~~our~~and ~~share~~developing ofstore ~~specific~~employees, ~~self~~locating ~~storage~~our ~~markets.~~stores ~~We place prominent advertisements~~ in ~~the~~convenient, ~~yellow~~easy ~~pages and seek~~ to ~~promote customer awareness of our storage centers through highly visible storage center~~ access locations, ~~site~~providing ~~signage~~security ~~and~~for ~~architectural features. We locate~~ our self-storage centers ~~along retail~~ and ~~high-traffic~~devoting ~~corridors,~~resources ~~usually with significant road frontage~~ to ~~increase~~grow ~~visibility.~~our ~~We build a distinctive “lighthouse” office on most newly developed~~ self-storage ~~centers~~business ~~to distinguish us from competitors~~ and to ~~increase~~promote ~~customer awareness of~~ the Shurgard brand. ~~We promote our 24-hour toll free sales and customer service center number and website in our advertising, marketing materials and site signage.~~

~~Portfolio~~Quality ~~Management~~employees. ~~Our~~We ~~portfolio~~view ~~management~~the ~~strategy~~quality isof customers’ interaction with employees as critical to ~~increase~~our ~~cash~~long-term success. ~~flow~~Accordingly, bywe ~~achieving~~emphasize ~~the~~customer ~~highest~~service ~~rental~~and ~~rate structure~~teamwork ~~consistent~~in ~~with~~our ~~strong~~employee ~~occupancy~~training ~~rates~~programs. Through our focus on training, ~~cost~~personnel ~~containment~~development and decentralized decision-making, ~~improved~~we ~~operating~~believe ~~leverage~~we ~~and~~attract ~~expansion~~well-qualified, ofhighly ~~our~~motivated employees ~~existing~~who ~~storage~~are ~~centers~~committed to providing superior levels of customer service.

~~Revenue~~Convenient ~~Optimization. We~~and ~~seek~~secure tostorage ~~optimize~~centers. Our ~~our revenue by achieving the highest rental rate structure for our~~ storage centers, ~~and~~are ~~high~~easily ~~levels of occupancy~~accessible, ~~through~~offer ~~the~~a ~~use~~range of ~~teams of~~ storage ~~center~~products ~~employees~~ and ~~district~~services ~~managers~~for ~~who~~customer ~~are~~convenience ~~trained~~ and ~~authorized~~emphasize tosecurity ~~change~~and product ~~rental~~quality. ~~rates~~We ~~based~~believe onour ~~their~~strategy ~~analysis~~ of ~~demand~~offering ~~and~~high-quality, ~~availability~~convenient ~~at a particular~~ storage ~~center.~~ ~~Market~~centers ~~personnel~~strengthens ~~regularly~~our ~~evaluate~~Shurgard ~~their~~brand ~~properties’ rental rates~~image, ~~based~~attracts ~~on unit demand~~ and ~~unit~~retains ~~availability,~~customers and ~~can~~enables ~~quickly~~us ~~change marginal rental rates~~ to ~~ensure~~achieve ~~that~~and ~~revenue~~maintain ispremium ~~optimized~~rents.

~~Cost~~• ~~Containment~~Store location and ~~Improved Operating Leverage~~hours. We ~~seek~~Our tostorage ~~increase~~centers ~~cash~~are ~~flow~~generally bylocated ~~carefully~~in ~~containing~~major ~~operating~~metropolitan ~~expenses.~~areas ~~For~~along ~~example,~~retail weand ~~closely~~high-traffic ~~monitor~~corridors ~~our~~for ~~real~~easy ~~estate~~customer ~~tax~~access ~~assessments,~~and ~~appealing~~often ~~such~~have ~~assessments~~significant asroad ~~appropriate,~~frontage ~~and~~for ~~engage~~high ~~consultants to manage certain utility costs~~visibility. InAlthough ~~addition,~~hours asvary wefrom ~~increase~~storage ~~the~~center ~~number~~to ofstorage ~~properties in our targeted markets~~center, wecustomers ~~achieve economies of scale because we~~ can dogenerally soaccess ~~without~~their ~~incurring~~individual ~~significant~~units ~~incremental~~between ~~overhead~~6 ~~expense~~a.m. Weand ~~believe~~9 ~~that~~p.m. ~~our~~seven ~~management and~~days ~~operational~~a week.

•

One-stop convenience and services. Most of our storage centers have retail services and offer a range of storage products and ancillary services, including supplies such as packing materials, locks and boxes, as well as services such as storage center tenant insurance referrals, moving company referrals and truck rentals that we believe conveniently and efficiently address customers’ storage needs. In addition, a number of our storage centers offer temperature-controlled storage space.

•

Property security. We use a variety of measures at our storage centers, as appropriate, to enhance security. Such measures may include, among others, on-site personnel, electronic devices such as intrusion and fire alarms, access controls, video and intercom surveillance devices, individual unit alarms, fencing and lighting. We assign each customer a designated personal identification number for use in connection with a computerized gate access system. Each access is automatically logged into a computer database.

•

Capital expenditures and maintenance. We invest capital to improve our properties consistent with our commitment to maintain attractive and secure self-storage centers, which enables us to pursue a premium pricing strategy. In addition, capital expenditures for consistent signage and color scheme among our properties strengthen our brand image.

Marketing and sales. We train storage center managers in fundamental sales and customer service skills to elicit customer needs and turn prospects into customers. We also have a national sales and customer service

~~procedures,~~center ~~which~~in ~~can~~the beUnited ~~implemented~~States ~~over~~to afield ~~large~~telephone ~~number~~calls offrom ~~properties,~~current ~~enable~~and usprospective customers. Employees at our U.S. sales center are able to ~~add~~lease ~~new~~space ~~properties~~at the ~~quickly~~storage ~~and~~center ~~with~~most ~~little~~convenient ~~disruption~~to the customer. We have implemented additional sales and marketing programs to broaden our ~~operations.~~distribution channels, such as a website for our enhanced e-commerce business, business directed marketing and an expanded direct sales force in selected markets.

~~Strategic~~• ~~Expansions~~Market research. We ~~seek~~ tomaintain ~~increase~~an ~~revenue~~extensive bymarket ~~building~~research ~~additional~~database ~~rentable~~on ~~storage~~our ~~space~~primary atmarkets ~~suitable~~and ~~storage~~closely ~~centers~~track ~~either~~occupancy ~~through~~levels, ~~on-site~~rental ~~expansion~~rates orand ~~acquisition~~other ofoperational ~~property~~data ~~adjacent~~for tocompeting ~~existing~~ self-storage ~~centers~~properties within these markets. We ~~typically~~have ~~receive~~conducted ~~higher~~focus ~~incremental~~group ~~returns~~research ~~on these~~and ~~investments~~telephone surveys, ~~because~~and ~~resulting~~use ~~revenue~~customer ~~increases~~comment ~~are~~cards ~~achieved~~to ~~with~~identify ~~little~~the ~~increase~~primary considerations in ~~fixed~~customers’ ~~operating~~self-storage ~~costs.~~choices and satisfaction so that we can better attract and service customers.

~~Economies~~• ofMarket ~~Scale~~share. We ~~will~~employ ~~continue~~various means to ~~focus~~increase our ~~growth~~share inof specific self-storage markets. ~~where~~We weplace ~~are~~prominent ~~already~~advertisements ~~present~~in sothe ~~that~~yellow wepages ~~improve the~~and ~~efficiency~~seek to promote customer awareness of our ~~support~~storage ~~system~~centers through highly visible storage center locations, site signage and ~~achieve~~architectural ~~economies~~features. We build a distinctive “lighthouse” office on most newly developed storage centers to distinguish us from competitors and to increase customer awareness of ~~scale~~the Shurgard brand. We promote our 24-hour toll free sales, customer service center number and website in our advertising, marketing materials and site signage.

~~Development~~Portfolio management. Our portfolio management strategy is to increase cash flow by optimizing revenue, containing cost, improving operating leverage and ~~Acquisitions~~expanding our existing storage centers.

~~Our external~~• ~~growth~~Revenue ~~strategy~~optimization. isWe seek to ~~develop~~optimize ~~new,~~our ~~high-quality~~revenue ~~self~~by ~~storage~~achieving ~~properties~~the ~~and~~highest torental ~~acquire~~rate ~~additional~~structure ~~self~~for our storage ~~properties~~centers ~~that~~and ~~meet,~~high orlevels ~~can~~of ~~be upgraded to meet our standards. In general~~occupancy, wethrough ~~plan~~the touse ~~develop~~of orteams ~~acquire~~of ~~new~~storage ~~properties~~center ~~or acquire~~employees ~~existing~~and ~~properties~~district ~~primarily~~managers inwho ~~our~~are ~~existing~~trained ~~markets~~ and inauthorized ~~new~~to ~~markets~~change ~~that~~rental ~~create~~rates ~~economies~~based ofon ~~scale~~their ~~for~~analysis ~~our current network~~ of ~~storage~~demand ~~centers.~~and Inavailability ~~most markets, we seek to own~~ at ~~least~~a 15particular storage ~~centers~~center. inMarket ~~order~~personnel toregularly ~~realize~~evaluate ~~operating~~their ~~and marketing~~properties’ ~~efficiencies~~rental ~~and~~rates, ~~increase~~based ~~brand~~on ~~awareness.~~unit Wedemand ~~believe~~and ~~that~~unit ~~the~~availability, ~~experience of our management team in developing~~ and ~~acquiring~~can ~~self~~quickly ~~storage~~change ~~properties~~marginal ~~strengthens~~rental ~~our~~rates ~~ability~~ to ~~pursue~~ensure ~~our~~that ~~external~~revenue ~~growth~~is ~~strategy~~optimized.

We• ~~rely~~Cost oncontainment ~~our~~and ~~market~~improved ~~personnel~~operating leverage. We seek to ~~target~~increase ~~areas~~cash flow by carefully containing operating expenses. For example, in ~~which~~2005, toas ~~develop~~we ~~new~~gained full ownership of Shurgard Europe, ~~redevelop~~ ~~existing~~we orwere ~~acquire~~able ~~existing~~to ~~storage~~start ~~centers.~~changing Wethe ~~have~~management ~~developed~~structure ~~comprehensive~~of ~~market~~Shurgard ~~expansion~~Europe ~~plans~~and ~~for~~undertake ~~each~~overhead costs reduction initiatives through 2007. As we increase the number of properties in our ~~target~~targeted markets, ~~including~~and ~~those~~increase inthe ~~Europe~~number of properties we manage, ~~and~~we ~~use~~achieve ~~these~~economies ~~plans~~of asscale ~~the~~because ~~basis~~we ~~for~~can ~~selecting~~do ~~new~~so ~~storage~~without ~~center~~incurring ~~locations~~significant ~~and acquisition~~incremental ~~targets~~overhead expense. ~~The~~We ~~market~~believe ~~expansion~~that ~~plans~~our ~~use~~management and operational procedures, which can be implemented over a ~~demographic~~large ~~analysis~~number of anproperties, ~~area~~enable ~~along~~us to add new properties quickly and with anlittle ~~evaluation~~disruption ofto ~~competitors’~~our ~~locations~~operations. In addition, ~~rates~~we closely monitor our real estate tax assessments, appealing such assessments as appropriate, and ~~product~~engage ~~quality~~consultants to ~~determine~~manage ~~the~~certain ~~optimum~~utility ~~number~~costs ~~and~~to ~~location~~contain increases of ~~new~~such ~~storage centers~~costs. We will continue to focus our growth in markets where we are already present so that we improve the efficiency of our support system and achieve economies of scale.

~~Development~~• Redevelopments. We ~~believe~~seek ~~that~~to ~~several factors~~increase ~~favor~~revenue by building additional rentable storage space at suitable storage centers either through on-site expansion or acquisition of property adjacent to existing storage centers. We typically receive higher incremental returns on these investments, because resulting revenue increases are achieved with little increase in fixed operating costs. Our management teams constantly review our ~~development~~existing ~~strategy:~~portfolio of stores to identify areas of underperformance or underutilization of our real estate. This review process evaluates all aspects of the property and related local market conditions in order to identify new investment opportunities through redevelopment. Redevelopment projects may include upgrading storage space by converting it to temperature controlled, expansions, office modernization and other improvements to the storage centers outlook and features. All redevelopment proposals are subjected to the same investment underwriting analysis and return expectations as we have for new developments.

• Development Expertise. We have substantial real estate development, construction management and project design expertise that has been developed over the past 30 years. Along with our predecessor companies, we developed more than a third of the properties we currently own, lease or manage, and, since 1972, we have maintained an internal development staff. We have built over 130 storage centers in Europe using our locally based internal development staff.

• Strategic Site Selection. To obtain the best storage center locations, we target sites for development in urban areas and retail areas that often require rezoning and other complex development measures. We believe that the difficulties of developing storage properties in such urban areas may discourage competitors from locating nearby and, as a result, enable us to operate in underserved areas. This in turn enables us to charge higher rental rates.

• Focus on Quality and Brand Image. We have greater control of quality and brand image by developing our own self storage properties. This enables us to focus on high construction quality and standards and a consistent and inviting building design. We believe our focus on quality and consistency will enable us to obtain repeat business, to further strengthen awareness of the Shurgard brand and to maintain premium prices and differentiate us from our competitors.

Redevelopments. Our management teams constantly review our existing portfolio of stores to identify areas of underperformance or underutilization of our real estate. This review process evaluates all aspects of the property and related local market conditions in order to identify new investment opportunities through redevelopment. Redevelopment projects may include upgrading storage space by converting it to be temperature controlled, expansions, office modernization and other improvements to the storage centers outlook and features. All redevelopment proposals are subjected to the same investment underwriting analysis and return expectations as we have for new developments.

~~Acquisitions. We~~Development ~~also~~and ~~selectively acquire high-quality operating properties that are consistent with our business plan.~~ Acquisitions allow us to spread overhead and certain management, marketing and advertising costs over a greater number of revenue-producing assets. As a result, we can achieve increasing economies of scale with each new property acquired. We complete a thorough analysis of each property that we intend to acquire, including, but not limited to, a review of capital expenditures that will be required for the property to meet our standards. In addition to adding high-quality properties, we look for high-quality portfolios of properties that would establish a market presence for us in a new market.

~~Joint Venture Investments.~~ Our ~~joint~~external ~~venture~~growth strategy is ~~important~~to asdevelop itnew, ~~allows~~high-quality usself-storage properties and to ~~partner~~ ~~with~~acquire ~~experienced~~additional self -storage properties ~~developers~~that inmeet, ~~domestic~~or ~~markets~~can inbe ~~which~~upgraded weto ~~otherwise~~meet ~~lack~~our astandards. ~~significant~~In ~~presence~~general, we plan to ~~share~~develop ~~the~~or ~~development~~acquire new properties or acquire existing properties primarily in our existing markets and ~~rent-up~~in ~~risk~~new markets that create economies of ~~new~~scale ~~developments~~for our current network of storage centers. In most markets, ~~which~~we ~~expand~~seek ~~our~~to own at least 15 storage centers in order to realize operating and marketing efficiencies and increase brand ~~through~~awareness. We believe that the ~~use~~experience of our ~~partners’~~management team in ~~capital,~~developing and acquiring self-storage properties strengthens our ability to ~~access~~pursue ~~cost~~our ~~effective~~external ~~capital~~growth ~~for~~strategy. ~~expansion~~Since ~~and~~2003, we have sought to generate internal growth in the United States by redeveloping some of our properties.

We rely on our local market personnel to target areas in which to develop new, redevelop or acquire existing storage centers. We have developed comprehensive market expansion plans for each of our target markets, including those in Europe, and use these plans as the basis for selecting new storage center locations and acquisition targets. The market expansion plans use a demographic analysis of an area along with an evaluation of competitors’ locations, rates and product quality to determine the optimum number and location of new storage centers.

Development. We believe that several factors favor our development strategy:

•

Development expertise. We have substantial real estate development, construction management and project design expertise that has been developed over the past 30 years. Along with our predecessor companies, we developed more than a third of the properties we currently own, lease or manage, and, since 1972, we have maintained an internal development staff. We have built over 140 storage centers in Europe using our locally based internal development staff.

•

Strategic site selection. To obtain the best storage center locations, we target sites for development in urban areas and retail areas that often require rezoning and other complex development measures. We believe that the difficulties of developing storage properties in such urban areas may discourage competitors from locating nearby and, as a result, enable us to operate in underserved areas. This in turn enables us to charge higher rental rates. In 2005, we refocused our site selection in Europe to areas where we already had established a presence and have deferred projects in areas that are not in a core strategic market.

•

Focus on quality and brand image. We have greater control of quality and brand image by developing our own self-storage properties. This enables us to focus on high construction quality and standards and a consistent and inviting building design. We believe our focus on quality and consistency will enable us to obtain repeat business, to further strengthen awareness of the Shurgard brand and to maintain premium prices and differentiate us from our competitors.

•

Joint venture investments. Our joint venture strategy is important as it allows us to partner with experienced self-storage developers in domestic markets, in which we otherwise lack a significant presence, to share the development and rent-up risk of new developments, which expand our brand through the use of our partners’ capital, and to access cost effective capital for expansion and growth.

Acquisitions. We also selectively acquire high-quality operating properties that are consistent with our business plan. We complete a thorough analysis of each property that we intend to acquire, including, but not limited to, a review of capital expenditures that will be required for the property to meet our standards. In addition to adding high-quality properties, we look for high-quality portfolios of properties that would establish a market presence for us in a new market.

Property Management Systems

We have integrated property management systems and procedures for marketing, advertising, leasing, operations and security of properties and the management of on-site personnel. In both the United States and ~~Europe, our computerized management information~~ systems link our corporate offices with each storage center. We use proprietary software that facilitates financial statement and budget preparations, allows the daily exchange of information with our corporate office and manages detailed information with respect to the tenant mix, demographics, occupancy levels, rental rates, revenue optimization, payroll and other information relating to each storage center. Additionally, we use network-based email, accounting, and consolidation software packages that aid in the compilation and dissemination of information from and to our storage centers. Software integration enables our national sales center, commercial accounts department and our corporate employees to have access to storage center information. In the United States, we are developing significant upgrades to our property management software that we expect will improve management information and increase effectiveness in compiling information and disseminating it to our storage centers.

Europe, our computerized management information systems link our corporate offices with each storage center. We use proprietary software that facilitates financial statement and budget preparation, allows the daily exchange of information with our corporate office and manages detailed information with respect to the tenant mix, demographics, occupancy levels, rental rates, revenue optimization, payroll and other information relating to each storage center. Additionally, we use network-based email, accounting, and consolidation software packages that aid in the compilation and dissemination of information from and to our storage centers. Software integration enables our national sales center, commercial accounts department and corporate employees to have access to storage center information. In the United States, we are developing significant upgrades to our property management software that we expect to be in operation in 2006. We expect these upgrades to improve management information and increase effectiveness in compiling information and disseminating it to our storage centers.

Third Party Management

We also manage, under the Shurgard name, self -storage properties owned by others that meet our quality standards. Management of such properties enables us to spread the cost of our overhead across a greater number of properties. Additionally, it allows us to expand our presence in the markets in which we operate, to offer customers a broader geographic selection of self -storage properties to suit their needs and to establish relationships with property owners that may lead to future acquisitions. ~~Management fees that we earn are not qualifying income for REIT qualification purposes. Accordingly, we closely monitor the level of these activities to ensure our continued qualification as a REIT.~~

Capital Strategy

WeOur ~~seek~~goal is to ~~maintain~~maximize ashareholders’ ~~strong~~value, ~~flexible~~which ~~capital~~includes ~~structure~~completing ~~with~~the aproposed ~~corporate~~merger transaction described above. If for any reason we should be unable to consummate the proposed merger, we would continue to pursue one or more strategic transactions and/or the continued implementation of our primary business strategy as discussed above. There can be no assurance as to the completion, timing or terms of: any other strategic transaction.

•Absent ~~maintaining~~any strategic ashift ~~moderate~~that ~~level~~results offrom ~~leverage~~our ~~consistent~~proposed merger into Public Storage, Inc., we would continue to seek to maintain a strong, flexible capital structure with ana ~~investment~~corporate ~~grade~~strategy ~~bond~~of: ~~rating~~

• maintaining a moderate level of leverage consistent ~~dividend~~with ~~policy~~an investment grade bond rating;

• ~~extending~~maintaining ~~and~~a ~~laddering~~consistent ~~our~~dividend ~~debt maturities~~policy;

• ~~mitigating~~extending ~~our~~and ~~exposure~~laddering toour ~~interest~~debt ~~rate~~maturities ~~risk~~where possible;

• ~~maintaining~~mitigating ~~appropriate~~our ~~liquidity~~exposure to interest rate risk; and

We• ~~believe~~maintaining ~~these~~appropriate strategies will continue to enable us to maintain an unsecured credit rating and allow us to access a broad array of capital sources, including bank or institutional borrowings, secured and unsecured debt and private and public equity financingsliquidity.

5We believe these strategies would continue to enable us to maintain an investment grade unsecured credit rating and allow us to access a broad array of capital sources, including bank or institutional borrowings, secured and unsecured debt and private and public common or preferred equity financings.

In order to mitigate our currency and interest rate risk, we contract with financial institutions for derivative products that help us manage these exposures. Our investment policy prohibits us from entering into any such contract solely to secure profit by speculating on the direction of currency exchange or interest rates if unrelated to capital borrowed or invested by us.

We have maintained consistent dividend growth. We paid dividends of $2.23 per share of common stock in 2005, representing a 27% increase from the annualized rate in 1994, the year we became a public company. Additionally, we have paid 48 consecutive quarterly dividends. However, under our proposed merger agreement

In we ~~order~~agreed to ~~mitigate~~pay ~~our~~a ~~currency~~$0.56 ~~and~~dividend ~~interest rate risk, we contract with financial institutions~~ for ~~derivative~~ ~~products~~the ~~that~~first ~~help~~quarter us2006 ~~manage~~and ~~this~~then ~~exposure.~~to ~~Our~~adjust ~~investment~~our ~~policy~~quarterly ~~prohibits~~dividends usto ~~from~~a ~~entering~~level ~~into~~consistent ~~any~~with ~~such~~Public ~~contract~~Storage ~~solely~~and tothere can ~~secure~~be ~~profit~~no byassurance ~~speculating on the direction~~ of ~~currency~~future ~~exchange~~dividend ~~or interest rates if unrelated to capital borrowed or invested by us~~payments.

We have maintained consistent dividend growth. We paid dividends of $2.19 per Share of Common Stock in 2004, representing a 24% increase from the annualized rate in 1994, the year we became a public company. Additionally, we have paid 44 consecutive quarterly dividends. However, there can be no assurance of future dividend payments.

We have and may continue to enter into joint ventures, partnerships and limited liability companies as an alternative method to investing directly in real estate. Our decision whether to hold a property directly or indirectly is based on a variety of facts and considerations, including:

• our ability to enter into a new market and establish a long -term relationship with an existing self -storage operator/developer;

• our desire to diversify our capital sources based on product type and risk;

• ~~the~~our ~~economic~~desire ~~and~~to ~~tax~~moderate ~~considerations~~risks offrom ~~the~~new ~~partner or seller~~developments;

• ~~our~~the ~~desire~~economic toand ~~preserve~~tax ~~our~~considerations ~~capital~~of ~~resources~~the topartner ~~maintain liquidity~~ or ~~balance~~seller; ~~sheet strength~~and

•

our desire to preserve our capital resources to maintain liquidity or balance sheet strength.

Substantially all of these joint ventures, partnerships and limited liability companies use secured mortgage financing for a portion of their overall capitalization, which may affect our ability to maintain high credit ratings.

We have sought and will continue to seek opportunities to issue our common ~~equity~~stock in exchange for self -storage and other real estate investments where and ~~when~~ when appropriate. Future issuance will depend ~~upon~~on market conditions at the time, including the market price of our equity securities. All of these methods of investment may be subject to review and reasonable consent of Public Storage prior to the closing date of the proposed merger.

Seasonality

Our revenues are ~~impacted~~affected by rental patterns of our customers, and as a result, we do not generate revenues evenly throughout the year. We experience peak occupancy by our customers during the spring and summer, which results in higher revenues for our second and third fiscal quarters relative to our first and fourth fiscal quarters.

Employees

As of December 31, ~~2004~~ 2005, Shurgard had approximately 2,~~000~~300 employees. None of our employees in the United States are covered by a collective bargaining agreement. Two countries in Europe have employees represented through an internal collective bargaining council. We believe that our relations with our employees are generally good.

Regulation

Environmental Regulations

We are subject to federal, state, local and foreign environmental regulations that apply to the ownership, management and development of real property, including regulations affecting both the construction and operation of self -storage properties.

Generally, in assessing potential acquisition targets, developing properties and constructing improvements, we use environmental consultants to advise us of any recognized environmental concerns with respect to the property. If any such areas are identified, development and construction are planned in conformance with applicable environmental and land-use requirements. The principal laws in the United States that could affect us are the Resource Conservation and Recovery Act and the Comprehensive Environmental Response, Compensation and Liability Act. Foreign, state and local governments have also adopted separate but similar environmental laws and regulations that vary from country to country, state to state and locality to locality.

~~are~~Under ~~the~~various ~~Resource~~federal, ~~Conservation~~state, local and ~~Recovery~~foreign ~~Act~~laws, ordinances and regulations, an owner or operator of real property may become liable for the ~~Comprehensive~~costs ~~Environmental~~of ~~Response,~~removal ~~Compensation~~or ~~and~~remediation ~~Liability~~of ~~Act~~certain hazardous substances released on or in its property. ~~Foreign~~Such laws may impose liability without regard to whether the owner or operator knew of, ~~state~~or ~~and~~was ~~local~~responsible for, ~~governments~~the ~~have~~release ~~also~~of ~~adopted~~such ~~separate~~hazardous ~~but~~substances. ~~similar~~The ~~environmental~~presence ~~laws~~of ~~and~~hazardous ~~regulations~~substances ~~that~~on ~~vary~~a ~~from~~property ~~country~~may adversely affect the owner’s ability to ~~country,~~sell ~~state~~the property or to ~~state~~borrow using the property as collateral and ~~locality~~may cause the owner or manager of the property to ~~locality~~incur substantial remediation costs. In addition to claims for cleanup costs, the presence of hazardous substances on a property could cause the owner or manager to incur substantial liabilities as a result of a claim by a private party for personal injury or a claim by an adjacent property owner for property damage.

~~Under~~Except ~~various~~for ~~federal,~~one ~~state,~~property ~~local~~in ~~and~~St. ~~foreign laws~~Louis, ~~and~~Missouri ~~ordinances~~discussed ~~and regulations~~below, anwe ~~owner~~have ornot ~~operator~~been ofnotified ~~real~~by ~~property may~~any ~~become~~governmental ~~liable~~authority ~~for the costs~~ of ~~removal~~any orcurrent, ~~remediation~~material ofenvironmental ~~certain~~noncompliance, ~~hazardous~~claim ~~substances released on~~ or ~~in its property. Such laws may impose~~ liability ~~without~~in ~~regard~~connection towith ~~whether~~any of the ~~owner~~properties orwe ~~operator~~own ~~knew of,~~ or ~~was~~manage. ~~responsible~~We ~~for,~~have ~~the~~not ~~release~~been notified of ~~such~~ ~~hazardous~~any ~~substances.~~current ~~The~~claims ~~presence~~for ofpersonal ~~hazardous~~injury ~~substances~~or ~~on a~~ property ~~may~~damage ~~adversely~~by ~~affect~~a ~~the~~private ~~owner’s~~party ~~ability~~in toconnection ~~sell~~with ~~the~~environmental ~~property~~conditions orat toany ~~borrow~~of ~~using~~ the ~~property~~properties aswe ~~collateral~~own ~~and may cause the owner~~ or ~~manager~~manage. ofWe ~~the~~obtained ~~property~~Phase toI ~~incur~~environmental ~~substantial~~assessment ~~remediation~~reports ~~costs.~~prepared Inby ~~addition~~independent toenvironmental ~~claims~~consultants for ~~cleanup costs,~~ the ~~presence~~properties ofwe ~~hazardous~~own ~~substances~~in ~~on a property could cause~~ the ~~owner~~United orStates, ~~manager~~and tosimilar ~~incur~~environmental ~~substantial~~reports ~~liabilities as a result of a claim by a private party~~ for ~~personal injury~~properties orwe aown ~~claim~~in ~~by an adjacent property owner for property damage~~Europe.

WeIn ~~have~~1995, ~~not~~we ~~been~~ notified bythe ~~any~~Missouri ~~governmental~~Department ~~authority~~of Natural Resources (MDNR) of elevated ~~any~~levels ~~current,~~of ~~material~~hydrocarbons ~~environmental~~found ~~noncompliance~~in groundwater monitoring wells on a property in St. Louis, ~~claim~~Missouri orthat ~~liability~~we had been monitoring in ~~connection~~accordance with ~~any~~a ofwork ~~the~~plan ~~properties~~approved weby ~~own~~the orMDNR. ~~manage~~In 1998, ~~except~~a ~~for~~quarterly ~~one~~monitoring ~~property~~report revealed continued contamination in Stthe groundwater samples. ~~Louis~~The ~~discussed below~~MDNR notified us that it would continue requiring quarterly groundwater monitoring. WeDuring ~~have~~1999, ~~not~~at ~~been~~the ~~notified~~MDNR’s request, with the help of ~~any~~an ~~current~~environment ~~claims~~consultant, ~~for~~we ~~personal~~developed ~~injury~~a orwork ~~property~~plan ~~damage~~to address bythe aMDNR’s ~~private~~question ~~party~~regarding inwhether ~~connection~~on-site ~~with~~contamination ~~environmental~~might ~~conditions~~be atspreading ~~any~~to adjacent properties. The work plan encompasses a broader scope of ~~the~~monitoring, including installation of four additional monitoring wells on adjacent properties. weThe ~~own~~work orplan ~~manage~~required on-going monitoring through April 2003, when the MDNR indicated that based on test results, on-going testing was no longer required. WeIn ~~obtained~~2004, Missouri adopted a ~~Phase~~new Iprogram ~~environmental~~that ~~assessment~~required us to conduct additional ~~report~~testing ~~prepared~~on bythis ansite. ~~independent~~The ~~environmental~~MDNR ~~consultant~~approved ~~for~~our proposed plan to address the ~~properties~~new program and we ~~own~~have incompleted initial testing. We presented the ~~United~~results ~~States,~~to ~~and~~MDNR. ~~similar~~In ~~environmental~~October ~~reports~~2005, ~~for~~the ~~properties~~MDNR weissued ~~own~~a inno ~~Europe~~further action letter.

InWe ~~1995,~~are wenot ~~notified~~aware ~~the Missouri Department~~ of ~~Natural~~any ~~Resources~~environmental ~~(MDNR)~~condition ofwith ~~elevated~~respect ~~levels~~to ~~of hydrocarbons found in~~the ~~groundwater~~properties ~~monitoring~~we ~~wells~~own onor amanage ~~property in St. Louis, Missouri~~ that wecould ~~had~~have ~~been monitoring in accordance with~~ a ~~work~~material ~~plan~~adverse ~~approved~~effect byon ~~the~~our ~~MDNR.~~financial ~~In 1998~~condition, aoperating ~~quarterly~~results ~~monitoring~~and ~~report~~cash ~~revealed continued contamination in the groundwater samples~~flows. ~~The~~ ~~MDNR~~We ~~notified~~cannot usgive ~~that it would continue requiring quarterly groundwater monitoring. During 1999~~assurance, ~~at the MDNR’s request~~however, ~~with~~that ~~the~~any ~~help~~environmental ofassessments anundertaken ~~environment~~with ~~consultant,~~respect ~~we developed a work plan~~ to ~~address~~ the ~~MDNR’s~~properties ~~question regarding~~have ~~whether~~revealed ~~on-site~~all ~~contamination~~potential ~~might~~environmental beliabilities, ~~spreading~~whether toany ~~adjacent~~prior ~~properties.~~owner ~~The~~or ~~work~~operator ~~plan encompasses a broader scope~~ of ~~monitoring,~~the ~~including installation of four additional monitoring wells on adjacent~~ properties. ~~The~~created ~~work~~any ~~plan~~material ~~required~~environmental ~~on-going monitoring~~condition ~~through~~not ~~April~~known ~~2003,~~to ~~when~~us ~~the~~or ~~MDNR indicated~~ that ~~based~~an onenvironmental ~~test~~condition ~~results,~~does ~~on-going~~not ~~testing~~otherwise ~~was~~exist noas ~~longer required. In 2004, Missouri adopted a new program that required us~~ to ~~conduct~~any ~~additional~~one ~~testing~~or onmore ~~this site. Our proposed plan to~~of ~~address~~ the ~~new~~properties ~~program~~that ~~was~~could ~~approved by the MDNR and initial testing has been completed. The results~~ have ~~been~~a ~~presented~~material toadverse ~~MDNR;~~effect ~~however,~~on ~~MDNR~~our ~~has~~financial ~~yet to determine whether testing is complete~~condition, ~~more~~operating ~~testing~~results or ~~remediation~~cash ~~is required, or if the test results provide a basis for no further action letter~~flows. ~~Based~~In onaddition, ~~the~~we ~~results~~cannot ofgive ~~the~~assurance ~~testing~~that: ~~the MDNR may require identification of the location of the groundwater contamination and construction of a system to remediate the problem.~~

We are not aware of any environmental condition with respect to the properties we own or manage that could have a material adverse effect on our financial condition, operating results and cash flows. We cannot give assurance however, that any environmental assessments undertaken with respect to the properties have revealed all potential environmental liabilities, that any prior owner or operator of the properties did not create any material environmental condition not known to us or that an environmental condition does not otherwise exist as to any one or more of the properties that could have a material adverse effect on our financial condition, operating results or cash flows. In addition, we cannot give assurance that

•

future laws, ordinances or regulations will not impose any material environmental liability;

•

the current environmental condition of our owned or managed properties will not be affected by the condition of properties in the vicinity of such properties (such as the presence of leaking underground storage tanks) or by third parties unrelated to us; or

•

tenants will not violate their leases by introducing hazardous or toxic substances into our owned or managed properties that could expose us to liability under federal, state, local or foreign environmental laws.

7Other Available Information

We file our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports with the Securities and Exchange Commission (SEC). You may obtain copies of these documents by visiting the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549, by calling the SEC at 1-800-SEC-0330 or by accessing the SEC’s website at http://www.sec.gov. In

~~Risk~~addition, ~~Factors~~as soon as reasonably practicable after such materials are filed with or furnished to the SEC, we make copies of these documents (other than exhibits) available to the public free of charge through our website at www.shurgard.com or by contacting our Secretary at our principal offices, which are located at 1155 Valley Street, Suite 400, Seattle, Washington 98109, telephone number (206) 624-8100.

In addition, Shurgard’s corporate governance guidelines, director independence criteria, committee charters, codes of conduct and ethics, and other documents setting forth our corporate governance practices can be accessed in the “Corporate Governance” section of Shurgard’s investor relations’ web site at http://investorrelations.shurgard.com or by writing to Shurgard’s Investor Relations department at our address set forth above.

Item 1A—Risk Factors

The following factors are risks associated with our business:

Risks Associated with our Proposed Merger with Public Storage

The announcement of our proposed merger with Public Storage may have a negative effect on our business, financial condition and operating results. In response to our announcement and the potential uncertainty about our future operating strategy and decisions, customers may delay, defer or cancel leases or contracts with us, which could negatively affect our revenues and results of operations. In addition, current and prospective employees may experience uncertainty about their future role with the combined company, which may impair our ability to attract and retain key management, development, marketing and other personnel in the United States and in Europe, which could further affect our operating results. Declining results could have negative consequences on our relationships with and obligations to customers, joint venture partners, creditors and others with whom we have business relationships. A negative impact on operating results could also cause a decline in our stock price.

If we are unable to realize our proposed merger with Public Storage, our business, financial condition, operating results and stock price could suffer. If our or Public Storage’s shareholders do not approve the transactions contemplated by the Merger Agreement or we otherwise fail to satisfy the closing conditions to the transaction, we could face adverse consequences, including:

•

we would remain liable for significant costs relating to the transaction, including, among others, legal, accounting, financial advisory and financial printing expenses;

•

activities relating to the proposed merger and related uncertainties could divert management’s attention from our day-to-day business and disrupt our operations;

•

an announcement that we have abandoned the proposed merger could trigger a decline in our stock price to the extent that our stock price reflects a market assumption that we will complete the merger;

•

we could be required to pay Public Storage a termination fee of $125 million less expense reimbursements of up to $10 million if the Merger Agreement is terminated under certain circumstances; and

•

we may forego alternative business opportunities or fail to respond effectively to competitive pressures.

The Merger Agreement limits our ability to pursue alternatives to the proposed merger. Under the Merger Agreement, we are generally precluded from encouraging or participating in any discussions that could lead to an alternative acquisition proposal. Similarly our board of directors is restricted in its ability to withdraw or modify its recommendation that our shareholders approve this merger. In certain circumstances, our board of directors may terminate the Merger Agreement or withdraw or modify its recommendation that our shareholders approve this merger in order to pursue a proposal that it deems to be superior. In these circumstances, we would be required to pay Public Storage a termination fee of up to $125 million.

The effect of these provisions could be to discourage or prevent a party interested in a possible acquisition of our company from pursuing an offer to acquire us. The occurrence of these events individually or in combination could have a material adverse effect on our business, financial condition, cash flows and operating results.

Certain restrictive pre-closing covenants in the Merger Agreement may negatively affect our business, financial condition, operating results and cash flows. Pending completion of the proposed merger, we have agreed to conduct our business in the ordinary course and consistent with our past practices. We have also agreed to certain restrictions on the conduct of our business, including among others, prohibitions, except in limited circumstances, against:

•

issuing any new securities or purchasing or redeeming existing securities;

•

increasing cash or equity compensation or benefits payable to our employees;

•

the transfer, lease, sale or other encumbrance or disposal of our property or assets;

•

new material contracts or any amendment to our existing material contracts;

•

capital expenditures;

•

new indebtedness;

•

new hedging or other financial arrangements to protect against fluctuations in interest or currency exchange rates;

•

the acquisition of property or assets; and

•

the initiation or settlement of any material litigation.

These restrictions could have a material adverse effect on our business, financial condition, cash flows, operating results and stock price.

Real Estate Investment Risks

We have significant real estate holdings that can be difficult to sell in unfavorable economic conditions and that can have unpredictable decreases in value. Our primary business involves owning real estate-related assets and operating self -storage centers in the United States and Europe. Real estate investments can be difficult to sell, especially when economic conditions are unfavorable. This makes it difficult for us to diversify our investment portfolio and to limit our ~~risk~~exposure when economic conditions change. Decreases in market rents, negative tax, real estate and zoning law changes, and changes in environmental protection laws may also increase our costs, lower the value of our investments and decrease our income, which would adversely affect our business, financial condition, operating results and cash flows.

Our real estate development and acquisition activities can result in unforeseen liabilities and increases in costs. Real estate development involves risks in addition to those involved in owning and operating existing properties. For example, we must hire contractors or subcontractors to develop our properties. Problems can develop with these relationships, including contract and labor disputes and unforeseen property conditions that require additional work and construction delays. These problems can increase construction and other costs and delay the date when tenants can occupy the property and pay us rent. Properties that we acquire may not meet our performance expectations, including projected occupancy and rental rates, and we may have overpaid for ~~acquisitions~~acquired properties. Failure of our properties to perform as expected or the cost of unforeseen significant capital improvements could decrease our cash flow. We may also have underestimated the cost of improvements needed for us to market a property effectively, requiring us to pay more to complete a project. If a number of these events were to occur, our business, financial condition, operating results and cash flows would be adversely affected.

We10 focus almost exclusively on the self storage business, which makes us vulnerable to changes in the profitability of self storage properties. Our investments focus on self storage business and related real estate interests. We do not expect to invest in other real estate or businesses to hedge against the risk that industry trends might decrease the profitability of our self storage-related investments. As a result, unfavorable changes in the self storage industry may have a material adverse effect on our business, financial condition, operating results and cash flows.

Our occupancy rates may decline if we are unable to compete successfully against other companies in the self storage industry. We face intense competition in every U.S. market in which our storage centers are located and to a lesser extent in Europe. Our competitors include national, regional and many local self storage operators and developers. Entry into the self storage business by acquiring existing properties is relatively easy for persons or entities with the required initial capital. Competition may increase if available funds for investment in real estate increase. Some of our competitors may have more resources than we do, including better access to financing, greater cash reserves and less demanding rules governing distributions to shareholders. Some competitors may have lower prices, better locations, better services or other advantages. Local market conditions will play a significant part in how competition affects us; additional competition has lowered occupancy levels and rental revenue of our self storage properties in specific markets from time to time. For example, from 2003 to 2004, occupancy of our properties declined in the Chicago market resulting in decreased revenue of $51,000. If our occupancy rates or rental revenues decline, our business, financial condition, operating results and cash flows will be adversely affected.

We would have great difficulty acquiring or developing properties without access to financing. In order to acquire and develop properties, we need access to financing sources. Currently, we finance acquisitions and development of properties through our existing credit facilities. Fluctuations in market conditions or in our operating results may cause us to violate the covenants of these existing credit facilities. If we cannot access our existing financing sources, we may need to obtain equity and/or alternative debt financing in order to continue to

~~acquire~~We ~~and~~focus ~~develop~~almost ~~properties.~~exclusively Ifon wethe ~~obtain~~self-storage ~~financing~~business, bywhich ~~issuing~~makes ~~additional~~us ~~capital~~vulnerable ~~stock,~~to wechanges ~~could~~in ~~further dilute~~ the profitability ~~ownership~~ of ~~our~~self-storage ~~existing shareholders~~properties. Our Ifinvestments wefocus ~~attempt~~predominantly toon ~~obtain~~self-storage ~~financing~~business byand ~~entering~~related ~~into~~real ~~alternative~~estate ~~debt~~interests. ~~financing,~~We wedo ~~might~~ not beexpect ~~able~~to invest in other real estate or businesses to ~~obtain~~hedge ~~financing~~against atthe risk ~~reasonable~~that ~~interest~~industry ~~rates,~~trends ormight atdecrease ~~all~~the profitability of our self-storage-related investments. ~~The~~As ~~inability~~a toresult, ~~acquire~~unfavorable ~~and~~changes ~~develop~~in ~~properties~~the ~~would~~self-storage industry may have a material, adverse effect on our ~~future~~ business, financial condition, operating results and cash flows.

WeOur ~~face~~occupancy ~~risks~~rates ~~due~~may decline if we are unable to ~~our~~compete ~~investments~~successfully ~~through~~against ~~joint~~other ~~ventures~~companies in the self-storage industry. We ~~invest~~face ~~and~~intense ~~may~~competition ~~continue~~in toevery ~~invest~~U.S. market in ~~properties~~which ~~through~~our ~~joint~~storage ~~ventures.~~centers Weare ~~often~~located ~~share~~and ~~control~~to ~~over~~a ~~the~~lesser ~~operations~~extent ofin ~~the~~Europe. Our ~~joint~~competitors ~~venture~~include ~~assets~~national, regional and many local self-storage operators and developers. ~~Therefore,~~Entry ~~these~~into ~~investments~~the ~~may,~~self-storage ~~under~~business ~~certain~~by ~~circumstances~~acquiring ~~involve~~existing ~~risks~~properties ~~such~~is asrelatively easy for persons or entities with the ~~possibility~~required ~~that~~initial ~~our~~capital. Competition ~~partner~~may inincrease anif available funds for investment ~~might~~in ~~become~~real ~~bankrupt,~~estate orincrease. Some of our competitors may have ~~economic~~more orresources ~~business~~than ~~interests~~we ordo, ~~goals~~including ~~that~~better ~~are~~access ~~inconsistent with~~to ~~ours~~financing, orgreater becash inreserves aand ~~position~~less demanding rules governing distributions to ~~take~~shareholders. ~~action~~Some ~~contrary~~competitors tomay ~~our~~have ~~instructions~~lower orprices, ~~requests~~better orlocations, ~~our~~better ~~policies~~services or ~~objectives~~other advantages. ~~Although~~Local wemarket ~~generally~~conditions ~~seek~~will toplay ~~maintain~~ a ~~sufficient~~significant ~~level~~part ofin ~~control~~how ofcompetition ~~any~~affects ~~joint~~us. ~~venture~~Additional tocompetition ~~permit~~has ~~our~~lowered occupancy ~~objectives~~levels toand berental ~~achieved, we~~revenue ~~may~~of beour ~~unable~~self-storage toproperties ~~take~~in ~~action~~specific ~~without~~markets ~~the~~from ~~approval~~time ofto ~~our~~time. ~~joint~~Also, ~~venture~~an ~~partners~~economic orslowdown ~~our~~in ~~joint~~a ~~venture~~particular ~~partners~~market could ~~take~~have ~~actions~~a ~~binding~~negative effect on ~~the~~our ~~joint~~storage ~~venture~~center ~~without~~revenues. For example, from 2004 to 2005, occupancy of our ~~consent.~~Same AStore ~~significant~~properties ~~loss~~declined onin ~~these~~the ~~investments~~Detroit ~~could~~market ~~have~~resulting ain ~~material, adverse~~decreased ~~effect~~revenue onof $250,000. If our ~~future~~occupancy rates or rental revenues decline, our business, financial condition, operating results and cash flows will be adversely affected.

We would have great difficulty acquiring or developing properties without access to financing. In order to acquire and develop properties, we need access to financing sources. Currently, we finance acquisitions and development of properties through our existing credit facilities. Fluctuations in market conditions or in our operating results may cause us to violate the covenants of these existing credit facilities. If we cannot access our existing financing sources, we may need to obtain equity and/or alternative debt financing in order to continue to acquire and develop properties. If we obtain financing by issuing additional capital stock, we could further dilute the ownership of our existing shareholders. If we attempt to obtain financing by entering into alternative debt financing, we might not be able to obtain financing on reasonable terms, at reasonable interest rates, or at all. The inability to acquire and develop properties would affect the implementation of our business strategy as anticipated.

We face risks due to our investments through joint ventures. We invest and may continue to invest in properties through joint ventures. We often share control over the operations of the joint venture assets. Therefore, these investments may under certain circumstances involve risks, such as the possibility that our partner in an investment might become bankrupt, have economic or business interests or goals that are inconsistent with ours, or be in a position to take action contrary to our instructions, requests, policies or objectives. Although we generally seek to maintain a sufficient level of control of any joint venture to permit our objectives to be achieved, we may be unable to take action without the approval of our joint venture partners, or our joint venture partners could take actions binding on the joint venture without our consent. A significant loss on these investments could have a material, adverse effect on our future business, financial condition, operating results and cash flows.

We face possible liability for environmental cleanup costs and damages for contamination related to our properties. Because we own and operate real property, various federal, state, local and foreign laws (including European Union requirements) might impose liability on us for the costs of removal or remediation of various hazardous substances released on, from or in our property. The principal U.S. federal laws that could affect us are the Resource Conservation and Recovery Act and the Comprehensive Environmental Response Compensation, and Liability Act. Foreign, state and local governments have also adopted separate but similar environmental laws and regulations that vary from country to country, state to state and locality to locality. These laws may impose liability whether or not we knew of or caused the release.

~~Some~~11 of our properties were used for commercial activities involving matters regulated under environmental laws before we acquired them. We obtain environmental assessment reports on the properties we acquire, own or operate as we deem appropriate. However, the environmental assessments that we have undertaken might not have revealed all potential environmental liabilities or claims for such liabilities. The presence of hazardous substances on a property or the failure to meet environmental regulatory requirements may materially adversely affect our ability to use or sell the property, or to use the property as collateral for borrowing, and may cause us to incur substantial remediation or compliance costs. In addition, if hazardous substances are located on or released from one of our properties, we could incur substantial liabilities through a private party personal injury claim, a claim by an adjacent property owner for property damage or a claim by a governmental entity for other damages. This liability may be imposed on us under environmental laws or common law principles. It is also possible that future enacted, amended or reinterpreted laws, ordinances or regulations will impose material environmental liability on us, that the current environmental conditions of properties we own or operate will be affected by other properties in the vicinity or by the actions of third parties unrelated to us or that our tenants will violate their leases by introducing hazardous or toxic substances into the properties we own or manage and expose us to liability under federal, state, local or foreign environmental laws or otherwise engage in activities that could expose us to such liabilities. The costs of defending these claims, conducting this environmental remediation, resolving liabilities caused by tenants or third parties or responding to such changed conditions could materially adversely affect our financial condition, operating results and cash flows.

We must comply with the Americans with Disabilities Act and fire and safety regulations, which can require significant expenditures. All of our properties must comply with the applicable portions of the Americans with Disabilities Act and the related regulations, rules and orders, commonly referred to as the ADA, or similar applicable foreign laws. The ADA, for example, has separate compliance requirements for “public accommodations” and “commercial facilities,” but generally requires that buildings be made accessible to persons with disabilities. If we fail to comply with the ADA and other applicable laws, the U.S. or foreign

Before we acquired them, some of our properties were used for commercial activities involving matters ~~government~~regulated under environmental laws. We obtain environmental assessment reports on the properties we acquire, own or operate as we deem appropriate. However, the environmental assessments that we have undertaken might ~~impose~~not ~~fines~~have revealed all potential environmental liabilities or claims for such liabilities. The presence of hazardous substances on usa ~~and~~property ~~award~~or ~~damages~~the failure to ~~individuals~~meet ~~affected~~environmental byregulatory requirements may materially adversely affect our ability to use or sell the ~~failure~~property, or to use the property as collateral for borrowing, and may cause us to incur substantial remediation or compliance costs. In addition, weif ~~must~~hazardous ~~operate~~substances are located on or released from one of our properties, inwe ~~compliance~~could ~~with numerous~~incur ~~local~~substantial ~~and~~liabilities through ~~foreign~~a ~~fire~~private ~~and~~party ~~safety~~personal ~~regulations~~injury claim, ~~building~~a ~~codes~~claim ~~and~~by an adjacent property owner for property damage or a claim by a governmental entity for other ~~land~~damages. ~~use~~This ~~regulations~~liability may be imposed on us under environmental laws or common law principles. ~~Compliance~~It is ~~with~~also ~~these~~possible ~~requirements~~that ~~could~~future ~~require~~enacted, amended or reinterpreted laws, ordinances or regulations will impose material environmental liability on us, tothat ~~spend~~the ~~substantial~~current ~~amounts~~environmental conditions of ~~money,~~properties ~~which~~we ~~could~~own ~~adversely~~or ~~affect~~operate will be affected by other properties in the vicinity or by the actions of third parties unrelated to us or that our ~~operating~~tenants ~~results.~~will violate their leases by introducing hazardous or toxic substances into the properties we own or manage or otherwise engage in activities that ~~Failure~~could expose us to ~~comply~~liability ~~with~~under federal, state, local or foreign environmental laws. The costs of defending these ~~requirements~~claims, ~~may~~conducting ~~also~~this environmental remediation, resolving liabilities caused by tenants or third parties or responding to such changed conditions could materially adversely affect ~~the~~our ~~marketability~~business, offinancial ~~the~~condition, ~~properties~~operating results and cash flows.

We must comply with the Americans with Disabilities Act and fire and safety regulations, which can require significant expenditures. All of our properties must comply with the applicable portions of the Americans with Disabilities Act and the related regulations, rules and orders, commonly referred to as the ADA, or similar applicable foreign laws. The ADA, for example, has separate compliance requirements for “public accommodations” and “commercial facilities,” but generally requires that buildings be made accessible to persons with disabilities. If we fail to comply with the ADA and other applicable laws, the U.S. or foreign government might impose fines on us and award damages to individuals affected by the failure. In addition, we must operate our properties in compliance with numerous local and foreign fire and safety regulations, building codes and other land use regulations. Compliance with these requirements could require us to spend substantial amounts of money, which could adversely affect our operating results. Failure to comply with these requirements may also affect the marketability of the properties.

If property taxes increase, our earnings and cash flows could decline. Each of our properties is subject to real property taxes. These real property taxes may increase in the future as property tax rates change and as our property values are assessed or reassessed by tax authorities. Depending on local market conditions, we may not be able to offset the tax increases through increases in rents or other income, which may adversely affect our business, financial condition, operating results and cash flows.

We face potential underinsured losses on our investments. We maintain title insurance on all of our U.S. properties and other property-related insurance on all of our U.S. and European properties. We exercise discretion in determining amounts, coverage limits and deductibility provisions of title, casualty and other insurance relating to our properties, taking into account the appraised or estimated value of the property in each case to obtain appropriate insurance coverage at a reasonable cost and on suitable terms. We currently carry the following insurance coverage:

• commercial general liability and excess liability insurance for our U.S. properties, covering up to an aggregate of $5060,000,000, and subject to deductibles of $50,000 ~~or $10,000~~ per occurrence ~~depending on the circumstances~~;

• commercial general liability insurance for our European properties, covering up to an aggregate amount ranging from €1 million ($1.42 million as of December 31, ~~2004~~2005) to €6 million ($87.21 million as of December 31, ~~2004~~2005), and subject to deductibles ranging from € 0 to €~~375~~16,779 ($~~510~~19,871 as of December 31, ~~2004~~2005) per occurrence, depending on the country in which the property is located;

• property insurance for our U.S. properties, covering up to an aggregate of $50,000,000, with deductibles of $20,000 per occurrence for general damages depending on the property, deductibles ranging from $25,000 to $1,000,000 per occurrence in the case of flood damage depending on the circumstances of the flood, a minimum deductible of the greater of 5% of the property value or $100,000 per occurrence in the case of damages due to named wind storms depending on the state in which the property is located, and a minimum deductible of $250,000 per occurrence for earthquake damages depending on the state in which the property is located; earthquake deductible for California and Washington is 5% of property value or $250,000, whichever is greater;

•12 property insurance for our European properties, covering up to an aggregate amount ranging from €50 million ($68.0 million as of December 31, 2004) to €88.9 million ($120.9 million as of December 31, 2004), and subject to deductibles ranging from €857 ($1,169 as of December 31, 2004) to €612,000 ($832,000 as of December 31, 2004) per occurrence, depending on the country in which the property is located;

• boiler & machinery insurance for our U.S. properties, covering up to $50,000,000 of direct damages with a $20,000 deductible per occurrence;

• terrorism insurance on our U.S. properties, covering up to an aggregate amount of $50,000,000 subject to deductibles ranging from $10,000 to $20,000 per occurrence, depending on the location of the property; and

• terrorism insurance on our properties in Belgium, France, the Netherlands, Denmark, and the United Kingdom, covering up to an aggregate amount in each country ranging from €8 million ($10.9 million as of December 31, 2004) to €88.9 million ($120.9 million as of December 31, 2004) or for full value in some countries, and subject to deductibles ranging from €1,365 ($1,856 as of December 31, 2004) to €612,000 ($832,000 as of December 31, 2004) per occurrence, depending on the country in which the property is located.

$25,000 to $1,000,000 per occurrence in the case of flood damage depending on the circumstances of the flood, a minimum deductible of the greater of 5% of the property value or $100,000 per occurrence in the case of damages due to named wind storms depending on the state in which the property is located, and a minimum deductible of $250,000 per occurrence for earthquake damages depending on the state in which the property is located; earthquake deductible for California and Washington is 5% of property value or $250,000, whichever is greater;

•

property insurance for our European properties, covering up to an aggregate amount ranging from €40.1 million ($47.5 million as of December 31, 2005) to €1.1 billion ($1.3 billion as of December 31, 2005), and subject to deductibles ranging from €200 ($237 as of December 31, 2005) to €612,000 ($725,000 as of December 31, 2005) per occurrence, depending on the country in which the property is located;

•

boiler & machinery insurance for our U.S. properties, covering up to $50,000,000 of direct damages with a $20,000 deductible per occurrence; and

•

terrorism insurance on our properties in Belgium, France, the Netherlands, Denmark, Germany and the United Kingdom, covering up to an aggregate amount in each country ranging from €8 million ($9.5 million as of December 31, 2005) to €88.9 million ($105.3 million as of December 31, 2005) or for full value in some countries, and subject to deductibles ranging from €200 ($237 as of December 31, 2005) to €612,000 ($725,000 as of December 31, 2005) per occurrence, depending on the country in which the property is located.

Depending on the type of insurance, and subject to deductibles and coverage limits, we either receive direct payment of the replacement value of losses or tender the defense of a claim to the insurance carrier. This might mean that, in the event of a loss, our insurance coverage would not pay the full current market value or current replacement cost of our lost investment. Inflation, changes in building codes and ordinances, environmental considerations and other factors might also increase the replacement cost of a facility after it has been damaged or destroyed. In that case, the insurance proceeds that we receive might not be enough to restore us to our economic position with respect to the property.

Terrorist attacks and the possibility of armed conflict may have an adverse effect on our business, financial condition, operating results and cash flows and could decrease the value of our assets. Terrorist attacks and other acts of violence or war, such as those that took place on September 11, 2001, or the ~~recent~~on-going war ~~with~~in Iraq, could have a material adverse effect on our business and operating results. There can be no assurance that there will not be further terrorist attacks against the United States or any of the European countries in which we operate. Attacks or armed conflicts that directly impact one or more of our properties could significantly affect our ability to operate those properties and thereby impair our ability to achieve our expected results. Further, we may not have sufficient insurance coverage for losses caused by a terrorist attack. Such insurance may not be available, or if it is available and we decide, or are required by our lenders, to obtain such terrorism coverage, the cost for the insurance may be significant in relationship to the risk covered. In addition, the adverse effects that such violent acts and threats of future attacks could have on the U.S. economy or relevant foreign economies could similarly have a material adverse effect on our business, financial condition, operating results and cash flows. Finally, further terrorist acts could cause the United States or other countries where we operate to enter into armed conflict, which could further impact our business, financial condition, operating results and cash flows.

International Operations

We have significant international operations that carry additional risks. We invest in, and conduct, operations outside the United States. With our increased investment and ownership position in Shurgard Europe, we face increased exposure to risks related to Shurgard Europe’s operations. The inherent risks that we face in international business operations include, but are not limited to:

•

currency risks, including currency fluctuations;

•

unexpected changes in legislative and regulatory requirements;

•

potentially adverse tax burdens;

• burdens of complying with different permitting standards, labor laws and a wide variety of foreign laws;

•

obstacles to the repatriation of earnings and cash;

•

regional, national and local political uncertainty;

•

economic slowdown and/or downturn in foreign markets;

•

difficulties in staffing and managing international operations; and

•

reduced protection for intellectual property in some countries.

Each of these risks might impact our cash flow or impair our ability to borrow funds, which ultimately could adversely affect our business, financial condition, operating results and cash flows.

Our European operations ~~have not been profitable to date and~~ may not become profitable. New and recently developed self -storage centers require a significant amount of start-up capital and generally take a considerable amount of time to complete the rent-up period. During the early stage of the rent-up period, properties are not profitable. ~~Because~~Over ~~over 45~~50% of the European properties in which we have an investment have been developed since January 1, 2002 ~~and are still undergoing rent-up~~, ~~many of these properties,~~ and therefore our European operations in general, have not been profitable and have only recently started to generate positive cash flows. Also our expansion efforts may require more funding than we currently anticipate. We will also need to generate significant additional revenue once the rent-up is completed, before we will be able to sustain or increase profitability. We cannot assure that these properties, or other properties that Shurgard Europe and its development joint ventures acquire and develop, will become profitable. The failure of Shurgard Europe’s operations to become profitable would have a material adverse effect on our business, financial condition, operating results and cash flows.

currently anticipate, and we will need to generate significant additional revenue once the rent-up period is achieved, before we will be able to sustain or increase profitability. We cannot assure you that these properties, or other properties that Shurgard Europe and its development joint ventures acquire and develop, will become profitable even after the rent-up periods. The failure of Shurgard Europe’s operations to become profitable would have a material adverse effect on our business, financial condition, operating results and cash flows.

Our growth strategy in Europe may not be successful. We entered the European market in 1995 because we believed that the size and potential growth of that market made it a significant opportunity for our continued growth. Our ability to achieve our strategy in Europe depends on a number of factors, including:

• the continued growth in acceptance of the self -storage concept in a market where the concept remains relatively new;

• our ability to compete effectively as the European market develops and webecomes ~~face~~more ~~increased competition~~competitive; and

•

our ability to locate, acquire and develop appropriate new properties.

We cannot assure you that we will be successful in implementing our strategy or overcoming these challenges or other problems ~~encountered~~we may encounter with our European operations, some of which may be beyond our control.

We do not have sole operating control over Shurgard Europe. We hold a combined indirect and direct 87.23% ownership interest in Shurgard Europe as of December 31, 2004. Private equity funds managed by Fremont Realty Capital, which we refer to as Fremont, currently hold the remaining 12.77% ownership interest. Under the joint venture agreement governing Shurgard Europe, substantially all of the major decisions of Shurgard Europe require both our approval and the approval of Fremont, notwithstanding the difference in ownership positions. These decisions include among other things, the disposition and acquisition of assets, entry into new markets, approval of the annual business plan and financing arrangements and the hiring of key executives As a result, we may not be able to pursue business opportunities that we consider beneficial to Shurgard Europe if Fremont does not vote in favor of these actions.

The Shurgard Europe joint venture agreement provides that if, by December 31, 2004, Fremont did not have an opportunity to liquidate its interest through an initial public offering or a sale of its ownership interest, it could initiate steps to retain an investment bank to value Shurgard Europe, at which time we would have a preemptive right to purchase Fremont’s ownership interest at that value. As of March 2005, we were in negotiations with Fremont to acquire their interest. There can be no assurance at this time that our negotiations will reach a successful conclusion. There may be adverse consequences if we are unable to reach a successful conclusion to acquire Fremont’s interest. If we do not purchase Fremont’s interest, certain procedures under the joint venture agreement could lead to an initial public offering or to the sale of Shurgard Europe or its assets. Fremont’s interest in Shurgard Europe is subject to a right of first refusal. We are subject to other restrictions on the transfer and sale of our ownership interest in Shurgard Europe. The operation of these provisions could continue to affect our ownership interest in, and the structure of, our European investment.

Risks Relating to Qualification and Operation as a REIT

We might lose our REIT status and incur significant tax liabilities. We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the Code), commencing with our taxable year ended December 31, 1994. So long as we meet the requirements under the Code for qualification as a REIT each year, we can deduct dividends paid to our shareholders when calculating our taxable income. ~~For~~To ~~us to~~ qualify as a REIT, we must meet detailed technical requirements, including income, asset, distribution and stock ownership tests, under several Code provisions that have not been extensively interpreted by judges or administrative officers. In addition, we do not control the determination of all factual matters and circumstances that affect our ability to qualify as a REIT. New legislation, regulations, administrative interpretations or court decisions might significantly change the tax laws with respect to REIT qualification or the federal income tax consequences of such qualification. We believe that we are organized so that we qualify as a REIT under the Code and that we

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~~such qualification. We believe that we are organized so that we qualify as a REIT under the Code and that we~~ have operated and will continue to operate so that we continue to qualify. However, we cannot guarantee that we will qualify as a REIT in any given year because:

•

the rules governing REITs are highly complex;

•

we do not control all factual determinations that affect REIT status; and

•

our circumstances may change in the future.

For any taxable year that we fail to qualify as a REIT, we would not be entitled to deduct dividends paid to our shareholders from our taxable income. Consequently, our net assets and distributions to shareholders would be substantially reduced because of our increased tax liability. If we made distributions in anticipation of our qualification as a REIT, we might be required to borrow additional funds or to liquidate some of our investments in order to pay the applicable tax. If our qualification as a REIT terminates, we may not be able to elect to be treated as a REIT for the four taxable years following the year ~~during which~~ we lost the qualification.

We may pay taxes even if we continue to qualify as a REIT. Even if we continue to qualify as a REIT, we are required to pay some federal, state, local and foreign taxes on our income and our property. For example, Shurgard TRS, Inc. and certain of our other corporate subsidiaries have elected to be treated as taxable REIT subsidiaries. We will be subject to a 100% penalty tax on payments we receive from these subsidiaries if the economic arrangements between the REIT and the taxable subsidiaries are not comparable to similar arrangements between unrelated third parties. In addition, all of our European subsidiaries are subject to local taxation. We also could be subject to tax in the event we, among other things:

• sell property that is considered to be held for sale to customers in the ordinary course of our trade or business (for example, inventory) for federal income tax purposes; and

•

fail to satisfy certain distribution rules, as described below.

Our REIT distribution requirements are complex and may create tax difficulties. To maintain our status as a REIT for federal income tax purposes, we generally must distribute to our shareholders at least 90% of our taxable income each year. In addition, we are subject to a 4% nondeductible excise tax on the amount by which our distributions for a calendar year are less than the sum of:

•

85% of our ordinary income for the calendar year;

•

95% of our capital gain net income for the calendar year; and

•

any amount of our income that we did not distribute in prior years.

For tax purposes, we may be required to treat interest, rent and other items as earned even though we have not yet received these amounts. In addition, we may not be able to deduct currently as expenses for tax purposes some items that we have actually paid. We could also realize income, such as income from cancellation of indebtedness that is not accompanied by cash proceeds. If one or more of these events happened, we could have taxable income in excess of cash available for distribution. In such circumstances, we might have to borrow money or sell investments on unfavorable terms in order to meet the distribution ~~requirement~~requirements applicable to a REIT.

Our indirect investments may result in liabilities against which we cannot protect. We have and may continue to ~~make~~enter into participating mortgages, orand we have and may acquire additional equity interests in partnerships, joint ventures or other legal entities that have invested in real estate. Our bylaws require that we satisfy several conditions before we make these indirect investments, including that the joint investment not jeopardize our eligibility to be taxed as a REIT or result in our becoming an investment company under the Investment Company Act of 1940, as amended. These investments carry risks that are not present when we invest directly in real estate and against which we may not be able to protect ~~ourselves~~, including the risk that we may not control the legal entity that has title to the real estate, the possibility that the enterprise in which we invest has liabilities that are not disclosed at the time of the investment and the possibility that our investments may not be easily sold or readily accepted as collateral by our lenders.

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~~time~~All of our real estate investments in Europe, with the ~~investment~~exception of one facility, are held indirectly through partnerships and ~~the~~joint ~~possibility~~venture arrangements. If we are unable to effectively control these indirect investments, there is a risk that our ~~investments~~joint ~~are~~ventures ~~not~~enter ~~easily~~into ~~sold~~transactions orthat ~~readily~~would ~~accepted~~cause asus ~~collateral~~to bylose our ~~lenders~~status as a REIT.

All of our real estate investments in Europe, with the exception of one facility, are held indirectly through partnerships and joint venture arrangements. If we are unable to effectively control these indirect investments, or if they result in significant liabilities that were undisclosed at the time we entered into them, our business, financial condition, operating results and cash flows may be materially adversely affected.

Financing Risks

~~Inability~~If towe ~~access~~fail ~~the capital markets could delay or adversely affect execution of our business plan. Due~~ to ~~the~~complete ~~delay in filing our annual report on Form 10-K for 2003 and our quarterly report on Form 10-Q for~~ the ~~first~~proposed ~~quarter~~merger ~~2004,~~with wePublic are currently not eligible to access capital markets to raise equity or debt using a short-form registration statement on Form S-3. Instead we would be required to use a long-form registration statement on Form S-11Storage, ~~which may mean delays in registering additional securities for sale~~Inc. ~~In addition,~~ we ~~may face delays in applying to register our securities should the SEC conclude~~will ~~that~~have ~~our failure to comply with Section 404 of~~ the ~~Sarbanes-Oxley~~following ~~Act~~financing ofrisks: ~~2002 renders this filing incomplete.~~

WeInability ~~have~~to aaccess the ~~substantial~~capital ~~amount~~markets could delay or adversely affect execution of ~~debt~~our ~~outstanding~~business ~~and~~plan. Because ~~will~~we ~~continue~~did not file a fully compliant annual report on Form 10-K for 2004, until October 14, 2005, we are not eligible to ~~have~~access public ~~significant~~capital ~~interest~~markets ~~payments.~~to ~~Our~~raise ~~substantial~~equity or debt using a short-form registration statement on Form S-3 until November 2006. Instead we would be required to use a long-form registration statement on Form S-11, which may: mean delays in registering additional securities for sale.

•We ~~require~~have ~~us to dedicate~~ a substantial ~~portion~~ amount of ~~our~~debt ~~cash~~outstanding ~~flow~~and ~~from~~will ~~operations~~continue to ~~make~~have ~~payment~~significant oninterest ~~our~~payments. Our debt, ~~thereby~~may: ~~reducing funds available for operations, future business opportunities and other purposes;~~

•

require us to dedicate a significant portion of our cash flow from operations to make payment on our debt, thereby reducing funds available for operations, future business opportunities, dividends and other purposes;

•

limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

•

limit our ability to borrow additional funds, or to sell assets to raise funds, if needed, for working capital, capital expenditures, acquisitions or other purposes;

• increase our vulnerability to general adverse economic and industry conditions, including changes in interest rates; or

•

place us at a disadvantage compared to our competitors that have less debt.

Market interest rates may negatively affect the price of our debt securities, preferred stock and common stock and increase our interest costs. Annual yields on other financial instruments might exceed the yield from our interest payments, preferred stock dividends or common stock distributions. This could lower the market price of our debt securities, preferred stock or common stock and make it more difficult for us to raise capital. As of December 31, ~~2004~~2005, we had approximately $1.0524 billion, ~~and may incur more,~~ of indebtedness that ~~bears~~carries variable interest rates. With interest rates trending upward in recent periods, the interest rates on our variable rate indebtedness have increased and may continue to increase. We seek to mitigate this risk by entering into interest rate swaps and interest rate caps.

Covenants in our debt agreements could limit our activities. Our unsecured senior notes and our unsecured ~~line~~domestic of credit agreement contain customary restrictions, requirements and other limitations on our ability to incur indebtedness, including total debt to asset ratios, secured debt to total asset ratios, debt service coverage ratios, ~~and~~ minimum ratios of unencumbered assets to unsecured debt, which we must maintain. Our credit facilities under our European joint ventures contain financial covenants based on the operating performance of our storage centers, we also have to maintain a maximum loan to value of the collateral ratio and a minimum debt service ratio. Our continued ability to borrow under our credit facilities is subject to compliance with applicable ~~our~~ financial and other covenants contained in our debt instruments. In addition, our failure to comply with such covenants could cause a default under the applicable debt agreement, which could allow the lenders or other debt holders ~~under the applicable debt~~ to declare all borrowings outstanding to be due and payable, ~~and~~in which case we may ~~then~~ be required to repay such debt with capital from other sources. Under those circumstances, other sources of capital may not be available to us, or be available only on unfavorable ~~unattractive~~ terms. If the amounts outstanding under our credit facility or other debt were to be accelerated, we cannot assure you that our assets would be sufficient to repay in full money owed to the lenders or to our other debt holders.

1416

We may not be able to repay our debt financing obligations. We might not have sufficient net cash flow from our operations to meet required payments of principal and interest under our loans. As a result, we might not be able to refinance the existing debt on our properties, or we might have to enter into credit terms ~~that~~ that are less favorable than the terms of our existing debt. If we cannot generate sufficient cash from our operations to meet our debt service and repayment obligations, we may need to reduce or delay capital expenditures, the development of our business generally and any acquisitions. In addition, we may need to refinance our debt, obtain additional financing or sell assets, which we may not be able to do on commercially reasonable terms, or at all.

WeIf ~~have~~we ~~identified~~fail ~~material~~to ~~weaknesses~~maintain inan ~~our~~effective system of internal control, we may not be able to accurately report our financial results or prevent fraud. AsEffective ~~discussed~~internal incontrols ~~Item~~are 9Anecessary for us to provide reliable financial reports and ~~Status~~effectively ofprevent ~~Management’s~~fraud. ~~Report~~Any oninability ~~Internal~~to ~~Control~~provide ~~over~~reliable financial ~~Financial~~reports ~~Reporting~~or ~~below,~~prevent ~~management~~fraud ~~was~~could ~~unable~~harm our business. The Sarbanes-Oxley Act of 2002 requires management to ~~complete~~evaluate ~~its~~and ~~assessment~~assess the effectiveness of our internal control over financial reporting, and our independent registered public byaccounting ~~the~~firm ~~filing~~must ~~deadline~~attest to management’s evaluation. These Sarbanes-Oxley requirements may be modified, supplemented or amended from time to time. Satisfying these requirements may take a significant amount of time and inrequire significant expenditures. In the process of conducting ~~this~~the ~~assessment~~management toevaluation ~~date~~of our internal control over financial reporting at December 31, 2004, which evaluation we ~~have~~did not complete until October 2005, we identified a number of control deficiencies that ~~are~~were characterized as “material weaknesses.” ~~Management~~and ~~intends~~identified toand ~~complete~~instituted ~~its~~new ~~assessment~~processes ofand ~~our internal~~controls ~~control~~to ~~over~~remediate ~~financial~~the ~~reporting,~~deficiencies. ~~and~~We wecontinued ~~intend~~ to institute new processes and controls through the end of 2005 in order to remediate the deficiencies, ~~but~~identified ~~there~~in ~~can~~last beyear’s nointernal ~~assurance~~control ~~that~~evaluation. As discussed elsewhere in this report, our management ~~will~~evaluated ~~complete~~our ~~the~~internal ~~assessment~~control over financial reporting as of December 31, or2005, and concluded that wesuch ~~will~~internal control ~~completely~~over ~~remediate~~financial ~~our deficiencies~~reporting ~~and~~was ~~material~~effective ~~weaknesses~~at such ~~that~~date. ~~management~~Although ~~will~~our bemost ~~able~~recent tointernal ~~conclude~~control evaluation concluded that our internal control over financial reporting is effective, ~~and~~we ~~our~~may ~~independent~~in ~~registered~~the ~~public~~future ~~accounting~~identify ~~firm~~control ~~will~~deficiencies, including deficiencies that arise to the level of a material weakness. We may not be able to ~~express~~implement annecessary ~~opinion~~control onchanges and employee training effectively and timely to ensure continued compliance with the Sarbanes-Oxley Act and other ~~effectiveness~~regulatory ofand ~~our~~reporting requirements. If we fail to maintain effective internal control over financial reporting, ~~for~~we ~~the~~could ~~years~~be ~~ended~~subject ~~December~~to 31regulatory scrutiny and sanctions, ~~2004~~and orinvestors ~~2005~~could lose confidence in the accuracy and completeness of our financial reports. We cannot assure you that we will be able to comply fully with the requirements of the Sarbanes-Oxley Act or that management will conclude that our internal controls over financial reporting are effective in future periods.

Other Risks

The Jobs and Growth Tax Relief Reconciliation Act of 2003 may adversely affect the value of our common stock. On May 28, 2003, President Bush signed the Jobs and Growth Tax Relief and Reconciliation Act of 2003 into law, which provides favorable income tax rates for certain corporate dividends received by individuals through December 31, 2008. Under this law, REIT dividends are not eligible for the preferential capital gain rates applicable to dividends unless the dividends are attributable to income that has been subject to corporate-level tax. As a result, substantially all of the distributions paid on our shares are not expected to qualify for such lower rates. This new law could cause stock in non-REIT corporations to be more attractive to investors than stock in REITs, which may negatively affect the value of, and the market for, our common stock.

~~Other~~Item 1B—Unresolved ~~Available~~Staff ~~Information~~Comments

~~We file our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports with the Securities and Exchange Commission (SEC)~~None. You may obtain copies of these documents by visiting the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549, by calling the SEC at 1-800-SEC-0330 or by accessing the SEC’s website at http://www.sec.gov. In addition, as soon as reasonably practicable, after such materials are filed with or furnished to the SEC, we make copies of these documents (other than exhibits) available to the public free of charge through our website at www.shurgard.com or by contacting our Secretary at our principal offices, which are located at 1155 Valley Street, Suite 400, Seattle, Washington 98109, telephone number (206) 624-8100.

In addition Shurgard’s corporate governance guidelines, director independence criteria, committee charters, codes of conduct and ethics, and other documents setting forth our corporate governance practices can be accessed in the “Corporate Governance” section of Shurgard’s web site at http://investorrelations.shurgard.com or by writing to Shurgard’s Investor Relations department at our address set forth above.

Item 2—Properties

As of December 31, ~~2004~~2005, we operated a network of ~~633~~646 storage centers and two business parks located throughout the United States and in Europe. Of these properties, we own or lease, directly and through our ~~subsidiaries~~ ~~and joint ventures, 610 properties containing approximately 38.5 million net rentable square feet and manage 23 properties containing approximately 1.3 million rentable square feet for third parties.~~

1517

Of subsidiaries ~~the~~and ~~610~~joint ventures, 633 properties: containing approximately 39.8 million net rentable square feet and manage 13 properties containing approximately 715,000 rentable square feet for third parties.

•Of wethe ~~owned~~633 ~~or leased 475 U.S.~~ properties: ~~in 21 states containing approximately 31.2 million rentable square feet including 99 properties in which we hold joint venture interests ranging from 38% to 99%~~

• we owned or leased ~~135~~484 U.S. properties in ~~seven~~21 ~~European~~states ~~countries~~ containing approximately 731.38 million rentable square feet. including 105 properties in which we hold joint venture interests ranging from 38% to 99%; and

~~Description~~• ~~and~~we ~~Utilization~~owned ofor ~~Properties~~leased 149 properties in seven European countries containing approximately 7.9 million rentable square feet, including 46 properties in which we hold 20% joint venture interests.

~~Our~~Description ~~self storage properties are designed to offer accessible storage space for personal~~ and ~~business~~Use ~~use. Individuals typically rent one or more units in self storage properties for storage~~ of ~~personal belongings such~~Properties as furniture, appliances, boats and other household and recreational goods. Businesses typically rent space for storage of business property such as equipment, products, seasonal goods, records and fixtures. We believe that it is desirable to have commercial customers because they tend to rent larger units, stay for longer terms and are reliable payers. Based on surveys of our customers, we estimate that commercial users account for approximately 25% of our total customer base in the United States and Europe.

Our self -storage properties are ~~divided~~designed to offer ~~into~~accessible astorage ~~number~~space offor personal and business use. Individuals typically rent one or more units in self-~~enclosed~~storage ~~rental~~properties ~~units~~for ~~that~~storage ~~generally~~of ~~range~~personal inbelongings ~~size~~such ~~from~~as ~~approximately~~furniture, 25appliances, toboats ~~900~~and ~~square~~other ~~feet~~household and recreational goods. Businesses ~~Many~~typically ~~properties~~rent ~~have~~space ~~uncovered~~for storage ~~outside~~of ~~the~~business ~~buildings~~property ~~for~~such ~~parking~~as ~~motor~~equipment, ~~vehicles~~products, ~~boats~~seasonal goods, ~~campers~~records and ~~other~~fixtures. ~~similar~~We ~~items suitable~~believe ~~for~~that ~~outside~~it ~~storage.~~is ~~Additionally,~~desirable ato ~~number~~have ofcommercial ~~our~~customers, ~~properties~~because ~~include~~they ~~temperature-controlled~~tend ~~storage~~to rent larger units, to stay for longer ~~which~~terms weand ~~typically~~to ~~charge~~be areliable ~~premium~~payers.

~~Customers~~Our self-storage properties are divided into a number of self-enclosed ~~storage~~rental ~~properties~~units ~~are~~that ~~generally~~typically ~~responsible~~range ~~for~~in ~~delivering~~size ~~and~~from ~~retrieving~~approximately ~~their~~25 ~~goods.~~to ~~Many~~360 ~~leased~~square ~~spaces~~feet ~~can~~in bethe ~~accessed~~United ~~directly~~States ~~by automobile~~and orfrom ~~truck,~~approximately ~~but~~10 ~~some~~to ~~properties,~~300 square feet in ~~particular~~Europe. ~~the~~A ~~multistory~~few ~~buildings,~~storage centers have ~~separate~~larger units ~~loading~~upwards ~~docks~~of ~~and~~900 ~~elevators~~square ~~available~~feet. ~~for~~We ~~delivery~~have ~~and~~approximately ~~retrieval~~200 ofto ~~stored~~2,000 ~~goods~~units at each storage center. ~~The~~Many ~~leasing~~properties have uncovered storage outside the buildings for parking motor vehicles, ~~maintenance~~boats, campers and ~~operation~~other ofsimilar ~~our~~items suitable for outside storage. ~~centers~~Additionally, ~~are~~a ~~the responsibility~~number of our properties include temperature-controlled storage ~~center~~units ~~managers~~for which we typically charge a premium.

Customers of self-storage properties are generally responsible for delivering and retrieving their goods. Many leased spaces can be accessed directly by automobile or truck, but some properties, in particular the multi-story buildings, have separate loading docks and elevators available for delivery and retrieval of stored goods.

Although our storage centers range considerably in size, most domestic properties consist of one or more single-story buildings. The smallest storage center has approximately 20,000 net rentable square feet, while the largest storage center has approximately 280,000 net rentable square feet. The properties generally are constructed with concrete block or tilt-up concrete panels, with steel columns or pre-cast concrete columns that rest on concrete footings and slabs, and have built-up tar roofs or pitched truss roofs with shingles or standing seam metal roofs. The interior walls are generally constructed with metal studs and partitions or other construction materials that are secure but readily movable. The parking areas and driveways are generally asphalt or concrete. All storage centers have fencing, floodlights and electronic gates.

In some cases, ~~multistory~~multi-story buildings have been converted into self -storage properties. In addition, similar ~~multistory~~multi-story buildings for self -storage have been constructed in dense urban areas where land costs, zoning and other development considerations make it impractical or undesirable to construct single-story buildings.

Rental of Storage Units: . Storage units are usually rented on a month-to-month basis. Based on our most recent evaluation of customer move-outs for the year ended December 31, ~~2004~~2005, the average rental period for a tenant is approximately 1112 months. This average is comprised of the rental periods of business tenants, whose average stay approximates 17 18 months, and those of residential customers, whose average stay approximates 1011 months. Based on a sampling of our customers, we estimate that commercial users account for approximately one third of our total customer base in the United States and Europe. Rental rates vary substantially depending on the size of the storage space, the property location, the quality of the property and the proximity of competition.

Other Properties: . Shurgard owns two business parks located near Tacoma, Washington and Burke, Virginia. The business parks were built in 1979 and 1984, respectively, and they contain an aggregate of approximately 158,000 net rentable square feet.

1618

Location of Properties

The following table sets forth the geographic dispersion of our self -storage properties as of December 31, ~~2004~~2005.

	Number of Properties as of December 31, 2004	Percentage of 2004Store Revenue (1)
	Number ofProperties as ofDecember 31, 2005	Percentageof 2005Store Revenue (1)
California	5253	1211.37	%
Washington	5451	98.47	%
Texas	65	98.12	%
Virginia	35	5.8	%
Florida	32	6.2	%
Florida	29	5.7	%
Virginia	36	5.3	%
North Carolina	3441	4.16	%
Michigan	27	3.74	%
Arizona	2322	3.32	%
Minnesota	19	3.3	%
New York	11	3.2	%
New York	11	3.1	%
Minnesota	19	3.0	%
Illinois	23	3.0	%
Georgia	18	2.75	%
Oregon	1314	2.10	%
Maryland	11	1.5	%
South Carolina	15	1.5	%
Indiana	13	1.43	%
Tennessee	10	1.10	%
Other domestic	23	23.93	%
Domestic Total	~~475~~484	7673.06	%
France	3439	67.42	%
Netherlands	2932	4.38	%
Sweden	22	4.67	%
Belgium	18	3.1	%
United Kingdom	18	4.7	%
United Kingdom	16	4.3	%
Belgium	19	2.9	%
Germany	9	0.3	%
Denmark	8	1.4	%
Denmark	7	1.0	%
Germany	11	0.7	%
Europe Total	~~135~~149	2426.04	%
Total	~~610~~633	100.0	%

(1) Revenue includes revenue of all storage centers we actively operate regardless of ownership interest in the property ~~and whether the storage center is owned by an entity that is consolidated in our financial statements~~.

Ownership and Leasing Arrangements of Properties

We evaluate the performance of our real estate assets in two categories: Same Store and New Store (see definition in Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations— SEGMENT ANALYSIS). Same Store includes storage centers and business parks that were acquired prior to January 1 of the prior year and developed properties that have been operating for at least two full years as of January 1 of the current year. New Store represents those storage centers recently acquired or developed for which performance is measured primarily based on original investment expectations. We evaluate all storage centers on the same basis regardless of ownership interest in the property. We believe NOI is a meaningful disclosure of operating performance as a supplement to net income because we rely on NOI for purposes of making decisions with respect to resource allocations, current property values, segment performance, and comparing period-to-period and market-to-market property operating results. NOI is defined as storage center operations revenues less direct operating and real estate tax expense for each of our properties. For a reconciliation of Same Store and New Store NOI to net income see Note 23 to our Consolidated Financial Statements.

We have various ownership and leasing arrangements with respect to properties included in our Same Store and New Store portfolios. The table below includes information as of and for the year ended December 31, 2004 that identifies the proportion of Same Store and New Store results attributable to each of these arrangements. The following tables include 100% of the cost, operating results and other information presented regardless of our percentage ownership interest in that property.

	No. of Properties	Net Rentable Square Feet	Gross Book Value (7)		Revenue		NOI			Lease Expense
	(in thousands except for number of properties)
Same Store
Wholly owned or leased (1)	328	21,105	$	1,264,519	$	236,769	$	160,713		$	3,593
European consolidated subsidiary (2)	72	4,078		618,821		73,241		42,702			1,620
Domestic consolidated joint ventures (3)	83	5,939		337,863		51,300		33,842			143
Total Same Store	483	31,122	$	2,221,203	$	361,310	$	237,257		$	5,356
New Store
Wholly owned or leased (1)	46	2,993		258,217		24,191		11,472			431
European consolidated subsidiary (2)	30	1,550		296,200		20,674		7,488			272
European 20% development ventures (4)	32	1,649		225,466		7,617		(3,483	)		215
Domestic consolidated joint ventures (5)	16	1,006		84,142		6,977		3,288			—
Properties under leasing arrangements (6)	3	211		22,481		1,651		641			—
Total New Store	127	7,409	$	886,506	$	61,110	$	19,406		$	918

(1) Includes owned and leased properties in which we have a 100% interest. The new store amount includes one wholly-owned European property.

(2) Includes properties developed by Shurgard Europe in which we hold an 87.23% interest. The store information and results reflected represent 100% amounts.

(3) Includes domestic properties in which we own an interest less than 100% but that are consolidated in our financial statements. The store information and results reflected represent 100% amounts. There were mortgage notes payable of $219.9 million on these properties as of December 31, 2004. Our pro-rata share in these storage centers is approximately 79%.

(4) Includes properties developed under First Shurgard SPRL and Second Shurgard SPRL in each of which we hold a 17.4% indirect ownership interest through Shurgard Europe. (For a description of First Shurgard and Second Shurgard, see Consolidated Joint Ventures under Item 2 (Properties) in this annual report on Form 10-K.)

(5) Includes domestic properties in which we own an interest less than 100% but that are consolidated in our financial statements. The store information and results reflected represent the full 100% amounts. There were mortgage notes payable of $22.9 million on these properties as of December 31, 2004. Our pro-rata share in these storage centers is approximately 71%.

(6) Three storage centers are operated through a leasing arrangement with a California developer for which the storage center assets are consolidated in our financial statements but not the store operations. We receive property management fees for operating these storage centers.

(7) The actual completed cost of these projects are reported in U.S. dollars translated at the December 31, 2004 exchange rate of $1.36 to the Euro. Operating results are reported at the average exchange rate for the year ended December 31, 2004 which was $1.24 to the Euro. As these exchange rates are different we believe it does not allow for an accurate measure of property investment yield. However, we believe the application of a constant exchange rate to both the property cost and operating results may provide a more meaningful measure of investment yield.

Wholly-Owned or Leased

The majority of our storage centers are owned directly or through wholly-owned subsidiaries. Additionally, as of December 31, ~~2004~~2005, we operated ~~16 properties~~40 instorage ~~the~~centers, ~~U.S.~~including ~~and~~17 25in ~~(including~~the 5United ~~capital~~States ~~leases)~~and 23 in Europe, that are subject to land or building leases; ~~requiring~~of ~~non-contingent~~the ~~rent~~23 ~~payments~~properties in Europe, five are under capital leases. Additionally, we have five corporate offices under operating leases in Europe.

Consolidated Joint Ventures

We develop and operate ~~233~~151 properties in the United States and in Europe with various partners through joint ventures in which we have ownership interests ranging from 20% to 99%.

We operate 11 properties through Tennessee joint ventures and 21 properties through Florida joint ventures, in which our ownership ranges from 50% to 90%. Through December 31, 2004, those joint ventures were managed by two separate groups with whom we established affiliation relationships to develop and manage jointly-owned storage centers. As of January 1, 2005, we took over the property management of the Florida properties directly. Under the joint venture agreements, all major decisions require unanimous consent of both parties. However, we have the ability to exercise unilateral control without incurring significant costs and therefore we consider that we have effective control over those joint ventures.

We operate 43 properties in North Carolina and South Carolina through various joint ventures with Morningstar Storage Centers, LLC (Morningstar). We have entered into an agreement with Morningstar members to form one or more joint ventures to develop and operate additional self storage properties. As of December 31, 2004, we had two properties operating under one such joint venture in which we hold a 75% ownership interest. Additionally, we acquired one property in 2004. Morningstar’s members manage these properties and will manage the properties under development, through an affiliated entity using the Shurgard brand, management systems and standards. We pay Morningstar Property Management, LLC a property management fee equal to the greater of $1,000 per property per month or 4.25% of the gross revenues of each property per month.

We operate eight storage centers owned through a joint venture with a California developer. Under our agreement with this developer, the California developer purchases sites in southern California and constructs storage centers on them according to our specifications. On completion of the rent-up period, the storage centers may be purchased by a joint venture that is consolidated in our financial statements. Prior to such purchase, we have no ownership interest in the properties and accordingly, they are not included in any discussions of our operating results. In 2003 and 2004 we entered into loan agreements with this developer collateralized by three properties under construction. As of December 31, 2004, the developer had drawn $10.3 million under these loan agreements, which amount is included in other assets on our consolidated balance sheet, and $5.2 million remained available to finance the construction of the properties. We also have three properties under leasing arrangements with this developer.

Additionally, as of December 31, 2004, we had ownership interest ranging from 50% to 99% in joint ventures which held 16 properties with various partners in the United States. We manage all of these properties for a fee.

Shurgard Europe operates 32 properties through two consolidated joint ventures in each of which it holds a 20% ownership interest. These joint ventures, First Shurgard SPRL (First Shurgard) and Second Shurgard SPRL (Second Shurgard) were formed in January 2003 and July 2004, respectively, with Crescent Euro Self Storage Investments SARL and Crescent Euro Self Storage Investments II, respectively to develop up to 38 and 37 properties, respectively. Shurgard Europe has entered into development agreements with those joint ventures and receives fees for newly developed storage centers together with, certain financing fees. Also, Shurgard Europe has entered into a 20-year management agreement and receives fees to manage those properties.

Item 3—Legal Proceedings

~~the~~We ~~class~~operate of11 ~~potential~~properties ~~members~~through Tennessee joint ventures and 22 properties through Florida joint ventures, in ~~this~~which ~~lawsuit~~our isownership ~~limited~~ranges from 50% to ~~California~~90%. ~~customers~~As of January 1, 2005, we took over the ~~Company.~~property Nomanagement ~~class~~of ~~has~~the ~~yet~~Florida ~~been~~properties ~~certified.~~directly, Weand dowe ~~not~~expect ~~currently believe~~to ~~that~~takeover the ~~outcome~~property ofand ~~this~~asset ~~litigation~~management ~~will~~of ~~have~~the aTennessee ~~material~~properties ~~adverse~~in 2006. ~~effect~~Under onthe ~~our~~joint ~~financial~~venture ~~position~~agreements, ~~results~~all ofmajor ~~operations~~decisions orrequire ~~cash~~unanimous ~~flows~~consent of both parties. However, we ~~cannot~~have ~~presently~~the ~~determine~~ability ~~the~~to ~~potential~~exercise ~~total~~unilateral ~~damages,~~control ifwithout ~~any~~incurring significant costs, orand ~~the~~therefore ~~ultimate~~we ~~outcome~~consider ~~of the~~that ~~litigation.~~we Wehave effective ~~are~~control ~~vigorously~~over ~~defending~~those ~~this~~joint ~~action~~ventures.

We ~~are~~ aoperate ~~defendant~~44 properties in ~~litigation~~North ~~filed~~Carolina onand ~~October~~South ~~30,~~Carolina ~~2002,~~through invarious ~~the~~joint ~~U.S.~~ventures ~~District~~with ~~Court~~Morningstar ~~for the Northern District of California styled as Patricia Scura et al. v. Shurgard~~ Storage Centers, ~~Inc.~~LLC (~~Case No. C 02-5246-WDB~~Morningstar). ~~The~~in ~~complaint~~most ~~alleges~~of ~~that~~which we ~~required~~ ~~our~~have ~~hourly~~a ~~store~~74% ~~employees~~ownership tointerest. ~~perform~~We ~~work~~have ~~before~~entered ~~and~~into ~~after~~an ~~their~~agreement ~~scheduled~~with ~~work~~Morningstar ~~times~~members ~~and failed~~ to ~~pay~~form one ~~overtime~~or ~~compensation~~more ~~for~~joint ~~work~~ventures ~~performed~~to ~~before~~develop and ~~after~~operate ~~hours~~additional ~~and~~self-storage ~~during meal periods~~properties. ~~The~~As ~~lawsuit~~of ~~seeks class action status and seeks damages~~December 31, injunctive relief and a declaratory judgment against us under the federal Fair Labor Standards Act and California statutory wage and hour laws and laws relating to unlawful and unfair business practices. In December 20042005, we ~~reached~~had ~~a tentative~~two ~~agreement~~properties tooperating ~~settle~~under ~~this~~one ~~lawsuit.~~such ~~The~~joint ~~basis~~venture ~~terms of the proposed agreement are reflected~~ in ~~a Memorandum of Understanding~~ which ~~will~~we behold ~~incorporated into~~ a ~~definitive~~75% ~~settlement~~ownership ~~agreement~~interest. ~~that~~These ~~must~~storage becenters ~~submitted for approval by the~~are ~~District~~managed ~~Court. Notwithstanding this proposed agreement, and as an express part thereof, Shurgard continues to deny any and all allegations of wrongdoing raised~~ by ~~this~~affiliates lawsuit. We recognized a $2.75 million liability for the proposed settlement in December 2004 and this amount is classified in accounts payable and other liabilities on our consolidated balance sheet as of ~~December~~certain ~~31,~~members ~~2004. We do not believe that the outcome~~ of ~~this~~Shurgard/Morningstar ~~litigation~~Storage ~~will have further material adverse effect on our financial position~~Centers, ~~results~~LLC ofthat ~~operations~~are orunrelated ~~cash~~to ~~flows~~Shurgard. ~~However, we cannot determine whether the District Court will approve the terms of the settlement agreement and if significant numbers of plaintiffs will opt-out of the proposed settlement class.~~

OnWe ~~January~~operate ~~19,~~12 ~~2005,~~storage ~~David~~centers ~~Gross~~owned ~~filed~~through atwo ~~purported class~~joint ~~action~~ventures ~~suit~~with ina ~~U.S.~~California ~~District~~developer ~~Court~~in ~~for~~which ~~the~~we ~~Western~~have ~~District~~85% ofand ~~Washington~~87% ~~styled~~ownership asinterests. ~~David~~Under ~~Gross~~our agreement v.with ~~Shurgard~~this ~~Storage Centers~~developer, ~~Inc.,~~the ~~Charles~~California K.developer ~~Barbo,~~purchases ~~and~~sites ~~Harrell~~in L.southern ~~Beck.~~California ~~(Case~~and ~~No.~~constructs ~~CV05-0098)~~storage ~~for~~centers ~~alleged~~on ~~violations~~them ofaccording ~~federal~~to ~~securities~~our ~~law~~specifications. ~~Mr.~~ ~~Gross~~On ~~claimed~~completion ~~that~~of ~~Shurgard~~the ~~made~~rent-up ~~material~~period, ~~misleading~~the ~~misstatements~~storage ~~and~~centers ~~omissions~~may ~~relating~~be topurchased ~~our~~by ~~financial~~joint ventures ~~statements~~we inhave ~~various~~with ~~public~~this ~~statements~~developer ~~and~~that ~~filings,~~we ~~which~~consolidate ~~Mr.~~in ~~Gross alleges led to the artificial inflation of~~ our ~~stock~~financial ~~price~~statements. OnPrior ~~March 9,~~to ~~2005~~such purchase, we ~~received~~have ano ~~copy~~ownership ofinterest ain ~~Notice~~the ofproperties ~~Dismissal~~and ~~without~~accordingly, ~~Prejudice~~they ~~filed~~are bynot ~~the~~included ~~law~~in ~~firms~~our ~~that~~operating ~~had represented the plaintiffs~~results.

OnShurgard ~~March~~Europe ~~15,~~operates ~~2005,~~46 ~~the~~properties ~~law~~through ~~firms~~two consolidated joint ventures in ~~the~~which ~~Gross~~it ~~matter~~holds ~~filed~~20% aownership ~~class~~interests. ~~action~~Those ~~suit~~joint inventures, ~~U.S.~~First ~~District~~Shurgard ~~Court~~SPRL ~~for~~(First ~~the~~Shurgard) ~~Western~~and ~~District~~Second ofShurgard ~~Washington~~SPRL ~~styled~~(Second ~~as Stephen~~Shurgard) ~~Zak,~~were etformed ~~al.~~in v.January ~~Shurgard~~2003 ~~Storage~~and ~~Centers~~July 2004, ~~Inc.~~respectively, ~~Charles~~with KCrescent Euro Self Storage Investments. ~~Barbo,~~Those ~~and~~joint ~~Harrell~~ventures ~~Beck~~are ~~(Case~~expected ~~No.~~to ~~CV05-0417C)~~develop ~~for~~or ~~alleged~~acquire ~~violations~~up ofto ~~federal~~approximately ~~securities~~75 ~~law.~~storage Mrfacilities in Europe. ~~Zak’s~~Shurgard ~~complaint~~Europe ~~makes~~has ~~substantially~~entered ~~similar~~into ~~claims~~development toagreements with those injoint ~~the~~ventures ~~Gross~~and receives fees for newly developed storage ~~complaint~~centers ~~summarized~~together ~~above~~with certain financing fees. ~~The~~Also, ~~suit~~Shurgard ~~seeks~~Europe ~~unspecified~~has ~~damages~~entered ~~including~~into ~~attorneys’~~a ~~fees~~20-year management agreement and ~~costs~~receives fees to manage those properties. WeSuch ~~currently~~fees ~~intend~~are toeliminated ~~vigorously~~upon ~~defend~~consolidation ~~this~~of ~~litigation~~our joint ventures.

~~The~~Additionally, ~~Company~~as isof ~~party~~December 31, ~~to various claims~~2005, ~~complaints~~we ~~and~~had ~~other~~ownership ~~legal~~interests ranging ~~actions~~from ~~that~~51% ~~have~~to ~~arisen~~99% in ~~the~~joint ~~normal~~ventures ~~course~~that ofheld ~~business from~~16 ~~time~~properties towith ~~time~~various ~~that~~partners ~~are~~in ~~not~~the ~~described~~United ~~above~~States. We ~~believe~~manage ~~that~~all ~~it is unlikely that the outcome~~ of these ~~other~~properties ~~pending~~for ~~legal proceedings, including employment and tenant claims, in the aggregate, will have~~ a ~~material adverse effect upon the financial position, operating results, or cash flows of the Company~~fee.

Item 4 3—~~Submission~~Legal ofProceedings ~~Matters to a Vote of Security Holders~~

NoOn ~~matters~~March 7, ~~were~~2006, ~~submitted~~Doris toStaer filed a ~~vote~~purported class action suit in the Superior Court of ~~shareholders~~Washington ~~during~~for King County styled as Doris Staer v. Shurgard Storage Centers, Inc., Charles K. Barbo, Anna Karin Andrews, Raymond A. Johnson, W. Thomas Porter, Gary E. Pruitt, David K. Grant, Howard P. Behar and Richard P. Fox (Case No. 06-2-08148-0 SEA) alleging self-dealing and breaches of fiduciary duties. Ms. Staer claims that Shurgard and the ~~fourth~~named directors ~~quarter~~breached their fiduciary duties in connection with the approval of ~~2004~~our Merger Agreement with Public Storage, Inc. and seeks among other things to enjoin the transaction. We believe that our actions and the actions of our board of directors were appropriate.

We are a defendant in litigation filed on September 17, 2002, in the Superior Court of California for Orange County styled as Gary Drake v. Shurgard Storage Centers, Inc. et al (Case No. 02CC00152). The complaint alleges that we misrepresented the size of our storage units, seeks class action status and seeks damages, injunctive relief and declaratory relief against us under California statutory and common law relating to consumer protection, unfair competition, fraud and deceit and negligent misrepresentation. The Court recently ruled that the class of potential members in this lawsuit is limited to our California customers. No class has yet been certified. It is possible that we may incur losses as a result of this litigation, but we currently do not believe that the range of such losses would be material to our financial position, operating results or cash flows.

~~PART~~However, IIwe cannot presently determine the potential total damages, if any, or the ultimate outcome of the litigation. We are vigorously defending this action.

In addition, from time to time we are subject to ~~Item~~various ~~5—Market~~legal ~~for~~proceedings that arise in the ~~Registrant’s~~ordinary ~~Common~~course ~~Equity~~of business. Although we cannot predict the outcomes of these proceedings with certainty, we do not believe that the disposition of these matters and ~~Related~~the ~~Stockholder~~matters ~~Matters~~discussed above will have a material adverse effect on our financial position, operating results or cash flows.

~~Our common stock is traded on the New York Stock Exchange (NYSE), under the symbol “SHU.” As of March 1, 2005 there were 15,915 holders of~~ ~~record~~Item 4—Submission of ~~our~~Matters ~~common~~to ~~stock~~a ~~and~~Vote ~~the reported NYSE closing price per share~~ of ~~Common~~Security ~~Stock~~Holders ~~was $40.43.~~

~~The~~No ~~table~~matters ~~below~~were ~~sets~~submitted ~~forth~~to ~~for~~a ~~the~~vote ~~fiscal~~of ~~periods~~shareholders ~~indicated~~during the ~~high~~fourth ~~and~~quarter ~~low sales prices per share~~ of ~~Common Stock as reported in the NYSE composite tapes for applicable periods, and distributions declared~~2005.

	High		Low		Distributions Declared (1)
2004
Fourth Quarter	$	44.98	$	38.45	$	0.55
Third Quarter		40.39		36.30		0.55
Second Quarter		40.50		32.87		0.55
First Quarter		39.91		36.45		0.55
2003
Fourth Quarter	$	39.32	$	34.86		0.54
Third Quarter		35.30		32.09		0.54
Second Quarter		34.99		31.00		0.54
First Quarter		32.30		28.37		0.54

(1) Distributions declared by our Board of Directors based on financial results for the quarter specified, but declared and paid in the following quarter.

Holders of shares of common stock are entitled to receive distributions when declared by our board of directors out of any assets legally available for payment. We are required to distribute annually to our shareholders at least 90% of our “REIT taxable income,” which, as defined by the relevant tax statutes and regulations, is generally equivalent to net taxable ordinary income in order to maintain our REIT status for federal income tax purposes.

~~Item~~PART ~~6—Selected~~II ~~Financial Data~~

	For the years ended December 31,
	2004		2003		2002		2001		2000
OPERATING DATA:	(1)						(2)		(2)
	(in thousands except per share data)
Total revenue	$	425,661	$	299,234	$	269,445	$	238,715	$	208,471
Income from continuing operations	$	30,099	$	35,754	$	46,230	$	20,997	$	27,637
Per Common Share—Basic:
Income from continuing operations available to common shareholders adjusted	$	0.39	$	0.59	$	0.86	$	0.19	$	0.64
Per Common Share—Diluted:
Income from continuing operations available to common shareholders adjusted	$	0.39	$	0.58	$	0.84	$	0.19	$	0.63
Distributions per common share:
Ordinary income	$	1.52	$	1.67	$	1.92	$	1.74	$	1.73
Capital gain		0.32		0.06		0.08		0.07		—
Return of capital		0.35		0.42		0.11		0.26		0.30
Total	$	2.19	$	2.15	$	2.11	$	2.07	$	2.03
	(in thousands)
BALANCE SHEET DATA:							(2)		(2)
Total assets	$	2,932,884	$	2,067,091	$	1,620,327	$	1,353,296	$	1,303,816
Total borrowings (3)	$	1,684,502	$	1,014,869	$	826,423	$	590,934	$	660,402

Item 5—Market for the Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities

~~(1)~~Our ~~The~~common ~~consolidation~~stock ofis ~~Shurgard~~traded ~~Europe~~on ~~and~~the ~~First~~New ~~Shurgard~~York inStock ~~our~~Exchange ~~financial~~(NYSE), ~~statements~~under ~~for~~the symbol ~~periods~~“SHU.” ~~beginning~~As ~~January~~of 1March 8, ~~2004~~2006 ~~materially~~there ~~affects~~were ~~the~~14,256 ~~comparability~~holders of ~~total~~record ~~revenue,~~of ~~total~~our ~~assets~~common stock and ~~total~~the ~~borrowings~~reported ~~presented~~NYSE inclosing ~~this~~price ~~table.~~per ~~See~~share ~~Note~~of 3Common toStock ~~our~~was ~~Consolidated Financial Statements~~$65.32.

~~(2)~~ The ~~balances~~table below sets forth for ~~2001~~the ~~(balance~~fiscal ~~sheet~~periods ~~data~~indicated ~~only)~~the high and ~~2000~~low ~~have~~sales ~~not~~prices ~~been~~per ~~audited.~~share of Common Stock as reported in the NYSE composite tapes for applicable periods, and distributions declared per share:

(3) Total borrowings include participation rights liability net of discount (See Note 11 to our Consolidated Financial Statements).


	High		Low		Distributions Declared (1)
2005
Fourth Quarter	$	59.63	$	50.89	$	0.56
Third Quarter		57.45		45.02		0.56
Second Quarter		46.78		39.40		0.56
First Quarter		44.37		39.30		0.56
2004
Fourth Quarter	$	44.98	$	38.45	$	0.55
Third Quarter		40.39		36.30		0.55
Second Quarter		40.50		32.87		0.55
First Quarter		39.91		36.45		0.55

(1)

Distributions declared by our board of directors based on financial results for the quarter specified, but declared and paid in the following quarter.

Holders of shares of common stock are entitled to receive distributions when declared by our board of directors out of any assets legally available for payment. In order to maintain our REIT status for federal income tax purposes, we are required to distribute annually to our shareholders at least 90% of our “REIT taxable income,” which, as defined by the relevant tax statutes and regulations, is generally equivalent to net taxable ordinary income. Under our existing domestic credit agreement, our distributions are restricted to a percentage of our quarterly Adjusted Funds from Operations, as defined in the credit agreement. See Note 4 to our consolidated financial statements included elsewhere in this document.

We paid dividends of $2.23 per share of common stock in 2005, representing a 27% increase from the annualized rate in 1994, the year we became a public company. In addition to the dividend of $0.56 per share of common stock, we paid on March 13, 2006 to holders of common stock as of the previously announced record date, under our merger agreement with Public Storage, Inc. we are also entitled to pay a dividend to holders of our common stock of $0.56 per share in the second quarter of 2006. Thereafter, for each calendar quarter ending prior to the closing date of the merger, we are entitled to pay a dividend to holders of our common stock in an amount per share equal to the regular quarterly dividend per share then paid to holders of Public Storage’s common stock multiplied by the exchange ratio for the merger (0.82).

Item 6—Selected Financial Data


	2005			2004		2003		2002		2001
OPERATING DATA	(1)			(1)
	(in thousands except per share data)
Total revenue	$	483,214		$	423,624	$	297,390	$	267,637	$	236,935
(Loss) income from continuing operations (4)	$	(867	)	$	29,231	$	35,148	$	45,312	$	19,406

Basic per share amounts
(Loss) income from continuing operations available to common shareholders (4)	$	(0.28	)	$	0.37	$	0.57	$	0.83	$	0.14

Diluted per share amounts
(Loss) income from continuing operations available to common shareholders (4)	$	(0.28	)	$	0.37	$	0.56	$	0.81	$	0.14
Distributions per common share:
Ordinary income	$	1.47		$	1.52	$	1.67	$	1.92	$	1.74
Capital gain		0.22			0.32		0.06		0.08		0.07
Return of capital		0.54			0.35		0.42		0.11		0.26

Total	$	2.23		$	2.19	$	2.15	$	2.11	$	2.07


	As of December 31,
	2005			2004		2003		2002		2001(2)
	(in thousands)
BALANCE SHEET DATA
Total assets	$	2,957,372		$	2,940,584	$	2,067,091	$	1,620,327	$	1,353,296
Total borrowings (3)	$	1,859,220		$	1,684,502	$	1,014,869	$	826,423	$	590,934

(1)

The consolidation of Shurgard Europe and First Shurgard in our financial statements for periods beginning January 1, 2004 materially affects the comparability of total revenue, total assets and total borrowings presented in this table. See Note 3 to our consolidated financial statements.

(2)

The balances for 2001 (balance sheet data only) have not been audited.

(3)

Total borrowings include participation rights liability net of discount of $40.6 million, $47.5 million and $47.7 million in 2003, 2002 and 2001, respectively.

(4)

For all reported periods, we reclassified to discontinued operations the results of properties that we intended to sell or had sold as of December 31, 2005.

Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

Our Business

We own, operate and develop self -storage properties in principal cities in the United States and in Western Europe. ~~Headquartered~~As inof ~~Seattle~~December 31, ~~Washington~~2005, inwe ~~the~~owned ~~U.S~~or leased, directly and ~~Brussels,~~through ~~Belgium~~our insubsidiaries ~~Europe~~and joint ventures, we633 ~~operate~~properties ascontaining aapproximately ~~REIT~~39.8 million ~~Since~~net ~~our~~rentable ~~founding~~square feet. We are one of the largest self-storage property owners in ~~1972,~~the weUnited ~~(and~~States ~~our~~with ~~predecessor~~a ~~company)~~network ~~have~~of ~~steadily~~484 ~~grown our~~storage ~~business~~centers, as of ~~investing~~December 31, in2005, ~~and~~that ~~operating~~generate 74% of our revenues. We are the largest self-storage ~~facilities~~owner in Europe with 149 storage centers located in seven countries that generate 26% of our revenues. We directly own ormost ~~lease,~~of ~~directly~~these properties and hold indirect interests in the others through our subsidiaries and joint ventures,. ~~610~~Over ~~properties~~the ~~containing~~past ~~approximately~~few ~~38.5~~years ~~million~~we ~~net~~have ~~rentable~~sought growth ~~square~~by ~~feet~~increasing ~~and~~our ~~manage~~investment 23in ~~properties containing~~the ~~approximately~~European ~~1.3~~market ~~million~~and ~~rentable~~by ~~square~~improving ~~feet~~the ~~for~~performance ~~third~~of ~~parties.~~our ~~Today~~portfolio wein ~~are~~the ~~estimated~~United toStates bethrough ~~one~~redevelopment of ~~the~~our ~~largest~~existing ~~self~~properties, and acquisitions of new self-storage ~~property~~facilities. ~~owners~~In in2005, ~~the~~we ~~United~~invested $92.5 million ~~States~~through ~~with~~our aEuropean ~~network~~joint ofventures ~~475~~in new storage ~~centers~~center ~~located~~developments; inopened 2114 ~~different~~new ~~states.~~stores, ~~We are~~adding ~~the~~710,000 ~~largest~~net ~~self~~rentable ~~storage~~square ~~owner~~feet into ~~Europe~~the ~~with~~European ~~135~~portfolio; ~~storage~~and ~~centers~~acquired ~~located~~our inpartner’s ~~seven~~remaining ~~countries~~12.77% interest in Shurgard Europe. We ~~directly~~also ~~own~~completed ~~most~~major redevelopments of ~~these~~five properties ~~but~~in ~~also~~the ~~hold~~United ~~indirect~~States, ~~interests~~opened ~~through~~three ~~our~~new ~~subsidiaries~~storage centers and ~~joint~~acquired ~~ventures~~ten properties, adding approximately one million net rentable square feet to our domestic portfolio.

~~Our~~Operating ~~Approach~~Performance ~~to Investment in Self Storage~~

~~Our~~Income ~~objective~~from isoperations toon ~~maximize~~a ~~shareholder~~consolidated ~~value~~basis ~~through~~increased ~~continued~~by ~~improvement~~$21.8 million, inor ~~the~~26%, ~~performance~~to of$106.2 million ~~our~~in ~~existing~~2005. ~~portfolio~~This ~~and~~increase ~~through~~was ~~acquisition~~due ~~and~~to ~~development~~strong ~~and~~growth ~~investment~~ in ~~additional~~our ~~self~~U.S. ~~storage~~as ~~properties.~~well ~~Historically,~~as weour ~~have~~European ~~been~~Same ~~long-term~~Store ~~holders~~and ofNew ~~storage~~Store ~~properties~~segments. ~~that~~In we2005, ~~acquire~~consolidated orNOI ~~develop~~after ~~because~~indirect ~~we believe~~and ~~these~~leasehold ~~assets~~expenses ~~have~~for ~~steady~~our ~~long-term~~U.S. ~~growth~~Same ~~characteristics~~Store segment improved by $9.3 million, ~~low~~or ~~functional~~5%, ~~obsolescence~~to $195.9 million, and ~~cost~~for ~~benefits~~our ~~relating~~European toSame ~~economies~~Store ofsegment ~~scale~~by $9.1 ~~However~~million, weor ~~will~~27%, ~~from~~to ~~time~~$45.0 million toin ~~time~~2005. In 2005, ~~sell~~consolidated ~~properties~~NOI ~~when~~after weindirect ~~feel~~and ~~market~~leasehold ~~conditions~~expenses ~~warrant~~improved orfor ~~where~~our aU.S. New ~~property~~Store ~~fails~~segment by $9.5 million to ~~fit~~$10.1 million, ~~into~~and our ~~strategic~~European ~~plans.~~New WeStore ~~take~~segment aconsolidated ~~long-term~~net ~~view~~operating oflosses ~~planning~~after indirect and ~~executing~~leasehold ~~this~~expenses ~~objective~~improved by $5.5 million to $2.9 million in 2005.

WeDomestic ~~have~~operations. In ~~observed~~the ~~that~~United ~~changes~~States, our operations in ~~people’s~~2005 ~~lives~~benefited orfrom ~~circumstances~~a ~~are~~strong ~~the~~economy ~~key~~and ~~driver~~stable of demand ~~for~~that ~~short-term~~have ~~storage~~allowed ~~space.~~us ~~Private~~to ~~individuals represent~~increase ~~approximately~~prices ~~70%~~while ofmarginally improving our ~~customer base~~occupancies. ~~Business~~Compared ~~customers~~with ~~looking~~2004, ~~for~~approximately ~~expansion~~one-third orof ~~transition~~our $59.8 million storage ~~space~~center ~~make~~revenues growth upin ~~the~~2005 ~~balance,~~came ~~although~~from ~~this~~our ~~ratio~~Same ~~may~~Store ~~vary~~portfolio ~~from~~in ~~storage~~the ~~center~~United toStates; ~~storage center~~U.S. ~~Our~~Same ~~customer~~Store ~~base~~revenues ~~spans~~increased a$19.8 million, ~~wide~~or ~~range~~6%, ~~of economic~~to ~~strata~~$329.0 million ~~and~~primarily ~~business~~driven ~~types.~~by ~~Based~~a on5% ~~our~~increase ~~experience~~ in ~~the~~our ~~business,~~average werental ~~have~~rates. ~~determined~~Additionally, ~~that~~our ~~most~~new ~~customers~~storage centers ~~place~~opened ain ~~high~~2005 ~~value~~and on2004 ~~convenience~~are ~~through~~taking ~~the~~a ~~location~~shorter ofperiod ~~the center and ease~~ of ~~renting,~~time ~~access~~compared ~~and~~to ~~moving.~~the ~~Consequently,~~past wethree ~~have elected~~years to ~~focus~~reach ~~our~~rental ~~investment~~stabilization, ~~activities~~which inwe ~~densely~~typically ~~populated,~~consider ~~high~~to ~~quality~~be ~~neighborhoods~~85% ~~and~~occupancy. ~~offer~~We ~~high~~attribute ~~quality~~this ~~products~~to ~~and~~improvements ~~services.~~in Weour ~~believe~~selection aof ~~growing~~development sites, ~~segment~~stronger offocus ~~prospective~~on ~~customers~~local ~~are~~marketing, ~~willing~~heightened attention to ~~pay~~operations ~~higher~~and ~~rates~~a ~~for~~favorable ~~these benefits~~economy.

~~When~~International weoperations. In ~~enter~~Europe, our Same Store average occupancy improved to 78% in 2005 compared to 71% in 2004 as a result ~~new~~of ~~market~~improving economic conditions as well as to changes in our pricing strategy. For the fourth quarter of 2005, weour ~~seek~~European ~~highly~~Same ~~visible~~Store portfolio achieved an average occupancy of 83% due primarily to strong performance in France, ~~easily~~Sweden and ~~accessible~~Denmark. ~~locations~~Rent-up inof ~~retail~~our ~~corridors~~self-storage centers has taken longer than initially anticipated due to ~~create~~the ~~customer~~lack of awareness. ~~Through~~of ~~multiple~~the ~~locations~~product, ofslower ~~this~~than ~~kind~~expected economic recovery and significant new supply in acertain ~~metropolitan~~countries. ~~area~~In 2005, we ~~seek~~reduced rates to ~~establish~~attract ~~brand~~new ~~recognition~~customers and as ~~well~~a asresult, ~~economies~~European ofSame ~~scale~~Store inrevenues ~~operating~~increased $10.9 million, or 12%, and our ~~storage~~consolidated ~~centers~~Same Store NOI after indirect and leasehold expenses improved by $9.1 million. InUpon ~~most~~completing the acquisition of ~~markets~~the remaining minority interest in Shurgard Europe in June 2005, ~~our~~we ~~goal~~realized isexisting toopportunities ~~own~~for atfurther ~~least~~integration 15of ~~storage~~international ~~centers~~and domestic operations. We strategically refocused our European development activities in ~~order~~core tomarkets ~~realize~~with proven ~~these~~product ~~efficiencies.~~acceptance, Towhile deferring further ~~enhance~~development ~~brand~~of ~~recognition~~opportunity markets, where we ~~strive~~still tosee ~~achieve~~short-term ademand ~~uniform~~lagging ~~look~~behind tolong-term ~~our~~potential. ~~properties~~Strong ~~through~~Same ~~the~~Store ~~use~~and ofNew ~~signage,~~Store ~~color~~NOI ~~schemes,~~growth ~~quality~~in of2005 ~~the~~in certain countries such as France, ~~buildings~~Sweden and ~~our~~the ~~trademark~~Netherlands ~~“lighthouse”~~allows ~~office~~us ~~design~~to inrely ~~new~~on ~~developments~~those markets to further develop our European portfolio.

Our Approach to Managing the Business

We believe that the supply and demand characteristics of the self storage industry are defined by neighborhood trade areas that can range in size from one to five miles in radius. To manage the business effectively at any given location, we must be aware of the local dynamics of demand, pricing and competition within the applicable neighborhood trade area.

As a result, we approach the management of our business and portfolio on a decentralized basis by maintaining local management and marketing expertise in all our key markets. Our field personnel constantly monitor market trends in demand, competition, pricing and internal performance, making strategic and tactical

adjustments at the storage centers as needed. Key metrics in monitoring the supply of self storage properties include construction starts, sales of doors by suppliers to the industry and inquiry levels at the storage centers. We monitor competition and pricing by watching our closing rate on inquiries and our volume of discounting for new customers. Centrally, we maintain an in-house asset management team that evaluates all investment proposals and monitors progress and performance of each property.

We take a similar approach to the business in Europe where we have integrated a centralized European investment team and decentralized management teams made up almost entirely of local personnel in each of the countries where we invest.

Current Industry Trends and Outlook

Supply and Demand

After experiencing a general softening in demand at our U.S. self storage centers in 2002 and 2003, we noticed an increase in inquiries in the fourth quarter of 2003 that remained steady through March 2005. However, certain of our new storage centers, particularly in Europe, are taking a longer period of time, to reach rental stabilization, which we typically consider to be 85% occupancy. In the last several years, new storage centers have been taking 24 to 48 months to reach stabilization. In order to counteract this slow down in the rent up pace, we have offered reduced rates to attract new customers.

We believe there were two main factors contributing to the trends during 2002 and 2003: the slowdown in the U.S. economy, and the volume of new supply entering our markets. We believe some local economies have been more affected by downturns, such as Northern California, a market that continued to be slow in 2004. In other markets, such as Sweden, the Netherlands, Chicago and parts of Texas, we have seen a significant amount of new supply over the past three years, contributing to weaker operating results.

In our view, the sustained rate at which new supply came in to the markets during 2002 and 2003 was unusual. We attribute the continued development, in the face of declining industry fundamentals, to the historically low interest rates available to developers. Reported new construction starts have only noticeably started to decline over the past 12 months.

Beginning in 2002, in response to the reduced demand and increased competition, we became more aggressive with our sales training programs and increased our storage center operating hours. Additionally in 2003 and 2004 we intensified our storage center maintenance program and we expect in 2005 to increase capital expenditures to improve our existing storage centers. We believe these efforts began to show results in the third quarter of 2003 and throughout 2004. Although customer inquiries have been fairly stable in 2004 compared to 2003, we experienced an increase in our closing rates and we have been able to increase average occupancy and rental rates in most areas.

Customer inquiries have remained steady in the fourth quarter of 2004, compared to the fourth quarter of 2003, but average annual rental rates per square foot in our Same store portfolio of $13.02 in the fourth quarter 2004 grew by 3.5% and occupancy by 2.3%. This growth in rental rates and occupancy resulted in Same store operations revenue growth and NOI growth in 2004 of 5.8% and 6.1%, respectively, over the same period of 2003. (See SEGMENT ANALYSIS for details).

As we expand in Europe to reach targeted economies of scale in various markets, our newly developed storage centers have had an impact on our existing European storage centers, as evidenced by lower than expected occupancy. We believe this impact is temporary. Consumer awareness of the self storage product is dramatically different in Europe than in the United States. In the United States, where self storage has existed for over 30 years, the product is well known and accepted by the U.S. consumer. The European market penetration is only 1.5% of the current U.S. level (based on the ratio of number of self storage properties to the population).

~~Today,~~Key ~~there~~Economic ~~are~~Factors aAffecting ~~reported~~Our ~~37,000~~Business self storage facilities in the United States. In Europe, however, self storage is still relatively new and general consumer awareness is lower. There are reported to be approximately 650 self storage properties in the European countries where we operate. As consumer awareness and acceptance grows in Europe, we believe that these effects of expansion will begin to decline.

~~Acquisition~~Self- Storage Operations. Our operating performance is affected primarily by the supply of and ~~Development~~demand for self-storage space. We are operating in different competitive and economic environments in the United States and Europe. Whereas, self-storage is a commoditized product and a highly competitive industry in the United States, consumer awareness of ~~Real~~self-storage ~~Estate~~is still emergent in Europe. Supply in the United States is estimated at over 41,000 self-storage facilities, which equate to more than 1.6 billion rentable square feet. The U.S. market is highly fragmented with the top ten operators managing less than a quarter of total net rentable square feet. By comparison, European self-storage is still in its infancy with less than 1,000 self-storage facilities across 13 Western European countries. While local competition has been increasing, Shurgard remains the single largest provider of self-storage services in Europe as of December 31, 2005.

~~Historically~~In the United States, weaverage ~~have~~self-storage ~~grown~~industry inrental rates going into 2005 declined gradually for the ~~United~~majority ~~States~~of ~~both~~unit ~~through~~sizes ~~development~~compared ~~and~~to ~~acquisition~~2004, ~~taking~~while ~~advantage~~nation ofwide ~~current~~self-storage occupancy levels remained firm in 2005. High demand in certain markets lifted occupancies as much as 6% in the Southeast and provided for modest rate increases. Accordingly, while market ~~conditions~~rates in early 2005 decreased, we realized a 5% increase in rental rates in our domestic Same Store segment, due largely to ~~select~~rate ~~either~~increases ~~alternative~~in our southeastern U.S. Inproperties. ~~Europe,~~Although ~~most~~we have not seen erosion of ~~our~~the ~~growth~~rental ~~has~~rate ~~been~~gains we achieved in 2005, and pricing and occupancy levels in fact have remained unseasonably strong through ~~development~~the end of ~~new~~the ~~storage~~fourth ~~centers.~~quarter Weof ~~have~~2005, ~~made~~we ~~limited~~do ~~dispositions~~not expect such rate growth to be sustained at present occupancy levels in 2006 based on projections of ~~properties.~~changes in consumer spending.

WeIn ~~believe~~Europe, ~~that~~self-storage ~~low~~business ~~interest~~conditions improved ~~rates~~in France, the Netherlands, Sweden and Denmark. Advances were due primarily to increasing product demand and product awareness, accompanied in Sweden and Denmark by growing strength in the ~~United~~national ~~States~~economies. ~~have~~Economic stagnation in Belgium ~~contributed~~and toGermany aslowed ~~rise~~self-storage business expansion plans in those countries. Market conditions in the ~~price~~United ~~being~~Kingdom ~~paid~~were negatively impacted by ~~private~~a ~~and~~weakening ~~public~~economy ~~investors~~combined towith ~~acquire~~increasing ~~existing~~self-storage supply and competition. European self-storage rental ~~facilities~~rates reversed trend during 2005: A decline in the ~~United~~first ~~States~~half of 2005 was driven by conscious rate moderation in an effort to increase occupancy. In ~~this~~the ~~environment,~~second wehalf ~~have~~of ~~focused~~the onyear, ~~acquisitions~~rental ~~that~~rates weincreased ~~consider~~in ~~unique~~stronger ormarkets ~~strategic~~and infor ~~nature.~~certain ~~The~~unit ~~current~~categories. ~~environment~~We ~~has~~are ~~also~~planning ~~created~~to ~~opportunities~~continue to ~~sell~~raise ~~some~~rental ofrates in the ~~assets~~locations inwhere ~~our~~we ~~portfolio~~reached ~~that~~stable nooccupancy. ~~longer~~However, ~~meet~~continued discounting from our ~~long-term~~target ~~strategic~~rental ~~goals~~rates ~~and~~might webe ~~will~~required ~~continue~~in tomarkets ~~consider~~which ~~these~~lack ~~opportunities~~product acceptance.

~~Our~~Real ~~development~~Estate ~~of new storage centers in the United States has slowed in recent years as quality opportunities have become more limited~~Development. Supply ~~In general, we view the U.S. market as mature, with a strong supply~~ of ~~self~~and ~~storage~~demand for properties. ~~Although~~suitable ~~current~~for ~~trends~~real ~~have~~estate ~~been more encouraging, we believe future~~ development ~~growth opportunities~~into ~~will~~self-storage ~~result~~facilities ~~from~~is ~~population~~affected ~~growth~~by fluctuations in ~~new~~the ~~markets~~overall and ~~depends~~regional onstrength ~~the rent up~~ of ~~our properties,~~ the ~~economic~~economy ~~growth~~as ofwell ~~each~~as ~~region~~by ~~and~~availability ~~competition.~~of Wecapital ~~have placed renewed emphasis on performance and opportunities~~ for ~~improvement~~investment ~~within our~~in ~~existing~~real ~~portfolio~~estate, ~~particularly~~which ~~through~~is ~~redevelopment~~largely influenced ofby ~~our~~fluctuations ~~older storage centers. Increases~~ in ~~steel,~~long-term ~~cement~~interest rates and ~~other~~returns ~~construction~~from ~~costs~~alternative ~~may further affect our ability to continue to develop or improve our existing properties cost effectively~~investments.

In ~~Europe~~the United States, ~~where~~low weinterest rates and lower capitalization rates have contributed to a ~~significant~~rise ~~market~~in the price that private and public investors are ~~leadership~~paying ~~position~~for inacquiring anexisting ~~emerging~~self-storage ~~industry~~facilities. In this environment, we ~~continue~~have tofocused ~~develop~~on acquisitions that we consider unique or strategic in nature. As our development of new storage centers ~~due~~in to the ~~availability~~United ofStates has slowed in recent years, during which quality ~~real~~opportunities ~~estate~~have atbecome ~~attractive~~more limited and construction prices have risen, we have placed renewed emphasis on realization of opportunities for improvement within our existing portfolio, particularly through redevelopment of our older storage centers. ~~From~~Redevelopments ~~time~~allow us to ~~time~~capture wedemand ~~consider~~for ~~expanding~~higher ~~into~~quality ~~additional~~self-storage ~~European~~services ~~markets~~and ~~when~~to compete better against the newer supply that we ~~feel conditions~~face ~~are~~in ~~appropriate~~certain markets. We ~~believe~~expect ~~continued~~redeveloped ~~growth~~stores into ~~Europe~~generate ~~will~~higher ~~help~~returns ~~solidify~~on ~~our~~the capital ~~position~~invested asand ~~market~~create ~~leader~~new ~~and~~growth ~~improve~~opportunities for our ~~economies~~Same ofStores. ~~scale~~Increases in ~~marketing~~construction ~~and~~costs ~~management~~may affect our ability to continue to develop or improve our existing properties cost effectively.

In Europe, we continue to develop new storage centers based on the ~~CRITICAL~~availability ~~ACCOUNTING~~of ~~POLICIES~~quality ~~AND~~real ~~ESTIMATES~~estate at attractive prices. We currently conduct our developments through joint ventures in which we have 20% interests. From time to time, we consider expanding into additional European markets when we feel conditions are appropriate. Over the past two years, however, we have slowed our development to approximately 15 storage

Our discussion and analysis of financial condition and operating results is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as of the date of the financial statements and the amounts of revenues and expenses recognized during the reporting periods. We evaluate our assumptions and estimates on an on-going basis. We base our estimates on experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Significant estimates include the evaluation of impairment of long-lived assets and goodwill, estimated lives of depreciable assets, valuation allowances for deferred tax assets and the allocation of purchase prices of acquired properties. Actual results may differ from these and other estimates under different assumptions or conditions.

Consolidated and Unconsolidated Joint Ventures: We consolidate all wholly-owned subsidiaries. As of January 1, 2004, we adopted Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 46R, “Consolidation of Variable Interest Entities”, a revision to FIN 46. Under FIN 46R, a variable interest entity (VIE) must be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns. We assess

~~whether~~centers ~~partially~~per ~~owned~~year, ~~subsidiaries~~compared ~~are~~to ~~VIEs~~initially ~~and~~anticipated we25, ~~consolidated~~in ~~all~~order ~~VIEs~~to ofbe ~~which~~more weselective ~~are~~about ~~the~~expansion ~~primary~~markets ~~beneficiary. Partially-owned subsidiaries~~ and ~~joint ventures~~the ~~that~~location ~~are~~of ~~not~~sites. ~~VIEs~~We ~~are~~have ~~consolidated~~repositioned our ~~when~~developments wetowards ~~control~~markets ~~the~~where ~~entity,~~penetration ~~which~~has ~~could~~proven ~~result~~to ~~from~~be ~~(i)~~successful. ~~the~~We ~~ability~~have toalso ~~elect~~encountered aand ~~majority~~expect ofwe ~~the~~will ~~management~~continue ~~committee,~~to ~~board~~encounter ofdifficulties ~~partners~~in orcertain ~~similar authority~~markets, ~~(ii)~~such ~~our being named~~ as ~~the~~in ~~managing investor of~~ the ~~entity~~United Kingdom, orfinding ~~(iii)~~real ~~our~~estate ~~providing~~that ~~substantially~~meets ~~all~~our investment ~~of the equity~~criteria. ~~In assessing the consolidation treatment of partially-owned entities~~Therefore, we ~~also~~have ~~consider~~started ~~the~~to ~~nature~~consider ofgrowth ~~veto~~through ~~rights,~~acquisitions ifin ~~any,~~Europe ~~held~~and bycompleted ~~minority investors. To the extent that~~ a ~~minority investor~~nine ~~has~~storage ~~substantive~~center ~~veto~~acquisition ~~rights~~in ~~over~~France ~~major~~in ~~decisions,~~January ~~the entity will generally not be consolidated~~2006. ~~Entities~~We ~~not~~believe ~~consolidated~~continued ~~are~~growth ~~generally~~in ~~accounted~~Europe ~~for~~will ~~under~~help ~~the~~solidify ~~equity~~our ~~method,~~position as ~~we typically have significant influence over unconsolidated~~the ~~subsidiaries~~market leader and ~~joint~~improve ~~ventures. Under the equity method, we recognize~~ our ~~proportionate~~economies ~~share~~ of ~~earnings~~scale orin ~~losses~~marketing ~~based on our ownership interest~~ and ~~the profit allocation provisions of the entity~~management. ~~See further discussion below on the adoption of FIN 46.~~

~~Revenue~~Based ~~Recognition: We~~on ~~recognize rental~~our ~~revenue~~experience ~~from~~in the ~~majority~~business, ofwe ~~our~~have determined that most customers atplace a high value on convenience, such as the ~~contracted~~location ~~rate~~of ~~for~~the ~~each~~storage ~~month~~center ~~occupied~~and ~~because~~ease ~~they~~of ~~are~~renting, ~~under~~access ~~month-~~and moving. Consequently, we have elected to~~-month~~ ~~lease~~focus ~~agreements~~our investment activities in densely populated, high quality neighborhoods and offer high quality products and services. ~~Revenue~~We ~~related~~believe toa growing segment of prospective customers ~~who~~are ~~sign~~willing ~~longer~~to ~~period~~pay ~~leases~~higher isrates ~~recognized~~for ~~ratably~~these ~~over~~benefits. As ~~the~~a result, we have reconsidered our presence in certain markets that no longer meet our long-term of ~~the~~strategic ~~lease~~goals and we sold our investments in those markets when conditions were favorable. We will continue to consider such opportunities.

~~Storage~~Operational ~~Centers: Storage centers~~Initiatives are recorded at cost unless circumstances indicate that cost cannot be recovered, in which case, the carrying value of the property is reduced to estimated fair value. In a business combination we also assess the value of in-place lease intangibles which are amortized to expense over the expected life of the leases. Using our best estimates based on reasonable and supportable assumptions and projections, we review storage centers for impairment whenever events or changes in circumstances indicate that the carrying amount of our assets might not be recoverable. Fair values are determined based on estimated future cash flows using appropriate discount and capitalization rates. The estimation of expected future net cash flows is inherently uncertain and relies on assumptions regarding current and future market conditions. If impairment analysis assumptions change, then an adjustment to the carrying amount of our long-lived assets could occur in the future period in which the assumptions change.

~~Goodwill:~~ We ~~test~~ ~~goodwill~~believe ~~for~~that ~~impairment~~the ~~annually~~supply and ~~whenever~~demand ~~events~~characteristics orof ~~circumstances~~the ~~make~~self-storage industry itare ~~more~~defined ~~likely~~by ~~than~~neighborhood ~~not~~trade areas that ~~impairment~~can ~~may~~range ~~have~~in ~~occurred,~~size ~~such~~from asone ato ~~significant~~five ~~adverse~~miles ~~change~~ in radius. To manage the business ~~climate.~~effectively Toat ~~determine~~any ifgiven ~~there~~location, iswe ~~impairment~~must webe ~~compare~~ aware of the ~~carrying~~local ~~value~~dynamics of ~~goodwill~~demand, pricing and ~~our~~competition ~~storage~~within ~~centers~~the applicable ~~assets~~neighborhood totrade ~~the~~area. ~~estimated~~To ~~fair~~that ~~market~~end, ~~value~~we approach the management of our ~~Same~~business ~~Store~~and portfolio ~~storage~~on ~~centers~~a decentralized basis by maintaining local management and marketing expertise in all our key markets. WeIn ~~use~~the ~~common~~past ~~industry~~two ~~methods~~years, we have significantly increased management positions in our regional operations group. This has allowed us to ~~assess~~improve the ~~value~~quality of ~~our~~service ~~portfolio~~offered ~~and~~to wecustomers, ~~estimate~~increase ~~future~~our ~~cash~~closing ~~flows~~rates, ~~based on~~improve ~~the~~our ~~storage~~rental ~~centers’~~rate ~~NOI~~management, and ~~current~~increase ~~market~~sales ~~capitalization~~of ~~rates~~retail services.

~~Derivatives: Gains~~We ortake ~~losses~~a ~~resulting~~similar ~~from~~approach ~~changes~~to in the ~~fair~~business ~~value of derivatives are recognized~~ in ~~earnings or recorded in other comprehensive income, and subsequently recognized in the statement~~Europe ofwhere ~~earnings~~we ~~when~~have ~~the~~integrated ~~hedged~~a ~~item~~centralized ~~affects~~European ~~earnings,~~investment ~~depending~~team ~~on the purpose of the derivatives~~ and ~~whether~~decentralized ~~they~~management ~~qualify~~teams ~~for~~made ~~hedge~~up ~~accounting~~almost ~~treatment.~~entirely ~~Changes in the fair value~~ of ~~derivative~~local ~~instruments~~personnel ~~not designated as hedging instruments are recognized~~ in ~~earnings.~~each Weof ~~evaluate~~ the ~~effectiveness~~countries ofwhere ~~designated~~we ~~hedges at inception and on a quarterly basis~~invest. ~~Our~~However, ~~main objective~~ in ~~using~~an ~~derivatives~~effort is to ~~add stability to interest expense, to manage our exposure to interest rate movements and to~~ reduce ~~our~~costs ~~various~~in ~~foreign currency risks. To accomplish these objectives~~2005, we ~~use~~have ~~interest~~started ~~rate~~a restructuring ~~swaps and caps as part~~ of our ~~cash~~European ~~flow hedging strategy and we use the sale of forward contracts and the purchase of call options to reduce our foreign currency risks~~operations. We ~~assess~~have ~~the~~increased ~~effectiveness~~synergies ofbetween ~~each~~countries ~~hedging~~and ~~relationship~~reduced ~~by comparing~~ the ~~changes~~number ~~in fair value or cash flows~~ of ~~the~~regional ~~derivative~~management ~~hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction~~positions. ~~The changes in the fair value of derivative instruments may materially affect net income.~~

~~Dispositions~~We ~~and~~continuously ~~Financing~~seek ~~Arrangements: We~~to ~~account~~improve ~~for~~infrastructures ~~sales~~and ofsupport ~~certain~~to ~~storage~~our ~~centers~~field inoperations. ~~which~~As such, we have ~~continuing~~developed ~~involvement~~a ~~as financing~~new ~~arrangements.~~point Weof ~~use~~sales ~~the~~management ~~effective~~software that ~~interest~~we ~~method~~expect ~~based~~will onbe ~~estimated~~operating ~~future cash flows~~ in ~~determining~~all ~~the~~U.S. ~~amortization~~storage ofcenters ~~participation~~during ~~rights~~2006. ~~This~~We ~~estimate~~expect isthis ~~evaluated~~software ~~each~~will ~~period~~allow ~~and~~us ~~is sensitive~~ to ~~both~~more ~~amount~~efficiently and ~~timing~~more oftimely ~~cash flows,~~meet demand and ~~projected~~it ~~purchase~~will ~~price.~~increase ~~Estimated~~effectiveness ~~amount~~in ~~and~~compiling ~~timing~~information ofand ~~distributions~~disseminating isit ~~based~~to onour storage ~~projected property operating cash flows~~centers. ~~Estimated amount and timing of~~

Opportunities and Challenges

While the growth in our operating expenses has been consistent with growth in revenues, increases in real estate development and administrative costs in 2005 negatively affected our operating results. However, we expect real estate taxes in 2006 to increase faster than we have experienced in past years and energy expenses to increase significantly over 2005. In the United States, personnel costs have increased as we have increased wages and incentive bonuses paid to our store level employees in order to retain and attract more highly qualified personnel and motivate store managers through participation in targeted improvements in store level NOI. Other personnel costs have risen due to increased workmen’s compensation claims and employee benefits. In the past two years, we have incurred significant costs related to financial reporting compliance and improving our financial reporting processes. Those costs have started declining in the fourth quarter of 2005 and we expect them to further decline in 2006. In Europe, we have started undertaking cost reduction initiatives by consolidating certain departments, reducing the number of positions in certain countries. We expect these initiatives to gradually take effect through 2007 and we will be incurring restructuring charges over that period.

~~purchase~~On ~~price~~March 6, is2006, ~~based~~we onentered ~~projected~~into ~~stabilized~~the ~~NOI~~Merger Agreement with Public Storage, that contemplates a merger whereby we will be merged with and ~~our~~into ~~estimate~~a subsidiary of ~~when~~Public ~~each~~Storage. ~~property~~Each outstanding share of our common stock will ~~reach~~be ~~stabilization~~converted into the right to receive 0.82 Weof ~~periodically~~a refully paid and non-~~evaluate~~assessable ~~our~~share ~~estimate~~ of ~~the~~Public ~~option~~Storage ~~price~~common stock, ~~the~~and ~~projected~~we ~~timing~~expect to redeem our outstanding preferred stock in accordance with their respective terms. Public Storage will assume approximately $1.8 billion of our ~~joint~~debt. ~~venture~~Holders ~~partner~~of Shurgard’s ~~exercise~~stock ofoptions, ~~their~~restricted ~~put~~stock ~~option~~units and ~~the~~shares ~~related~~of ~~expected~~restricted ~~cash~~stock ~~flows.~~will ~~Changes~~receive, ~~are~~subject ~~accounted~~to adjustments, options exercisable for asshares aof ~~change~~Public inStorage ~~estimate~~common stock, ~~affecting~~restricted ~~gross~~stock ~~participation~~units ~~rights~~ and ~~subsequent amortization~~restricted shares of ~~participation~~Public ~~rights~~Storage common stock, respectively.

~~Real~~Our ~~Estate Investment~~board ~~Trust: As~~of adirectors ~~REIT,~~and wethe ~~generally~~board ~~will~~of ~~not~~directors beof ~~subject~~Public toStorage ~~corporate~~have ~~level~~approved ~~federal~~the ~~income~~Merger ~~taxes if minimum distribution, income, asset and shareholder tests are met~~Agreement. ~~However,~~The ~~not~~proposed ~~all~~merger ofis ~~our underlying entities are qualified REIT subsidiaries and may be~~ subject to ~~federal~~our shareholders’ ~~and state taxes~~approval, ~~when~~to ~~applicable.~~Public InStorage’s ~~addition,~~shareholders’ ~~foreign~~approval ~~entities may also be subject to taxes~~ of the ~~host~~issuance ~~country.~~of Anshares ~~income~~of ~~tax~~Public ~~provision~~Storage isstock ~~required~~ to be ~~estimated~~used onas ~~our~~merger ~~taxable~~consideration ~~income arising from our taxable REIT subsidiaries~~ and ~~foreign~~other ~~entities.~~customary Aclosing ~~deferred tax component has arisen based upon the differences in GAAP versus tax income for items such as depreciation and gain recognition~~conditions.

~~Deferred Tax Assets:~~ We have ~~deferred~~made ~~tax assets resulting primarily from cumulative net operating losses arising in~~ certain ~~domestic~~representations ~~taxable subsidiaries~~ and warranties in ~~our European subsidiaries. We regularly evaluate both~~ the ~~positive~~Merger Agreement and ~~negative~~have ~~evidence~~agreed ~~that~~to wecertain ~~believe~~covenants, isincluding, ~~relevant~~among inothers, ~~assessing~~subject ~~whether~~to ~~the deferred~~certain ~~tax~~exceptions, ~~assets~~to ~~will~~permit beour ~~realized.~~board ~~When~~of wedirectors ~~determine~~to ~~that~~comply itwith isits ~~more~~fiduciary ~~likely~~duties, ~~than~~and not ~~that~~to wesolicit, ~~will~~negotiate, ~~not~~provide ~~realize~~information ~~the tax asset either~~ in ~~part~~furtherance ~~or in whole~~of, ~~a valuation allowance is provided. One significant factor representing negative evidence in~~approve, ~~the~~recommend ~~evaluation of whether deferred tax assets arising from cumulative net operating losses will be realized is historical taxable income~~ or ~~loss~~enter ofinto ~~the~~any ~~entity.~~other Inacquisition ~~cases~~proposal ~~where~~(as adefined ~~taxable entity has not demonstrated a history of achieving taxable income, this represents significant negative evidence~~ in ~~assessing whether~~ the ~~amounts~~Merger ~~will be realized and generally requires that we provide a valuation allowance~~Agreement).

~~Recent~~This ~~Accounting~~description ~~Pronouncements~~of certain terms of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Merger Agreement, a copy of which is filed with our current report on Form 8-K dated March 7, 2006.

~~In December 2004, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 123R, a revision of SFAS No. 123,~~ ~~“Accounting~~CRITICAL ~~for~~ACCOUNTING ~~Stock-Based~~POLICIES ~~Compensation”.~~AND ~~This~~ESTIMATES statement eliminates the alternative to use APB Opinion No. 25’s intrinsic value method of accounting and generally requires entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards. We will adopt the provisions of SFAS 123R when it becomes effective in the third quarter 2005. Under SFAS 123R we will recognize stock-based compensation expenses related to our stock option plans and our Employee Stock Purchase Plan which were previously only disclosed. Although we are still evaluating under which transition method we will adopt SFAS 123R and are still assessing the impact on our financial position and operating results, we believe that the disclosures required under SFAS 123 approximate our results if we had adopted the provisions of SFAS 123R as of December 31, 2004.

Consolidated and unconsolidated subsidiaries. We consolidate all wholly-owned subsidiaries. As of January 1, 2004, we adopted Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 46R, “Consolidation of Variable Interest Entities,” a revision to FIN 46. Under FIN 46R, a variable interest entity (VIE) must be consolidated by a company if that company is subject to a majority of the risk of loss from the VIEs activities or entitled to receive a majority of the entity’s residual returns. We assess whether our subsidiaries are VIEs and consolidate all VIEs of which we are the primary beneficiary. Partially-owned subsidiaries and joint ventures that are not VIEs are consolidated when we control the entity, which could result from (i) the ability to elect a majority of the management committee, board of partners or similar authority, (ii) our being named as the managing investor of the entity, or (iii) our providing substantially all of the equity. In assessing the consolidation treatment of partially-owned entities, we also consider the nature of veto rights, if any, held by minority investors. To the extent that a minority investor has substantive veto rights over major decisions, the entity will generally not be consolidated. Entities not consolidated are generally accounted for under the equity method, as we typically have significant influence over unconsolidated subsidiaries and joint ventures. Under the equity method, we recognize our proportionate share of earnings or losses based on our ownership interest and the profit allocation provisions of the entity.

Revenue recognition. We recognize rental revenue from the majority of our ~~RESULTS~~customers, OFwho ~~OPERATIONS~~are under month-to-month lease agreements, at the contracted rate for each month occupied. Revenue related to customers who sign longer period leases is recognized ratably over the term of the lease. Revenues are presented net of provisions for doubtful accounts.

~~Our~~Storage ~~Consolidated~~centers. Storage ~~Statements~~centers are recorded at cost unless circumstances indicate that cost cannot be recovered, in which case, the carrying value of ~~Net~~the ~~Income~~property is reduced to estimated fair value. We capitalize acquisition, development and construction costs of properties in development that include, where applicable, salaries and related costs, real estate taxes, interest, lease expense and preconstruction costs directly related to the project. The preconstruction stage of development of a storage center (or redevelopment of an existing storage center) includes efforts to secure land control and zoning, to evaluate feasibility and to complete other initial tasks that are essential to development. Costs of preconstruction efforts incurred prior to projects being considered probable to be completed are charged as real estate development expenses as incurred. We record abandonment losses for previously capitalized costs of development projects when we assess that the completion of the project is no longer probable. In a business combination, we also assess the value of in-place lease intangibles, which are amortized to expense over the expected life of the leases. Using our best estimates based on reasonable and supportable assumptions and projections, we review storage centers for impairment annually and whenever events or changes in circumstances indicate that the carrying amount of our assets might not be recoverable. Fair values are determined based on estimated future cash flows using appropriate discount and capitalization rates. The estimation of expected future net cash flows is inherently uncertain and relies on assumptions regarding current and future market conditions. If impairment analysis assumptions change, then an adjustment to the carrying amount of our long-lived assets could occur in the future period in which the assumptions change.

~~For~~Goodwill. We ~~periods prior~~test togoodwill ~~2004,~~for weimpairment ~~did~~annually ~~not~~and ~~consolidate~~whenever ~~Shurgard~~events ~~Europe~~ or ~~First~~circumstances ~~Shurgard~~make it inmore ~~our~~likely ~~financial~~than ~~statements.~~not ~~Instead,~~that weimpairment ~~accounted~~may ~~for~~have ~~our~~occurred, ~~investments~~such inas ~~these~~a ~~entities~~significant ~~under~~adverse ~~the~~change ~~equity~~in ~~method~~the ofbusiness ~~accounting~~climate. ~~due~~To todetermine ~~the~~if ~~substantive~~there ~~and~~is ~~important~~impairment, ~~approval rights~~we ~~over~~compare ~~significant~~the ~~operating~~carrying ~~decisions~~value ~~retained~~of bygoodwill and our ~~partners~~storage incenters ~~these~~assets ~~entities.~~to ~~Beginning~~the inestimated fair ~~2004,~~market wevalue ~~consolidated~~of ~~these~~our ~~entities~~Same inStore ~~accordance~~portfolio ~~with~~storage ~~FIN 46R~~centers. ~~Because~~We ~~consolidation~~use ~~results~~common inindustry ~~the~~methods ~~inclusion~~to ofassess ~~Shurgard~~the ~~Europe’s~~value ~~and~~of ~~First Shurgard’s~~our ~~revenues~~portfolio and ~~expenses~~we inestimate ~~the~~future ~~consolidated~~cash ~~financial~~flows ~~statements~~based ~~and~~on the ~~equity~~storage ~~method~~centers’ ~~did~~NOI ~~not, the financial statements for 2003~~ and ~~2002~~current ~~are~~market ~~not~~capitalization ~~directly comparable to the financial statements in 2004~~rates.

~~The~~Derivatives. Gains ~~following~~or ~~table~~losses resulting ~~summarizes~~from changes in the ~~main~~fair ~~components~~value of ~~the~~derivatives ~~changes~~are recognized in ~~net~~ earnings or recorded in other comprehensive income (loss), and subsequently recognized in the statement of earnings when the hedged item affects earnings, depending on the purpose of the derivatives and whether they qualify for hedge accounting treatment. Changes in the ~~year~~fair ~~ended~~value ~~December~~of 31derivative instruments not designated as hedging instruments are recognized in earnings. We evaluate the effectiveness of designated hedges at inception and on a quarterly basis. Our main objective in using derivatives is to add stability to interest expense, ~~2004~~to ~~compared~~manage our exposure to ~~the~~interest ~~year~~rate ~~ended~~movements ~~December~~and 31to reduce our various foreign currency risks. To accomplish these objectives, ~~2003:~~we use interest rate swaps and caps as part of our cash flow hedging strategy and we use the sale of forward contracts and the purchase of call options to reduce our foreign currency risks. We assess the effectiveness of each hedging relationship by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction. The changes in the fair value of derivative instruments may materially affect net income.

	Change in Net Income			Diluted earnings per share (1)
	(In thousands except per share data)
Impact of :
Gain on sale of properties from discontinued operations	$	16,226		$	0.40
Increase in domestic operating income before General, administrative and other		9,267			0.23
Decrease in impairment losses		12,591			0.31
Decrease in amortization income related to participation rights discount		(4,406	)		(0.11	)
Increase in ownership of Shurgard Europe (net of minority interest)		(12,068	)		(0.29	)
Additional depreciation on basis difference of Shurgard Europe’s assets		(3,979	)		(0.10	)
Cumulative effect of change in accounting principle in 2004		(2,339	)		(0.06	)
Increase in domestic General, administrative other than STG exit costs and stock compensation expense		(3,731	)		(0.09	)
Increase in stock compensation expense		(2,283	)		(0.06	)
Exit costs of containerized storage operations (STG)		(2,276	)		(0.06	)
Increase in interest on loans		(3,124	)		(0.08	)
Increase in unrealized foreign exchange gain on intercompany debt		2,088			0.05
Domestic gains and losses on derivatives		2,824			0.07
Other, net (including the effect of additional shares outstanding)		(1,133	)		(0.12	)
Increase in Net income	$	7,657		$	0.09

Dispositions and financing arrangements. We account for sales of certain storage centers in which we have continuing involvement as financing arrangements. We use the effective interest method based on estimated future cash flows in determining the amortization of participation rights. This estimate is evaluated each period and is sensitive to both amount and timing of cash flows, and projected purchase price. Estimated amount and timing of distributions is based on projected property operating cash flows. Estimated amount and timing of purchase price is based on projected stabilized NOI and our estimate of when each property will reach stabilization. We periodically re-evaluate our estimate of the option price, the projected timing of our joint venture partner’s exercise of their put option and the related expected cash flows. Changes are accounted for as a change in estimate, affecting gross participation rights and subsequent amortization of participation rights.

(1) The diluted earnings per share impact is calculated using the weighted average shares for the year ended December 31, 2003.

Net Income: Net income was $45.3 million in 2004 compared to net income of $37.6 million in 2003 and $48.1 million in 2002. The increase in net income from 2003 to 2004 is primarily due to a gain on the sale of properties, lower impairment losses and an increase in our domestic storage centers operating results which were partially offset by higher losses and higher financing costs related to our increased ownership in Shurgard

Real estate investment trust. As a REIT, we generally will not be subject ~~Europe~~to corporate level federal income taxes if minimum distribution, income, asset and ~~higher~~shareholder ~~general~~tests are met. However, ~~administrative~~not all of our underlying entities are qualified REIT subsidiaries and ~~other~~may ~~expense~~be assubject ~~further~~to ~~discussed~~federal ~~below~~and state taxes, when applicable. In ~~The~~addition, ~~decline~~foreign inentities ~~net~~may ~~income~~also ~~from~~be ~~2002~~subject to ~~2003~~taxes isof the ~~result~~host ofcountry. An income tax provision is required to be estimated on our taxable income arising from our taxable REIT subsidiaries and foreign entities. A deferred tax component has ~~impairment~~arisen ofbased ~~long-lived~~upon ~~assets~~the ~~recognized~~differences in ~~2003~~GAAP ~~and~~versus oftax ~~higher~~income ~~general,~~for ~~administrative~~items such as depreciation and ~~other~~gain ~~expense~~recognition.

~~Storage~~Deferred ~~Center~~tax ~~Operations~~assets. We ~~Revenue: Storage~~have ~~center~~deferred ~~operations~~tax ~~revenue~~assets ofresulting ~~$420.6~~primarily ~~million~~from incumulative ~~2004~~net ~~increased~~operating ~~$128.2~~losses ~~million,~~arising orin ~~44%,~~certain ~~compared~~domestic totaxable ~~2003~~subsidiaries ~~due~~and ~~substantially~~in toour European subsidiaries. We regularly evaluate both the ~~consolidation~~positive ofand ~~Shurgard~~negative ~~Europe,~~evidence ~~which~~that ~~contributed~~we ~~$101.5~~believe ~~million~~is ofrelevant ~~revenue.~~in ~~Domestic~~assessing ~~storage~~whether ~~center~~the ~~operations~~deferred ~~revenue~~tax ~~increased~~assets ~~$26~~will be realized.1 ~~million,~~When we determine that it is more likely than not that we will not realize the tax asset either in part or 9%in whole, ~~compared~~a tovaluation ~~2003~~allowance asis aprovided. ~~result~~One ofsignificant anfactor ~~increase~~representing negative evidence in the ~~number~~ evaluation of ~~storage~~whether ~~centers,~~deferred ~~higher~~tax ~~occupancy~~assets ~~and~~arising ~~increases~~from incumulative net ~~rates.~~operating ~~Storage~~losses ~~centers~~will ~~operations~~be ~~revenue~~realized ofis ~~$292.4~~historical ~~million~~taxable inincome ~~2003~~or ~~increased~~loss ~~$29~~of the entity.0 ~~million,~~In orcases ~~11%,~~where ~~from~~a ~~2002~~taxable asentity has not demonstrated a ~~result~~history of ~~the~~achieving ~~increasing~~taxable ~~portfolio~~income, ofthis ~~stores~~represents insignificant ~~particular~~negative ~~from~~evidence ~~stores~~in assessing whether ~~acquired~~the inamounts ~~2002~~will be realized and generally requires that we provide a valuation allowance.

~~Other~~Foreign ~~Revenue: Other revenue~~currency translation. The results of ~~$5.1~~our ~~million~~operations inand ~~2004~~our ~~decreased~~financial ~~$1.8~~position ~~million~~are oraffected ~~26%~~by ~~compared~~the tofluctuations ~~2003.~~in ~~Our~~the ~~containerized~~value ~~storage~~of ~~business~~the euro, ~~which~~and ~~had~~to ~~revenue~~a oflesser ~~$3.2~~extent, ~~million~~other ~~in 2003~~European currencies, ~~ceased~~against ~~operations~~the inU.S. dollar. We recognize the ~~first~~foreign ~~quarter~~currency translation effects of ~~2004~~exchange rate fluctuations on our European assets, liabilities and ~~therefore~~equity ~~had~~as ~~nominal~~a ~~revenue~~currency translation adjustment in ~~2004. This~~other comprehensive income (loss). ofWe include ~~revenue~~gains ~~was~~and ~~partially~~losses ~~offset~~from inforeign ~~2004~~currency bytransactions, asuch ~~growth~~as inthose ~~revenue~~resulting from ~~our~~the ~~tenant~~settlement ~~referral~~of ~~insurance~~foreign ~~program~~receivables ~~which~~or ~~generated~~payables ~~$1.8~~on ~~million~~intercompany transactions, in ~~2004~~net ~~compared~~income. Also, we are exposed to ~~$1.4~~foreign ~~million~~currency exchange risk related to intercompany debt with or between our European subsidiaries that are not denominated in ~~2003.~~the ~~Other~~functional ~~revenue~~currency of $6the subsidiary or the investee.9 ~~million~~We inrecognize ~~2003~~the ~~increased~~effects ~~from~~of ~~$6.1 million~~foreign currency on such debt in ~~2002~~net ~~due~~income ~~primarily~~when we expect to settle the ~~increased~~debt, ~~revenue~~and ~~from~~in ~~our~~other ~~tenant~~comprehensive ~~insurance~~income ~~referral~~when ~~program~~the ~~that~~debt ~~started~~is inconsidered ~~2002,~~to ~~which~~be ~~was~~of ~~$765,000~~a inlong-term ~~2002~~investment nature.

~~Operating~~In ~~Expenses: Operating~~connection ~~expenses~~with ofour ~~$185.5~~exploration ~~million increased $85.7 million, or 86% compared to 2003,~~ of ~~which~~strategic ~~$75.7~~alternatives ~~million~~and ~~relate to~~ our ~~consolidation~~proposed ofmerger ~~Shurgard~~with ~~Europe~~Public inStorage, ~~2004.~~we ~~Domestic~~entered ~~operating~~into ~~expenses~~engagement ~~increased~~letters ~~$9.7~~with ~~million~~our financial ~~or 9~~advisors.7% ~~compared~~We toaccrued ~~2003~~combined asminimum afee ~~result~~obligations ofunder anthese ~~increase~~agreements intotaling ~~the~~$12 ~~number~~million ofin ~~storage~~2005 ~~centers~~ and anexpect ~~increase~~to inincur ~~personnel~~an ~~expenses.~~additional ~~See~~$12 ~~discussion~~million of ~~these expenses~~such ~~under~~fees ~~SEGMENT ANALYSIS. Expenses associated with our containerized storage business, which ceased active operations~~ in ~~the first quarter of 2004~~2006, ~~were~~plus ~~$3.4~~expense ~~million in 2002, $4~~reimbursement.0 ~~million in 2003 and nominal in 2004.~~ In addition ~~to the expenses identified under SEGMENT ANALYSIS~~, ~~operating expenses include internal acquisition costs and development expenses~~ related to ~~abandoned~~our exploration ~~development efforts~~ of ~~$2.8~~strategic ~~million~~alternatives inwe ~~2004~~incurred ~~compared to~~ $1.28 million in ~~2003~~legal fees and ~~$1.2~~expense ~~million~~reimbursements in ~~2002.~~ ~~This~~2005 isand ~~primarily~~we ~~due~~expect to ~~abandoned~~incur ~~development projects in Europe where we scaled down our developments in certain countries and in the abandonment of~~ an ~~acquisition~~additional ~~project. Also in 2004 we incurred approximately~~ $35.90 million of ~~costs~~such onfees ~~two operating-related~~and ~~litigation~~expenses ~~matters, including $2.75 million~~ in ~~settlement~~connection ~~costs~~with ~~that~~our ~~we recognized in December 2004 when we reached a~~ proposed ~~settlement.~~merger ~~See~~with ~~Item~~Public 3:Storage ~~Legal Proceedings for further discussion of these matters. Operating expenses of~~in ~~$99~~2006.9 ~~million in 2003 increased by $15.8 million or 19% compared to 2002. This was primarily a result of increased expenses attributable to new stores.~~

~~Depreciation~~We ~~and~~have ~~Amortization: Depreciation~~entered ~~and~~into ~~amortization~~an ofagreement ~~$87.7~~with ~~million~~each inof ~~2004~~our executive ~~increased~~officers ~~$31.9~~that ~~million~~provides orfor ~~57%~~payments ~~compared~~in tothe ~~2003. Consolidation~~event ofthat ~~Shurgard~~the ~~Europe~~officer’s ~~and~~employment ~~the~~is ~~growth~~terminated ofby ~~our~~us ~~European~~other ~~operations~~than ~~accounted~~ for ~~$27.5~~cause, ~~million~~or ofby the ~~increase,~~employee ~~including~~for angood ~~increase~~reason, ofwithin ~~$6.3~~two ~~million~~years ~~related~~after tocertain ~~the~~business ~~excess~~combination oftransactions, ~~the~~including, but ~~purchase~~not ~~price~~limited weto, ~~paid~~the ~~for~~proposed ~~our~~merger ~~additional~~with ~~ownership~~Public ~~interests in~~Storage. ~~Shurgard~~In ~~Europe~~the ~~over~~event ~~its~~of ~~book~~such ~~value~~a ~~in 2003~~termination, anthe ~~amount~~officer ~~that~~would webe ~~allocated~~entitled to ~~buildings~~payment inof ~~which~~two ~~Shurgard~~and ~~Europe~~one-half ~~had~~times ~~ownership~~his ~~interests.~~or ~~Depreciation~~her ~~and~~annual ~~amortization~~salary ofplus ~~domestic~~his ~~facilities~~or ~~increased~~her $4bonus.5 ~~million~~In oraddition, 8%in to the ~~prior~~event ~~year due to~~ the ~~increase~~payments inmade ~~the~~under ~~number~~one of ~~storage~~these ~~centers~~agreements ~~and~~are insubject ~~particular~~to ~~due~~certain totaxation, the ~~fact~~officer ~~that~~would webe ~~had~~entitled ato ~~full~~additional ~~year~~payments ofnecessary ~~depreciation~~to onreimburse ~~stores~~him ~~acquired mid-year in 2003. Depreciation and amortization of $55.8 million in 2003 increased $5.1 million~~ or ~~10%~~her ~~compared~~for ~~to 2002~~such ~~primarily~~additional ~~due~~tax ~~to the increase in number of stores~~payment.

~~Impairment~~Recent ~~Losses: In~~Accounting ~~2004~~Pronouncements we recognized $80,000 of impairment losses because we adjusted the value of one piece of excess land that we intend to sell. In 2003 the $12.7 million of impairment losses included $9.9 million of impairment losses related to certain real estate assets, of which $7.5 million relates to four properties associated with our joint venture CCP/Shurgard (see Note 11 to our Consolidated Financial Statements). Additionally in 2003 we recognized a $1.1 million impairment expense related to our decision to exit the containerized storage business and a $1.6 million write down of a note receivable. In 2002, impairment losses of $1.6 million related to one real estate property.

In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment,” a revision of SFAS No. 123. This statement disallows APB Opinion No. 25’s intrinsic value method of accounting for share based compensation awards and generally requires entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the fair value of those awards as of their grant date. We will adopt the provisions of SFAS 123R as of January 1, 2006 using the modified prospective method. Under the modified prospective method, compensation cost is recognized beginning with the effective date for all share- based payments granted after the effective date and for the unamortized portion of all awards granted to

~~General, Administrative and Other Expenses: General and administrative expenses of~~ ~~$33.0~~employees ~~million~~prior ~~in 2004 increased $14.9 million or 83% compared~~ to ~~2003.~~the ~~Our~~effective ~~consolidation~~date of ~~Shurgard~~SFAS ~~Europe accounted for $6~~No.~~5 million of the increase~~ 123R. OfUnder ~~the~~SFAS ~~remaining $8~~No.~~4 million~~ 123R, ~~$2.3~~we ~~million~~will isrecognize ~~due~~stock-based tocompensation ~~exit~~expenses ~~costs~~related ~~incurred~~to ~~in connection with the~~our ~~closing~~stock ofoption ~~our~~plans ~~containerized storage business,~~ and ~~the~~our ~~remainder~~Employee ~~consists~~Stock ~~primarily~~Purchase ofPlan ~~increased~~that ~~professional~~were ~~fees~~previously ~~incurred~~only insubject ~~connection~~to ~~with accounting, and financial reporting, as well as compensation expenses resulting from newly created management positions~~disclosure. ~~Consultant~~Under ~~fees associated with efforts to comply with Section 404 of~~ the ~~Sarbanes-Oxley~~terms ~~Act~~ of ~~2002~~our ~~were~~proposed ~~approximately~~merger ~~$3.8~~with ~~million~~Public ~~and~~Storage ~~compensation~~all ~~expenses~~outstanding ~~increased~~unvested ~~by approximately $2.7 million. The increase in compensation expenses was attributable primarily to higher~~ stock ~~based~~options ~~compensation~~for ~~resulting~~common ~~from our increased use of restricted~~ stock ~~instead~~ of ~~stock~~Shurgard ~~options~~Storage ~~to compensate our executives. These increases were partially offset by a decrease of approximately $900~~Centers,~~000 in audit fees~~ Inc. ~~Our~~will ~~2003~~become ~~audit~~fully ~~fees~~vested ~~were higher because after our former auditors resigned in November 2003, our new independent registered public accountants were required to re-audit 2001~~ and ~~2002~~exercisable inimmediately ~~addition~~prior to ~~auditing 2003.~~consummation ~~The increase in stock based compensation expense accounts for $1.5 million~~ of the ~~increase~~proposed inmerger ~~compensation expense~~ and ~~results~~all ~~from~~shares ~~our increased use~~ of restricted stock ~~grants~~will ~~instead~~become offully ~~stock~~vested ~~option~~immediately ~~grants~~after toconsummation ~~compensate our executives. General and administrative expenses were $18.0 million for 2003, an increase~~ of ~~$8.1~~the ~~million,~~proposed ~~or 82% compared to 2002~~merger. ~~This increase is primarily attributable to a $5.2 million increase in accounting and professional fees and a $1.1 million increase in compensation expense related to newly created positions.~~

~~Interest~~In onOctober ~~loans: Interest~~2005, ~~expense~~the ofFASB ~~$82.9~~issued ~~million~~FASB ~~increased~~Staff ~~$31.7~~Position ~~million~~(FSP) ~~compared~~FAS to13-1, “Accounting ~~$51.2~~for ~~million~~Rental inCosts ~~2003,~~Incurred anduring ~~increase~~a ofConstruction ~~62%.~~Period,” ~~The~~which ~~consolidation~~clarifies ofthat ~~Shurgard~~rental ~~Europe~~costs ~~and~~incurred during the ~~debt~~period ~~financing~~of construction of ~~new~~an ~~developments~~asset inon ~~Europe in~~leased ~~2004~~property ~~account~~should ~~for~~not ~~$28.1~~be ~~million~~capitalized; ofrather ~~the~~they ~~increase.~~should ~~The~~be ~~interest~~recognized as rental expense ~~incurred~~ in the ~~United~~same ~~States~~manner ~~increased~~as byrental ~~$3.1~~costs ~~million~~incurred inafter ~~2004~~the ~~due~~construction period. However, to the ~~higher~~extent ~~aggregate~~a ~~indebtedness~~lessee ~~incurred~~accounts ~~during~~for ~~2003~~rental toof ~~finance~~real ~~the~~estate ~~purchase~~projects ofunder ~~additional~~SFAS ~~ownership interest~~No. 67, in“Accounting ~~Shurgard~~for ~~Europe~~Costs and toInitial ~~finance~~Rental ~~the~~Operations ~~acquisition~~of Real ~~and~~Estate ~~development~~Projects,” ofit ~~additional~~should ~~properties~~continue incapitalizing ~~2004~~rental costs. We lease under operating leases certain parcels of land and ~~2003.~~buildings ~~Interest~~on ~~expenses~~which inwe ~~2003~~develop ~~totaled~~storage ~~$51.2~~centers ~~million~~or ~~compared~~perform tocertain ~~$40~~construction improvements.1 ~~million~~We inhave ~~2002.~~historically capitalized ~~The~~rental ~~increase~~costs induring ~~2003~~the ~~relates~~construction ~~primarily~~period ~~to increased~~on ~~mortgage~~such ~~notes~~properties. ~~payable~~We ~~assumed~~account asfor ~~part~~real ofestate ~~the~~projects ~~purchase~~involving our development and construction of ~~our~~self-storage ~~74%~~facilities ~~interest~~under inSFAS ~~Morningstar~~No. 67; intherefore, ~~June~~we ~~2002~~do ~~and~~not ~~the~~believe ~~issuance~~that the adoption of ~~$200~~this ~~million~~FSP ~~senior~~will ~~notes~~have ~~payable~~an inimpact ~~March~~on ~~2003~~our financial position, operating results or cash flows.

~~Amortization~~In ofMay ~~Participation~~2005, ~~Rights~~the ~~discount: We~~FASB ~~recognized~~issued ~~amortization~~SFAS ~~income~~No. 154, “Accounting Changes and Error Corrections—a replacement of ~~$1.1~~APB ~~million~~Opinion inNo. 20 ~~2004~~and FASB ~~compared~~Statement toNo. 3.” ~~amortization~~This ~~income~~statement ofreplaces $5APB Opinion No.5 20, ~~million~~“Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in ~~2003~~Interim Financial Statements,” and ~~amortization~~changes ~~expense~~the requirements for the accounting for and reporting of ~~$4.8~~a ~~million~~voluntary change in ~~2002~~accounting principle. ~~The~~It ~~adjustments~~also applies to ~~amortization~~changes ~~are~~required ~~based~~by onan ~~re-evaluations~~accounting ofpronouncement ~~our~~in ~~estimated~~the ~~participation~~instance ~~rights~~that ~~liability~~the ~~each~~pronouncement ~~period~~does ~~based~~not oninclude ~~the~~specific transition provisions. APB Opinion ~~performance~~No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the ~~related~~period ~~properties~~the ~~and~~cumulative ~~estimates~~effect of ~~rights~~changing ~~retirement~~to ~~dates~~the new accounting principle. OnSFAS ~~June~~No. 154 ~~25,~~requires ~~2004~~retrospective application weof ~~entered~~changes ~~into~~in anaccounting ~~agreement~~principle to ~~retire~~prior periods’ financial statements, unless it is impracticable to determine either the ~~remaining~~period-specific ~~participation~~effects ~~rights~~or the cumulative effect of the change. ~~This~~We ~~transaction~~will ~~closed~~adopt inthe ~~December~~provisions ~~2004~~of SFAS No. 154 ~~See~~as ~~Note~~of 11January 1, to2006, and we do not believe this statement will have a material impact on our ~~Consolidated Financial~~financial ~~Statements~~position, operating results or cash flows.

Loss on Derivatives: The gain or loss on financial derivatives is the gain or loss recognized for the changes in the fair market value of those financial instruments that do not qualify for hedge accounting treatment under SFAS No.133. We had an unrealized loss of $615,000, $2.2 million and $11.0 million in 2004, 2003 and 2002 respectively. The loss in 2004 is primarily the net effect of the change in value of certain domestic interest rate swaps and certain currency forward contracts on the euro that do not qualify for hedge accounting. The losses in 2003 and 2002 related to the changes in values of domestic interest rate swaps we entered into in 2001 to mitigate the risk of interest rate fluctuations related to our various options on the financing of a development transaction. These swaps matured and were paid off in February 2005.

Foreign Exchange Gain (Loss): The foreign exchange gain of $6.2 million in 2004 relates primarily to bonds with Shurgard Europe and a wholly-owned European subsidiary that are marked to the period end exchange rate. We had limited foreign operations in 2003 and in 2002.

Interest Income and Other, Net: Interest income and other in 2004 was $4.4 million compared to a $4.9 million in 2003 and $6.3 million in 2002, respectively. Interest income is comprised primarily of interest income on notes receivable and of other gain. In 2002 we recognized a $1.8 million one-time lease termination.

~~Minority Interest: As a result of our consolidation of Shurgard Europe and its~~ ~~subsidiaries~~RESULTS ~~beginning~~OF ~~January~~OPERATIONS 1, 2004 we recorded a minority interest benefit of $18.4 million in 2004. Approximately, $13.3 million of this minority interest benefit in 2004 relates to First Shurgard and Second Shurgard, respectively, in which Shurgard Europe holds a 20% ownership interest and $5.1 million relates to our partner’s interest in Shurgard Europe. For the years ended 2004, 2003 and 2002 minority interest expenses related to our domestic joint ventures totaled $1.8 million, $1.2 million and $866,000, respectively.

~~Equity in~~Our ~~Earnings~~financial ~~(Losses)~~statements ofinclude ~~Other~~our ~~Real~~European ~~Estate~~subsidiaries ~~Investments: In~~whose ~~2004~~functional currency is the euro. Accordingly, weour ~~had~~results anof ~~interest~~operations, infinancial ~~one~~position ~~entity~~and ~~that~~cash weflows ~~accounted~~are ~~for~~affected ~~under~~by fluctuations in the ~~equity~~value ~~method.~~of Inthe ~~2003~~euro ~~and~~against ~~2002,~~the weU.S. ~~accounted~~dollar. ~~for~~We translate ~~our~~assets ~~interest~~and inliabilities ~~Shurgard~~into ~~Europe~~U.S. ~~under~~dollars at the ~~equity~~exchange ~~method~~rate ~~of accounting~~in ~~and~~effect ~~recorded~~at ~~losses~~the end of ~~$3.1~~each ~~million~~period and ~~$1.2~~statement ~~million,~~of ~~respectively~~income ~~for~~accounts ~~this~~at ~~investment.~~the Inaverage ~~2004,~~exchange werate ~~consolidated~~for ~~Shurgard~~each ~~Europe~~period. ~~and~~These ~~therefore~~exchange ~~had~~rates nowere ~~related~~as ~~comparable~~follows ~~charge~~(in U.S. dollars per euro):

Income Tax Expense: Shurgard Europe is subject to income taxation in the various jurisdictions in which it operates and, as a result of losses it has incurred since its inception, has generated deferred tax assets. Our domestic non-REIT activities (principally our containerized storage business) also incurred losses and generated tax deferred assets. Because we have been unable to demonstrate recoverability of such assets, we have recorded a valuation allowance offsetting these deferred tax assets for each reporting period. As a result, no material income tax expense or benefit is recorded in our Consolidated Statements of Net Income.


	2005	2004
Closing rate as of December 31st	1.18	1.36
Average rate for the year	1.25	1.24

~~Cumulative effect~~Our of change in accounting principle: Upon adoption of FIN 46R, we recorded a cumulative effect of change in accounting principle in the amount of $2.3 million due to the consolidation of First Shurgard. This is the result ofConsolidated ~~eliminating~~Statements ~~all intercompany profits from inception~~ of ~~First~~Operations ~~Shurgard~~for in2005 ~~2003~~and ~~as required under FIN 46R. Before~~ 2004, ~~prior to adoption of FIN 46R, we eliminated our 20% ownership share of intercompany profits.~~

~~Discontinued~~Net income. We ~~operations: In~~had ~~2004~~net income of $11.7 million in 2005, wecompared ~~reclassified~~to ~~the operating~~net income of ~~six~~$45.3 ~~storage~~million ~~centers~~in ~~that~~2004. weThe ~~sold~~decrease in ~~2004~~net income is primarily due to higher interest expense and ~~two~~to ~~additional~~fluctuations ~~storage~~in ~~centers~~foreign ~~that~~exchange werates. Additionally, ~~sold~~increases in ~~January~~our ~~and~~store ~~February~~operations ~~2005.~~results Wewere ~~recognized~~more athan ~~$16.2~~offset ~~million~~by ~~gain~~higher ongeneral, ~~the~~administrative ~~sale~~and ofother ~~the~~expenses, ~~six~~costs ~~storage~~related ~~centers~~to inour ~~2004.~~exploration ~~There~~of ~~were~~strategic noalternatives ~~comparable transactions~~and inreal ~~2003~~estate ordevelopment ~~2002~~expenses.

~~European~~Total revenue. Total revenue increased by $59.6 ~~Consolidated~~million, ~~Statement~~or of14%, ~~Income~~to ~~(See~~$483.2 ~~separate~~million, ~~Note~~due 6primarily ofto higher rental rates for our ~~Consolidated~~domestic ~~Financial~~storage ~~Statements~~centers, ~~included~~the growth in ~~this~~the ~~Form~~number ~~10-K)~~of stores and higher occupancy in our European and domestic storage centers. See further discussion of storage center operations revenue in SEGMENT ANALYSIS.

~~Shurgard Europe began consolidating First Shurgard as of January 1, 2004 and has grown its storage center portfolio significantly since 2002.~~Operating ~~Consequently, Shurgard Europe’s results of operations are not directly comparable to its results for the same periods in 2003 and 2002~~Expenses. ~~This analysis is included to explain operating and other trends occurring in Shurgard Europe.~~

Shurgard Europe’s statements of operations were converted from euros to U.S. dollars at an average exchange rate of $1.24 to the euro for the year ended December 31, 2004, $1.13 to the euro for the year ended December 31, 2003 and $0.94 to the euro for the year ended December 31, 2002. Accordingly, some portions of the changes discussed below are also attributable to the different exchange rates used in the currency translations. Revenues and total expenses increased $20.3 million and $22.3 million, respectively, from 2003 to 2004 at each period’s average exchange rate. At constant exchange rates, using the 2004 average rate, the respective increases in revenues and expenses from 2003 to 2004 would be $12.3 million and $13.9 million.


	2005		2004		% Change
	(in thousands)
Direct store operating expenses	$	186,615	$	164,705	13.3	%
Indirect operating and leasehold expense		43,942		39,169	12.2	%
Other operating		2,100		7,181	(70.8	)%

Operating expense	$	232,657	$	211,055	10.2	%

~~Storage~~Direct ~~Centers~~and ~~Operations~~indirect store ~~Revenue: Storage~~operating ~~centers~~expenses ~~operations revenue of $101.5 million in 2004~~ increased by $3126.47 million, or 4513%, ~~from $70.1 million~~ in ~~2003~~2005, ~~and~~compared ~~from $45.0 million in 2002. At constant exchange rates storage centers operations revenues increased~~ to ~~$101.5~~the ~~million~~prior inyear, ~~2004~~primarily ~~from~~as ~~$77.0~~a ~~million~~result inof ~~2003~~an ~~and~~increase ~~$58.9 million~~ in ~~2002. These increases are~~ the ~~results of the increasing~~ number of storage centers ~~in Europe~~ and ~~the~~increases ~~rent-up~~in ofpersonnel ~~existing stores~~expenses, asreal ~~well~~estate astaxes ~~the~~and ~~consolidation~~utility ~~of First Shurgard as of January 1, 2004~~expenses. ~~The~~See discussion ~~performance~~ of ~~the~~these ~~storage~~expenses ~~centers is discussed more fully~~ under ~~European~~SEGMENT ~~Segment Analysis~~ANALYSIS.

Real estate development expenses. Real estate development expenses of $10.0 million for 2005 increased $5.1 million compared to 2004. This increase resulted from less capitalization of costs, which was due primarily to a significant decrease in development activity relative to prior years and due to increasing efforts pursuing acquisitions, for which internal costs are not capitalized.

Depreciation and amortization. Depreciation and amortization of $95.7 million in 2005 increased $8.3 million, or 9%, compared to 2004. The increase is due primarily to storage center acquisitions and developments completed in late 2004 and in 2005.

Impairment and abandoned project expense. Abandoned project expense relates to previously capitalized costs of development projects that have been assessed as unlikely to be completed. Such losses totaled $2.9 million in 2005 and $2.8 million in 2004. Most of these losses were related to reassessments of projects in certain new markets in Europe; in particular Germany and France in 2005 and in Sweden in 2004. As we continue to try to penetrate new markets in Europe, we may continue to incur such losses. We also recorded impairment losses of approximately $420,000 in 2005 and $80,000 in 2004 related to changes in our estimates of the fair value of parcels of land we were holding for sale.

~~Other~~General, ~~Revenue: Other~~administrative ~~revenue~~and ofother ~~$11~~expenses.4 General ~~million~~and inadministrative expenses ~~2003 consisted primarily~~ of ~~development~~ ~~and management fee revenue paid by First Shurgard~~$35.3 ~~Fees~~million ~~from joint ventures are eliminated~~ in ~~the~~2005 ~~consolidation~~increased ~~in 2004. Shurgard Europe recognized~~ $0.2.4 million, inor ~~2004~~7%, ofcompared ~~development~~to ~~and~~the ~~management~~same ~~fees~~period ~~from~~in ~~Shurgard~~2004. UKThe ~~West~~major ~~London~~components ~~Ltd, a wholly-owned subsidiary~~ of ~~Shurgard~~these ~~which~~expenses ~~owns a storage center that is operated by Shurgard Europe. Such fees~~ are ~~eliminated~~as ~~upon~~follows: ~~consolidation with Shurgard.~~

Operating Expenses: Operating expenses increased to $75.7 million in 2004 from $57.2 million in 2003 and $33.7 million in 2002. At constant exchange rates the operating expenses increased to $75.7 million in 2004 from $62.7 million in 2003 and $44.1 million in 2002. The increase results from higher storage center direct and indirect operating expense due to the growth of Shurgard Europe’s storage center portfolio. This increase was partially offset by the elimination of real estate development costs related to First Shurgard under FIN 46R in 2004. Such costs amounted to $6.8 million in 2003 and were not eliminated. Real estate operating expenses are affected by the adoption of FIN 46R as in 2003, the expenses relating to the development of First Shurgard sites were recognized in the Statements of Operations. The increase in costs results as well from abandoned acquisition and development projects in 2004 in France and the United Kingdom.


	2005		2004		% Change
	(in thousands)
Personnel expenses	$	13,855	$	12,527	10.6	%
Professional fees—audit and consulting		11,172		9,975	12.0	%
Restructuring and exit costs		2,465		2,264	8.9	%
Other general and administrative		7,826		8,195	(4.5	)%

General, administrative and other	$	35,318	$	32,961	7.2	%

~~Real~~Personnel ~~estate~~expenses ~~taxes: Real~~in 2005 ~~estate~~increased ~~taxes~~primarily ~~increased~~as toa ~~$5.3~~result ~~million~~of additional positions in ~~2004~~our ~~from~~financial ~~$3.5~~reporting ~~million~~and inaccounting ~~2003~~function and ~~$2.2~~our ~~million~~information intechnology ~~2002~~function. AtProfessional ~~constant~~fees—audit and consulting consist of costs of consultants assisting us with ~~exchange~~our ~~rates,~~efforts to comply with the ~~operating~~requirements ~~expenses~~of inSection 404 ~~2003~~of ~~would~~the ~~have~~Sarbanes-Oxley ~~been~~Act $3of 2002 and external audit fees.9 ~~million~~Such professional fees have increased significantly due to our additional efforts during 2005 to comply with the requirements for both 2004 and 2005. We incurred $2.94 million in ~~2002.~~2005 ~~The~~in ~~increase~~connection ~~results~~with ~~from~~plans to restructure the ~~growth~~management of ~~the~~Shurgard ~~storage~~Europe. ~~center~~We ~~portfolio,~~continue ~~the~~to ~~consolidation~~evaluate ofour ~~First~~management ~~Shurgard~~structure in ~~2004,~~Europe asand ~~opposed~~may todevelop ~~2003,~~additional ~~and~~cost toreduction plans for which ~~one-time~~we ~~tax~~may ~~credits~~incur ~~received~~additional restructuring expenses through 2007. In 2004, we recorded exit costs of $2.3 million in ~~2003~~connection with the closing of our containerized storage business.

~~Depreciation and~~Costs ~~amortization: Depreciation~~related ~~and amortization increased~~ to ~~$21.1~~takeover ~~million~~proposal inand ~~2004~~exploration ~~from~~of ~~$19~~strategic alternatives.4 In ~~million~~2005, inwe recorded ~~2003 and~~ $13.08 million in ~~2002.~~advisory Atand ~~constant~~legal ~~exchange~~fees ~~rates~~related to the ~~depreciation~~takeover ~~and~~proposal ~~amortization~~that ~~remained~~Shurgard’s ~~stable~~board atof ~~$21.1~~directors ~~million~~rejected in ~~2004~~ ~~compared~~July ~~to $21~~2005.3 ~~million~~In inOctober ~~2003.~~2005, ~~The~~our ~~stability~~board inof ~~2004~~directors isauthorized ~~due to~~ the ~~reduction~~exploration of ~~depreciation~~strategic ~~expense~~alternatives inand ~~certain~~we entered ~~countries~~into toa ~~align~~merger toagreement ~~Shurgard’s~~on ~~accounting~~March 6, ~~policy~~2006. ~~upon consolidation~~Consequently, ~~which~~we ~~reduction~~may ~~offsets~~incur ~~the~~additional ~~increase~~charges in ~~depreciation resulting~~this ~~from new operating storage centers~~area.

~~General, Administrative~~Interest expense and ~~Other~~amortization ~~Expenses: General,~~of ~~administrative~~participation ~~and~~rights ~~other~~discount. Interest ~~expenses~~expense ~~increased~~of to $6105.56 million in 2005, increased $22.7 million, or 27%, compared to 2004. ~~from~~Interest expense in Europe increased $67.2 million infor ~~2003~~the year ended December 31, 2005, because we refinanced a variable rate credit facility with bonds that are swapped to a fixed rate and because our development joint ventures increased their borrowings by $469.82 million into ~~2002~~finance on-going development projects. The remaining increase was due primarily to increased borrowings on our line of credit and higher interest rates. At ~~constant~~December 31, 2005, ~~exchange~~interest rates ~~the~~on ~~general~~our ~~administrative~~line of credit and ~~other expenses~~term ~~decreased~~loan towere $62.51 ~~million~~percentage inpoints higher than at December 31, 2004. ~~from~~In 2005, we borrowed an additional $6186.82 million inunder ~~2003~~our ~~primarily~~revolving ascredit aand ~~result~~term loan facilities to finance our acquisition of ~~higher~~the ~~legal~~remaining ~~fees~~interest in Shurgard Europe, ~~consultancy~~property ~~fees~~acquisitions, development and ~~increased~~redevelopment ~~personnel~~projects. ~~costs~~In ~~which~~2004, ~~were~~we ~~incurred~~recognized ina ~~the~~$1.1 ~~second~~million ~~half~~expense relating to the amortization of ~~2003~~an ~~resulting~~estimated ~~from~~participation ~~the~~rights ~~strengthening~~liability. ofWe ~~Shurgard~~retired ~~Europe’s~~the ~~accounting~~remaining ~~function~~participation rights in December 2004, and ~~changes~~therefore ~~made~~recorded inno ~~the~~related ~~organization~~amortization in 2005.

Loss on derivatives~~: The~~, ~~loss~~net. This onrepresents ~~derivatives~~loss inas ~~2004~~recognized isfor ~~primarily~~ the ~~result~~changes ~~of a $1.9 million loss~~ in the fair market ~~value~~values of athose ~~three-year amortizing cap to secure the interest charge for the period~~derivative ~~2011~~financial ~~through~~instruments ~~2014~~that ondo ~~the €325 million bonds issued by Shurgard Europe. This cap does~~ not qualify for hedge accounting; ~~however,~~treatment onunder ~~consolidation~~SFAS ~~with~~No. 133 ~~Shurgard,~~and ~~this~~changes ~~loss~~in isthe ~~offset~~ineffective byportions aof ~~gain~~those onderivatives aclassified ~~reverse~~as ~~sold~~cash ~~cap~~flow hedges. ~~Within~~The ~~Shurgard Europe, the~~ loss isof ~~partially~~$2.1 ~~offset~~million byin athe ~~gain~~year ofended December 31, ~~$700~~2005,~~000~~ ~~due~~was toprimarily the ~~marking-to-market~~net effect of athe ~~series~~change in the value of euro currency call options ~~maturing~~that ~~May~~do ~~26,~~not ~~2008~~qualify ~~whereby~~for ~~First~~hedge ~~Shurgard~~accounting ~~has~~and the ~~right~~effect toof ~~purchase~~hedge ~~€15~~ineffectiveness ~~million~~of ~~for~~certain ~~$18.6~~interest ~~million~~rate swaps.

~~Minority~~Foreign ~~interest:~~ exchange (loss) gain. The ~~minority~~foreign exchange ~~interest~~loss of $139.37 million ~~relates~~ toin ~~Shurgard~~2005 ~~Europe’s~~and ~~ownership~~a ~~interests~~gain of $6.2 million in ~~First~~2004 ~~Shurgard~~relate ~~and~~primarily ~~Second~~to ~~Shurgard.~~intercompany ~~First~~loans ~~Shurgard~~with ~~was~~our ~~consolidated~~European subsidiaries that were marked to the period-end exchange rate. In connection with our acquisition of the remaining interest in Shurgard Europe, inwe ~~2004~~reevaluated our intercompany debt with our European subsidiaries as of July 1, ~~but~~2005, ~~was~~and ~~not~~determined inthat ~~2003~~such debt is of a long-term investment nature and therefore ceased to recognize exchange gains or losses through earnings on such intercompany debt. Rather, beginning July 1, 2005, we report these translation adjustments as a component of other comprehensive income (loss).

Interest income and other: Interest income and other decreased to $630,000 in 2004 from $1.5 million in 2003 primarily due to interest recognized on properties prior to their transfer to First Shurgard.

Interest expense: Interest expense of $36.1 million in 2004 increased from $28.4 million in 2003 and $24.1 million in 2002. Interest and other charges consist primarily of interest on the senior credit facilities of Shurgard Europe, First Shurgard and Second Shurgard and the €325 million senior notes that Shurgard Europe issued in October 2004. Interest and other charges of $28.4 million in 2004 increased from $21.5 million in 2003. Of this increase, $2.1 million is attributable to exchange rate variance. The remaining increase resulted primarily from

~~increased~~Minority ~~borrowings~~interest. Most ~~under~~of ~~First~~our ~~Shurgard’s~~minority ~~senior~~interest ~~credit~~benefit ~~facility,~~results ~~which~~from ~~was~~our 80% ~~used~~partner’s tointerests ~~fund its development activities as well as an increase~~ in ~~amortization~~ ofour ~~financing~~European ~~costs~~joint ~~related~~ventures, ~~to both the~~ First Shurgard and Second Shurgard ~~credit facilities~~. ~~Also,~~The ~~the~~minority ~~senior notes issued in the fourth quarter 2004 as fixed under swap agreements bear higher~~ interest ~~rates~~benefit ~~than~~for Shurgard Europe~~’s credit~~ ~~facility~~relates ~~and~~to ~~resulted~~our ~~in higher interest rate expense and amortization of financing costs in the second half of 2004~~12.77% ~~These~~minority ~~increases~~partner’s in interest ~~and~~which ~~other~~we ~~charges~~acquired ~~were offset by a $7.8 million decrease in interest expenses~~ on ~~a subordinated loan from Recom & Co.~~June 30, ~~SNC (Recom) as a result of the repayment of that loan in September 2003~~2005. The components ~~increase~~of inminority interest ~~expense~~were ~~from~~as ~~2002~~follows: ~~to 2003 is primarily due to increased draws on Shurgard Europe’s line of credit and additional bonds issued to Shurgard to finance developments of new storage centers.~~

Unrealized Foreign Exchange Gain (Loss): The unrealized foreign exchange gain of $4.9 million, $9.8 million and $2.4 million in 2004, 2003 and 2002, respectively, relate primarily to the $61.3 million bonds and related balances outstanding with Shurgard. Because these bonds are denominated in U.S. dollars and Shurgard Europe conducts business in Euros, variations in exchange rates result in unrealized gains or losses. The increase in 2003 compared to 2002 results from the increase in the loan balance in 2003 and exchange rate fluctuations.


	2005			2004
	(in thousands)
European development joint ventures	$	19,832		$	13,334
Shurgard Europe		4,134			5,091
Domestic joint ventures		(3,030	)		(1,817	)

Total minority interest	$	20,936		$	16,608

Income ~~Taxes:~~ tax expense. Shurgard Europe is subject to income ~~taxes~~taxation in ~~several of~~ the various jurisdictions in which it operates. Itand, ~~has~~as ~~paid~~a noresult ~~significant~~of ~~income~~losses ~~taxes because~~ it has incurred ~~losses~~ since its inception, ~~but~~has itgenerated ~~has~~deferred tax assets. Our domestic non-REIT activities (principally our insurance referral program) have generated taxable income in 2005. However these activities have a history of losses which have generated deferred tax assets. Because ~~Shurgard~~we ~~Europe~~have ~~has~~ been unable to demonstrate recoverability of such deferred tax assets, itwe ~~has~~have recorded a valuation allowance offsetting ~~these~~them ~~deferred~~for ~~tax~~each ~~assets~~reporting period. As a result, no significant income tax expense or benefit is recorded in our consolidated statements of ~~December~~operations 31in relation to the REIT. In 2005, ~~2004~~we incurred approximately $410,000 ~~Shurgard Europe~~of ~~had~~federal ~~deferred~~and state income tax ~~assets~~expense ~~and~~related ~~offsetting~~to ~~valuation~~the ~~allowances~~transfer of ~~$75~~ownership interests in certain properties from a taxable subsidiary to the REIT.3 ~~million~~The remaining tax expense relates to taxes on taxable income generated by certain European subsidiaries.

~~Cumulative~~Discontinued ~~effect~~operations. In of2005, ~~change~~we recognized $11.8 million in ~~accounting~~gain ~~principle: Upon~~on ~~adoption~~the sale of ~~FIN~~five ~~46R,~~operating storage centers and we ~~recorded~~recognized a$16.2 ~~cumulative~~million ~~effect~~on the sale of ~~change~~six properties in ~~accounting~~2004. ~~principle~~Such sales result from opportunities to sell assets in ~~the~~our ~~amount~~portfolio ofthat ~~$2.3~~no ~~million~~longer ~~due~~meet toour long-term strategic goals. We reclassified the ~~consolidation~~ operating income of ~~First~~thirteen ~~Shurgard~~storage incenters ~~2004~~as ~~and~~income ~~the~~from ~~resulting~~discontinued ~~elimination~~operations ofincluding ~~all~~income ~~intercompany~~from ~~profits~~two ~~since~~properties ~~the~~that ~~inception~~we still ofheld ~~First~~for ~~Shurgard~~sale inas ~~2003~~of December 31, 2005.

Cumulative effect of change in accounting principle. On the adoption of FIN 46R, in 2004, we recognized a cumulative effect of change in accounting principle of approximately $2.3 million relating to the consolidation of First Shurgard. This is the result of eliminating all intercompany profits from inception of First Shurgard in 2003 as required under FIN 46R. Before 2004, prior to the adoption of FIN 46R, we eliminated our 20% ownership share of intercompany profits.

Our Consolidated Statements of Operations for 2004 and 2003

For periods prior to 2004, we did not consolidate Shurgard Europe or First Shurgard in our financial statements. Instead, we accounted for our investments in these entities under the equity method of accounting due to the substantive and important approval rights over significant operating decisions retained by our partners in these entities. Beginning in 2004, we consolidated these entities in accordance with FIN 46R. Because consolidation results in the inclusion of Shurgard Europe’s and First Shurgard’s revenues and expenses in our consolidated financial statements and the equity method did not, the financial statements for 2003 are not directly comparable to the financial statements in 2004.

Net income. Net income was $45.3 million in 2004, compared to net income of $37.6 million in 2003. The increase in net income from 2003 to 2004 is due primarily to a gain on the sale of properties, lower impairment losses and an increase in our domestic storage centers operating results, which were partially offset by higher losses and higher financing costs related to our increased ownership in Shurgard Europe, and higher general, administrative and other expense as further discussed below.

Total revenue. Total revenue of $423.6 million in 2004 increased $126.2 million, or 42%, compared to 2003 due substantially to the consolidation of Shurgard Europe, which contributed $101.5 million of revenue.

~~SEGMENT~~Domestic ~~ANALYSIS~~storage centers operations revenue increased $25.9 million, or 9%, compared to 2003 as a result of an increase in the number of storage centers, higher occupancy and increases in rates. This increase was partially offset by a loss of revenue from our containerized storage business, which had revenue of $3.2 million in 2003 but ceased operations in the first quarter of 2004 and therefore had nominal revenue in 2004.

~~We have~~Operating ~~historically~~expenses. Operating ~~evaluated~~expenses ~~performance~~ of ~~our~~$211.1 ~~real~~million ~~estate~~increased ~~assets~~$85.5 inmillion, ~~two~~or ~~segments:~~68%, ~~Domestic~~compared ~~Same~~to ~~Store~~2003, ~~and~~of ~~New~~which ~~Store~~$74.5 ~~Following~~million ~~the~~relate to our consolidation of Shurgard Europe ~~beginning~~in ~~January 1,~~ 2004,. weDomestic ~~added~~operating ~~two~~expenses ~~new~~increased ~~reportable segments~~$10.9 million, ~~European~~or ~~Same~~9%, ~~Store~~compared ~~and European~~to ~~New~~2003 ~~Store.~~as ~~Same~~a ~~Store~~result ~~includes~~of ~~those~~an ~~stores~~increase ~~acquired~~in ~~prior~~the tonumber ~~January 1~~ of ~~the~~storage ~~prior~~centers ~~year~~ and ~~developed~~an ~~properties~~increase ~~operating~~in ~~for~~personnel ~~two~~expenses. ~~full~~See ~~years~~discussion as of ~~January~~these 1expenses ofunder ~~the~~SEGMENT ~~current year~~ANALYSIS. ~~New~~Expenses ~~Store~~associated ~~represents~~with ~~those~~our ~~storage~~containerized ~~centers recently~~storage ~~acquired~~business, ~~or developed for~~ which ~~performance~~ceased isactive ~~measured~~operations ~~primarily~~in ~~based on original investment expectations. We evaluate all storage centers on~~ the ~~same~~first ~~basis~~quarter ~~regardless~~ of ~~our~~2004 ~~ownership~~were ~~interest in the property~~$4.0 Wemillion ~~believe~~in ~~NOI~~2003 isand anominal ~~meaningful measure~~in of2004. ~~operating~~In ~~performance~~addition ~~as a supplement~~ to ~~net~~the ~~income~~expenses ~~because~~identified weunder ~~rely~~SEGMENT ~~on NOI for purposes of making decisions with respect to resource allocations~~ANALYSIS, ~~current~~in ~~property~~2004 ~~values,~~we ~~segment~~incurred ~~performance,~~approximately ~~and comparing period-to-period and market-to-market property operating results~~$3.9 ~~NOI~~million isof ~~defined~~costs ason ~~storage center operations revenues less direct~~ two operating-related ~~and~~litigation ~~real~~matters, ~~estate~~including ~~tax expense for each of our properties~~$2.75 ~~For~~million ain ~~reconciliation~~settlement ofcosts ~~Same~~that ~~Store~~we ~~and~~recognized ~~New~~in ~~Store~~December ~~NOI~~2004 towhen ~~net~~we ~~income~~reached ~~see Note~~a 23proposed ~~to our Consolidated Financial Statements~~settlement. ~~The following sections discuss the performance of these segments.~~

~~The~~Real ~~following~~estate ~~table~~development ~~summarizes~~expense. We ~~key~~had ~~operational~~real ~~data~~estate ~~for~~development ~~our~~expenses ~~storage~~of ~~center~~$5.0 ~~portfolio~~million asin of2004 ~~December~~and ~~31,~~nominal ~~2004~~activity in 2003. ~~This~~The ~~data~~majority isof ~~further~~the ~~discussed~~real ~~below~~estate development activity in ~~this section~~2004 byrelated ~~segment:~~to development projects in Europe which was not consolidated in 2003.

	Year ended December 31, 2004
	Domestic					Europe					Total
	Amount			% of total		Amount			% of total		Amount		% of total
	(dollars in thousands except average rent)
Same Store (1)
Number of Storage Centers		411		87	%		72		53	%		483	79	%
Revenues	$	288,069		90	%	$	73,241		72	%	$	361,310	86	%
NOI after indirect and leasehold expense	$	176,410		93	%	$	32,301		117	%	$	208,711	96	%
Avg. annual rent per sq. ft.	$	11.53				$	21.52
Avg. sq. ft. occupancy (3)		85	%				75	%
Total Storage Center Costs (4)	$	1,602,382		82	%	$	618,821		54	%	$	2,221,203	71	%
New Store (2)
Number of Storage Centers		64		13	%		63		47	%		127	21	%
Revenues	$	32,242		10	%	$	28,868		28	%	$	61,110	14	%
NOI after indirect and leasehold expense	$	12,826		7	%		(4,729	)	-17	%	$	8,097	4	%
Avg. sq. ft. occupancy (3)		70	%				36	%
Total Storage Center Costs (4)	$	349,127		18	%	$	537,379		46	%	$	886,506	29	%
Combined New and Same Store
Number of Storage Centers		475		100	%		135		100	%		610	100	%
Revenues	$	320,311		100	%	$	102,109		100	%	$	422,420	100	%
NOI after indirect and leasehold expense	$	189,236		100	%	$	27,572		100	%	$	216,808	100	%
Total Storage Center Costs (4)	$	1,951,509		100	%	$	1,156,200		100	%	$	3,107,709	100	%

Depreciation and amortization. Depreciation and amortization of $87.4 million in 2004 increased $32.0 million, or 58%, compared to 2003. Consolidation of Shurgard Europe and the growth of our European operations accounted for $27.5 million of the increase, including an increase of $6.3 million related to the excess of the purchase price we paid for our additional ownership interests in Shurgard Europe over its book value in 2003, an amount that we allocated to buildings in which Shurgard Europe had ownership interests. Depreciation and amortization of domestic facilities increased $4.5 million or 8% to the prior year due to the increase in the number of storage centers and in particular due to the fact that we had a full year of depreciation on stores acquired mid-year in 2003.

~~(1)~~Impairment ~~Our~~and ~~definition~~abandoned project expenses. Abandoned project expense relates to previously capitalized costs of ~~Same~~development ~~Store~~projects ~~includes~~that ~~existing~~have ~~storage~~been ~~centers~~assessed ~~acquired~~as ~~prior~~unlikely to ~~January~~be 1completed. ofSuch ~~the~~losses ~~previous~~were ~~year~~$2.8 asmillion ~~well~~in as2004 ~~developed~~and ~~properties~~related ~~that~~to ~~have~~projects ~~been~~in ~~operating~~Europe ~~for~~where awe ~~full~~scaled ~~two~~down ~~years~~on asour ofdevelopments ~~January~~in 1certain ofcountries ~~the~~and ~~current~~where ~~year~~we abandoned an acquisition project in 2004. ~~Our~~In ~~definition~~2003, we recognized losses of ~~Same~~$1.2 ~~Store~~million ~~results~~on abandoned projects in the ~~addition~~United ofStates. ~~storage~~We ~~centers~~also ~~each~~recorded ~~year~~impairment aslosses ~~new~~of ~~acquisitions~~$80,000 in 2004 and ~~developments~~$12.7 ~~meet~~million in 2003. In 2003, the ~~criteria~~$12.7 ~~for~~million ~~inclusion~~of impairment losses included $9.9 million of impairment losses related to certain real estate assets, soof wewhich ~~then~~$7.5 ~~include~~million ~~these~~related ~~storage~~to ~~centers~~four properties associated with a joint venture in ~~the~~which ~~previous~~we ~~year’s~~had ~~comparable~~participation ~~data~~rights. ~~Other~~Also ~~storage~~in ~~companies~~2003, ~~may~~we ~~define~~recognized ~~Same~~a $1.1 ~~Store~~million ~~differently,~~impairment ~~which~~expense ~~will~~related ~~affect~~to our decision to exit the ~~comparability~~containerized storage business and a $1.6 million write down of ~~the~~a ~~data~~note receivable.

~~(2)~~General, ~~Our~~administrative ~~definition~~and other expenses. General and administrative expenses of ~~New~~$33.0 ~~Store~~million in 2004 increased $14.9 million, asor ~~shown~~83%, incompared to 2003. Our consolidation of Shurgard Europe accounted for $6.5 million of the ~~table~~increase. ~~above~~Of the remaining $8.4 million, ~~includes~~$2.3 ~~existing~~million ~~domestic~~is ~~facilities~~due ~~that~~to ~~had~~exit ~~not~~costs ~~been~~incurred ~~acquired~~in orconnection ~~leased~~with asthe closing of ~~January~~our 1containerized ofstorage business, and the ~~previous~~remainder ~~year~~consists primarily of increased professional fees incurred in connection with accounting, and financial reporting, as well as ~~developed~~compensation ~~properties~~expenses ~~that~~resulting ~~have~~from ~~not~~newly ~~been~~created ~~operating~~management apositions. ~~full~~Consultant ~~two~~fees associated ~~years~~with asefforts ofto ~~January~~comply 1with Section 404 of the ~~current~~Sarbanes-Oxley ~~year~~Act of 2002 were approximately $3.8 million, and compensation expenses increased by approximately $2.7 million. The increase in compensation expenses was attributable primarily to higher stock-based compensation resulting from our increased use of restricted stock instead of stock options to compensate our executives. These increases were partially offset by a decrease of approximately $900,000 in audit fees. Our 2003 audit fees were higher because after our former auditors resigned in November 2003, our new independent registered public accountants were required to re-audit 2001 and 2002 in addition to auditing 2003.

(3) Average annual rent per square foot is calculated by dividing actual rent collected by the average number of square feet occupied during the period.

(4) Total costs capitalized to storage centers.

Interest expense and amortization of participation rights discount. Interest expense and amortization of participation rights discount of $81.8 million in 2004 increased $36.1 million, or 79% compared to 2003. The consolidation of Shurgard Europe and the debt financing of new developments in Europe in 2004 account for $28.1 million of the increase. The interest expense incurred in the United States increased by $3.1 million in 2004 due to the higher aggregate indebtedness incurred during 2003 to finance the purchase of additional ownership interest in Shurgard Europe and to finance the acquisition and development of additional properties in 2004 and 2003. The interest expense increase was also due to the decrease in amortization of participation rights discounts. The adjustments to amortization are based on re-evaluations of our estimated participation rights liability each period based on the performance of the related properties and estimates of rights retirement dates. In December 2004 we retired the remaining participation rights.

Loss on derivatives, net. The gain or loss on financial derivatives is the gain or loss recognized for the changes in the fair market value of those financial instruments that do not qualify for hedge accounting treatment under SFAS No.133. We had an unrealized loss of $610,000 and $2.2 million in 2004 and 2003 respectively. The loss in 2004 represented primarily the net effect of the change in value of certain domestic interest rate swaps and certain currency call options on the euro that do not qualify for hedge accounting. The losses in 2003 related to the changes in values of domestic interest rate swaps we entered into in 2001 to mitigate the risk of interest rate fluctuations related to our various options on the financing of a development transaction. These swaps matured and were paid off in February 2005.

Foreign exchange gain (loss). The foreign exchange gain of $6.2 million in 2004 relates primarily to intercompany bonds with Shurgard Europe and a wholly-owned European subsidiary that are marked to the period end exchange rate. We had limited consolidated foreign operations in 2003.

Minority interest. As a result of our consolidation of Shurgard Europe and its subsidiaries beginning January 1, 2004 we recorded a minority interest benefit of $18.4 million in 2004. Approximately, $13.3 million of this minority interest benefit in 2004 relates to First Shurgard and Second Shurgard, respectively, in which Shurgard Europe holds a 20% ownership interest and $5.1 million relates to our partner’s interest in Shurgard Europe. Additionally we had minority interest expenses related to our domestic joint ventures of $1.8 million and $1.2 million in 2004 and 2003, respectively.

Equity in earnings (losses) of other real estate investments. In 2004, we had an interest in one entity that we accounted for under the equity method. In 2003, we accounted for our interest in Shurgard Europe under the equity method of accounting and recorded losses of $3.1 million for this investment. In 2004, we consolidated Shurgard Europe and therefore had no related comparable charge.

Income tax expense. Shurgard Europe is subject to income taxation in the various jurisdictions in which it operates and, as a result of losses it has incurred since its inception, has generated deferred tax assets. Our domestic non-REIT activities (principally our containerized storage business) also incurred losses and generated tax deferred assets. Because we have been unable to demonstrate recoverability of such assets, we have recorded a valuation allowance offsetting these deferred tax assets for each reporting period. As a result, no material income tax expense or benefit was recorded in our consolidated statements of operations.

Discontinued operations. In 2004, we recognized an aggregate gain of $16.2 million on the sale of six properties in 2004. Such sales result from opportunities to sell assets in our portfolio that no longer meet our long-term strategic goals and there were no comparable transactions in 2003. We reclassified the operating income of thirteen storage centers that we considered discontinued operations in 2005 but that still had operations in 2004 and 2003, including income from two properties that we still held for sale as of December 31, 2005.

Cumulative effect of change in accounting principle. Upon adoption of FIN 46R, we recorded a cumulative effect of change in accounting principle in the amount of $2.3 million in 2004 due to the consolidation of First Shurgard. This is the result of eliminating all intercompany profits from inception of First Shurgard in 2003 as required under FIN 46R. Before 2004, prior to adoption of FIN 46R, we eliminated our 20% ownership share of intercompany profits.

SEGMENT ANALYSIS

Shurgard currently has four reportable segments: Domestic Same Store and New Store and European Same Store and New Store. Same Store includes those stores acquired prior to January 1 of the prior year and developed properties operating for two full years as of January 1 of the current year. New Store represents those storage centers recently acquired or developed for which performance is measured primarily based on original investment expectations. We evaluate all storage centers on the same basis regardless of our ownership interest in the property. Although Net Operating Income (NOI) is a non-GAAP measure, we believe it is a meaningful measure of operating performance as a supplement to net income because we rely on NOI for purposes of making decisions with respect to resource allocations, current property values, segment performance, and comparing period-to-period and market-to-market property operating results. NOI is defined as storage center operations revenues less direct operating and real estate tax expense for each of our properties. For a reconciliation of Same Store and New Store NOI to income (loss) from continuing operations, see Note 20 to our consolidated financial statements. The following sections discuss the performance of these segments.

The following tables summarize key operational data for our storage center portfolio as of December 31, 2005 and 2004. This data is further discussed below in this section by segment:


	2005
	Domestic (1)					Europe					Total
	Amount			% of total		Amount			% of total		Amount		% of total
	(dollars in thousands except average rent)
Same Store (2)
Number of Storage Centers		441		91	%		96		64	%		537	85	%
Segment Revenues	$	329,002		93	%	$	101,819		80	%	$	430,821	90	%
NOI after indirect and leasehold expense	$	195,854		95	%	$	45,021		107	%	$	240,875	97	%
Avg. annual rent per sq. ft. (4)	$	12.13				$	22.19
Avg. sq. ft. occupancy		86	%				78	%
Total Storage Center Costs (5)	$	1,785,614		89	%	$	810,231		68	%	$	2,595,845	81	%

New Store (3)
Number of Storage Centers		43		9	%		53		36	%		96	15	%
Segment Revenues	$	23,432		7	%	$	24,698		20	%	$	48,130	10	%
NOI after indirect and leasehold expense	$	10,055		5	%	$	(2,853	)	(7	)%	$	7,202	3	%
Avg. sq. ft. occupancy		76	%				40	%
Total Storage Center Costs (5)	$	231,290		11	%	$	372,777		32	%	$	604,067	19	%

Combined New and Same Stores
Number of Storage Centers		484		100	%		149		100	%		633	100	%
Segment Revenues	$	352,434		100	%	$	126,517		100	%	$	478,951	100	%
NOI after indirect and leasehold expense	$	205,909		100	%	$	42,168		100	%	$	248,077	100	%
Total Storage Center Costs (5)	$	2,016,904		100	%	$	1,183,008		100	%	$	3,199,912	100	%


	2004
	Domestic (1)					Europe (6)					Total
	Amount			% of total		Amount			% of total		Amount			% of total
	(dollars in thousands except average rent)
Same Store (2)
Number of Storage Centers		441		94	%		96		71	%		537		89	%
Segment Revenues	$	309,228		98	%	$	90,485		89	%	$	399,713		96	%
NOI after indirect and leasehold expense	$	186,556		100	%	$	35,573		131	%	$	222,129		104	%
Avg. annual rent per sq. ft. (4)	$	11.59				$	22.24
Avg. sq. ft. occupancy		84	%				71	%

New Store (3)
Number of Storage Centers		30		6	%		39		29	%		69		11	%
Segment Revenues	$	7,010		2	%	$	10,915		11	%	$	17,925		4	%
NOI after indirect and leasehold expense	$	534		0	%	$	(8,389	)	(31	)%	$	(7,855	)	(4	)%
Avg. sq. ft. occupancy		55	%				24	%

Combined New and Same Stores
Number of Storage Centers		471		100	%		135		100	%		606		100	%
Segment Revenues	$	316,238		100	%	$	101,400		100	%	$	417,638		100	%
NOI after indirect and leasehold expense	$	187,090		100	%	$	27,184		100	%	$	214,274		100	%

(1)

Table includes the total operating results of each storage center regardless of our percentage ownership interest in that storage center.

(2)

Our definition of Same Store includes existing storage centers acquired prior to January 1 of the previous year as well as developed properties that have been operating for a full two years as of January 1 of the current year. Our definition of Same Store results in the addition of storage centers each year as new acquisitions and developments meet the criteria for inclusion, so we then include these storage centers in the previous year’s comparable data. Other storage companies may define Same Store differently, which will affect the comparability of the data.

(3)

Our definition of New Store, as shown in the table above, includes existing domestic facilities that had not been acquired or leased as of January 1 of the previous year as well as developed properties that have not been operating a full two years as of January 1 of the current year.

(4)

Average annual rent per square foot is calculated by dividing actual rent collected by the average number of square feet occupied during the period.

(5)

Total costs capitalized to storage centers.

(6)

Amounts have been translated from local currencies to U.S. dollars at a constant exchange rate using the average exchange rate for 2005.

Domestic Same Store

The following table summarizes ~~Same~~key ~~Store~~ operating ~~performance~~data asfor ~~defined~~Domestic Same Store at December 31, ~~2004~~2005.

	Number ofProperties	(Inin millions) TotalStorage CenterCost (1)		Total NetRentablesq. ft. whenall phasesare complete	Average Occupancy						Average Annual Rent (per sq. ft) (2)
					2004		2003		2002		2004		2003		2002
					2005		2004		2003		2005		2004		2003
Same Store since 2004 (3)	60	$	222.6	4,449,000	78	%	74	%	63	%	$	8.15	$	7.84	$	7.20
Same Store since 2005	34	$	180.3	2,321,000	83	%	79	%	65	%	$	12.62	$	11.98	$	11.13
Same Store since 2003	30		137.2	1,845,000	84	%	79	%	69	%		13.18		12.58		12.50
Same Store since 2004 (3)	59		221.6	4,424,000	81	%	78	%	74	%		8.69		8.10		7.81
Same Store since 2002 or prior	321		1,242.6	20,750,000	86	%	85	%	85	%		12.04		11.82		11.84
Same Store since 2003 or prior	348		1,383.7	22,339,000	87	%	86	%	85	%		12.71		12.17		11.92
Same Store total	~~411~~441	$	1,~~602~~785.46	2729,~~044~~084,000	8586	%	8384	%	8182	%	$	1112.5313	$	11.3059	$	11.4733

	(In thousands) Revenue						(In thousands) NOI (after leasehold expense)
	(in thousands) Revenue						(in thousands) NOI (after leaseholds expenses)
	2004		2003		2002		2004		2003		2002
	2005		2004		2003		2005		2004		2003
Same Store since 2004 (3)	$	30,937	$	27,534	$	14,658	$	18,810	$	15,800	$	7,349
Same Store since 2005	$	26,232	$	23,582	$	12,052	$	14,735	$	12,845	$	4,866
Same Store since 2003		22,048		20,287		17,881		11,596		10,593		8,301
Same Store since 2004 (3)		34,017		30,267		26,993		20,965		18,408		15,530
Same Store since 2002 or prior		235,084		227,576		226,125		160,413		154,748		155,562
Same Store since 2003 or prior		268,753		255,379		246,591		177,143		170,278		164,121
Same Store total	$	~~288~~329,~~069~~002	$	~~275~~309,~~397~~228	$	~~258~~285,~~664~~636	$	~~190~~212,~~819~~843	$	~~181~~201,~~141~~531	$	~~171~~184,~~212~~517

(1)

Total capitalized costs to storage centers since the storage center was acquired or developed.

(2)

Average annual rent per square foot is calculated by dividing actual rent collected by the average number of square feet occupied during the period.

(3)

Same Store since 2004 include Morningstar Storage Centers, LLC stores acquired in 2002.

3538

The following table summarizes domestic Same Store operating performance:

Same Store Results (1)

	As defined in 2004								As defined in 2003
	As defined in 2005								As defined in 2004
	For the year ended December 31,								For the year ended December 31,
	2005			2004			% Change		2004			2003			% Change
	2004			2003			% Change		2003			2002			% Change
	(dollars in thousands except average rent)
	(dollars in thousands)
Segment revenue	$	329,002		$	309,228		6.4	%(a)	$	288,167		$	275,397		4.6	%(a)
Storage center operations revenue	$	288,069		$	275,397		4.6	%(a)	$	254,549		$	250,148		1.8	%(a)
Operating expense:
Personnel expenses		3136,~~495~~949			2834,~~408~~014		108.96	%(b)		2531,~~404~~495			2328,~~014~~436		10.48	%(b)
Real estate taxes		2329,~~830~~195			2426,~~218~~954		-18.63	%(c)		2223,~~526~~830			2324,~~271~~218		-3(1.26	)%
Repairs and maintenance		89,~~334~~432			79,~~967~~295		41.65	%~~(c)~~		68,~~954~~334			57,~~597~~967		244.26	%~~(c)~~
Marketing expense		79,~~550~~153			8,~~506~~503		~~-11~~7.26	%(d)		7,~~624~~550			8,~~273~~506		-7(11.82	)%(d)
Utilities and phone expenses		911,~~787~~646			910,~~782~~793		07.19	%(e)		89,~~664~~921			89,~~465~~827		21.40	%
Cost of Goods Sold		3,411			2,970		14.8	%(e)		2,784			2,725		2.2	%
Cost of goods sold		4,058			3,661		10.8	%		3,411			2,970		14.8	%
Store admin and other expenses		911,~~107~~569			910,~~164~~363		-011.6	%(f)		89,~~401~~377			89,~~270~~477		(1.61	)%
Direct operating and real estate tax expense		93112,~~514~~002			91103,~~015~~583		28.71	%		8293,~~357~~918			7991,~~615~~401		32.48	%
NOI		~~194~~217,~~555~~000			~~184~~205,~~382~~645		5.5	%		~~172~~194,~~192~~249			~~170~~183,~~533~~996		15.06	%
Leasehold expense		34,~~736~~157			34,~~241~~114		151.30	%~~(f)~~		3,~~240~~736			3,~~201~~241		115.23	%
NOI after leasehold expense		~~190~~212,~~819~~843			~~181~~201,~~141~~531		5.36	%		~~168~~190,~~952~~513			~~167~~180,~~332~~755		5.4	%
Indirect operating expense (2)		1416,~~409~~989			1314,~~153~~975		913.54	%(g)		1114,~~035~~103			912,~~708~~767		1310.75	%(fg)
NOI after indirect operating and leasehold expense	$	~~176~~195,~~410~~854		$	~~167~~186,~~988~~556		5.0	%	$	~~157~~176,~~917~~410		$	~~157~~167,~~624~~988		05.20	%
Avg. annual rent per sq.ft.	$	1112.5313		$	11.3059		24.07	%	$	11.8453		$	11.8530		-02.10	%
Avg. sq.ft. occupancy		8586	%		8384	%				8485	%		83	%
Total net rentable sq.ft.		2729,~~044~~084,000			2729,~~044~~084,000					2327,~~386~~044,000			2327,~~386~~044,000
Number of properties as of December 31		~~411~~441			~~411~~441					~~361~~411			~~361~~411

(1)

Table includes the total operating results of each storage center regardless of our percentage ownership interest in that storage center.

(2) Indirect operating expense includes certain shared property costs such as district and corporate management, purchasing, national contracts personnel and marketing, as well as certain overhead costs allocated to property operations such as business information technology, legal services, human resources and accounting. Does not include ~~containerized storage operations,~~ internal real estate acquisition cost or abandoned development expense. Indirect operating expense is allocated to storage centers based on number of months in operation during the period.

(a) ~~During~~The ~~2004,~~increase ~~Same~~in ~~Store~~ revenue ~~increased~~in ~~4.6%~~2005 over ~~2003,~~2004 ofresulted ~~which~~primarily ~~1.2%~~from ~~relates~~higher rental rates and to ~~storage~~a ~~centers~~lesser ~~that~~extent ~~have~~to ~~been~~increases in ~~the~~occupancy. ~~Same~~Increases ~~Store~~in rental ~~pool~~rates ~~since~~resulted ~~the beginning~~from ofa ~~2004.~~sustained ~~During~~demand ~~2003,~~continuing ~~Same~~through ~~Store~~the ~~revenue~~fourth ~~increased~~quarter ~~1.8%~~of ~~over~~2005 ~~2002.~~and Inincreased ~~2002,~~focus weon ~~started~~price tomanagement. ~~experience~~Storage ~~erosion~~centers in ~~occupancy~~Florida ~~and~~account infor ~~rental~~$4.5 ~~rates~~million ~~that~~of wethe ~~attributed~~increase toas ~~general~~this ~~economic~~area ~~conditions~~has ~~and~~experienced toexceptional demand since the ~~rate~~fourth ~~reductions~~quarter ~~being~~of ~~offered by competitors~~2004. InAlso, ~~response~~over tothe ~~these~~past ~~conditions,~~two years we have consistently provided additional training to our direct sales team and ~~storage~~made ~~center~~changes ~~management~~in ~~personnel,~~the ~~and~~management weof ~~re-aligned~~ our ~~sales~~field ~~center~~teams tothat ~~improve~~have ~~our~~resulted in improved closing ratios on inquiries made by customers. ~~We believe~~These ~~these~~ initiatives, ~~together~~contributed ~~with~~to anincreases ~~improvement~~ in ~~the~~our ~~general~~Same ~~economic~~Store ~~conditions~~revenue ~~starting~~from in2003 ~~the~~to ~~fourth~~2004 ~~quarter~~and offrom ~~2003,~~2004 ~~resulted~~to in2005. anThe increase in ~~our~~revenue ~~average~~from ~~occupancy~~2003 ~~without having~~ to ~~further~~2004 ~~adjust~~resulted ~~our~~from ~~rates~~improved ~~downward~~general ineconomic ~~2003.~~conditions Insince ~~2004~~the fourth wequarter ~~were~~of ~~able~~2003 toas ~~continue~~well toas ~~increase~~the ~~occupancy~~above bymentioned ~~2.4%~~changes ~~and~~in ~~annual~~our ~~rental~~management ~~rates~~of ~~by 2~~operations.~~1%.~~ ~~Additionally,~~Retail ~~retail~~ sales and truck rentals contributed approximately $820,000 and $1.12 million to our revenue increase from ~~2003~~2004 to ~~2004~~2005 and ~~$655,000~~2003 ~~from~~to ~~2002~~2004, torespectively. ~~2003~~In ~~which~~2005, ~~reflect~~we ~~improvements~~also started seeing increases in ~~the~~Same ~~management~~Store ofrevenue ~~our~~as ~~inventory~~a ~~and~~result of the ~~portfolio~~redevelopments ofthat ~~retail~~we ~~products~~have ~~offered~~completed in 2004 and 2005, see further discussion below.

(b) Personnel expenses have increased ~~due~~as toa ~~higher~~result ~~salaries for more experienced store managers and employees that are part~~ of our ~~effort~~initiatives to ~~increase~~ improve the quality of service and reduce employee turnover. ~~Also,~~These asinitiatives aincluded ~~result of achieving certain performance targets,~~ higher ~~bonuses~~salaries and ~~commissions~~incentive ~~were~~compensation ~~paid in 2004. Increased employee coverage~~ for ~~extended~~more ~~hours and Sunday openings and other programs~~ ~~designed to enhance the service~~

3639

experienced store managers and ~~the~~other ~~appearance~~employees. ofNew ~~our~~bonus ~~storage~~programs ~~centers~~that ~~also~~reward for retail sales and occupancy growth performance and the achievement of performance targets have contributed to higher ~~personnel~~ expenses both infor ~~2003~~2004 ~~compared~~and to2005. ~~2002~~Additionally, health insurance and workers’ compensation costs increased by $0.9 million from 2004 to 2005. Increase in personnel expenses from 2003 to 2004 ~~compared~~also reflect increased employee coverage for extended hours and Sunday openings and other programs designed to ~~2003~~enhance the service and the appearance of our storage centers.

(c) ~~Repair~~The ~~and~~increase ~~maintenance~~in ~~costs~~real ~~increased~~estate bytax ~~4.6%~~expense in ~~2004 over~~2005 ~~2003 due to the “curb appeal initiative,” which~~ was andriven ~~effort~~by ~~to bring the exterior appearance of all stores to a standardized level, and to the~~ higher ~~cost~~property oftax ~~materials in 2004. Repair~~ and ~~maintenance~~assessments ~~costs increased significantly~~ in ~~2003~~ ~~over~~certain ~~2002~~regions ~~due to higher snow removal costs experienced by our properties in the northeastern region~~ of the ~~United States~~country. ~~Additionally~~Also, wein ~~created~~2004 awe ~~centralized~~benefited ~~maintenance~~from ~~program~~tax ~~that~~refunds ~~enabled~~as usa toresult ~~accelerate~~of ~~our~~successful ~~repair~~tax ~~activities for our older U~~appeals.S. ~~properties.~~

(d) Marketing expense increased in 2005 primarily due to the timing of phone book advertising expense. The marketing expense decrease in ~~marketing~~2004 ~~reflects~~compared to 2003 is attributable to higher levels of productivity from the consolidation of activities at our sales center along with a reduction of employees in our field sales and marketing functions.

(e) InUtility ~~2004~~expense ~~cost of goods sold~~ increased ~~$440,000~~as ora ~~14.8%~~result ~~over~~of ~~the~~rising ~~prior~~electricity ~~year~~costs ~~which is proportionate with increases in~~across ~~retail~~the ~~sales~~nation.

(f) ~~Leasehold~~Store ~~expense~~administrative and other direct expenses increased primarily due to 19% rise in bank charges as a result of ~~the~~an ~~impact~~increase in customers using credit cards, auto-debit and online payments. Our bank credit card fees continue to escalate due to our efforts to increase customer retention and accelerate collection of ~~escalation~~revenues ~~clauses~~through broader customer enrolment in our auto credit program, which automatically charges monthly rent to the customer’s credit card.

(g) Indirect operating expenses ~~increased~~have ~~primarily~~been ~~due~~consistently higher in 2005 compared to ~~the~~2004 ~~creation~~as ofthroughout ~~new~~2004 we created new management positions in certain regions. Weand ~~also created~~ new regional field sales and marketing positions that were in ~~2004~~place for the full year in 2005. We believe that these expenses have leveled off with the stabilization of the regional infrastructure. The new marketing positions allow us to conduct local marketing actions and to provide the flexibility to focus our efforts in the areas where they are most needed. ~~The~~In 2004 compared to 2003, the increase in marketing expenses iswas partially offset by decreases in direct marketing expenses at the store level. ~~Additionally the increase from 2002 to 2003 reflected increases in salaries incentive compensation expense resulting for the implementation of our decentralized management structure.~~

37In 2004 and 2005, we invested $10.9 million in completed redevelopment of certain of our Same Store. Additionally, as of December 31, 2005, we had two major on-going redevelopments under construction. During the construction period those stores were partially closed. After the redevelopment is completed the storage centers generally have a faster revenue growth than non-redeveloped stores thereby affecting the comparability of our Same Store results. From 2004 to 2005, those redevelopments accounted for $260,000 of the Same Store revenue increase and a $90,000 decrease in NOI after indirect and leasehold expense and we expect that in 2006 these storage centers will have further impact on our operating results.

Domestic New Store

The following table summarizes domestic New Store operating performance as defined at December 31, ~~2004.~~2005:

New Store Results (1)

	Acquisitions Year EndedDecember 31,						Developments Year EndedDecember 31,						Total New StoresYear EndedDecember 31,
	Acquisitions						Developments						Total New Stores
	2004			2003			2004			2003			2004			2003
	2005			2004			2005			2004			2005			2004
	(dollars in thousands except average rent)
	(dollars in thousands)
Storage center operations revenue	$	16,093		$	6,731		$	16,149		$	6,706		$	32,242		$	13,437
Segment revenue	$	11,306		$	986		$	12,126		$	6,024		$	23,432		$	7,010
Operating expense:
Direct operating and real estate tax expense		4,255			280			7,290			5,479			11,545			5,759
Personnel expenses		1,711			630			3,185			1,789			4,896			2,419
NOI		7,051			706			4,836			545			11,887			1,251
Real estate taxes		2,314			972			2,657			1,717			4,971			2,689
Leasehold expense		—			—			379			53			379			53
Repairs and maintenance		785			369			657			357			1,442			726
NOI after leasehold expense		7,051			706			4,457			492			11,508			1,198
Marketing expense		603			347			1,697			955			2,300			1,302
Indirect operating expense (2)		527			52			926			612			1,453			664
Utilities and phone expenses		529			201			1,127			646			1,656			847
NOI after indirect operating and leasehold expense	$	6,524		$	654		$	3,531		$	(120	)	$	10,055		$	534
Cost of Goods Sold		129			56			388			224			517			280
Avg. sq. ft. occupancy		86	%		91	%		68	%		51	%		76	%		55	%
Store admin and other expenses		566			222			781			444			1,347			666
No. of properties		17			7			26			23			43			30
Direct operating and real estate tax expense		6,637			2,797			10,492			6,132			17,129			8,929
NOI		9,456			3,934			5,657			574			15,113			4,508
Leasehold expense		—			—			431			445			431			445
NOI after leasehold expense		9,456			3,934			5,226			129			14,682			4,063
Indirect operating expense (2)		626			271			1,230			621			1,856			892
NOI after indirect operating and leasehold expense	$	8,830		$	3,663		$	3,996		$	(492	)	$	12,826		$	3,171
Avg. sq. ft. occupancy		82	%		79	%		61	%		46	%		70	%		58	%
No. of properties		27			20			37			28			64			48

~~(1)~~The ~~Table~~following ~~includes~~table summarizes ~~the~~domestic ~~total~~New Store operating ~~results~~performance ofas ~~each~~defined ~~storage~~at ~~center~~December 31, ~~regardless~~2004: ~~of our percentage ownership interest in that storage center.~~

(2) Indirect operating expense includes certain shared property costs such as district and corporate management, purchasing, national contracts personnel and marketing, as well as certain overhead costs allocated to property operations such as business information technology, legal services, human resources and accounting. Does not include containerized storage operations, internal real estate acquisition cost or abandoned development expense. Indirect operating expense is allocated to storage centers based on number of months in operation during the period.

The following table summarizes New Store operating performance as defined at December 31, 2003:

New Store Results (1)

	Acquisitions Year EndedDecember 31,						Developments Year EndedDecember 31,						Total New StoresYear EndedDecember 31,
	Acquisitions						Developments						Total New Stores
	2003			2002			2003			2002			2003			2002
	2004			2003			2004			2003			2004			2003
	(dollars in thousands except average rent)
	(dollars in thousands)
Storage center operations revenue	$	28,192		$	10,898		$	12,778		$	4,896		$	40,970		$	15,794
Segment revenue	$	16,093		$	6,731		$	14,498		$	6,706		$	30,591		$	13,437
Operating expense:
Direct operating and real estate tax expense		6,631			2,806			9,652			6,150			16,283			8,956
Personnel expenses		3,496			1,533			2,763			1,311			6,259			2,844
NOI		9,462			3,925			4,846			556			14,308			4,481
Real estate taxes		2,669			917			2,739			1,281			5,408			2,198
Leasehold expense		—			—			431			445			431			445
Repairs and maintenance		1,398			534			599			180			1,997			714
NOI after leasehold expense		9,462			3,925			4,415			111			13,877			4,036
Marketing expense		1,170			504			1,308			603			2,478			1,107
Indirect operating expense (2)		632			262			1,052			603			1,684			865
Utilities and phone expenses		1,265			550			1,003			462			2,268			1,012
NOI after indirect operating and leasehold expense	$	8,830		$	3,663		$	3,363		$	(492	)	$	12,193		$	3,171
Cost of goods sold		202			107			340			202			542			309
Avg. sq. ft. occupancy		82	%		79	%		62	%		46	%		71	%		58	%
Store admin and other expenses		997			394			710			399			1,707			793
No. of properties		27			20			37			28			64			48
Direct operating and real estate tax expense		11,197			4,539			9,462			4,438			20,659			8,977
NOI		16,995			6,359			3,316			458			20,311			6,817
Leasehold expense		1			—			444			26			445			26
NOI after leasehold expense		16,994			6,359			2,872			432			19,866			6,791
Indirect operating expense (2)		2,369			1,112			1,010			497			3,379			1,609
NOI after indirect operating and leasehold expense	$	14,625		$	5,247		$	1,862		$	(65	)	$	16,487		$	5,182
Avg. sq. ft. occupancy		75	%		69	%		56	%		38	%		69	%		58	%
No. of properties		68			48			40			26			108			74

(1)

Table includes the total operating results of each storage center regardless of our percentage ownership interest in that storage center.

(2) Indirect operating expense includes certain shared property costs such as district and corporate management, purchasing, national contracts, personnel and marketing, as well as certain overhead costs allocated to property operations such as business information technology, legal services, human resources and accounting. ~~Does~~It does not include ~~containerized storage operations,~~ internal real estate acquisition cost or abandoned development expense. Indirect operating expense is allocated to storage centers based on number of months in operation during the period.

Increases from year to year in NOI for the New Store portfolio reflect the greater number of properties and, correspondingly, property months for the periods presented. Although this increase gives some indication of how much of our overall NOI growth results from New Store, we do not regard it as a good method of evaluating the performance of assets within this segment. Rather, we use other methods, including primarily comparisons of actual results to targeted NOI for the appropriate period from opening or at maturity. The performance of our domestic acquisitions and developments are discussed in the sections that follow.

3941

Domestic Acquisitions

We continue to seek acquisition opportunities for high quality storage centers that meet our investment standards. We have limited our efforts to pursue only those storage centers that enhance our existing network of storage centers or allow us to establish significant market presence in new markets (i.e. establish greater market presence or expand an established market to create greater economies of scale). The operating results of our acquisitions are discussed below.

The following table summarizes our acquisition activity from ~~2002~~2003 to ~~2004~~2005:

	Number ofProperties	(Inin millions)TotalStorage CenterCost (1)		Total NetRentablesq. ft. whenall phasesare complete	Average Occupancy						Average Annual Rent (per sq. ft) (2)
					2004		2003		2002		2004		2003		2002
					2005		2004		2003		2005		2004		2003
Acquisitions in 2004	7	$	52.8	503,000	91	%	—		—		$	9.89	$	—	$	—
Acquisitions in 2005	10	$	44.5	751,000	83	%	—		—		$	8.77	$	—	$	—
Acquisitions in 2003	20		101.0	1,447,000	81	%	79	%	—			12.05		11.60		—
Acquisitions in 2004	7		52.8	504,000	88	%	91	%	—			15.07		9.89		—
Acquisitions in 2002	48		167.5	3,703,000	77	%	74	%	69	%		7.53		7.34		6.62
Acquisitions in 2003	20		103.1	1,449,000	83	%	81	%	79	%		12.24		12.05		11.60

(1)

Total capitalized costs to storage centers since the storage center was acquired or developed.

(2)

Average annual rent per square foot is calculated by dividing actual rent collected by the average number of square feet occupied during the period.

In the first quarter of 2005, we acquired one property in North Carolina through Shurgard/Morningstar Storage Centers, LLC, one of our consolidated subsidiaries, in which we own 74%, for $3.0 million (including $121,000 paid for a non-compete agreement). In the second quarter of 2005, we completed the purchase of six storage centers in North Carolina for an aggregate purchase price of $26 million. These storage centers are managed by affiliates of certain members of Shurgard/ Morningstar Storage Centers, LLC that are unrelated to Shurgard.

In the second quarter of 2005, we also acquired Central Parkway Storage, Inc. (CPI), which owns two storage properties in Florida. We had a pre-existing relationship with the shareholders of CPI and as part of the transaction we settled approximately $1.2 million of liabilities due to them. We also settled an option we had to acquire an interest on a property owned by them and recorded a gain on that option of approximately $555,000. The net consideration we issued in these transactions was approximately $10.4 million and consisted of 127,684 shares of common stock ($5.5 million) and cash ($4.9 million). The amount of the consideration allocated to storage centers and related assets was $9.8 million.

Also in the second quarter of 2005, we contributed three storage centers in California to a consolidated joint venture. The development manager of these storage centers contributed an additional storage center in California (subject to a mortgage due to us) to the venture. We cancelled the mortgage on that storage center and received an approximate 85% interest in the venture; our partner received an approximate 15% interest in the venture.

In 2004, we purchased seven storage centers: one in North Carolina for $6.3 million (including $376,000 paid to secure a non-competition agreement), and another two in California for $5.2 million and $8.8 million in two separate transactions. We also acquired one in each of Indiana and New Jersey and two in New York for $10.8 million plus $17.4 million of assumed debt.

During 2003, we purchased 20 storage centers. On June 30, 2003, we purchased 19 storage centers from the owners of Minnesota Mini Storage for 3,050,000 shares of our common stock (see Note 54 to our ~~Consolidated~~consolidated ~~Financial~~financial ~~Statements~~statements), the equivalent of $89.5 million. These 19 storage centers had occupancy of 8083% at December 31, ~~2004~~2005. ~~We purchased one additional storage center from a California developer on December 31, 2003 for $6.3 million. Its occupancy was 94% at December 31, 2004.~~

~~During~~We ~~2002, we~~ purchased ~~eight~~one ~~individual~~ storage ~~centers~~center ~~totaling~~from ~~481,000 net~~a ~~rentable~~California ~~square~~developer ~~feet~~on December 31, 2003 for ~~a purchase price of~~ $276.13 million. ~~These~~Its ~~properties are in the following locations: three in Indiana, one in Maryland, one in California, one in Illinois and two in Florida. The average~~ occupancy ~~of these storage centers~~ was 6994% asat of December 31, ~~2004~~2005.

On42 June 26, 2002, we purchased for $62.1 million a 74% interest in Morningstar, which at the time owned and operated 40 storage centers in North Carolina and South Carolina that consist of 3,145,000 net rentable square feet. We also entered into an agreement with certain members of Morningstar to form one or more joint ventures for the purpose of developing and operating high quality self storage properties in North Carolina and South Carolina. (See Note 5 to our Consolidated Financial Statements). Occupancy for these 40 storage centers is 78% as of December 31, 2004.

Domestic Developments

Our investment strategy includes development of new storage centers in markets in which we currently operate where we have identified underserved markets with high barriers to entry.

The following table summarizes our domestic development activity from ~~2002~~2003 to ~~2004.~~2005:

	Number ofProperties	(Inin millions)TotalStorage CenterCost (1)		Total NetRentablesq. ft. whenall phasesare complete	Average Occupancy						Average Annual Rent (per sq. ft) (2)
					2004		2003		2002		2004		2003		2002
					2005		2004		2003		2005		2004		2003
Developments in 2004	9	$	43.8	507,000	41	%	—		—		$	10.92	$	—	$	—
Developments in 2005	3	$	10.8	156,000	43	%	—		—		$	10.38	$	—	$	—
Developments in 2003	14		74.6	842,000	56	%	29	%	—			11.22		7.91		—
Developments in 2004	9		47.2	506,000	66	%	40	%	—			12.71		9.22		—
Developments in 2002	14		76.9	873,000	75	%	54	%	25	%		11.86		10.59		8.06
Developments in 2003	14		76.1	842,000	71	%	54	%	28	%		12.36		10.51		7.55
Development total	3726	$	~~195~~134.31	21,~~222~~504,000	6168	%	4651	%	2528	%	$	1112.5242	$	10.0728	$	87.0655

	(In thousands) Revenue						(In thousands) NOI (after leasehold expenses)
	(in thousands) Revenue						(in thousands) NOI (after leasehold expenses)
	2004		2003		2002		2004			2003			2002
	2005		2004		2003		2005			2004			2003
Developments in 2004	$	1,746	$	—	$	—	$	(279	)	$	—		$	—
Developments in 2005	$	300	$	—	$	—	$	(320	)	$	—		$	—
Developments in 2003		5,929		1,106		—		1,393			(948	)		—
Developments in 2004		3,969		1,000		—		1,368			(381	)		—
Developments in 2002		8,474		5,600		1,136		4,112			1,077			(528	)
Developments in 2003		7,857		5,024		961		3,409			873			(862	)
Development total	$	1612,~~149~~126	$	6,~~706~~024	$	~~1,136~~961	$	54,~~226~~457		$	~~129~~492		$	(~~528~~862	)

(1)

Total capitalized costs to storage centers since the storage center was acquired or developed.

(2)

Average annual rent per square foot is calculated by dividing actual rent collected by the average number of square feet occupied during the period. On the year of opening the average annual rent is lower as the storage center has not been opened a full year.

We normally project new storage properties to rent-up at occupancy rates of between 3% and 4% per month. InOn ~~order~~average ~~to maintain this pace of rent-up over the past three years we have needed to offer reduced rates to attract new customers. As a result, over the past three years certain of~~ our ~~newly~~developments ~~developed storage centers~~ have been renting at ~~a slower pace and our occupancy grew at~~ 3.02% per month. ~~However,~~ ~~stores opened in 2004 appear to be renting up faster.~~ We can give no assurance that the projections noted above regarding the development projects will occur. Actual occupancy levels and rates could be lower if we experience competition from other self -storage properties and other storage alternatives in close proximity to our developments.

In ~~2004~~2005, we opened ~~nine~~one new storage ~~centers.~~center Wein ~~opened~~California ~~four~~and ~~facilities~~one in Oregon in the ~~first~~third quarter and one storage center in ~~California,~~Florida ~~South~~in ~~Carolina,~~the ~~Michigan,~~fourth ~~and~~quarter. ~~New~~The ~~Jersey;~~Oregon ~~one facility~~storage incenter ~~the~~is ~~second~~a ~~quarter~~redevelopment inat ~~Washington;~~a ~~and~~site ~~two~~where ~~facilities~~we inhad ~~the~~torn ~~third~~down ~~quarter~~an older facility in ~~Pennsylvania~~October ~~and~~2004. The California storage center is under an operating lease. InThose ~~the~~storage ~~fourth~~centers ~~quarter~~had wean ~~opened~~average ~~two~~occupancy ~~additional~~of ~~stores~~54% inat ~~Texas~~December 31, ~~and~~2005, ~~Colorado~~after being opened an average of four months.

~~During~~In ~~2003~~2004, we opened ~~fourteen~~nine new storage centers.: ~~Certain~~four ofproperties ~~these~~located ~~storage~~one each ~~centers~~in ~~are~~California, ~~still~~ in ~~the~~South ~~early~~Carolina, ~~stages~~Michigan ofand ~~rent-up.~~New ~~The~~Jersey ~~first~~in ofthe ~~these~~first ~~storage~~quarter; ~~centers~~one ~~opened~~property in ~~March;~~Washington ~~the next three opened~~ in the second quarter; ~~seven~~one ~~opened~~each in Pennsylvania and California in the third quarter; and ~~the~~one ~~remaining~~each ~~three~~in ~~opened~~Texas and Colorado in the fourth quarter. ~~As of December~~ ~~31,~~The 2004, ~~the 2003~~ developments ~~had~~were ~~been~~ open ~~for~~ an average of 1819 months ofand ~~operations. These storage centers~~ had an average occupancy ~~rate~~ of 6372% at December 31, ~~2004~~2005. ~~and~~Most atstores ~~this stage~~ are ~~performing~~renting ~~according~~up toas ~~projections,~~anticipated except ~~for~~one ~~two~~in ~~stores~~Michigan and one in North Carolina that are renting up more slowly, wethan expected. ~~believe~~The slow rent up in Michigan is primarily due to ~~competition~~the economic slowdown in ~~their~~that ~~area~~state.

~~During~~The ~~2002,~~2003 wedevelopments ~~opened~~were ~~fourteen~~open ~~domestic~~an ~~storage~~average ~~centers~~of 29 months and had an average occupancy rate of 76% at December 31, 2005. ~~These~~Eight ~~2002~~of the 2003 developments are asrenting up at a ~~group~~slower ~~generated~~pace ~~$4.3~~than ~~million~~average inincluding ~~NOI~~four in ~~2004,~~the ~~have~~Chicago ~~been~~and ~~open~~Michigan ~~for~~areas andue ~~average~~to ofhigher 30competition ~~months~~in both states and ~~had~~the anslowdown ~~average~~in ~~occupancy~~the ofMichigan ~~78%~~economy. In response to the slow rent up we have adjusted rental rates in these states to sustain occupancy growth.

4143

atDomestic ~~December~~developments ~~31, 2004. This represents a rent-up that is somewhat below projections. This is attributable primarily to two storage centers that have been particularly slow to rent up~~ and ~~that~~redevelopments ~~had~~under ~~occupancies~~construction ~~at December 31, 2004 of 52% and 59%, respectively.~~

~~For~~In ~~both~~addition ~~2003~~to ~~and 2002,~~ the ~~stores~~operating ~~that~~properties ~~were~~discussed ~~slower~~in todomestic ~~rent-up~~developments, we ~~were~~have ~~either~~properties ~~located~~under inconstruction ~~regions~~or ~~that~~pending ~~were~~construction ~~going~~and ~~through~~various anredevelopment ~~economic~~projects ~~slow~~on ~~down,~~existing ~~such~~properties. ~~as Michigan~~The ~~and~~following ~~Northern~~table ~~California,~~summarizes orthe ~~facing~~properties ~~high~~under ~~competition,~~construction ~~such~~ as inof ~~Chicago.~~December 31, 2005:

Domestic developments under construction


	Number of Projects	Estimated Completed Cost of Projects (1)		Total Cost to Date as of December 31, 2005
	(dollars in millions)
Developments:
Construction in progress	6	$	53.7	$	27.1
Land purchased pending construction	4		22.8		6.9

Total Developments	10		76.5		34.0
Redevelopment projects:
Construction in progress	2		6.0		1.1

Total	12	$	82.5	$	35.1

In addition to the operating properties discussed in Domestic developments, we have nine properties under construction or pending construction. The following table summarizes the properties under construction as of December 31, 2004.

	NumberofProjects	EstimatedCompletedCost ofProjects (1)		Total Cost toDate as ofDecember 31,2004
	(dollars in thousands)
Developments Under Construction:
Construction in progress	1	$	6,089	$	2,902
Land purchased pending construction	4		32,000		10,675
Total	5	$	38,089	$	13,577

(1)

The actual completed cost of these projects could vary due to delays during construction caused by weather, unforeseen site conditions, labor shortages, personnel turnover, scheduling problems with contractors, subcontractors or suppliers, or resource constraints.

Included in construction in progress at December 31, ~~2004~~2005, is $19.07 million in costs related to ongoing capital ~~improvement projects and $3~~improvements.0 ~~million for redevelopment of existing storage centers projects.~~ The remainder of domestic development costs was incurred on projects prior to commencement of construction. We select stores for redevelopment when we identify opportunities to increase return on investment by upgrading the property. As of December 31, ~~2004~~2005, we had 31two ~~stores~~major storage centers that were ~~going~~undergoing ~~through~~ expansion or redevelopment projects.

European Same Store

The following table summarizes by market the performance of European Same Stores for the years ended December 31, ~~2004~~2005 and ~~2003~~2004. European Same Store includes properties located in all of the European markets in which we operate, with the exception of Germany as the first store in that market opened in 2003.

Year ended December 31, ~~2004~~2005 annual comparison for European Same Store ~~(1)~~

	Number ofProperties	~~2004~~2005 AverageOccupancy		~~Percent~~Occupancy ~~change~~atDecember ~~compared to prior year~~31,2005		Percent change compared to prior year
				Revenue		NOI		Occupancy		Rate
						SegmentRevenue		NOI (afterleaseholdexpenses)		Occupancy		Rate
Belgium	1517	~~77.1~~76	%	~~4.2~~78	%	54.4	%	13.59	%	13.81	%	(0.9	)%(a)
Netherlands	1522	~~69.6~~72	%	~~10.6~~78	%	918.80	%	1026.32	%	114.23	%	(1.8	)%(a)
France	1623	~~82.3~~83	%	~~11.6~~84	%	1412.34	%	1121.03	%	-010.25	%	1.1	%
Sweden	1720	~~72.2~~81	%	~~10.9~~87	%	1014.43	%	926.38	%	213.12	%	1.8	%
Denmark	24	~~73.7~~85	%	~~22.5~~87	%	3728.98	%	1652.82	%	226.49	%	(0.1	)%(a)
United Kingdom	710	~~72.9~~77	%	~~7.1~~81	%	-08.60	%	412.75	%	210.6	%~~(a)~~	(4.2	)%(a)
Europe Totals	7296	~~75.0~~78	%	~~9.5~~82	%	912.15	%	719.87	%	19.79	%	(0.2	)%

(a) ~~The~~Our ~~decrease~~rates indecreased ~~NOI~~ in ~~the~~those ~~United~~countries ~~Kingdom~~where competition is ~~explained~~highest bybecause ~~increased~~we ~~real~~adjusted ~~estate~~our ~~taxes~~rates in ~~2004~~order ~~compared~~ to ~~2003~~improve ~~as a result of tax rebates obtained in 2003~~occupancy.

The following table summarized European Same Store operating performance.

Same Store Results

	As defined in 2004 (1)								As defined in 2003 (2)
	Year ended December 31,								Year ended December 31,
	2004			2003 (5)			% Change		2003 (5)			2002 (5)			% Change
	(in thousands except average rent)
Storage center operations revenue	$	73,241		$	66,867		9.5	%(a)	$	44,523		$	41,714		6.7	%(a)
Operating expense:
Personnel expenses		10,035			9,040		11.0	%(b)		5,435			4,832		12.5	%(b)
Real estate taxes		3,150			2,888		9.1	%(c)		1,714			1,830		-6.3	%(c)
Repairs and maintenance		2,786			2,386		16.8	%(d)		1,447			1,287		12.4	%(d)
Marketing expense		4,972			4,297		15.7	%(e)		2,309			2,150		7.4	%
Utilities and phone expenses		1,846			1,920		-3.9	%		1,084			996		8.8	%
Cost of Goods Sold		2,515			2,337		7.6	%		1,466			1,084		35.2	%(f)
Store admin and other expenses		5,235			4,849		8.0	%(g)		2,718			2,712		0.2	%
Direct operating and real estate tax expense		30,539			27,717		10.2	%		16,173			14,891		8.6	%
NOI		42,702			39,150		9.1	%		28,350			26,823		5.7	%
Leasehold expense		1,620			1,563		3.6	%		1,167			1,062		9.9	%
NOI after leasehold expense		41,082			37,587		9.3	%		27,183			25,761		5.5	%
Indirect operating expense (3)		8,781			9,610		-8.6	%(h)		5,328			5,480		-2.8	%(h)
NOI after indirect operating and leasehold expense	$	32,301		$	27,977		15.5	%	$	21,855		$	20,281		7.8	%
Avg. annual rent per sq. ft. (4)	$	21.52		$	21.17		1.7	%	$	19.28		$	18.66		3.3	%
Avg. sq. ft. occupancy		75	%		70	%	7.8	%		76	%		74	%	2.7	%
Total net rentable sq. ft.		4,078,000			4,078,000					2,736,000			2,736,000
Number of properties		72			72					47			47

(1) Amounts have been translated from local currencies at a constant exchange rate using the average exchange rate for 2004 for the 2004 to 2003 comparison and at 2003 average exchange rates for the 2003 to 2002 comparison.

(2) Amounts have been translated from local currencies at a constant exchange rate using the average exchange rate for 2003 for the 2003 to 2002 comparison.

(3) Indirect operating expense includes certain shared property costs such as district and regional management, national contracts personnel and marketing, as well as certain overhead costs allocated to property operations such as business information technology, human resources and accounting. It does not include internal real estate acquisition cost or abandoned development expense. Indirect operating expense is allocated to storage centers based on number of months in operation during the period.

(4) Average annual rent per square foot is calculated by dividing actual rent collected by the average number of square feet occupied during the period.

(5) The 2003 and 2002 results were not consolidated in our Consolidated Financial Statements.

(a) Revenue increased by 9.5% in 2004 compared to 2003 and 6.7% in 2003 compared to 2003 at constant exchange rates, primarily as a result of increases in occupancy combined with slightly improved rental rates. Revenue growth in U.S. dollars, when translated at the applicable average period rates, increased by 20.6% in 2004 compared to 2003 and 26% in 2003 compared to 2002 due to a significant change in currency exchange rates from 2002 to 2004.

(b) Increase in personnel expenses resulted from the creation of sales representative positions in the field targeted at commercial customers in 2004. This has especially been the case in France where their additional presence in the storage centers resulted in a positive effect on occupancy. We had started adding new positions to support sales in the field in 2003, which explains the increase in personnel expenses in 2003 compared to 2002.

(c) Real estate taxes in 2003 were unusually low as they were reduced by tax reimbursements received in the United Kingdom. This explains the decrease of real estate taxes in 2003 compared to 2002 and the increase in 2004 compared to 2003.

(d) Repair and maintenance expenses in 2004 increased significantly in Belgium and in the Netherlands as a result of security enhancements. Repair and maintenance increased to a lower extent in France, Sweden and the United Kingdom as we are accelerating our repair activities for our older European properties. In 2003 repair and maintenance cost increased compared to 2002 due to the creation of more positions dedicated to that function.

(e) The increases in marketing expenses are due to new programs launched in the third quarter 2004 and to higher phone directories expenses. Targeted marketing initiatives and sales training launched during the third quarter 2004 accelerated during the fourth quarter, yielding positive results in terms of inquiries and improved our ability to close sales in several markets. Certain marketing actions also resulted in better retention of our existing customers and our ability to market auxiliary services such as retail products.

(f) The increase in costs of goods sold in 2003 is the result of discounts obtained in 2002.

(g) The increase in store admin and other expenses results from higher local and other taxes.

(h) The decrease in indirect operating expense allocated to Same Store is primarily the result of spreading certain indirect costs over more stores as the European market expands.

The following ~~tables~~table ~~present~~summarized ~~reconciliations of the~~ European Same Store ~~results~~operating ~~translated~~performance: to U.S. dollars at a constant exchange rate to Same Store results translated at an average exchange rate. Each of the categories presented is reconciled in Note 23 to our Consolidated Financial Statements.

	Year ended December 31, 2003
	Exchange
	Same Store (1)		Difference			Total (2)
	(in thousands)
Storage center operations revenue	$	66,867	$	(6,160	)	$	60,707
Direct operating and real estate tax expense		27,717		(2,581	)		25,136
NOI		39,150		(3,579	)		35,571
Leasehold expense		1,563		(130	)		1,433
NOI after leasehold expense		37,587		(3,449	)		34,138
Indirect operating expense		9,610		(876	)		8,734
NOI after indirect and leasehold expense	$	27,977	$	(2,573	)	$	25,404
	Year ended December 31, 2002
	Exchange
	Same Store (2)		Difference			Total (3)
	(in thousands)
Storage center operations revenue	$	41,714	$	(6,366	)	$	35,348
Direct operating and real estate tax expense		14,891		(2,276	)		12,615
NOI		26,823		(4,090	)		22,733
Leasehold expense		1,062		(176	)		886
NOI after leasehold expense		25,761		(3,914	)		21,847
Indirect operating expense		5,480		(1,172	)		4,308
NOI after indirect and leasehold expense	$	20,281	$	(2,742	)	$	17,539

Same Store Results (1)

(1) Amounts are translated from local currencies to U.S. dollars using the average exchange rate for 2004 for the purpose of comparison with the 2004 results.


	As defined in 2005 (1)								As defined in 2004 (1)
	2005			2004			% Change		2004			2003 (4)			% Change
	(dollars in thousands except average rent)
Segment revenue	$	101,819		$	90,485		12.5	%(a)	$	73,241		$	66,867		9.5	%(a)
Operating expense:
Personnel expenses		13,863			13,267		4.5	%(b)		10,035			9,040		11.0	%(b)
Real estate taxes		4,532			4,300		5.4	%		3,150			2,888		9.1	%
Repairs and maintenance		3,230			3,711		(13.0	)%(c)		2,786			2,386		16.8	%(c)
Marketing expense		7,037			7,118		(1.1	)%(d)		4,972			4,297		15.7	%(d)
Utilities and phone expenses		2,766			2,456		12.6	%		1,846			1,920		(3.9	)%
Cost of goods sold		3,673			3,230		13.7	%		2,515			2,337		7.6	%
Store admin and other expenses		7,491			6,949		7.8	%		5,235			4,849		8.0	%

Direct operating and real estate tax expense		42,592			41,031		3.8	%		30,539			27,717		10.2	%

NOI		59,227			49,454		19.8	%		42,702			39,150		9.1	%
Leasehold expense		2,299			1,883		22.1	%		1,620			1,563		3.6	%

NOI after leasehold expense		56,928			47,571		19.7	%		41,082			37,587		9.3	%
Indirect operating expense (2)		11,907			11,998		(0.8	)%(e)		8,781			9,610		(8.6	)%(e)

NOI after indirect operating and leasehold expense	$	45,021		$	35,573		26.6	%	$	32,301		$	27,977		15.5	%

Avg. annual rent per sq. ft. (3)	$	22.19		$	22.24		(0.2	)%	$	21.52		$	21.17		1.7	%
Avg. sq. ft. occupancy		78	%		71	%	9.9	%		75	%		70	%	7.1	%
Total net rentable sq. ft.		5,288,000			5,288,000					4,022,000			4,022,000
Number of properties		96			96					72			72

(21) Amounts ~~are~~have been translated from local currencies toat ~~U.S.~~a ~~dollars~~constant exchange rate using the average exchange rate for 2005 for the 2005 to 2004 comparison and at 2004 average exchange rates for the 2004 to 2003 comparison.

(32) ~~Amounts~~Indirect ~~are~~operating ~~translated~~expense ~~from~~includes ~~local~~certain ~~currencies~~shared property costs such as regional management, national contracts personnel and marketing, as well as certain overhead costs allocated to Uproperty operations such as business information technology, human resources and accounting.S It does not include internal real estate acquisition cost or abandoned development expense. ~~dollars~~Indirect ~~using~~operating ~~the~~expense ~~average~~is ~~exchange~~allocated ~~rate~~to ~~for~~storage ~~2002~~centers ~~for~~based ~~purpose~~on number of ~~reconciliation~~months ~~with~~in ~~the~~operation ~~2002~~during ~~Consolidated~~the ~~Financial Statements~~period.

(3)

Average annual rent per square foot is calculated by dividing actual rent collected by the average number of square feet occupied during the period.

(4)

The 2003 results were not included in our consolidated financial statements because we did not consolidate Shurgard Europe until 2004.

(a) The growth in revenue at constant exchange rate in 2005 over 2004 results primarily from increases in occupancy that were achieved through heightened marketing, better pricing management and improved retention of existing customers. We have seen most of the improvement in Sweden and France, where we have been able to maintain rates. In 2004, most of the revenue growth compared to 2003 was due to increases in occupancy as many of the stores were still in rent up phase. Revenue growth in U.S. dollars, when translated at the applicable average period rates, increased by 12% in 2005 compared to 2004 and 20.6% in 2004 compared to 2003.

~~European~~(b) ~~New~~Personnel ~~Store~~expenses increased from 2004 to 2005 as a result of hiring more experienced store managers with higher salaries and more incentive compensation, in particular in Sweden and the Netherlands. This more experienced workforce has contributed to the revenue increases in those countries discussed above. Personnel increases from 2003 to 2004 resulted from the creation in 2004 of sales representative positions in the field targeted at commercial customers, in particular in France where they have had a positive effect on occupancy.

~~All~~(c) ~~but~~In ~~one~~2004 ofwe ~~our~~incurred ~~European~~significant ~~properties~~repair ~~were~~and ~~developed.~~maintenance Weexpenses ~~acquired~~on ~~one~~our security ~~self~~systems ~~storage~~in ~~facility~~Belgium inand ~~Europe~~the ~~during~~Netherlands that explain both the ~~third quarter.~~decrease ~~The~~of ~~following~~repair ~~table~~and ~~summarizes~~maintenance ~~New~~costs ~~Store~~compared ~~operating~~to ~~performance~~2005 asand ~~defined~~the atincrease ~~December~~compared ~~31,~~to ~~2004~~2003.

~~European~~(d) ~~New~~On ~~Store~~an ~~Results~~annual ~~(1)~~basis, marketing expenses have slightly decreased over the prior year as a result of decreasing marketing initiatives in the second half of the year in France, the United Kingdom and Sweden. The increases in marketing expenses in 2004 compared 2003 are due to new programs launched in the third quarter 2004 and to higher phone directories expenses. Targeted marketing initiatives and sales training that were launched during the third quarter 2004 accelerated during the fourth quarter, yielding positive results in terms of inquiries and improved our ability to close sales in several markets. Certain marketing actions also resulted in better retention of our existing customers and our ability to market ancillary services.

	Developments year ended December 31,						Acquisitionsyear endedDecember 31,					New Store year ended December 31,
	2004			2003 (3)			2004			2003 (3)		2004			2003 (3)
	(dollars in thousands)
Storage center operations revenue	$	28,291		$	11,028		$	577		$	—	$	28,868		$	11,028
Operating expense:
Personnel expenses		7,487			4,051			147			—		7,634			4,051
Real estate taxes		2,187			1,100			31			—		2,218			1,100
Repairs and maintenance		1,732			738			10			—		1,742			738
Marketing expense		5,969			4,542			42			—		6,011			4,542
Utilities and phone expenses		1,554			731			—			—		1,554			731
Cost of Goods Sold		1,261			599			3			—		1,264			599
Store admin and other expenses		4,096			2,129			56			—		4,152			2,129
Direct operating and real estate tax expense		24,286			13,890			289			—		24,575			13,890
NOI		4,005			(2,862	)		288			—		4,293			(2,862	)
Leasehold expense		487			276			—			—		487			276
NOI after leasehold expense		3,518			(3,138	)		288			—		3,806			(3,138	)
Indirect operating expense (2)		8,490			6,039			45			—		8,535			6,039
NOI after indirect operating and leasehold expense	$	(4,972	)	$	(9,177	)	$	243		$	—	$	(4,729	)	$	(9,177	)
Avg. sq. ft. occupancy		36	%		14	%		88	%		—		36	%		14	%
No. of properties		62			50			1			—		63			50

(e) As a result of reorganization decisions and efforts to create synergies in between countries initiated since the second quarter of 2005, we have started to see a decline in indirect expenses. We expect to continue realizing further efficiencies in 2006. Indirect operating expense allocated to Same Store decreased in 2004 compared to 2003 primarily as a result of spreading certain indirect costs over more stores as the European market expands.

(1) Amounts for both years have been translated from local currencies at a constant exchange rate using the average exchange rates of 2004 for the 2004 to 2003 comparison.

(2) Indirect operating expense includes certain shared property costs such as district and regional management, national contracts personnel and marketing, as well as certain overhead costs allocated to property operations such as business information technology, human resources and accounting. It does not include internal real estate acquisition cost or abandoned development expense. Indirect operating expense is allocated to stores based on number of months in operation during the period.

(3) The 2003 results were not consolidated in our Consolidated Financial Statements.

In August 2004, we acquired a single storage facility in central London (United Kingdom). This 38,000 net rentable square feet property represents a total investment of $14.6 million, translated at the historical purchase cost.

The following ~~table~~tables ~~presents~~present areconciliations ~~reconciliation~~ of the ~~New~~European Same Store results translated to U.S. dollars at a constant exchange rate to ~~New~~Same Store results translated at an average exchange rate ~~for year ended December 31, 2003~~. Each of the categories presented is reconciled in Note 2320 to our ~~Consolidated~~consolidated ~~Financial~~financial ~~Statements~~statements.

	Year ended December 31, 2003
	2004
	Exchange
	Same Store (1)			Exchange Difference				Total (2)
	New Store (1)				Difference				Total (2)
	(in thousands)
	(in thousands)
Segment revenue	$	90,485		$	463			$	90,948
Storage center operations revenue	$	11,028			$	(963	)		$	10,065
Direct operating and real estate tax expense		41,031			110				41,141
Direct operating and real estate tax expense		13,890				(1,229	)			12,661
Consolidated NOI		49,454			353				49,807
NOI		(2,862	)			266				(2,596	)
Leasehold expense		1,883			9				1,892
Leasehold expense		276				(29	)			247
NOI after leasehold expense		47,571			344				47,915
NOI after leasehold expense		(3,138	)			295				(2,843	)
Indirect operating expense		11,998			27				12,025
Indirect operating expense		6,039				(510	)			5,529
Consolidated NOI after indirect and leasehold expense	$	35,573		$	317			$	35,890
NOI after indirect and leasehold expense	$	(9,177	)		$	805			$	(8,372	)
	2003
	Same Store (2)			Exchange Difference				Total (3)
	(in thousands)
Segment revenue	$	66,867		$	(6,160	)		$	60,707
Direct operating and real estate tax expense		27,717			(2,581	)			25,136
Consolidated NOI		39,150			(3,579	)			35,571
Leasehold expense		1,563			(130	)			1,433
NOI after leasehold expense		37,587			(3,449	)			34,138
Indirect operating expense		9,610			(876	)			8,734
Consolidated NOI after indirect and leasehold expense	$	27,977		$	(2,573	)		$	25,404

(1) Amounts are translated from local currencies to U.S. dollars using the average exchange rate for ~~the~~2005 ~~respective period of 2004~~ for the purpose of comparison with the ~~2004~~2005 results.

(2) Amounts are translated from local currencies to U.S. dollars using the average exchange rate for ~~the respective period of 2003 for purpose of reconciliation with the 2003 Consolidated Financial Statements of Shurgard Europe~~2004.

(3)

Amounts are translated from local currencies to U.S. dollars using the average exchange rate for 2003 for purpose of reconciliation with the 2003 consolidated financial statements.

European New Store ~~Results (1) (3)~~

	New Store year endedDecember 31,
	2003			2002
	(dollars in thousands)
Storage center operations revenue	$	26,249		$	11,257
Operating expense:
Personnel expenses		6,463			3,659
Real estate taxes		1,891			716
Repairs and maintenance		1,388			649
Marketing expense		5,735			3,453
Utilities and phone expenses		1,311			632
Cost of Goods Sold		1,207			567
Store admin and other expenses		3,629			2,178
Direct operating and real estate tax expense		21,624			11,854
NOI		4,625			(597	)
Leasehold expense		513			206
NOI after leasehold expense		4,112			(803	)
Indirect operating expense (2)		8,935			4,810
NOI after indirect operating and leasehold expense	$	(4,823	)	$	(5,613	)
Avg. sq. ft. occupancy		31	%		20	%
No. of properties		75			49

All but one of our European New Stores were developed at December 31, 2005. We acquired one self-storage facility in the United Kingdom in 2004. The following table summarizes New Store operating performance as defined at December 31, 2005:

~~(1)~~European ~~Amounts~~New ~~for~~Store ~~both~~Results ~~years~~(1) ~~have been translated from local currencies at a constant exchange rate using the average exchange rates of 2003 for the 2003 to 2002 comparison.~~


	Developments						Acquisitions						New Store
	2005			2004			2005			2004			2005			2004
	(dollars in thousands)
Segment revenue	$	23,109		$	10,367		$	1,589		$	548		$	24,698		$	10,915
Direct operating and real estate tax expense		20,177			13,559			537			274			20,714			13,833

NOI		2,932			(3,192	)		1,052			274			3,984			(2,918	)
Leasehold expense		325			215			—			—			325			215

NOI after leasehold expense		2,607			(3,407	)		1,052			274			3,659			(3,133	)
Indirect operating expense (2)		6,423			5,214			89			42			6,512			5,256

NOI after indirect operating and leasehold expense	$	(3,816	)	$	(8,621	)	$	963		$	232		$	(2,853	)	$	(8,389	)

Avg. sq. ft. occupancy		39	%		22	%		78	%		88	%(a)		40	%		24	%
No. of properties		52			38			1			1			53			39

(3a) The ~~2003~~occupancy ~~and~~of ~~2002~~this ~~results~~storage ~~were~~center ~~not~~has ~~consolidated~~decreased insince ~~our~~it ~~Consolidated~~was ~~Financial~~acquired ~~Statements~~due to partial closure for redevelopment.

The following table ~~presents~~summarizes ~~a reconciliation of the~~ New Store ~~results~~operating ~~translated~~performance atas adefined ~~constant exchange rate to New Store results translated~~ at ~~average exchange rate for the year ended~~ December 31, ~~2002.~~2004: ~~Each of the categories presented are reconciled in Note 23 to our Consolidated Financial Statements.~~

	Year ended December 31, 2002
	Exchange
	New Store(1)			Difference			Total(2)
	(in thousands)
Storage center operations revenue	$	11,257		$	(1,629	)	$	9,628
Direct operating and real estate tax expense		11,854			(1,842	)		10,012
NOI		(597	)		213			(384	)
Leasehold expense		206			(27	)		179
NOI after leasehold expense		(803	)		240			(563	)
Indirect operating expense		4,810			(532	)		4,278
NOI after indirect and leasehold expense	$	(5,613	)	$	772		$	(4,841	)

European New Store Results (1)

(1) Amounts are translated from local currencies to U.S. dollars using the average exchange rate for the respective period of 2003 for purpose of reconciliation with the 2003 Consolidated Financial Statements of Shurgard Europe.


	Developments						Acquisitions					New Store
	2004			2003 (3)			2004			2003 (3)		2004			2003 (3)
	(dollars in thousands)
Segment revenue	$	28,291		$	11,028		$	577		$	—	$	28,868		$	11,028
Direct operating and real estate tax expense		24,286			13,890			289			—		24,575			13,890

NOI		4,005			(2,862	)		288			—		4,293			(2,862	)
Leasehold expense		487			276			—			—		487			276

NOI after leasehold expense		3,518			(3,138	)		288			—		3,806			(3,138	)
Indirect operating expense (2)		8,490			6,039			45			—		8,535			6,039

NOI after indirect operating and leasehold expense	$	(4,972	)	$	(9,177	)	$	243		$	—	$	(4,729	)	$	(9,177	)

Avg. sq. ft. occupancy		36	%		14	%		88	%		—		36	%		14	%
No. of properties		62			50			1			—		63			50

(21) Amounts ~~are~~for both years have been translated from local currencies toat ~~U.S.~~a ~~dollars~~constant exchange rate using the average exchange ~~rate~~rates ~~for~~of ~~2002~~2005 for ~~purpose~~the of2005 ~~reconciliation~~to ~~with~~2004 comparison and the ~~2002~~2004 ~~Consolidated~~exchange ~~Financial~~rates ~~Statements~~for the 2004 to 2003 comparison.

(2)

Indirect operating expense includes certain shared property costs such as regional management, national contracts personnel and marketing, as well as certain overhead costs allocated to property operations such as business information technology, human resources and accounting. It does not include internal real estate acquisition cost or abandoned development expense. Indirect operating expense is allocated to stores based on number of months in operation during the period.

(3)

The 2003 results were not included in our consolidated financial statements because we did not consolidate Shurgard Europe until 2004.

The following tables present reconciliations of the European ~~Developments~~New Store results translated to U.S. dollars at a constant exchange rate to New Store results translated at an average exchange rate. Each of the categories presented is reconciled in Note 20 to our consolidated financial statements.

The following table summarizes performance of European developments (and one acquisition during the third quarter of 2004) opened through 2004 by country during the past three years:


	2004
	Exchange
	New Store (1)			Difference			Total (2)
	(in thousands)
Segment revenue	$	10,915		$	246		$	11,161
Direct operating and real estate tax expense		13,833			140			13,973

Consolidated NOI		(2,918	)		106			(2,812	)
Leasehold expense		215			—			215

NOI after leasehold expense		(3,133	)		106			(3,027	)
Indirect operating expense		5,256			35			5,291

Consolidated NOI after indirect and leasehold expense	$	(8,389	)	$	71		$	(8,318	)


	2003
	Exchange
	New Store (2)			Difference			Total (3)
	(in thousands)
Segment revenue	$	11,028		$	(963	)	$	10,065
Direct operating and real estate tax expense		13,890			(1,229	)		12,661

Consolidated NOI		(2,862	)		266			(2,596	)
Leasehold expense		276			(29	)		247

NOI after leasehold expense		(3,138	)		295			(2,843	)
Indirect operating expense		6,039			(510	)		5,529

Consolidated NOI after indirect and leasehold expense	$	(9,177	)	$	805		$	(8,372	)

	Number ofProperties	(in millions)TotalStorage CenterCost (1)		Total NetRentablesq. ft. whenall phasesare complete	Average Occupancy						Average Annual Rent (per sq. ft) (2) (3)
					For the year ended,December 31,						For the year ended, December 31,
					2004		2003		2002		2004		2003		2002
New store:
Opened in 2004
Germany	4	$	28.0	202,000	5.0	%	—		—		$	17.00	$	—	$	—
France	4		24.7	217,000	1.9	%	—		—			21.77		—		—
Denmark	2		15.4	101,000	10.2	%	—		—			18.95		—		—
United Kingdom	3		32.4	123,000	28.9	%	—		—			19.56		—		—
Total opened in 2004	13	$	100.5	643,000	9.3	%	—		—		$	19.17	$	—	$	—
Opened in 2003
Belgium	1	$	3.8	46,000	51.8	%	4.9	%	—		$	14.49	$	9.43	$	—
Netherlands	7		42.2	351,000	30.3	%	2.1	%	—			19.93		14.97		—
Germany	5		38.2	268,000	25.8	%	2.6	%	—			14.20		7.62		—
France	7		46.9	371,000	25.1	%	3.1	%	—			22.24		20.58		—
Sweden	2		12.5	94,000	36.2	%	7.8	%	—			17.41		13.05		—
Denmark	1		8.4	50,000	53.1	%	9.5	%	—			21.98		20.23		—
United Kingdom	3		34.0	149,000	34.4	%	4.2	%	—			40.05		36.06		—
Total opened in 2003 (a)	26	$	186.0	1,329,000	30.4	%	3.5	%	—		$	21.64	$	18.11	$	—
Opened in 2002
Belgium	2	$	7.8	101,000	46.8	%	33.7	%	11.7	%	$	12.28	$	12.18	$	11.48
Netherlands	7		44.0	368,000	49.1	%	29.7	%	5.1	%		18.82		18.95		14.76
France	7		46.9	376,000	59.5	%	35.0	%	10.2	%		19.93		20.56		19.89
Sweden	3		20.2	151,000	66.5	%	40.8	%	12.5	%		20.05		18.07		17.13
Denmark	2		15.7	106,000	60.6	%	25.1	%	2.1	%		21.44		20.76		10.70
United Kingdom	3		35.4	163,000	61.2	%	27.2	%	3.7	%		40.32		42.88		34.91
Total opened in 2002 (b)	24	$	170.0	1,265,000	56.6	%	32.2	%	7.6	%	$	22.14	$	21.49	$	17.85
New Store Total	63	$	456.5	3,237,000	36.4	%	14.0	%	7.6	%	$	21.82	$	21.15	$	17.85
Same store:
Opened in 2001
Belgium	1	$	4.0	51,000	65.7	%	53.5	%	25.8	%	$	15.42	$	14.77	$	14.02
Netherlands	9		51.7	484,000	64.1	%	54.2	%	32.3	%		17.94		17.97		17.45
France	5		35.9	280,000	80.2	%	65.2	%	40.5	%		22.05		21.84		21.30
Sweden	6		35.7	315,000	69.4	%	55.6	%	28.3	%		18.24		17.50		17.77
Denmark	2		14.4	110,000	73.7	%	63.1	%	42.0	%		21.23		20.73		20.33
United Kingdom	2		22.2	102,000	61.8	%	56.2	%	47.1	%		41.01		41.85		37.87
Total opened in 2001 (c)	25	$	163.9	1,342,000	69.4	%	57.7	%	34.7	%	$	20.76	$	20.68	$	20.75
Opened in 2000 and before
Belgium	14	$	72.5	855,000	77.8	%	77.3	%	78.1	%	$	15.87	$	15.61	$	14.91
Netherlands	6		37.5	345,000	77.2	%	75.4	%	71.7	%		22.26		21.45		20.47
France	11		63.2	585,000	83.4	%	78.5	%	74.0	%		26.29		26.25		24.66
Sweden	11		68.0	677,000	73.5	%	70.9	%	70.0	%		20.80		20.37		20.92
United Kingdom	5		47.6	274,000	77.0	%	74.7	%	69.6	%		32.40		31.18		31.13
Total opened before 2001	47	$	288.8	2,736,000	77.8	%	75.5	%	73.5	%	$	21.85	$	21.36	$	20.64
Same Store Total	72	$	452.7	4,078,000	75.0	%	69.6	%	60.1	%	$	21.52	$	21.17	$	20.68

(1)

Amounts are translated from local currencies to U.S. dollars using the average exchange rate for 2005 for the purpose of comparison with the 2005 results.

(2)

Amounts are translated from local currencies to U.S. dollars using the average exchange rate for 2004.

(3)

Amounts are translated from local currencies to U.S. dollars using the average exchange rate for 2003 for purpose of reconciliation with the 2003 consolidated financial statements.

	(In thousands) Revenue (2)						(In thousands) NOI (2) (after leasehold expense)
	For the year ended, December 31,						For the year ended, December 31,
	2004		2003		2002		2004			2003			2002
New store:
Opened in 2004
Germany	$	193	$	—	$	—	$	(887	)	$	—		$	—
France		106		—		—		(625	)		(2	)		—
Denmark		250		—		—		(259	)		—			—
United Kingdom		753		—		—		84			—			—
Total opened in 2004	$	1,302	$	—	$	—	$	(1,687	)	$	(2	)	$	—
Opened in 2003
Belgium	$	369	$	24	$	—	$	110		$	(93	)	$	—
Netherlands		2,266		125		—		(357	)		(829	)		—
Germany		1,069		61		—		(915	)		(941	)		—
France		2,430		287		—		(783	)		(790	)		—
Sweden		717		119		—		(92	)		(314	)		—
Denmark		670		119		—		232			(222	)		—
United Kingdom		2,317		279		—		456			(204	)		—
Total opened in 2003	$	9,838	$	1,014	$	—	$	(1,349	)	$	(3,393	)	$	—
Opened in 2002
Belgium	$	625	$	454	$	122	$	89		$	(145	)	$	(255	)
Netherlands		3,614		2,266		152		1,253			51			(580	)
France		5,183		3,142		632		1,658			(5	)		(791	)
Sweden		2,277		1,319		255		1,008			186			(413	)
Denmark		1,503		607		5		560			(191	)		(254	)
United Kingdom		4,526		2,226		109		2,274			361			(274	)
Total opened in 2002	$	17,728	$	10,014	$	1,275	$	6,842		$	257		$	(2,567	)
New Store Total	$	28,868	$	11,028	$	1,275	$	3,806		$	(3,138	)	$	(2,567	)
Same store:
Opened in 2001
Belgium	$	573	$	449	$	209	$	317		$	143		$	(57	)
Netherlands		5,906		5,061		3,032		2,532			1,907			(4	)
France		5,554		4,449		2,867		3,073			2,010			809
Sweden		4,612		3,602		1,875		2,133			1,399			(223	)
Denmark		1,888		1,542		998		873			633			107
United Kingdom		2,876		2,706		2,082		1,633			1,557			1,035
Total opened in 2001	$	21,409	$	17,809	$	11,063	$	10,561		$	7,649		$	1,667
Opened in 2000 and before
Belgium	$	11,684	$	11,317	$	10,949	$	7,549		$	7,322		$	7,630
Netherlands		6,383		6,052		5,457		3,983			4,020			3,561
France		14,271		13,323		11,702		7,993			7,596			6,248
Sweden		11,821		11,222		11,143		6,475			6,366			6,748
United Kingdom		7,673		7,144		6,687		4,521			4,634			4,153
Total opened before 2001	$	51,832	$	49,058	$	45,938	$	30,521		$	29,938		$	28,340
Same Store Total	$	73,241	$	66,867	$	57,001	$	41,082		$	37,587		$	30,007

European Developments

~~(1)~~ The ~~actual~~following ~~completed~~table ~~cost~~summarizes performance of ~~these~~European ~~projects~~developments ~~are~~and ~~reported~~acquisition inopened ~~U.S.~~through ~~dollars~~2005 ~~translated~~by atcountry ~~the December 31~~during 2005, 2004 exchange rate of $1.36 to the euro. Operating results (see note (2) below) are reported at the average exchange rate for the year 2004 which was $1.24 to the euro. As these exchange rates are different we believe it does not allow for an accurate measure of property investment yield. We believe the application of a constant exchange rate to both the property cost and operating results would provide a more meaningful measure of investment yield. The cost of the storage centers excludes the excess cost of approximately $247 million we paid for part of our ownership interest acquisition in Shurgard Europe in 2003.:

(2) The amounts have been translated from local currencies at a constant exchange rate using the average exchange rate for 2004.


	Number of Properties	(in millions) Storage Center Cost				Total Net Rentable sq. ft.	Average Occupancy					Average Annual Rent (per sq. ft) (3) (4)
		(in millions) Storage Center Cost					For the year ended December 31,					For the year ended December 31,
		Development Cost (1)		Total Cost (2)			For the year ended December 31,					For the year ended December 31,
New store:		Development Cost (1)		Total Cost (2)			2005		2004		2003	2005		2004		2003
Opened in 2005
Belgium	1	$	5.8	$	5.8	55,000	2.6	%	—		—		N/A	$	—	$	—
Netherlands	3		10.9		10.9	138,000	1.6	%	—		—		N/A		—		—
Germany	2		11.7		11.8	93,000	7.0	%	—		—	$	7.73		—		—
France	5		36.8		37.0	292,000	7.4	%	—		—		5.01		—		—
Denmark	1		7.2		7.2	50,000	20.8	%	—		—		13.70		—		—
United Kingdom	2		20.1		20.3	80,000	15.8	%	—		—		17.50		—		—

Total opened in 2005	14	$	92.5	$	93.0	708,000	7.8	%	—		—	$	9.53	$	—	$	—

Opened in 2004
Germany	4	$	25.3	$	25.5	202,000	34.2	%	5.0	%	—	$	17.43	$	8.35	$	—
France	4		22.9		23.2	217,000	26.0	%	1.9	%	—		19.65		6.40		—
Denmark	2		13.9		14.0	101,000	49.9	%	10.2	%	—		20.43		10.36		—
United Kingdom	3		29.9		30.3	87,000	46.7	%	28.9	%	—		49.14		18.34		—

Total opened in 2004	13	$	92.0	$	93.0	607,000	35.7	%	9.3	%	—	$	24.67	$	12.67	$	—

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Filing Compare · SHURGARD STORAGE CENTERS INC