Editor's Note: This is another in our series of articles profiling companies in the REIT and publicly traded real estate industry. Portfolio runs profiles like this one on companies that have shown leadership, innovation or resourcefulness that we believe our readers will find of interest.

Growth has always been the focus for Shurgard Storage Centers. The company has aggressively pursued new markets, set up creative alliances and partnerships in the United States and Europe and sought to brand their stores as high-quality alternatives to run-of-the-mill self storage facilities through their added amenities, trademark architecture and prime locations. Shurgard's management team has shown a strong propensity for industry leadership and innovation and insisted on following its own designs for the future success of the company.

A Typical Shurgard Property A typical Shurgard location offers 550 to 600 units and roughly 60,000 square feet of rentable space. Acreage varies depending on the cost of land and the potential for future expansion. Some facilities, for example, cover a single acre on a three-acre site. Others sit on a half acre or with a vertical multi-floor structure equipped with flights of stairs and elevators. The company looks for locations in areas with growing residential populations. Branded architecture with masonry perimeter walls characterize the company's developments. Monthly rents for an average 10-foot cube vary from $60 to $80 on the low end to $150 to $200 on the high end. Security is a key design element in Shurgard facilities. Main gates accessible with personalized customer access codes control the entrances. In multi-story buildings, motion sensors activate lighting as soon as someone steps off the elevator. Intercoms in hallways and elevators ensure that customers can call for assistance from on-site managers during business hours. Closed-circuit security cameras throughout the buildings are monitored by employees during business hours as well. Digital code entry systems record the time in and time out of customers and allow access only to the floor or building in which the customer is renting.

Planned Growth and Expansion

Charles (Chuck) K. Barbo, chairman, president, and chief executive officer, founded Shurgard in Olympia, WA, in 1972 with an eye toward growth and expansion. Over the next 20 years, Barbo attracted more than $600 million in equity investments from more than 80,000 individual investors invested in 24 separate real estate limited partnerships, all sponsored by Shurgard.

By March, 1994, Barbo had consolidated 17 of those limited partnerships under a single, publicly-traded REIT, headquartered in Seattle. At that point, the REIT owned—directly or through joint venture interests—about 161 locations and managed another 104 or so.

The company's 1995 annual report, its first as a REIT, showed revenue growth of 22.1 percent from January to December 1994, from $79.3 million to $96.8 million. Funds from operations increased 32 percent to $45.8 million over the same period.

At the end of 1999, the company owned 352 self storage properties across the country and in Europe. Total domestic rental revenues stood at $175 million, up 13.1 percent over 1998. European revenues rose 114 percent to $9.2 million for the period. Funds from operations hit $78.6 million, a 9.3 percent increase over the prior year.

Yet, despite a large increase in the number of facilities, occupancy rates between 1995 and 1999 showed only a slight dip from 88 percent to 86 percent. An impressive achievement that showed Barbo's growth plan was not outstripping the company's ability to manage the properties being added regularly to its real estate portfolio.

All told, Shurgard has doubled its revenues while increasing funds from operations by more than 60 percent in five years of REIT operation. By the middle of 2000, the company's property count had reached 385, including about 30 locations in Europe.

New Opportunities in the 'Old World'

Shurgard's expansion into Europe—rare for any REIT, and a pioneering effort for the self-storage sector—actually began in 1995, less than a year after the formation of the REIT. The first Shurgard center appeared in Brussels in that year.

Shurgard reasoned that with 350 million people in Western Europe and just 200 self storage facilities to service them—compared to over 25,000 self storage facilities serving about 300 million in the United States and Canada—the market was waiting to be captured. Since the initial foray in 1995, Shurgard has steadily increased its presence in Europe.

Recently, Shurgard's approach to the European market turned more aggressive. In mid-October, 1999, the company announced the creation of a joint venture to fund the growth of European operations. The agreement joins Deutsche Bank, Credit Suisse First Boston, Fremont Realty Capital, and AIG Global Real Estate Investment Corporation as partners with Shurgard and Grana International in a company called SSC Benelux & Co., SCA (Shurgard Benelux).

The new investors committed 122 million Euros to the Shurgard Benelux business plan. In return, the new joint venture partners received a combined 43 percent ownership interest. Accompanying the capital investment was another 140 million Euro credit facility arranged with Credit Suisse First Boston.

By the end of 1999, Shurgard's European venture had opened 28 locations in five European countries, including Belgium, England, France, The Netherlands, and Sweden.

Thanks, but No…

Shurgard's strong growth and committed business plan has made other companies in the sector sit up and take notice. As a result, this past April, Glendale, CA-based Public Storage, Inc. made a buy-out offer to Shurgard.

With 1,323 properties in 27 states, Public Storage ranks as the largest publicly-owned self-storage company in the industry. Shurgard, with 385 properties in 19 states and Europe, holds third position among publicly owned companies in the sector.

To many in the financial community, the overture, which proposed an unspecified premium over net asset value, seemed worth investigating. But Shurgard's officers decided that they were very happy with the direction and growth of the business, and turned down the offer without asking the size of the premium.

This raised the hackles of some investors. In media reports, one portfolio manager called the Shurgard move "frustrating."

In the quarterly conference call to the financial community following the offer, Shurgard executives said that the company's lack of interest in selling did not indicate irresponsibility, but did not provide an explanation for not inquiring about the premium Public Storage might have been willing to pay.

Shurgard's stock has suffered somewhat as a result. Between May and June of this year, the share price dipped about 15 percent from its April 28 level of 26 3/16. As of early August, the stock had not recovered and was bouncing around 23 3/4.

"I have concerns about why they would not inquire as to what premium Public Storage would have considered," says John Sheehan, an associate analyst who follows Shurgard for A. G. Edwards & Sons of St. Louis, MO. Currently, A. G. Edwards rates Shurgard as "maintain," a position that indicates a belief that the company is sound, with a secure dividend, but faces one or another issue that may prevent the stock from outperforming its peer group or general category.

On the plus side, Sheehan points to management and real estate choices: "Management has some positive qualities," he says. "The company builds fantastic stores in good locations."

The Self Storage REITs As of January 1, 2000, Shurgard Storage Centers, Inc. ranked third among the self storage REITs in terms of equity market capitalization. Public Storage, Inc., Glendale, CA, topped the list with an equity market capitalization of $2.9 billion and ownership of or interest in 1,323 properties in 37 states. Storage USA, Inc., Memphis, TN, the second largest self-storage REIT, reported an equity market cap of $848 million and 510 facilities in 31 states. At the beginning of the year, number three Shurgard was capitalized with $676 million in equity and owned 385 properties in 19 states and five European countries. Sovran Self Storage, Inc., Buffalo, NY, ranked fourth, with equity capitalization of $232 million and 226 facilities in 21 states.

Shurgard officers continue to deflect questions about the Public Storage offer but are more than willing to spell out their views of the company's strategic strengths. "We have a superior long term business plan," says Jeffrey Scott Szorik, the company's assistant treasurer. "We build high quality designs in the highest quality retail locations. We are the most innovative. We were the first to go to Europe; the first with a call center; the first to go 24 and 7 with our call center; the first to offer rental trucks on our property."

Doing it Their Way

Given Shurgard's solid five year performance as a REIT, financial analysts might well see the year 2000 as a fine time to sell or at least to explore opportunities offered by a suitor with deep pockets.

But Shurgard has always grown by going its own way. "I think Chuck Barbo views himself as being entrepreneurial," says Sheehan of A.G. Edwards. "I don't disagree."

Shurgard's executives hold similar views: "We have a visionary leader in Chuck Barbo," says Szorik. "He started with one store in Olympia, WA, and has created the most compelling engine for growth in the sector."

"Our chairman has built a creative culture," says John Steckler, Shurgard's senior vice president for marketing. "And he perpetuates the culture."

Of course, the business remains of visionary but over-reaching entrepreneurs litter the roadways of the corporate map. Self-confident vision often declines into self-destructive hubris.

Then again, when opportunities present themselves, who can blame those who find themselves in the right position for making a run?

Capturing New Markets

The roots of the self-storage industry lay in the storage requirements of people dealing with problems such as divorce, criminal convictions, death.

Unlike the lion's share of self-storage companies in the market, Shurgard has not pursued such low-priced markets. "If you visit a Shurgard and have concerns about price, you probably won't go in," Steckler says. "Our properties have beautiful stone masonry walls, comfortable offices, and security cameras and gate codes. You can see just by looking that these are not the cheapest places."

According to Steckler, an entirely new self storage market has emerged over the past decade. "Today, the driving force in the self-storage industry is transient lifestyles," he says. "About 50 percent of the storage business today is related to moving. People must stage their homes when selling. They have staggered closings on new homes. They move to new parts of the country and haven't found new places to live. This is a huge part of the current storage business."

Creative Alliances

Service industries also offer increasing opportunities to modern self-storage providers, notes Steckler.

Shurgard, for example, services an account in the northwestern United States for Ikon Office Supplies. Ikon service technicians repair copiers throughout the region. At one time, Ikon technicians in need of parts had to drive to a single company warehouse; the distance involved often delayed the repair until the following day, irritating customers and reducing productivity. Today, Ikon technicians draw inventory from a network of Shurgard Storage Centers in the region. According to Steckler, a drive of more than five minutes is now rare.

Shurgard has established a number of these kinds of corporate relationships. Pfizer Pharmaceutical representatives, for example, maintain product inventories in Shurgard centers across the country.

Shurgard has also begun to attach itself to a number of marketing partners to find both consumer and business customers.

AAA members, for example, receive 10 percent discounts on Shurgard units. Home Base, a chain of home improvement centers, displays Shurgard signage and offers direct phone lines to the Shurgard call center. Costco business members receive Shurgard discounts.

Innovation and the Future

In March of this year, the company renovated its web site to accept orders on-line. The site, www.shurgard.com, offers storage, packing supplies, information about moving trucks, and information related to moving, a Shurgard store locator, and a space estimator.

The web site adds virtually unlimited consumer contact options to the company's long-standing toll-free number. For example, customers looking for apartments at www.rent.net will see a button labeled storage. Clicking that button takes them to the Shurgard site.

Another retail-style service works something like the pizza delivery business: Shurgard Storage To Go. In this program, Shurgard will deliver a mobile storage unit to a customer's home or business. The customer packs the unit and locks it. Shurgard returns the unit to a local storage location. When the customer wants the goods, Shurgard brings them back. The service costs $99 on each end.

In short, Shurgard's vision of the future is retail. "We are turning self-storage into a retail business, and that is a new and unique idea," Steckler says. "Analysts look at the storage business and say that it's over-built. We see the industry as just getting started. Our industry has barely tapped the emerging storage market. Only about six percent of the general population rents storage."

But what if 6 percent of the population is all that needs storage? Steckler disagrees. "We think that the category of people with too much stuff is growing," he says. "Look how the cost of manufactured goods—sound systems, television sets, computers—has declined in recent years. Combine that with increasing home ownership, and storage becomes a growth category."

By way of proof, Steckler points to Shurgard sales. "More than 20 percent of our current customers rent storage because they have too much stuff," he says. "That's a category that may have been only five percent of our business in 1995. That's growth. I believe we are well positioned to market to this category."

Shurgard executives express great confidence in the potential of this emerging retail-style market for self-storage.

In fact, the level of this confidence leads to the speculation that Shurgard turned down the Public Storage offer because it confirmed Shurgard's confidence in itself and its future.

Michael Fikes is a freelance writer from Cockeysville, MD.