UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.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, 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 or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer x		Accelerated Filer ¨		Non-accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Aggregate market value of voting stock held by non-affiliates of the registrant, based on the closing price of the registrant’s common stock, as of June 30, 2005: $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 1A—Risk Factors		9

Item 1B—Unresolved Staff Comments		17

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		22

Item 6—Selected Financial Data		23

Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
OVERVIEW		24
CRITICAL ACCOUNTING POLICIES AND ESTIMATES		27
RESULTS OF OPERATIONS		31
SEGMENT ANALYSIS		36
FUNDS FROM OPERATIONS		52
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES		53
OFF BALANCE SHEET TRANSACTIONS.		58

Item 7A—Qualitative and Quantitative Disclosures about Market Risk		58

Item 8—Financial Statements and Supplementary Data		60

Item 9—Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		60

Item 9A—Controls and Procedures		60

Item 9B—Other Information		61

PART III

Item 10—Directors and Executive Officers of the Registrant		62

Item 11—Executive Compensation		66

Item 12—Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		70

Item 13 —Certain Relationships and Related Transactions		72

Item 14—Principal Accountant Fees and Services		74

PART IV

Item 15—Exhibits, Financial Statement Schedules		75

SIGNATURES		82

Item 8—Financial Statements and Supplementary Data		F-1

Financial Statement Schedule		F-49

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:

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we or Public Storage may encounter difficulties in completing our proposed merger and integrating the two companies; or we may fail to obtain approval of the transaction by our shareholders or to satisfy other closing conditions to the transaction;

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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;

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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;

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

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tax law changes may change the taxability of future income;

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

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

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Shurgard Self Storage SCA, our wholly-owned European subsidiary that we refer to as Shurgard Europe, may be adversely affected if it is unable to find adequate sites to complete the targeted number of developments in its Second Shurgard joint venture;

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we may not maintain compliance with our debt covenants; and

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

The proposed merger and other factors that could affect our financial results are described below and in Item 1A Risk Factors of this annual report on Form 10-K. Forward-looking statements are based on estimates as of the date of this report. We do not 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, 2005, we operated a network of 646 storage centers containing approximately 40 million net rentable square feet located throughout the United States and 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. 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 realize shareholder value through:

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

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acquisition of additional self-storage properties;

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development of new storage centers; and

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redevelopment or expansion of selected properties.

We believe the geographic diversification of our portfolio and our operating economies of scale will enhance our ability to achieve this objective.

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 the performance of all storage centers on the same basis regardless of our ownership interest in the property. We believe NOI 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. A summary of revenues, NOI and storage center assets for each of our segments for the years ended December 31, 2005, 2004 and 2003 is set forth in Note 20 to our consolidated financial statements included elsewhere in this report and is incorporated by reference.

Business Strategy

Our mission is to 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.

Proposed Merger with Public Storage

On March 6, 2006, we entered into an Agreement and Plan of Merger (Merger Agreement), with Public Storage, Inc. (Public Storage), that contemplates a merger whereby we will be merged with and into a subsidiary of Public Storage. Each outstanding share of our common stock will be converted into the right to receive 0.82 of a fully paid and non-assessable share of Public Storage common stock. In connection with this transaction, we expect to redeem each series of our outstanding preferred stock in accordance with its terms. Public Storage will assume approximately $1.8 billion of our debt. Holders of Shurgard’s stock options, restricted stock units and shares of restricted stock will receive, subject to adjustments, options exercisable for shares of Public Storage common stock, restricted stock units and restricted shares of Public Storage common stock, respectively.

Our board of directors and the board of directors of Public Storage have approved the Merger Agreement. The proposed merger is subject to our shareholders’ approval, Public Storage’s shareholders’ approval of the issuance of shares of Public Storage stock to be used as merger consideration and other customary closing conditions.

We have made certain representations and warranties in the Merger Agreement and have agreed to certain covenants, including, among others and subject to certain exceptions, to permit our board of directors to comply with its fiduciary duties, and not to solicit, negotiate, provide information in furtherance of, approve, recommend or enter into any other acquisition proposal (as defined in the Merger Agreement).

This description 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.

Customer Service and Satisfaction

Our customer service and satisfaction strategy focused on training and developing store employees, locating our stores in convenient, easy to access locations, providing security for our self-storage centers and devoting resources to grow our self-storage business and to promote the Shurgard brand.

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.

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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.

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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.

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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.

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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

center in the United States to field telephone calls from current and prospective customers. Employees at our U.S. sales center are able to lease space at the storage center most convenient to the customer. We have implemented additional sales and marketing programs to broaden our distribution channels, such as a website for our enhanced e-commerce business, business directed marketing and an expanded direct sales force in selected markets.

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Market research. We maintain an extensive market research database on our primary markets and closely 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.

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Market share. We employ various means to increase our share of specific self-storage markets. We place prominent advertisements in the yellow pages and seek to promote customer awareness of our storage centers through highly visible storage center locations, site signage and architectural features. We build a distinctive “lighthouse” office on most newly developed storage centers to distinguish us from competitors and to increase customer awareness of 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.

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

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Revenue optimization. We seek to optimize our revenue by achieving the highest rental rate structure for our storage centers and high levels of occupancy, through the use of teams of storage center employees and district managers who are trained and authorized to change rental rates based on their analysis of demand and availability at a particular storage center. Market personnel regularly evaluate their properties’ rental rates, based on unit demand and unit availability, and can quickly change marginal rental rates to ensure that revenue is optimized.

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Cost containment and improved operating leverage. We seek to increase cash flow by carefully containing operating expenses. For example, in 2005, as we gained full ownership of Shurgard Europe, we were able to start changing the management structure of Shurgard Europe and undertake overhead costs reduction initiatives through 2007. As we increase the number of properties in our targeted markets, and increase the number of properties we manage, we achieve economies of scale because we can do so without incurring significant incremental overhead expense. We believe that our management and operational procedures, which can be implemented over a large number of properties, enable us to add new properties quickly and with little disruption to our operations. In addition, we closely monitor our real estate tax assessments, appealing such assessments as appropriate, and engage consultants to manage certain utility costs to contain increases of such 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.

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Redevelopments. We seek to increase 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 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 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 and Acquisitions

Our external growth strategy is to develop new, high-quality self-storage properties and to acquire additional self-storage properties that meet, or can be upgraded to meet our standards. In general, we plan to develop or acquire new properties or acquire existing properties primarily in our existing markets and in new markets that create economies of scale for our current network of storage centers. In most markets, we seek to own at least 15 storage centers in order to realize operating and marketing efficiencies and increase brand awareness. We believe that the experience of our management team in developing and acquiring self-storage properties strengthens our ability to pursue our external growth strategy. Since 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:

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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.

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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.

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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.

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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 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.

Capital Strategy

Our goal is to maximize shareholders’ value, which includes completing the proposed 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 any strategic shift that results from our proposed merger into Public Storage, Inc., we would continue to seek to maintain a strong, flexible capital structure with a corporate strategy of:

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maintaining a moderate level of leverage consistent with an investment grade bond rating;

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maintaining a consistent dividend policy;

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extending and laddering our debt maturities where possible;

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mitigating our exposure to interest rate risk; and

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maintaining appropriate liquidity.

We 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

we agreed to pay a $0.56 dividend for the first quarter 2006 and then to adjust our quarterly dividends to a level consistent with Public Storage and 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:

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

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

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our desire to moderate risks from new developments;

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the economic and tax considerations of the partner or seller; and

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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 stock in exchange for self-storage and other real estate investments where and when appropriate. Future issuance will depend 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 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, 2005, Shurgard had approximately 2,300 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.

Under various federal, state, local and foreign laws, ordinances and regulations, an owner or operator of real property may become liable for the costs of removal or remediation of certain hazardous substances released on or in its property. Such laws may impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances. The presence of hazardous substances on a property may adversely affect the owner’s ability to sell the property or to borrow using the property as collateral and may cause the owner or manager of the property to 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.

Except for one property in St. Louis, Missouri discussed below, we have not been notified by any governmental authority of any current, material environmental noncompliance, claim or liability in connection with any of the properties we own or manage. We have not been notified of any current claims for personal injury or property damage by a private party in connection with environmental conditions at any of the properties we own or manage. We obtained Phase I environmental assessment reports prepared by independent environmental consultants for the properties we own in the United States, and similar environmental reports for properties we own in Europe.

In 1995, we notified the Missouri Department of Natural Resources (MDNR) of elevated levels of hydrocarbons found in groundwater monitoring wells on a property in St. Louis, Missouri that we had been monitoring in accordance with a work plan approved by the MDNR. In 1998, a quarterly monitoring report revealed continued contamination in the groundwater samples. The MDNR notified us that it would continue requiring quarterly groundwater monitoring. During 1999, at the MDNR’s request, with the help of an environment consultant, we developed a work plan to address the MDNR’s question regarding whether on-site contamination might be spreading to adjacent properties. The work plan encompasses a broader scope of monitoring, including installation of four additional monitoring wells on adjacent properties. The work plan required on-going monitoring through April 2003, when the MDNR indicated that based on test results, on-going testing was no longer required. In 2004, Missouri adopted a new program that required us to conduct additional testing on this site. The MDNR approved our proposed plan to address the new program and we have completed initial testing. We presented the results to MDNR. In October 2005, the MDNR issued a no further action letter.

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, whether any prior owner or operator of the properties created 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:

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

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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

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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.

Other 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

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 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:

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

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

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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;

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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

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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:

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issuing any new securities or purchasing or redeeming existing securities;

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

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

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

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capital expenditures;

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new indebtedness;

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

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the acquisition of property or assets; and

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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 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 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.

We focus almost exclusively on the self-storage business, which makes us vulnerable to changes in the profitability of self-storage properties. Our investments focus predominantly 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. Also, an economic slowdown in a particular market could have a negative effect on our storage center revenues. For example, from 2004 to 2005, occupancy of our Same Store properties declined in the Detroit market resulting in decreased revenue of $250,000. 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 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.

Before we acquired them, some of our properties were used for commercial activities involving matters 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 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 or otherwise engage in activities that could expose us to liability under federal, state, local or foreign environmental laws. 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 business, 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 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:

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commercial general liability and excess liability insurance for our U.S. properties, covering up to an aggregate of $60,000,000, and subject to deductibles of $50,000 per occurrence;

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commercial general liability insurance for our European properties, covering up to an aggregate amount ranging from €1 million ($1.2 million as of December 31, 2005) to €6 million ($7.1 million as of December 31, 2005), and subject to deductibles ranging from €0 to €16,779 ($19,871 as of December 31, 2005) per occurrence, depending on the country in which the property is located;

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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;

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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;

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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

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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 on-going war 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:

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currency risks, including currency fluctuations;

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unexpected changes in legislative and regulatory requirements;

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potentially adverse tax burdens;

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

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obstacles to the repatriation of earnings and cash;

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regional, national and local political uncertainty;

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economic slowdown and/or downturn in foreign markets;

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difficulties in staffing and managing international operations; and

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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 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. Over 50% of the European properties in which we have an investment have been developed since January 1, 2002, 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.

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:

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

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our ability to compete effectively as the European market develops and becomes more competitive; and

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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 we may encounter with our European operations, some of which may be beyond our control.

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. 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

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:

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the rules governing REITs are highly complex;

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

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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 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:

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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

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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:

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85% of our ordinary income for the calendar year;

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

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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 requirements applicable to a REIT.

Our indirect investments may result in liabilities against which we cannot protect. We have and may continue to enter into participating mortgages, and 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, 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.

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, there is a risk that our joint ventures enter into transactions that would cause us to lose our status as a REIT.

Financing Risks

If we fail to complete the proposed merger with Public Storage, Inc. we will have the following financing risks:

Inability to access the capital markets could delay or adversely affect execution of our business plan. Because we did not file a fully compliant annual report on Form 10-K for 2004, until October 14, 2005, we are not eligible to access public capital markets to raise 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 have a substantial amount of debt outstanding and will continue to have significant interest payments. Our debt may:

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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;

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

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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;

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

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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, 2005, we had approximately $1.24 billion of indebtedness that 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 domestic 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, 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 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 to declare all borrowings outstanding to be due and payable, in which case we may 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 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.

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 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.

If we fail to maintain an effective system of internal control, we may not be able to accurately report our financial results or prevent fraud. Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. Any inability to provide reliable financial reports or prevent fraud could harm our business. The Sarbanes-Oxley Act of 2002 requires management to evaluate and assess the effectiveness of our internal control over financial reporting, and our independent registered public accounting firm must 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 require significant expenditures. In the process of conducting the management evaluation of our internal control over financial reporting at December 31, 2004, which evaluation we did not complete until October 2005, we identified a number of control deficiencies that were characterized as “material weaknesses” and identified and instituted new processes and controls to remediate the deficiencies. We continued to institute new processes and controls through the end of 2005 in order to remediate the deficiencies identified in last year’s internal control evaluation. As discussed elsewhere in this report, our management evaluated our internal control over financial reporting as of December 31, 2005, and concluded that such internal control over financial reporting was effective at such date. Although our most recent internal control evaluation concluded that our internal control over financial reporting is effective, we may in the future identify control deficiencies, including deficiencies that arise to the level of a material weakness. We may not be able to implement necessary control changes and employee training effectively and timely to ensure continued compliance with the Sarbanes-Oxley Act and other regulatory and reporting requirements. If we fail to maintain effective internal control over financial reporting, we could be subject to regulatory scrutiny and sanctions, and investors 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.

Item 1B—Unresolved Staff Comments

None.

Item 2—Properties

As of December 31, 2005, we operated a network of 646 storage centers and two business parks located throughout the United States and Europe. Of these properties, we own or lease, directly and through our

subsidiaries and 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 the 633 properties:

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we owned or leased 484 U.S. properties in 21 states containing approximately 31.8 million rentable square feet including 105 properties in which we hold joint venture interests ranging from 38% to 99%; and

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we owned or 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.

Description and Use of Properties

Our self-storage properties are designed to offer accessible storage space for personal and business use. Individuals typically rent one or more units in self-storage properties for storage of personal belongings such 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, to stay for longer terms and to be reliable payers.

Our self-storage properties are divided into a number of self-enclosed rental units that typically range in size from approximately 25 to 360 square feet in the United States and from approximately 10 to 300 square feet in Europe. A few storage centers have larger units upwards of 900 square feet. We have approximately 200 to 2,000 units at each storage center. Many properties have uncovered storage outside the buildings for parking motor vehicles, boats, campers and other similar items suitable for outside storage. Additionally, a number of our properties include temperature-controlled storage units 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, multi-story buildings have been converted into self-storage properties. In addition, similar 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, 2005, the average rental period for a tenant is approximately 12 months. This average is comprised of the rental periods of business tenants, whose average stay approximates 18 months, and those of residential customers, whose average stay approximates 11 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.

Location of Properties

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


	Number of Properties as of December 31, 2005	Percentage of 2005 Store Revenue (1)
California	53	11.7	%
Washington	51	8.7	%
Texas	65	8.2	%
Florida	32	6.2	%
Virginia	36	5.3	%
North Carolina	41	4.6	%
Michigan	27	3.4	%
Arizona	22	3.2	%
New York	11	3.2	%
Minnesota	19	3.0	%
Illinois	23	3.0	%
Georgia	18	2.5	%
Oregon	14	2.0	%
Maryland	11	1.5	%
South Carolina	15	1.5	%
Indiana	13	1.3	%
Tennessee	10	1.0	%
Other domestic	23	3.3	%

Domestic Total	484	73.6	%

France	39	7.2	%
Netherlands	32	4.8	%
Sweden	22	4.7	%
United Kingdom	18	4.7	%
Belgium	19	2.9	%
Denmark	8	1.4	%
Germany	11	0.7	%

Europe Total	149	26.4	%

Total	633	100.0	%

(1)

Revenue includes revenue of all storage centers we actively operate regardless of ownership interest in the property.

Ownership and Leasing Arrangements of Properties

Wholly-Owned or Leased

The majority of our storage centers are owned directly or through wholly-owned subsidiaries. Additionally, as of December 31, 2005, we operated 40 storage centers, including 17 in the United States and 23 in Europe, that are subject to land or building leases; of the 23 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 151 properties in the United States and 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 22 properties through Florida joint ventures, in which our ownership ranges from 50% to 90%. As of January 1, 2005, we took over the property management of the Florida properties directly, and we expect to takeover the property and asset management of the Tennessee properties in 2006. 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 44 properties in North Carolina and South Carolina through various joint ventures with Morningstar Storage Centers, LLC (Morningstar) in most of which we have a 74% ownership interest. 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, 2005, we had two properties operating under one such joint venture in which we hold a 75% ownership interest. These storage centers are managed by affiliates of certain members of Shurgard/Morningstar Storage Centers, LLC that are unrelated to Shurgard.

We operate 12 storage centers owned through two joint ventures with a California developer in which we have 85% and 87% ownership interests. 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 joint ventures we have with this developer that we consolidate in our financial statements. Prior to such purchase, we have no ownership interest in the properties and accordingly, they are not included in our operating results.

Shurgard Europe operates 46 properties through two consolidated joint ventures in which it holds 20% ownership interests. Those 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. Those joint ventures are expected to develop or acquire up to approximately 75 storage facilities in Europe. 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. Such fees are eliminated upon consolidation of our joint ventures.

Additionally, as of December 31, 2005, we had ownership interests ranging from 51% to 99% in joint ventures that held 16 properties with various partners in the United States. We manage all of these properties for a fee.

Item 3—Legal Proceedings

On March 7, 2006, Doris Staer filed a purported class action suit in the Superior Court of Washington 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 named directors breached their fiduciary duties in connection with the approval of 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.

However, we 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 various legal proceedings that arise in the ordinary course of business. Although we cannot predict the outcomes of these proceedings with certainty, we do not believe that the disposition of these matters and the matters discussed above will have a material adverse effect on our financial position, operating results or cash flows.

Item 4—Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of shareholders during the fourth quarter of 2005.

PART II

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

Our common stock is traded on the New York Stock Exchange (NYSE), under the symbol “SHU.” As of March 8, 2006 there were 14,256 holders of record of our common stock and the reported NYSE closing price per share of Common Stock was $65.32.

The table below sets forth for the fiscal periods indicated the high and low sales prices per share of Common Stock as reported in the NYSE composite tapes for applicable periods, and distributions declared per share:


	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 Western Europe. As of December 31, 2005, we owned or leased, directly and through our subsidiaries and joint ventures, 633 properties containing approximately 39.8 million net rentable square feet. We are one of the largest self-storage property owners in the United States with a network of 484 storage centers, as of December 31, 2005, that generate 74% of our revenues. We are the largest self-storage owner in Europe with 149 storage centers located in seven countries that generate 26% of our revenues. We directly own most of these properties and hold indirect interests in the others through our subsidiaries and joint ventures. Over the past few years we have sought growth by increasing our investment in the European market and by improving the performance of our portfolio in the United States through redevelopment of our existing properties, and acquisitions of new self-storage facilities. In 2005, we invested $92.5 million through our European joint ventures in new storage center developments; opened 14 new stores, adding 710,000 net rentable square feet to the European portfolio; and acquired our partner’s remaining 12.77% interest in Shurgard Europe. We also completed major redevelopments of five properties in the United States, opened three new storage centers and acquired ten properties, adding approximately one million net rentable square feet to our domestic portfolio.

Operating Performance

Income from operations on a consolidated basis increased by $21.8 million, or 26%, to $106.2 million in 2005. This increase was due to strong growth in our U.S. as well as our European Same Store and New Store segments. In 2005, consolidated NOI after indirect and leasehold expenses for our U.S. Same Store segment improved by $9.3 million, or 5%, to $195.9 million, and for our European Same Store segment by $9.1 million, or 27%, to $45.0 million in 2005. In 2005, consolidated NOI after indirect and leasehold expenses improved for our U.S. New Store segment by $9.5 million to $10.1 million, and our European New Store segment consolidated net operating losses after indirect and leasehold expenses improved by $5.5 million to $2.9 million in 2005.

Domestic operations. In the United States, our operations in 2005 benefited from a strong economy and stable demand that have allowed us to increase prices while marginally improving our occupancies. Compared with 2004, approximately one-third of our $59.8 million storage center revenues growth in 2005 came from our Same Store portfolio in the United States; U.S. Same Store revenues increased $19.8 million, or 6%, to $329.0 million primarily driven by a 5% increase in our average rental rates. Additionally, our new storage centers opened in 2005 and 2004 are taking a shorter period of time compared to the past three years to reach rental stabilization, which we typically consider to be 85% occupancy. We attribute this to improvements in our selection of development sites, stronger focus on local marketing, heightened attention to operations and a favorable economy.

International operations. In Europe, our Same Store average occupancy improved to 78% in 2005 compared to 71% in 2004 as a result of improving economic conditions as well as to changes in our pricing strategy. For the fourth quarter of 2005, our European Same Store portfolio achieved an average occupancy of 83% due primarily to strong performance in France, Sweden and Denmark. Rent-up of our self-storage centers has taken longer than initially anticipated due to the lack of awareness of the product, slower than expected economic recovery and significant new supply in certain countries. In 2005, we reduced rates to attract new customers and as a result, European Same Store revenues increased $10.9 million, or 12%, and our consolidated Same Store NOI after indirect and leasehold expenses improved by $9.1 million. Upon completing the acquisition of the remaining minority interest in Shurgard Europe in June 2005, we realized existing opportunities for further integration of international and domestic operations. We strategically refocused our European development activities in core markets with proven product acceptance, while deferring further development of opportunity markets, where we still see short-term demand lagging behind long-term potential. Strong Same Store and New Store NOI growth in 2005 in certain countries such as France, Sweden and the Netherlands allows us to rely on those markets to further develop our European portfolio.

Key Economic Factors Affecting Our Business

Self- Storage Operations. Our operating performance is affected primarily by the supply of and 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 self-storage 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.

In the United States, average self-storage industry rental rates going into 2005 declined gradually for the majority of unit sizes compared to 2004, while nation wide 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 rates in early 2005 decreased, we realized a 5% increase in rental rates in our domestic Same Store segment, due largely to rate increases in our southeastern U.S. properties. Although we have not seen erosion of the rental rate gains we achieved in 2005, and pricing and occupancy levels in fact have remained unseasonably strong through the end of the fourth quarter of 2005, we do not expect such rate growth to be sustained at present occupancy levels in 2006 based on projections of changes in consumer spending.

In Europe, self-storage business conditions improved 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 national economies. Economic stagnation in Belgium and Germany slowed self-storage business expansion plans in those countries. Market conditions in the United Kingdom were negatively impacted by a weakening economy combined with increasing self-storage supply and competition. European self-storage rental rates reversed trend during 2005: A decline in the first half of 2005 was driven by conscious rate moderation in an effort to increase occupancy. In the second half of the year, rental rates increased in stronger markets and for certain unit categories. We are planning to continue to raise rental rates in the locations where we reached stable occupancy. However, continued discounting from our target rental rates might be required in markets which lack product acceptance.

Real Estate Development. Supply of and demand for properties suitable for real estate development into self-storage facilities is affected by fluctuations in the overall and regional strength of the economy as well as by availability of capital for investment in real estate, which is largely influenced by fluctuations in long-term interest rates and returns from alternative investments.

In the United States, low interest rates and lower capitalization rates have contributed to a rise in the price that private and public investors are paying for acquiring existing self-storage facilities. In this environment, we have focused on acquisitions that we consider unique or strategic in nature. As our development of new storage centers in the United States has slowed in recent years, during which quality opportunities have become 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. Redevelopments allow us to capture demand for higher quality self-storage services and to compete better against the newer supply that we face in certain markets. We expect redeveloped stores to generate higher returns on the capital invested and create new growth opportunities for our Same Stores. Increases in construction costs 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 availability of quality real 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

centers per year, compared to initially anticipated 25, in order to be more selective about expansion markets and the location of sites. We have repositioned our developments towards markets where penetration has proven to be successful. We have also encountered and expect we will continue to encounter difficulties in certain markets, such as in the United Kingdom, finding real estate that meets our investment criteria. Therefore, we have started to consider growth through acquisitions in Europe and completed a nine storage center acquisition in France in January 2006. We believe continued growth in Europe will help solidify our position as the market leader and improve our economies of scale in marketing and management.

Based on our experience in the business, we have determined that most customers place a high value on convenience, such as the location of the storage center and ease of renting, access and moving. Consequently, we have elected to focus our investment activities in densely populated, high quality neighborhoods and offer high quality products and services. We believe a growing segment of prospective customers are willing to pay higher rates for these benefits. As a result, we have reconsidered our presence in certain markets that no longer meet our long-term strategic goals and we sold our investments in those markets when conditions were favorable. We will continue to consider such opportunities.

Operational Initiatives

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. To that end, 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. In the past two years, we have significantly increased management positions in our regional operations group. This has allowed us to improve the quality of service offered to customers, increase our closing rates, improve our rental rate management, and increase sales of retail services.

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. However, in an effort to reduce costs in 2005, we have started a restructuring of our European operations. We have increased synergies between countries and reduced the number of regional management positions.

We continuously seek to improve infrastructures and support to our field operations. As such, we have developed a new point of sales management software that we expect will be operating in all U.S. storage centers during 2006. We expect this software will allow us to more efficiently and more timely meet demand and it will increase effectiveness in compiling information and disseminating it to our storage centers.

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.

On March 6, 2006, we entered into the Merger Agreement with Public Storage, that contemplates a merger whereby we will be merged with and into a subsidiary of Public Storage. Each outstanding share of our common stock will be converted into the right to receive 0.82 of a fully paid and non-assessable share of Public Storage common stock, and we expect to redeem our outstanding preferred stock in accordance with their respective terms. Public Storage will assume approximately $1.8 billion of our debt. Holders of Shurgard’s stock options, restricted stock units and shares of restricted stock will receive, subject to adjustments, options exercisable for shares of Public Storage common stock, restricted stock units and restricted shares of Public Storage common stock, respectively.

Our board of directors and the board of directors of Public Storage have approved the Merger Agreement. The proposed merger is subject to our shareholders’ approval, to Public Storage’s shareholders’ approval of the issuance of shares of Public Storage stock to be used as merger consideration and other customary closing conditions.

We have made certain representations and warranties in the Merger Agreement and have agreed to certain covenants, including, among others, subject to certain exceptions, to permit our board of directors to comply with its fiduciary duties, and not to solicit, negotiate, provide information in furtherance of, approve, recommend or enter into any other acquisition proposal (as defined in the Merger Agreement).

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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 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 customers, who 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.

Storage centers. Storage centers 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. 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.

Goodwill. We test goodwill for impairment annually and whenever events or circumstances make it more likely than not that impairment may have occurred, such as a significant adverse change in the business climate. To determine if there is impairment, we compare the carrying value of goodwill and our storage centers assets to the estimated fair market value of our Same Store portfolio storage centers. We use common industry methods to assess the value of our portfolio and we estimate future cash flows based on the storage centers’ NOI and current market capitalization rates.

Derivatives. Gains or losses resulting from changes in the fair value of derivatives are recognized in 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 fair value of derivative 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, to manage our exposure to interest rate movements and to reduce our various foreign currency risks. To accomplish these objectives, 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.

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.

Real estate investment trust. As a REIT, we generally will not be subject to corporate level federal income taxes if minimum distribution, income, asset and shareholder tests are met. However, not all of our underlying entities are qualified REIT subsidiaries and may be subject to federal and state taxes, when applicable. In addition, foreign entities may also be subject to taxes of the host country. 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 arisen based upon the differences in GAAP versus tax income for items such as depreciation and gain recognition.

Deferred tax assets. We have deferred tax assets resulting primarily from cumulative net operating losses arising in certain domestic taxable subsidiaries and in our European subsidiaries. We regularly evaluate both the positive and negative evidence that we believe is relevant in assessing whether the deferred tax assets will be realized. When we determine that it is more likely than not that we will not realize the tax asset either in part or in whole, a valuation allowance is provided. One significant factor representing negative evidence in the evaluation of whether deferred tax assets arising from cumulative net operating losses will be realized is historical taxable income or loss of the entity. In cases where a taxable entity has not demonstrated a history of achieving taxable income, this represents significant negative evidence in assessing whether the amounts will be realized and generally requires that we provide a valuation allowance.

Foreign currency translation. The results of our operations and our financial position are affected by the fluctuations in the value of the euro, and to a lesser extent, other European currencies, against the U.S. dollar. We recognize the foreign currency translation effects of exchange rate fluctuations on our European assets, liabilities and equity as a currency translation adjustment in other comprehensive income (loss). We include gains and losses from foreign currency transactions, such as those resulting from the settlement of foreign receivables or payables on intercompany transactions, in net income. Also, we are exposed to foreign currency exchange risk related to intercompany debt with or between our European subsidiaries that are not denominated in the functional currency of the subsidiary or the investee. We recognize the effects of foreign currency on such debt in net income when we expect to settle the debt, and in other comprehensive income when the debt is considered to be of a long-term investment nature.

In connection with our exploration of strategic alternatives and our proposed merger with Public Storage, we entered into engagement letters with our financial advisors. We accrued combined minimum fee obligations under these agreements totaling $12 million in 2005 and expect to incur an additional $12 million of such fees in 2006, plus expense reimbursement. In addition, related to our exploration of strategic alternatives we incurred $1.8 million in legal fees and expense reimbursements in 2005 and we expect to incur an additional $5.0 million of such fees and expenses in connection with our proposed merger with Public Storage in 2006.

We have entered into an agreement with each of our executive officers that provides for payments in the event that the officer’s employment is terminated by us other than for cause, or by the employee for good reason, within two years after certain business combination transactions, including, but not limited to, the proposed merger with Public Storage. In the event of such a termination, the officer would be entitled to payment of two and one-half times his or her annual salary plus his or her bonus. In addition, in the event the payments made under one of these agreements are subject to certain taxation, the officer would be entitled to additional payments necessary to reimburse him or her for such additional tax payment.

Recent Accounting Pronouncements

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

employees prior to the effective date of SFAS No. 123R. Under SFAS No. 123R, we will recognize stock-based compensation expenses related to our stock option plans and our Employee Stock Purchase Plan that were previously only subject to disclosure. Under the terms of our proposed merger with Public Storage all outstanding unvested stock options for common stock of Shurgard Storage Centers, Inc. will become fully vested and exercisable immediately prior to consummation of the proposed merger and all shares of restricted stock will become fully vested immediately after consummation of the proposed merger.

In October 2005, the FASB issued FASB Staff Position (FSP) FAS 13-1, “Accounting for Rental Costs Incurred during a Construction Period,” which clarifies that rental costs incurred during the period of construction of an asset on leased property should not be capitalized; rather they should be recognized as rental expense in the same manner as rental costs incurred after the construction period. However, to the extent a lessee accounts for rental of real estate projects under SFAS No. 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects,” it should continue capitalizing rental costs. We lease under operating leases certain parcels of land and buildings on which we develop storage centers or perform certain construction improvements. We have historically capitalized rental costs during the construction period on such properties. We account for real estate projects involving our development and construction of self-storage facilities under SFAS No. 67; therefore, we do not believe that the adoption of this FSP will have an impact on our financial position, operating results or cash flows.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3.” This statement replaces APB Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements,” and changes the requirements for the accounting for and reporting of a voluntary change in accounting principle. It also applies to changes required by an accounting pronouncement in the instance that the pronouncement does not include specific transition provisions. APB Opinion No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period the cumulative effect of changing to the new accounting principle. SFAS No. 154 requires retrospective application of changes in accounting principle to prior periods’ financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. We will adopt the provisions of SFAS No. 154 as of January 1, 2006, and we do not believe this statement will have a material impact on our financial position, operating results or cash flows.

RESULTS OF OPERATIONS

Our financial statements include our European subsidiaries whose functional currency is the euro. Accordingly, our results of operations, financial position and cash flows are affected by fluctuations in the value of the euro against the U.S. dollar. We translate assets and liabilities into U.S. dollars at the exchange rate in effect at the end of each period and statement of income accounts at the average exchange rate for each period. These exchange rates were as follows (in U.S. dollars per euro):


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

Our Consolidated Statements of Operations for 2005 and 2004

Net income. We had net income of $11.7 million in 2005, compared to net income of $45.3 million in 2004. The decrease in net income is primarily due to higher interest expense and to fluctuations in foreign exchange rates. Additionally, increases in our store operations results were more than offset by higher general, administrative and other expenses, costs related to our exploration of strategic alternatives and real estate development expenses.

Total revenue. Total revenue increased by $59.6 million, or 14%, to $483.2 million, due primarily to higher rental rates for our domestic storage centers, the growth in the number of stores and higher occupancy in our European and domestic storage centers. See further discussion of storage center operations revenue in SEGMENT ANALYSIS.

Operating Expenses.


	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	%

Direct and indirect store operating expenses increased by $26.7 million, or 13% in 2005, compared to the prior year, primarily as a result of an increase in the number of storage centers and increases in personnel expenses, real estate taxes and utility expenses. See discussion of these expenses under SEGMENT 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.

General, administrative and other expenses. General and administrative expenses of $35.3 million in 2005 increased $2.4 million, or 7%, compared to the same period in 2004. The major components of these expenses are as follows:


	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	%

Personnel expenses in 2005 increased primarily as a result of additional positions in our financial reporting and accounting function and our information technology function. Professional fees—audit and consulting consist of costs of consultants assisting us with our efforts to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and external audit fees. 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 $2.4 million in 2005 in connection with plans to restructure the management of Shurgard Europe. We continue to evaluate our management structure in Europe and may develop additional cost reduction plans for which we may incur additional restructuring expenses through 2007. In 2004, we recorded exit costs of $2.3 million in connection with the closing of our containerized storage business.

Costs related to takeover proposal and exploration of strategic alternatives. In 2005, we recorded $13.8 million in advisory and legal fees related to the takeover proposal that Shurgard’s board of directors rejected in July 2005. In October 2005, our board of directors authorized the exploration of strategic alternatives and we entered into a merger agreement on March 6, 2006. Consequently, we may incur additional charges in this area.

Interest expense and amortization of participation rights discount. Interest expense of $105.6 million in 2005, increased $22.7 million, or 27%, compared to 2004. Interest expense in Europe increased $7.2 million for 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 $69.2 million to finance on-going development projects. The remaining increase was due primarily to increased borrowings on our line of credit and higher interest rates. At December 31, 2005, interest rates on our line of credit and term loan were 2.1 percentage points higher than at December 31, 2004. In 2005, we borrowed an additional $186.2 million under our revolving credit and term loan facilities to finance our acquisition of the remaining interest in Shurgard Europe, property acquisitions, development and redevelopment projects. In 2004, we recognized a $1.1 million expense relating to the amortization of an estimated participation rights liability. We retired the remaining participation rights in December 2004, and therefore recorded no related amortization in 2005.

Loss on derivatives, net. This represents loss as recognized for the changes in the fair market values of those derivative financial instruments that do not qualify for hedge accounting treatment under SFAS No. 133 and changes in the ineffective portions of those derivatives classified as cash flow hedges. The loss of $2.1 million in the year ended December 31, 2005, was primarily the net effect of the change in the value of euro currency call options that do not qualify for hedge accounting and the effect of hedge ineffectiveness of certain interest rate swaps.

Foreign exchange (loss) gain. The foreign exchange loss of $9.7 million in 2005 and a gain of $6.2 million in 2004 relate primarily to intercompany loans with our European subsidiaries that were marked to the period-end exchange rate. In connection with our acquisition of the remaining interest in Shurgard Europe, we reevaluated our intercompany debt with our European subsidiaries as of July 1, 2005, and determined that 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).

Minority interest. Most of our minority interest benefit results from our 80% partner’s interests in our European joint ventures, First Shurgard and Second Shurgard. The minority interest benefit for Shurgard Europe relates to our 12.77% minority partner’s interest which we acquired on June 30, 2005. The components of minority interest were as follows:


	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 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 insurance referral program) have generated taxable income in 2005. However these activities have a history of losses which have generated deferred tax assets. Because we have been unable to demonstrate recoverability of such deferred tax assets, we have recorded a valuation allowance offsetting them for each reporting period. As a result, no significant income tax expense or benefit is recorded in our consolidated statements of operations in relation to the REIT. In 2005, we incurred approximately $410,000 of federal and state income tax expense related to the transfer of ownership interests in certain properties from a taxable subsidiary to the REIT. The remaining tax expense relates to taxes on taxable income generated by certain European subsidiaries.

Discontinued operations. In 2005, we recognized $11.8 million in gain on the sale of five operating storage centers and we recognized $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. We reclassified the operating income of thirteen storage centers as income from discontinued operations including income from two properties that we still held for sale as 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.

Domestic 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.

Operating expenses. Operating expenses of $211.1 million increased $85.5 million, or 68%, compared to 2003, of which $74.5 million relate to our consolidation of Shurgard Europe in 2004. Domestic operating expenses increased $10.9 million, or 9%, compared to 2003 as a result of an increase in the number of storage centers and an increase in personnel expenses. See discussion of these expenses under SEGMENT ANALYSIS. Expenses associated with our containerized storage business, which ceased active operations in the first quarter of 2004 were $4.0 million in 2003 and nominal in 2004. In addition to the expenses identified under SEGMENT ANALYSIS, in 2004 we incurred approximately $3.9 million of costs on two operating-related litigation matters, including $2.75 million in settlement costs that we recognized in December 2004 when we reached a proposed settlement.

Real estate development expense. We had real estate development expenses of $5.0 million in 2004 and nominal activity in 2003. The majority of the real estate development activity in 2004 related to development projects in Europe which was not consolidated in 2003.

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.

Impairment and abandoned project expenses. Abandoned project expense relates to previously capitalized costs of development projects that have been assessed as unlikely to be completed. Such losses were $2.8 million in 2004 and related to projects in Europe where we scaled down on our developments in certain countries and where we abandoned an acquisition project in 2004. In 2003, we recognized losses of $1.2 million on abandoned projects in the United States. We also recorded impairment losses of $80,000 in 2004 and $12.7 million in 2003. 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 related to four properties associated with a joint venture in which we had participation rights. Also 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.

General, administrative and other expenses. General and administrative expenses of $33.0 million in 2004 increased $14.9 million, or 83%, compared to 2003. Our consolidation of Shurgard Europe accounted for $6.5 million of the increase. Of the remaining $8.4 million, $2.3 million is due to exit costs incurred in connection with the closing of our containerized storage business, and the remainder consists primarily of increased professional fees incurred in connection with accounting, and financial reporting, as well as compensation expenses resulting from newly created management positions. Consultant fees associated with efforts to comply with Section 404 of the Sarbanes-Oxley 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.

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 key operating data for Domestic Same Store at December 31, 2005.


	Number of Properties	(in millions) Total Storage Center Cost (1)		Total Net Rentable sq. ft. when all phases are complete	Average Occupancy						Average Annual Rent (per sq. ft) (2)
					Average Occupancy						Average Annual Rent (per sq. ft) (2)
					2005		2004		2003		2005		2004		2003
Same Store since 2005	34	$	180.3	2,321,000	83	%	79	%	65	%	$	12.62	$	11.98	$	11.13
Same Store since 2004 (3)	59		221.6	4,424,000	81	%	78	%	74	%		8.69		8.10		7.81
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	441	$	1,785.6	29,084,000	86	%	84	%	82	%	$	12.13	$	11.59	$	11.33


	(in thousands) Revenue						(in thousands) NOI (after leaseholds expenses)
	2005		2004		2003		2005		2004		2003
Same Store since 2005	$	26,232	$	23,582	$	12,052	$	14,735	$	12,845	$	4,866
Same Store since 2004 (3)		34,017		30,267		26,993		20,965		18,408		15,530
Same Store since 2003 or prior		268,753		255,379		246,591		177,143		170,278		164,121

Same Store total	$	329,002	$	309,228	$	285,636	$	212,843	$	201,531	$	184,517

(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.

The following table summarizes domestic Same Store operating performance:

Same Store Results (1)


	As defined in 2005								As defined in 2004
	2005			2004			% Change		2004			2003			% Change
	(dollars in thousands except average rent)
Segment revenue	$	329,002		$	309,228		6.4	%(a)	$	288,167		$	275,397		4.6	%(a)
Operating expense:
Personnel expenses		36,949			34,014		8.6	%(b)		31,495			28,436		10.8	%(b)
Real estate taxes		29,195			26,954		8.3	%(c)		23,830			24,218		(1.6	)%
Repairs and maintenance		9,432			9,295		1.5	%		8,334			7,967		4.6	%
Marketing expense		9,153			8,503		7.6	%(d)		7,550			8,506		(11.2	)%(d)
Utilities and phone expenses		11,646			10,793		7.9	%(e)		9,921			9,827		1.0	%
Cost of goods sold		4,058			3,661		10.8	%		3,411			2,970		14.8	%
Store admin and other expenses		11,569			10,363		11.6	%(f)		9,377			9,477		(1.1	)%

Direct operating and real estate tax expense		112,002			103,583		8.1	%		93,918			91,401		2.8	%

NOI		217,000			205,645		5.5	%		194,249			183,996		5.6	%
Leasehold expense		4,157			4,114		1.0	%		3,736			3,241		15.3	%

NOI after leasehold expense		212,843			201,531		5.6	%		190,513			180,755		5.4	%
Indirect operating expense (2)		16,989			14,975		13.4	%(g)		14,103			12,767		10.5	%(g)

NOI after indirect operating and leasehold expense	$	195,854		$	186,556		5.0	%	$	176,410		$	167,988		5.0	%

Avg. annual rent per sq.ft.	$	12.13		$	11.59		4.7	%	$	11.53		$	11.30		2.0	%
Avg. sq.ft. occupancy		86	%		84	%				85	%		83	%
Total net rentable sq.ft.		29,084,000			29,084,000					27,044,000			27,044,000
Number of properties as of December 31		441			441					411			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 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) The increase in revenue in 2005 over 2004 resulted primarily from higher rental rates and to a lesser extent to increases in occupancy. Increases in rental rates resulted from a sustained demand continuing through the fourth quarter of 2005 and increased focus on price management. Storage centers in Florida account for $4.5 million of the increase as this area has experienced exceptional demand since the fourth quarter of 2004. Also, over the past two years we have consistently provided additional training to our direct sales team and made changes in the management of our field teams that have resulted in improved closing ratios on inquiries made by customers. These initiatives contributed to increases in our Same Store revenue from 2003 to 2004 and from 2004 to 2005. The increase in revenue from 2003 to 2004 resulted from improved general economic conditions since the fourth quarter of 2003 as well as the above mentioned changes in our management of operations. Retail sales and truck rentals contributed approximately $820,000 and $1.2 million to our revenue increase from 2004 to 2005 and 2003 to 2004, respectively. In 2005, we also started seeing increases in Same Store revenue as a result of the redevelopments that we have completed in 2004 and 2005, see further discussion below.

(b) Personnel expenses have increased as a result of our initiatives to improve the quality of service and reduce employee turnover. These initiatives included higher salaries and incentive compensation for more

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

(c) The increase in real estate tax expense in 2005 was driven by higher property tax and assessments in certain regions of the country. Also, in 2004 we benefited from tax refunds as a result of successful tax appeals.

(d) Marketing expense increased in 2005 primarily due to the timing of phone book advertising expense. The marketing expense decrease in 2004 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) Utility expense increased as a result of rising electricity costs across the nation.

(f) Store administrative and other direct expenses increased primarily due to 19% rise in bank charges as a result of an 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 revenues through broader customer enrolment in our auto credit program, which automatically charges monthly rent to the customer’s credit card.

(g) Indirect operating expenses have been consistently higher in 2005 compared to 2004 as throughout 2004 we created new management positions in certain regions and new regional field sales and marketing positions that were in 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. In 2004 compared to 2003, the increase in marketing expenses was partially offset by decreases in direct marketing expenses at the store level.

In 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, 2005:

New Store Results (1)


	Acquisitions						Developments						Total New Stores
	2005			2004			2005			2004			2005			2004
	(dollars in thousands)
Segment revenue	$	11,306		$	986		$	12,126		$	6,024		$	23,432		$	7,010
Direct operating and real estate tax expense		4,255			280			7,290			5,479			11,545			5,759

NOI		7,051			706			4,836			545			11,887			1,251
Leasehold expense		—			—			379			53			379			53

NOI after leasehold expense		7,051			706			4,457			492			11,508			1,198
Indirect operating expense (2)		527			52			926			612			1,453			664

NOI after indirect operating and leasehold expense	$	6,524		$	654		$	3,531		$	(120	)	$	10,055		$	534

Avg. sq. ft. occupancy		86	%		91	%		68	%		51	%		76	%		55	%
No. of properties		17			7			26			23			43			30

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

New Store Results (1)


	Acquisitions						Developments						Total New Stores
	2004			2003			2004			2003			2004			2003
	(dollars in thousands)
Segment revenue	$	16,093		$	6,731		$	14,498		$	6,706		$	30,591		$	13,437
Direct operating and real estate tax expense		6,631			2,806			9,652			6,150			16,283			8,956

NOI		9,462			3,925			4,846			556			14,308			4,481
Leasehold expense		—			—			431			445			431			445

NOI after leasehold expense		9,462			3,925			4,415			111			13,877			4,036
Indirect operating expense (2)		632			262			1,052			603			1,684			865

NOI after indirect operating and leasehold expense	$	8,830		$	3,663		$	3,363		$	(492	)	$	12,193		$	3,171

Avg. sq. ft. occupancy		82	%		79	%		62	%		46	%		71	%		58	%
No. of properties		27			20			37			28			64			48

(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. 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.

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.

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 2003 to 2005:


	Number of Properties	(in millions) Total Storage Center Cost (1)		Total Net Rentable sq. ft. when all phases are complete	Average Occupancy						Average Annual Rent (per sq. ft) (2)
	Number of Properties	(in millions) Total Storage Center Cost (1)		Total Net Rentable sq. ft. when all phases are complete	2005		2004		2003		2005		2004		2003
Acquisitions in 2005	10	$	44.5	751,000	83	%	—		—		$	8.77	$	—	$	—
Acquisitions in 2004	7		52.8	504,000	88	%	91	%	—			15.07		9.89		—
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 4 to our consolidated financial statements), the equivalent of $89.5 million. These 19 storage centers had occupancy of 83% at December 31, 2005.

We purchased one storage center from a California developer on December 31, 2003 for $6.3 million. Its occupancy was 94% at December 31, 2005.

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 2003 to 2005:


	Number of Properties	(in millions) Total Storage Center Cost (1)		Total Net Rentable sq. ft. when all phases are complete	Average Occupancy						Average Annual Rent (per sq. ft) (2)
	Number of Properties	(in millions) Total Storage Center Cost (1)		Total Net Rentable sq. ft. when all phases are complete	2005		2004		2003		2005		2004		2003
Developments in 2005	3	$	10.8	156,000	43	%	—		—		$	10.38	$	—	$	—
Developments in 2004	9		47.2	506,000	66	%	40	%	—			12.71		9.22		—
Developments in 2003	14		76.1	842,000	71	%	54	%	28	%		12.36		10.51		7.55

Development total	26	$	134.1	1,504,000	68	%	51	%	28	%	$	12.42	$	10.28	$	7.55


	(in thousands) Revenue						(in thousands) NOI (after leasehold expenses)
	2005		2004		2003		2005			2004			2003
Developments in 2005	$	300	$	—	$	—	$	(320	)	$	—		$	—
Developments in 2004		3,969		1,000		—		1,368			(381	)		—
Developments in 2003		7,857		5,024		961		3,409			873			(862	)

Development total	$	12,126	$	6,024	$	961	$	4,457		$	492		$	(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. On average our developments have been renting at 3.2% per month. 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 2005, we opened one new storage center in California and one in Oregon in the third quarter and one storage center in Florida in the fourth quarter. The Oregon storage center is a redevelopment at a site where we had torn down an older facility in October 2004. The California storage center is under an operating lease. Those storage centers had an average occupancy of 54% at December 31, 2005, after being opened an average of four months.

In 2004, we opened nine new storage centers: four properties located one each in California, in South Carolina, Michigan and New Jersey in the first quarter; one property in Washington in the second quarter; one each in Pennsylvania and California in the third quarter; and one each in Texas and Colorado in the fourth quarter. The 2004 developments were open an average of 19 months and had an average occupancy of 72% at December 31, 2005. Most stores are renting up as anticipated except one in Michigan and one in North Carolina that are renting up more slowly than expected. The slow rent up in Michigan is primarily due to the economic slowdown in that state.

The 2003 developments were open an average of 29 months and had an average occupancy rate of 76% at December 31, 2005. Eight of the 2003 developments are renting up at a slower pace than average including four in the Chicago and Michigan areas due to higher competition in both states and the slowdown in the Michigan economy. In response to the slow rent up we have adjusted rental rates in these states to sustain occupancy growth.

Domestic developments and redevelopments under construction

In addition to the operating properties discussed in domestic developments, we have properties under construction or pending construction and various redevelopment projects on existing properties. The following table summarizes the properties under construction as of December 31, 2005:


	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

(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, 2005, is $9.7 million in costs related to ongoing capital improvements. 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, 2005, we had two major storage centers that were undergoing 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, 2005 and 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, 2005 annual comparison for European Same Store


	Number of Properties	2005 Average Occupancy		Occupancy at December 31, 2005		Percent change compared to prior year
	Number of Properties	2005 Average Occupancy		Occupancy at December 31, 2005		Segment Revenue		NOI (after leasehold expenses)		Occupancy		Rate
Belgium	17	76	%	78	%	4.4	%	3.9	%	3.1	%	(0.9	)%(a)
Netherlands	22	72	%	78	%	18.0	%	26.2	%	14.3	%	(1.8	)%(a)
France	23	83	%	84	%	12.4	%	21.3	%	10.5	%	1.1	%
Sweden	20	81	%	87	%	14.3	%	26.8	%	13.2	%	1.8	%
Denmark	4	85	%	87	%	28.8	%	52.2	%	26.9	%	(0.1	)%(a)
United Kingdom	10	77	%	81	%	8.0	%	12.5	%	10.6	%	(4.2	)%(a)

Europe Totals	96	78	%	82	%	12.5	%	19.7	%	9.9	%	(0.2	)%

(a)

Our rates decreased in those countries where competition is highest because we adjusted our rates in order to improve occupancy.

The following table summarized European Same Store operating performance:

Same Store Results (1)


	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

(1)

Amounts have been translated from local currencies at a 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.

(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 storage centers based on number of months in operation during the 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.

(b) Personnel 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.

(c) In 2004 we incurred significant repair and maintenance expenses on our security systems in Belgium and the Netherlands that explain both the decrease of repair and maintenance costs compared to 2005 and the increase compared to 2003.

(d) On an annual 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.

(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.

The following tables present reconciliations of the European Same Store results translated 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 20 to our consolidated financial statements.


	2004
	Same Store (1)		Exchange Difference			Total (2)
	(in thousands)
Segment revenue	$	90,485	$	463		$	90,948
Direct operating and real estate tax expense		41,031		110			41,141

Consolidated NOI		49,454		353			49,807
Leasehold expense		1,883		9			1,892

NOI after leasehold expense		47,571		344			47,915
Indirect operating expense		11,998		27			12,025

Consolidated NOI after indirect and leasehold expense	$	35,573	$	317		$	35,890


	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 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.

European New Store

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:

European New Store Results (1)


	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

(a)

The occupancy of this storage center has decreased since it was acquired due to partial closure for redevelopment.

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

European New Store Results (1)


	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

(1)

Amounts for both years have been translated from local currencies at a constant exchange rate using the average exchange rates of 2005 for the 2005 to 2004 comparison and the 2004 exchange rates 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.

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 tables present reconciliations of the European 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.


	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	)

(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.

European Developments

The following table summarizes performance of European developments and acquisition opened through 2005 by country during 2005, 2004 and 2003:


	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	$	—

Opened in 2003
Belgium	1	$	3.3	$	4.6	45,000	75.0	%	51.8	%	4.9	%	$	15.01	$	15.31	$	2.66
Netherlands	7		37.6		40.1	351,000	59.0	%	30.3	%	2.1	%		19.40		21.59		5.01
Germany	5		33.2		33.6	268,000	49.7	%	25.8	%	2.6	%		14.84		15.80		3.80
France	7		41.4		44.9	372,000	56.1	%	25.1	%	3.1	%		20.33		21.58		9.01
Sweden	2		10.8		13.7	94,000	67.6	%	36.2	%	7.8	%		18.02		17.63		7.86
Denmark	1		7.4		10.0	49,000	93.4	%	53.1	%	9.5	%		23.13		22.97		11.70
United Kingdom	3		30.8		39.9	152,000	59.9	%	34.4	%	4.2	%		38.42		41.38		22.23

Total opened in 2003	26	$	164.5	$	186.8	1,331,000	58.8	%	30.4	%	3.5	%	$	21.00	$	22.58	$	8.43

New Store Total	53	$	349.0	$	372.8	2,646,000	39.8	%	23.5	%	3.5	%	$	21.16	$	20.75	$	8.43


Same store:
Opened in 2002
Belgium	2	$	7.0	$	10.0	101,000	53.8	%	46.8	%	33.7	%	$	12.52	$	13.04	$	13.17
Netherlands	7		38.4		54.6	368,000	62.7	%	49.1	%	29.7	%		19.80		20.49		20.24
France	7		40.9		58.8	378,000	74.3	%	59.5	%	35.0	%		20.04		20.02		20.63
Sweden	3		17.0		24.7	151,000	81.1	%	66.5	%	40.8	%		21.64		20.38		18.64
Denmark	2		13.8		19.9	102,000	85.8	%	60.6	%	25.1	%		22.08		22.25		20.94
United Kingdom	3		32.1		48.6	166,000	75.4	%	61.2	%	27.2	%		37.10		41.46		43.62

Total opened in 2002	24	$	149.2	$	216.6	1,266,000	71.2	%	56.6	%	32.2	%	$	22.32	$	22.94	$	22.18

Opened in 2001 and before
Belgium	15	$	67.5	$	100.5	894,000	78.9	%	77.1	%	76.0	%	$	16.30	$	16.38	$	16.26
Netherlands	15		73.4		110.5	821,000	76.7	%	69.5	%	63.0	%		20.90		21.14		21.05
France	16		87.1		131.7	855,000	87.4	%	82.3	%	74.2	%		25.67		25.08		25.12
Sweden	17		86.8		135.6	974,000	80.8	%	72.2	%	66.1	%		20.44		20.22		20.08
Denmark	2		12.7		18.5	107,000	85.1	%	73.7	%	63.1	%		21.88		21.78		21.83
United Kingdom	7		64.3		96.8	371,000	77.3	%	72.9	%	69.6	%		34.92		35.58		34.55

Total opened before 2002	72	$	391.8	$	593.6	4,022,000	80.7	%	75.0	%	69.6	%	$	22.15	$	22.07	$	21.88

Same Store Total	96	$	541.0	$	810.2	5,288,000	78.4	%	70.7	%	60.8	%	$	22.19	$	22.24	$	21.92


	(in thousands) Segment Revenue (3)						(in thousands) NOI (3) (after leasehold expense)
	For the year ended December 31,						For the year ended December 31,
New store:	2005		2004		2003		2005			2004			2003
Opened in 2005
Belgium	$	1	$	—	$	—	$	(68	)	$	—		$	—
Netherlands		1		—		—		(205	)		—			—
Germany		61		—		—		(626	)		—			—
France		147		—		—		(833	)		—			—
Denmark		183		—		—		(240	)		—			—
United Kingdom		268		—		—		(454	)		—			—

Total opened in 2005	$	661	$	—	$	—	$	(2,426	)	$	—		$	—

Opened in 2004
Germany	$	1,279	$	181	$	—	$	(380	)	$	(867	)	$	—
France		1,310		99		—		(394	)		(608	)		—
Denmark		1,212		240		—		187			(257	)		—
United Kingdom		2,152		719		—		693			74			—

Total opened in 2004	$	5,953	$	1,239	$	—	$	106		$	(1,658	)	$	—

Opened in 2003
Belgium	$	552	$	366	$	22	$	264		$	106		$	(90	)
Netherlands		4,233		2,234		116		1,189			(385	)		(775	)
Germany		2,107		1,055		56		6			(929	)		(900	)
France		4,857		2,392		270		1,568			(814	)		(752	)
Sweden		1,324		694		109		517			(106	)		(302	)
Denmark		1,167		659		112		591			225			(218	)
United Kingdom		3,844		2,276		268		1,844			428			(206	)

Total opened in 2003	$	18,084	$	9,676	$	953	$	5,979		$	(1,475	)	$	(3,243	)

New Store Total	$	24,698	$	10,915	$	953	$	3,659		$	(3,133	)	$	(3,243	)


Same store:
Opened in 2002
Belgium	$	740	$	624	$	451	$	206		$	83		$	(150	)
Netherlands		4,856		3,605		2,236		2,289			1,253			14
France		6,543		5,166		3,105		2,863			1,624			(28	)
Sweden		2,944		2,231		1,278		1,745			983			155
Denmark		2,117		1,492		591		1,076			552			(208	)
United Kingdom		5,099		4,462		2,182		2,754			2,237			329

Total opened in 2002	$	22,299	$	17,580	$	9,843	$	10,933		$	6,732		$	112

Opened in 2001 and before
Belgium	$	12,718	$	12,272	$	11,772	$	8,059		$	7,871		$	7,439
Netherlands		13,904		12,287		11,111		7,536			6,532			5,995
France		21,550		19,823		17,747		12,477			11,025			9,581
Sweden		18,081		16,166		14,576		10,202			8,436			7,597
Denmark		2,226		1,881		1,536		1,081			865			625
United Kingdom		11,041		10,476		9,780		6,640			6,110			6,139

Total opened before 2002	$	79,520	$	72,905	$	66,522	$	45,995		$	40,839		$	37,376

Same Store Total	$	101,819	$	90,485	$	76,365	$	56,928		$	47,571		$	37,488

(1)

Development cost of these projects is reported in U.S. dollars translated at the December 31, 2005 exchange rate of $1.18 to the euro. Operating results (see note (3) below) are reported at the average exchange rate for the year 2005, which was $1.19 to the euro. To the extent these exchange rates differ, we believe this data 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 may provide a more meaningful measure of investment yield. The cost of the storage centers exclude the excess cost of approximately $293 million over carrying cost we paid for ownership interests acquired in Shurgard Europe in 2003 and 2005.

(2)

Total storage center cost includes all cost capitalized to storage centers since the store was acquired or developed. The costs are reported in U.S. dollars translated at the December 31, 2005 exchange rate of $1.18 to the euro. Operating results (see note (3) below) are reported at the average exchange rate for 2005 which was $1.19 to the euro. To the extent these exchange rates differ, 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 may provide a more meaningful measure of investment yield.

(3)

The amounts have been translated from local currencies at a constant exchange rate using the average exchange rate for 2005.

(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. The average annual rent is lower in the first year of operations as the store has not been opened a full year.

European Developments Under Construction

The following table summarizes European development projects in progress at December 31, 2005.


	First Shurgard and Second Shurgard
	Number of Projects	Estimated Completed Cost of Projects (1)		Total Cost to Date as of December 31, 2005
		(dollars in millions)
Construction in Progress
France	1	$	4.5	$	2.5
Sweden	1		3.7		2.5
United Kingdom	1		5.9		5.3

	3		14.1		10.3

Land purchased pending construction
France	1	$	10.2	$	6.1
United Kingdom	1		7.1		3.0

	2		17.3		9.1

Total	5	$	31.4	$	19.4

(1)

The actual completed cost of 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. See Risk Factors in Item 1A (Risk Factors) of this report.

FUNDS FROM OPERATIONS

We use Funds From Operations (FFO) in addition to net earnings to report our operating results. We use the definition of FFO adopted by the National Association of Real Estate Investment Trusts (NAREIT) as interpreted by the Securities and Exchange Commission. Accordingly, FFO is defined as net income (computed in accordance with GAAP), excluding gains (losses) on dispositions of interests in depreciated operating properties and real estate depreciation and amortization expenses. FFO includes our share of FFO of unconsolidated real estate ventures and discontinued operations and excludes minority interests in real estate depreciation and amortization expenses. We believe FFO is a meaningful disclosure as a supplement to net earnings because net earnings assumes that the values of real estate assets diminish predictably over time as reflected through depreciation and amortization expenses. We believe that the values of real estate assets fluctuate due to market conditions. Our calculation of FFO may not be comparable to similarly titled measures reported by other companies because not all companies calculate FFO in the same manner. FFO is not a liquidity measure and should not be considered as an alternative to cash flows or indicative of cash available for distribution. It also should not be considered an alternative to net earnings, as determined in accordance with U.S. GAAP, as an indication of the Company’s financial performance.

The following table sets forth the calculation of FFO in accordance with the NAREIT definition:


	2005			2004			2003
	(in thousands)
Net income	$	11,659		$	45,295		$	37,638
Depreciation and amortization (1)		81,174			77,131			52,715
Depreciation and amortization from unconsolidated joint ventures and subsidiaries		—			—			12,150
Gain on sale of operating properties (2)		(12,299	)		(16,226	)		(2,238	)
Cumulative effect of change in accounting principle		—			2,339			—

FFO		80,534			108,539			100,265
Preferred distribution and other (3)		(12,066	)		(12,193	)		(12,082	)

FFO attributable to common shareholders	$	68,468		$	96,346		$	88,183

(1)

Excludes depreciation related to non-real estate assets and minority interests in depreciation and amortization and includes depreciation and amortization of discontinued operations.

(2)

We have included in FFO gains and losses of land and non-real estate operating assets of approximately $550,000, $130,000 and $250,000 in 2005, 2004 and 2003, respectively. Additionally, we have included in FFO income from discontinued operations of $850,000, $2.9 million and $3.4 million for years ended December 31, 2005, 2004 and 2003, respectively.

(3)

Net of impact of antidilutive securities.

FFO attributable to common shareholders for 2005 decreased $27.9 million compared to FFO for 2004, which had increased $8.2 million over 2003. FFO in 2005 benefited from a 26% increase in income from operations over 2004. However, this increase was more than offset by costs incurred in 2005 associated with our previously announced exploration of strategic alternatives totaling $13.8 million; fluctuations in foreign currency exchange rates between 2005 and 2004 resulting in a net negative change of almost $16 million and increases in interest expense of $22.7 million due to higher borrowings and interest rates.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Our primary cash requirements are for payments of operating expenses, debt service, dividends on common and preferred stock, expansions and improvements to existing properties and acquisitions and developments of new properties. These requirements have been funded by operating cash flows and from our lines of credit. We believe that our liquidity and capital resources are adequate for our near-term and longer-term requirements. We had cash and cash equivalents of $39.8 million at December 31, 2005, and $50.3 million at December 31, 2004. As of December 31, 2005, we had $116.5 million available under our domestic revolving line of credit.

As a REIT, our ability to retain cash flow for reinvestment is restricted. In order for us to qualify as a REIT for federal income tax purposes, we are required, among other things, to make distributions to our shareholders of at least 90% of our REIT taxable income. For the years ended December 31, 2005, 2004 and 2003, the Company distributed $113.3 million, $112.8 million, and $99.3 million, respectively, to its shareholders. We expect to use our cash flow from operating activities for distributions to shareholders and we intend to invest amounts accumulated for these distributions in short-term investments.

Up until 2004, we relied primarily on the public debt and equity markets for our long-term financing. Because we did not file a fully compliant Annual Report on Form 10-K for 2004 until October 14, 2005, we are not eligible to access the public capital markets to raise equity or debt using a short-form registration statement on Form S-3 until November 2006. We have traditionally used proceeds from borrowings under our credit facilities to fund our property development and acquisition requirements. Although, we have subsequently repaid these borrowings with proceeds from public debt and equity offerings, we currently anticipate utilizing our credit

facilities, which mature in February of 2008. We have also used these proceeds to repay maturing corporate or mortgage debt and for other corporate purposes.

We believe that the development joint venture structure provides several advantages to Shurgard Europe at this stage in its growth. It allows Shurgard Europe to expand the Shurgard brand with less capital and, therefore, represents a more efficient use of its capital. Even if Shurgard Europe does not ultimately acquire the properties developed by the joint venture, the development and management fees provide it with a stable source of income. Currently, we employ a joint venture development strategy that is funded approximately 42% through equity and the remainder through debt financing. We have a 20% ownership interest in the related joint ventures. We raise the balance needed through credit facilities collateralized by the properties of the ventures.

The following table summarizes certain information regarding our liquidity and capital resources:

Short-term and long-term liquidity


	As of December 31,
	2005			2004			2003
	(dollars in millions)
Total market capitalization (1)	$	4,664		$	3,880		$	2,881
Debt to total market capitalization (1) (2)		40	%		43	%		35	%
Weighted average interest rate (3)		5.77	%		5.25	%		5.93	%

(1)

Total market capitalization is based on the closing market price at each period end, of the Class A Common Stock, Series C Preferred Stock and the Series D Preferred Stock multiplied by their respective total number of outstanding shares plus total debt.

(2)

Debt includes notes payable, lines of credit and participation rights. The 2005 and 2004 debt includes our European subsidiaries’ debt which results in a higher debt to total market capitalization ratio. In 2003, our unconsolidated European subsidiaries had third party debt totaling $443.2 million.

(3)

Represents weighted average interest rate on our outstanding lines of credit and notes payable.

In 2005, we entered into a three-year unsecured domestic credit agreement, which includes a revolving credit facility with a group of banks to borrow up to $350 million and a $350 million term loan facility that matures in February 2008. These new facilities replaced previously existing facilities that matured in February 2005. We borrowed the entire available $350 million on the term loan facility. The revolving credit facility can be extended for one year at our option for a fee. The credit facility and the term loan require interest payments at LIBOR plus a margin based on the ratings assigned to our senior unsecured long-term debt securities. As of December 31, 2005, our margin was 0.90% on the revolving credit facility and 1.10% on the term loan, which reflect an 0.20% increase in our margins effective since July 2005 following downgrades on credit ratings by Moody’s Investor Service, Inc. (Moody’s), Standard & Poor’s Rating Services (S&P) and Fitch, Inc. (Fitch). Subsequent to the closing of the new facility, Moody’s announced a downgrade of our senior unsecured long-term debt to Baa3 and in July 2005, S&P and Fitch announced downgrades to BBB-. As of December 31, 2005, the term loan had no additional funds available, and availability under the revolving credit facility was $116.5 million. We can use borrowings under the revolving credit facility for various purposes, including project acquisition and development costs, repayment of debt and other corporate needs.

First Shurgard and Second Shurgard have senior credit agreements denominated in euros to borrow, in aggregate, up to €272.5 million ($322.7 million as of December 31, 2005). As of December 31, 2005, the available amount under those credit facilities was in aggregate €115.5 million ($136.8 million). Our draws under the First Shurgard and Second Shurgard credit facilities are determined on a development project basis and can be limited if the completion of projects is not timely or if we have certain cost overruns. Borrowings under both the First Shurgard and Second Shurgard credit facilities were such that they could only be used to fund property development costs of First Shurgard and Second Shurgard. In January 2006, we amended Second Shurgard’s credit agreement such as to allow for borrowings for up to €21.9 million ($25.9 million as of December 31, 2005)

to be used for acquisition of existing self-storage properties including properties under capital leases. We expect that internally generated cash flows within Shurgard Europe will be sufficient to fund Shurgard Europe’s on-going equity commitments to both First Shurgard and Second Shurgard.

We are continually evaluating sources of capital and believe they are available to meet our liquidity needs without necessitating sales of properties. In addition to our cash and cash equivalents and availability under our credit facility, we have other sources of capital. We may sell operating properties if market conditions warrant in 2006. We may also contribute properties to joint ventures in exchange for interests in and cash distributions from those ventures. We may also sell peripheral and other land parcels. In addition, most of our domestic operating properties are unencumbered by mortgage debt.

Our contractual cash obligations and construction cost commitments are summarized as follows at December 31, 2005:


	2006		2007			2008		2009		2010		Thereafter		Total
	(in thousands)
Debt:
Scheduled principal payments	$	5,359	$	10,224		$	5,392	$	3,040	$	3,170	$	8,170	$	35,355
Balloon Payments		3,867		54,086			808,650		34,936		7,461		908,706		1,817,706
Interest (1)		102,786		105,070			58,993		50,348		49,972		19,008		386,177
Capital lease obligations		618		630			642		654		604		33,784		36,932
Operating leases		9,509		8,512			7,265		6,584		5,200		143,852		180,922
Construction commitments
Domestic		29,055		—			—		—		—		—		29,055
Shurgard Europe		576		231			231		203		274		—		1,515
First Shurgard		6,604		47			55		64		—		—		6,770
Second Shurgard		14,540		(241	)		24		29		5		—		14,357
Commitments to lend		4,129		58			—		—		—		—		4,187
Commitment to purchase minority partners interests		2,000		—			—		—		—		—		2,000
Advisory contract commitments		11,350		—			—		—		—		—		11,350

Total	$	190,393	$	178,617		$	881,252	$	95,858	$	66,686	$	1,113,520	$	2,526,326

(1)

Projected interest is based on annual debt maturities and weighted-average interest rates on outstanding debt at the end of each year as well as a LIBOR and EURIBOR at December 31, 2005, of 4.39% and 2.40%, respectively, along with a forward yield curve for following years and the applicable margin to each debt.

On March 6, 2006, we entered into the Merger Agreement with Public Storage. On consummation of the proposed merger, each outstanding share of our common stock will be converted into the right to receive 0.82 of a fully paid and non-assessable share of Public Storage common stock. We also expect to redeem each series of our outstanding preferred stock in accordance with its terms for a combined aggregate of approximately $136.3 million, payable by Public Storage. Public Storage will assume approximately $1.8 billion of our debt.

In connection with our exploration of strategic alternatives and our proposed merger with Public Storage, we entered into engagement letters with our financial advisors. Under these agreements we expensed $12 million in combined minimum fee obligations of which $11.4 million remained unpaid included in other liabilities. As a result of entering into the Merger Agreement with Public Storage, we will incur $12 million of additional financial advisory fees plus out of pocket expenses in 2006. Of the total $23.4 million financial advisory fees payable in 2006, approximately $10.5 million are due during the first quarter of 2006; the balance of $12.9 million will become payable upon consummation of the proposed merger. In addition, related to our

exploration of strategic alternatives we incurred $1.8 million in legal fees and expense reimbursements in 2005 and we expect to incur an additional $5.0 million of such fees and expenses in 2006 in connection with our proposed merger with Public Storage.

The following table summarizes our cash flows activity:


	2005			2004			2003
	(in thousands)
Net cash provided by operating activities	$	116,152		$	122,741		$	123,698
Net cash used in investing activities		(282,186	)		(187,186	)		(408,119	)
Net cash provided by financing activities		159,740			99,367			283,123
Effect of exchange rate changes on cash and cash equivalents		(4,205	)		3,685			—

(Decrease) increase in cash and cash equivalents		(10,499	)		38,607			(1,298	)
Cash and cash equivalents at beginning of period		50,277			11,670			12,968

Cash and cash equivalents at end of period	$	39,778		$	50,277		$	11,670

The decrease in cash provided by operating activities in 2005 was attributable primarily to the timing of certain payments. Net cash used by operating activities in Europe amounted to approximately $6.0 million.

Investing

Cash used in investing activities in 2005 included:

•

$66.9 million invested in domestic new development, redevelopments and enhancements of existing storage centers;

•

$100.0 million for development and improvements of new European storage centers;

•

$35.5 million expended for acquisition of domestic storage centers; and

•

$97.8 million for the acquisition of additional interests in Shurgard Europe.

These expenditures were partially offset by $26.3 million of proceeds from the sales of interests in operating storage centers and sale of other real estate assets.

Our developments in Europe were conducted through First Shurgard and Second Shurgard which were financed primarily by borrowings on their credit facilities and by capital contributions by us and our joint venture partners. In June 2005, we acquired the remaining 12.77% ownership interests in Shurgard Europe, which became a wholly-owned subsidiary.

Cash used in investing activities in 2004 included:

•

$62.8 million invested in domestic new development, redevelopments and enhancements of existing storage centers;

•

$31.1 million expended for acquisition of domestic storage centers;

•

$121.4 million for development and improvements of new European storage centers;

•

$14.6 million for acquisitions of European operating storage centers; and

•

$5.3 million for the acquisition of additional interests in Shurgard Europe.

In July 2004, we purchased the remaining shares of Recom, through which we hold part of our ownership interest in Shurgard Europe for approximately $5.3 million cash and the forgiveness of a note of approximately $2.3 million. As a result of this transaction, we increased our ownership interest in Shurgard Europe from

85.47% to 87.23%. In August 2004, we acquired a single property storage facility in the United Kingdom, through a wholly-owned consolidated European subsidiary. We financed this $14.6 million acquisition with proceeds from our domestic line of credit.

Cash used in investing activities in 2003 included:

•

$309.1 million for our acquisition of the majority interest in Shurgard Europe;

•

$84.1 million for domestic new development, redevelopments and enhancements of existing storage centers; and

•

$13.4 million for improvements to our existing domestic storage centers.

Financing

Cash provided by financing activities in 2005 included:

•

$32.0 million from capital contributions received primarily from our partner in First Shurgard and Second Shurgard;

•

$250.0 million proceeds from the new three-year term loan facility;

•

$69.2 million proceeds from First Shurgard and Second Shurgard’s credit facilities; and

•

$9.5 million proceeds from new domestic mortgage notes.

These cash proceeds were partially offset by the following payments:

•

$113.3 million distributions paid on Common and Preferred stock;

•

$63.8 million of net repayments on our domestic revolving line of credit;

•

$15.0 million of payment on interest swaps that matured in February 2005; and

•

$5.5 million repayment on domestic mortgage notes payable.

Cash provided by financing activities in 2004 included:

•

$29.4 million from capital contributions received primarily from partners in First Shurgard and Second Shurgard;

•

$384.0 million proceeds from euro denominated bonds issued in October 2004;

•

$100.0 million proceeds from new one-year term loan facility obtained in April 2004;

•

$34.1 million of net additional draws on our domestic revolving line of credit;

•

$72.0 million proceeds from new domestic mortgage notes; and

•

$101.5 million proceeds from First Shurgard and Second Shurgard’s credit facilities.

Cash provided by financing activities in 2003 included:

•

$178.9 million of net proceeds from the sale of 5.75 million shares of common stock;

•

$197.9 million of proceeds from our issuance of senior unsecured notes; and

•

$39.1 million proceeds from new domestic mortgage notes.

In October 2004, Shurgard Europe completed a €325 million secured bond offering, the proceeds of which it used to repay its credit facility. The bonds are collateralized by 101 storage centers wholly-owned by Shurgard Europe that had a net book value of $579 million as of December 31, 2004 and contain various financial

covenants. The notes are due on October 1, 2011. The notes are structured in three tranches, with a weighted average interest rate of 0.51% over EURIBOR. Shurgard Europe has entered into interest rate and currency swap agreements in order to hedge its interest rate exposure and to fix the interest rate through maturity at 4.23%. Additionally, on October 15, 2004, Shurgard Europe obtained a €30 million senior credit facility available in the event of a liquidity shortfall through the legal maturity of the bonds.

Using borrowing under our line of credit, we repaid our 7.5% senior unsecured notes upon their maturity in April 2004 and retired the remaining participation rights liability in December 2004.

These cash proceeds were partially offset by the following payments:

•

$99.3 million distributions paid on our Common and Preferred stock; and

•

$35.8 million repayment of mortgage notes payable.

On March 19, 2003, we issued $200 million (net proceeds of $197.9 million) in 5.875% senior unsecured notes due in 2013. The notes require semi-annual interest payments due March 15 and September 15. We used the proceeds from the notes to repay credit facility borrowings that were used to fund the acquisition of additional interests in Shurgard Europe.

On July 11, 2003, we raised approximately $178.9 million of net proceeds through the sale of 5.75 million shares of our common stock. We used approximately $101.6 million of the proceeds to fund the acquisition of an additional 19.7% ownership interest in Shurgard Europe. We used additional proceeds to repay a portion of the indebtedness under our line of credit.

OFF BALANCE SHEET TRANSACTIONS

We had no off balance sheet arrangements as of December 31, 2005.

Item 7A—Qualitative and Quantitative Disclosures about Market Risk

We are exposed to changes in interest rates primarily from our floating rate debt arrangements. We have implemented a policy to protect against interest rate and foreign currency exchange risk. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows. To achieve these objectives we issue long-term notes payable, primarily at fixed interest rates, and may selectively enter into derivative financial instruments, such as interest rate lock agreements, interest rate swaps and caps in order to mitigate our interest rate risk on existing or future borrowings. 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 lent or invested by us.

We have foreign currency exposures related to our investment in the construction, acquisition, and operation of storage centers in countries outside the United States to the extent such activities are financed with financial instruments or equity denominated in non-functional currencies. Since all foreign debt is denominated in the corresponding functional currency, our currency exposure is limited to our equity investment in those countries. Countries in which we have exposure to foreign currency fluctuations include Belgium, France, the Netherlands, Sweden, Denmark, Germany and the United Kingdom. Our net investment in these foreign operations at December 31, 2005, was in excess of $425 million, most of which we consider long term and our 2005 net loss from our foreign operations was approximately $30.0 million.

The table below summarizes annual debt maturities and weighted-average interest rates on outstanding debt at the end of each year and fair values required to evaluate our expected cash-flows under debt agreements and our sensitivity to interest rate. The weighted average interest rate was determined based on a LIBOR of 4.39% and 2.42% at December 31, 2005 and 2004, respectively, a EURIBOR of 2.40% and 2.13% at December 31, 2005 and 2004, respectively, a forward yield curve for following years and the applicable margin to each debt:

As of December 31, 2005 (in thousands):


Expected maturity date	2006			2007			2008			2009			2010			Thereafter			Total			Fair Value
Fixed rate debt (1)	$	4,710		$	53,173		$	21,476		$	2,900		$	3,084		$	531,987		$	617,330		$	648,848
Average interest rate		6.71	%		6.61	%		6.60	%		6.60	%		6.61	%		5.88	%

Variable rate LIBOR debt (2)	$	2,384		$	4,209		$	650,631		$	140		$	7,547		$	—		$	664,911		$	664,911
Average interest rate		5.67	%		5.83	%		6.94	%		6.98	%		7.05	%		—

Variable rate EURIBOR debt (3)	$	2,132		$	6,928		$	141,935		$	34,936		$	—		$	384,889		$	570,820		$	570,820
Average interest rate		3.58	%		4.28	%		4.23	%		3.76	%		3.85	%		3.94	%

Interest rate swaps
Swap on EURIBOR	$	(101	)	$	—		$	(3,075	)	$	(3,541	)	$	—		$	(14,913	)	$	(21,630	)	$	(21,630	)

As of December 31, 2004 (in thousands):


Expected maturity date	2005			2006			2007			2008			2009			Thereafter			Total			Fair Value
Fixed rate debt	$	2,964		$	7,180		$	53,257		$	21,570		$	2,990		$	531,549		$	619,510		$	667,678
Average interest rate		6.74	%		6.72	%		6.64	%		6.63	%		6.63	%		6.63	%
Variable rate LIBOR debt	$	471,946		$	—		$	585		$	—		$	—		$	—		$	472,531		$	472,531
Average interest rate		4.25	%		6.40	%		6.72	%		—			—			—
Variable rate EURIBOR debt	$	—		$	—		$	12,977		$	118,967		$	5,820		$	443,299		$	581,063		$	581,063
Average interest rate		3.28	%		3.74	%		4.11	%		4.06	%		4.29	%		0.00	%
Interest rate swaps
Swaps on LIBOR	$	(14,890	)	$	—		$	—		$	—		$	—		$	—		$	(14,890	)	$	(14,890	)
Swap on EURIBOR	$	—		$	(634	)	$	—		$	(3,436	)	$	(2,808	)	$	(12,689	)	$	(19,567	)	$	(19,567	)

(1)

The fair value of our fixed rate debt decreased by $19 million, from $668 million at December 31, 2004, due primarily to an increase in market interest rates.

(2)

Variable rate LIBOR debt increased by $192 million, from $473 million at December 31, 2004. In 2005, we entered into a three-year unsecured credit agreement with a group of banks to borrow up to $350 million and a term loan facility of $350 million. Both have a maturity date of February 2008. We recognized expenses of approximately $500,000 relating to arrangement fees associated with these changes. Downgrades made in 2005 to our senior unsecured debt rating have resulted in an increase of 20 basis points in our interest rate.

(3)

Variable rate EURIBOR debt decreased by $10 million, from $581 million at December 31, 2004, as a result of the appreciation of the U.S. dollar against the euro, which more than offset incremental borrowings of €37.5 million. First Shurgard and Second Shurgard have senor credit agreements denominated in euros to borrow, in aggregate, up to €272.5 million ($322.7 million as of December 31, 2005). As of December 31, 2005, the available amount under those credit facilities was in aggregate €115.5 million ($136.8 million). Our draws under the First Shurgard and Second Shurgard credit facilities are determined on a development project basis.

At December 31, 2005, we were party to pay-fixed, receive-variable interest rate swaps designated as cash flow hedges that effectively fix the EURIBOR rate on portions of our expected variable rate debt through 2011. The notional amounts, the weighted average pay rates and the terms of these agreements are summarized as follows (in millions):


	2006			2007			2008			2009			2010			Thereafter
Notional amounts	$	648.0		$	671.6		$	586.5		$	467.0		$	384.9		$	384.9
Weighted average interest rate		4.91	%		4.99	%		4.83	%		4.54	%		4.23	%		4.23	%

At December 31, 2005, we had pay-fixed, receive variable-rate swaps with a notional amount of $531.9 million.

Based on our outstanding variable-rate LIBOR and EURIBOR debt and interest rate swaps at December 31, 2005, a hypothetical increase in these interest rates of 1% would cause our annual interest costs to increase by $6.6 million. All of our EURIBOR debt and notional amounts of interest rate swaps are denominated in euros.

Item 8—Financial Statements and Supplementary Data

Our consolidated financial statements for the year ended December 31, 2005, are set forth beginning on page F-1.

Quarterly results of operations are set forth in Note 21 to our consolidated financial statements that are included beginning at page F-1.

Item 9—Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A—Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 as amended (Exchange Act) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including the chief executive officer and the chief financial officer, as appropriate, to allow timely decisions regarding required financial disclosure.

Our management, including the chief executive officer and the chief financial officer, with the participation of our Disclosure Committee, carried out an assessment of the effectiveness of our disclosure controls and procedures as of December 31, 2005, pursuant to Exchange Act Rule 13a-15(b). Based on that assessment, the chief executive officer and the chief financial officer concluded that our disclosure controls and procedures were effective.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP.

Our management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2005, using the criteria described in Internal Control—Integrated Framework issued by the

Committee of Sponsoring Organizations of the Treadway Commission (or the COSO criteria). Based on its assessment, management has concluded, as of December 31, 2005, we maintained effective internal control over financial reporting.

PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005, as stated in their report, which appears herein.

Changes in Internal Control Over Financial Reporting

We reported in our Management’s Report in Internal Control over Financial Reporting filed on October 13, 2005, that we did not maintain effective internal control over financial reporting as of December 31, 2004, because of the existence of material weaknesses related to our: (1) ineffective control environment; (2) insufficient complement of personnel with an appropriate level of accounting knowledge, experience and training; (3) ineffective period-end financial accounting and reporting processes and controls; (4) ineffective controls over the reconciliation of significant accounts; (5) ineffective controls over the consolidation process; (6) ineffective controls over the authorization and review of manual journal entries and (7) ineffective controls to ensure the validity of certain capital additions.

During 2005, in connection with our remediation plan, we: (i) developed new controls to remediate the material weaknesses identified; (ii) obtained sufficient evidence of the design and operating effectiveness of the new controls and (iii) determined the new controls have been in effect for a sufficient period of time to permit the assessment of their design and operating effectiveness.

Specifically, our remediation efforts completed during the fourth quarter of 2005 were as follows:

•

We hired a Finance Controller in the United States. This person had worked as a contractor with Shurgard for two years previously.

•

We filled four accounting positions. Two of the new hires had prior experience with Shurgard.

•

We provided thorough documentation of accounting conclusions, following a strict review and approval process to ensure compliance with GAAP.

Additionally, during the quarter ended December 31, 2005, we determined the remediated controls discussed above and those previously discussed under Item 9A “Recent Developments Relating to Our Internal Control Over Financial Reporting” in our Annual Report on Form 10-K/A filed on October 13, 2005, were effectively designed and have demonstrated effective operation for a sufficient period of time to enable us to conclude the material weaknesses identified as of December 31, 2004 have been remediated.

Other than the changes described above, there were no other changes in our internal control over financial reporting during the quarter ended December 31, 2005 that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

Item 9B—Other Information

None.

PART III

Item 10—Directors and Executive Officers of the Registrant

Our Board of Directors

Our board of directors has nine directors and the following standing committees: (1) Audit; (2) Finance; which is a subcommittee of the Audit Committee; (3) Compensation; (4) Nominating and Corporate Governance; and (5) Technology. The membership of each committee and the function of each of the committees are described below.

Name of Director

Audit

Finance

Compensation

Nominating
and Corporate
Governance

Technology

David K. Grant

Charles K. Barbo

Anna Karin Andrews

Howard P. Behar

Jerry L. Calhoun

Richard P. Fox

Raymond A. Johnson

W. Thomas Porter

Gary E. Pruitt

Chair

David K. Grant (age 52) was appointed to our board of directors effective December 3, 2004. Mr. Grant joined Shurgard Incorporated in November 1985 as Director of Real Estate Investment and Development. In 1993, he became the Company’s Executive Vice President. In January 1996, Mr. Grant became President of Shurgard Europe and moved to Brussels, Belgium. During this time, he also continued to serve as an Executive Vice President of Shurgard Incorporated. In August 2003 he returned to the United States at which time he was promoted to the role of President and Chief Operating Officer of Shurgard Storage Centers. He also served as Interim Chief Financial Officer from January 2004 until September 2004. In May 2005, Mr. Grant was named as Chief Executive Officer (CEO) designate by the Board of Directors and as of January 1, 2006, holds the positions of both President and CEO. Mr. Grant has a Bachelor of Arts degree in Business Administration and a Bachelor of Science degree in Accounting, both from Washington State University.

Charles K. Barbo (age 64) has been involved as a principal in the real estate investment industry since 1969. Mr. Barbo is one of the co-founders of Shurgard Incorporated, which was organized in 1972 to provide property management services for self-storage facilities and other real estate and commercial ventures. Prior to the merger of our former management company, Shurgard Incorporated, with and into Shurgard in 1995, he served as Chairman of the Board and President of Shurgard Incorporated. On the closing of the merger with Shurgard Incorporated, he was named Chairman of the Board, President, and Chief Executive Officer of Shurgard. At the end of 2005, Mr. Barbo retired from day-to-day operations as Chief Executive Officer. He is currently involved in strategic planning issues, providing support of the Company’s mission and values and continues as Chairman of the Board. Mr. Barbo is a graduate of the Owner/President Management Program of Harvard Business School and has a Bachelor of Arts degree in history from the University of Washington. He is an alumnus of the Young Presidents’ Organization.

Anna Karin “Annika” Andrews (age 35) has served on the board of directors since August 2002. Ms. Andrews is Vice President, Business Development with Northwest Hospital in Seattle, Washington. Prior to her current position, Ms. Andrews served as Chief Information Officer from 1999 to 2001 and served in various other technology and project management capacities with Northwest Hospital. Ms. Andrews received her B.A. in Economics from Princeton University.

Howard P. Behar (age 61) was appointed to the board of directors in December 2002 and began his term in January 2003. Mr. Behar has been a director of Starbucks Coffee Company (NASDAQ: SBUX), a retail coffee company, since January 1996. Mr. Behar served as President of Starbucks Coffee International, Inc. from June 1994 until his retirement in late 1999. He rejoined Starbucks in September 2001 as President, North American Operations and retired from that position in late 2002. Mr. Behar also served as the Executive Vice President, Sales and Operations from February 1993 to June 1994 and held various other senior operations and management positions with that company beginning in 1989. Mr. Behar has been a director of Gap, Inc. (NYSE: GPS) since 2003, where he is a member of the Compensation and Management Development Committee and the Governance, Nominating and Social Responsibility Committee.

Jerry L. Calhoun (age 62) was appointed to our board of directors on August 11, 2005. Mr. Calhoun is the Vice President, Human Resources for Boeing’s Commercial Airplanes Group and has more than 38 years of human resources and labor relations experience. Mr. Calhoun has worked for The Boeing Company (NYSE:BA) for a total of 35 years, interrupted only by service as a Deputy Assistant Secretary of Defense from 1981-83 and Chairman of the Federal Labor Relations Authority (FLRA) from 1985-89. Mr. Calhoun received his B.A. from Seattle University and his MBA from the University of Washington and also attended Arizona State University School of Law. Mr. Calhoun serves as a Director of the Labor Relations Research Assoc., Boston, Mass., the Intiman Theater, Seattle, Washington, and the Council on Labor Law Equality, Washington DC.

Richard P. Fox (age 58) was appointed to the board of directors in January 2004. Since October 2001, Mr. Fox has provided consulting services to entrepreneurs and the financial services industry. From April 2000 to September 2001, he was an officer of CyberSafe, an Information Technology security company, serving as President and Chief Operating Officer. Mr. Fox spent 28 years with Ernst & Young, last serving as managing partner of the Seattle office. He has a BBA from Ohio University and an MBA from the Fuqua School of Business, Duke University, and is a Certified Public Accountant in Washington State. He also serves as Treasurer and is a member of the Board of Trustees of the Seattle Foundation, on the Board of Visitors of the Fuqua School of Business, Duke University, and on the board of directors of Premera Blue Cross, a managed healthcare company; aQuantive (NASDAQ: AQNT), an Internet marketing company; Flow International (NASDAQ: FLOW), a machine tool manufacturer; and QuatRx Pharmaceutical, which has filed an S-1 for an Initial Public Offering (IPO).

Raymond A. Johnson (age 64) has served as a director since September 1997. He retired from Nordstrom, Inc. (NYSE: JWN) as its Co-Chairman and a member of its board of directors in 1996. In June 2002, Mr. Johnson returned to Nordstrom, Inc. to head that company’s catalog and Internet division. He is currently a principal in RAJ LLC, a consulting firm whose primary client is Nordstrom, Inc. Prior to his retirement from Nordstrom, Inc., Mr. Johnson was its Co-President and held a variety of other executive and managerial positions at Nordstrom, Inc. in Washington and California, dating back to 1969. He attended Western Washington University.

W. Thomas Porter (age 72) has served as a director since March 1999. He retired as an Executive Vice President and member of the senior management committee of Seafirst Bank in March 1999, after 15 years in numerous leadership positions with Rainier Bank, Security Pacific Bank and Seafirst Bank (a unit of Bank of America). Prior to his career in banking, for 15 years he was with Touche Ross & Co. in New York and Seattle and was National Partner for Professional Development and Planning. He also was the National Partner in charge of Executive Financial Counseling. He was a Professor of Management Control at the University of Washington for nine years and for one year at the North Europe Management Institute in Oslo, Norway. Mr. Porter has a Bachelor of Science degree from Rutgers University, a Master of Business Administration degree from the University of Washington and a Doctor of Philosophy degree from Columbia University. Mr. Porter is a director of Coldstream Holdings, Inc., a registered investment company.

Gary E. Pruitt (age 56) was appointed to the board of directors effective February 3, 2005. Mr. Pruitt is the chief executive officer of Univar N.V., a chemical distribution company based in Bellevue, Washington with

distribution centers in the United States, Canada and Europe. Mr. Pruitt joined Univar in 1978 and held a variety of senior management positions until his appointment as chairman and chief executive officer in 2002. Mr. Pruitt was a certified public accountant prior to joining Univar. Mr. Pruitt has a Bachelor’s degree from Gonzaga University.

In light of the adoption of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) and related regulations issued by the Securities and Exchange Commission (SEC) and corporate governance standards adopted by the NYSE, the board of directors has examined the functions of the various committees, adopted new or revised charters as appropriate, reviewed our corporate governance guidelines and our code of business conduct for employees and management and directed revisions and enhancements to those documents where necessary. In addition, the board of directors has reviewed the qualifications of our audit committee members and has determined that W. Thomas Porter and Richard P. Fox each meet the definition of an “audit committee financial expert” under the SEC rules.

Our board of directors is committed to conducting its business using the highest principles and practices of corporate governance and stewardship. Our board of directors has codified those principles into a formally adopted set of corporate governance guidelines and has adopted a code of ethics that applies to our Chief Executive Officer, chief financial officer, chief accounting officer, controller and persons performing similar functions. Our corporate governance guidelines, codes of business conduct and ethics, director independence criteria, committee charters and other documents setting forth our corporate governance practices can be accessed in the “Corporate Governance” section of our web site at http://investorrelations.shurgard.com or by writing to our Investor Relations department at our address. We intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding any amendment to or waiver of the code of ethics with respect to the persons identified above by posting such information on our web site.

Our Executive Officers

The following table sets forth certain information regarding our executive officers as of December 31, 2005:


Name	Age	Positions and Offices with Shurgard
David K. Grant	52	President and Chief Executive Officer
Harrell L. Beck	49	Executive Vice President, Chief Investment Officer and Treasurer
Devasis Ghose	52	Executive Vice President and Chief Financial Officer
Jane A. Orenstein	50	Vice President, General Counsel and Corporate Secretary
Steven K. Tyler	53	Senior Vice President, Retail Services

Biographical information regarding Mr. Grant is included above under Our Board of Directors.

Harrell L. Beck joined Shurgard Incorporated in April 1986 and has held a number of positions since joining Shurgard, including President, Senior Vice President, Chief Financial Officer, Treasurer and Eastern Regional Vice President. Mr. Beck was appointed Executive Vice President and Chief Investment Officer in February 2004. Mr. Beck also served as a director from July 1993 through December 2004. Prior to joining Shurgard Incorporated, Mr. Beck was a manager with Touche Ross & Co., a public accounting firm, where he was employed for approximately six years, during which time he provided services primarily to clients in the real estate and aerospace industries. Mr. Beck has a Bachelor of Arts degree in Business Administration from Washington State University.

Devasis Ghose joined Shurgard in June 2004 and was appointed Executive Vice President and Chief Financial Officer in September 2004. Prior to joining Shurgard, Mr. Ghose served approximately one year as a financial service partner with Tatum Partners. For more than 16 years between 1986 and 2003, Mr. Ghose, was part of the leadership group of Health Care Property Investors, a public REIT listed on the New York Stock Exchange (NYSE: HCP). At HCP, Mr. Ghose served in a number of senior financial capacities, including as

Senior Vice President, Finance and Treasurer and as Vice President and Controller. Prior to HCP, he was with Price Waterhouse in the United States and KPMG in the United Kingdom. Mr. Ghose has a Bachelor of Science degree in Physics from the University of Delhi and received his MBA from the University of California, Los Angeles. In addition to being a Certified Public Accountant, he is a Fellow of the Institute of Chartered Accountants in England and Wales.

Jane A. Orenstein joined Shurgard in 1999 and served as an Assistant General Counsel until she was named Vice President, General Counsel and Corporate Secretary in December 2004. Prior to working at Shurgard, Ms. Orenstein served four years as Assistant General Counsel for Smart & Final Inc. (NYSE: SMF), a retail store operator based in Commerce, California. Ms. Orenstein has over twenty years experience as a corporate and government lawyer. Ms. Orenstein received her law degree from the University of Southern California Law Center and her Bachelor of Arts degree in history from the University of California, Los Angeles.

Steven K. Tyler has served as Senior Vice President of Retail Services since August 2003, overseeing marketing, sales center and human resources activities. He also interfaces with field leadership regarding business plan implementation. He was Senior Vice President in charge of sales, marketing and domestic operations from November 2000 to August 2003. Mr. Tyler joined Shurgard Incorporated in May of 1996 as Regional Vice President of Midwest and East Coast markets. Prior to joining Shurgard, he was a Regional Operations Manager with Victoria’s Secret (a division of Limited Brands Inc.) and Casual Corner (a division of U.S. Shoe Corp.) and a District Operating Manager with Gap, Inc. and Sears (a division of Sears Holdings Corp.). He has a Bachelor of Arts degree in Business Administration from the University of Minnesota-Duluth.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires Shurgard’s officers and directors, and persons who own more than 10% of a registered class of Shurgard’s equity securities, to file reports of ownership and changes in ownership with the SEC. Officers, directors and greater than 10% beneficial owners are required by SEC regulations to furnish Shurgard with copies of all Section 16(a) forms they file.

Based solely on its review of the copies of such forms received by it or on written representations from certain reporting persons required for those persons, Shurgard believes that during the 2005 fiscal year, all filing requirements applicable to its officers and directors were substantially complied with by such persons, with the exception of one late Form 4 filing for Mr. Barbo, which was filed late due to a clerical error.

Item 11—Executive Compensation

The following table sets forth the compensation that we paid for services rendered during the fiscal years ended December 31, 2005, 2004 and 2003, to Mr. Barbo, our chief executive officer until the end of 2005, and to our four other most highly compensated executive officers at the end of 2005:


	YEAR	ANNUAL COMPENSATION						LONG-TERM COMPENSATION AWARDS			ALL OTHER COMPEN- SATION ($)
NAME AND PRINCIPAL POSITION	YEAR	SALARY(a) ($)		BONUS(b) ($)		OTHER ANNUAL COMPEN- SATION ($)		RESTRICTED STOCK AWARDS(c) ($)		SHARES UNDERLYING OPTIONS/ STOCK OPTION AWARDS (#)	ALL OTHER COMPEN- SATION ($)
Charles K. Barbo Chairman of the Board and former Chief Executive Officer	2005 2004 2003	350,000 363,462 350,000		91,875 102,813 136,140		12,613 -0- -0-	(f)	391,274 417,264 382,279	(k)	39,643 75,330 76,091	28,378 4,436 4,590	(p)

David K. Grant President and Chief Executive Officer	2005 2004 2003	425,000 363,462 325,000		111,562 132,519 86,250	(d)	-0- -0- 1,308	(g)	423,707 365,127 2,467,086	(l)	42,926 65,913 77,228	44,470 18,455 38,196	(q) (r)

Harrell L. Beck Executive Vice President, Chief Investment Officer and Treasurer	2005 2004 2003	265,000 259,615 220,000		94,738 89,376 86,300		3,802 1,196 -0-	(h) (i)	153,335 156,495 143,594	(m)	15,535 28,249 28,586	29,905 26,674 57,135	(s) (t)

Devasis Ghose Executive Vice President and Chief Financial Officer	2005 2004 2003	265,000 144,231 -0-	(e)	134,738 55,168 -0-	(e)	116,425 -0- -0-	(j)	139,370 186,273 -0-	(n)	14,123 37,024 -0-	14,078 769 -0-	(u)

Steven K. Tyler Senior Vice President, Operations	2005 2004 2003	245,000 244,039 235,000		57,808 85,000 93,300		-0- -0- -0-		83,853 119,970 120,132	(o)	8,499 21,657 23,910	13,740 14,547 12,465	(v)

(a)

Our payroll is processed biweekly and paid on alternating Fridays. In most years, this results in 26 pay periods; however, in 2004, there were 27 pay periods. Accordingly, actual salaries paid to all of our employees in 2004 were 1/26th or approximately 3.9% higher than their base salaries.

(b)

Represents bonus awards earned during the identified year pursuant to the terms of incentive compensation, discretionary bonus and profit-sharing arrangements. The board of directors approved these amounts in March 2006. The 2005 bonus amount listed for Mr. Ghose also includes $40,000 paid to him pursuant to the Shurgard Sarbanes-Oxley Section 404 Compliance Bonus Program.

(c)

The listed dollar values of restricted shares shown in the table for the 2005 grants are based on the per share closing price of our common stock on the date of grant (December 12, 2005) of $57.71. The listed dollar values of restricted shares shown in the table for the 2004 grants are based on the per share closing price of our common stock on the date of grant (December 3, 2004) of $42.77. The listed dollar values of restricted shares shown in the table for the 2003 grants are based on the per share closing price of our common stock on the date of grant (December 17, 2003) of $37.60, except with respect to Mr. Grant, who also received a grant of 2,090 shares on July 24, 2003, on which date the per share closing price of our common stock was $33.30.

(d)

Includes a bonus payment of $48,000 paid to Mr. Grant for services rendered in 2003 but reported as $60,000 in our proxy statements related to our 2004 and 2005 annual shareholders’ meetings based on estimates available at that time.

(e)

Mr. Ghose joined Shurgard in June 2004. Accordingly, these amounts represent salary and prorated bonus paid to Mr. Ghose for approximately seven months of service.

(f)

Represents a tax reimbursement payment.

(g)

Represents a tax reimbursement payment made in 2006 related to foreign allowances paid to him in 2003 and valued at less than $10,000.

(h)

Represents a tax reimbursement payment.

(i)

Represents a tax reimbursement payment that was paid in December 2004 but inadvertently omitted from the amounts reported in our proxy statement related to our 2005 annual shareholders’ meeting.

(j)

Includes $64,295 paid for housing and travel and a tax reimbursement payment of $52,130.

(k)

As of December 31, 2005, Mr. Barbo held 67,034 restricted shares with an aggregate 2005 fiscal year end value of $3,801,498 based on the per share closing price of our common stock on that date of $56.71.

(l)

As of December 31, 2005, Mr. Grant held 81,732 restricted shares with an aggregate 2005 fiscal year end value of $4,635,022 based on the per share closing price of our common stock on that date of $56.71.

(m)

As of December 31, 2005, Mr. Beck held 23,427 restricted shares with an aggregate 2005 fiscal year end value of $1,328,545 based on the per share closing price of our common stock on that date of $56.71.

(n)

As of December 31, 2005, Mr. Ghose held 6,940 restricted shares with an aggregate 2005 fiscal year end value of $393,567 based on the per share closing price of our common stock on that date of $56.71.

(o)

As of December 31, 2005, Mr. Tyler held 18,453 restricted shares with an aggregate 2005 fiscal year end value of $1,046,470 based on the per share closing price of our common stock on that date of $56.71.

(p)

Represents $4,378 contributed by us under our Employee Retirement Savings Profit-Sharing Plan (the ESOP) and a gift valued at $24,000 in recognition of Mr. Barbo’s 30 years of service to Shurgard.

(q)

Represents $4,378 contributed by us under the ESOP, $5,008 of employer-matching contributions under our Employee Retirement Savings 401(k) Plan (the 401(k) Plan), a gift valued at up to $25,000 in recognition of Mr. Grant’s 20 years of service to Shurgard and a payment of approximately $10,083 relating to interests in cash distributions from certain partnerships.

(r)

Includes a payment of $2,222 relating to interests in cash distributions from certain partnerships earned in 2004 but paid after the printing of the proxy statement related to our 2005 annual meeting of shareholders and therefore not previously reported.

(s)

Represents $4,378 contributed by us under the ESOP, $4,614 of employer-matching contributions under the 401(k) Plan, $7,301 of payments toward annual insurance premiums for an executive disability plan, a payment of $6,351 towards a gift in recognition of Mr. Beck’s 15 years of service to Shurgard and a payment of $7,260 relating to interests in cash distributions from certain partnerships.

(t)

Includes an initial payment of $3,325 towards Mr. Beck’s 15-year service gift and a payment of $1,600 relating to interests in cash distributions from certain partnerships earned in 2004 but paid after the printing of the proxy statement related to our 2005 annual meeting of shareholders and therefore not previously reported.

(u)

Represents $4,378 contributed by us under the ESOP, $4,615 of employer-matching contributions under the 401(k) Plan and $5,084 of payments toward annual insurance premiums for an executive disability plan.

(v)

Represents $4,378 contributed by us under the ESOP, $4,614 of employer-matching contributions under the 401(k) Plan and $4,747 of payments toward annual insurance premiums for an executive disability plan.

Option Grants in Last Fiscal Year

The following table sets forth certain information regarding options to purchase shares of common stock that we granted during the fiscal year ended December 31, 2005 to our executive officers for whom we are reporting compensation information:


NAME	NUMBER OF SHARES UNDERLYING OPTIONS GRANTED (1)	PERCENT OF TOTAL OPTIONS GRANTED TO EMPLOYEES IN FISCAL YEAR (2)		EXERCISE PRICE ($/SHARE) (3)	EXPIRATION DATE	GRANT DATE PRESENT VALUE ($) (4)
Charles K. Barbo	39,643	9.1	%	57.71	12/12/2015	365,905
David K. Grant	42,926	9.8	%	57.71	12/12/2015	396,207
Harrell L. Beck	15,535	3.6	%	57.71	12/12/2015	143,388
Devasis Ghose	14,123	3.2	%	57.71	12/12/2015	130,355
Steven K. Tyler	8,499	1.9	%	57.71	12/12/2015	78,446

SHURGARD STORAGE CENTERS INC 10-K