Public Storage (PSA) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Shurgard Storage fourth quarter earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to Dev Ghose, Please go ahead, sir.

Good morning and good afternoon and good evening to those people joining the call from Europe. Welcome to the Shurgard Storage Centers' earnings conference call for 2004. I am Dev Ghose, I am CFO for the company. With me are Chuck Barbo, chief executive officer; Dave Grant, president and chief operating officer; Jane Orenstein, general counsel; Steve Tyler, SVP, retail operations; Stuart Black [ph] , director of capital markets; Harrell Beck, chief investment officer, is traveling and won't be able to participate in the call. I also have on the call Bruno Roqueplo, president of our European operations; and Steven De Tollenaere, chief financial officer for Shurgard Europe.

Before we get going, I'd like to read you the forward-looking statement. The statements made on this call concerning the beliefs, expectations, intentions, future events, future performance, business prospects, and business strategy and earnings guidance for 2005 and beyond constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act and are based on several assumptions. If any of these assumptions are not satisfied or prove to be incorrect, actual results could differ materially from those indicated in the forward-looking statements.

A discussion of additional risks and other factors that could affect these forward-looking statements and Shurgard's financial performance, please see Shurgard's annual report on Form 10-K for the year ended December 31, 2004, filed with the SEC on March 29, 2005 and Form 10-Q for the quarter ended March 31, 2004, filed with the Securities and Exchange Commission on July 12, 2004, Form 10-Q for the quarter ended June 30, 2004, filed with the SEC on August 13, 2004, and finally Form 10-Q for the quarter ended September 30, 2004, filed with the SEC on November 9, 2004.

At this time I would like to turn the call over to Dave Grant. Dave?

Thanks, Dev. Hi, everyone, thanks for joining the call. Since this is 2004, it really represents my first year as president and COO for the company, I thought it would be a good time to step back and go through some of the highlights for the year and how it relates to some of the strategic things we are attempting to do as a company. Before I turn it back over to Dev to go through some of the specific numbers for the year and for the fourth quarter. After that, I'll come back on and talk through some of our forecast and views about how we see 2005.

As many of you remember, I returned from running our European operation approximately midway through 2003, and spent a great deal of the rest of the year with the executive team here looking closely at all aspects of our business, partly to get me reacquainted with the business in the U.S. but also just to statistically evaluate what our opportunities were here as well as in Europe. And that led to us developing a fairly comprehensive long-range business plan that focused clearly on two objectives. One was to maximize the potential opportunity we had and have begun to achieve in Europe and the expansion of that business, and the other was to focus on capitalizing a lot of the value and potential that we saw in our existing portfolio in the U.S. complementing the more modest growth that we expected to achieve here. To do that, we felt we had to reposition the company in many ways to streamline our focus and allow us to put maximum attention to achieving those goals.

So as some of you recall, we immediately set about in 2004 to shed those parts of our activities we didn't feel were producing to the levels of our main opportunities. We exited the Storage to Go containerized business in the first quarter of the year; we dropped our Preferred Partners service line business; we also started to focus on some of our relationships that we felt we could improve on the efficiencies of our interactions; we bought out our Chase portfolio properties near the end of this year; we also took over the management of all of our Florida properties at the beginning of this year, which will give us a much better presence and market knowledge on the ground in an important state to us.

We also started to put a lot of attention to the U.S. as far as focusing on our portfolio, and that started with realigning our entire field operations in the U.S. where we put much more general business authority in the hands of our regional operators, which include both the real estate activities as well as the operating activities. This is what's led us to, I think, accomplish much of the momentum in our U.S. portfolio this year. As we mentioned in last year's beginning call that we would start to actively sell off non-strategic properties. We have been able to take advantage of a good market -- sold off six stores last year and already have two that have sold this year and more that we will prune as long as market conditions are favorable to do that.

We've also actively started to redevelop properties we feel are under-utilized in the U.S. As you remember, many of our properties go back 20 and 30 years, and when you look at a property that sits on five or eight or 10 acres of ground with single-story individual buildings, it definitely presents some opportunities for more intensive utilization. That process started in earnest across the country last year, and we have over 30 projects that are in various stages of outright redevelopment or late stages of permitting. And we also continue to further simplify our ownership interests in Europe, and now we have just the two partners -- ourselves and Fremont -- also the ability to fully consolidate those into our financials now. It gives us a much better look at what the overall company looks like, going forward.

And obviously on the finance side, we've had several good successes in positioning ourselves, the development in Europe now with our second -- or what we call "second Shurgard joint venture," gives us a development capacity there well through into mid-to-late 2006. We greatly reduced our exposure to floating-rate debt by refinancing our line €325 million bond offering we did there, and then, most recently, the renegotiation of our U.S. line, better terms and flexibility and even some ability to work in Europe with that line.

And obviously building the support structure and the infrastructure that we needed the company to operate at a global platform was a major emphasis. Quite candidly, it was a bigger emphasis than I ever would have imagined it would need to be, as you all know, with the year we've gone through. We've made great progress in that area, and I'll let Dev talk more specifically about it in a few minutes.

But with all of these positioning activities going on, and real estate moves, I'm very pleased with the overall core operating results we've had both in the U.S. and Europe this year. I think as most of you remember from our first forecast for the year, we had anticipated that the U.S. stores would be in the neighborhood of 3.5% to 5% growth in our same-store NOI, and they clearly came out -- and this is before indirects and leaseholds -- and we achieved the higher end of that. Even after indirects, we were still 5% up on total NOI for the year, which was a very pleasing result from our standpoint. We've seen, most notably, a positive trend is that the revenue gain, quarter-on-quarter, has continued to pick up through the year, and the fourth quarter turned out to be our strongest gain, quarter-over-quarter, with 5.3% gain.

Similarly, in Europe, we had projected that we'd be in the 7% to 9% growth for our same-store pool. They also, before indirects, were at the higher end of that with NOI being up over 9%. And after indirects, obviously, it was even higher than that, up over 15%. So the decentralized approach that we consider to be a key part of our entrepreneurial strategies running this company, clearly paid off. Nobody would doubt or question some of the distractions we had to deal with this year in rebuilding some of our support infrastructure, and the fact that our teams were able to execute so well in the field is a real testimony to that.

We're very pleased with the progress overall we have made in moving strategically to get us into this position, and I'm going to turn it over to Dev right now and let him take you through some more of the details for the year and the quarter. Dev?

Thanks, Dave. I just want to quickly cover the results. Net income for the year increased by $7.6 million, $45.2 million for 2004, representing a gain of 26%. Net income per share increased by $0.72 per share. The primary changes -- firstly, the positives -- gains on sales of properties represented $16.2 million; domestic operating income increases were $9.3 million; reduced impairment losses constituted about $12.6 million; higher foreign exchange gains, $2.1 million; lower losses and derivatives, $2.8 million. These increases were offset by lower amortization income on the [inaudible] of $4.4 million; losses from Shurgard Europe including depreciation on the stepped-up basis, $16 million; exit costs on our Storage to Go business, $0.3 million; higher stock compensation, $2.3 million; highest interest expense, $3.1 million; and, lastly, higher G&A, $3.7 million for a total of $7.6 million.

Looking at FFO, FFO per share was $2.07 per share versus $2.15 per share in 2003. Again, the positives were the lower payment costs, the higher foreign exchange gains, and the higher domestic NOI that I discussed earlier offset by the increased share of Europe's losses, increased Sarbanes-Oxley compliance costs, and our litigation settlement costs.

Working through some of the line items, revenues increased by $128 million of which domestic revenues were $26 million higher than last year, and of this $26 million, $13 million represented same-store growth, $17 million was new-store growth, and then disposed and discontinued operations deducted from that to the tune of $4 million.

In-store revenues increased by 4.6% with occupancy increasing 2.4% to 5%, and rates increasing by 2.1%. New-store occupancy increased to 70% from 58%, with 16 additional stores in this category. The consolidation of Europe resulted in an additional $102 million of storage center revenue. This, by the way, represents a significant increase from Europe's 2003 revenue of $70 million. Europe's same-store revenue increased 9.5%, occupancy increasing 7.7% of 75% and rates increasing about 2%.

Finally, new-store occupancy increased to 36% from 14%, 13 new stores in this category.

Operating expenses represented an increase of $85 million of which $9 million came from the U.S. and $76 million from Europe. Of this $9 million, plus the net expenses, represented about $4 million, and legal and settlement costs that I discussed earlier of about $4 million.

In Europe, operating expenses of $76 million was a $19 million increase, which represented across-the-board increases relating to the bigger portfolio. Total operating expenses as a function of revenues declined in the U.S. from 39% to 36% and in Europe from 58% to 56%.

Other noteworthy items -- we had a significant impairment expense in 2003 and hardly any in 2004. General and administrative expenses increased in the U.S. from $18 million last year to $26 million. Of this increase, Sarbanes-Oxley compliance costs were on the order of $5.4 million, and the other big increase in G&A was closure of the Storage to Go business that brought $2.3 million of cost to the G&A pool.

If you look at G&A, our G&A is $32 million -- $26 million here and $6 million in Europe. That, applicable to Sarbanes-Oxley compliance and audit costs, represents about $9 million of the $32 million amount, and that's the area that we'll be focused on down the road to reduce as we build infrastructure in the finance accounting organization, and I'll talk about that more in a bit.

Interest expense increased about $4 million domestically, of which $3 million represented amounts of higher borrowings, and the balance represented higher rates. Next we had about $6 million of foreign exchange gain. Last year the comparable number was $4 million, which is embedded within the investment in Shurgard Europe numbers. You don't actually see it moving out.

Then, lastly, the minority interest represented a benefit of $16 million in 2004. Approximately $13 million of this relates to the company's investment in first and second Shurgard, where 80% of the losses are borne by outside shareholders and $5 million related to our minority partners interest in Shurgard Europe. These losses are offset by gains of $2 million representing minority interests relating to our domestic joint ventures.

Our forecast and most recent forecast that we put out was $2.13 per share to $2.16 per share in FFO. Looking at the low end of $2.13, I'd like to quickly map what happened to bring it to $2.07 actual [inaudible]. Foreign exchange gains represented about $0.12 a share of positive. These were offset by the probable Eagle settlement, litigation settlement of about $0.06 per share. Higher G&A relating to Sarbanes-Oxley and audit costs as well as severance and relocations costs, about $0.04 per share. Higher interest and loan costs of $0.02 per share, net deal and real estate costs relating to development of $0.05 per share bring it down to about $2.07 per share.

I'd like to talk a little bit about the state of the finance and accounting function. As you know, we ended 2003 and began 2004 with significant challenges. We changed the chief financial officer and controller for the company and began to absorb Europe through full consolidation. This was a big challenge for us at a time when we were also gearing up new people and new processes, and undoubtedly we've had teething [ph] problems. We've worked through most of them. There are still some challenging areas within the technical components of accounting -- things like OCI, where we had to really go back and redo things that we did in the first quarter. As you know, we restated the first quarter 10-Q relating to OCI and derivatives in the second quarter. And most recently, yesterday, we filed AKK [ph] relating to restatements of OCI the first, second, and third quarters relating to minority interest in joint ventures. This does not affect net income or FFO, but we are mindful of these, and we are building people and process to make sure that we can transcend these errors.

We have had several new people that have joined the group to add to the DNA of the company. In the last year, we have had -- I joined the company in the middle of the year; had a new corporate controller who joined us in October, a new vice president of financial reporting joined us in January, a new director of internal audit, new director of tax, and a new director of capital markets. Most of these people have had significant public company and many have had significant real estate investment trust experience. We feel good about the team that we've assembled. The average tenure has been about four months, but we are ready to take on the burden of running the international company.

That's all I had in my prepared remarks.

Okay, Dev, thanks. Maybe we can touch a little bit further on fourth quarter and leading into the forecast for next year. As we mentioned, on the U.S. side, we continued to see a gain on the revenue improvement that was our strongest quarter for the year. That was dented, to some degree, by higher expenses than our average run rate. For the most part, that is more periodic blips and allocations that -- or lumpiness -- that happens from one quarter to the next. In the indirect areas, though, where we've also had some increase, some of that increase will carry over into next year, even though some pieces come and go, the increase in the amount of salaries, some of which Dev has referred to, does find its way into part of that area that we'll expect to have some elevation, going forward.

When you look at U.S. results, so far, in the first quarter we continue to see a trend of year-over-year improvement on revenues, and I can tell you from a categorization, it's very broad-based. We have actually no markets at this time that have actually shown a backwards erosion. We have a few of them, like Texas, Illinois, and Tennessee that are more in a stable position year-over-year. The remainder of the balance of the markets that we operate in are actually on the increased side. The most active -- or highest amount of increase we're experiencing is in Florida, California, and the Carolinas. We are continuing to see pricing power. We continue to use discounts judiciously. We have not had a material change in that. That's still in the 20% of transactions range. Again, that is very much property-specific. It's not a U.S. kind of an approach.

But I will say that occupancy is still contributing to the game but not as much as in previous years. It's more a component of rate that is driving what we're currently seeing. So our forecast is relatively optimistic for continuation through the year. We have forecast in the neighborhood of a 3% to 4% NOI after indirects, and what tempers, a little bit, our expectation there is again that we expect to see expenses stay very much managed and in line, but there will be some uplift in some of our indirects, as I mentioned before.

Look at Europe, Europe also continued to show good, solid revenue gains through the year. The fourth quarter was coming in at about 7% uplift. We did make a tactical change this year in Europe. We talked about in the fourth quarter of '03, we had consciously cut back a fair amount on our marketing expenses in many of the countries there, and we found that left us in a worse position entering the beginning of the year than we had expected, and that strategy was changed this year, and there was quite a ramp-up in that area. That definitely did help. I think we're coming out of the first few months in good shape from what I can see in most of the areas, certainly those areas that were in recovery mode, like Sweden; Denmark, very much bounding back; the Netherlands also starting to show a rebound as well. But that marketing cost, clearly, is reflected in a big jump over fourth quarter of the year before, which help to pretty much flatten out any kind of a net NOI gain for the quarter.

The year still finished, as I said, on the higher side of what we had been forecasting, and the same-store pool in Europe obviously is a very volatile group, just given the relatively small size and the relatively young age, you will note that we've got 72 stores that are in that pool for 2004. That jumps to 96, so that's like a 30-some percent increase, so you're bringing in some fairly younger occupied stores into that group, and so consequently we continue to expect fairly robust same-store growth in the 12% to 15% range for this year.

What is going to hold us back as far as what you can expect to see on the FFO line, we'll still be seeing a definite uplift from the 207 that Dev has reported, but, candidly, 2005 will continue to be a lumpy year for us. We are still a work in progress; we must complete our SOX-compliance activities which, obviously, is a top priority for us to get behind us; and the main movements you'll see in G&A from last year, while we expect the total is going to be somewhere in the same neighborhood, obviously, the Storage to Go exit costs are behind us, but that will be replaced by some uplift across the salary levels of many of the new people that we've hired that will fully annualize this year and, as Dev mentioned before, close to $9 million of our costs last year related to audit, tax, SOX, SOX-related issues. So it's a major chunk, and this cost is obviously never going to go away entirely. We still expect it to be stubbornly high and very well possibly similar to what we've experienced this year. There is no question it's the most frustrating part of what I've had to deal with in trying to watch how to estimate what to expect, but what's obviously most important in our mind is that we comply, and we get done as quickly as possible, and those costs sometimes are not, as a result, easy to predict.

We've made great progress but have some work left to do this year and, as I mentioned before, my expectation, as you see, as we come into '06, we will be in a much more solid and orderly position. But those continued high G&A costs will temper the amount of growth that we can actually see getting to the FFO line. But that's the number that I can point people to as one that we will be focusing on, going forward, to start to harvest some of what I think will be true efficiencies. We'll come out of this structure, there are certainly parts of the SOX process that are not going to be bottom-line productive, but there is no question that certain processes, certain systems, will improve our speeds, will improve our efficiencies, and certainly our capacity to handle more growth and more storage in the future.

On the development side, I had neglected to mention and will not neglect is the one disappointment I had on the store-opening side last year was in Europe. We fell short of our target. We expected to be in the 20 to 25-store range, and as we reported on the previous call, that was cut back significantly. We ended up with 13 stores, 12 developments, one new store. This was a result, as, again, mentioned previously, part of some more difficult sites that we either failed to get permits on or had delays on getting permits. In some cases, we got more aggressive in tightening down underwriting standards, where we were not seeing sufficient results, particularly in the Netherlands where we pulled back on projects to allow those to catch up. This caused significant uptick in our debt deal costs.

On top of that, we also had a major transaction. We had looked to acquire a large group of properties in France last year that went through extensive due diligence and ultimately we decided to back away from that transaction, and that also cost us close to $700,000 in due diligence costs -- so a double disappointment in that area. One is the lack of the store openings; the second being, obviously, the attendant real estate debt-deal costs that go with that.

My expectation is this year that we will see Europe come back up to more of a traditional 20-store range of openings, but we will continue to monitor closely to ensure that the locations that are coming in will be truly accretive to the group and not unnecessarily damaging the ecosystem that may already be there, and they seem to be in a good position to accomplish that this year.

The U.S., I expect, will continue to be selective on development openings somewhere in the neighborhood of five to 10 stores. As I mentioned, you will continue to see us do some selective dispositions as well. We've already had two that were sold in the first quarter, and we'll be reporting more news on the progress with our redevelopments as they come along.

So as I look back on 2004 and look forward to 2005, we made a lot of great progress, I've very excited about the opportunities that this company has got, and I'm very pleased with the progress Dev and his team have made. It was no small feat to do the job they've had in pulling us up by the bootstraps and the accounting and finance group, it is a big task to integrate all eight countries, adjust to the accounting nuances of GAAP to foreign bases and standards, and he's done a super job. I'm very proud of what they've done.

So without further adieu, I will pass it back to the operator and open up for questions.

[OPERATOR INSTRUCTIONS] Jordan Sadler [ph], please state your company name followed by your question.

Hi, it's Citigroup. I'm here with Jon Litt. The first question relates to, I guess, the expenses overall, and I appreciate, Dev, you went through great detail, and I flipped through the K and looked through some of this, but could you identify what the one-time items are in the $54 million of gross operating expenses on a total basis in the fourth quarter? I know there was a settlement charge, for instance, but maybe could you identify what the deal costs were on top of that?

We had litigation settlement costs of $2,750,000. We reckon debt-deal-related costs were of the magnitude of $1.5 million.

I'm sorry, Jordan, were you asking about fourth quarter only?

Yes, fourth quarter.

Yes, about $1.5 million to $1,750,000 of debt deal and related costs.

That was it? I know with Europe you obviously had a significant increase in marketing expenses. Maybe, Dave, you could talk about that, but I was just -- beside that, if there was anything else.

The only other thing was in the area -- we had some multi-loan fee costs we wrote up in Europe, and that was about $750,000.

That shows up in the interest expenses opposed -- these other are in the operating expense line items, right?

Right.

We could certainly go back and comb through and try to -- part of it, as you already hit on, Jordan, one is separating out what are some true operating expenses that may be just differences from one quarter versus another versus truly one-off types of things like litigation settlements, and we could certainly dig deeper for you on that. But that's where some of the key items would be.

Right, I guess my point is sequentially your gross operating expenses from the top line are up $8 million from $46 million to $54 million, and you identified $4 million of it. I guess I'll try and chase down what the additional $4 million is with you later, but maybe you could just talk about the operating expenses in Europe -- what the marketing efforts entail, and if you think they'll be ongoing?

Sure, what I'll do, Jordan, is we've got Bruno on the line, and I'll turn it over to him to answer that question.

Good afternoon, good morning, everybody. While we looked in the last quarter a couple of special projects related to sales force. As you know, sales force is very important when you start up market and implemented the sales force all around Europe testing the concept and the integrating through the various countries, [inaudible - highly accented language] expenses that was tackled in the last quarter. And, number one, is related to studies and actions relating to the way we promote the business -- flyers, activities, especially where we change the way we communicate and diffuse these flyers and such. We also, in fourth quarter, we looked at the logo claims we are putting behind some of the marketing campaigns in Europe, and we put some expenses behind that.

The benefits we are seeing now are [inaudible - highly accented language] immediate increase occupancy for the sales force being in place now. We can see that the way we promote the business also is becoming more efficient, better understood in new country where we start with. So that's for the marketing.

We have also a couple of additional expenses we experimented in last quarter, things related to real estate taxes. Not a major issue -- this, in fact, is just -- I just mentioned credits received during the year; a couple of issues related to environmental information we sent to the customers in Europe. We spent about €100,000 there to explain issues related to environmental issues and such. So, again, most of the expenses were marketing-related and additional expenses were more one [inaudible - highly accented language] real estate tax or administration expenses.

Could you identify how much is nonrecurring?

Let me say that I have about €250,000 of nonrecurring costs.

Okay. Dev or maybe Dave, I'm looking at the vintage analysis and obviously it's skewed in terms of cost and actual income as a result of the two different translation amounts -- €1.36 versus $1.24 average versus spot. Do you know what the yields look like on euros? Could you actually present this data in euros so that we could see --

We have actually talked about it, and we'll make an effort to do that next time, for sure. We thought that we would present the tables in euros and then maybe supplementary say what the dollar numbers were. I think that would be much better to -- that people look at [inaudible].

Jordan, it's a great question, and obviously it drives me nuts trying to work backwards through the same issue, and we do put in both exchange rates for anybody that wants to go through yield computations, basically, dividing any historical cost item by $1.36 will get you back to a euro base for the cost, and dividing any NOI information by $1.24 gets you back to euro-based NOI. The impact, because of how much the euro ran up right at the end of the year, created a pretty significant spike in the difference. It's about an 11% effect as far as a yield is done on a simple calculation versus a euro-to-euro calculation.

So what are you underwriting new development at, and what are your expected yields at today -- the 20 you'll open in 2005 brings in?

Of course, it will vary depending on the specific markets. We'll target a lower yield when you go into cities or locations like Paris and London, and you'll target higher yields when you get out into more secondary markets. But anywhere from a 10.5 to a 13 would be what we would look for in the stabilized occupancy yield.

Are you achieving that on the vintage stuff that was, I guess, built before 2000?

The answer to your question is yes. On one side, we are typically experiencing higher rates than our forecast and our projections had called for. That's almost pervasively across portfolio. The stubborn part has been obviously on the occupancy side and how fast are we getting these rented up, as we talked about. Certainly, many, many of the older stores that we've got have gone well north of those numbers, and when you bring into the same-store pool some of these younger properties that are only 70%, 75% occupancy, no question, that brings the blend down.

The only other thing I would add to that is we made a basic decision to -- when as we go into any city, we wanted to make sure we got off to an efficient model or platform as far as marketing and management costs, and that means you're getting up to four, five, or six stores in any geographic spot to achieve that, and sometimes the later stores coming in, especially as we talked about in the Netherlands, would actually erode, temporarily, stores that were full -- some of our older stores. So as we now have gotten into areas where we've kind of crossed over those plateaus of needing to have the economies of scale, it has allowed us to be more selective about how fast and where we add properties, and so that's partly, as I mentioned, why we cut back on some of the targeted growth we hadn't planned last year.

What was the contribution of Europe to FFO in the fourth quarter and what's the expectation for '05?

Well, you may notice that we've been asked a couple of times about is there a way to break it out, and obviously we can do a simplistic approach. When you decide what to do in the way of weighting capital allocation to it, it's an area we've got to steer a bit clear of, because it's so subjective, and you can use whatever you'd like. But we have, for the first time, added back a table into the press release. I think it's number -- what is it, Dev?

Table 5, Dave.

Table 5 that gives you a breakout of the base European results for the year, and I would emphasize that's with keeping the interest cost that Europe is charged in our mezzanine finance in their numbers as opposed to -- you know, those are eliminated in the consolidation. And so our expectation in the fourth quarter we had basically gone to slightly positive for Europe, and Europe will definitely be a positive contribution in '05.

Okay. Now, last question -- in the K I noticed that you guys are considering buying out your partner's share in Shurgard Europe -- the remaining 12.5% or so interest? What are your expectations for that? Do you have a valuation in place? And how would it be financed?

Well, obviously, it's way too early for me to speculate or talk about any or all of that, but we will definitely let the market know, as we get to a more definitive spot about what or if we put something together with Fremont. As we said before, they have been very good long-time partners of ours, and if it's decided and mutually agreed for us to do a buyout, and we come to an agreement, we'll certainly be able to let you know the details and the impact of all those elements at that time.

Have they decided to exit formally?

No, they have not. As you know, they have a right to do what they call a "long stop date." Anytime during this year they could raise their hand and request a formal exit process, so they have not done that. But we have had informal discussion.

The capital market -- what are your expectations on 404 non-compliance? Is that going to push your access to the S3 registration back another year?

Well, the S3 is not going to be eligible until September at the earliest. That's what we have heard from counsel, so we certainly hope that our assessment for 2004 will be complete, and we'll be filing a 10-K8 to that effect. We are also working strenuously on achieving 404 compliance for 2005. As you know, it's a pass/fail test at the end of the calendar year, but we are making plans for 2005, as we speak.

[OPERATOR INSTRUCTIONS] Brett Johnson, please state your company name followed by your question.

Hi, it's Brett Johnson from RBC Capital Markets. I'm here with Jay Leupp. Just one quick question -- wondering if you could talk about how you book foreign exchange gains and what your expectations for those are in 2005?

The only foreign exchange gains that we book are related to so-called "non-long-term investments." Those have to run through the income statement. And, as you know, in 2004 the euro ran against the dollar quite significantly. So that enabled about -- as a result of that, about $6 million of foreign exchange gains ran through the income statement. In the prior year, it was $4 million. It's a little difficult to speculate on the direction of the dollar, but that's sort of as it comes, you have to take it.

So is it fair to say, then, when you guys, I guess, looking back to August or November when you were looking and giving guidance for 2004, you hadn't expected to have such a large gain in the third quarter?

I actually went back and looked right around the 9th of November when we did our third quarter call, the euro was 1.28 to the dollar -- 1.28 dollars to the euro, and at the end of the year it was 1.36. So it ran quite a lot in the last six weeks of the year. And since then it's dropped back to the 1.28, 1.29 area. So it's been quite volatile in the last three months.

Okay, and then for 2005, I know you mentioned in your press release that you are assuming flat exchange rates. Does that mean that you would not have any gains?

What we're trying to say is that we are not trying to anticipate gains or loss from foreign exchange in anything that we forecast. So that basically, as we said in the press release, if you just mark off the $1.36 at the end, whatever we end on any given quarter compared to that, and you translate the value of our mezzanine loan, in particular, which is what most of this relates to, it will get re-marked at that time. So it just automatically is an addition or a subtraction on that point-to-point play. So we're just not trying to pretend we have any clue about the direction that that's going to go and always keep that on a current basis.

Okay, and then the last question about that, and I'll let you guys go, but being that we're pretty close to the end of the first quarter here, do you have any comment on where that might be for the first quarter?

Well, obviously, as we get closer -- assuming it finishes around the $1.30 mark that it's hovering at, there's no question we will show a reversal of foreign exchange gain. It will be a loss coming through as the complete reversal of the quarter before.

Are there any offsetting -- either revenues or expenses that when you get a move in the currency it would offset or, I guess, the gain or the loss that you would report on that line? Does that make sense?

No, that one sort of [inaudible]. You do have currency affecting operating activities in Europe if the dollar goes up, and to the extent that, I guess, the euro then you make more in dollar terms and vice-versa when it goes the other way, and that's at the margin.

Obviously, these are unrealized gains or losses. That's probably why we call them out on the P&L because they're not the kind of things that -- one the one hand, while -- from a money standpoint, the gains that we booked on the sale of property, the $16 million, even those that's not an FFO compliance, it's actually something we really like and count on, but the flip side is, these foreign exchange gains and movements aren't realized -- they wouldn't be realized unless and until Europe paid off the mezzanine loan to us, and then it would become a net gain or loss.

[OPERATOR INSTRUCTIONS] Management, at this time we appear to have no additional audio questions. If you would like to conclude with any closing remarks.

Thanks very much, Operator, we appreciate the attendance on the call. Have a good day, thank you.

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