Public Storage (PSA) 2005 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Shurgard Storage first-quarter 2005 earnings release conference call. At this time all participants are in a listen-only mode. Following today's presentation instructions will be given for the question and answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded on Wednesday, May 11, 2005. I would now like to turn the conference over to Mr. Dev Ghose, Chief Financial Officer of Shurgard. Please go ahead.

Good morning and good afternoon. Thank you for joining us for Shurgard Storage Centers’ first-quarter 2005 conference call. I'm Dev Ghose, CFO for the Company. With me on the call today are Chuck Barbo, Chairman and CEO; Dave Grant, President and Chief Operating Officer; Harrell Beck, Executive VP and Chief Investment Officer; Steve Tyler, Senior Vice President of Retail Sales; Jane Orenstein, VP and General Counsel; and Steven De Tollenaere, Managing Director of Shurgard Europe.

Before we started I'm reading the required statement. The statements made on this call concerning the beliefs, expectations, intentions, future events, future performance, business prospects, 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 upon 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. For a discussion of additional risks and other factors that could affect the 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.

To start the call, firstly, my apologies for not giving everyone advance notice about our earnings call. Clearly our focus this quarter was to be done before the 10-Q filing deadline of May 10. There were a couple of items that we were working on that took a little bit more time than we had planned. It was actually quite a challenge for our team to get this done by 40 days after we filed the 10-K late March. We certainly intend to provide you earlier notice for subsequent quarters' calls. To that end, we have made significant progress in building a strong finance and accounting team in the U.S. and Europe.

Next a little commentary on results. FFO per share was $0.33 for the quarter compared to $0.36 for the same quarter of the prior year. After adjusting for some unrealized derivative and foreign exchange losses, FFO was even at $0.42 a share between the first quarter of 2005 and 2004.

Key items for this year were that we produced strong NOI growth of about $0.14 a share above last year; however, these improvements were moderated by unfavorable variances from higher borrowing costs in Europe. That constituted about $0.05 a share and that was a result of doing a seven-year bond securitization last October with a very attractive coupon of 5.5% all-in.

In addition, interest rates were higher in the U.S. to the tune of about $0.04 a share primarily reflecting from higher short-term interest rates. We also had higher G&A related to increased Sarbanes-Oxley compliance and audit fees. And lastly higher real estate development overhead and dead-deal costs of about $0.05 cents a share. We will elaborate on these a little further later on.

Next a little comment on SOX. We made a late start last year. We made significant progress, but we were not compliant for 2004. After we filed the 10-K in March, we jumped on and substantially completed our assessment for 2004. At this time our auditors PwC is working on their audit of our assessment; and once they are done we will file a revised 10-K; that is a 10-K/A, for 2004. We expect to do that in June. At this time the material weaknesses that we had disclosed in the 10-K stand, and we don’t have anything further to report.

We have embarked also upon our 2005 SOX assessment, and have deployed additional resources to assist us in remediating material weaknesses and significant deficiencies. We have set ourselves the target of being compliant well before December 31, 2005. At this time I'd like to turn the call over to Chuck Barbo, Chairman and CEO.

Good morning, everybody. There have been some questions about my announcement of retiring as CEO and I needed to deal with that. This is part of a long-term plan that was put in place by the Board many, many years ago and really began as well when Dave came back from Europe. When we elected him President and COO, it was our intention after a relatively short period of time to elect him CEO as well. As a matter-of-fact a lot of the responsibility, a lot of the work differentiation has been transferring over to Dave. We have been working together on all these issues.

So this is something that was just right. It was no secret that I was planning on doing this; and I'm not leaving the Company. I will continue to serve as Chairman of the Board. I'll be involved with Dave and others in long-term strategy issues. I'm planning on spending more time out in the field, going around visiting our operations and working with those folks. So I am still going to be involved, and I will still be around, and I will still be around for you to kick me in the shins every once in a while.

If you have any other questions about that, during the question-and-answer period I will be happy to elaborate further. But I think that probably is sufficient. Dave?

Thanks, Chuck. Good morning and good afternoon, everybody. I want to go through some of the highlights I see in the quarter. I think we have continued to make great progress in the repositioning of the Company and moving if forward. I want to compliment Dev and his team. They have made great progress in digging us out of the backlog of work that we had put on his shoulders last summer. Although it doesn't seem like a big accomplishment to be getting our quarterly reports out on time, believe me it is a huge improvement. I'm very pleased with what he has been able to accomplish that way.

Let me kind of go through some of the key areas of the Company and elaborate a little further on what Dev mentioned. Our general view on the store operating results combined for U.S. and Europe were very solid for the quarter. We have now got 540 stores in our total same-store pool. 444 of those are in the U.S.; and now 96 are in Europe. If you remember we have 101 stores that we as the Shurgard Europe entity own outright. That outside our first (technical difficulty) Shurgard entities. Of those 101, now 96 are in the same-store category. So it is a big block of the total.

If you look at the total revenue growth for the combined group, that is 7.5% year-over-year. NOI was up 5.5%. That is off the pace of growth of revenue in part because of the fairly significant increase in indirect expenses. That is something we mentioned on our previous call, that we have been adding positions both in the U.S. and Europe, partly in response to Sarbanes-Oxley and building of infrastructure where we need it. Some of it is also field positions that will definitely help us in the general management and sourcing of new real estate opportunities as well. You will see that rate of increase, when you are comparing one year or one quarter to the next, start to burn off as it annualizes, as we get out toward the third and the fourth quarters.

The U.S. piece of that, with the 444 stores, had good revenue growth as well, in line with what we had expected, about 5.8% over the prior year. Again, a pretty good balance between occupancy growth and rate growth. The NOI was 3.3%, in line with what we had expected. The trends that we are seeing continuing through April are consistent with that pattern. We continue to get what we consider good pricing power in most of our markets. That is our projection, that for the foreseeable future, the rest of this year, we are anticipating.

Then turning over to Europe, also had a solid quarter. Revenues were up 13%. NOI up 17%. The main thing that we have started to really push the teams on there is to begin to get more aggressive in some of their pricing strategy. We are finally starting to see that take hold in a general sense.

If you look at our reported results, you'll see that we were just at about 73% occupancy for these 96 stores as an average for the first quarter. By the end of the first quarter these stores were up to 75%; and by the end of April, our freshest information that has just come in, those stores were up to an occupancy average of 77%. While it will be another month or two before we have a grasp on what the level of discounting impact is in getting these offsets, but we definitely feel getting the occupancy jumpstarted and moved aggressively coming into the busy season is important. So I am very pleased with the progress that they are making there.

There are some spots that are particularly bright. Sweden, Denmark, and the Netherlands have shown a strong recovery from where they had been over the past year. On the flip side, the UK, which was a strong performer last year, started to hit real market weakness about the last month of last year, which has continued so far into this year, to which we've had to adjust pricing strategy to combat.

I also continue to watch closely our German markets. While I think they are making good occupancy gain now in general, we still have not got a grasp fully on where pricing will settle out in that new market. I will talk a little bit more about how we have adjusted a bit of our development strategy accordingly for that.

And our new stores in general, U.S. and Europe, are showing good solid progress. So overall we are very pleased with what we are seeing on store performance.

Moving over to the real estate side of the coin, we continue to follow the plan that we had set. We have three stores under construction in the U.S. We have been on a pattern of selective development. Quite candidly I think you will start to see us begin to build some of that pipeline in the following years. The spread that we see between our development performance and what we continue to see in the pricing of acquisitions in the market has become wider and wider. We have, as I said, beefed up some of our store teams to give us more capacity and flexibility for sourcing future real estate opportunities in the U.S.

We've stayed very much on a track of actively working our redevelopment properties. We're now up to 18 projects that are in active redevelopment. The early signs of stores coming out of that have responded very well to these improvements. I'm very pleased with what I am seeing there.

We are continuing with only very selective acquisitions. We announced that we had one store we acquired during the quarter, and eight that have now closed within the first month-plus of the second quarter.

A couple things I would comment about why these stores. In all cases these were stores that were within our existing systems. A bunch of them were in the Carolinas with the MorningStar group, properties they were already managing for other owners. Our ability to buy those and bring them into the system in a very cost-effective manner, and obviously we know all of the operating statistics, made it attractive to us. Same thing with our partner in Florida, picking up two additional properties from the Michelson group in a similar fashion, already branded Shurgard.

These properties combined had north of a 7.5 cap yield on trailing results and were acquired for a weighted average price of just about $56 per square foot. So again we feel that this fits very well with the strategy that we've set out on the side of the investment coin.

Turning over to Europe, we have nine stores under construction; and I am very pleased with the quality of what is coming out of the ground. We did announce that we have trimmed back some of our projection about expected store openings for this year. This is really in response to what I see in some of the markets, and particularly Germany, where in general we are seeing across all markets good recovery on occupancy. There are some places where I feel that we're still too aggressive on some of our assumptions of adding new supply. So we have backed those down modestly. As I say, two of those stores were in the German area.

We need to make sure we've got our underwriting metrics understood well before we get too further aggressive there. But in general I think what we are putting up and bringing online is great quality.

I'd like to comment now as well about a change in the format of our presentation for the P&L that we put out. You will notice that we now have a new line called real estate development expense. This is an expense that we have always had as a Company; it is just that historically it has been buried up in a large group called operating expenses. It became kind of obvious to me, based on some questions on the last call, when people were trying to understand movements between quarters in that number, that we really needed to do a better job of giving visibility to this piece of our business.

We are in the real estate investment business. We make a significant commitment to generating new opportunities in development and acquisition. And these expenses do not behave in the same fashion that expenses associated with running self-storage do. So that coupled with the fact we have added the European platform now, which obviously significantly increases our commitment running through our financials, is why we decided to keep this broken out.

A couple of comments about that. Our total real estate based platform costs in Europe are about $14 million a year. Our total in the U.S. is about 8 million. That amount is either capitalized or expensed in any given quarter, based on the activities that we're doing and the volume that we are doing at that point in time. We always capitalize cost based on the efforts that we expend on specific projects as we go.

However, in Europe when we are doing activities for our joint ventures, where we generate fees that are based on not the effort equation but rather as money is actually placed in the ground, like closing on land, it creates a much lumpier, more volatile up-and-down between quarters as far as whether we are recognizing expenses in that quarter or capitalization. As you all know, we do not capitalize costs associated with the acquisition of properties or the sale of properties which has become a much more active part of our business.

So my only point is that we've got to do a better job in helping the analysts understand the parts of our business, and we're (ph) forecasting FFO what effect this specific number in our financials will have. We do believe that the first quarter, which was unusually low volume compared to the rest of the quarters as far as investment placed in the ground, we forecast will definitely be our highest quarter for this going forward.

Obviously part of our expectations is that the remaining permits we have yet to receive are received on time and we move forward. If timing is affected, obviously the timing of recognition of cost capitalization on those projects would be deferred us well. So that is why we have taken the move to do that, and we will do the best we can to help forecast our expectations in those areas as we go toward.

If I move off and -- one other point I would make, and I realize it is not a part of FFO, but we are a real estate investment Company. We believe you create value in buying smart, and selling smart, and developing smart. I would point out in the last 12 months we have generated over 22 million in gains on property sales alone. That is a real testimony to some of the great work these guys have accomplished. You will continue to see us focusing in those areas.

I want to talk a little bit about organizational changes that we have made and announced, starting with the U.S. We had announced the hiring of Ray Loeffler as our new regional Vice President for the Southeast and the hiring of Sydney Johnson-Gorrell as our new Vice President of Human Resources. I have talked a lot over the last 18 months since I have been back about building the bench strength of the Company as well as the reformatting of our organizational structure.

This really now brings us for the first time to what I consider a full complement of management team in place. I feel we have assembled and added a great deal of quality to our team over this period of time. I am very excited about the contribution these people are collectively going to make moving forward.

On the European side I don't have any news, new news to report about our discussions with Fremont about the buyout of their interest in Europe. But I am optimistic that we will accomplish something along that line in the future. In the meantime it is clear that if we are going to get true, full advantage out of Europe and the full efficiencies there we do need to begin to consolidate and integrate the work of these two groups.

That, coupled with the fact that we now have very strong, four strong operating managers on the ground in the key countries is what led Bruno and I to conclude that it just, from a future standpoint, was not a good match of his skill sets and what we really needed from that position going forward. So this does began us moving down the road, as I say, toward a more efficient cooperation. I'm very excited about what the potential that will give for us.

I also very excited about announcing Steven De Tollenaere's appointment as the Managing Director for Europe. I have worked with Steven for eight years now and think very, very highly of his abilities; and his knowledge about the investment and finance and accounting parts of our business will be a big boost to us. So Steven, while I take a break I will let you introduce yourself.

Thank you very much, Dave. Obviously I think a few people on the call actually know me from prior contacts. So basically as Dave said I have spent about eight years or just over eight years of my professional life with Shurgard, basically having joined Shurgard in Europe when we only had four sites building. We are building up all the way up to 136. And basically we had activities in one country, which is now to seven countries.

Most of my activities have been focused on accounting; later on finance; and then also on the real estate investments in Europe. I am obviously very excited to be able to run the Company as a whole. I was very excited to collaborate very closely back with Dave, which is (indiscernible) that was the same thing we did for years in Europe. So hopefully (indiscernible) also commit to deliver growth in the real estate side as well as in our operating results.

Thanks, Steven. I guess what I would like to close with is just a couple comments on our FFO forecast. As you recall on our call from about 45 days ago we had forecast FFO would be in the neighborhood of 225 to 240 per share. A couple things I want to point out about that. First of all, as we stated on that call, we do have an unpredictable component. Well, we have several; but the one that is particularly out of our control, which is the foreign exchange gains and losses on our intercompany borrowings.

A question had been asked on the previous call about that. Our policy is not to attempt to make midcourse adjustments in our forecast between quarters based on the movement of the euro, and that is very much what we will stick to. There is a $0.09 impact from the euro dropping during this quarter from where we ended the year. So that is why we have made the adjustment in the guidance mathematically to take that into account. Obviously as we go forward if, for instance, the exchange rate continues to be below $1.30 as it is today, we will have additional loss to adjust for come the end of the second quarter. But that is how we will be approaching that from quarter to quarter.

Other than that we have no further adjustments at this time in our forecast. I think that our operating results are very much in line with what we had been expecting so far. Naturally, this is one of the lowest quarters, if not the lowest quarter, of the year. We are coming into our high season as we move toward the end of the second quarter and the third quarter. Obviously we expect a lot of continued growth out of the results from Europe to contribute to the results us well.

As I mentioned before we do expect a definite drop-off in our real estate development expense amounts as we move through the balance of these quarters given our current forecast. That will obviously be dependent on us continuing to hit our permit and construction speed as we currently see that. That would be my only other comment, is that we will attempt to make up dates to (ph) the forecast as we think we've got something meaningful to provide.

Obviously as we continue to sell properties during the year that will cause us to adjust our forecast for FFO, that those would normally contribute. Redevelopment activities as they start will have a minor impact in certain stores. If we do announce or come to a conclusion with Fremont to buy their interest out, we will also at that time announce any impact that would have on our forecasts. So these are all things that will certainly do our best to keep everybody mindful of.

But as I said before we are very pleased with the progress the Company is making this first quarter and look forward to the balance of the year. So with that and those comments, I think it is appropriate that we turn it over for questions.

(OPERATOR INSTRUCTIONS) Jordan Sadler, Smith Barney.

I appreciate all the color on guidance, Dave. I just had another follow-up, which was just on expenses year-over-year. I guess the same-store number is up 7.7% and you talked about adding some people maybe for SOX and infrastructure compliance. Is that a good number, you think, off the core, to use for the rest of the year? Will that trickle right through?

You mean at the same increased level? We have added some people up in the direct line as well. That is a partial contribution to some of that expense increase. I think what you will see though, Jordan, is there will be some burn off in the percentage gain, especially in the indirects as you move into Q3 and Q4, just based on a timing -- as you annualize some of these hirings.

Is there anything else onetime in nature in that 7.5% increase? (multiple speakers) break it out into the new hiring and sort of normalized, maybe two different baskets?

I think we have some increase in some of our legal expenses on some of the cases that we have been defending as a piece of that. But I can't point out anything in particular. Marketing and repair and maintenance, those are very much sporadic. They will either be dependent as when Yellow Page books come out, or when are launching specific programs. Your R&M costs tend to kick up as you get more into the summer season.

So you are going to see some trade-offs going back and forth that would not make me want to characterize it as just being a lockstep process going toward. But as I mentioned, as we mentioned on the call last time, we had forecast that we expected NOI for the same-store pool U.S. to be in the 3 to 4% range. So I think the best guidance I could give you is from what we see right now, we are still comfortable with that range.

That works. I guess a question on Fremont. You said at some point in the future you will likely accomplish something with them. What do you think would be the magnitude of that 13% interest or 12-plus% interest? And how would that be financed?

I apologize for being evasive or coy. I just don't feel we are in a position to make that comment. I am optimistic that we will accomplish something with them, and that is why I made that statement. The minute we have something that is definitive and that we can really do a better job of answering those questions, we will certainly do that.

I assume they have raised their hand and said they are looking for an exit.

Sure, we definitely -- I wouldn't have said that we were having conversations with them if they hadn't shown that interest.

We have had continual conversations with them. When we bought out Deutsche Bank and the other people, they were given a chance at that time to participate in those things, and they declined. So the conversation has been going on for a very long time. As you know there is a specific process that they can go through; but so far they are not choosing to do that. We are just having conversations.

Their share is in Shurgard Europe, correct?

That is correct.

Do we know what is the gross book value of Shurgard Europe on depreciated costs?

About $1 billion.

About a billion.

Okay.

Euros or dollars?

Dollars.

And they are 12.27, 7%.

So that is a good floor to use to be safe. To the extent you had to spend 150 million bucks or so, whatever the number might be -- I don't want to put words in your mouth but --.

Thanks.

Using gross book as a rough proxy, as a floor, where would the liquidity come from at this point? Maybe could give us some color on what the availability is right now. It looked like your line availability is a little bit -- is pretty light at this point.

I really don't want to try to get overly specific about pricing etc. with them. We obviously are looking at a lot of different options about financing, and we will consider those as and if we move to a conclusion. Dev, I don't know if you want to give any more additional thought on that.

No, today we have about 60, 65 million left on the line. When we put the line in place, we put together an accordion feature which would enable the line to be increased from 500 to $700 million. So that is certainly a potential source of financing, as are all the other financing options that we have.

But the line of credit is 350, right?

There is a term piece, which is 150.

And you could extend the line from 350 to 550?

The combination from (multiple speakers) to 700. We sort of look at the two together.

Are there any limitations under the shelf registrations at this point other than the one that sort of lingered from the late filing last year?

That is the only real sort of line in the sand. We won't have the shelf available before September 1 of this year. As you know our 10-K filing was incomplete for not have complete the Sarbanes-Oxley assessment for 2004. We are confident that we will be able to file the 10-K again next month and thereafter start a process. What that will impact, we don't know for sure yet. There is nothing definitive on that.

But the SOX delay -- ?

That is all we are facing.

That is not going to extend it past September 1 at this point?

No, it might. We don't know for sure. September 1 is the earliest.

I guess on the swaps that were terminated, was there anything in the P&L related to the $15 million charge?

The P&L charge has been taken over time. It was just a delayed payment swapped. So we made that terminal payment in February.

Was there any residual accrual that occurred during the quarter that needs to come out of my numbers?

No.

Lastly, Dave, you mentioned the total cost of the real estate platforms in Europe and the U.S. are 14 and 8 respectively. Number one, what does the total real estate platform cost mean? What does that translate into? Is that excluding all senior G&A? And then secondly, what amount of that total 22 was capitalized last year?

We obviously excluding any of senior management who are not capitalizable bodies, if you will, anyway. These are only people that would be in the pool of even hypothetically being capitalized, varying degrees. Does that make sense?

So acquisitions and development personnel?

Oh, yes, it is the whole stand. You've got architects. We are a very internal-based group. We have architects, construction managers, the whole gamut of people. We are not our own general contractor, but other than that, we have both those types of platforms in place in both the U.S. and Europe.

With no property operating people, obviously, included in those numbers?

Some property operating people do -- as we mentioned before, we firmly believe that our people on the ground in the field need to play an active role in real estate. So some of our senior field people do play an active role in the real estate process. And to the extent that they are involved in specific projects, then a portion of their time would certainly go there and be part of that number.

And then just how much was capitalized? That is my last question.

Dev, I don't know if you can give a broad stroke on that.

I think my recollection is about 60% of that number would have been capitalized.

Last year?

Last year.

Thanks.

Brett Johnson (ph) with RBC Capital Markets.

Here with Lay Leupp. A couple of quick questions. I know you guys talked a bit about how your development yields, I guess the spread between your development yields and what you're seeing in the acquisition market has widened, and develops have become more attractive versus acquisitions. Could you comment a bit just on what you think your acquisition volume might be this year and next, versus what your expected disposition volume might be, excluding anything with Fremont?

Fair question because, as I say, we tend to be pretty opportunistic when it comes to doing these acquisitions. We are not out actively chasing them. They kind of more are ones that come across our radar screen and kind of fit the criteria we've got. We typically have a basket of maybe 10 to 15 properties on the disposition side that are greenlighted as far as if we find the right circumstance and price we would be willing to sell. So you need to start with that number; and then some percentage of that over the next four quarters you would tend to see roll out.

Are these assets that you guys are looking to trim down your position in a specific market? Or just assets that you can get very good pricing on?

It is predominantly strategic based, where we are either exiting certain areas that we just find inefficient to manage or properties that we just feel are way out of a zone that we can really add value to, and so it is predominantly driven by that.

So we would not you expect to see any dispositions in your core markets?

I'd say never would be an extreme statement, but generally that is true.

One of the things that is happening now is a change over the last 30 years in the business. A lot of people have said that what our industry is, is a holding pattern for property into a higher and better use someday. Someday these properties will be torn down and office buildings or something else will be built on them. So far in the history of the industry that has not happened. But all of a sudden it is beginning to.

We are seeing some older properties now being sold for very high prices for alternative uses. Again, you would expect that over time at some point in time, and it is beginning to happen. That has two impacts. Number one it reduces the supply in some markets to the extent that that happens, which is good. And it also will be resulting in some sales and some conversions of even some -- it is conceivable in some of the markets that we would want to stay penetrated in.

Perfect. Good. Your real estate taxes seemed a bit high in the quarter. Was that a timing issue or is that something that's going to be recurring?

I think part of it was we received some pretty healthy rebates coming in toward the end of last year that actually helped to depress the net real estate taxes we had in the fourth quarter last year. And actually had some, actually throughout the year we had had some pretty good success on reeling back in on property appeals.

I think that I don't think we would say we are experiencing substantial increases now in our taxes at this point. But obviously that is something that we had even cautioned about three calls ago, that we were concerned that with the city budgets across the land really getting constrained there would be more pressure on real estate taxes.

Thank you for also breaking out the real estate development expenses line. Can you give us a bit more color going forward on what that line item might be in terms of both magnitude and seasonality quarter to quarter? Pretty big picture is fine.

As I mentioned before, I started with the basket of this 22 million between the U.S. and Europe. So obviously what is capitalized in any given a quarter is dependent on, to some degree, the volume in Europe that is actually been placed in the ground; and it also depends on the mix of activities. Because as I say, if we find we have a huge focus on disposition or acquisition that is going to divert some of this group's time to activities that are not capitalizable. And so all those play into the volatility.

I wish I could just tell you quarter by quarter I knew exactly what that number is going to be. Now, on top of that, what will run through that line is if we have an abandoned project, dead-deal expenses, that will also be running through that very same line item there. That is obviously something. Quarter by quarter we look at all projects in process; and those that for one reason or another have to be abandoned, we would take the full charge at that time.

I apologize I can not give you a more accurate way of looking at it. The best I can tell you is, from everything we see in our current forecast, we expect to the first-quarter number that was reported to actually be the high water mark for the year, and that the other quarters we expect to be definitely lower than that.

That is very helpful. My very last question goes back to your guidance for the year. I think I asked the same question on the last call. The $0.09 that you reduced your guidance by, then, when you had the last call that guidance did not include any foreign exchange gain or loss, is that correct?

That is exactly right. As I mentioned earlier in my prepared remarks, basically we started the year with the euro at $1.36, and so we don't attempt to do any forecasting of what that may or may not do during the quarter. So you now have the euro at the end of the quarter at $1.31. Now I think it has hovered anywhere as low as $1.25 and I think back up around $1.29. To the extent that that is floating south of $1.31 we will definitely report additional FX loss in a quarter if that is where it ended up.

So then just to kind of reiterate then, the first quarter you guys had a $0.09 per share charge for that. Your full-year guidance now includes that $0.09, but nothing for the next three quarters.

Exactly right. We just think that is the easiest way. I will caution people to be aware of that, but it is just the easiest way for us to manage the process.

Thank you very much.

Ross Nussbaum with Banc of America Securities.

Here with Christine McElroy. Dave, did I hear you correctly that you had $0.05 of bad deal costs in the first quarter?

I don't think I said that.

Of the real estate development expenses.

Of real estate development expenses.

That is the new line that we've broken out this time.

Included in there, you mention it's not just development expense but some acquisition.

What that expense line will include is internal personnel costs that are not capitalized; as well if we have dead-deal cost in any given a quarter, those would be in there as well. Those being external costs.

Did you have any of those in the first quarter?

Nothing of any materiality that I remember.

Back to the platform cost question. I want to make sure I'm understanding what you are saying. It sounds to me as though you're going to be almost centralizing decision-making for Europe back towards Seattle. If that a fair way of stating it?

No, no, no. Just like our approach in the U.S., it is the same in Europe. We firmly believe you have got to run this business with strong personnel in the field. That is both from the sourcing of real estate investments as well as the managing of them. That is exactly how we approach it in Europe.

We have four strong what I'll call regional managers, one for the UK, one for the Benelux, one for Scandinavia, one for Germany-France, that we have a lot of confidence in their ability to run our business there. What we expect to see in the way of synergies going forward is a lot of the support structure, areas like human resources, IS, accounting, finance. Those are all pieces of the business that are completely separate universes just by the nature of how that investment was built in the first place up to this point. So our hope and expectation is to integrate more on those levels as we go forward.

How much of the 14 million platform costs over in Europe could theoretically go away? And how quickly will that occur?

Well, that is more on a real estate side. Things that are going to our indirect costs, our overhead costs, it is more of those areas that I would expect to see that kind of impact over time. Not from eliminating production people off the field of play.

The decision to part ways with Bruno it sounds like had more to do with the streamlining of operations rather than an unhappiness with respect to the way operations were being run.

That is correct.

You had also touched on that you have got some redevelopments in progress. Can you just define for me, what do you mean when you say redevelopment? Is it as much as an expansion or are we talking about putting a new coat of paint on?

You have certainly hit the one end of the limit, that is for sure. It is not a new coat of paint. We have a real estate investment committee that sees and approves all investments that we do. So for instance -- and even approves our CapEx budgets for the year.

To us a redevelopment is when somebody presents a case for spending money at a store that they believe is going to generate incremental return that is equal to or better than our development thresholds. Which we target always 11% or better on a stabilized run rate. So that is the first part of the test.

The second piece is the range or the scope. What are some examples? Of the 18 stores in development, the total cost that we are targeting for that is about 15 million. So you have got some sense of the average. But that runs from as low as about 0.5 million to as much as 3 million.

The most extreme is like a project we've got in Portland, Oregon, where we had a very small store; tore it (ph) to the ground; it was full; it's going to be open in about two months, at about two and a half times its size, bringing in climate control and a lot of other modern features.

The other end is all the way down to taking space and climate -- putting in climate control. What can be relatively minor upgrades if you will, but clearly give us a chance to move price. So this is the range of what you would really find.

Also, one other aspect of it is that we have got a lot of our older stores that don't have lighthouses on them. So all of these redevelopments, if they are those older stores like that, would involve getting a lighthouse on it as well.

And upgraded office (multiple speakers).

The whole package.

That is basically the range, Ross.

Final question is I am looking at your vintage analysis for your domestic stores. If I'm looking at this correctly, it would appear as though the majority of your same-store growth came from properties which hit the same-store pool in '04 and '05. Meaning properties that were developments and not necessarily fully stabilized; whereas the older properties in the pool since '03 generated just 1.4% growth. Am I looking at that?

You are exactly correct. Our occupancy on the oldest group you are looking at stayed basically even at about 85%. Most of the gain, well, virtually all of the gain they got was on pricing. No question the two other vantages that you're looking at had a balance of pricing and occupancy.

How did those older stores perform relative to your expectation?

Very much in line with what we expected. Budget-wise across all sectors we were generally very pleased with what we saw.

A couple of the -- some of the newer stores that you pointed out that are now in the same store, we had some slower rent ups in some of the vintage of the old, the 2000, '01, '02 stores. They are now part of the same-store pool and so they are performing much better now. So they came into the same-store pool at lower occupancies. So they get the opportunity to have both rent increases as well as occupancy increases.

It is the same thing you would see in the European group when you look at the most recent addition. Obviously a 13% increase in revenue is very, very high; well, a big chunk of that is coming from your newest additions. The 96 same stores in Europe, 26 just rolled into that group. So it is percentage-wise a big chunk.

Thanks, guys.

Michael Knott with Green Street Advisers.

With respect to the former same-store pool in Europe, is it possible to get how the oldest 47 did this quarter relative to last year?

Well, I'm sure we could go back and line that out. I don't have it off the top of my head. I don't think that there was anything particular about those 47 versus the 25 that came in the year after that.

Okay. Other question. What sort of a strategy, excluding whatever might happen with Fremont, for regaining some additional flexibility on the line? I know you said you have the accordion feature that could push that up another 200 million. But what should we be expecting you guys to do from a capital strategy perspective?

Dev or Harrell, do you want to take that comment?

This is Harrell. I don't know we have any particular things that we are prepared to talk about at this time. I think as Dev says we certainly have availability under the accordion feature, under the line of credit. We think that the bank market today is certainly very robust in terms of what we are seeing out there in the amount of lending activity in the marketplace at this point in time.

Remember that in Europe we are funded all the way through late 2006 with our venture with First Islamic, and the bank line that we have there with Societe Generale and RBC.

Clearly here, as Dave mentioned earlier, from a domestic perspective we have very modest kind of development goals this year. We think we are going to do somewhere between 7 and 10 on the development side. You can see, although it sounds like a large number on the redevelopment side, again as Dave said, it is only about $15 million.

If you even look at that, I think there is five of the 15 has been spent on the development site. I think if you look at what we have in the ground right now, about a third of that has been spent. So I think certainly our investment needs this year in 2005 are fairly modest. We certainly have the ability, again as Dave pointed out, that we will be doing -- actively looking at dispositions.

To date, we have realized about 13 million already from the sale of two facilities and gains of about 6.5 million. So that is another source.

Is it a fair conclusion to reach that on a sort of normalized basis. meaning once you regain access to issuing off the shelf, that you guys don't want to have this much on your lines of credit?

Actually if you looked at it on an overall sense, variable rate debt is sort of 12, 15% of overall capitalization. So we don't see it as very high. Clearly we want to be able to fix rates on different tranches. We are taking a hard look at that.

We have 150 million out on the term; and we might look at that and another (ph) area of possible financing as well.

My last question is can you talk a little bit about the strategy to increase the dividend? You guys weren't -- that wasn't necessary was it? It was just sort of a discretionary move?

It is just we have historically done that. We saw no reason to increase it further or not stay with that pattern. It is no more than that. It is just typically where we have actually looked at the dividend each year was at this time.

Thank you, that is all.

Jordan Sadler from Smith Barney.

It's Craig Melchor (ph) here with Jordan. To what extent have you been exploring the opportunity to maybe raise capital selling some assets for alternative uses at some really low cap rates? Kind of like department (ph) REITs have been doing for condo converters?

As Chuck said, it is interesting that -- it's kind of funny that this business started way back in the '70s, that is what everybody thought it was. That three or four years after we started building that you would be selling them. And the land banking concept never happened.

But we are starting to see some noises in different places where that potentially can happen. As a strategy we are not specifically trying to target and go after it. It is only a case where on a case-by-case basis, if we were approached and we thought that the value creation through a sale like that well outstripped what we perceived we could do with the property, then we would certainly pursue it. But I couldn't describe it as any kind of an organized program.

Second, just a little bit more color on that 38 million of acquisitions in May. Do you have the cap rates on those deals?

I gave it to you as a blended rate. The trailing cap rate on the group was just north of 7.5.

Thank you.

Andrew Moss (ph), Starwood.

I just have a follow-up question on the foreign exchange. What I am trying to understand maybe a little better is that you had your last conference call at the end of Q1, at which time the drop in the euro had already occurred. Had you not seen this drop then? And why was it not already a part of guidance?

Sure we had. In fact we specifically on the call stated that if in fact the euro locked on the last day at that level, we will in fact incur a drop in the guidance or a drop in our performance. What we tried to emphasize then is the same thing we emphasize going forward, that this is an intercompany loan. To us it is an unrealized kind of a gain or loss and it should not have any undue emphasis as far as the performance of this Company.

But we will mechanically update our guidance on each quarterly call, as we are doing now, based on where those euros-dollar exchange rate ends up, period to period.

Great. Can you just maybe give again what we can watch for magnitude changes in the euro? What that would mean to FFO for you?

Well, let's see, I think as it stands right now it is not a significant variance. We ended I think at $1.31.

At $1.31, (multiple speakers) the dollar-euro rate changed by about 5%, 5.5% between December and March. You're seeing the effect of that running into the income statement. The dollar strengthened against the euro by about by 5.5% on roughly a $60 million intercompany loan. So that is the 3.5 odd million that you see.

So depending on where the exchange rate locks June 30 compared to the $1.31, we will obviously do that recalibration at that point.

Thank you.

Management, at this time we have no further questions. Please continue with any further remarks you would like to make.

Thanks very much, operator. Thank you, everybody, for joining the call. We appreciate the time. Bye-bye.

Ladies and gentlemen, this concludes the Shurgard Storage first-quarter 2005 earnings release conference. If you would like to listen to a replay of today's conference. please dial in to 1-800-405-2236 or 303-590-3000; and use the access code of 110-30155. (OPERATOR INSTRUCTIONS) We thank you for your participation on today's teleconference. You may now disconnect, and thank you for using ACT Teleconferencing.