CubeSmart (CUBE) 2015 Q4 法說會逐字稿

Good morning, and welcome, to the CubeSmart fourth-quarter 2015 earnings conference call.

(Operator instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Charlie Place, Director of Investor Relations. Please go ahead, Sir.

Thank you, Chad. Hello, everyone. Good morning from Melbourne, Pennsylvania. Welcome to CubeSmart's fourth-quarter 2015 earnings call.

Participants on today's call include Chris Marr, President and Chief Executive Officer, and Tim Martin, Chief Financial Officer. Our prepared remarks will be followed by a Q&A session. In addition to our earnings release, which was issued yesterday evening, supplemental operating and financial data is available under the Investor Relations section of the Company's website at www.cubesmart.com.

The Company's remarks will include certain forward-looking statements regarding earnings and strategy that involve risks, uncertainties and other factors that may cause the actual results to differ materially from those forward-looking statements. The risks and factors that could cause our actual results to differ materially from forward-looking statements are provided in documents the Company furnishes to or files with the Securities and Exchange Commission, specifically the Form 8-K we filed this morning, together with our earnings release filed with the Form 8-K and the Risk Factor section of the Company's annual report on Form 10-K.

In addition, the Company's remarks include reference to non-GAAP measures. A reconciliation between GAAP and non-GAAP measures can be found in the fourth quarter financial supplement posted on the Company's website at www.cubesmart.com. I will now turn the call over to Tim.

Thanks, Charlie, and thank you, to everyone for joining us this morning and for your continued interest and support. Industry fundamentals remain positive and our operating platform continues to deliver exceptional occupancy NOI and FFO per share growth. Our fourth quarter was certainly a busy one and a great way to closeout a very successful 2015.

Our reported FFO per share as adjusted of $0.33 met the high-end of our guidance range and represents 17.9% growth over last year. But the full-year, in 2015, our FFO per share as adjusted grew 15.7% to $1.25 per share.

Same-store NOI for the quarter grew 11.1% over last year representing the second highest quarterly growth result in our history. Drivers of the NOI growth were an 8% increase in revenue and a 0.9% increase in operating expenses. Revenue growth came mostly from gains and effective rents of 6.5%, a 20 basis point sequential increase, as well as a 130 basis point gain in average occupancy during the quarter.

We remain active and disciplined in our pursuit of external growth opportunities and we were very active during the fourth quarter. We closed on the acquisition of 13 properties for $124.2 million, and so far in 2016, we've acquired four properties for $57.4 million, and have another four properties under contract for $64 million.

Also during the quarter, we established a 10% ownership position in a newly created joint venture that acquired 31 properties for $199.4 million. The venture is under contract to acquire six additional properties for $43.1 million.

On the development front, we opened for operation two JV developments during the quarter, one in Queens and one in Brooklyn, for a total investment of $32.2 million. So far in 2016, we've opened an additional JV development in Queens for $32.2 million, and purchased a property at C/O in Brooklyn for $48.5 million. Details of our value creation pipeline are included in our supplemental information package on pages 26 and 27.

We also completed the previously announced disposition activity exiting our ownership position in El Paso, Texas, and our remaining asset in London. Proceeds from our disposition activity during the quarter totaled $47.4 million -- or $47.7 million, excuse me.

From a balance sheet perspective, we continue to focus on funding our growth in a conservative manner that's consistent with our BBB BAA2 credit ratings. In October, we completed our third bond offering issuing $250 million of 4% unsecured senior notes due in 2025. Additionally, we remain active using our at the market equity program selling 3.5 million shares during the quarter for net proceeds of $97.4 million.

Also during the quarter, we increased our quarterly dividend 31.3% to $0.21 per share. Even with this meaningful increase, our FFO payout ratio of 63.6% remains the lowest in the sector. 2016 guidance reflects our expectation of continued positive fundamental trends in our markets.

The same-store pool will grow by 54 properties in 2016, representing approximately 4 million net rentable square feet. And for 2016, we're estimating revenue growth of 6% to 7% primarily driven by growth in net effective rents. Expense growth is expected to be 3% to 4% primarily driven by higher property taxes. And as a result, our NOI growth is expected to be 7.5% to 8.5%.

Our FFO per share is adjusted guidance range of $1.35 to $1.40 for 2016 reflects 10% year-over-year growth at the midpoint and captures the full-year impact of our fourth-quarter 2015 unsecured bond issuance as well as our expected dilution from our new store openings. For some additional color, let me turn the call over to Chris.

Thank you, Tim. Our fourth quarter performance was certainly the capstone of a very solid 2015. Organic growth has remained robust as our strong operating platform is firing on all cylinders and is buoyed by strong industry fundamentals to achieve exceptional results.

The operating performance in the quarter was extremely strong across the vast majority of our major markets. Overall, occupancy contributed 1.4%, increases in rents and a lower discounts contributed 5.9% and growth in ancillary revenue contributed the balance of our 8% same-store revenue growth in the quarter. Discounts as a percent of in-place rent declined about 30 basis points from last year to 3.9%.

Strong markets included our portfolio in the New York City boroughs with 9.1% revenue growth and 240 basis points of occupancy growth, Atlanta with 9.7% revenue growth and 140 basis points of occupancy, and Southern California with 10.2% revenue growth and 300 basis points of occupancy growth. We had a fantastic quarter in Houston.

On our 12 asset same-store pool 8.7% revenue growth. When you add in our 27 Houston stores in our joint venture, the combined 39 stores delivered 10.2% same-store growth in revenues.

A soft spot for us was in Chicago where our 28 same-store properties delivered solid quarter-over-quarter NOI growth on favorable expense comps, however revenue growth was 3.8% and we experienced a 30 basis point decline in occupancy. This performance can be attributed to a combination of tougher year-over-year comps coupled with slower economic conditions with unemployment growing 50 basis points from Q3 and a new city budget that includes a historic property tax hike. Looking forward, we remain very bullish and believe our quality portfolio demographics and operating platform will continue to produce strong internally generated cash flow growth.

Shifting to investments, it was another productive quarter and year for us. It really was a spectacular year for our third-party management platform. At the end of the year, we managed 227 facilities with 46 properties added during the quarter.

As Tim mentioned, during the quarter, we formed a venture with an institution to acquire 37 assets in which we invested approximately $8 million net of capital for a 10% ownership plus a promoted interest providing us with an opportunity to participate in the upside in addition to earning property management and other fees. We looked at this portfolio as it was coming to market.

The majority of these assets were not an ideal fit for our core market investment strategy on our balance sheet. Typically as you can imagine, it's very difficult to split a portfolio up, buying select assets and trying to find a buyer for the balance. The seller is typically much better off selling as a portfolio.

Fortunately, we have a great long-standing relationship with our partner. We've done business with them in the past. So we put our heads together to create a venture that satisfied both of our objectives.

We're able to have a modest equity investment in the assets and drive compelling returns as we receive market management fees. We're also able to leverage our operating platform and have additional assets contributing to the overall marketing machine. Finally, at some point in the future when our partner seeks liquidity and the venture looks to sell assets, we're in a great position to buy those assets that fit our core investment strategy while participating in the value creation on the balance of the assets.

We continue to invest on balance sheet and high-quality demographic markets. During the quarter, we opened two joint venture development projects; one in Brooklyn and one in Queens, and added 13 acquisition properties for an investment of $124.2 million. The 13 fourth-quarter acquisitions were a balance, a blend of stabilized and non-stabilized assets.

The non-stabilized being in their early period of lease up. Our investment momentum has continued into 2016 and our pipeline remains very active and very attractive.

So with that brief market and investment overview, operator, let's open it up for questions.

(Operator Instructions)

The first question comes today from Gaurav Mehta with Cantor Fitzgerald.

Good morning. Following up on the 10% joint venture. Could you provide details as to whether this JV can grow in the future or it's restricted to what they've already acquired?

Hi, Gaurav. Good morning. This was a -- this particular entry was a single portfolio transaction. That being said, again, we have an excellent relationship, repeat business with this partner. And so to the extent that opportunities present themselves to us or to them in the future, we certainly have a structure that we think delivers great value to our shareholders, particularly on a basis of return on invested capital.

The opportunity is there to certainly add to the venture or do more. There is no commitment to do so. There is no restrictions on our ability to buy assets in any market we so choose on balance sheet. It is unique to this particular transaction, but I will say that an awful lot of time and energy was put into the structure and should we want to do additional deals, the opportunity is there.

Okay. And second question on the development. Could you provide details on the wholly-owned development that you have in this quarter and is that something you plan to grow, developing by yourself?

In terms of wholly-owned development on this quarter, the assets that we placed in service in Brooklyn and Queens and the assets that we have under development are all in ventures. Again, we have relationships in certain markets where we have partners who are experts at finding the sites and navigating through the local market condition. Our assets that are under construction in Queens, the Bronx, down in DC, North Palm Beach and Brooklyn, are all in the same typical partnership structure we've been using for the last few years.

All right. Great. That's all I have.

The next question comes from Todd Thomas with KeyBanc Capital Markets.

Thanks. Good morning. A question on your commentary around Chicago. You mentioned the tough comps but you've been cycling tough comps throughout the portfolio now for a couple of years. And then you mentioned the uptick in unemployment of 50 basis points.

What impact did that have on operations in Chicago? What happened there specifically? Was it an increase in move out activity and inability to raise rents?

Yes. In Chicago, and again, you have North Chicago and South Chicago. We have a little bit more pressure in South Chicago than we do on the North side. That portfolio was in the 91% occupancy range, at least the stores we had back in 2013.

So if I think about Chicago and DC, they're both markets that didn't suffer in the downturn as badly as some of the other high beta markets. And so coming out of that, the occupancy upside in those two markets was less than we had in others.

Chicago specifically in this past quarter, it was a rate issue. You saw that the occupancy decline was about 30 basis points which is frankly, pretty immaterial. The struggle was on the rate side. Not only were we not raising rents in South Chicago, we were lowering them to generate activity.

Okay. And then as you think about the revenue growth guidance that you provided for the year, are you expecting a stronger start to the year coming off of this quarter and the acceleration that you saw through the winter? Or in the model are you expecting a rather constant, consistent growth trend throughout the year?

Todd, I think fairly consistent with the last couple of years, the momentum going into the first quarter is great. The visibility into the first and second quarter is higher at this point then it will be.

We will have better visibility into the busy season the latter half of the year as we move through. So right now baked into our expectations, is pretty robust performance in the first half of the year and then an assumption of some trail off in the second half.

Okay. And just the last question on the balance sheet. No floating rate debt exposure at all this quarter. Do you anticipate drawing down on the line or letting any debt float throughout the year or do you plan to keep it pretty close to zero?

Yes. So, right now, Todd, it's Tim. The only exposure we have to the short-end of the curve is the result of borrowings that we would have outstanding on the line. Part of it is a timing issue as to we did the bond issuance in the fourth quarter, used the proceeds from that to fund, among other things, repaying amounts drawn on the lines.

So certainly, we would expect to use the line to fund our development, to fund our external growth. That provides us some exposure to the short-end of the curve. So, we expect to use the line and be comfortably underutilization of half of that. Once we would build up to half of the $500 million, that would put us in a position to evaluate terming that debt out on a longer-term basis and on a fixed rate basis.

Okay. Any financing assumptions baked into the model this year in 2016?

Just financing and repayment of the modest amount of debt that matures and then financing our external growth.

Okay. Thank you.

Thanks.

The next question is from Smedes Rose with Citigroup.

I wanted to ask you big picture. Could you comment on what you're seeing on the supply side for 2016? Maybe if you have any thoughts nationwide and then what you're seeing in your market specifically?

Sure. Be glad to dig into that level of detail for you. When we look at our top seven MSAs. So, in our top seven MSAs, that is about, if you include the assets in Houston that are in the venture, that's about 57% of our NOI. So we go back to 2014, and what our data tells us is that there were 21 assets that opened in 2014 in those top seven. There were 50 that we had opening in 2015.

And under construction at this point in those, we see 95 properties in those markets. The current expectation is that a portion of those will open in 2016 based on where they are.

About 30% of those stores would be in a position where they would compete with a CubeSmart. Five of those 30 were competing with ourselves. So we are either owning or managing that store. So that total that I gave you includes stores that may be branded CubeSmart either because we own or we manage.

So, while we're seeing, again, that very slight uptick in supply, we don't see that having any impact on our 2016 performance as evidenced by our fairly strong guidance. And as we look out into 2017 knowing that some of these stores will lag, some of these stores won't get completed on time, it to us, remains a very manageable level of supply in those top seven markets and impact if any potentially in 2017, maybe in 2018, but modest at best.

Okay. That's helpful. And I want to ask you, on the HVPeek JV, can you talk about these going in yield on that venture and of the -- you mentioned that most of the properties aren't a great fit for your platform, but how many over time would you expect to be able to purchase or what percentage of it?

Right. So when you look at this, and again, this is our thinking here is that there are larger transactions that have come to market where they just don't fit entirely on our balance sheet and breaking it up is a challenge. You get into this issue on portfolios where cap rates are quoted on a blended basis, but then if you dig in and you try to allocate between the cap rate paid on an A market and the cap rate paid on a B market, it's a tough analysis.

And so for us, we looked at this transaction and of the 37 stores, and again, we're projecting out into the future. But today, about one-third of those stores were in markets, principally in the Boston area and Nashville, Tennessee, that we would have been interested in putting on our balance sheet.

In terms of a yield, these were mid-80s occupied. So I think overall, the portfolio has some nice upside. We are sensitive to disclosure relative to our 90% partner. Let's say it was a low to mid-six. I'll give you that direction on year one.

Okay. That's helpful. Thanks a lot.

The next question is from Jeremy Metz with UBS.

Good morning. Tim, you mentioned the 15% increase in the same-store pool. I would think that some of the assets rolling into the pool are generally still below the portfolio average in terms of occupancy and rents. So assuming that is the case and maybe that's actually the first part of the question, but assuming it is, I was just wondering if you could walk us through how much impact those are having on your full-year same-store guide versus where the existing 2015 same-store pool growth expectations alone would have been?

Yes. So, if you go back and look historically with the disclosure that we provide showing the three-year pools, you can see looking backwards, you can see the impact of new stores being added. Were pretty modest here looking backward. The NOI growth is pretty consistent amongst our 2015, 2014, 2013 platforms.

Looking forward, and thinking about the 50-some assets that are being added to the pool, they are in our expectations. They do lift the overall result a little bit on the top line about 20 to 30 basis points of the growth. It comes from the addition of the new properties to the pool. So those new properties that are being added to the pool were just over 90% occupied at year-end, 2015. So they do have a slightly larger or slightly higher growth profile than the balance of the same-store pool.

Great. And as a follow up, can you let us know where things stood for that new pool at the end of January in terms of occupancy and rents?

Sure thing. This is Chris. At the end of January on the 31st, they were 91.4% occupied and asking rents were 5.1% up over the prior January 31.

Okay and just one final question here. As I look at your asking rents verse your end placements, they are about equal right now. And then if I look at your asking rents verse your realized rents, there's still call it a 5% gap there. So that's a narrower spread we've seen here in the past few years.

I'm wondering how we should be thinking about the convergence of those and what it means? Part of it obviously, is normal seasonality, but I'm wondering if it's also perhaps a sign we're getting to a point where the market is pushing back on rent increases or the ability to drive discounts lower is sort of over at this point? Just curious how to think about it?

Yes. I know you all continue to want to have that call made correct but it is absolutely not an indication of any sort of a slowdown. It's seasonal. Again, we provide that disclosure of asking rents. I don't believe anybody else does in our group. And so, it's what our asking rents were at 31 October, 30 November and 31 December, on average. It's a three data points at time.

It gives you a direction of where our asking rents are but we are moving rents every day. I wouldn't read into that extensively at all. It is just very indicative of our systems indicating to us that we had in occupancy opportunity in Q4. I think if you look at the sequential change in our occupancy relative to some of the other reporters, our change was less in terms of the decline from September 30.

And so, we saw that as an occupancy opportunity. We made some reductions in asking rents to new customers during that time period but it's seasonal. And you are also looking at a delta. So you got to compare that to where we were at 12/31 of 2014, where actually the system suggestion was the opposite. We had a larger decline in physical occupancy in 2014 because we were being a little bit more aggressive in terms of asking rents.

Thanks. Appreciate the color.

The next question is from Jana Galan with Bank of America Merrill Lynch.

Thank you. Good morning. I wanted to clarify the assets under contract, that's not yet into 2016 guidance? And then I'm sorry, is it $76 million? I think in Tim's comments he said $64 million?

So the guidance includes everything that has been announced as closed. The assets under contract would not be included in our guidance. They're not going to have a material impact on it at that level. But, that's the specific treatment in our guidance. So only things that have closed through today.

And can you provide cap rates on assets acquired in Q4 and first quarter?

Yes. This is Chris. In the fourth quarter, that group of assets that were acquired, as I said, was a blend of stable and stores that were in lease up. When you look at that blend, it was low 5%. The blend there is kind of all over the place because some of those assets were in lower levels of physical occupancy when we acquired them. I don't think -- if you're looking at that as a market check, I wouldn't consider that a market check because of the different stages of growth that those stores are in.

When you look at the market in the first quarter, again, for the stabilized assets, which of the stores that we closed on in the quarter and then subsequent, there was only four and those were again mid-5%. I think you continue to see a market where call it 5% to 5.5% for a stabilized asset in an A market continues to be, on a single asset deal, continues to be the range of cap rate. Sometimes you can find some opportunities a little bit north of that, but that's where market is.

Thank you.

The next question is from Ki Bin Kim with SunTrust.

Thanks. Are you guys noticing any change in the number of customers moving out due to rent increase letters being pushed some?

No. Not specifically due to -- no, is the answer. We still see customers who are -- who don't have other options. So when you're looking at rent increase letters, even if you get push back, if the general manager at the store gets pushed back, the response is actually fairly easy for them. If you look -- you can share with the customer that the surrounding options for them are full and their rates are in line with ours.

Okay. And I'm not sure if you guys track this, I can't remember, but do you have a rough idea of where your average rent per square foot is versus some of your nearby peer set in every location? Also on average, how far you are above or compared to the peer set?

Yes.

And how is that looking or trending?

It changes every day, Ki Bin. In general, I would say if you look at effective rents. So that's what someone is asking for a vacant cube, where they are on free rent and where they are on any sort of online discount, trend has been fairly consistent. We compete with one very, very large operator at the majority of our locations. The other operators -- it's location specific. And we're all operating within a band that hasn't really materially changed over the last year or so.

Again, part of the issue with that analysis is that the availability of vacant cubes is so small that you're just not seeing a lot of data points. You're looking at what inventory is available, not what the existing customers are paying. We don't have insight into that information.

Okay. And one last quick one. Log redevelopments, the ones that you've recently developed and the ones that you have yet to be completed, about eight of them in total are New York MSA-centric. Is there any concern that you're maybe doing too much where it cannibalizes your own product? Or do you think the market is that strong that it can actually absorb it and not hurt your already owned assets?

Yes. First of all, we believe that in the Boroughs you have the best storage market in the United States. We're obviously fully invested there and continue to believe in that. As you look forward, between what de Blasio has put forth to limit self storage in the Boroughs, when you look at where zoning is in the Boroughs, you're just increasingly, there's an increasingly few number of sites that are available to be developed. So from our perspective, we are very interested in owning as many of those sites as we can.

In some instances, I would say particularly in the Bronx, and again, this is based on where zoning is, so you tend to have assets clustered together. When we open a new asset, it does compete with an existing cube or multiple existing cubes, which does put a little bit of near-term pressure on the performance of those existing assets. But in the long run, when you look at the square foot per capita in the Boroughs, when you look at all of the demographics there, in the long run, we obviously believe that it is a fantastic place for us to invest and think we have a real competitive advantage there.

Okay. Thank you, guys.

The next question is from George Hoglund with Jefferies.

First question on the JV. Are there any agreements in place in terms of what types of assets the JV would target relative to what you guys would buy on balance sheet?

No. Again, just to be clear, this was a portfolio that we had insight into. It made sense for us to have a discussion with our partner. The transaction works for both sides and that was the end.

To the extent that we elect on either side to do more, that's obviously both at our options. There's no requirement to do anymore. There's no restrictions around what Cube can do.

Okay. And just the portfolio that was purchased. Were these all pretty much stabilized properties or were there some new development properties in the portfolio?

No. They were all existing assets. In terms of occupancy, I think you would have seen the typical disconnect between the private operator and a public operator. They were lower occupied than what we would expect them to be in the future.

Okay. And one question on guidance. When you look at the high-end of guidance, what do you think are the factors that would most likely push you to the high-end or that could even push you above guidance?

George, it's Tim. The most impactful set of assumptions included in the guidance are obviously the performance of our same-store portfolio. So, to get towards the high-end of the FFO guidance would imply performance at the high-end of the same-store revenue expense and NOI ranges that we've provided.

Other factors are going to be timing of any financing or refinancing activity. Timing of when our development properties open. Because as you're aware, when we opened a project, it is dilutive day one and it's particularly dilutive during the first six months of opening. So the extent any of our projects were to open earlier, that would create a bit more drag in the year to the extent that they would open a little bit later. That would create an FFO good guy if you will during the year.

So those are the biggest factors that come to mind. Again, the same-store performance is really the biggest driver. We do of course, have assets that have been acquired over the past year. The performance of those assets could outperform and help bring us up in the range or the opposite could hold true as well.

Okay. And how much of an occupancy increase are you guys assuming in 2016?

George, it's Chris. Again, I always like to answer that question by saying you've got to look at occupancy and rate and discounting, et cetera. All those levers move with each other, so to just answer that question in isolation I think doesn't really get the full picture.

If you look at the midpoint of our guidance, generally it would assume occupancy in the 100 basis point to 150 basis point range. And then to get to that midpoint of 6.5%, the balance is going to be that combination of in-place rents plus discounts.

Okay. Thanks, guys.

The next question is from Paul Adornato with BMO Capital Markets.

Thanks. I was wondering if you could talk a little bit about risk management, specifically with respect to FFO dilution and development exposure? How do you guys think about that and how -- as more development hits the market, development will remain front and center over the next -- for the foreseeable future. To help us understand how you guys see it and think about it?

Sure, Paul. This is Chris. You start by thinking about where you would be comfortable taking that risk. And certainly, when you look at page 26 of our supplemental on the value creation pipeline, you see the markets Queens, Bronx, Brooklyn, Dallas, downtown Miami, Chicago. So, it's a high barrier to entry, great demographic markets, great real estate. That's the first step.

Then when we look at volumes, we're not really looking at it from a dilution perspective. We're looking at it from how much as a percentage of our gross assets are we comfortable having in that pipeline. Again, when you look at the pipeline as it stood at December 31, between the anticipated total divestment in the developments and the facilities at C/O, where you're taking a little bit different risk. None on the construction but the lease up, it's a little bit shy of $250 million.

I think that range is a reasonable exposure for us given the size of the Company. And so, as assets come out of there and get placed in service, we're looking at opportunities in the 2017 and 2018 at this point. Obviously balancing the financing strategy on that side as well.

So you're making a commitment for something that will open in the future and we want to make sure that we continue to manage the balance sheet so that we are in a comfortable position thinking about that future need. Those are the factors that come into play as we think about those assets on page 26.

Okay. In terms of -- I think I heard you say that this is probably the maximum level in terms of corporate, overall exposure that you're comfortable with. Is that --?

Plus or minus, right? It's $3 billion plus in gross assets. If we had 10% of that, it's around $300 million. Between 5% and 10% depending upon where we are in the cycle, feels right to us at this point.

Obviously, it also comes into play with performance and what other opportunities are. So to the extent that our facility in Arlington, Virginia which rapidly got to 50% occupancy, to the extent they're all like that, we may revisit. I wouldn't consider it a hard cap, but I think that's our thinking as I understood the question.

Sure. And finally, just looking in the recent past, are there certain developments that have taken longer than expected or maybe if you had to do it over again you would not choose to have that exposure?

No. None of them have taken longer than expected. They've either been on track and on budget or have exceeded our expectations. I will say that combining both the lease up and the revenue performance. I would say from that perspective, they've all been extremely solid deals.

I think to a prior question about cannibalization in the Boroughs of New York, I think our Tremont Avenue store in the Bronx, certainly was one where we have three other stores in that marketplace. If you had to put things, self rank, that one would be in the category of on budget and on track for our expectations. If you look at Arlington for example, or our store on Northern Boulevard in Queens, those are ones that have far exceeded our expectations.

Thank you.

The next question is from Jason Belcher with Wells Fargo.

Just following up on the disposition front. I know you recently sold your El Paso assets. Can you give us an update on your thoughts around dispositions more broadly and what the pipeline looks like there?

Sure. So we don't have any specific dispositions baked into the 2016 expectations. We continually force rank the portfolio. We're always looking at those assets within our own pool that then and ultimately are in that bottom 25% and evaluating the long-term hold opportunities.

We have a few markets with I guess I will call them some orphan assets where we own less than 10 assets in a market and we need to look at what's the right answer there long-term. Can we continue to grow and if not, is there a better use of our capital?

But, we like the portfolio where it is today. We've been an extraordinarily active seller over time. We'll continue to evaluate. We're not completely eliminating the possibility that we may sell some assets in 2016, but nothing's baked in at the moment. It will be opportunistic and I would call it more pruning than anything else.

Got it. That's helpful. And on the operating expense management side, what are you doing there? It looks like you're seeing a good bit of relief in the property tax and property insurance categories, as well as utilities. Anything specific initiative wise you all are doing to drive any of that?

This is Tim. It's a continued focus on blocking and tackling and being extraordinarily focused on each and every line that adds up to the operating expenses. We are active in investing in energy efficiency initiatives, lighting programs, temperature control investments that overtime have helped to reduce and control our utility expenditures. We remain focused on trying to bulk purchase where and when we can.

Nice of you to say that the real estate tax line item appears to be under control. It certainly feels like one where we continue to have pressure. We are very active despite that growth being more than inflationary levels.

We're very active in challenging any assessments across the country and across the portfolio and do so very aggressively when we see an opportunity there. We remain focused on continuing to try to improve our margins by keeping our credit card fees low, just a whole host of areas that we remain focused on.

One area that we have a little bit of pressure over the last two years, is that we do feel very strongly that we have incentive compensation programs down throughout our organization, down to the store levels. And to the extent that our portfolio is exceeding prior year performance and budgeted performance, we have had higher than traditional levels of store level bonus, which we're happy to have that -- we're happy to have that pressure on our expense side, because it means our revenue sides, the revenue side of the equation is outperforming. It will be a continued focus on making sure that we control expenses in every area that we can.

Great. Thanks a lot, guys.

(Operator Instructions)

The next question is from Ryan Burke with Green Street Advisors.

Thank you. Chris, the de Blasio plan I believe ends as of right development and will going forward require special permitting. Can you talk about how much more difficult that will make it to build self storage properties in the Boroughs and do you have a feel for what percentage of the geography that encompasses of the total Boroughs area?

Ryan, I'm not sure I could put that fine of a point on it other than to say it will make what is already a very difficult process significantly more difficult. Most, if not all, of what gets done even today in the Boroughs is zoned for storage. Removing that will take what today has been a challenge and I think just make it extraordinarily challenging.

We're obviously watching that very carefully. It's kind of a double edged sword because we think the value add from what we can get done is very, very significant. So on one side, on the other side obviously our position there just becomes that much more valuable if it's more difficult to get any additional product into the market.

Okay. Thanks. That's helpful. And leasing in general, not only in the Bronx but Long Island and Dallas, stalled this quarter. You've touched on dynamics in the Boroughs. Is it a similar dynamic in Dallas? And then for all three of those markets, is your perception that other competitive development properties are also seeing slowing of lease up as well?

Yes, so, I'm looking at -- I'm looking at page 28. The growth in Dallas/Fort Worth/Arlington from 90.2% last year to 91.8%. So I'm assume you're probably more looking at it -- sequentially or you're just looking at the one store that we have there.

Yes. I'm not calling into question your performance from an operating perspective in the same-store pool. It's the specific focus is on the development properties, on page 27.

Got you. No. I think Dallas without a doubt, to be clear, in the Frisco, McKinney area, which is very high growth, you are also seeing new product coming in. There certainly is some of that impact there. But I think in general when you look at Q4, it's back to that balance between occupancy and rate and different strategies from the system in different markets.

It's seasonal as well. You're going to get in a lease up store that has a variety of inventory, you just tend to get luckier and demographically, you get more of the larger units rented during the summer than you do in October to December. I think, clearly, there is some supply in Dallas, but I don't think that's having a negative impact on our lease up properties at all.

And then, would you say that both in the Boroughs and in Dallas, if we did have disclosure from both public and private operators, do you think that their development properties in those areas would have behaved similarly from an occupancy perspective?

Yes. That's hard to answer again, because of the different strategies. It's atypical to see a significant movement in a new asset in that October to December timeframe. So I don't know how I would speak to what others are seeing. But I think what we saw was pretty consistent with our expectations.

Okay. Thank you.

The next question is from Jonathan Hughes with Raymond James.

Good morning. Thanks for taking my questions. You guys acquired nearly $300 million of assets in 2015, but G&A was actually down for the year. And I know you touched earlier on an incentive comp at the property level, but was wondering if you could give us some color on the corporate level on how you were able to keep that in check?

It's a very scalable business from that perspective. A lot of the back office and a lot of those costs are just very scalable. As we add stores, given that so much of our processes are through the use of technology, which has just created an opportunity to be able to add assets. I do think it's worth noting that in the fourth quarter, the volume of owned and managed assets that we brought on, along with the volume of new teammates, particularly at the stores that we on boarded, that we were able to do that very smoothly, in our perception at least, without significant cost pressure.

Again, it goes to, it's a very scalable business. I think we have got a great foundation, a great technology platform. We have great people. I think it gives us the encouragement that if a very large transaction were to present itself and we were fortunate to be the buyer, we could integrate a significant number of properties we believe without really any hiccups within that integration.

Yes. That's great color. Appreciate that. And then earlier, I didn't quite follow the Chicago commentary on the tax rate hike there. Could you clarify what drove the 12% decline in operating expenses in that market?

Yes. So in the fourth quarter, anytime you have a growth number it's either something happened in the fourth quarter this year or the fourth quarter of last year. And in Chicago in particular, we had a pretty significant increase in our real estate tax expense in Chicago in the fourth quarter of 2014.

So, it created an easier comp if you think about it from a growth rate perspective. Because we had been accruing to a certain amount in 2014, and then had to increase that expense level late in the year based on the assessments that we were receiving and planning on expensing. So, 2015 benefited from 2014 having a bigger relative hit.

Sorry, my commentary was just more macro. That Illinois in general and Chicago specifically, is having budgetary issues and they are currently attempting to solve that through property taxes, which are already at the highest levels in the United States.

Okay. That makes sense. And I had one last one. Looking at C/O deals that you are seeing out there, has it become more difficult in recent months for those developers to secure financing from lenders?

I think the degree of difficulty is about the same on development. You continue to see low advance rates, desire or demand for recourse, et cetera. I think the issues in the CMBS market have seemingly created some challenges for private buyers who rely on that market heavily to be able to finance their acquisitions.

Okay. Thanks, guys.

Thanks.

The next question is a follow-up from George Hoglund with Jefferies.

On the valet storage business. Since you guys have a heavy exposure in New York, just wondering how you view that business in terms of competition? And also, are there any of these valet storage businesses that are actually renting space from you guys?

Hey, George. It's Chris. We had experimented a bit with that concept. CubeSmart Direct was the brand. What we learned was that it tends to morph fairly quickly into the moving and storage business. The idea that the customer is interested in putting shoes in a tote and having that taken away moves pretty quickly into can you move my entire one-bedroom apartment, which is just back to the traditional moving and storage business.

We haven't felt a direct impact from that business anywhere and not in the Boroughs. But we shall see. Maybe that's, again, on a cost basis, that might be a little bit more appealing in Manhattan. Although again, Manhattan is where we were testing CubeSmart Direct. I think in direct response to your question, don't -- haven't seen it as a competitor.

In terms of do folks use our stores? Yes. The moving and storage companies use us. I'm sure somewhere there's a valet business that does as well. I couldn't point to specific stores or specific customers.

Okay. Thanks.

This concludes our question-and-answer session. I would like to turn the conference back over to Chris Marr, for any closing remarks.

Okay. Thank you everyone for your interest. It was a great call. Obviously, we were pleased with the quarter and off to a great start here on both the internal and external front in 2016. Look forward to speaking to you all again after our first quarter reporting. So, thank you and have a great weekend.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.