CubeSmart (CUBE) 2016 Q4 法說會逐字稿

Good morning and welcome to the CubeSmart fourth quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions).

After today's presentation there will be an opportunity to ask questions. (Operator Instructions). Please also note that this event is being recorded.

I would now like to turn the conference over to Charlie Place, Director of Investor Relations. Please go ahead.

Thank you, Andrea. Hello, everyone. Good morning from always sunny Melbourne, Pennsylvania. Welcome to CubeSmart's fourth quarter 2016 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 strategies that involve risks, uncertainties, and other factors that may cause the actual results to differ materially from those forward-looking statements.

The risk factors that could cause 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 a Form 8-K in the Risk Factors 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 Chris.

Thank you, Charlie, and good morning.

Our fourth quarter with 8.1% same-store net operating income growth and 15.2% growth in Funds from Operations per share capped off another fabulous year of results for our Company. Full year 2016 same-store net operating income growth of 10 4.2% represented our highest internal growth rate over this last five year period of extremely strong storage fundamentals.

Our 2016 FFO per share growth of 15% was our sixth consecutive year of double-digit FFO per share growth. In recent years it was occasionally tempting to get caught up in the excitement of some of the larger deals. We continued to be disciplined in our external growth, targeting opportunities that expand our market presence and have upside through occupancy and ate growth as a result of being added to our platform.

Interestingly, of the 25 stores we acquired in 2016 18 were single asset transactions. We closed on two portfolios of two assets each and one portfolio of three assets. This speaks to the depth of our industry relationships and a proven ability to scour the market for attractive one-off investment opportunities.

Our third-party management program had a spectacular year in 2016. We ended the year managing 316 stores containing 19.7 million square feet. To put this into perspective third-party stores represent nearly 40% of our portfolio at year-end creating a growing source of fee income, adding tremendous scale to our operating platform and providing an excellent source of future growth.

Needless to say we are extremely excited by the performance of this program. Looking forward we are acutely aware that challenging waters we must navigate. On the internal growth front we are experiencing a reduced contribution to our growth from physical occupancy gains and lower levels of discounting.

We are facing new supply entering our markets. Therefore, our proficiency in engaging the customer at the very beginning of their exploration of self-storage and pricing the offer we present is of critical importance. We believe our people and systems in the marketing and revenue management departments are first class and up to the challenge and our more than 2200 teammates across the country will continue to differentiate the CubeSmart experience through Best-in-Class customer service.

The current share price and seller expectations makes for a challenging acquisitions environment. We plan on remaining diligent with an intense focus on finding opportunities sourced directly through our third-party platform that will create value for our shareholders in this challenging environment. We are willing to be patient and find deals that meet our criteria.

Our balance sheet is in great shape and we have the capacity to fund our development commitments without modifying our leverage profile. We have a proven track record of disposing of assets and recycling capital as well as utilizing private capital in a venture structure and we will continue to use this experience to maximize value for our stakeholders.

Our business had a very solid start to 2017 and we are cautiously optimistic that we will be able to smoothly navigate through these headwinds that I have outlined continue to produce solid results for our shareholders in 2017 and beyond.

Tim, I would like to now turn the call over to you.

Thank you, Chris, and thank you to everybody, as always, for your continued interest and for joining us today.

As Chris touched on our fourth quarter results rounded out a very successful year across many fronts. Same-store performance included headline results of 5.8% revenue growth and 0.2% expense growth, yielding NOI growth of 8.1% for the quarter.

For the full year same-store revenues grew 7%, expenses actually declined by 0.3% to yield a very robust NOI growth of 10 4.2%. From an investment standpoint we closed on the acquisition of four stores for $52.8 million in the quarter resulting in a total of 25 stores acquired for the year totaling $334.2 million. We acquired an additional three stores in C/O and opened two JV development stores in the year for a total investment of $133.4 million.

In mid-December we closed on a newly formed joint venture that acquired a 13 store portfolio in the New England states for $87.5 million. CubeSmart is a 10% partner in the venture contributing $3.8 million. This structure is identical to several of our recent transactions and allows us to expand our footprint, earn fee income, leverage our operating platform and achieve attractive all-in returns on a minority ownership position.

In November we redeemed all of our outstanding perpetual preferred shares at par for $77.5 million. As part of the redemption we recognized a noncash charge of $2.9 million which we do not include in our FFO per share as adjusted. The preferreds with effectively refinanced with a portion of the proceeds raised from our notes offering back in August. In December we announced a 28.6% increase to our quarterly dividend, bringing our dividend to $1.08 on an annualized basis.

Based on the midpoint of our 2017 guidance the increased dividend suggests an FFO payout ratio of 70%. We did not raise any capital through our after market equity program during the fourth quarter. Our balance sheet is well-positioned with only $6 million in debt maturities in 2017 and modest maturities of $100 million in 2018.

We have the ability to fund our existing development commitments on a leverage neutral basis over the next two years, without raising any additional equity capital, by utilizing our expected free cash flow. Details of our 2017 earnings guidance and related assumptions were included is our release last night. Our 2017 same-store property pool increased by 26 stores or around 6%.

Same-store revenue guidance assumes little impact from occupancy and is, again, overwhelmingly driven by expected levels of asking rates, promotions, and discounting activities. Our forecasts are based on a detailed asset by asset ground up approach and consider the impact at the store level, if any, of competitive new supply delivered in 2015, 2016, as well as the impact of 2017 deliveries that will compete with our stores. In 2016 our same-store expense growth was a source of very good news throughout the year as our same-store expenses actually declined by 0.3%, as I mentioned earlier.

That good news in 2016 creates an awfully high bar or a tough comp heading into 2017. Our same-store expense guidance reflects our expectation of a return to more historically normal levels of snow removal and seasonal expenses. We also benefited last year from coming in better than expected on real estate taxes.

Some of that beat was from successful appeals and some of the bigger increases we anticipated in 2016 we now expect to hit us in 2017. Excluding real estate tax expense we expect all other expenses, as a group, to grow in the 2% to 3% range. We remain very pleased with the lease-up progress of our newly developed stores and we're proceeding nicely through the construction phase of our in process development assets.

The expected delivery timing has shifted slightly for a few projects as is typical given the complexities of developing in the markets we target. Our development pipeline will create meaningful NAV accretion of stabilization but, of course, in the short-term it creates a drag to our FFO per share as when properties open all capitalization of costs ends and the store opening day one with no revenue and essentially a full expense load. Our FFO guidance for 2017 is impacted negatively by $0.06 to $0.07 per share as result of this dilution.

Our guidance does not include the impact of any acquisition or disposition activity as levels of activity and timing are very difficult to predict. Echoing Chris's comments 2016 was a strong year of execution across all aspects of our business, core internal performance exceeded expectations as our people and our systems continue to demonstrate the ability to deliver market leading performance. We remain disciplined in executing our focused external growth strategy and also leveraged our operating platform and created future growth opportunities through successful efforts and expanding our third-party management program.

We also remain focused on our balance sheet objectives raising equity capital early in the year and attractive value to pre-fund our development commitments and also to ensure our balance sheet is set for the long-term through our fourth bond issuance and preferred share redemption. We are well-positioned on all fronts to face the challenges and opportunities that 2017 is likely to present.

Thanks again for taking the time this morning to join us and at this time, Andrea, why don't we open up the call for questions.

(Operator Instructions). Our first question comes from Smedes Rose of Citigroup. Please go ahead.

Hi. Good morning.

Good morning.

I -- good morning. I wanted to ask you. as always it's great to hear a little bit about what you're seeing on the supply front. and I want to specifically if you could cover maybe just your top five market which are about 50% of your NOI of kind of how you're thinking about New York, Chicago, Miami, Dallas and Washington.

And then in New York, you know, I was just also curious, your thoughts with there new PSA facility that's I think in the process of opening now the largest in the country and do you feel like that would have any impact on your -- you know New York City assets or do you feel like it's kind of out of the area for your typical customers?

Okay. Thanks, Smedes. The -- if you think about supply and I guess I'll start at the very high level and then drill in for you.

So if you -- if you start -- and I'll take the top 12 markets which represent approximately 75% of our 2016 same-store revenues. So you got the New York MSA, Chicago, Miami, Dallas, DC, Northern Virginia, Baltimore, Atlanta, Philadelphia, Riverside San Bernardino, Houston, Phoenix, et cetera. If you look at those markets by our tracking there were 125 new properties delivered in 2016 and then we expect 180 stores to be delivered in 2017.

So if you think about that as sort of a headline for that group of MSAs and then you go one -- you know, you dig a little bit deeper, the square foot per capita then in those markets is expected to grow about 5% from 4.6 square feet to 4.9 square feet. So then you go a little bit deeper and you take that information and say okay, how does that, you know, relate to the national average. So the national average is roughly 6.8 square feet per capita.

So you're seeing some supply. You are seeing it increase the square foot per capita in these markets. However, these top 12 markets still will be less supplied on a square foot per capita basis than the top 12.

So you start to dig in and you look at where are you seeing significant or square footage per capita growth at its peak, it's kind of interesting to me because you literally move away from those top 12 and the leader in the markets that we track, which is about an additional eight or nine on top of that, is Raleigh, Durham, Chapel Hill which is expected to get a 17% increase in the square foot per capita going from 6.1 square feet to 7.2 square feet. That's followed by Miami, Fort Lauderdale at 8.2% going from 5.08 square feet to 5.49 square feet. Followed by Dallas Fort Worth at 7.7 square feet.

You have also got the Washington, DC, Baltimore, Northern Virginia area at 7.7 square feet and then you have New York City, Westchester, Long Island, North Jersey at 7.4 square feet. So that's sort of a -- one way I think that's very helpful for us to think about looking at supply. If you just look at the five boroughs, and you dig into just the five boroughs specifically, you know, what we're seeing right now is an increase of new supply that will increase the square foot per capita from 1.3 to 1.6.

So while a -- still under supplied market obviously that math gets to about a 24% increase in that supply. So we think it is and again CubeSmart is self-supplying a decent percentage of that growth. So New York is going to have some pressure in the near-term on the existing stores to the extent that any of that new supply competes and in New York City many of them will and so it is manageable, albeit it will definitely have some impact on the same-store results in that market in the near-term.

To your question on a very large development, our understanding PSA is doing a very large store much like their Gerard store in Jersey City and we don't expect necessarily a whole lot of people to travel out of the five boroughs to Jersey City to a store so we don't see that having a material impact on our New York exposure.

Okay. That's great. I appreciate it.

Then I just wanted to ask you just one more question, if I could. Have you in your transactions when you're looking at product have you seen any sort of change in the quality of products or in cap rates and general pricing as you're looking at things you might acquire?

So if you just look at that since the last time we were all together in October, the short answer would be no. Clearly there's a -- there is a near-term here disconnect between rising cost of capital for Cube and seller expectations which is not closed and so stating the obvious either our cost of capital has to come down or seller expectations have to come down. One or the other, but in the interim here I have not seen much of a change.

Okay. Thank you very much.

Thanks.

Our next question comes from Gwen Clark of Evercore. Please go ahead.

Oh, hi. On the dispositions can you talk about the assets you may looking to sell and also the rationale behind it?

Sure. Hi, Gwen. The stores that we -- first of all, we look at markets where we don't have adequate scale and don't see a path to adequate scale and so there are a few small southwest markets that we are considering for exit.

And then on an individual store basis we always rack and stack our portfolio. We look at those that fall into that bottom quartile and evaluate what the hold IRR would be relative to selling at a market cap rate and redeploying those proceeds. You know, we have a -- we have some stores in the middle part of the country, in the Midwest, that meet that criteria and we would explore disposition of those stores.

And do you have and idea of what the pricing on those would be?

No. Too early to tell. You know, if I had to pick a range, it would be a large range but somewhere between [6] and [7] cap is probably the -- the range we would expect to trade.

Okay. Thank you very much.

Yes.

Our next question comes from Juan Sanabria of Bank of America. Please go ahead.

Good morning, guys. Thanks for the time. I was just hoping you could speak briefly about what your expectations are for new lease growth and renewals and I think, Chris, you started out by saying 2017 is off to a kind of solid start.

If you could quantify kind of what that means in any way that would be fantastic. Thank you.

Sure. So I guess I'll take it -- good morning, Juan. I'll take it backwards.

In terms of 2017, January was fantastic and I'm not usually this bubbly, but rentals over January of last year on a same-store basis were up 7% and it was our best net rental performance, rentals less vacates, in our history as far as we could go back for the month of January. So January was extremely strong from a demand perspective and in line with our expectation is on a vacant perspective, which ended up with a great result.

From a pricing perspective, you know, today effective rents are approximately 1% higher than they were at this point last year. So, again, great on the demand. About 1% on the effective rent side.

You know, as we go through the year, you know, I think as I said in my openings remarks, the opportunity on the discounting side is reduced. If you just think about the pattern of discounts as a percentage of rents for CubeSmart over the past year, you know, saw the middle two quarters of the year Q2 and Q3 where that was at 3%. We saw it in Q4 at 3.5%, which was a 30 basis points contraction from levels we experienced in the fourth quarter of 2015 and so we were able to continue to bring down discounts to really historically low levels throughout 2016 and would anticipate in our modeling for 2017 that, you know, there's not much of that opportunity left, if any.

So, you know, pricing in the space you look at inflation and arguably we always feel like we should be able to get something at or slightly above that as a base case. When you think about renewals to the -- or rate increases to the existing customers, that process hasn't changed and we have seen no change in customer behavior. We continue the model of passing along increase is at the sixth month and every 12 months thereafter and they have ranged -- they have had quite a wide range, but they have averaged in the high cycle digit percentage increases.

Okay. So if I heard you right, Street rate growth would be kind of in line or slightly above inflation?

You know, that's what we would target as a topline. Again, that comes into question then where you see discounting and as I said, I would expect that to be in a range from either kind of at what we were able to do in 2016 or maybe we need to open that funnel up a little bit more as we go through 2017.

Okay. Just one more quick question for me, if you don't mind. Any early thoughts or views on how 2018 supply could stack up? Do you think it would be higher than the levels you are seeing in 2017 or expect in 2017?

I think if you, again, look at the 12 markets that we talked about at the beginning and you look at what we would see as anticipated openings in that year, it's starting to look like 2018 certainly would be no worse than 2017. Or no more supply than 2017.

Okay. Thanks a lot.

Our next question comes from Gaurav Mehta of Cantor Fitzgerald. Please go ahead.

Yes. Great Thanks. Good morning.

So you touched upon your third-party management back from a (inaudible) in your prepared remarks and in 2016 you add 115 stores to that (inaudible). I guess in 2017 what kind of pace should we expect as far as third-party expansion is concerned?

Hi Gaurav,. I think we would anticipate continuing to grow that program at a fairly good clip. I'm not quite ready to say it's over 100 new stores, but I certainly think that we should be able to deliver more than 50. And that's kind of what we see in the pipeline right now.

It's a really nice balance of inflow between existing and operating stores where the owner is starting to run up against that occupancy ceiling as is discovering that the -- you know, the absence of the sophistication on managing rate is creating slower growth than they would like and they're contacting us and then we have a nice pipeline of stores that are being -- contemplated being developed and so the real challenging one for us to estimate is on the developed side because the -- as you know, the barriers are high and projects tends to get pushed back.

So I think we're going to be in that north of 50. It would be great if we were able to duplicate another hundred plus but not ready to go there yet.

Okay. Second question that I have is on 2017 revenue guidance. I was wondering if you would comment on how you expect that to trend over the year. Are you expecting first half to be better than second half or vice versa?

Hi Gaurav. Yes. This is Chris. Yes, we would -- as we sit here today, our modeling would expect that the first half of 2017 revenue growth is higher than the second half of 2017 revenue growth.

Okay. And then, lastly, for the acquisitions that you're targeting $25 million to $75 million in 2017, is that only wholly-owned acquisitions or it also includes any assets that you may acquire by JV?

Yes. We don't get into that specificity, but you know, could be either I guess is the right answer.

Okay. Thank you.

Our next question comes from Ryan Burke of Green Street Advisors. Please go ahead.

Thanks. Chris, are you able to specifically quantify what rent and occupancy assumptions are underpinning the same-store revenue growth guidance. You've talked about it from a more qualitative perspective but some quantification would certainly be helpful for everyone.

Hi Ryan. It's actually Tim. Embedded in that range is very little impact from occupancy. So our same-store revenue guidance is almost entirely based on our expectations for our ability to grow net effective rate.

Okay so maybe slightly positive to flat occupancy as opposed to occupancy loss, right?

Yes. I think it's in a range from -- if there's an occupancy loss, it's a very small one to if there's an occupancy gain, it's a industry a very small one.

Okay. And you roll in a relatively similar both number and dollar value of properties into the same-store pool this year as you did last year. Is it going to have a major impact on your reported growth revenue or NOI?

No. Not in a material way. I guess slightly additive, but it's pretty immaterial difference.

Okay. On the acquisition side, the 13 property portfolio that was the KC portfolio and you acquired it in a new joint venture but alongside an existing JV partner. Is that correct.

That's correct.

That's correct. Yes. Same structure.

Would you have -- if you had a more favorable cost of capital right now, would you have been more inclined to buy that property or that portfolio outright or how does that process work between you and the JV partner?

Yes. It really was very similar to the two other deals that we had done. There were a portion of the assets that were attractive to us from an on balance sheet perspective. It was not a -- it was not a transaction that we were able to parse the portfolio and so we elected to have the conversation with our partner as to their interest and obviously they were interested and we transacted. If we were forced to acquire -- if the only option was to acquire the entire portfolio on-blance sheet, I don't believe we would have.

Okay. And should we take, from your earlier comments, that you probably would have paid a similar cap rate 12 months ago on that portfolio as you ultimately paid in December?

Yes. Plus or minus, yes.

Okay. Thank you.

Thanks.

Our next question comes from Todd Thomas of KeyBanc Capital Markets. Please go ahead.

Hi. Thanks. Good morning. Just circling back to discounting and concessions you said that there's not much of an opportunity therein 2017 that 2016 marked the trough. What's the impact to revenue growth in guidance for 2017 from discounting and free rent?

Yes. Not much. When we look at our expectations for -- for 2017, you know, that is as I said flat to maybe a little bit more aggressive on the discounting side, but it doesn't have a meaningful impact on our modeling, you know, a few basis points.

Okay. And then, in the supplement where you show five quarters of schedule annual rent per square foot, which is asking rents, two questions, I guess. First, is that a quarter average or is it an end of period snapshot?

And then that spread versus the realized annual rent per occupied square foot has been narrowing a little bit it was just 2.9% in the quarter, about half of what it was in the fourth quarter of last year, and I'm just curious what we should be reading from that trend, if anything.

The calculation is the average of the month end asking rents for the three months within the quarter and I think the narrowing simply reflects the more aggressive increases to the existing customers relative to the pace of increase in that scheduled rent-to-own new customers.

Okay. So with that spread narrowing does that impact your -- the pool of customers that you would be increasing rents to existing customer rent increases and/or the rate of rate increases across the -- that segment of the portfolio?

No. Not materially because, again, it's rooted in that -- in the fact that the costs to vacant or the cost to relocate to that customer is fairly significant, not only the financial cost but the time and energy and most customers, again, perceive that they're only going to be in the -- in the space for a short period of time once they get that rate increase.

At some point you can't be -- you can't be passing along or you're more sensitive about what you pass along relative to today's market but very similar to cell phones or other cable television. You know, the deal being offered to new customer people seem to accept is unique to that new customer's position.

Okay. Got it. And just lastly your comments about how revenue growth should trend throughout the year. You said it will be higher in the first half, you know, relative to the second half.

Are you expecting it to stabilize by the end of the year or do you think there could be a little further softening as we head into 2018 just given the new supply pipelines you're seeing and some other trends that you're thinking about.

I mean right now I expect to stabilize as we get into the last half of this year if we just focus in on July through December. Not ready yet to prognosticate on 2018. We will have a much better feeling as we see how we move here through the first part of this busy season.

Okay. Got it. Thank you.

Our next question comes from Jeremy Metz of UBS. Please go ahead.

Hi, guys. Good morning. A lot has already been addressed. I was just wondering, did you happen to mention all of the impact on the revenues side from the change in the same-store pool?

Yes. Hi Jeremy. It's Tim.

We touched on it briefly. With only 25 stores at 6% it has a very, very minor positive impact and you will see that as we report all the different pools as we go through the year. I think it might be 10 basis points more because of the added stores but nothing material.

Okay. And I want to stick with the revenue trajectory. I guess I would have thought if anything given the really hard comps you guys are facing in the first half of the year that it would have accelerated here probably started low and accelerated in the back half of the year.

I guess since that's not exactly what's happening. Is that just somewhat, as you get a little further along here in the year and occupancy starts no narrow and maybe some -- you know, you talked about discounting as supply comes on. Is that what should really kind of draw that sort of starting higher in the first half and slowing a little bit more towards the back half the year, is that the right way to be thinking about the trajectory what's impacting it?

I think it's -- you know, if you start to -- if you start to over simply things and just say there's zero just for illustration, zero impact of zero, zero impact of discounts then ultimately you're just following how increases to Street rates or move in rates flow through over time given a six months median length of stay and a 13 month average length of stay.

You go back to the middle part of 2015 when we had the second and third quarters had our highest level of ability to push on street rate and so the three and four quarters that followed that benefited from the impact of those very, very high levels of street rate growth in the middle part of 2015 flowing through and as the ability and the levels at which street rates have grown has come down from those record levels in the middle part of 2015, that just has a lower rate of growth than coming through in the quarters that follow. So I think -- I think over simplistically that's what you're seeing and that's the deceleration, if you will, is the flow-through impact over time of the way our ability to push on rents has flowed.

And, Jeremy, this is Chris. I think the other component to that is, again, we sit here we know-how January played out and feel like we can be more accurate in how they which about changes in effective rents here. In the near-term you get out into July through December and you're going to have to be cautiously optimistic about how things go there and we will update at the end of the year.

All right. I appreciate that and just one more for Tim. You know, just in the -- in guidance you talked about some long-term capital funding for the debt maturities you have coming up and some of the CO deals and developments.

I'm just wondering, should we think about that in terms of a possible unsecured offering here maybe early in this year?

Yes. I think there are a range of potential things starting from -- from my earlier comment that we don't have to do anything. We're in great position.

We have a -- we have a lot of capacity under our line, we have -- we have (inaudible - technical difficulty).

Yes. Sorry. No. Yes. I don't know if that was -- yes I was just trying to figure out how we should think about if there should be if there's a bond offering that's baked into guidance and that's something that's maybe a little bit of a drag on numbers and how we should think about some of those sources and uses of capital.

So on one end we would do nothing. On the other end, as we have done over the past couple of years, we will opportunistically look at our balance sheet look at $100 million we have maturing next year, look at the potential impact or opportunities that the Barclays index going from [250] to [300] and whether that creates any opportunities for us to access that market and so our -- our guidance range contemplates a lot of things including us doing nothing to perhaps us being opportunistic on continuing to be mindful of extending and looking at our debt maturity profile and also minimizing our long-term cost of debt capital.

All right. Great. Thanks.

Thanks.

Our next question comes from Ki Bin Kim of SunTrust. Please go ahead.

Thanks. First off when you say net effective of rents were 1% positive, is that just (inaudible) or is that combining changes in promotions?

That's combining changing in promotions.

Okay. Thanks. And just going back to your guidance, you touched on a lot of point, but maybe you can help clarify how much are you expecting street rates to grow in 2017 and how much contribution does existing customer rate increase program make to that same-store revenue guidance?

Yes. We don't specifically guide to the components for street rate. We touched on earlier we touched on the fact that occupancy is likely to provide various little impact in total of our revenue growth. We touched on the fact that levels of discounts are expected to have a very small contribution.

I would add to that, that the impact of passing along increases to existing customers given the fact that we have done those increases very consistently over the years both in frequency and in dollar amount in total, across all customers who receive an increase, that component is also likely to be a very small contributor. So what your left with then is the combination of street rates, discounts, promotions, and our ability to push on those, not only this year but the impact that flows into 2017 from our ability to do so last year.

And I think that's a -- maybe a tricky part for everyone to understand is that, are you saying that because you have seen customer rate increase program has been consistent over the past few years that when you look at the people who get it and the people who leave and go down to street rates that the contribution to same-store revenue growth is over time comes down to very low numbers is that correct?

Yes. It's additive to revenues. It's you know, you get into that esoteric conversation of it's not as additive to revenue growth rates as some people might think, but it's certainly additive to revenues. If you were to stop doing it would be pretty bad, your revenues would decline and your revenue growth rate would decline but if you're consistent in your approach, the overall impact to growth rates is pretty limited.

Okay. And just last one here. You mentioned that January was pretty good.

Can we just take that to understand that your occupancy should get a benefit so far in the year versus where you ended in the fourth quarter? And is there anything that you did differently in terms of how you marketed your assets so get that uplift?

Yes to the question that it was additive to occupancy. You know, we had a net positive January. It was the best net you know as far back as we could go.

You know, I think it's a combination of finding the right price for the customer. Obviously, there has to be some impact in markets from what competitors maneuvers may have been and a continued improvement in our ability to get that customer's eyeballs on the front end and then continue to convert them into a reservation and ultimately a rental. So it's one of the challenges in our business is the month to month changes in -- you know, in movement.

You know, you could look at weather, absent Maine through Massachusetts, we had a relatively mild January across the country. We didn't have significant storms outside of that region and so you had -- you know, you had to have had some benefit from that.

You know, February is going to be interesting because we lose a day. You know, last year was a 29 day month and we had a pretty significant amount of rentals on that last day of February in 2016. We won't have that extra day here in 2017.

Okay. Thank you, guys.

Thanks.

Our next question is from George Hoglund of Jefferies. Please go ahead.

Hi. Good morning, guys. Since you have maintained a very conservative balance sheet and your well-positioned to be opportunistic if some attractive acquisitions opportunities or distress comes to the sector, one, you know, what's the likelihood you think, you know, some attractive opportunities come up or that there's more distress?

And then, two, assuming there isn't -- if that doesn't come to fruition and pricing maintains very competitive on assets, do you look at potentially doing a share buyback since you have the strong balance sheet or increasing your appetite on the development and C of O side?

Hi George. Good morning. It's Chris. I'll take them backwards.

I think the exposure we have at this point in the cycle, you know, relative to our balance sheet size from a development or speculative acquisition perspective is where we're comfortable. I don't anticipate, at all, that we would choose to ramp-up the exposure at this stage in the cycle.

In terms of share repurchase we have a plan in place. We have had one in place for quite some time. We have never elected to use it to-date, but certainly that is in the tool belt.

However, I would put it this way. I do not perceive us levering up in order to execute on a share repurchase program. And then in terms of your first question how do we see the opportunities playing out for some things that look very attractive, we'll put it that way.

You know, I think it's just going to be some time period here before we see those type of things happening. I think you have got a few markets, I named a few of them in response to the first question, that are going to experience in the near-term a significant submarket level of supply. I think those stores are going to -- you know, obviously compete against one another along with the existing supply in the market.

I think there is going to be some slower than anticipated lease-up and, again, I think we want to be in position and have a balance sheet in the great shape that it's in to take advantage. I would suspect that that duration of time for capitulation is going to be longer than 2017. You know, I would think that that is more likely as a 2018 opportunity.

Okay. Thanks. And then just one more.

In terms of the New York market or in the greater New York Metro area, are you able to give any sort of guidance around or just a range around potential same-store NOI outcomes in 2017?

Yes. We don't tend to want to go in market-by-market and dig into that level of detail, but from a general 30,000-foot kind of perspective, you know, our expectation for next year in New York is going to be positive NOI growth, positive revenue growth at a level that will be below our expectations for the same-store pool as a whole.

Okay. Thanks, guys.

Thanks.

Question comes from Jonathan Hughes of Raymond James. Please go ahead.

Hi. Good morning. Thanks for taking my questions. I don't think I heard this. Maybe you personally didn't say it, but what percentage of your tenants are above street rates?

Wow, boy, I'm going to have to guess for you on that one. It's not a number I have off the top of my head and I'm going to guess it's 60%.

Okay. 60% above the current street rate. Street asking rate.

Yes. That's a huge guess.

Okay. And then I guess switching to the expense side you mentioned guidance of 2% to 3% excluding property taxes and I think that implies something like 7% to 8% tax hikes for the year. Is that right?

Yes.

How aggressively are you appealing some of those tax increases? I know you said that you had some success last year and that would impact this year, but just curious if that's skewed do you know to the downside if you get more aggressive and successful in fighting some of these assessments?

Yes. It's -- we have been for many years very aggressive looking for opportunities or looking for -- for areas that we think are assessments that are too onerous where we think we have good data to go in and fight and appeal and challenge. Often times those challenges it's not a quick process in a lot of places, it takes often times multiple years to get -- to get resolution, But, candidly, we're not fighting any harder today than we always have been. It's always been an area of focus and we dedicate a fair amount of resources to doing it. It's a big line item that we're continually focused on.

Okay. And then switching acquisitions. Could you just let us know what the spread is that you're underwriting on expected yield for the CO deals in development, projects versus stabilized acquisition an if that's moved over the past 12 months.

Yes. It has expanded out a little bit. I would say the one additional deal that entered the pipeline in Florida we had some -- some enhanced expectations on that spread in order to -- in order to transact.

So that one more looking at a 250 basis points spread to stabilized in that market on the developments, you know, those have stayed in the 225 to 275 kind of range.

And where was that -- so that spread has been I guess the onis has been to the upside over the past five, six months.

Yes. Slightly. Not a big move. More lack of transaction.

Sure. And then looking at some lease-up of properties in and around Dallas it looks like that, you know, kind of slowed in the quarter and obviously some of that's due to seasonality but were there any new openings in direct competition of these properties? Chris, you mentioned Dallas in your supply projections on the first question but how many of those 180 openings in 2017 are in the Dallas area?

Yes. The= two stores leasing up in Dallas were not impacted by any additional supply. One was impacted by road construction around the store.

So as part of the development in the submarket there was quite a lot of road construction and infrastructure as well as multi-family construction and that has made it challenging to access the store. When we originally entered our anticipation was that most of the that work would be finished simultaneously with our opening of the store and we actually the store was opened prior to all that being finished. So that's more of a contributor there, not supply. In terms of new supply in Dallas relative to that 180, we're seeing about 60 stores in Dallas and Fort Worth.

60, and then would you venture to guess like how many stores in that entire market.

Oh, I'm sorry. I'm sorry. I misspoke. It's 28. 28 stores in Dallas Fort Worth is part of that 180.

Okay. All right. That's it. That's it for me. Thanks, guys.

Yes.

Thanks.

Our next question comes from Paul Adornato of BMO Capital Markets. Please go ahead.

Hi. Good morning. I was wondering if, given the higher level of incentives and perhaps for volatility in rates, that we might see a return of greater seasonality throughout the year.

Great question, Paul. Good morning. I think the muting of seasonality has had more to do with the divergence on the marketing side of the equation than it has had to do so much on the pricing side of the equation.

I think you have seen muting of seasonality because -- again, if you think about it simplistically you need a ten by ten in July and you go online and search in your ZIP Code the likelihood of the major brands having one available is low and so you continue your search because you have a need until you locate a store that meets our needs.

When you get into the shoulder seasons and you go online to try to find a -- you try to find a ten by ten, the larger brands usually have some availability and they tend to take that customer so I think it's more, the muting has been more the ability to have the larger brands take more than their share of demand in the softer times, the slower times than it hats necessarily to do with price.

And looking at the development I was wondering if the development model is -- will change going forward, you know, there used to be no appetite for development of any kind in the storage industry. I was wondering if we might see more C of O deals versus joint venture? How do you think about the risk profile of development going forward?

Yes. Thanks. Again, I think when you really look at it, the impact to your FFO or your P&L from adding a property is the same whether you buy something that has been purpose built for you in a build-to-suit type of arrangement and you acquire it empty or if you develop it yourself or with a partner and acquire it empty, the impact to the FFO per share and the P&L is the same.

You're dealing with, as Tim noted, a store that's empty and has no revenue but has a full expense load.

The difference is obviously on the risk side taking a lot more risk as soon as you try to purchase the land and put a shovel in the ground on the pure development side than you are on the build-to-suit. You know, I think industry-wide as we move forward I still think the vast majority of stores that will be developed will be developed by the local entrepreneur, that's been the case, I don't see that changing.

I think when you look at the impact that the REITs have had on supply from a development perspective or even from REITs buying sort in that build-to-suit type arrangement it's really been a de minimis portion of the overall growth. I think if you count all the CO deals that have been at least announced by the REITs, you're talking about less than 20 relative to the volumes of new supply that have been tossed around. So I think again it's just a difficult model for a national plan and I think it will always be a more local market entrepreneur business on the development side.

Yes. Great. Thank you.

Our next question comes from David Corak of FBR Capital. Please go ahead.

Morning guys. Most of my questions have been answered but just on expense growth. You sort ever answered this but I'm going to ask it any way.

If the snow removal and property tax increases were to end up comparable to 2016 levels, where would your annual expense growth number shakeout?

Somewhere in the 2% to 3% range. Probably hovering -- Yes. Towards the 2.

Okay. Okay. So comparable to what you said before. Okay. Fair enough.

And then appreciate your comments on environment but have you seen a material move in any particular market and what seems to be driving that if you have?

Yes. We have not. I think you have seen the REITs deal with a change in our cost to capital by being more selective and demanding a higher yield.

We have yet to see sellers match up with those demands. And then I think in the secondary and tertiary market you have seen the usual suspects on the private side. You know, those folks tend to be the more levered buyers and frankly the cost to debt capital hasn't moved that materially.

I just think going forward you see the types of growth that is being expected. I think that puts pressure on underwriting. I would expect that people start to reduce their expectations in terms of how rapidly they can grow rate and I think that probably creates an environment where a significant number of deals just don't get done, particularly on the development side.

Okay. Great. And kind of on that front, do you think there is a shift in the development opportunity set from primary to secondary tertiary markets or vice verse or a shift (inaudible)?

Well, you know, again, I touched on Raleigh, Durham as a decent amount of supply coming on, I don't know, a per square foot basis. You know, I think again it's certainly easier to develop in the lower barrier to entry markets. Maybe more conducive, again, to that local entrepreneur.

Arguably a lower land cost, which means a lower all-in cost, which brings down the just sheer dollar amount of equity that that developer has to bring. So I -- you know, we don't track the tertiary markets, but I would suspect you would see some continuing activity in those markets.

Fair enough. Thanks, guys.

Next we have a follow-up question from Ki Bin Kim. Please go ahead.

Thank you. Just a quick one. Is your schedule of rents that you disclose (inaudible) is that weighted average or simple average? Meaning are the properties that are more -- are higher in rent like in New York do they have a bigger weighting or is that just simplified?

That question is almost above my -- almost above my -- my pay grade there, Ki Bin. And I think the right answer is it's a weighted look at the rates the way the formula works, it's not a simple average it's a weighted average.

Okay. All right. Thank you.

Sure.

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

Andrea, thanks. Hi, it's Tim Martin, first. I wanted to go back.

Smedes had touched on many, many questions ago, he had known something out there that I just wanted to get back to. And that was that 50% of our NOI comes from markets that are thought to be or noted as high supply market and I think that is -- we have heard similar statements to that in the past and I wanted to provide a little bit of additional color on our thoughts around the impact of new supply and its potential impact on our 2017 performance.

Embedded in our same-store guidance expectations is the impact that competing new supply will have an impact on our stores and our grounds up property level budgeting process, about 25%, our stores our same-stores reflect the impact of competing new supply that came online over the last two years or we know is going to come online in 2017. So that 25% of impacted same-stores is up from last year when approximately 15% of our stores were impacted by new supply.

And when competing against new comply we typically see pressure on rates. While we don't chase all the way to new competitor pricing we will typically lower price or be slightly more promotional to remain competitive. Occupancies tend to hold flat or decline slightly during the lease-up of the competing asset and so the impact to individual store varies sometimes greatly depending on many factors, including the relative amount of new supply that's coming into that submarket along with the pricing approach of that menu competitor.

So when considering all of those factors, on an asset by asset basis when we do our budget, revenue growth on the supply impacted stores is expected to be about 200 to 250 points lower -- basis points lower than revenue growth on the un impacted stores. So I thought that may be helpful for folks to think about how to get their minds around the impact of new supply, perhaps in a little bit different way than it is often discussed. So hopefully that's helpful from a modeling persistence.

So, Chris, I'll turn it to you for final comment.

Okay. Thanks, Tim. One correction the question on the percentage of customers who were above current street rate I gave a guess of 60%. The answer is actually 51% of our customers find themselves meeting that description today. So I wanted to correct that for the record. Thank you everyone for participating in the call.

I think to paraphrase, I believe Mark Twain, the rumors of the demise of self-storage I think were greatly exaggerated. We feel very confident heading into 2017 that we will be able to navigate these choppy waters. We appreciate everyone taking the time to participate in this call.

We look forward to seeing you at the various conferences over the next couple of months and talking to you again when we report first quarter 2017 earnings. Thank you and have a great day.

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