CubeSmart (CUBE) 2017 Q4 法說會逐字稿

Good morning, everyone, and welcome to the CubeSmart Fourth Quarter 2017 Earnings Conference Call. (Operator Instructions) Please also note, today's event is being recorded.

At this time, I'd like to turn the conference call over to Mr. Charlie Place, Director of Investor Relations. Sir, please go ahead.

(technical difficulty)

And everyone, this is the conference operator. Once again, I've connected the speaker line back into the conference. And Mr. Place, you may start over.

Thank you very much, Jamie. Hello, everyone. Good morning from sunny Malvern, Pennsylvania, home of your World Champion Philadelphia Eagles, if you didn't hear me the first time. Welcome to CubeSmart's Fourth Quarter 2017 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 these 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 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.

Okay. Thank you, Charlie. Our apologies for the technical difficulties. Our solid fourth quarter results brought 2017 to a successful conclusion. Full year FFO per share growth of 10.4% and same-store net operating income growth of 5.1% compare extremely favorably to most other sectors and certainly exceed the gloomy outlook that many others had at this point last year.

We entered the fourth quarter of 2017 with record-high physical occupancy, and we capitalized on the opportunity with higher asking rates and modestly lower levels of discounting compared to the fourth quarter of 2016. The health of our customer remains solid with no significant changes in any of the key metrics we monitor. Average length of stay elongated slightly during the fourth quarter compared to the fourth quarter of 2016.

6 of our top 10 markets reported same-store revenue growth that was higher in the fourth quarter of 2017 than what we achieved in the third quarter of 2017. Comparing markets on a year-over-year basis, every single one of our reported markets produced positive same-store revenue growth.

Our non-same-store assets also performed well during the quarter, and our development assets continue to exceed our occupancy revenue and net operating income targets. We remain disciplined in our investment approach and will continue to prudently allocate capital, both on balance sheet and in joint ventures.

As expected, new supply will have an increased impact in 2018 as additional new openings add to the properties still in lease-up from 2016 and 2017. Over this 3-year period, square feet per capita in our top 12 markets is expected to increase by approximately 9%, from 4.6% to 5.1%, still well below the national average of 6.8%.

So on an annual basis of just about 3% increase in supply per year, with our markets continuing to demonstrate strong demographic trends leading to increasing levels of awareness and demand, we believe the short-term impact of new supply is manageable.

Now new supply understandably has been a primary focus for many who follow self-storage. That focus has been on quantifying how much new supply and suggesting that it will create a headwind to the metric same-store revenue growth, which, of course, it will. But perhaps, what is not getting enough focus is that demand for self-storage remains very strong.

When looking at 2017 actual results and our expectations for 2018, one might take the perspective that our growth in same-store revenues, in light of the short-term impact of new stores leasing up in direct competition, is actually fairly meaningful and speaks to the continued solid levels of demand and the power of having a sophisticated operating platform like ours.

In closing, 2018 seems to be shaping up much like 2017: volatile REIT share prices and treasury yields, new supply impacting an increasing number of our stores across our markets. However, we also have a customer who, in a tight labor market, is possibly experiencing real wage growth for the first time in a while and seeing more in their paycheck due to lower tax rates. We certainly believe that our extremely solid balance sheet, short lease term, high-quality portfolio and sophisticated operating platform well positions us to continue maximizing the opportunity presented.

I will now turn the call over to our Chief Financial Officer, Tim Martin, for additional commentary on the quarter and our outlook for 2018. Tim?

Thanks, Chris, and thank you to everyone on the call for your continued interest and support. As Chris touched on, our fourth quarter results rather had a successful year across many fronts for CubeSmart. Same-store performance included headline results of 4% revenue growth and 0.1% expense growth, yielding NOI growth of 5.4% for the quarter. For the full year, same-store revenues grew 4.4% and expenses grew 2.8%, leading to NOI growth of 5.1%.

We started 2017 with an expectation that we would be able to improve our overall occupancy levels modestly over 2016 with more opportunity in the first half of the year than the back half. Looking back, the benefit we received from occupancy levels played out just that way as year-over-year average occupancy was 40 basis points higher in Q1, 20 basis points higher in Q2, 10 basis points higher in Q3 and flat year-over-year in Q4. Of course, the goal is to maximize revenue, and we were able to drive effective rent growth of over 4% during 2017, which is meaningful in light of the increasing pressure throughout the year from new supply.

Same-store expense growth for the quarter came in a bit better than our expectations as we received real estate tax bills in Florida and Chicago that were lower than our estimates.

We reported FFO per share as adjusted of $0.41 for the quarter, which was at the high end of the range we provided and represents growth of 7.9% over the same quarter last year. For the year, our reported FFO per share was $1.59, which was a 10.4% increase over 2016.

We remain active and disciplined in our pursuit of external growth opportunities. During the fourth quarter, we closed on the purchase of 2 properties for $18.6 million, which were under contract and disclosed in our release last quarter. A third acquisition property disclosed last quarter was acquired by a newly formed JV for $9.4 million. For the year, we acquired 4 stores for $40.4 million. During the quarter, we also acquired 2 stores at C/O: 1 in Chicago and 1 in Delray Beach, Florida, for $29.1 million, and we also opened our $49.3 million JV development store in Brooklyn.

For the year, we invested $208.3 million in newly opened stores, including 3 stores at C/O, 2 wholly owned development stores and 2 JV development stores. We did not add any new projects to our development pipeline during the fourth quarter.

On the third-party management front, we finished off an incredibly productive year by adding 37 more stores in the fourth quarter, bringing our 2017 total to 160 new stores added to our program. Those additions allowed us to grow our [3PM] store count 43% during the year as we ended the year with 452 stores, allowing us to enhance our market position in existing markets and expand the CubeSmart brand into new markets like Seattle, Pittsburgh, Kansas City and St. Louis.

On the balance sheet, we continue to focus on funding our growth in a conservative manner that's consistent with our BBB/Baa2 credit ratings. For the first time in over a year, we were active using our ATM or at-the-market equity program, selling 1 million shares during the quarter at an average sales price of $29.13 per share, raising net proceeds of $29.6 million.

Our balance sheet is well positioned with no debt maturities in 2018 and modest maturities of $200 million in 2019. We continue to have the ability to fund our existing development commitments on a leveraged neutral basis over the next 2 years without raising any additional equity capital by utilizing our expected free cash flow.

In December, we announced an 11% increase to our quarterly dividend, bringing our dividend to $1.20 per share on an annualized basis. And based on the midpoint of our 2018 guidance, the increased dividend suggests an FFO payout ratio of just under 74%.

Details of our 2018 earnings guidance and related assumptions were included on -- in our release last night. Our 2018 same-store property pool increased by 26 stores or around 6%. Same-store revenue guidance assumes little impact from occupancy and, again, is overwhelmingly driven by expected growth in net effective rates.

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 2016 and 2017 as well as the impact of 2018 deliveries that will compete with our stores. Embedded in our same-store expectations for the year is the impact of new supply that will compete with approximately 40% of our same-store portfolio. So that 40% is up from the number we provided last year of 25%.

The impact to an individual store facing new competition in its competitive trade rank and range based on many factors, but overall, we expect the group of stores impacted by new supply to have revenue growth 200 to 300 basis points lower than the stores that are not impacted by new supply.

We remain very pleased with the lease-up progress of our newly developed stores, and we believe our development pipeline will create meaningful NAV accretion and stabilization. But of course, in the short term, it creates a drag to our FFO per share. Our FFO guidance for 2018 is impacted negatively by $0.06 to $0.07 per share as a result of this dilution.

Our guidance includes the impact of acquisitions we've closed to date or have under contract but does not include the impact of any speculative acquisition or disposition activity as levels of activity and timing are very difficult to predict.

So echoing Chris' comments, 2017 was another strong year of execution across all aspects of our business. Our people, our systems continue to demonstrate the ability to deliver market-leading performance. We remain disciplined in executing our focused external growth strategy, and we meaningfully expanded our third-party management program. We remain focused on our balance sheet objectives and have the capacity to fund our development commitments on a leveraged neutral basis.

And while the sector is clearly impacted by new supply being added in many markets, consumer demand for self-storage remains strong and broad-based. We believe our high-quality real estate portfolio and operating platform position us well to perform throughout all parts of the cycle.

So thanks again for joining us on the call this morning. At this time, Jamie, why don't we open up the call for some questions?

(Operator Instructions) Our first question today comes from Jeremy Metz from BMO Capital Markets.

Chris, in terms of the modest slowing you're expecting in revenues, the 2% to 3%, which is primarily driven by rate at this point, as we look further out, do you sort of see it stabilizing at this level? And if so, can you comment anything in particular you're seeing today that kind of helps you give you confidence in that?

Jeremy, I think as we, again, look at the historic performance of self-storage, looking back 20 years, same-store revenue growth over that time period averaged just right around 4%. Obviously, that's through varying cycles, a period of less sophistication, the great recession, et cetera. So I think as you look out over the next 20, I would sit there and say, given the increasing level of sophistication, the power of brand, et cetera, certainly, one should expect that through varying cycles over the next 20 years, I would think same-store revenue growth within the self-storage sector should be at that 4% or better. I think in the near term, obviously, the short-term impact of new supply is going to affect us, I think, as we look on potentially signs of growing inflation. Again, given the short-term nature of our lease, I would think maybe just behind lodging, our sector should be able to grow rates than at a faster clip that we are starting to see signs of inflation. So I think not specifically able to pinpoint your answer to what's going to happen in 2019 or 2020, but I think over the long term, our expectations would certainly be higher than what we expect to achieve here in 2018. And I think 2019 possibly could be impacted by growing signs of inflation, which certainly would create an opportunity for us to be a little more aggressive on the rate.

And you had mentioned supply. I mean, as you look at -- out to next year, do you actually have a view at this point, I don't know if it's too early to tell, that supply, as you look into 2019, stabilizes from where it is from here? Do you think it actually gets a little better or worse?

Our view has been that to the best of our visibility, which, at this point in 2018, in many markets, I would say is not particularly clear. Certainly, stores could -- people could take down land, and stores could be constructed and opened next year that aren't on our radar yet today. But based on all of the data that we have available and the conversations that we have, it does feel like that rolling 3-year supply in 2019 shouldn't see the same levels of growth that we saw certainly in 2018.

Our next question comes from Nick Yulico from UBS.

This Trent Trujillo, on for Nick. Just to follow up a little bit on the same-store revenue topic guidance and that about 150 basis points deceleration from the fourth quarter level, and I know you're mentioning that you managed to net effective rent growth. But could you maybe talk a little bit more about how you're thinking about the different components that make up same-store revenue? Maybe any occupancy assumption, changes to existing customer rent increases and how you're thinking about rate versus discounting?

Hey, it's Tim. The individual components of the revenue growth are -- will vary based on market conditions, and our revenue management system is designed to maximize revenue using any of those variables. So we tend not to guide to nor focus individually on those components. What is different about 2018, of course, is that we expect now that 40% of our stores are impacted by new supply where last year, it was 25%. So individual components of revenue drivers, not all that relevant, although I did -- my comments touched on the fact that our ability to gain physical occupancy on average throughout 2017 weighing from 40 basis points in the first quarter down to flat in the fourth quarter. And so looking at occupancy moving forward, we expect very little, if any, benefit from physical occupancy in 2018 over '17. And so the rate -- the revenue growth that we're going to get on the top line is entirely going to come from growth in net effective rate.

And this is Chris. Just to do a little color on discounting. The discounts as a percentage of rent in Q4, it was an identical 30 basis point reduction at about 3.2% that we saw compared to 4Q '16 at 3.5%. That 30 basis point further reduction was consistent with what we had seen in 3Q '17 compared to 3Q '16. So that helped sequentially. Again, as we talked about last quarter, those are historic lows for our portfolio. And again, we wouldn't expect to be able to squeeze much more out of the discounting line in 2018.

Okay. Fair enough. Very helpful to have that detail. And since we're roughly halfway through the first quarter, is there any indication that you can provide as to how things have been trending so far year-to-date?

Yes. Year-to-date has been trending very consistent with the ground-up process that Tim articulated. Our occupancies on the new same-store pool have been running basically around 10 basis points higher than where we were at -- in the first, what are we like, 45, 50 days of 2018 compared to 2017. We continue to have positive growth in our rental rates, and our discounting remains pretty consistent with levels that we would have seen thus far comparing '17 to '16 on this pool. So market continues to be good. We have had some bad walk with weather in certain markets where we've had either frigid temperatures or snow. It has happened to be on a Friday or Saturday. But again, those customers have a need, and they tend to come back when things clear up. They also humorously don't tend to move out when it's that cold, either. So that's positive.

Our next question comes from Ki Bin Kim from SunTrust.

Maybe help me -- maybe you can help bridge the gap a little better on a 2.5% of same-store revenue guidance. How much of it is due to the ground-up where you do it versus just the management being a little bit conservative given that it's a seasonal product and we're not in a spring leasing season yet, so you don't really know? So I'm just trying to understand how much is -- how much wiggle room you have in your guidance.

So Ki Bin, we take a consistent approach to how we think about the upcoming year at this time every year. We do an asset-by-asset ground-up process, as I mentioned. The same as we have always done. And as we sit here in mid-February without visibility to where rates are going to be in the main part of the summer leasing season, without visibility to competitive pricing actions, without visibility to exactly what levels of consumer demand are going to be there for us throughout the year, it is a challenge in a 30-day lease business, and we have limited visibility. I think we have a track record for providing a guidance range that encapsulates all of the potential outcomes that we see coming over the next 10.5 months. And all I can tell you is that it's a consistent approach that we have taken for nearly 10 years.

And what were the Street rates in January-February?

Street rates running basically somewhere between 1% and 2% over a similar day in 2016.

And so you said in 2018, most of the growth will come from rental rate growth, but if I look at your Street rates over the past year and January-February of, call it flattish, maybe a little positive, 1% or 2%, it would indicate that eventually, the same-store rental rates would have to come down towards that level. Where would I may be wrong on that assessment?

Not sure. I'm not sure I follow your assessment. Try me again.

Well, I mean, your same-store revenue is 2.5% to 3%, so you're still getting some type of benefit from the flow-through from last year's good news or existing customer rate increase program, but your Street rates are still kind of 0 or 2% positive. It would somewhat indicate that over time, the same-store revenue might -- should go towards that 0 to 2%, not 2% to 3% over time. So do you think that's correct? Or am I missing a lever or ingredient there?

I think it's over a long period of time, and I think there are -- I think Street rates fluctuate. I think your own survey would suggest that Street rates can fluctuate in a relatively volatile manner, assuming that your survey results are indicative of the way pricing works. We have provided a guidance range that we think best reflects our expectation for what our performance is going to be in 2018.

Our next question comes from our [Aria Justanavan] from Bank of America.

This is Juan Sanabria. Just on the same-store guidance, what's the expected trajectory of growth throughout '18? And should we be assuming that, that 30 basis point lower concession that you saw in the second half '17 carries through as a tailwind in the first half of '18?

Hey, Juan, it's Chris. I'll start off. Consistent with the way we think about this, and as Tim has described the process we go through, you certainly have more visibility into Q1 and then increasingly less visibility given the nature of our customer base as we go throughout the year. So again, not that different than sitting here at this point last year. We would expect that your occupancy opportunity is going to range plus or minus 10 to 20 basis points over the course of the year. The discounting, we would certainly expect will increase as we go through the year as we would expect Street rates to increase. And again, given the sort of nature of how this business operates, your same-store revenue growth, we would expect would be higher in the first half of the year than in the second half of the year.

Okay. But do you expect it to carry forward the benefit that you saw on the first half? There was like a 30-basis point tailwind to lower concessions year-over-year, second half '17 versus second half '16 into the first half of '18. Or are you just saying as a whole concessions in a higher supply environment they're just going to generally trend higher?

Yes. I think what we're saying is that -- as that concessions for record lows for us, our expectation is they have a lower probability of continuing to trend lower in our expectation today than the fact that they would either stay flat or increase. But again, that can change tomorrow because we're managing, as Tim has stated, to an effective rent. And so if the right answer tomorrow is to provide no concession and lower asking rent, then that's the approach we will take to maximize revenue. If the right answer tomorrow is to grow our asking rents meaningfully and also be a little more liberal with concessions, then that's the action we will take to maximize revenue.

And on that pricing strategy and the flexibility there, are you seeing any opportunity to kind of take advantage of the fact that customers maybe tend to stay longer than they anticipate when they start and maybe offer some upfront concessions that would put them on a higher starting Street rate that will last longer than they expect?

Consistent with the way we have analyzed pricing in our business over the last many years, yes, all of those things come into consideration as we are looking at the right mix that maximizes revenue.

Okay. And just a quick follow-up on that. What's the average length of stay now? You said it ticked up a bit.

Yes. The average length of stay in the fourth quarter was right around 14 months.

Our next question comes from Smedes Rose from Citi.

I wanted to ask you just on the expense side. You mentioned pressure on real estate taxes specifically as a driver of that line item. Are there any markets that you can call out specifically that where you're seeing a significant uptick or expecting a significant uptick in real estate taxes? Or is it just generally across the board?

Hey, Smedes, it's Tim. It's -- boy, it sounds like I answered this question the exact same way every single year because the answer is the exact same answer single year. We see broad pressure across most of our markets. In particular, we feel like there's additional pressure in Illinois, Chicago, in particular, as well as Texas and Florida. And all of our work and all the work we do with outside consultants suggest that there is still the potential for additional pressure there, not only in 2018 but probably for the next couple of years. And so we -- as we indicated, our fourth quarter '17 results were helped a little bit. Those expenses came in, in the fourth quarter, so ultimately, 2017 tax bills came in a little bit lower than we were expecting, which creates a little bit tougher comp leading to percentage increases in '18 that might be a little bit higher. So we've experienced, on that line item over the past 3 or 4 years, growth from the high 3s, call it 3.8% to almost 8%, and so that 4% to 8% type growth over the past 3 or 4 years, I believe, is probably pretty indicative of what you'll see, not only for CubeSmart but probably across the sector here, again, for the next couple of years.

Okay. And then just looking at Houston, you saw, I mean, it's pretty high same-store NOI growth in the fourth quarter. Could you just maybe talk about the sort of lingering impacts or the overall impact from hurricane activity and how you think that might play out in that market over the course of the year?

Hey, it's Chris. So Houston, through yesterday, continues to hold up pretty well: asking rents, plus 4-ish percent; occupancy, 250 to 300 basis points over last year. But the customers are gradually no longer having a need for the space. So we'd expect that, that would just be a slow vacate for those who determine ultimately that they no longer have a need for the product. That contrasts a bit with Florida where I think we've already seen the overwhelming majority of customers that we provided a service to as a result of the weather conditions there have left us.

Okay. And then just a final one for me. And you kind of touched on this. What's -- what is the spread, I guess, between your asking rates and your in-place rent at this point across the portfolio?

Yes. If you take a look at where we are today, we've got about a little bit more than half of our customers are at rates. Well it's almost 50-50 between customers whose rates are below current Street and those customers whose rates are above current Street.

Our next question comes from Todd Thomas from KeyBanc Capital Markets.

First question, Tim, the change in 2018 with 40% of the portfolio being impacted from new development versus 25% last year, how does that impact the revenue management system and pricing model specifically as you kind of think ahead?

So Todd, I thought your first question was going to be whether I consider playing Fly, Eagles, Fly, but I thought that was just a -- like that was a little bit too much. So we reverted back to Steve Miller's Fly Like An Eagle. So I'm disappointed on what's your first question. But to answer your question, in that ground-up process, we certainly look at how we budget for stores that have new competitive properties within their trade ring differently, then we look at how we budget and forecast the 50% of the stores that don't have new competition. So we look at trailing data. We look at how stores have performed. When they compete against the new supply and build that into the ground-up process to develop the expectations for those stores just like we do all stores. So different inputs to get to the answer.

Okay. And then I'm just thinking about the trajectory of growth at this point in '18, but with some of the comments that you said around the guidance. But I'm also curious if I look back last quarter, you raised your revenue growth forecast for the full year from 3.75% to 4.75% to 4.25% to 4.75%. And you're almost halfway through the fourth quarter, and you came in just below the midpoint there. And I'm just trying to gauge whether December was a little bit more challenging than you anticipated. Maybe I'm reading into it a little too much, but maybe you could talk about the quarter itself breaking out sort of the performance you saw in October, November and maybe talk about what happened then in December and the back half of the quarter, perhaps.

Yes. Hey, Todd, it's Chris. Within a few basis points, we came in as we would have expected. I would say that from a rental volume perspective, we were probably a little more optimistic at the date of the call on the how the back half, certainly of November and December, would perform. And December was a little bit light for us. I think -- again, back to my previous commentary, I think a good deal of that just had to do with our markets and the way the weather pattern worked in December. So we saw a portion of those customers come back in January. So I think a bit of it was just timing on when those customers elected to rent.

Okay. And you have seen some of that recovered in January so far?

Some of it, yes. We've had equal weekends with some bad weather here in some of our markets in the snow areas as well in January. But January is, all in all, came out pretty well, and the first part of February continues to be solid.

Okay. And just lastly, on the acquisitions. Can you provide a cap rate for the wholly owned properties that you acquired in the quarter?

Sure. The assets, the couple of assets that we bought during the quarter are a mixture of where they are in their stage of lease-up but came in right around 5.5%.

Our next question comes from David Corak from B. Riley FBR.

Just sticking with the cap rates for a second. Have you seen any material movement in cap rates or a change in the bid-ask spread? And then on your development deals, have there been any -- have you made any changes or changed any assumptions as to kind of what your stabilized yields are going to end up looking like?

Hey, David, on the cap rate environment, we really haven't seen any change in cap rates, and that's pretty consistent with the last couple of quarters. I think as the REITs have been a little bit less acquisitive, you've seen a variety of private capital move into the space, particularly in the secondary and tertiary markets, and are being fairly aggressive in deploying funds that they had raised. So I think that combination has kept cap rates relatively unchanged. I think it takes a while for moves in treasuries to ultimately filter their way through. Certainly, if we continue to see upward pressure on rates, one would expect to see some pressure on cap rates as we move forward. On the development side, for those stores that we have placed in service or even those that are under construction, our actual performance, if you just look at cash flow, has overall exceeded our expectations. As we move forward, again, we continue to underwrite very cautiously and haven't adjusted our expectations based on the fact that those stores have performed a little bit better than we would have anticipated.

Okay. And I don't know if you had this number updated, but based on everything that you have today, including in lease-up and still coming out of ground, what percentage of total NOI will stem from the boroughs and the New York MSA in total on kind of a stabilized basis?

Ultimately, when everything is finished and if you consider that we don't add stores in other markets, which, certainly, we are going to continue to grow in other markets as we finish out the stores in New York City, I would expect that the NOI there is going to be somewhere in that 12% to 15% contribution range.

Our next question comes from George Hoglund from Jefferies.

Just a couple of questions here. So one, when you look at same-store NOI growth by market, where would you expect the greatest variances relative to 2017, both positively and negatively in '18?

Yes. So much of that on the NOI, George, is tough because it's related to where we're going to see an unusual burden on taxes. So the markets that Tim spoke about that have the greatest pressure on taxes, we would expect would have the greatest downward possibilities on NOI. I think when you look at the other markets, there's not one particular market that's going to pop out as being an outlier.

Okay. And then should I maybe also infer from that or maybe your greatest possibility of kind of outperforming or coming in towards the high end of your same-store NOI guidance would be basically a beat on taxes.

I think it's potentially a beat on taxes on the expense side, and then, of course, there's a 2% to 3% range on revenues. And so to the extent that we're able to come in at the higher end of that range on the revenue side, there's certainly an opportunity there as well. It's just a little bit less visibility on the revenue side than on many items on the expense side.

Okay. And then just one last one. And so in looking at kind of primary versus secondary market, I guess, anecdotally, we've been hearing kind of more aggressive pushing or revenue management in the secondary markets. Just more broadly speaking, that's having a impact where better NOI generation from secondary markets. Is that something consistent with what you're seeing in your portfolio?

No. I think when we look at our portfolio, we would frame that to say there is obviously a bifurcation between the supply markets and the nonsupply markets. And that to us is more evident than necessarily, primary, secondary or tertiary.

Our next question comes from Jackson Belcher (sic) [Jason Belcher] from Wells Fargo.

First, on your third-party management platform. Can you guys remind me of some of the economics around that? How do you charge and then manage those stores? Is it a percent of revenue or flat fee? And then, I guess, given the recent growth, what does that now account for as a percentage of total revenue?

So on the first part of that question, the contractual relationship with an owner is overwhelmingly a percentage of revenues with a floor to the extent that it's a brand-new store and lease-up model. That's consistent with the way the contracts have been structured for the last several years. I think it was -- we were following some best practices, and we put information in our supplemental package with a few more inputs on the guidance range, one of which is our expectation of management fees. So I would refer you to that table included in the supplemental, which I think will help with getting a sense of what we expect as a management fee contribution in terms of gross revenue to our 2018 expectations.

Specifically, the ranges included in that table is an expectation in 2018 in property management fees in the $19 million to $21 million range. And as a percentage of our total revenues, that puts us just a little bit north of 3% of our total revenues. We expect to come from fees generated from third-party management.

Got it. And then on the C/O stores, how is lease-up trending there? And how does that compare to, say, a year ago?

So on our few stores that we have acquired that were purpose built for us and then also on our overall development openings, we continue to see performance, particularly if you cut to the chase on the cash flow that has been superior to our expectations. Specifically looking at the C/O stores, they continue to lease up at or a little bit better than our expectations going in. Each individual store and each individual market has its own idiosyncrasies. But overall, we continue -- as we said in the opening remarks, continue to see good solid demand for the product in our markets.

Our next question comes from R.J. Milligan with Baird.

I wanted to follow up on Smedes' question on Houston, not sure if you guys have this. But do you have where Houston occupancy was at the beginning of the fourth quarter versus the end of fourth quarter?

Houston occupancy at the beginning of the fourth quarter versus the end of the fourth quarter.

R.J., I'll look for that. If you have another question, let me see if I can find that, while you ask another question.

Yes, sure. For the incremental 15% of your properties that are going to be competing with new supply in '18, can you talk about which of your top markets is that going to be the most concentrated in?

Yes. It is more impactful, as you would expect, in those markets that we've been talking about for quite a while in terms of new supply. So the more impact in Miami and Dallas, Washington, D.C., Atlanta, boroughs in New York; less impactful in California, in Boston. I think Austin, we've actually seemingly stabilized there. We seem to have stabilized a bit in Houston, a little bit more supply in Phoenix, fairly stable in the Philadelphia, North and South Jersey markets.

Hey, R.J., on the Houston question, our same stores in Houston ended the third quarter at physical occupancy of 94.8% and ended the year at 92.1%.

Okay. And my last question, if last year, you guys saw a 25% of your properties competing with new supply and 2018 is expected to be 40%, would it be fair to assume that the number in '19 would be higher than 40% given that 2017 deliveries will likely still be in lease up?

Well, 2017 deliveries will be included in both, right? So in our 40%, we're really looking at deliveries in '16, '17 and '18 contribute to the 40% number. So when we do that calculation a year from now, we'll be looking at deliveries from '17, '18 and '19. So the '17 deliveries will be in both populations. So the overall question is, do we think the 40% goes up or down? To Chris' comments, I think in his opening remarks, really difficult to have visibility into what deliveries are going to look like in many of our markets in '19. It's just -- it's pretty far out, given the time it takes to get the approvals done and get construction done. You could absolutely start a project today and have it delivered in 2019. So it's hard to have perfect visibility into that. What we do think, though, is that we went from 25% of our stores impacted last year to 40% this year. I think whether it goes up or down from the 40%, our expectation is that it won't be as far from 40%, up or down, as the move we saw this year going up from 25% to 40%. So could you frame that to say we would expect it to be somewhere between 35% and 45% as we sit here today? But boy, that's a big guess because the crystal ball is awfully fuzzy on that one.

Got you. So the real question is, is '19 going to be greater than '16? And that will...

I think that's the right question, yes. And it's a little bit too early to call that.

Got you. And then my last question is there was a bit of a decel in California in some of those markets there. I don't know if there was any extra color there. Is that just a little bit of new supply? Or just inability to push rate? What's -- it wasn't significant, but it was noticeable in a couple of markets.

Yes. Hey, R.J., it's Chris. I think you're just starting to see the weight of many, many years of significantly above-average rate growth. And so we're not really seeing any new supply there at all, but we may have gotten a little bit too far out over our skis in terms of the magnitude and the cumulative magnitude of rate growth there.

Our next question comes from Rob Simone from Evercore ISI.

Most of my questions on the operational side have been answered already, so I just wanted to focus on the financing side a little bit. Your guidance on interest expense is a little higher than we would have expected. I guess, could you maybe talk about your financing plan for the year and then maybe how much of that change is maybe attributable to rising rates this year?

Sure. So it's not a -- there's not a lot of moving parts in the -- on the balance sheet for the guidance and the underlying assumptions that we put forth. We certainly have exposure to the short end of the curve. 15% to 17% of our debt is variable rate, and so there's certainly an expectation that those -- that the short-term rates are going to move. We also have a portion of our term loan borrowings that is currently hedged in that hedge. You may or may not have in your model that hedge burns off midyear, and so that could be something that would impact, perhaps, your model projections versus our expectations.

Got it. And are -- can you maybe talk about any plans later in the year? I mean, obviously, this is contingent on market conditions. But would the plan kind of be to term out your line effectively as you potentially borrow against it to fund development costs?

Yes. Our playbook is pretty straightforward over the past 5, 6, 7 years on how we like to finance the debt portion of our capital stock. We have an adequately sized line of credit of $500 million, which allows us to use that as we grow, as we fund our developments, as we -- as we're optimistic on the external growth front; allows us to utilize, say, up to half of that amount. And when we get to a critical mass, we can start to think about really 1 of 2 likely paths that we would use to term that out and fix the rate on that debt. 1 path would be to go to the end of the maturity stack and look again to think about an index eligible 10-year bond issuance at some point at the $300 million size. The other alternative that we've used in the past that at times can be very attractive on a relative basis is to look at the bank unsecured term loan market, and that would allow us to most likely look at a 5- or 7-year-type term. And the market has been pretty volatile over the last few years. There are times in the cycle where the term loan component is much more attractive than the bond market. There's certainly been times where the bond market is more attractive in the other direction. But to get that term, to get that 10-year term to continue to elongate and keep our average years to maturity above 5, which is our -- which is one of our objectives. I think, we're currently a little bit more than 6. Being able to move the maturity out to the end of the stack is strategically important to us. So ideally, the bond market would be there for us to be able to term that out on a longer-term basis.

And our next question is a follow-up from Ki Bin Kim from SunTrust.

Just a quick one on New York City, your largest market. If this market falls in that category of the 40% of markets being impacted by new supply, how should we think about the same-store revenue growth potential for this market?

So to be clear, Ki Bin, the 40% is not 40% of markets. It's 40% of the stores.

Yes.

And -- I don't have the number in front me, but I believe that our same stores in New York is a number that's more like 80% of our stores -- of our same stores in New York. I think it's more like 80% of those are impacted by supply. So it's obviously more heavily weighted of the stores that are in that 40% within that market. It's a lot more in New York on a relative basis to that market. So what was the second part of your question, I'm sorry?

So if it's 80% of stores in New York, is it reasonable to expect, like you said, maybe 300 basis points less growth for those type of that stores? Or is something -- is there something different about New York City where that falloff would be better or worse?

I think you're going to have individual stores that are going to fall -- within the boroughs that are going to fall below that range. You're going to have some that are going to fall above that. And it's going to -- it's really asset-by-asset specific in that. If I have a store that enjoyed the benefit of not having a competitive store in its trade ring and now, all of a sudden I have 2, that's a much different impact than if I have a store that's impacted by a new store that was delivered in '16, and -- in 2016 and it's 1 of 15 competitive stores in the market. So even in the boroughs, even in the stores that are 4 miles apart from one another, it's really, really difficult to generalize. And that's why it's so important, and we believe, to do that asset-by-asset look and to think about very specifically what we expect the impact to be on a store-by-store basis to roll up to those overall numbers that we're providing you, which we just caution against overgeneralizing some of the numbers that we provide.

And ladies and gentlemen, we have reached the end of today's question-and-answer session. At this time, I'd like to turn the conference call back over to Chris Marr for any closing remarks.

Thank you very much for participating in our year-end '17 call. I think, as you can tell, we are and remain confident in our business plan. The balance sheet that we have provides us with great flexibility. As Tim mentioned, no need to raise additional equity capital to fund our known commitments. We have great access to a variety of different forms of capital, and we will continue to be judicious in how we deploy that capital both on balance sheet and in ventures.

From an internal growth perspective, again, supply is a reality. Our expectation for '18, frankly, is very consistent with how we would have talked about it a year ago. And again, we believe the quality of our platform, people and assets will continue to create a opportunity for us to outperform on a relative basis and continue to maximize the opportunity that is presented to us. That is our objective, has always been our objective and will continue to be our objective.

So thank you very much for participating, and we look forward to speaking with you at upcoming conferences or on our first quarter 2018 conference call. Have a great day.

Ladies and gentlemen, the conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.