CubeSmart (CUBE) 2011 Q4 法說會逐字稿

Good day and welcome to the CubeSmart fourth quarter 2011 earnings release and 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 note, this event is being recorded. I would now like to turn the conference over to Dean Jernigan. Please go ahead.

Thanks. Good morning to you all. Please bear with me for a minute. The company's remarks will include certain forward-looking regarding -- statements regarding earnings and strategy that involve risk and uncertainties and other factors that may cause the actual results to differ materially from these forward-looking statements. The risk and factors that would cause our actual results to differ materially from forward-looking statements are provided in documents the Company files with the SEC, specifically the 8-K, together with the earnings release filed with the Form 8-K in the business risk factor section of the Company's annual report on Form 10-K. In addition the company's remarks include reference to non-GAAP measures. A reconciliation between GAAP and non-GAAP can be found on the Company's website.

Good morning to you again. Thanks for joining us. As usual, we have with us Chris Marr, our President and Chief Investment Officer; and Tim Martin, our Chief Financial Officer. I will start off this morning and I want to talk about the future, as I usually do. I will let Tim and Chris address Q4 and 2011, but I want to talk about my crystal ball for 2012 and maybe a little bit beyond.

Crystal ball for 2012 at this point in time is very clear to me. Obviously, we are two months into it and I think I see clearly as to what -- how the year is going to play out, so I thought I would share that with you this morning. I see another outperformance year for the entire sector. Our Company and the other three public companies in our sector should outperform all the major US indices, along with the RMZ. I am very optimistic that we will have another outperformance year and the reasons for that optimism include the one that we always talk about, no new supply. Having no headwind from no new supply, can't emphasize that enough. That is something that over the years it is always a challenge having new properties open up around you, near you, but we measure that very carefully. This quarter we only had two properties. In all the markets we operate in across the country, we only had two properties open up as direct competitors of ours. That supply, new supply is I would call it less than a trickle, whatever that might be.

Another reason for optimism is the gradually improving economy. I know we all have our opinions on that. I did notice this morning that University of Michigan had a good consumer sentiment index out. I think the economy, even if it's going sideways or even back a little bit, that would not cause us any consternation regarding our 2012, my 2012 optimism.

So the third item, third reason is the larger players are still taking market share from the smaller players. And that division is becoming obvious to those smaller players and of course that leads into the fourth reason for optimism and that is more consolidation within our sector. We will continue to consolidate the sector, both at the ownership level and the operational level. The three public companies that have the third-party management programs, I see those growing quite nicely in 2012.

The last reason for my optimism is that I really don't see a reason not to be optimistic. I don't see anything that could disrupt or derail the first four reasons for optimism. I went through the list from tsunamis to $5.00 gas to the contagion washing up from Europe and I really don't see anything that is going to disrupt or disrail our sector for 2012. Another bit of good news is I think the great recession is clearly in our rearview mirror. I think we talked about this a couple quarters ago that we had reached and surpassed pre-recession levels of revenue.

I feel certain the other three public companies have as well. So, even though we all approach our business a little bit differently, we have all had similar results. I went back this morning and looked at the results of all four public companies since the first quarter of 2008. As you will recall we were officially in the recession in December 2007. So if you take all the recession years, the 18 months I should say, that we were in the recession and then the time since then of coming out of the recession, it is an amazingly tight performance band between the four public companies in our sector and all have performed well and admirably and I think you can look at that and see that all four companies were quick to cut expenses, some started in Q4 of 2008 and of course we all were about it in 2009. We've pushed revenues wherever we can, some to gain -- some have gained more occupancy than others. But we all have a very tight band as, again, as it relates to revenue. I continue to like our position with our three or four years of occupancy ramp up ahead of us.

If you do a revenue attribution analysis of the companies as to how we generate our revenue and we talked some about that on our calls. I think it has been occupancy up to this point in time, driven almost entirely by occupancy. If you don't have any occupancy left to gain, I think it is going to get tougher. I think as I've said in the past, with diminished promotions and starting to push street rates that will be very helpful, but we have, of course, those two levers available to us in addition to the occupancy ramp up that I have talked about for quite some time now. So, that's kind of the bottom line. Where is the risk? I don't really see a lot of risk to the downside, as I suggested, but I do see some opportunity to the upside and that is if we have an economy that starts to improve a little bit better than the small improvements we are seeing in it now, I think that is a good opportunity to the upside.

With that, I will pause, turn it over to Tim Martin, our Chief Financial Officer.

Thanks, Dean, and thanks to everyone for joining us today, for you're continued interest and support. The fourth quarter was very productive, if not transformational, for the company. We've continued to build the foundation for long-term growth. Our operational execution continues to drive healthy internal growth. The continued execution of our articulated investment strategy has improved the quality of our real estate and has created meaningful external growth. And our focus on enhancing our balance sheet creates improved access to capital and the flexibility to support our future growth.

Some quick highlights for the quarter. We closed on the first tranche of the Storage Deluxe transaction. Tranche one closed on November 3 and included the 16 unencumbered properties for a purchase price of $357.3 million. To fund the first closing, we closed on our common share offering of 23 million shares, raising net proceeds of $202.5 million. We closed on our debut preferred share offering, including the [shoe] we sold 3.1 million preferred shares for net proceeds of $74.8 million. Finally, we drew the first half or $100 million of our five-year unsecured bank term loan and that has an effective fixed rate of 3.09%. The second phase of the Storage Deluxe transaction includes the six encumbered assets. They have a combined purchase price of $202.7 million. One of these assets closed last week. We hope that three more will close next week and then the final two we expect to close sometime in mid- to late March. The second tranche will be primarily funded with the assumption of the $88 million of secured debt that has a blended 5.4% coupon, as well as the remaining $100 million of the aforementioned five-year unsecured bank term loan that included a delayed draw feature.

For modeling purposes, I think it is important to note that the first tranche included both stabilized assets as well as the non-stabilized assets and the Bruckner development property that opened in September. This first closing was also funded, as I laid out the capital, it is funded with the more expensive capital we are using for the transaction, including the common and preferred shares. In contrast, the second closing is effectively funded with the less expensive debt capital and includes all stabilized properties. Apart from the Storage Deluxe transaction, we closed on two other acquisitions during the quarter, both in the Washington, DC market. These acquisitions had a total purchase price of $31.3 million. We also during the quarter closed on a $1.7 million sale of a facility in Portage, Michigan.

In December we closed on our new $600 million unsecured credit facility that consists of $100 million three-year term loan, a $200 million five-year term loan and a $300 million revolver. At closing we drew the full $100 million three-year term loan and used the proceeds to repay the existing $100 million term loan. We also drew $100 million of the $200 million five-year term loan, as I mentioned, to fund the first Storage Deluxe closing, and then the remaining $100 million portion of that five-year term loan, again, will be drawn in March to fund the remaining closing of the Deluxe acquisition. We also entered into various interest rate swaps to fix the 30 day LIBOR potion of $200 million of facility borrowings through the maturity of the five-year term loans. The effective fixed rate after giving effect to the swaps on that five-year piece then will be 3.09%.

From an earnings standpoint, we reported $0.17 of adjusted FFO per share for the quarter. That is $0.01 better than our guidance range of $0.15 to $0.16. The adjusted FFO number does not include the $6.1 million of deferred financing costs that we wrote off related to the old credit facility. Nor does it include the impact of $3.2 million of acquisition related costs, primarily associated with the Storage Deluxe transaction.

Shifting, I would like to spend a few minutes to talk about the balance sheet. When this management team arrived a little bit more than five years ago, we believed and articulated that the optimal balance sheet structure for our company was an unsecured strategy. Our goal was to evolve the balance sheet to obtain investment grade credit ratings from the rating agencies. We believe that despite historically the slightly higher cost of unsecured debt compared to secured debt, that over time the trade-off is worthwhile given the many benefits the unsecured balance sheet provides us. We are able to be more nimble and opportunistic in managing our portfolio over time. As we see attractive opportunities to sell assets that have lower growth prospects and redeploy that capital into higher yielding assets over the long term, we like having the flexibility to do that without the restrictions of cross collateralized loan pools. By having a more conservative balance sheet structure, we believe that we have reduced the risk profile for our investors, as well as our lenders, and we will be able to provide superior long-term returns and reduce our overall long-term cost of capital. We also strongly believe that having access to the widest spectrum of capital sources allows us to be flexible and opportunistic through all parts of the economic cycle.

Our balance sheet has clearly transformed over the last several years. If I rewind the clock back to the end of 2008, we had debt to gross assets of 51%; we had a weighted average debt maturity of only 2.5 years; less than half of our NOI came from unsecured properties. We had no credit rating and had no access to the rated debt or preferred markets. Rolling forward to today, we have debt to gross assets of 35%; a weighted average debt maturity of four years; and no more than 22% of our debt matures in any given year; nearly 70% of our NOI comes from unsecured properties; and we have improved access to a much wider array of capital sources. The quality of our improved balance sheet was recognized in 2011 by the rating agencies. First, in mid-year we received a Baa3 rating from Moody's Investors Services, followed up by Standard & Poor's action in December to assign us a triple B- investment grade credit rating. We believe that our strong balance sheet position will enable us to be nimble and opportunistic as we fund our growth in the years to come.

Looking ahead now to 2012 and our earnings expectations we included in last evening's release. Our FFO guidance range of $0.67 to $0.73 per share for the full year and $0.14 to $0.15 per share for the first quarter. The underlying assumptions are included in the release, but I will add a bit of additional color. One of the biggest variables in our guidance, as we noted in the release, is the timing, the cost and the amount of an unsecured debt raise during 2012. We have consistently discussed our desire and intent to access the public debt markets and we expect to do so in 2012, market conditions permitting. We expect that our debut offering would be index eligible, making the minimum offering size for us 250 million. And we expect our debut offering would likely have a ten-year term. Accordingly, we have included in our guidance the impact of a range of assumptions on the size, the rate, the timing and the use of proceeds of a sizable debt offering this year.

Our guidance also includes the impact, of course, of our 2011 investment activity, including the Storage Deluxe transaction, and our guidance is predicated on the performance of those acquisitions at levels consistent with what we have previously communicated, blending to a combined 6% yield. One variable that has a big impact on our first quarter numbers is the timing of the closing of the remaining Storage Deluxe properties and when they close during the quarter. The timing of closing these assets is uncertain and largely outside of our control, as the loan assumption process includes special servicers and rating agency approvals. The remaining assumptions underlying our 2012 expectations are outlined in our earnings release and I believe are relatively straightforward and self-explanatory, so I won't belabor those.

At this point, I'd just like to thank everybody again for taking the time to join us this morning and I will pause and at this point turn the call over to Chris for his remarks.

Thanks, Tim. When we entered 2011 we had three key points of focus. The first was to continue to improve the quality of our portfolio cash flows through acquisitions in our core markets and dispositions in slower growth, lower barrier to entry markets.

During 2011, we acquired wholly-owned assets in the northern Virginia suburbs of Washington, DC, specifically Fairfax and Leesburg, Virginia; Miami, Florida; White Plains, New York; the Maryland suburbs of Washington, DC, specifically District Heights, Maryland; and in the District of Columbia itself. Through our joint venture with Harrison Street, we now own a 50% interest in assets in the Philadelphia suburbs, the Washington, DC suburbs, Long Island, New York and northern New Jersey. Combining our equity investment in the JV and our wholly-owned acquisitions, we invested approximately $127 million in these core market transactions. The Storage Deluxe acquisition was transformational and accelerated our long-term objective of earning the majority of our cash flow from our core markets. Upon our final closing, approximately 60% of our future cash flow will be derived from our core market assets. In February, as Tim mentioned, we closed on one of the final six Storage Deluxe assets. We anticipate closing on three additional assets before the end of this month and the last closing is expected before the end of the first quarter.

Our acquisition program continues to benefit from our relationships in the self storage industry, our reputation as a quality buyer and our third-party management program. Of our 2011 acquisitions, 9% were acquired through a broker marketed process and 81% were acquired on a direct basis, either acquiring managed assets or us working directly with the seller. Of our non-Storage Deluxe acquisitions, 60% were the acquisition of properties we were managing for a third party. Our third-party management program not only provides us with a built-in acquisition pipeline, it has also been a source of cash flow growth. We generated $3.8 million of fees through the program in '11, a 36% increase from 2010. During the year we added 23 new managed facilities, a 25% increase from where we ended 2010. On the disposition front, we generated proceeds of $45.2 million from the sale of assets in the Midwest -- Cleveland and Canton, Ohio; Indianapolis, Indiana; and suburban Detroit. We continue to experience roughly 100 basis point yield differential between cap rates on acquisitions and cap rates on dispositions.

Looking ahead to '12, we expect our external growth initiatives to be fairly similar to our outlook entering 2011. We will continue to acquire high-quality assets in our core markets. Thus far in the year we have closed on two transactions in our core markets, one on a brokered basis and one third-party management acquisition for an investment of $12 million. We are targeting acquisitions in the $75 million to $125 million range for the year. Our pipeline is as full as it has ever been and we are off to a great start. Our third-party management pipeline is positively overflowing. We continue to receive inbound inquiries and are currently working with owners of slightly more than 100 assets. On the disposition front, we have an objective of selling $35 million to $50 million of assets and currently have contracts for sale totaling $6.5 million. Cap rates on acquisitions in our core markets continue to be in the 7% to 7.25% range and our dispositions we continue to target in the low to mid-8%.

Our second point of focus was on generating increased cash flow from our own portfolio. Entering the year, we outlined our objectives -- 2.5% to 3.5% revenue growth; 2% to 3% expense growth; and 2% to 3% NOI growth, as well as growing our occupancy by 150 to 200 basis points. Our actual results -- 3.6% revenue; 0.3% expense, 5.7% NOI growth -- all exceeded our expectations entering the year. Our physical occupancy grew 460 basis points from our low of 76.3% in January of '11 to our peak of 80.9% in July. For the year, our average occupancy grew 200 basis points from 2010 average levels.

Our 2012 revenue and occupancy outlook is consistent with our actual results for '11. Our base case assumes an occupancy growth trend similar to '11 and we are targeting another 150 to 200 basis point gain. We expect to generate our revenue growth largely from occupancy gains, with a contribution from ancillary income, mainly tenant insurance. We continued during Q4 to have 91% of new renters take tenant insurance and overall have climbed to 61% of our total tenant base insured. On operating expenses, our focus on controlling cost continues to benefit us and has been accomplished while we have continued to provide salary increases to our store and field personnel, as well as being able to have no increase to employee paid health insurance premiums. We are pleased with our efficiency. We believe we have squeezed as much as we can and expect modest expense increases in 2012.

Our third point of focus is the continuous improvement of our balance sheet and maturity profile. As Tim noted, we achieved an objective we first articulated five years ago, receiving investment grade ratings from Moody's and S&P, and we are targeting our debut investment grade offering for the second or third quarter of the year. We have a well staggered maturity level, low leverage levels and a significant pool of unencumbered assets. However, we do believe that our maturity profile of about four years still remains an objective to be extended and we will do so assuming we complete our targeted debt issuance this year. As our capital raising activity in 2011 proved, we are well-positioned to access multiple capital markets.

During the second half of '11 we introduced our superstore concept and our new brand. As of February 15 of this year, we have 41 superstores across the country and our average investment per store is at $44,000 compared to our $50,000 per store original estimate. We have converted 212 of our stores to permanent CubeSmart signage and branding and are on track to convert the remaining stores by April. We currently estimate a capital investment of $2 million to $3 million in 2012, bringing our estimated total cost upon completion to a range of $4.5 million to $5.5 million. That compares to our original $8 million estimate.

We have built a platform of people, systems and processes at CubeSmart that has proven to be a solid foundation for growth. This is evidenced by our fourth quarter activity, during which we entered into the Storage Deluxe transaction, raised a significant amount of capital, closed the first tranche of the Deluxe acquisition and smoothly integrated the assets, acquired two additional core market assets, disposed of an asset, rebranded the company, continued the rollout of our superstores, reduced operating expenses, and had a very strong quarter from a same-store rental activity perspective, with move-ins up 6% from the same quarter of 2010, which had included an 11% increase in the month of December.

On behalf of the entire senior management team, I wish to thank all of our employees for the focus and dedication during an extraordinary 2011. It is due to all of our 1,300 associates moving in lockstep that we have been able to meet and exceed our objectives. At this point, operator, we would like to turn the call over for questions.

(Operator Instructions)

David Toti with Cantor Fitzgerald.

Dean, I want to go back to something I think I heard you mention in your opening remarks. Did you comment that you think occupancy gains are going to get tougher from here on out? I would think, given the industry conditions that you outlined that the occupancy gains should be theoretically relatively stable from recent trajectories?

That's not quite what I said, David. Good morning to you.

What I was -- I don't think I said that -- what I was trying to say is that revenue gains would get tougher going forward if you don't have an occupancy runway. In other words, you only have rate to deal with or diminish concessions. What I was referring to, as we do a revenue attribution analysis continuously here to see exactly what makes up our 3.6% revenue growth for the year, for example. Most of that came from revenue -- I'm sorry, most of that came from occupancy this past year. And so the point I was making is, if you don't have some occupancy left, it is going to get tougher going forward because you only have revenue to deal with.

And then Chris, question for you -- has the Storage Deluxe deal shaken out any new opportunities that you can speak about?

It absolutely has shaken out a very large pipeline of new opportunities. Not surprising, given the fact that we were able to execute on that transaction with no leakage in terms of disclosure, and raised the capital to close on that transaction very efficiently. We have received a significant amount of inbound inquiries from folks who are interested in doing business with us. Obviously, don't want to get into the level of details, but those transactions tend to have a long lead time and are obviously more complicated than a one-off. But we are very enthused by people's interest in doing business with us.

Has the pricing changed at all in your view, given the Storage Deluxe transaction? My sense is that, that may have instilled some optimism among sellers in the market?

Yes. The reality, as we would have expected, is that, that will influence peoples' expectations; and one of our jobs is to just make sure that the market doesn't misperceive their assets relative to that opportunity.

Okay great. Thanks guys.

Eric Wolfe with Citi.

Hi, guys, it's actually Nick Joseph here with Eric and Michael. I was wondering if you can walk us through the uses of the unsecured debt issuance assumed in guidance. I know you have $165 million of debt maturing in '12, and they're targeting net acquisitions of about $60 million. So what are you planning on doing with the remaining proceeds?

Good morning, it's Tim. Good question.

What we wanted to include in the guidance, of course, is our expectation, as I mentioned, of doing a sizable index-eligible offering, market conditions permitting. So, you hit the nail on the head for the first and most obvious use of proceeds, which would be to use them for the $164 million of 2012 maturities. The balance of the proceeds is really a mixture of potential other uses, including repaying other debt, including some secured debt that does not mature in 2012 that we could choose to prepay; includes the possibility of us prepaying some or all of our 2014 unsecured bank term loan and extend that maturity out from 2014, well out into the future.

We have an opportunity later in the year to look at a joint venture arrangement that we have, and the proceeds from a bond issue could be used to finance us buying out some or all of a partner's position in an existing joint venture. And of course we could use the proceeds to fund our net acquisition activity, depending on the timing and the amount of such activity.

And then, can you us give an update on your Superstore transformations? Basically, what are you seeing from these stores that are different from the rest of your portfolio?

This is Chris.

The one store that we have had open since September of last year is our Callowhill Street store in downtown Philadelphia; and the performance of that store, what I think is most interesting -- and again a portion of this is anecdotal, because the store has only been open for a while, and then a portion of it is related to our actual performance -- we have seen a good increase in the amount of commercial activity at that store. We have had a history there of having commercial tenants, and we have seen a sharp rise in the amount of commercial tenants at that store since we converted it to a Superstore. We have about a 10% increase in terms of the number of commercial tenants we have identified there from -- this is from January of last year to January of this year. So a portion of that attributed to the Superstore introduction in the third quarter of last year.

So clearly, they rent larger units and the commercial tenants are very much aligned with the types of services we are offering there, particularly the packing and shipping, the shredding, et cetera. We have at that store also used -- or sold -- a majority of the services that we have there at that particular store. Again, the shredding, packing and shipping, and moving services are the ones that have risen to the top of the list in terms of the most utilized.

And then, can you talk about the supply picture? You mentioned how low it is now in your markets. But when do you see it return to a more normalized level?

Are you talking about new supply?

Right, new supply.

I don't think it will ever return to the levels that we have seen in the past. I think we've become a mature sector. The old days when we build it and they will come model is no longer. I do see some development coming back, probably in latter parts of 2013 and 2014. But I think its clear sailing between now and then.

We would know about anything coming online in the next 12 months. That would be represented in starts that we monitor, and it's just not happening yet. So I think we've got probably another 24 months here before we can anticipate any supply impacting us in any fashion of importance.

It's Michael Bilerman speaking. Tim, I said just a quick follow-up.

In terms of this bond offering, I guess you are thinking 5.50% to 6% on the rate. That's like 350 to 400 over the current 10-year. Alexandria did their bond offering last week, same BBB-minus; they were 260 over. So, I guess, what are you -- I guess the 350 to 400 -- is that what the banks are telling you where your spread would be? Or are you thinking the 10-year is moving up materially between now and then?

It's more the latter. We certainly don't think that if we were to be in the market today or had we been in the market over the last eight weeks that our all-in costs would be 5.5% to 6%. We also certainly don't profess to have visibility into exactly what Treasuries are going to be in the range of time that we have provided in our guidance. By today's standards, today's Treasuries and our expectation of where we would price over the 10-year, that would suggest a little bit of conservatism in the 5.5% to 6% range by today's pricing. We just don't know exactly where Treasuries are going to go between now and then. We certainly don't expect that our spread over treasuries would be 3.5% to 4%, but would be more closely aligned with other BBB-minus credit companies.

Right, because you should be able to get this deal done in the low 5%s, potentially even lower. High 4%s if you were to go next week.

That is a fact.

How does that -- because it is a significant variance in guidance, and, obviously, how you use the proceeds and when you reinvest those proceeds would have a significant impact on guidance. The quarterly run rate in the guidance is $0.17 to $0.18; I got to imagine that, when all is said and done, you are going to be ending the year or heading into next year when all the money is put to work, and you have the acquisitions, that you are somewhere -- it's got a 2 in front of it instead being in the teens.

This is Chris.

Obviously, all of that depends upon all of those assumptions you just made. So let's see how this plays out, and hopefully, Treasuries will stay where they are. We obviously think the market is very interested -- the debt capital markets in self-storage paper. We will be the only real committed issuer in the space, and we are going to try our best to price closer to the BBB multifamilies than we would to the BBB-minus office REITs.

Okay. Thank you.

Christy McElroy with UBS.

Dean -- just wanted to follow up on your comments about things that could derail performance, potentially. With oil approaching $110 a barrel again, I am wonder if you have done any analysis looking at the correlation between net rental activity and gas prices over time, sort of all else being equal? And if it impacts some regions more than others, geographically.

No. Christy, good morning.

I don't think our data is that good enough in our sector yet to really be able to make observations, good observations like that, but I put a fair amount of thought into it; and what I do anticipate the impact to be is, just what every other type of industry or sector out there. It will take discretionary spending out of the pocket of the consumer, who is having to spend $5 a gallon on gasoline. So, to the extent that we have people out there who are thinking about storage but are filling their gas tank up at $100 a clip, they probably -- if they don't have a real demand for it they're going to put it off. So that's the only place that I can see it impacting us, and I think it's really at the margin.

And then, Tim, from a modeling perspective, how should we be thinking about the properties that are currently in lease-up? What are they currently yielding, and what should the ramp look like over time?

If you think about the 6% yield that we quoted that is on all of the 2011 acquisitions, including the full Storage Deluxe transaction, there certainly is a ramp up throughout the year. Wouldn't expect that to be 6% each quarter. Generically speaking, it grows from closer to a 5.5% combined return early in the year; gets to about that 6% midpoint, on average, between the second and third quarters, and then grows to closer up to the 6.25% to 6.5% range as you get to later in the year. So, from a big picture, that at least gives you some sensitivity to how the ramp up is going to flow throughout the year.

And then, when you pay off the loans coming due in August and September, does that free up any assets that you are targeting for disposition?

Hi, Christy, it's Chris.

It does. There are some assets in those pools that are orphans, so to speak, where they are a single asset in a particular market; and we are targeting those for disposition.

How much would you say?

Those are included in our objectives of the $35 million to $50 million.

And then just lastly -- what are you guys targeting for management fee income in '12?

Don't have it right in front of me, Christy. I will double back as soon as I put my finger on the number.

Okay. Thanks guys.

Jana Galan with Bank of America Merrill Lynch.

I was curious -- there's recent reports that homeowners are increasing renovations on their home. Have you seen some new demand come from those types of renters?

Good morning; it's Dean.

Yes, that really is an interesting opportunity, I think, for the storage sector, in that housing, as we've noted in the past, is not going to come roaring back. But that gray market out there of rental houses, if you will -- there's a lot of work needed on those; and also housing that has been vacant for a year or two that they are going to fix up to sell, and there are now people in the business -- I was hearing about a large entrepreneur the other day -- or large for that sector -- who was out buying houses, fixing them up, and selling. That's good for our sector. That is a good point to make. We don't have to have subcontractors who are building new homes; just those subcontractors getting back to work is going to be good for us.

And then, I guess -- regionally across your portfolio, are there some areas that you are feeling much stronger about versus others?

It's Chris.

Yes, I think when you look at markets across the country; and where we are feeling particularly strong would not be surprising. You are going to see on that list Chicago, the greater New York City area, Dallas-Fort Worth, Miami, Atlanta, Washington-Baltimore, Philadelphia corridor, and Boston. And then from markets where things are slower -- Houston, West Palm Beach, Orlando and Tampa in Florida, and then most of Arizona, although there are some pockets that are performing better than others.

And I'm sorry if I missed it -- did you give where occupancy is, currently?

We do not provide updated occupancy for the current year on the call. Seasonally, for January and February we are seeing trends very consistent with what you would expect.

Thank you.

If I could just interject -- Christy, this is Tim.

Back to your question -- a good range of expectation for 2012 on third-party management fees is a range of $4 million to $4.5 million, which is relatively consistent with our existing run rate. It is obviously dependent upon how many new contracts we bring on, and how many existing third-party management contracts become part of our acquisition results for the year.

Todd Thomas with KeyBanc Capital Markets.

I'm on with Jordan Sadler as well.

Just wanted to go back to your revenue growth forecast for 2012, and your expectation to gain 150 to 200 basis points or more of occupancy throughout the year. It seems like the occupancy gains will comprise more than half of that revenue target; and if I add in rent increases to existing customers in something consistent to 2011, in the 5% to 9% range, maybe modest growth in asking rents and tenant reinsurance income, which is included in revenue; you would think the top line should be a bit higher than what you are projecting. Am I missing anything there?

Well, maybe. If you think about the makeup, for example, of our fourth quarter growth -- our realized annual rent per occupied square foot, if you look on page 16 of the supplemental, was down about 0.5% for the quarter and was flat for the year. So, effectively that's saying that the combination of people moving in and moving out, the timing of when they do so, and the rate at which they move in and then they move out, along with promotions, discounts, specials, et cetera; offset, effectively, the impact of our street rate increases, where we are up about 2% in both periods. And when you are passing along a rate increase to existing customers, as we have throughout the recession, at a consistent 7% to 9%, we have tended to get to a point where we are flattening out a bit on how much of an impact to the growth rate that existing rent increase to existing tenant has.

So when you look at that line for us, and I think there is maybe one or two other of our peers who also disclose that line, it will give you basically the impact of all of those factors in one number; and we are effectively flat for the year. Expect that trend to continue; albeit as Dean said, we don't see downside risk. There could be upside to the extent that there is a more robust economic environment, and/or those who don't have the occupancy start to push on either street rents or reduce promotions.

But if you think about the attributes of our revenue for 2011 growth, and again, as we expect it to be in 2012, the vast majority of it will come from occupancy, with the remainder being from ancillary income, as I said; and our current base case contemplates that our realized annual rents are effectively flat.

And then, I was wondering, with regard to occupancy in the quarter -- some of your peers saw a more muted sequential decline in the fourth quarter from the third quarter. You were more in line with your historical changes in occupancy. I was wondering if you had any thoughts on what happened in the quarter in your portfolio, maybe versus some of your peers; and whether or not you were targeting a higher level of occupancy for the quarter?

We were not surprised by the quarter, in that we were expecting robust move-in activity given our enhanced marketing efforts and presence on the web, as well as the operations operating very smoothly throughout the year. So the 6%, as I quoted, move-in activity in line with expectations.

We also expected, given the fact that we had an incredibly strong June to August rental period in 2011, where our rentals were up about 10%; and as you know about 32% of our customers tend to stay three months. So we were targeting increased move-outs in the fourth quarter. They were about 13% higher than they were in the fourth quarter of 2010. We have very little to no control over when folks reach the end of their need for our product. We do have a good predictor of when that happens, and that move-out activity was not incredibly surprising. I think if anything, again, those same markets that I quoted, particularly -- the same markets that I quoted for the previous question were a little bit softer than, obviously, our core markets.

Lastly, your first quarter guidance -- did you talk about any of the assumptions that get you down from the $0.17 a share in the fourth quarter to the $0.14 to $0.15 share range?

Didn't talk about them specifically. Seasonally you would expect a little bit of a decline. I think one of the bigger variables there is that you have a full quarter of the first tranche of the Storage Deluxe transaction. Some of my comments earlier were really geared towards pointing out that, that part of the transaction was funded with the most expensive capital that goes along with the entire transaction. So you have a full quarter impact of the first tranche of Storage Deluxe. And you have the second quarter of that -- or the second tranche of that transaction -- is going to close heavily weighted towards the end of the first quarter.

So the first quarter is going to get the detriment of the more dilutive portion of the Storage Deluxe transaction, and does not get much of an impact from the second half, which is actually helpful from an FFO perspective. That is one of the larger drivers that maybe isn't at the forefront of everybody's thought process as to why the first quarter guidance is where it is.

Okay. Thank you.

Paul Adornato with the BMO Capital Markets.

I was wondering if you could touch on the concept of capitulation on the part of the smaller operators, both with respect to the management business; and so was wondering if you are seeing a better pop in the properties that you are now getting from the mom and pops, and also with respect to the pricing on acquisitions -- if there is some sort of noticeable impact on cap rates?

I'll take the first couple and I'll let Chris address cap rates and acquisitions.

It really is becoming obvious to the smaller players out there that they cannot compete in the marketing world that we live in today. So that capitulation, as you described it, is very appropriate. We are hearing from more and more of those folks; and the results -- part of your question -- is very positive. In fact, we are going to start putting that in our magazine ads, as to how well we performed last year, year-over-year, for our third-party managed assets. Because it's not that difficult to do, and the performances are really good; and that will add to the capitulation, I think, as we put those performance numbers out there.

Hi, Paul, this is Chris.

From an acquisition perspective, the trend has always been and continues to be that those entrepreneurial owners are very optimistic people, and so the May to July rental season will always be better this year than it was last. So at the moment, as we cycle through the year, a lot of folks are holding on to see how that progresses. And what we saw last year is, they had disappointment for how well they could perform during that time period. The capitulation came into play in that August, September, October time period, which is why we tend to see more transactions in the second half of the year. At this point, to specifically answer your question, I don't think it has had any impact on cap rates.

Maybe just a comment on cannibalization. Are you seeing any evidence that, as more and more properties become professionally managed that there is cannibalization among your properties?

Can you help me with what that exactly means?

That means that, if you are managing a whole bunch of assets in the market, that your properties, your owned assets, are going to give up a little bit because you are helping other properties.

No, it actually worked the opposite. To the extent that the larger, more sophisticated managers come into the market, they have more courage to push rent, they have a more sophisticated operating platform, and I think it tends to lift everyone in the market. So I think it actually works the opposite way.

Okay, thank you.

RJ Milligan with Raymond James.

Dean, in your comments about the market share grab that you expect to continue, and talking about the online marketing abilities of the mom and pops, I was just wondering if you are seeing them catch on at all? And if they have even the scale or the budgets to compete in a local market online?

Many of them are starting to understand -- good morning, RJ -- many of them are starting to understand and catch on, as you say; but they really can't do anything about it, and they are understanding that as well. They don't have the budget, they don't have the platform, don't have the consultants to manage that budget for them even if they have the budget. They are really in an impossible situation, except for one thing -- and I speak to these groups from time to time, and I tell them that they just really need to bring their bottom lines in. They need to circle their wagons. They need to shrink their geographical presence.

They can compete in a sub market. If you've got three properties, for example, you can compete in a sub-market in almost any city. You can't compete in three different cities, because of all the keywords you have to buy from Google and others. And so they are starting to understand that, and I think some of them are starting to do that. I spoke in the fall to some folks and I referenced the game of Monopoly; and I said we've all played Monopoly. You need to think about that, because you really need monopolies. You just can't own single properties around the board and expect to win the game. I think that is getting through to people.

Obviously, occupancy -- you guys have some room to go, and it's certainly another growth lever that you guys have to pull, and a couple of your peers have talked about hitting their optimal occupancy level. I'm just trying to get an idea of how you guys think about your optimal occupancy level and how long that runway is before you reach it?

We operate basically like -- well, we just think the best level to operate your properly -- if you just could snap your finger and say, this is where I want my properties to operate, you want them to average in the very high 80%s throughout the year. They will peak in the summertime at about 92%, and perhaps in the wintertime roll down to 86%, 87%, something like that. That gives you inventory throughout the year to rent. You don't run out of space to rent to people when they come up, and you keep pricing your space up to the point where you have inventory. So, high 80%s on average throughout the year is where we expect to take this portfolio to.

And just on your anticipation for the timeline -- how long do you think that's -- what do you think the ramp-up is over the next two years?

Well, what we keep talking about is -- and we've got our 200 bps this year. We keep talking about 150 to 200 bps a year and continued growth. With an improving economy I can see that maybe getting a little bit better than that; but I think, clearly, we can see out three to four years of occupancy ramp up available to this Company.

Great. Thank you guys.

Ki Bin Kim with Macquarie.

Going back to your unsecured bond issuance topic -- it seems like you're -- I understand you have to raise 250 to be part of the index, but it does seem like minus acquisitions is a little bit more capital than you need immediately. I guess my question is, why do you have to pursue unsecured bonds, anyway? Why can't you just stick with the mortgage market? And assuming the mortgage market is still a much more attractive than the 5.5% to 6% you will get in the bond market.

Hey, Ki Bin; this is Chris.

We have been very clear and consistent in articulating what our long-term strategy is, and it does not include secured debt. So it is not a direction that we would anticipate going.

I think if you look at a similar tenor piece of secured debt, and you take the trade-off of all of the cost to encumber self-storage assets, along with the coupon, along with the lower levels of leverage today, and along with the headaches that we have all experienced both going in and going out of these instruments, it is just not a place where this Company is going to play.

As it relates to strategy, we have been very consistent in what we are doing, and as you look at the opportunities we have this year to push out our maturity profile, should be no surprise to anyone that we are interested and will execute in the unsecured debt markets with a debuted ten-year deal along the lines of the amounts that Tim has articulated.

And is the debt coming due this year -- are those CMBS?

They are.

Any commentary on the market? Is that an option, or if that market comes back, or not at all?

It is not an option for us. Currently, I would say, that market is very tenuous. Have not seen a significant amount of deals get done, but that doesn't mean they won't before the end of this year. But not a market that we are interested in.

I know you haven't had a chance to fully put the Storage Deluxe assets under your system, and whatever upside there is on putting on your system, but you probably do have the historical financial statements. So I was wondering if you could comment on the same-store revenue or same store NOI growth in the quarter, or January, February for the Storage Deluxe portfolio.

To compare to what a prior operator did is probably not all that valuable to us, so we don't look at it that way. We look at how are we doing, versus our expectations, because that is a more relevant comp. And so the assets are integrated. We closed in November, hit the ground running, and were well-positioned to put them into our system without missing a beat; and they have been operating wonderfully. So as we look at revenue performance against our underwritten expectations, and along the lines of what Tim had articulated, the properties are performing better, so far than what we had anticipated. If you wanted a number compared to last year, I don't think it's a very fair comparison, but the assets are up on a year-over-year basis, and revenue is about 20%.

If I could ask the same question -- but when you said they are doing better from a revenue standpoint than what you modeled in or in your pro forma, I was wondering if you could give a little more detail around that?

Slightly better.

Just last question -- your G&A seems like it's moving up quite a bit in 2012. I was wondering you comment on the different components of that?

I think if you look at our G&A guidance for 2012 at $25.5 million to $26.5 million, and you dial back and you look at our guidance from one year ago as we entered 2011, it is an identical guidance range from where we were last year. In 2011, we performed better than our initial guidance range, partly due to the fact that we did not have a fully staffed team for the entirety of the year, given some turnover at some senior positions.

So our 2012 number contemplates a fully-staffed team, and also contemplates marginally some slightly higher costs related to having our operating partnership as an SEC registrar; and also some of the additional cost of having more shares outstanding, as well as the preferred issuance. But those aren't big increases, but they are a slight factor in the growth over 2011 numbers.

Okay. Thank you very much.

Michael Knott with Green Street Advisors.

Chris, can you give a little more color on -- I thought you said you are seeing cap rates in your markets 7% plus. Can you just compare and contrast that with the 6% number you guys gave for your guidance. Obviously, I think we all know the answer, but I just thought it would be interesting to compare and contrast those comments.

Yes. When you think about that number, that is a blend of, obviously, the Storage Deluxe stable assets, the Storage Deluxe lease-up assets, and then the mix of assets we acquired last year; which did also include a mix of stable assets we would've looked at on a cap rate basis, and those that had either some distress to them and where a bank-orchestrated short sale or some other opportunity for us where the going-in yield wasn't on a stabilized asset.

So when I think about what we are seeing out there -- when you have a one-off transaction, individual seller -- in all markets, I would say, except specifically Washington, DC, and New York Metro, you are generally in that 7% to 7.25% range as we look at in-place cap rates. When you are in the District itself, you can push inside of that, without a doubt; and New York definitely is inside of that. We have just not seen a lot of activity in the San Francisco Bay Area, but from identifying what traction there has been, you would see tighter cap rates in that market as well.

It's unlike, call it 50 million [Macs] dispositions in '12, and you are getting pretty close to the end of your pruning phase? Right?

Yes. With these upcoming CMBS maturities, as I said to a previous question, we have some orphans in markets along the Gulf Coast, et cetera, where it provides us an opportunity to exit. We are always going to look at the bottom 25% of the portfolio, and evaluate those as to the trade-off between disposition and redeployment, versus what they're upside potential would be; but the heavy lifting is done.

And then if you found another large opportunity like Storage Deluxe, how would you feel about the organization's capacity to integrate that kind of deal? Feels like integration risk isn't as big a deal as it used to be in this business, maybe because of technology. Do you guys have any comment on that?

We, collectively, would feel great about such an opportunity. The one thing to think about on the Storage Deluxe deal is, it was a large investment from a capital perspective, but the absolute quantity of assets was not that significant. So I go back to '94, '95, '96, and when we were targeting $300 million worth of acquisitions in a year, that could be 80 properties. So it was the lack of technology that we have today, and then it was just a larger quantity of moving parts. So we absolutely could absorb additional, either third-party managed or wholly-owned acquisitions, without missing a beat.

And then, last question -- Dean, if you wouldn't mind getting your crystal ball back out, I would be curious just any comments you can provide on -- I believe if I have my facts straight, when your contract is up at the end of next year, I believe, that you are planning on stepping down; and you've obviously sold companies before, but it seems unlikely to be sort of the endgame for CubeSmart, given your perspective on that consolidation opportunity. Any comments you have on what happens at the end of next year with the management team?

Well, Michael, you are always good at asking the tough questions.

This is a very strong management team that we have today; excluding me, or whatever you might think about me, this management team is outstanding. We've got depth. We've got a platform that has taken on sizable growth this past year; anticipates taking on sizable growth going forward. I think this Company has a wonderful opportunity in the future as a standalone leader in the sector of storage, and in the sector of real estate, public real estate. I'm very, very pleased with where we are positioned today.

Okay. Thank you.

(Operator Instructions)

Todd Stender with Wells Fargo Securities.

Real quick -- looking at the operating expenses for this year, and the risk to the downside that you can identify, what kind of visibility do you have on property taxes for 2012? Could this be an unforeseen risk, not for just for you guys, but for the industry?

That is always an area that none of us have very good visibility into. There is always the reality -- or the fear, I suppose -- that at some point municipalities are going to need to increase millage rates to make their budgets balance. However, we have not seen that over the past several years.

We have been pleasantly surprised with our ability to continue to challenge assessed values, and we have been able to have results that have had real estate taxes really held in check for several years. So, there is always the possibility that, that could change in any year. Hard to believe in an election year that, that would be the year that it would happen, and most of the folks that have to make those tough decisions at the local level like their jobs and like to remain elected officials. So, it is generally not in their best interest to raise those millage rates. There is always that part to offset the fact that they continue to struggle to have balanced budgets.

So, not a particularly pointed answer to your question. It is certainly an area that has risk. We don't believe that there is a lot of downside risk to us in 2012.

And quickly -- relative to your same store NOI expectations for 2012, where do your acquisition growth assumptions fit into that? Very much inside or a little above?

In terms of how we think about growth on those acquisitions?

Exactly, your underwriting assumptions

The expense is matched up nicely. On the revenue side, those assets, even if you took the nine or so assets that ended up in the same-store pool this year that we acquired in '10, they grow at a higher revenue pace than that same-store average.

Okay, thanks, guys.

Paula Poskon with Robert W. Baird & Co.

Couple of housekeeping questions, and a couple of big picture questions. Housekeeping -- could you tell us where you are, relative to plan on the Supercenter conversions?

Sure. We are right on track. As I mentioned in the preliminary comments, we have about a $44,000 per store average for the cost of putting the office into a Superstore condition, and that was against our $50,000 original estimate. And we are at 41 stores, with an expectation that we will be right up against that 100 that we targeted by the end of the year.

I did give some conversation around Callowhill, which is the one that has been open since last fall. I didn't have the specific in front of me and I now do. We have moved from 178 business/commercial/sales-rep type customers to 196 business/commercial/sales-rep type customers over the last year; and I don't have the exact number, but a good portion of that has occurred since we implemented the Superstore concept at that store.

How does that deeper penetration in that business/commercial segment compare to what you had hoped to see?

It is in line if not better than what we had anticipated, and probably a little bit quicker. Those are the type of locations that allow a good commercial presence. The additional amenities has obviously attracted a greater number of those types of tenants, many of which were not using storage before, but were dealing with their needs in a different way.

So, we are opening up different channels of customers, which is very positive; and then they rent larger units. So, again, that store has a 2% increase in square-foot occupancy, currently up into the very high 80%s. It was in the 90%s in September. So, it's had a positive impact on that store all the way around.

And then, likewise, where are you relative to plan on the physical rebranding rollout?

Also, as I had mentioned in my prepared remarks, we have 212 stores converted as of the 15th of February. The remaining will be done by April 1, and we had an original budget of $8 million for that, and it is coming in around $4.5 million to $5.5 million.

Thanks, I apologize if I missed that earlier.

Following up on Todd's earlier question about the third-party strategy -- how do you answer the critics who say that you are just driving up your future acquisition price by improving operations?

I think, consistently with the way everybody else has been asked that question, answered; the reality is, when we have an introduction to a potential customer, the first question we ask is -- can we make you an offer to acquire your asset today. If that is not successful, we look to get involved with them from a third-party management perspective.

It gives us perfect insight from an underwriting perspective into the asset, and gives us zero operational and underwriting risk in terms of bringing that asset into the system. So, the reality is, that does happen, but it's also an opportunity for us to control an asset in a market that we would like to be in, and we are willing to take that trade-off.

And then bigger picture -- I look back at the historic forward multiples between you guys and Extra Space. Back in the crisis of spring 2009, there was maybe a three-turn difference; and as things stabilized and both companies improved, the shares' valuation improved and the valuation gap there narrowed to just about a half a turn in -- let's call it -- summer of 2010. And that started to widen back out to a three or four turns even, as recently as this past fall. Why do you think that is? What is the market telling you?

I think the market is telling us that they very much understand and appreciate the portfolio transition that we are going through; but we have made significant changes to the quality of our portfolio very recently, and we, as we are very well aware, need to deliver on those expectations. Clearly, that's what we plan to do, and I think those who invest early in that process will be the winners, and we expect to deliver on what we've articulated.

Thanks, Chris.

Final bigger picture -- this is out of left field for you and Tim. You've been at the storage gig now for several years. What is the single biggest similarity and the single biggest difference between running a storage company and running an office company?

Clearly, the biggest difference is -- that'd be the office business, given the accounting and given the incredible amount of capital that needs to be invested every time a tenant leaves or you are trying to fill a new building, to me makes that a very difficult public company model. I mean, you definitely make your money in that business by buying at the right price, leasing the asset up, and selling it.

And those gains aren't valued in terms of how folks apply a multiple to a suburban office company. It's also a much tougher business in terms of, you have a broker involved in every transaction, and there is full awareness of what is going on in the market when an office tenant comes into lease. So, I think those are the biggest differences.

I think in terms of similarities, it's probably answering questions like that.

I would say the other difference, at least being at a public version of each of the sectors, is that this sector, certainly, is different in that you get to the end of a period and you are directly compared against other companies within your sector on most every metric; and that is a big difference, of course, from the office space. We rarely, if ever, were compared to a peer on a direct result. Most people would have evaluated results based on their expectations for delivering on our expectations on our portfolio. This sector is a little bit different, in that each of the companies seems to be lined up and compared against each other on a very regular basis.

Thank you very much. That's all I have.

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

Okay. Thanks again for your interest. Look forward to seeing you all soon. Good day.

The conference is now concluded. You may now disconnect.