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Edited Transcript of CUBE earnings conference call or presentation 28-Apr-17 3:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 CubeSmart Earnings Call

Cleveland May 1, 2017 (Thomson StreetEvents) -- Edited Transcript of CubeSmart earnings conference call or presentation Friday, April 28, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles W. Place

CubeSmart - Director of IR

* Christopher P. Marr

CubeSmart - CEO, President and Trustee

* Timothy M. Martin

CubeSmart - CFO and Treasurer

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Conference Call Participants

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* Andrew Patrick Smith

KeyBanc Capital Markets Inc., Research Division - Associate

* Bennett Smedes Rose

Citigroup Inc, Research Division - Director and Analyst

* David Steven Corak

FBR Capital Markets & Co., Research Division - VP and Research Analyst

* Gaurav Mehta

Cantor Fitzgerald & Co., Research Division - VP and Analyst

* George Andrew Hoglund

Jefferies LLC, Research Division - Equity Associate

* Gwendolyn Rose Clark

Evercore ISI, Research Division - Research Analyst

* Jonathan Hughes

Raymond James & Associates, Inc., Research Division - Senior Research Associate

* Juan Carlos Sanabria

BofA Merrill Lynch, Research Division - VP

* Ki Bin Kim

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Ryan Cole Burke

Green Street Advisors, LLC, Research Division - Analyst

* Trent Nathan Trujillo

UBS Investment Bank, Research Division - Associate Director and Research Associate

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Presentation

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Operator [1]

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Good morning, and welcome to CubeSmart's First Quarter 2017 Earnings Conference Call. (Operator Instructions) Please also note that 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.

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Charles W. Place, CubeSmart - Director of IR [2]

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Thank you, Jaime. Hello, everyone. Good morning, from sunny Malvern, Pennsylvania. Welcome to CubeSmart's First 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 those forward-looking statements. The risks and factors that could cause our actual results to differ materially from forward-looking statements are provided in documents the company furnishes to, or files with, the Securities and Exchange Commission, specifically the Form 8-K we filed this morning together with our earnings release filed with the Form 8-K and the Risk 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 first quarter financial supplement posted on the company's website at www.cubesmart.com.

I will now turn the call over to Chris.

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Christopher P. Marr, CubeSmart - CEO, President and Trustee [3]

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Thank you, Charlie. A very solid quarter for CubeSmart, and Tim will dig into the details of our financial performance and post-quarter and balance sheet activity.

We are pleased with the portfolio performance during the quarter, gaining 50 basis points in physical occupancy and experiencing solid demand across markets. And we continue to see solid lease-up in the nonstabilized asset pool. We experienced some nice acceleration in revenue growth from the fourth quarter in Chicago and Phoenix and continued to experience strong year-over-year growth in our California, Nevada and Utah portfolios.

In our other major MSAs, New York, Dallas and Washington, D.C. Metro, our performance was strong, and we continue to navigate through the impact of new supply. We are extremely pleased with the growth in our third-party management program. We added 44 new stores to the platform, 24 existing operating assets and 20 new developments, bringing our total under management to 356. We believe this program continues to expand our brand, leverage our robust operating platform and create a pipeline of excellent future acquisition candidates.

We remain disciplined in the on-balance sheet growth front. We continue to explore all opportunities, but we'll be cognizant and disciplined in transacting.

So with that, I'd like to turn it over to Tim for some more detailed comments. Tim?

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Timothy M. Martin, CubeSmart - CFO and Treasurer [4]

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Thanks, Chris. And thanks everyone joining us on the call for your continued interest and support.

We reported first quarter 2017 results last evening, including a headline result of $0.36 per share of FFO as adjusted, which was at the high end of our provided guidance range and represents a 12.5% growth over last year.

Overall, for the quarter, we can describe virtually every metric the same way, namely, in line with our expectations.

Demand remains steady and broad based, and rent growth continues to moderate as we expected, given the aggregate rent growth we've achieved over the last 3 years combined with the impact of new supply on a portion of our stores.

Same-store NOI of 6% was driven by a 5.4% increase in revenue and a 4.1% increase in operating expenses, all 3 metrics in line with our expectations.

Revenue growth was primarily driven by a 4.9% increase in effective rents and a 50 basis point increase in occupancy as we ended the quarter at 92.7%.

Our same-store expense growth was mostly attributable to the 8.7% growth in real estate taxes. Excluding real estate taxes, our expense growth for all other line items was 1.6%.

We remain active and disciplined in our pursuit of external growth opportunities. During the first quarter, we did not close on any property acquisitions and ended the quarter with 2 stores under contract for $22 million.

We opened 1 development property in North Palm Beach, Florida during the quarter, and as Chris mentioned, we added 44 stores to our third-party management program bringing our managed store count up 356 at quarter-end.

Client quarter also on the balance sheet as we again this quarter did not sell any shares under our aftermarket equity program. Subsequent to quarter-end and early April, we completed the issuance of $100 million of senior unsecured notes. The transaction enabled us to bring both our 2023 and 2025 notes up to the $300 million in total, keeping each of those tranches as index-eligible, with new higher minimum size requirement. The $50 million we added to the 2023 notes, priced at 3.495% yield to maturity, and the $50 million added to our '25 notes, priced at 3.811% yield to maturity.

Proceeds were used to repay our $100 million unsecured term loan that was scheduled to mature in 2018.

And with that, we now have no debt maturing until 2019. Our 2017 guidance and underlying assumptions remain unchanged from what we provided last quarter. We feel that we are well positioned operationally and financially as we head into the seasonally busiest part of the calendar for our business.

With that, thanks again for joining us on the call this morning.

At this point, Jamie, why don't we open the call up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Our first question today comes from Gaurav Mehta from Cantor Fitzgerald.

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Gaurav Mehta, Cantor Fitzgerald & Co., Research Division - VP and Analyst [2]

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So a couple of questions on same-store revenue growth. So you talked about earnings growth continuing to moderate, and on a sequential basis, you had a 40 basis points deceleration in 1Q. So I was wondering if you would comment upon your expectation for the rest of the year. Would you expect that deceleration to be in line with 1Q or be more or less as the year progresses?

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Christopher P. Marr, CubeSmart - CEO, President and Trustee [3]

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Yes, hey, Gaurav, it's Chris, good morning. I think implied in our guidance range for same-store revenue would be a continued deceleration in same-store revenue growth throughout the balance of the year. The magnitude, quarter-by-quarter, obviously, is going to be highly influenced by what happens as we move into the busy season here, which really starts, for all intents and purposes, tomorrow, and will run through the end of July. So I think macro guidance assumes continued deceleration in same-store revenue growth. The pace and the quarter-to-quarter impact, I think, macro, we would expect it to vary by quarter, depending upon what happens here in the next 90 days.

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Gaurav Mehta, Cantor Fitzgerald & Co., Research Division - VP and Analyst [4]

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Okay. And I guess as a follow-up, you had a good increase in third-party platform in 1Q. Can you comment on what you're hearing in the market? And how much expansion can we expect?

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Christopher P. Marr, CubeSmart - CEO, President and Trustee [5]

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Sure, Chris, will take that one as well. The marketplace continues to be evolving towards both existing open and operating assets coming into the program and we're seeing a bit of an uptick in interest from those existing property owners, as their performance have slowed due to either new supply or the fact that they've maxed out on the occupancy side. So I think going forward, our expectation is roughly an even split between existing stores and new developments. And I would expect that we would continue to see new properties coming into the program, whether they be open and operating or development assets at a fairly good clip here through the rest of the year and even into the first half of '18. We have a nice backlog. Obviously, hard to predict on the development assets how many will ultimately be built, but not quite ready to commit yet that '17 will meet or exceed '16, but certainly the visibility looks like we're on that pace.

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Operator [6]

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

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Andrew Patrick Smith, KeyBanc Capital Markets Inc., Research Division - Associate [7]

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This is Drew Smith on for Todd today. Just a couple of questions. First, on last quarter's call, you guys were pretty excited about January. You mentioned it was one of the best Januaries that Cube had had for rentals in a long time. Just wanted to see if you guys could talk a little bit about how the rest of the quarter played out, and if that changed much, and why exactly? That would be great.

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Christopher P. Marr, CubeSmart - CEO, President and Trustee [8]

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Sure, so Chris will take a crack at that one. Yes, January was quite robust. And then as we went through the quarter, I would say, again, positive fundamentals -- strong, positive demand trends relative to 2016 first quarter. February and March, not as robust as January, but still very pleased with how trends went and ended the quarter on both a -- on both in rental basis and on a net basis outperforming what was a very, very strong 2016, and 2016 obviously had an extra day in February as well. So I would say, from a demand perspective, for the first 4 months of the year, we're satisfied with what we're seeing in terms of customer interest in our markets for the product.

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Andrew Patrick Smith, KeyBanc Capital Markets Inc., Research Division - Associate [9]

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Got it. And then just pivoting to asking rents a little bit. Your scheduled annual rent per square foot was up just 80 basis points, that compares to 2.5% last quarter, 3.5% for the year in 2016. Curious, how we should think about this moving forward. Is this kind of a stabilized level? Or could we potentially see this go negative? Just wanted to get your thoughts on that.

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Christopher P. Marr, CubeSmart - CEO, President and Trustee [10]

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Yes, I would not expect to see the portfolio-wide go negative, as a point of reference against spot number, but thus far, in April, we are up about 1.8% over where we were at the same point last year. We would anticipate being able to continue to grow asking rents now starting with the beginning of the busy season tomorrow through the end of July. Our models and forecasts would be, assuming that we would continue to get some upward activity in Street rates, but we would also assume that the levels of discounting we saw in Q1 and the fact that discounts were down at just a bit in Q1 on a percentage of projected rent basis relative to Q1 of '16, that, that's likely to tighten as we go through the year. But our expectation is, during the busy season, we should be able to push rates more than how we were able to push rates during January, February and March, where we saw opportunity to gain some occupancy with customers who statistically are more valuable to us, because of those who rent during that time of the year tend to be a longer length of stay.

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Operator [11]

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Our next question comes from Ki Bin Kim from SunTrust.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [12]

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Could you just maybe provide us a little bit insight into how you are thinking about more C/O deals or more development starts going forward? What's your appetite today?

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Christopher P. Marr, CubeSmart - CEO, President and Trustee [13]

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Ki Bin, thanks. Chris will take that one. I think from the fact that our cost of capital certainly on the equity side has increased over the last several months and in looking at what's available in the marketplace on the C/O side, I would expect that we would be fairly disciplined in taking on any additional opportunities. We would have to see both a compelling opportunity from a market and quality of asset perspective as well as some more compelling pricing. On the development side, we would continue to look for opportunities in our top core markets, Boston, New York, Washington, D.C, for deliveries in, at this point, '18 or '19. But again, we're being very cautious in how we are thinking about underwriting and looking for, certainly, an adequate return for the risks. So I would say, interested in development options if we can find them, but we will be very disciplined in the volume and I think on the C/O side. I think today, we would have to see some more attractive -- pricing to be very active in that space.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [14]

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So I realize, I mean, the priority is always -- I mean, the most important part is finding a good deal, that's why -- I totally get that, but is your maybe more cautiousness towards that -- driven by what you think about market rents at that time in the future? Or has the pricing been less attractive?

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Christopher P. Marr, CubeSmart - CEO, President and Trustee [15]

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Well, I think it's across a variety of things. Pricing on a relative basis to our cost of capital is less attractive today than it was a year ago. Certainly, when we look out or making a commitment for a delivery in the future and we're dealing with an uncertain future cost of capital at the same time, and so all of those have always come into play as we've made decisions about where to make commitments. And I think we are pleased with the commitments that we made in the past that are starting to pay off for us today. I think going forward, all of those factors will come into play as we think about where to use the balance sheet capacity that we have.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [16]

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Okay. One last quick one, the scheduled rents that your report, I realized as a month-end snapshot, so average of 3 data points, but how does the average daily number look like? Any material difference in the 0.8%?

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Timothy M. Martin, CubeSmart - CFO and Treasurer [17]

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Ki Bin, it's Tim. We don't disclose it, and -- but I can tell you for this quarter that it tracked pretty similarly if you would have looked at it everyday to the 0.8% average of the 3-day points divided by 3. It wasn't a big difference between the 2.

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Operator [18]

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Our next question comes from Gwen Clark from Evercore ISI.

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Gwendolyn Rose Clark, Evercore ISI, Research Division - Research Analyst [19]

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Can you just talk about the market performance within the New York City metro area by submarket?

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Christopher P. Marr, CubeSmart - CEO, President and Trustee [20]

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Sure. If you just take the boroughs, the outer boroughs, and the performance relative to our expectations, it was pretty uniform throughout the 4 boroughs. So how we expected them to perform going into the quarter is how they perform during the quarter. If you think about their performance relative to the first quarter of 2016, our worst-performing market, no surprise, our borough, is where we have the biggest impact of new supply is in the Bronx and the revenue growth was basically flat there, asking rents were negative and then the highest performance, although with 1 store, would be Staten Island where we saw very strong revenue growth, teen-type revenue growth and good increases in asking rents. And Queens, which was middle of the road, closer to our same-store average. And then Brooklyn, which was positive, but not as robust as Queens. So I think it performed about as you would expect. No supply in Staten Island, top performer; limited supply in Queens; next, little more supply in Queen -- in Brooklyn; and then market with the most supply impacting us in the near term, Bronx was flat on the year-over-year revenue growth basis.

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Gwendolyn Rose Clark, Evercore ISI, Research Division - Research Analyst [21]

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And do you think the performance, I guess, over the next 6 months will be kind of similar by submarket?

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Christopher P. Marr, CubeSmart - CEO, President and Trustee [22]

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Yes, I would suspect. If you are talking about ranking the 4 boroughs, yes. If you are talking about relative performance, I would think another quarter or 2 and we could have gotten the kind of worst of the Bronx, but the development impact in Brooklyn is coming. So that will -- I would expect that one will be more challenging as we get to the bottom part of '17 and then to '18. And for the most part in Queens, I think we will have a much more muted impact of supply.

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Operator [23]

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Our next question comes from Smedes Rose from Citigroup.

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Bennett Smedes Rose, Citigroup Inc, Research Division - Director and Analyst [24]

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Just to follow-up on New York for a second. Do you have a sense of, I guess, the pace of supply as it rolls out over the course of the year? And you mentioned that performance was in line with your expectations. So I'm just wondering, what caused the 5% growth in expenses in the quarter? And also, are you seeing any impact from the large facility, PSA opened in Jersey City?

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Christopher P. Marr, CubeSmart - CEO, President and Trustee [25]

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So I'll take some of those. And then, Tim, you can chime in on the expenses and anything else as you see fit. Let's start backwards. No, the Jersey City development, no quantifiable impact. We certainly don't have product that's going to be a direct competitor to that store. And we are not feeling it as we are farther out in the trade ring. So if, in fact, it's possible to draw customers from significantly farther away than where we generally get 85% of our customers, we're not seeing any measurable impact of that today. I think as you look at new supply in the boroughs, no change from my commentary in Q1. We're going to continue to see some product coming on in limited basis in the Bronx. But I think the supply, for example, in Brooklyn, we saw 5 stores that opened in '16 and '17. We would anticipate 13 stores coming on in '17 and '18 in that borough. So I think Brooklyn will see more supply. About half of that supply coming on in Brooklyn will compete with an existing CubeSmart. About 25% of that new supply will be a Cube-controlled asset that will compete with another Cube in that market. So Queens, as I said, and not as much, nearly as much of an impact at all, much more muted supply. The Bronx, I think, we're coming to the back half of it. Brooklyn will see some activity in '17 and '18. Again, going back on per square foot, though, if I just want to go back again and make the point, if you're thinking about ending square foot per capita with that supply, our analysis would suggest that Brooklyn ends with 2 square feet per capita, queens at 2.1, Staten Island at 1.7 and the Bronx at 3.4. And we will be north of a 22% owner of the total supply in each of those boroughs. Well, if you include Manhattan, 22%, if you just take the core out of boroughs, we'll be an owner of about 27% of the total supply by the end of '18.

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Timothy M. Martin, CubeSmart - CFO and Treasurer [26]

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And then on the question on the expense growth, it's really, really 3 factors. You had a little bit of pressure on real estate taxes, but not nearly to the extent that we saw over the balance of the same-store portfolio, but you did have a little pressure -- from the snow removal, cost was up quite a bit over first quarter of last year, and then R&M, which is most often just timing of when things get done. So those are the 3 areas that contributed to the 5 percentage growth.

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Operator [27]

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Our next question comes from Juan Sanabria from Bank of America.

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [28]

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Just hoping you could comment a little bit on the concession environment. What you guys expect going from here? It sounds like there's more pressure on the smaller, more mom-and-pop operators and looking for sort of third-party more professionalized management? Given that, do you think that the pressures from concessions should accelerate? Or if you could just comment on how you think that plays out.

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Christopher P. Marr, CubeSmart - CEO, President and Trustee [29]

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Sure, I mean, just as, again, a data point. As we think about discounting, discounts in the first quarter were 3.8% of revenues, that was a 10-basis point decline from where we were in the first quarter of last year. So again, on an effective rent basis and playing that off against occupancy, so always looking at the 3 levers one has to pull. In the first quarter, I would say our systems went at it with a continued, very modest squeeze on the amount of free rent that we were offering. We were very modest in pushing on asking rates to new customers, and we were able to gain 50 basis points in physical occupancy, again, looking at those customers as slightly more valuable than those that tend to be showing up during the prime moving season. So we think that strategy will help us as we go into the next 90 days. I think going forward, we would expect that we would have more aggressive push on Street rates to new customers, combined with those discounts, probably going to flat to last year. And it wouldn't be surprising if we actually even got in a little bit more aggressive than that. And I would think that our occupancy, over the course of the year, will revert back to closer to flat. So that's the anticipation, but caution that as we start tomorrow, all 3 of those levers get pulled in different ways every day. And we'll update you in 3 months as to how the busy season started to play out, but that would be our expectation as we sit here today.

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [30]

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Then just on the occupancy, what would drive the decline, I guess, on a year-over-year basis? Is it just tougher comps? And are you seeing any pressures on the tenants in terms of higher bad debts or just any reasons for cause for concern there or is it just the health of the tenant?

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Timothy M. Martin, CubeSmart - CFO and Treasurer [31]

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Yes. So in terms of just the year-over-year growth in physical occupancy, as we went through last year, we peaked out quite high. And I think right now our expectation is that, that gap this year to last year -- again, throwing all the levers, our expectation is that we should be able to get a little bit more price as we go through the busy summer season in exchange for the fact that we would expect the occupancy growth to slow down here as we move into May, June and July. Again, as we caution all the time, all 3 levers move every day, and ultimately, we'll see what makes the most sense to maximize the opportunity being presented to us as we go through the busy season. In terms of our customer, just using the first quarter in April as a benchmark, from a receivables perspective and from a write-off perspective and from a pushback to rate increases, in our markets, we're not seeing any visible signs of change relative to what we would have seen in the back half of 2016. But obviously, that's something that we're paying close attention to. And we will, again, see what the opportunity the consumer and the market presents to us in the busy season. We feel like we've got the people and systems to maximize whatever that opportunity is.

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Operator [32]

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Our next question comes from Jonathan Hughes from Raymond James Financial.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [33]

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Just to go back to the last one. One of your peers yesterday discussed the stressed consumer and concerning demand environment decided some metrics they track. I mean, do you closely read into those as well? And think they are good ways to see what your consumer is thinking? And are you as concerned about the ability to get tenants into your Cubes?

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Christopher P. Marr, CubeSmart - CEO, President and Trustee [34]

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So the metrics, given the fact that our customer is every person and has a need that can be quite diverse, but ultimately, it's a residential person in transit moving in some way. So we do look at length of stay. We look at receivables. We look at write-offs. We look at pressure or any sort of pushback on rate increase. And I would say, again, for our customers in our markets, we're not seeing any meaningful change in behavior in the first part of 2017 relative to the back half or even a year ago of 2016. But obviously, that's across our markets and our almost 900 stores that we own and manage. So we listen to those who own or manage significantly more stores than us and more markets than we're in, and certainly, have that on our radar. But right now, I would not have thought to raise that particular issue on this call.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [35]

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Okay. And then turning back to New York, any update there on the proposal to ban development in the IBZs?

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Christopher P. Marr, CubeSmart - CEO, President and Trustee [36]

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Yes, we're tracking that, and it continues to make progress. Both the state association and the Self-Storage Association are doing great work, and we thank them for shouldering the burden of articulating positions there. And so at this point, to the best of my knowledge, nothing has been formerly put in place, but the issue is continuing to have some traction. And so we will update, and I'm sure the SSA and the New York State Association will update as more facts become available.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [37]

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Okay. Fair enough. And then could you give us some details on acquisitions in terms of cap rates, obviously, none completed in the quarter, but maybe what perspective deals are asking or requiring to get done?

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Christopher P. Marr, CubeSmart - CEO, President and Trustee [38]

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Yes, I think for the activity that we've seen in the Class A markets, Boston, New York, parts of D.C. and then out in the coastal California markets, we don't see any shift in seller expectations. Could there be a 25 basis point upward move in the other markets, that probably feels about right. But again, we didn't transact, and there was a limited number of transactions that we've been able to get information on to backcheck our underwriting. But that's what the market feels like right now. It feels like there's still a bit of a disconnect between, certainly, the REITs and our cost of capital and our expectations and where sellers are in terms of their expectations.

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Jonathan Hughes, Raymond James & Associates, Inc., Research Division - Senior Research Associate [39]

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Okay. And then just one more, could you maybe touch on the re-acceleration in revenue growth in Chicago? One of your peers highlighted a similar trend. Curious, what you're seeing there? And is may be an indication of the supply impact in that market passed and the strength to go continue throughout the year?

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Christopher P. Marr, CubeSmart - CEO, President and Trustee [40]

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Yes, I mean, Chicago is a fickle market, so hesitant to take a 3-month snapshot and call it a forward-looking trend. But it certainly feels as if some of the Yanks, I don't think they've solved any of their fiscal problems in Illinois or in Chicago, but it feels like some of the Yanks has maybe abated, and certainly, it feels like the impact of the supply that had come into the Chicago market is starting to mute. So optimistic about the market. Probably a little bit of both of those, and we would expect positive things from greater Chicagoland as we go forward, but again, caution it is a fickle market.

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Operator [41]

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Our next question comes from George Hoglund from Jefferies.

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George Andrew Hoglund, Jefferies LLC, Research Division - Equity Associate [42]

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Just look at the strong growth in third-party management business. I get that the owners are seeing more competition and basically want help there. But would this also drive maybe some of those owners to maybe decide to sell?

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Christopher P. Marr, CubeSmart - CEO, President and Trustee [43]

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Yes. I think it's always 1 of 2 things, right. So we certainly -- if we find the assets and the markets to fit into our strategy, always talk to potential customers about a sale. I think the reason for someone to choose 1 option versus the other is as varied as the reason why folks need and choose to use self storage. Some of it is estate planning, some of it is -- we desire to keep the cash flow, but we don't have anyone in the family who's interested in taking over the responsibility of management. There's just a variety of reasons why a owner would choose to go 1 direction or another. Again, ultimately, from our perspective, if the store is branded CubeSmart, if we're running the store, we're obviously in a great position, ultimately if that owner makes a decision to sell to be the first call. We may not always be the right bidder or the highest bidder, but certainly, we are the first call.

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George Andrew Hoglund, Jefferies LLC, Research Division - Equity Associate [44]

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Okay. And then what scenario or what would cause you guys to not want to do? Or not want to manage a store on a third-party basis?

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Christopher P. Marr, CubeSmart - CEO, President and Trustee [45]

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The first and primary is philosophical differences with an owner. We have a philosophy as to how we manage a store, and we are very clear in articulating that philosophy during the process of getting to know one another. And if it's apparent that we have different philosophies, it's in both parties best -- it's best for both parties -- if perhaps they try -- if perhaps somebody else takes over the management or they explore different options, it just creates too much headache on both sides. Second, would be if we have no relationship with that owner and it's in a market where there's no existing owner-managed Cube, the cost analysis there is different and presents some challenges for us. And then lastly would just be quality of the product in the market itself. So those 3 things, generally would be -- there'd be a disconnect on one of those 3 things that would cause us not to pursue.

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George Andrew Hoglund, Jefferies LLC, Research Division - Equity Associate [46]

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Okay. And what about -- if it's a market that's facing significant pressures from new supply, would that impact your decision?

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Christopher P. Marr, CubeSmart - CEO, President and Trustee [47]

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No. Again, we would feel like that goes back to the philosophy. We would have a conversation with the owner, and it would be us sharing our expectations of performance of that store in the face of that new supply and our strategy to get ultimately the store leased-up at the highest profitability possible. And so no, that would not -- we're not afraid of competing against anybody, but we would want to make sure the owner was aligned with our expectations.

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Operator [48]

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Our next question comes from David Corak from FBR Capital Markets.

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David Steven Corak, FBR Capital Markets & Co., Research Division - VP and Research Analyst [49]

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In terms of passing on renewals to longer-term customers, you guys have mentioned previously that you hadn't seen much of a change in consumer behavior specifically there and kind of the high-single digit pricing increases is pretty commonly accepted. When you guys are running your tests on this or even in just the normal course of business, is there any disparity there in either the retention rate or the price increase that you can get for stores that are competing directly with new supply versus a store that's not? And then maybe what's the magnitude of those differences, if there is one?

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Christopher P. Marr, CubeSmart - CEO, President and Trustee [50]

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Limited differences and modest. Again, a typical self-storage customer is not going to invest the time and the money for the rental of a truck, for labor and their own time and energy to relocate a purely overprice. The unique exception and the small number of customers would be those whose anticipatory length of stay is significantly long. And that's the number of customers for whom that's their anticipation is quite low. So modest difference, not significant and not much of an impact.

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David Steven Corak, FBR Capital Markets & Co., Research Division - VP and Research Analyst [51]

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Okay. That's fair. And then this was brought up on the call of one of your competitors yesterday, but I was hoping to get your take on it. Basically, the idea that by the time we get to the back half of 2018, we're going to have 2,000 to 2,500 stores or so in lease-up all at once. So my question is really, does this really matter? Or is it only the first leasing season that is really impactful to your stores that are in operations nearby?

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Christopher P. Marr, CubeSmart - CEO, President and Trustee [52]

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Well, when we think about taking of store opens brand-new and getting it from empty to stabilized, largely it's going to be over a 3- to 4-year -- 3 to 4 busy season time period. So the way we think about it is what does supply look like that came on in '15, '16 and '17? And then how will that -- how will the '15 burn off and the '18 come on and then roll it forward. So I think we're going to get to the end of '18. And as we go into '19 and we look at supply for '16 relative to '18 and '19, I think it's more likely to be flat or down than anything else. So I think as you get out of '18 into '19, regardless of the absolute quantity, I think the impact because of the lack of growth in total new supply year-over-year, will be much more muted.

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Operator [53]

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Our next question comes from Nick Yulico from UBS.

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Trent Nathan Trujillo, UBS Investment Bank, Research Division - Associate Director and Research Associate [54]

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This is Trent Trujillo on for Nick. So I wanted to build on the same-store revenue topic that was addressed a little bit earlier. So when separating the prior year same-store pool and the new same-store pool, there was about 40 basis points gap in the first quarter between the 2. And just using the prior year same-store pool, the revenue deceleration was about 80 bps from fourth quarter to first quarter. And if I recall correctly, you mentioned earlier in the year that the pool change would be slightly additive, call it maybe 10 basis points on same-store rev. So should we think of the performance gap narrowing between the 2 pools for the balance of the year?

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Christopher P. Marr, CubeSmart - CEO, President and Trustee [55]

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Yes, I think what we talked about on the prior call is that we expected the incrementally added stores to this year's pull to add 10 to 20 basis points and it would be more weighted -- benefit from those would be more weighted to the beginning part of the year and much less of a contribution to the overall 2017 same-store pool in the back half of the year. And so again, in line with a lot of the other things we've talked about, the results in the first quarter were very much in line with what we expected including the contribution of those stores.

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Operator [56]

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Our next question comes from Ryan Burke from Green Street Advisors.

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Ryan Cole Burke, Green Street Advisors, LLC, Research Division - Analyst [57]

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Just 1 follow up on the industrial action plan in New York City. If it does go the route of very real restrictions being put in place on the development of self storage in the boroughs, how soon could that happen? Do you have a feel for timing?

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Christopher P. Marr, CubeSmart - CEO, President and Trustee [58]

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Hey, Ryan, it's Chris. I believe that, that hasn't -- the details of that certainly haven't been fully articulated. The expectation is that those projects that have perfected their entitlements would be permitted to move forward. That projects that haven't even begun that process would be restricted. I don't have factual accuracy on the no man's land in between.

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Operator [59]

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And we do have a follow-up question from Ki Bin Kim from SunTrust.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [60]

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So going back to your third-party management platform, you're annualizing about $12 million per year and I realized there's an expense synergy to that number. Anyway, how do you quantify that expense part of it? So spreading out your advertising over a bigger platform and et cetera.

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Timothy M. Martin, CubeSmart - CFO and Treasurer [61]

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So I mean, generically, we think about it, Ki Bin, as a business that has a margin of, call it at the midpoint of 50% type margin in the business. And it's -- an incremental store that you add could be way higher or lower than that depending on if you have capacity within that market, within that district manager and so on and so forth. So overall, I would think about it from a modeling perspective at about a 50% type margin business.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [62]

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So the reason I ask about that is I know you have competition (inaudible) with EFR offering this platform, but if I think about it, why not charge promotes, right? I mean there's not many good deals in real estate, but this seems like it's one of the best deals for private operators to just pay you that 6% of revenue management fee and lash on to the better platform. Have you thought about maybe adding promotes to this business?

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Timothy M. Martin, CubeSmart - CFO and Treasurer [63]

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Yes, I think when you think...

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Christopher P. Marr, CubeSmart - CEO, President and Trustee [64]

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I think, from our -- go ahead, Tim.

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Timothy M. Martin, CubeSmart - CFO and Treasurer [65]

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Sorry, Chris. I was just going to say, from our standpoint, we would love to negotiate the best deal that we could. I mean I think there's a fair amount of competition here from those willing to manage, for those who are seeking management. And so from an economic deal structuring standpoint, we obviously want to have as competitive and lucrative contract as we can get. But we have to be mindful of being competitive with the rest of the market who is doing the same thing that we are doing. With the deals that we are doing there, we are very excited about the platform. It has a lot of benefits that you know about, I won't reiterate all of them. But having the larger scale, having 900 CubeSmarts out there is very beneficial to us in a number of ways, some of which are more tangible than others. Chris, you can add on.

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Christopher P. Marr, CubeSmart - CEO, President and Trustee [66]

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I think you nailed it.

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Operator [67]

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And ladies and gentlemen, at this time, and showing no additional questions, I'd like to turn the conference call back over to Chris Marr for any closing remarks.

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Christopher P. Marr, CubeSmart - CEO, President and Trustee [68]

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Okay. Thank you all for the questions and taking the time to participate in the call. I think just to reiterate, it was a quarter very much aligned with our expectations. I think, at this point, the supply impact is fairly well determined for the balance of this year. Again, we believe we are prepared and have the people and systems in place to maximize the opportunities that present themselves over this upcoming busy season. And we look forward to talking with you again on our second quarter call. So thank you, and have a great day.

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Operator [69]

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Ladies and gentlemen, that does conclude today's conference call. We do thank you for joining. You may now disconnect your lines.