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Edited Transcript of CUBE earnings conference call or presentation 22-Feb-19 4:00pm GMT

Q4 2018 CubeSmart Earnings Call

Cleveland Mar 1, 2019 (Thomson StreetEvents) -- Edited Transcript of CubeSmart earnings conference call or presentation Friday, February 22, 2019 at 4:00:00pm 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 & Trustee

* Timothy M. Martin

CubeSmart - CFO, Treasurer & Principal Accounting Officer

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Conference Call Participants

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* Bennett Smedes Rose

Citigroup Inc, Research Division - Director & Analyst

* Eric Joel Frankel

Green Street Advisors, LLC, Research Division - Senior Analyst

* Ki Bin Kim

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Omotayo Tejamude Okusanya

Jefferies LLC, Research Division - MD and Senior Equity Research Analyst

* Robert Jeremy Metz

BMO Capital Markets Equity Research - Director & Analyst

* Ryan Gregory Lumb

Green Street Advisors, LLC, Research Division - Senior Associate & Analyst

* Shirley Wu

BofA Merrill Lynch, Research Division - Research Analyst

* Todd Jakobsen Stender

Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst

* Todd Michael Thomas

KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the CubeSmart Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, today's event is being recorded.

And at this time, I'd like to turn the conference call over to Mr. Charles 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, Jamie. Hello, everyone. Good morning from sunny Malvern, Pennsylvania. Welcome to CubeSmart's Fourth Quarter 2018 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 Form 8-K we filed this morning, together with our earnings release filed with the Form 8-K and the Risk Factors section of the company's annual report on Form 10-K.

In addition, the company's remarks include reference to non-GAAP measures. A reconciliation between GAAP and non-GAAP measures can be found in the fourth quarter financial supplement posted on the company's website at www.cubesmart.com.

I will now turn the call over to Tim.

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Timothy M. Martin, CubeSmart - CFO, Treasurer & Principal Accounting Officer [3]

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Thanks, Charlie, and thank you to everyone on the call for your continued interest and support.

Our fourth quarter results rounded out another successful year across many fronts for CubeSmart. Same-store performance included headline results of 3.2% revenue growth and 6.9% expense growth, yielding NOI growth of 1.9% for the quarter. For the full year, same-store revenues grew 3.3%, expenses grew 3.5%, leading to NOI growth of 3.3%. Average occupancy in the fourth quarter was 91.8%, down 40 basis points year-over-year, while quarter-ending occupancy of 91.2% is a 30 basis point decrease. Both of those measures improved on a relative year-over-year basis compared to Q3 as we distance further from tough occupancy comps due to the residual occupancy gains achieved in 2017 from Hurricanes Harvey and Irma.

Same-store expense growth for the fourth quarter was in line with our expectations. Property taxes, again, this quarter, were a large contributor to the increase in overall expenses. And in particular, in the fourth quarter, those real estate taxes were up against a very tough comp from last year when we had the benefit of a handful of successful property tax appeals. Repair and maintenance expenses were up 9% this quarter, largely driven by timing as indicated by the full year result, which was essentially flat year-over-year.

Marketing costs were also impacted by timing in the fourth quarter based on when we spent our advertising budget this year relative to when we spent it last year.

We reported FFO per share as adjusted of $0.42 for the quarter, which was at the high end of the range we've provided and represents growth of 2.4% over the same quarter last year. For the year, our reported FFO per share of $1.64 was a 3.1% increase over 2017.

We remain active and disciplined in our pursuit of external growth opportunities. During the fourth quarter, we closed on the purchase of 4 properties for $117.7 million, and we closed on the final deal in our C/O pipeline in San Diego for $19.1 million. That brought our full year acquisition activity to $227.5 million.

During the quarter, we also completed the sale of 2 stores in Arizona for a total sales price of $17.5 million. And on the third-party management front, we finished off another very productive year by adding 61 stores in the fourth quarter, bringing our 2018 total to 209 new stores added to our program.

We ended the year with 593 managed stores, allowing us to enhance our market position and expand the CubeSmart brand.

On our balance sheet, we continue to focus on funding our growth in a conservative manner, consistent with our BBB/Baa2 credit ratings. We were active in the fourth quarter using our at-the-market equity program, raising net proceeds of $23.5 million at an average sales price of $32.25 per share.

In January, we completed the offering of $350 million of 10-year senior unsecured notes with a coupon of 4.375%. We appreciate the support we received from our fixed income investor base, and we remain committed to being a regular issuer over time in the bond market. We used the proceeds from the bond deal to repay a $200 million term loan that was set to expire early in 2019 and the balance to reduce borrowings under our revolver.

That effectively addresses our 2019 debt maturities, and our 2020 and '21 maturities are very manageable. Our balance sheet is well positioned, and we continue to have the ability to fund our existing development commitments on a leverage-neutral basis over the next 2 years without raising any additional equity capital by utilizing our expected free cash flow.

In December, we announced the 6.7% increase to our quarterly dividend, bringing our dividend to $1.28 per share on an annualized basis. And based on the midpoint of our 2019 guidance, the increased dividend suggests an FFO payout ratio of 76.9%.

Details of our 2019 earnings guidance and related assumptions were included in our release last evening. Our 2019 same-store property pool increased by 12 stores. Same-store revenue guidance assumes little impact from occupancy and is, again, overwhelmingly driven by expected growth in net effective rate.

Consistent with prior years, our forecasts are based on a detailed asset-by-asset ground-up approach and considered the impact at the store level, if any, of competitive new supply delivered in 2017 and 2018 as well as the impact of 2019 deliveries that will compete with our stores.

Embedded in our same-store expectations for 2019 is the impact of new supply that will compete with approximately 50% of our same-store portfolio. That's up from 40% last year and up from 25% back in 2017. The impact to an individual store facing new competition in its competitive trade ring can range based on many factors. But overall, we expect a group of stores impacted by new supply to have revenue growth 200 to 300 basis points lower than the stores that are not impacted by new supply.

We remain very pleased with the lease-up progress of our newly developed stores as well as stores that we have recently acquired that have been in early stages of lease-up. We believe our development pipeline and nonstabilized store acquisitions will create meaningful NAV accretion and stabilization. But of course, in the short term, those investments create a drag to our FFO per share. Our FFO guidance for 2019 is impacted negatively by $0.09 to $0.10 per share as a result of this dilution. Our guidance included the impact of acquisitions we've closed to date or have under contract but does not include the impact of any speculative acquisition or disposition activity as levels of activity and timing are difficult to predict.

As we wrap up 2018 reporting and look forward to 2019, clearly, we do so recognizing the impact of new supply. While we firmly believe that we're in the very late stages of this development cycle, the near-term headwinds for stores facing new supply are front and center and are a daily focus for our team. We believe the storage sector performance speaks well of the product's ability to perform well in the face of new supply, and we believe our results continue to validate the high quality of our real estate portfolio and the strength of our people and the strength of our operating platform.

Thanks again for joining us on the call this morning. Now let me turn the call over to Chris for some additional color on the quarter.

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Christopher P. Marr, CubeSmart - CEO, President & Trustee [4]

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Thanks, Tim. As you note, a very solid fourth quarter caps a year in which our significant markets held up very well in the face of new supply. As we reflect on how 2018 concluded relative to our expectations and shift our thoughts to 2019, our outlook is generally unchanged from the comments on our earnings call in October. We believe those markets impacted by supply that are characterized by strong demographics and, thus, do not heavily rely on population growth to absorb the new supply will continue to be more resilient. We believe that the market demand for self-storage remains very solid, and that the new stores being delivered will lease up. However, the more recent deliveries will likely lease up at a slower pace and certainly, at market rents lower than the developers would have originally projected. We are bullish on our third-party management program, which generated revenues of $20 million in 2018, up from $15 million the prior year.

In summary, we remain optimistic about our future opportunities, our recent successful bond offering, along with our 2018 asset sales and proceeds from our at-the-market equity program, result in a balance sheet with no significant near-term maturities. We believe the growth in our third-party management program is a validation of the strength of our operating platform, and we continue to invest in our people and technology to maximize the potential of our existing assets, while our investment team is focused on prudently growing our platform.

At this point, we would like to turn the call over 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 Jeremy Metz from BMO Capital Markets.

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Robert Jeremy Metz, BMO Capital Markets Equity Research - Director & Analyst [2]

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Chris, obviously, you mentioned the challenges you'll be facing from new supply here in 2019. But just at a broad level, can you just comment on your expected starts overall for the sector, how that compared to the deliveries that actually hit in '18? And then, if you could look in further into your crystal ball here, are you seeing anything on the ground that suggests that supply will slow further from here into 2020?

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

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Thanks, Jeremy. So I think nothing, as I said, has really fundamentally changed from our expectation in the -- as we talked at the end of the third quarter. We would expect deliveries in '19 on a rolling 3-year basis to certainly be more than what we saw delivered in -- on our top 12 markets in 2016. So the impact being felt on the same-store portfolio, as Tim articulated, will be greater in '19 than it was in '18. I think when we look at markets, certainly, in our top 12, the themes are pretty consistent with what we talked about a quarter ago. When you look at markets that had been impacted by new supply early in the cycle, so you think about a market like Chicago, for example, we can see a steady decline in the amount of deliveries going into '19. When you look at markets that saw just a very significant increase in deliveries in 2018, and I'll call out markets like Denver and Nashville, Raleigh, you do see a pretty then significant drop-off in what we have on our radar for 2019 coming off of very significant 2018 deliveries. Markets like Miami and Dallas continue to see levels of -- consistent levels of new supply being projected for '19 on top of what we saw in '18, on top of what we saw in '17. So I think it's a pretty consistent message market by market. It seems to us, when you look at compressed yields, you look at where rental rates are in these markets that have seen supply, you look at cost of construction, cost of land, shortage of labor, that looking out into 2020, it still feels like '19, plus or minus, is going to be a peak in terms of overall deliveries. I think you then have to take that question and say there is the impact of actual supply coming into the market in terms of the quantity. And then there is the impact on your same-store growth metrics from the impact of that supply. And I think based on the levels of supply being delivered in 2019, again, as our forecast have been for the last several years, no one should be surprised to the extent that the deceleration in those same-store metrics continues beyond the peak levels of supply until you reach some more stabilization. So I think the message remains the same largely from what we've talked about over the last couple of quarters.

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Robert Jeremy Metz, BMO Capital Markets Equity Research - Director & Analyst [4]

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No, that's helpful. And just switching gears in terms of rents, where did street rents, net effective rent and your existing customer rate increases trend and -- in the fourth quarter? And are those holding so far in the January and February?

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Timothy M. Martin, CubeSmart - CFO, Treasurer & Principal Accounting Officer [5]

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Hey, Jeremy, it's Tim. Thanks for the question. Street rates are a complicated question because it's -- with a portfolio the size of ours and the many, many markets that we operate in, it really is the tale -- in the fourth quarter, it's really the tale of 3 different buckets that you need to focus on. Obviously, for markets that have had an impact from new supply, those markets have been under the most pressure from an asking rate perspective. And you can focus on markets like Charlotte, Austin, Miami, Nashville, Denver, those are all markets that year-over-year on the fourth quarter, we would have seen the most pressure on street rates. And in those markets, you would have seen street rates down in the 8% to 11%, 11.5% range. If you focus on other markets that saw minimal levels of new supply, markets, including Philadelphia, Las Vegas, Tucson, you're in a much different operating environment. And in those markets, you've seen 5% to 10% growth in asking rates. And then the third bucket that's somewhat unique to the fourth quarter here is made up of markets like the western part of Florida and Houston who had the remaining impacts of the hurricanes last year. And so you think about the fourth quarter of last year in those markets, you had high levels of occupancy, and you had pretty strong rates given the outsized demand that came as a result of the hurricanes. So those are very difficult comps from a year-over-year comparison in street rates. And in those markets, when you look at street rates year-over-year, you're down 9% to 11%. So it's really a much more complicated question at times than I think some would like it to be. But it's really all over the place, depending on those factors. As we think about where that's trended here going into the first part of 2019, it's much the same.

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Robert Jeremy Metz, BMO Capital Markets Equity Research - Director & Analyst [6]

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If you blend that into effective rents? Sorry if I missed that. But like overall, just effective rents at the portfolio level, are those -- I think you were around 1% last quarter?

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Christopher P. Marr, CubeSmart - CEO, President & Trustee [7]

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Yes. And I think if you looked at Q4, blend all that together and you're down between 1% and 2%. And then in the more recent month of January, it's about flat.

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Robert Jeremy Metz, BMO Capital Markets Equity Research - Director & Analyst [8]

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All right. And last question for me. In terms of your existing customer rate increases, I mean, how many of your customers are hitting the buffers you put in place in terms of rent spread relative to market? Or maybe said differently, what percentage of customers are getting those increases? And is that something that's moderating here and, therefore, are also impacting some of the overall deceleration of growth you're expecting beyond just the supply impacts?

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Christopher P. Marr, CubeSmart - CEO, President & Trustee [9]

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So at the end of December, about 60% of our customers have been with us for over a year. And so to the extent then you've been with us for over a year, you've seen at least 1 rate increase. 42% of those have been with us for more than 2 years, so they've seen multiple rate increases. The average length of stay has continued to elongate. So I think it -- that's actually been a positive overall to our growth in same-store revenues. What we've seen, particularly in the more urban markets, is a gradual longer length of stay. And I think overall activity has been such that we've seen fewer vacates over the last couple of quarters, and that's contributed then to a slightly longer length of stay, which has then contributed to the ability to pass on rate increases to a larger component of our overall population. So that has actually been a slight positive to us in recent quarters.

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Timothy M. Martin, CubeSmart - CFO, Treasurer & Principal Accounting Officer [10]

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And then just to add on to that, Jeremy, you get different answers to that question across the public REITs. Some I have heard have talked about not passing along increases to certain portions of their customer base based on where they are versus street rate or other factors. For us, I'm not opening up the black box, but it's more typical for us as to how much the increase is to a customer that has been with us for a period of time, not if they get a rate increase. But our systems will vary the amount of increase somebody gets, rarely do we not pass along a rate increase.

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Operator [11]

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Our next question comes from Shirley Wu from Bank of America Merrill Lynch.

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Shirley Wu, BofA Merrill Lynch, Research Division - Research Analyst [12]

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So can we talk about New York a little bit? You guys had revenue growth of 2.5%. So what's the latest on the supply story and how that market is performing overall?

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

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So New York continues -- and again, I think, back to my comments on the beginning of the call, I think, again, a market like Greater New York MSA, which, obviously, it includes North Jersey and Long Island, we're not relying on population growth as you would see in, for example, a market like Austin or Denver to absorb the supply. So I think it's actually hung in there pretty well. Our outlook for the impact of supplies is unchanged. So I think we continue to expect to see supply in particular in Brooklyn. And I think our guidance overall for all our stores, but certainly for our Greater New York stores, factors in that impact. I think the impact was a little bit less in 2018 than we would have expected. So that's encouraging. I think the Bronx, in particular, continues to perform quite well as it bounces back from having experienced the more early impact from that new supply. And I think the other comment I would make on the boroughs is that as we look out at the new supply coming in, the impact of the supply being generated by us, whether it be owned or managed, is also going to wane a bit. So the new supply coming in '19 is a little bit more heavily weighted towards non-Cube-branded stores, which actually is a positive for us as we tend to perform a bit better when we're competing against another brand in that market.

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Shirley Wu, BofA Merrill Lynch, Research Division - Research Analyst [14]

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Got it. That makes sense. So could you -- would you be able to talk to street rates in those boroughs, 4Q or maybe even January?

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

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Yes. I think -- and again, overall, the Bronx, when we look at rate, it's up -- it was up in the quarter, about 2% over where we were in the Bronx the prior quarter. Queens and Brooklyn down between 3% and 5%, but occupancy in Brooklyn and in Queens is up 80, 90 basis points. So we're getting the customers. We're just offsetting a little bit of that occupancy growth with some lower asking rates. And then Staten Island, as it has been for many, many years, continues to be largely unaffected by competition, and street rate growth there was pretty aggressive, high-single digits.

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Shirley Wu, BofA Merrill Lynch, Research Division - Research Analyst [16]

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All right. So one more question from me. In terms of the transaction market, what are you seeing? And have there been more signs of distress selling lately?

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Timothy M. Martin, CubeSmart - CFO, Treasurer & Principal Accounting Officer [17]

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There really hasn't been signs of distress selling. I think that's still a little bit too early in the cycle. When you think about the development project, it takes a period of time until you get to that point likely when a loan comes due. We're certainly seeing more activity on nonstabilized assets. That's not a new trend. So what comes across our investment team's desk is more heavily weighted to something that is in some stage of lease-up than stabilized asset opportunities, at least in the markets that we're most focused on.

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Operator [18]

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

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [19]

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Just to dig in a little bit on the same-store revenue forecast for '19. What does that assume in terms of occupancy throughout the year?

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Timothy M. Martin, CubeSmart - CFO, Treasurer & Principal Accounting Officer [20]

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Todd, we never answer that question. You know that. We guide to an overall revenue expectation. We don't guide at individual components. I would tell you that what I mentioned in my opening remarks is that we do expect the occupancies to not be materially different in 2019 than we did in 2018. So without getting into specifics on the components, it's going to be certainly much more heavily weighted to net effective rate as a bucket that's going to be the primary driver of revenue growth.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [21]

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All right. And then, well, in terms of the revenue growth then, can you share what you're forecasting for New York and also maybe Miami?

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Timothy M. Martin, CubeSmart - CFO, Treasurer & Principal Accounting Officer [22]

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We don't provide revenue guidance on a market-by-market basis. Our overall expectation is same-store revenue growth of 1.5% to 2.5% for the year.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [23]

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Okay. And then, you mentioned that you saw -- you've seen some recovery in markets like Chicago, maybe Denver, Dallas, Houston, in Texas, in general. I was just wondering if you're beginning to see signs of a rebound there. Or is it still a little bit early?

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Christopher P. Marr, CubeSmart - CEO, President & Trustee [24]

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Yes, I think it's early. Certainly, in Dallas, you're going to continue to see the impact of supply. There's more supply being delivered in '19. Houston, where it seems like the supply is starting to wane, again, there is going to be a lagging effect on where your performance is in terms of the same-store growth metrics. And so I would suspect that for most of the Texas markets, you're going to see 2019 revenue growth over 2018. That's at the lower end of our overall same-store expectation.

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Todd Michael Thomas, KeyBanc Capital Markets Inc., Research Division - MD and Senior Equity Research Analyst [25]

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Okay. And just lastly, the $0.09 to $0.10 of dilution from lease-up properties, I was just curious if you could talk a little bit about how you expect that to trend throughout the year and whether you expect '19, which is up about $0.03, I think, at the midpoint, to be the year of maximum dilution from lease-up properties. Or will that sort of flow through and be, perhaps, a little bit heavier heading into 2020 as you think about the cumulative impact from your development in lease-up?

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Timothy M. Martin, CubeSmart - CFO, Treasurer & Principal Accounting Officer [26]

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Yes. So as I sit here and think about that today with what's embedded in our guidance, it would suggest that 2019 would be the peak because, as you get into 2020 for the projects that are embedded in that $0.09 to $0.10, they will continue to lease-up as they open and get through and get closer and closer to stabilization. The unknown, of course, is where our investment activity takes us here throughout the course of 2019. So to the extent that we were to add projects, more likely than not through acquisition of acquiring -- and as I mentioned on -- in my answer to Shirley's question, more opportunities that we're seeing in the markets that we're most focused on are in nonstabilized assets. So my only caution to that answer, suggesting that 2019 will be the peak, is subject to change based on where our activity -- our investment activity throughout the course of the year takes us.

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Operator [27]

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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 [28]

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So I just want to wrap up a couple -- follow up on a couple of questions earlier. On the impact from new supply, you said 2019 would be about 50% of your assets will be impacted, but you also said that peak year for new delivery to be 2019. Does that imply that 2020 should be at least 50% or maybe even higher?

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Timothy M. Martin, CubeSmart - CFO, Treasurer & Principal Accounting Officer [29]

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Boy, it took a lot of work to prepare the 2019 guidance. Now you're looking for 2020 guidance. I think that a starting point then is you're going to then focus on 2020 deliveries relative to 2017 deliveries, and it is a little bit too early to make that call. I would think from a directional standpoint, I wouldn't think that the number of stores impacted by supply in 2020 would be materially different than those in '19. But it's way too early to do that with any high degree of confidence.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [30]

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Right. And looking at the number of stores that are impacted by new supply, it's one aspect of looking at supply, but if you look at how deep and meaningful that supply is in those cities, meaning, a city that had 2% new supply is counted the same in that aspect as a city that had maybe 8% of new supply deliveries, how do you think about how deep that impact is in '19 versus '18?

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Timothy M. Martin, CubeSmart - CFO, Treasurer & Principal Accounting Officer [31]

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Yes. What's interesting in that question is the other component of what I tried to provide color on was not only is our same-store impacted by -- 50% of the stores are impacted by supply, but then I've also provided the expectation that those stores that are impacted by supply, we expect to underperform, if you will, or trail in growth the nonsupply-impacted stores by 200 to 300 basis points. And that range of varying performance from the supply-impacted stores to the nonsupply-impacted stores hasn't really changed that much over the last 2 years. So that would suggest that despite the fact that I completely get where you're coming from, suggesting that maybe a store that's impacted by supply is even more impacted by supply as you get deeper in the cycle. What we have seen, thus far, and what's in our detailed ground-up budgeting and forecasting, would suggest that the relative performance of the supply-impacted stores to those that are not impacted by supply has remained fairly consistent here over the past 1.5 years to 2 years, and we expect it to be the same into 2019. That's what our assumptions would suggest.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [32]

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Okay. And in terms of your same-store revenue guidance, if you assumed flat street rates, flat occupancy, so all else equal, what is the inherent revenue growth that your portfolio would generate just from the existing customer rate increases?

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Timothy M. Martin, CubeSmart - CFO, Treasurer & Principal Accounting Officer [33]

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Yes. I don't really have that component to share, but it's not 0. I think it's probably somewhere between 0 and 1%.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [34]

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Actually, that's a little surprising because I thought, if 60% of your customers are getting, call it, 8% to 9%, 10% increase, you would think -- and then taking into account the people that actually moved out from that, you would think the inherent growth will be at least 3%. Am I missing something?

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Timothy M. Martin, CubeSmart - CFO, Treasurer & Principal Accounting Officer [35]

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Well, except for the same thing happened last year.

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Operator [36]

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Our next question comes from Eric Frankel from Green Street Advisors.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Senior Analyst [37]

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Just a couple of platform-related questions. First, your G&A guidance looks to be about 10% or so higher than what occurred in '18, excluding the legal settlement. So maybe you can just provide some color on that increase and then also on the legal settlement itself.

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Timothy M. Martin, CubeSmart - CFO, Treasurer & Principal Accounting Officer [38]

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Sure, happy to. The increase in G&A ex the legal charge are consistent with our continued investments and building out our platform to support a store count that has grown far in excess of 10%. So it is a -- it is certainly a scalable platform. But as we add 209 managed stores and additional stores on balance sheet, certainly, that growth necessitates the need to continue to invest in people and systems and platform. As it relates to the legal charge, we are in a consumer-facing business. The result of which is that, occasionally, we find ourselves involved in various legal proceedings. These cases are related to things ranging from state-specific self-storage laws to consumer protection-related matters to ADA cases to claims of wrongful foreclosures. In one such case that was brought as a class-action suit, we have accrued a $1.8 million liability during the fourth quarter that represents our best estimate of the charge associated with settling that matter and all of the related costs associated with doing that. We expect it to be a nonrecurring onetime expense.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Senior Analyst [39]

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Okay. And then related to third-party property management, I understand you guys added 61 stores, but per our math, it looks like the net addition to third-party managed stores is only -- including JVs, is only 9 stores. So first, can you confirm if that's correct? And then second, if that -- if so, what caused the attrition? Yes, that's it.

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Timothy M. Martin, CubeSmart - CFO, Treasurer & Principal Accounting Officer [40]

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Yes. I think that math is accurate, plus or minus 1 or 2. I don't have that math right in front of me. But we have talked about on a prior call that we had a portfolio of 40 assets, 41 stores that we're leaving our platform. We discussed that, I think, last quarter, or maybe in the quarter prior. And those 41 stores left our 3PM platform at the end of October. So that was the primary driver of the stores that left the platform. We consistently have stores that leave the platform when they're sold to ultimate buyers who self manage. So stores come on the platform and off the platform. We've been fortunate here over the past couple of years as we've dramatically increased the scale and the size of our 3PM platform that the additions are obviously well in excess of the stores that leave the platform.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Senior Analyst [41]

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Okay. I didn't realize that, that big portfolio left in the fourth quarter, not the third quarter. And then, just in third-party management, are you seeing any sort of pricing pressure with your customers just related to Public Storage entering the third-party managed space?

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Timothy M. Martin, CubeSmart - CFO, Treasurer & Principal Accounting Officer [42]

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I think there's -- the third-party management business remains competitive. It was competitive prior to another group entering the business. Recent trade show, you see 8, 9, 10, different third-party managed providers. And so going from 9 to 10 doesn't make it exponentially more competitive. It has been for several years.

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Operator [43]

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Our next question comes from Smedes Rose from Citi.

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Bennett Smedes Rose, Citigroup Inc, Research Division - Director & Analyst [44]

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I wanted to ask on the third-party management platform. As industry conditions seemed to be getting a little more challenging, have you seen an uptick, an increase from independents who would -- who are interested in having a -- being part of a larger platform? Or is that something you would expect to see going forward? In other words, could that peak grow faster just given that conditions are tough?

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Timothy M. Martin, CubeSmart - CFO, Treasurer & Principal Accounting Officer [45]

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Yes. I think it's a good question. I think we've seen that over time already. And owner by owner, it's going to be a unique decision point. I think, certainly, as operating conditions get more difficult, I think, owners who are operating independently start to recognize things that they don't recognize when business is better and fundamentals are very strong. It starts to become more apparent that not having a sophisticated marketing platform is -- becomes more and more apparent that, that causes a relative underperformance. I think focusing on results that companies like ours put up quarter after quarter and thinking about the contribution that a sophisticated revenue management platform do to add to growth and cash flow, I think they become more apparent. Others recognize that when times are good and they realize that times -- while their property is performing well, it could perform even better under the hands of one of the high-powered platforms. And so I think on the margin, I guess, I would say, yes. I think the other thing that has certainly been a driver that has been helpful to grow the platform has been the development cycle. So stores being delivered are still -- new stores being delivered or in early stages of lease-up are still more of -- more than the majority of -- or they are the majority of the stores that we've been adding to the platform here over the past 18 to 24 months.

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Christopher P. Marr, CubeSmart - CEO, President & Trustee [46]

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Yes. In 2018, 40% of the additions were existing open and operating stores, and the balance were new developments.

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Bennett Smedes Rose, Citigroup Inc, Research Division - Director & Analyst [47]

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Okay. And then I wanted to ask you, it looks like you increased your same-store pool by, I think, it was about a dozen properties or so. Is that pretty broad-based geographically? Or does that reflect a lot of your New York properties rolling into the same-store pool?

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Timothy M. Martin, CubeSmart - CFO, Treasurer & Principal Accounting Officer [48]

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Yes. I think it's -- they're broadly spread out. I think they would be generally representative of our portfolio. I don't have it right in front of me, but I'll see if I can grab it. But it's not heavily weighted to any particular market. I think off the top of my head, 4 of it -- I think -- I'm sorry, Smedes, I think off the top of my head, 4 of the 12 are in the New York MSA.

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Bennett Smedes Rose, Citigroup Inc, Research Division - Director & Analyst [49]

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Okay. And then you talked about the dilution expected this year a little bit from properties in lease-up. I just wanted to make sure I understood it. Is it more a reflection of you have more properties in lease-up now than you did last year? Or is the time to lease up stretching out further than you had initially expected?

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Timothy M. Martin, CubeSmart - CFO, Treasurer & Principal Accounting Officer [50]

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No. It's the result of having more. So we have more stores being -- that we have opened, development stores that are in lease-up. And then, while many of the stores that we have acquired on balance sheet have been -- are stabilized assets, many of them are not, and we're buying them in the very early stages of lease-up. So the increase in that dilution is more driven by additional stores that have opened. For instance, in the fourth quarter, we closed on the final store that -- of our C/O pipeline in San Diego. So that's another story that is added to the group of lease-up assets, and then some of the other stores that we bought on balance sheet were in early stages of lease-up.

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Operator [51]

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Our next question comes from Todd Stender from Wells Fargo.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [52]

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Not to beat a dead horse, but just back to third-party management. Just to stay competitive, what management fees, I guess, on a percentage basis are you charging now versus, call it, 2 years ago, if any?

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Christopher P. Marr, CubeSmart - CEO, President & Trustee [53]

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Yes. Hey, Todd, it's Chris. Really, no change. I mean, the market for a service that is based on components of a percentage of revenues with some minimum for stores that are opening brand new, there's related costs that are passed through for marketing, for sales center. Obviously, the direct costs of the store are passed through to the owner. Those for that framework is unchanged. The negotiation as in any service business around the individual components has always been somewhat individual to the market, the owner, the quantity of stores being offered to take over from management, et cetera. But I would say, from a -- from an overall perspective, the economics of that business are very consistent over the last many years.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [54]

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Okay. And then just switching gears to your ad spend. What is your Google ad spend budget for 2019? And what other channels are you evaluating right now to reach prospects via social media? How are you guys looking at that?

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Timothy M. Martin, CubeSmart - CFO, Treasurer & Principal Accounting Officer [55]

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Yes. So again, we don't guide to individual components of the expense growth guidance and certainly, aren't going to provide our competitors an exact dollar amount of how much we intend to spend on Google. But that -- Google Search is the overwhelming majority of our spend, and we expect that to continue to be the same. We continue to explore many different opportunities to selectively invest in other types of digital medium to attract customers, and we contemplate testings. And as we find opportunities that give us a good return on those marketing dollars, we continue to invest.

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Christopher P. Marr, CubeSmart - CEO, President & Trustee [56]

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I think, Todd, it's safe to say that given their position, we certainly spend a lot of time exploring other avenues of digital marketing outside of paid search or search in general to try and diversify our risk away from the dominant player. So without a doubt, they are the dominant player and have to have a big focus of ours.

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Operator [57]

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Our next question comes from Tayo Okusanya from Jefferies.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [58]

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Could -- in fourth quarter, could you talk a little bit about the mark-to-market that was in the portfolio? And then, kind of like in place rents relative to when someone moves in, kind of what that mark-to-market is? And then, could you also kind of talk about it like over the course of the year, what kind of happens with that number?

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Timothy M. Martin, CubeSmart - CFO, Treasurer & Principal Accounting Officer [59]

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Yes. Thanks for the question. So it is -- the back half of your question is the really important point to focus on, which is that question on rent roll-down or churn gap, as some of our folks refer to it internally, is going to be heavily dependent upon what time of year you ask that question. And so you think about where you sit at the end of the year or in January, February. Seasonally, that is the point in time where you're asking rates throughout the course of the year are at their lowest because that's when demand typically is at its lowest. And in the summer months, your rates on a relative basis to your own portfolio are at their highest. And so you have the -- a disproportionate amount of your rental activity comes in the summer months. And when you think about a medium length of stay, between 6 and 6.5 months, a lot of those customers who come in during the higher-priced summer months are the customers that are vacating this time of year. So have customers that came in at the peak price who leave, and you're going to compare them to the customers that are now coming in at seasonally depressed rental rates. So this is the time of the year where that gap is always at its widest. And it is consistently for us, at this time of year, been in the 10% to 15% range. This year was no exception. And then if you would ask that question in July, that number historically would be about flat. So your customers leaving would be about flat to where you're asking. And in each of those cases, this past year has been no different than trends we would have seen over the past several years.

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Omotayo Tejamude Okusanya, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [60]

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Okay. So adjusting for seasonality, you haven't seen any -- it hasn't gotten worse?

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Timothy M. Martin, CubeSmart - CFO, Treasurer & Principal Accounting Officer [61]

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Well, I mean, it's gotten a little bit worse, not all that different than what we would talk about in overall asking rates. If ever our asking rates are down a little bit, then that negative churn is going to be a little bit wider than it would have been in last year's numbers or resulting in street rates being a little bit lower, but not in any material way.

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Operator [62]

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Our next question is a follow-up from Eric Frankel from Green Street Advisors.

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Ryan Gregory Lumb, Green Street Advisors, LLC, Research Division - Senior Associate & Analyst [63]

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This is Ryan Lumb. And yes, just following up on Todd's question on ad spend. I know in your opening remarks, you mentioned that there was a timing sort of issue in the fourth quarter for your ad spend to be down. But it looks like for the full year of '18, you were actually flat. Can you kind of expand on why or how Cube has been able to keep a lid on marketing spend when many peers in the industry are seeing outsized growth in ad spend?

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

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Yes. I can't comment on what others are seeing or doing. I think it's a combination of the reality that paid search is growing. The cost of paid search is growing faster than inflation. We're able to offset some of that cost with efficiency in our model as to how we are making determinations around daily spend. And then in our largest market of New York, given the fact that we are, between owned and managed, 23% of the square footage of self-storage in the boroughs, we do have an advantage in that we have a significant amount of organic search in that market, customers who are looking specifically for a CubeSmart because they see it every day when they ride by on the subway or walk or drive within the -- in their communities. So I think part of it is the less expensive organic is certainly helping us relative to those who don't have that benefit in a large market like New York. Part of it is efficiencies, and part of it is where we see opportunities to utilize additional marketing dollars to drive traffic, and it will change quarter by quarter. So I wouldn't -- I would certainly caution you not to interpret that the growth in '18 over '17 is going to be there or similar '19 over '18. I think we would expect that those efficiencies that we've been able to wring out are getting increasingly more difficult. And so I would suspect you would see growth in that number in '19 over '18. Quarter by quarter, it may vary, but overall, I think we'll continue to see that line item grow.

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Operator [65]

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And ladies and gentlemen, at this time, I'm 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 & Trustee [66]

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Okay. Thank you. Again, very, very pleased with the successful wrap to 2018. I think we've been particularly consistent on how we've thought about how 2019 will play out. Obviously, at the beginning of the year, given the nature of our business and the fact that a significant amount of our activity occurs in the typical spring and summer moving months, it is a challenge to look ahead. I think we've -- we in the industry have done a nice job of being realistic on our expectations and delivering against those. I don't suspect that 2019 will be any different.

And so we appreciate the interest in our company. Thank you for today's call. We look forward to seeing many of you at upcoming industry events. And if not, we will speak to you all at the end of our first quarter. Thank you very much.

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Operator [67]

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