Charlie Place - Director, IR Chris Marr - President & CEO Tim Martin - CFO.

Todd Thomas - KeyBanc Capital Markets Jana Galan - Bank of America Merrill Lynch George Hoglund - Jefferies Paul Adornato - BMO Capital Markets Jason Risorto - UBS Paula Poskon - D.A. Davidson.

Welcome to the CubeSmart Fourth Quarter 2014 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Charlie Place, Director of Investor Relations. Please go ahead..

Thank you Andrew. Hello everyone. Good morning from Malvern, Pennsylvania. Welcome to CubeSmart's fourth quarter 2014 earnings call. Participants on today's call include Chris Marr, President and Chief Executive Officer and Tim Martin, Chief Financial Officer. Our prepared remarks will be followed by a Q&A session.

In addition to our earnings release which was issued yesterday evening, supplemental operating and financial data is available under the Investor Relations section of the company's website at www.cubesmart.com.

The company's remarks will include certain forward-looking statements regarding earnings and strategy that involve risks, uncertainties and other factors that may cause the actual results to differ materially from these forward-looking statements.

The risks and factors that could cause our actual results to differ materially from forward-looking statements are provided in documents the company furnishes to or files with the Securities and Exchange Commission, specifically the Form 8-K we filed this morning together with our earnings release filed with the Form 8-K and the risk factors section of the company's annual report on Form 10-K.

In addition, the company's remarks include reference to non-GAAP measures. A reconciliation between GAAP and non-GAAP measures can be found in the fourth quarter's financial supplement posted on the company's website at www.CubeSmart.com. I will now turn the call over to Chris..

Thank you Charlie. It was a great fourth quarter closing out a great 2014. Performance was strong across all of our markets and as shown in our disclosure in our supplemental, our same-store revenue growth was consistent across our 2014, 2013 and 2012 same-store, pools reflecting robust organic growth.

Denver, Atlanta, Philadelphia, Chicago and all of our Florida markets had particularly strong same-store revenue growth. Our Albuquerque and El Paso stores closed the year out on a high note, rebounding nicely with revenues up 6.6% on a 530 basis point increase in physical occupancy.

Our non-same-store properties outperformed our expectations in the fourth quarter. Our newly developed Malvern store which opened in mid-January closed out last year at 95% physical occupancy with asking rents a little bit north of $20, 15% above our pro forma.

Our customer is experiencing increased disposable income from lower gas prices, increased confidence in the job market and in the overall economy. Strong property level fundamentals have continued into 2015 and signs point to another solid year for self-storage owners.

The current industry development pipeline is modest and certainly will not materially impact 2015 results. We continue to execute and identify external growth opportunities while staying disciplined to our core markets and to our yield requirements.

The capital markets continue to provide attractive opportunities and we intend to continue to source long-term capital to fund our business plan. So, in summary, there's continued strength across all phases of our business and that's reflected in our positive outlook and guidance.

We're very excited to close out 2014 and we very much look forward to a successful 2015. With that, let me turn the call over to Tim Martin, our Chief Financial Officer, who will dig deeper into both the results of the fourth quarter and the year as well as into our expectations provided in guidance for 2015.

Tim?.

Thanks Chris. Good morning, everyone and thank you for joining us this morning and for your continued interest and support. All of the detail supporting the release of our fourth quarter and full-year results is included in our earnings release and supplemental information package from last evening.

In summary, our fourth quarter results represented a continuation of the robust operating performance we experienced throughout 2014. Our reported FFO per share as adjusted of $1.08 for the year represents 19% growth over 2013 levels. That growth in FFO per share notably is on top of the 23% growth in FFO per share we posted in 2013 compared to 2012.

So, to close out 2014, I think about the year in the context of our three-pronged business plan that's focused on generating shareholder value through internal growth, external growth and sound balance sheet management. Starting with internal growth, as you know, our results have been fueled primarily from performance from our same-store portfolio.

Performance in 2014 again demonstrated the quality of our real estate portfolio, the power of our operating platform and the incredibly strong fundamentals within the self-storage industry. We posted same-store NOI growth of 9.6% in 2014 which again is even more meaningful on top of the 9.3% growth last year.

We reported FFO per share as adjusted of $0.28 for the quarter which was a $0.01 better than our guidance range. And again this quarter the beat on our numbers was from solid growth in effective rates and a little bit of good news across a number of expense line items.

On the external growth front, we had another very active year executing on property acquisitions and, importantly, property acquisitions that were consistent with our investment strategy. We acquired 53 storage facilities during the year for an aggregate purchase price of $568 million.

The majority of that investment was focused in New York City, Chicago, Dallas and Austin, Texas, Washington DC and Boston. In addition to our acquisition activity, we have built out a value creation pipeline of JV develop and purchase and completion opportunities with commitments totaling nearly $200 million.

We funded our 2014 growth in a manner consistent with our conservative balance sheet strategy. During the year, we raised $416 million of equity capital through our share offering back in October as well as sales throughout the year under our aftermarket equity program.

We raised this capital at premiums to NAV and were able to fund our growth while reducing leverage from 41.3% to 35.8% throughout the year as measured looking at debt to gross assets. And finally, during 2014, we met our long-term objective of achieving BBB and BAA2 investment grade credit ratings from S&P and Moody's respectively.

So moving on from 2014 and looking ahead towards 2015, we provided in our release last evening our full-year and first-quarter 2015 FFO per share as adjusted guidance and the related and underlying assumptions. I'll take a few moments now and walk through and provide some additional color on those assumptions.

Our expectations are based on our belief that self-storage fundamentals will remain very strong in 2015. Solid consumer demand, still limited new supply and the power of our platform and scale will allow us to continue to increase effective rents through a combination of pushing street rates and reducing promotions.

The growth in our same-store revenues anticipated in our guidance range is mostly coming from increased effective rents. As we've discussed over the last several quarters, the impact to our growth rate coming from gains in physical occupancy will likely be muted as our occupancy peaked at 93% and averaged 91% during 2014.

We also expect declining contributions to our growth rate from ancillary income as our tenant insurance penetration reaches peak levels and other drivers on that line item like fees and merchandise sales experience higher growth rates in times when we're experiencing significant gains in physical occupancy.

Our same-store expense guidance is again weighed down by our expectation of continued pressure on real estate taxes. We saw increases in our same-store real estate tax expense of 4.8% in 2014 and 8.1% in 2013. Higher expectation for increases in 2015 falls between those two results, so call it 5% to 8%.

Without the impact of taxes, our expectation is that the balance of our property -- the balance of our property operating expenses will grow in the 2% to 3% range.

We've included in our guidance the impact of all of our announced investment activity closed or under contract, including our development commitments, as detailed in our release and supplemental.

From a balance sheet management perspective, particularly in the current low interest rate environment, we continue to favor longer-term fixed-rate borrowings and lower leverage levels and we don't consider ourselves to be under levered.

So when thinking about the funding of our investment commitments, our short-term borrowings and debt maturities, we anticipate a continuation of our financing approach over the last several years which is to favor long-term financing over short-term floating-rate debt.

And finally, we're incredibly excited, as Chris mentioned, about the new product we delivered in 2014 and the product that we plan to deliver in 2015.

Our Malvern and Bronx stores that opened earlier in the year are performing well and our store in Long Island City that just opened in the fourth quarter looks great and we have high expectations for that property.

We believe these projects provide a very attractive risk-adjusted return and will create value for shareholders as we bring them to stabilization. Of course, that value creation comes at a cost to earnings in the short term as we lease up the sites. Our guidance includes $0.03 of FFO per share dilution that we expect from those projects in 2015.

That concludes our prepared remarks. Thanks again for joining us this morning.

At this time, Andrew, why don't we open up the call for questions?.

[Operator Instructions]. The first question comes from Todd Thomas of KeyBanc Capital Markets. Please go ahead..

A couple of questions.

First, in terms of the 2015 forecast, I was just wondering where are you budgeting sort of the year-over-year occupancy spread to be throughout the year and any thoughts about where this portfolio's peak occupancy rate might end up falling late this summer?.

From an occupancy contribution, I guess I'll answer it that way, to same-store revenue growth, between 100 and 150 basis point contribution is what's baked into our expectations. So, we peaked out in the 2014 pool at 93% last year at the beginning of August. And again, I think it's possible that the peak in 2015 could be higher than that.

But as we always say, it's a focus on maximizing our revenues and in some instances, as we talked about in Albuquerque and in El Paso, that's an occupancy focused contribution. In other instances, it's more of an effective rate focused contribution.

So I think that gives you kind of a sense of we're bullish on the portfolio and those are kind of the ranges that we would expect..

Okay. Thinking about rents then and sort of how you maximize revenue, I guess you talked about promotions a little bit in the quarter.

How much more room to reduce promotions do you think you have in the portfolio today? And how much discounting did you give away in the quarter and how did that compare year-over-year?.

Again, if you think about discounts or free rent in isolation and you look at the trends going back, in the fourth quarter of 2013, discounts as a percentage of rents were at about 5.1%. If you look at the fourth quarter of last year, they were at 4.3%, so they were down 80 basis points.

If you look at the average just over 2013 compared to the simple average over 2014, they were down about 100 basis points or so. And obviously, in the third quarter, you have your lowest level. So there is definitely room to continue to reduce the amount of free rent.

I think, when you look at Q4 of last year, we saw an opportunity to hold asking rents and to be a little more -- a little less I guess open in terms of offering free rent. And it's paid off for us. You know, we saw a 90% print at the end of 2014. January and February have been very, very strong.

As of yesterday, we were back to a 170 basis point spread between physical occupancy as of yesterday last year and as of yesterday in the same-store pool without having to open up the funnel on discounts or on reducing asking rents which is what we saw in a lot of the competing stores in the fourth quarter.

So, it is a combination of both, as we always say, but I do think we have continued room to shrink on our overall level of discounts in 2015..

So the 4.3%, the discount as a percent of rent, that number, where do you think the floor is for that in the portfolio? I guess we can sort of back into what that number looks like.

Where do you think it's sort of bottoms out? And where was sort of the trough in prior periods or is this the trough today?.

I don't know that our prior periods are all that comparable. I think, historically, my experience going all the way back to the 1990s, the trough would've been around 3%.

I think, in today's market just, given the reality that a first month free offer is so pervasive as opposed to where things were 20 years ago, that maybe mid-3s% is possibly as good as it gets..

The next question comes from Jana Galan from Bank of America Merrill Lynch. Please go ahead..

Following up on Tim's comments on the dilution from the developments, how are you thinking about leasing those? Are you kind of borrowing from the experience you saw in Malvern and the Bronx or is this more of a historical lease-up timeframe that you are underwriting?.

We continue to be very conservative in our underwriting. The Malvern store is fairly small in terms of an overall rentable square footage. Some of these projects are on the larger side and all of them are more in that traditional mid-60,000s, low-70,000 square feet range.

So, I think we continue to look at three solid leasing seasons which in many cases, just given the timing of when we open, implies kind of a four-year to stabilization lease-up model..

And then Jana I'll just pile onto that.

I think what's important also to point out is when you think about the first year when we open the doors on a new facility and we have 0% occupancy, when you think about the dilutive impact of that project in year one, generally speaking, our underwriting would suggest that by the time you get through the first 12 months over those entire 12 months, you get pretty close to a 0% NOI yield.

But that's really distorted between the first half of that first year and the second half of that first year. So for the first six months when we open up the door, it is absolutely cash flow-negative, NOI negative which obviously has a pretty big impact on short-term earnings.

And so, thinking about the $0.03 that we provided in our guidance range, all of those projects in particular the ones that open in 2015, are really hitting at that time when they are the most dilutive, when they are 0% occupied and you open the doors and you pretty much have a full expense load.

So the development pipeline is newer to our story and we think that $0.03 of dilution is perhaps not quite fully baked into some folks' expectations and we hope we provide some clarity around that..

And then maybe just a little bit more color on the supply outlook for your markets. It sounds that there is no real impact to 2015 results.

But if we kind of continue at this pace of increasing supply, could that start to impact 2016?.

Yes, I know supply remains very modest by historical levels, but it is absolutely out there and there are folks clearly looking for development opportunities given how good the business has been and where yields are on stabilized acquisitions.

I'm not, again, I'm not worried about 2016 at this point either, although clearly there will be more of an impact. When we look at stores that are actually under construction at this point in our top 10 markets that are on pace at least to open before the end of 2015, there are about 18 stores in our top 10 markets that meet that criteria.

So, the actual amount is fairly low. You do have some concentrations in the two major Texas markets, Dallas and Houston and in the boroughs of New York and in Chicago. I would say that's where we're seeing -- a little bit in South Florida, that's where we're seeing most of the activity now.

And it is a combination of one of the largest REITs and as well as private operators, many of whom have management contracts with one of the REITs to actually manage the stores which I think is becoming almost a given in many of these urban markets from a development perspective..

The next question comes from George Hoglund from Jefferies. Please go ahead..

I just wanted to see what was the January occupancy number? I know you gave the sort of yesterday occupancy number? And if you'd also comment on effective rents in January and February?.

In January and February, really no change in pricing philosophy from where we were in the fourth quarter, so effective rents were pretty consistent. And then we're back up into the mid-90% range in terms of physical occupancy..

Not implying 95%..

I'm sorry, no, 90.5%.

And then also just on the acquisition outlook, you guys had highlighted $100 million to $150 million of additional deals.

Just what do you anticipate sort of potential timing of that might be?.

Really hard to predict because our bread-and-butter, again is these single asset transactions in the submarket that we're seeking product and so it's extremely difficult to forecast the exact timing.

I can tell you that the market history is such that most sellers find motivation as they get into the spring and early summer, as their occupancies are up and they believe that somehow that helps them on pricing and then you tend to see most transactions close in that September to late October timeframe. That's just been history for a while..

Okay and then just last one.

Is there any change in your philosophy in terms of when you will put in rent increases? How long after a tenant has been in there?.

No, we have not changed, materially changed our philosophy which has been after a customer is with us for six months and then every 12 months thereafter..

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

Chris, I think I heard you say that there was a brand-new store that was being third-party managed by one of the REITs.

And so I was wondering is that something that you guys would consider doing and is there other third-party managers that are outside of the publicly traded REITs?.

Yes, so Paul, I think our pipeline right now, interestingly, for future projects that may or may not actually ever end up being built but the customer has come to us on the front end and asked us to enter into a management agreement is a very robust.

So we're incredibly bullish on the third-party management side, much more now on the possibility of these projects actually moving forward. So, I think it's almost more common that you see a third-party manager on a development store than it is to see a self-managed store. And we certainly welcome those opportunities.

And then to the second part of your question, there are many I'll call them start at the regional level, regional property management companies in the self-storage industry and then there are probably even more local market property management companies who tend to have expertise, as you would expect, in the more tertiary to secondary markets where quite often you won't find one of the REITs all that active generally speaking because, at a percentage of revenue contract, obviously it's more impactful for us in the higher end markets..

The next question comes from Jason Metz from UBS. Please go ahead..

This is actually Jason Risorto on with Jeremy. I know you had mentioned pushing some of your street rates earlier. I was just curious about what's baked into your revenue guidance for in-place customers and then also for street rates..

Yes, I guess we don't, again, look at it because the lever between street rate and discount moves back and forth all the time depending upon what pricing attribution attracts the customer. But if you just looked at effective rents, between 3.5% and 4.5% growth is sort of a range that's been baked into our expectations going in at this point to 2015.

Obviously, as we talk about every year, we put hay in the barn from April to August and it's early in the year. All signs are incredibly positive, but we'll have better information as we move through into the first quarter.

And then, in terms of rate increases to our existing customer base, historically, we've been pretty aggressive in terms of the percent increases on average, they've been in the high single digits. And I would say going into this year, that's a floor for us and we'll continue to test as to whether we can get even more aggressive than that..

And I'm also just hoping you could provide a little bit of color on new deals. I noticed your Brooklyn C/O deal and your Queens deal both flipped into one quarter of 2016. I was just hoping you could give us some comment on those..

Thank you for reading everything. The situation in the boroughs is one of administrative and permit delays. We're not having any problems at all with the sites. The sites have been very clean and that construction progress has been on track.

But there are more projects going on in the boroughs than the folks assigned to move them along from a permitting and inspection perspective. So we continue to see and we hear from others who are developing both multi-family as well as storage in New York that those delays continue.

So, we're fighting through it and we have good partners there helping us to continue to push things along, but we're subject to the municipalities..

[Operator Instructions]. The next question comes from Paula Poskon from D.A. Davidson. Please go ahead..

Two questions for you.

The first one, could you remind us how much of the -- how did the same-store pool change on this January 1?.

We added 15 properties or added to the 2015 pool that were not in the 2014 pool..

And how many more just with the -- notwithstanding the acquisitions that you've recently made or the developments that you have underway, how many from the Storage Deluxe would be rolling in next January?.

At this point, all of the Storage Deluxe from back in 2011, they are all in the same-store pool..

They're all in? Okay, good. Thank you..

They are..

And then the second question, Tim, can you also just remind us of your CMBS maturities and any thoughts about prepaying those?.

We have the final CMBS maturity of the debt that was here when Chris and I arrived that matures in November of this year, just above $54 million. And that's the maturity that we've spoken about over the past several quarters that has properties across a lot of southwestern markets, Tucson, Sacramento, Denver, El Paso, Salt Lake City.

And so we have the ability to prepay that as early as 120 days prior to that maturity and so we'll think about that. Again in our guidance, our expectation is to fund that and other cash deployments consistently with the way we've done it which would be thinking more long term and more fixed-rate than floating rate to repay that debt..

And those underlying assets, are those ones you think you will seek to sell or are you seeing more positive trends now, just given the overall fundamentals that you might consider keeping them?.

I think that answer is both. We're absolutely seeing more positive trends in those markets, but there are still some assets in those markets that don't make sense for Cube's portfolio long-term and we would anticipate some modest disposition activity in 2015..

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

Okay. Thank you. Thank you everyone for participating today, the end of a long earnings season. I would be remiss if I didn't look back on my first year as CEO of CubeSmart and then reflecting on 2014, just an incredible year for the self-storage industry.

Now that everybody has reported to look at Cube with just shy of a 91% average occupancy for the year when you look at same-store NOI growth north of 9%. The portfolio growth that we've experienced and been able to do in a very disciplined manner, the improvements to our balance sheet, creating continued opportunities for us to grow in the future.

And we were a first mover on the acquisition of C/O and the partnership development concepts and we're very pleased we were because it's become much more competitive and our early deals look even more attractive today than we thought they were when we went and entered into them. So, we're extraordinarily bullish on our prospects.

We think 2015 is going to be another great year for the self-storage industry and we look forward to reporting to you all after our first quarter results. Thank you and have a great weekend..

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