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CubeSmart
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Good morning, everyone, and welcome to the CubeSmart Fourth Quarter 2017 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note, today’s event is being recorded.
At this time, I would like to turn the conference call over to Mr. Charlie Place, Director of Investor Relations. Sir, please go ahead.
Thank you very much, Jamie. Hello, everyone. Good morning from sunny Malvern, Pennsylvania, home of your World Champion, Philadelphia Eagles, if you didn’t hear me the first time. Welcome to CubeSmart’s fourth quarter 2017 earnings call. Participants on today’s call will include Chris Marr, President and Chief Executive Officer; and Tim Martin, Chief Financial Officer. Our prepared remarks will be followed by a Q&A session. In addition to our earnings release which was issued yesterday evening, supplemental operating and financial data is available under the Investor Relations section of the company’s website at www.cubesmart.com.
The company’s remarks will include certain forward-looking statements regarding earnings and strategy that involve risks, uncertainties and other factors that may cause the actual results to differ materially from these forward-looking statements. The risks and factors that could cause our actual results to differ materially from forward-looking statements are provided in documents the company furnishes to or files with the Securities and Exchange Commission, specifically the Form 8-K we filed this morning, together with our earnings release filed with the Form 8-K and the Risk Factors section of the company’s Annual Report on Form 10-K.
In addition, the company’s remarks include reference to non-GAAP measures. A reconciliation between GAAP and non-GAAP measures can be found in the fourth quarter financial supplement posted on the company’s website at www.cubesmart.com.
I will now turn the call over to Chris.
Okay. Thank you, Charlie. Our apologies for the technical difficulties. Our solid fourth quarter results brought 2017 to a successful conclusion. Full-year FFO per share growth of 10.4% and same-store net operating income growth of 5.1% compared extremely favorably to most other sectors and certainly exceed the gloomy outlook that many others had at this point last year.
We entered the fourth quarter of 2017 with record high physical occupancy and we capitalized on the opportunity with higher asking rates and modestly lower levels of discounting compared to the fourth quarter of 2016. The health of our customer remains solid with no significant changes in any of the key metrics we monitor.
Average length of stay elongated slightly during the fourth quarter, compared to the fourth quarter of 2016. Six of our top 10 markets reported same-store revenue growth that was higher in the fourth quarter of 2017 than what we achieved in the third quarter of 2017. Comparing markets on a year-over-year basis, every single one of our reported markets produced positive same-store revenue growth.
Our non same-store assets also performed well during the quarter and our development assets continue to exceed our occupancy revenue and net operating income targets. We remain disciplined in our investment approach and will continue to prudently allocate capital both on balance sheet and in joint ventures.
As expected, new supply will have an increased impact in 2018, as additional new openings add to the properties still in lease-up from 2016 and 2017. Over this three-year period, square feet per capita in our top 12 markets is expected to increase by approximately 9% from 4.6% to 5.1%, still well below the national average of 6.8%.
So on an annual basis of just about 3% increase in supply per year, with our markets continuing to demonstrate strong demographic trends leading to increasing levels of awareness and demand, we believe the short-term impact of new supply is manageable.
Now new supply understandably has been a primary focus for many who follow self-storage. That focus has been on quantifying how much new supply and suggesting that it will create a headwind to the metric same-store revenue growth, which of course, it will. But perhaps what is not getting enough focus is that, demand for self-storage remains very strong.
When looking at 2017 actual results and our expectations for 2018, one might take the perspective that our growth in same- store revenues in light of the short-term impact of new stores leasing up in direct competition is actually fairly meaningful and speaks to the continued solid levels of demand and the power of having a sophisticated operating platform like ours.
In closing, 2018 seems to be shaping up much like 2017, volatile REIT share prices and treasury yields, new supply impacting an increasing number of our stores across our markets, however, we also have a customer who in a tight labor market is possibly experiencing real wage growth for the first time in a while and seeing more in their paycheck due to lower tax rates.
We certainly believe that our extremely solid balance sheet, short lease term, high-quality portfolio, and sophisticated operating platform well positions us to continue maximizing the opportunity presented.
I will now turn the call over to our Chief Financial Officer, Tim Martin for additional commentary on the quarter and our outlook for 2018. Tim?
Thanks, Chris, and thank you to everyone on the call for your continued interest and support. As Chris touched on, our fourth quarter results rather had a successful year across many fronts for CubeSmart. Same-store performance included headline results of 4% revenue growth and 0.1% expense growth, yielding NOI growth of 5.4% for the quarter.
For the full-year, same-store revenues grew 4.4% and expenses grew 2.8% leading to NOI growth of 5.1%. We started 2017 with an expectation that we would be able to improve our overall occupancy levels modestly over 2016 with more opportunity in the first half of the year than the back half.
Looking back, the benefit we received from occupancy levels played out just that way as year-over-year average occupancy was 40 basis points higher in Q1, 20 basis points higher in Q2, 10 basis points higher in Q3, and flat year-over-year in Q4. Of course, the goal is to maximize revenue and we were able to drive effective rent growth of over 4% during 2017, which is meaningful in light of the increasing pressure throughout the year from new supply.
Same-store expense growth for the quarter came in a bit better than our expectations, as we received real estate tax bills in Florida and Chicago that were lower than our estimates. We reported FFO per share as adjusted of $0.41 for the quarter, which was at the high-end of the range we provided and represents growth of 7.9% over the same quarter last year. For the year, our reported FFO per share was $1.59, which was a 10.4% increase over 2016.
We remain active and disciplined in our pursuit of external growth opportunities. During the fourth quarter, we closed on the purchase of two properties for $18.6 million, which were under contract and disclosed in our release last quarter. Our third acquisition property disclosed last quarter was acquired by a newly formed JV for $9.4 million. For the year, we acquired four stores for $40.4 million.
During the quarter, we also acquired two stores at C/O, one in Chicago and one in Delray Beach, Florida for $29.1 million, and we also opened our $49.3 million JV development store in Brooklyn. For the year, we invested $208.3 million in newly opened stores, including three stores at C/O, two wholly-owned development stores and two JV development stores. We did not add any new projects to our development pipeline during the fourth quarter.
On the third-party management front, we finished off an incredibly productive year by adding 37 more stores in the fourth quarter, bringing our 2017 total to a 160 new stores added to our program. Those additions allowed us to grow our 3PM Store count 43% during the year, as we ended the year with 452 stores allowing us to enhance our market position in existing markets and expand the CubeSmart brand into new markets like Seattle, Pittsburgh, Kansas City, and Saint Louis.
On the balance sheet, we continue to focus on funding our growth in a conservative manner that’s consistent with our BBB/Baa2 credit ratings. For the first time in over a year, we were active using our ATM or at-the-market equity program, selling 1 million shares during the quarter at an average sales price of $29.13 per share raising net proceeds of $29.6 million.
Our balance sheet is well-positioned with no debt maturities in 2018 and modest maturities of $200 million in 2019. We continue to have the ability to fund our existing development commitments on a leveraged neutral basis over the next two years without raising any additional equity capital by utilizing our expected free cash flow.
In December, we announced an 11% increase to our quarterly dividend, bringing our dividend to $1.20 per share on an annualized basis. And based on the midpoint of our 2018 guidance, the increased dividend suggests an FFO payout ratio of just under 74%.
Details of our 2018 earnings guidance and related assumptions were included in our release last night. Our 2018 same-store property pool increased by 26 stores or around 6%. Same-store revenue guidance assumes little impact from occupancy and again, is overwhelmingly driven by expected growth in net effective rates.
Our forecasts are based on a detailed asset-by-asset ground-up approach and consider the impact at the store level, if any, of competitive new supply delivered in 2016 and 2017, as well as the impact of 2018 deliveries that will compete with our stores.
Embedded in our same-store expectations for the year is the impact of new supply that will compete with approximately 40% of our same-store portfolio. So that 40% is up from the number we provided last year of 25%. The impact on individual store facing new competition in its competitive trade ring can range based on many factors. But overall, we expect the group of stores impacted by new supply to have revenue growth 200 to 300 basis points lower than the stores that are not impacted by new supply.
We remain very pleased with the lease-up progress of our newly developed stores, and we believe our development pipeline will create meaningful NAV accretion and stabilization. But of course, in the short-term, it creates a drag to our FFO per share. Our FFO guidance for 2018 is impacted negatively by $0.06 to $0.07 per share as a result of this dilution.
Our guidance includes the impact of acquisitions we’ve closed to date or have under contract, but does not include the impact of any speculative acquisition or disposition activity, as levels of activity and timing are very difficult to predict.
So echoing Chris’ comments, 2017 was another strong year of execution across all aspects of our business. Our people, our systems continue to demonstrate the ability to deliver market-leading performance. We remain disciplined in executing our focused external growth strategy and we meaningfully expanded our third-party management program.
We remain focused on our balance sheet objectives and have the capacity to fund our development commitments on a leveraged neutral basis. And while the sector is clearly impacted by new supply being added in many markets, consumer demand for self-storage remains strong and broad-based. We believe our high-quality real estate portfolio and operating platform position us well to perform throughout all parts of the cycle.
So thanks, again, for joining us on the call this morning. At this time, Jamie, why don’t we open up the call for some questions.
Ladies and gentlemen, at this time, we’ll begin the question-and-answer session. [Operator Instructions] Our first question today comes from Jeremy Metz from BMO Capital Markets. Please go ahead with your question.
Hey, guys. Chris, in terms of the modest slowing you’re expecting in the revenues, the 2% to 3%, which is primarily driven by rate at this point. As we look further out, do you sort of see it stabilizing at this level? And if so, can you comment anything in particular you’re seeing today that kind of helps you give you confidence in that?
Good morning, Jeremy. I think, I – as we again, look at the historic performance of self-storage looking back 20 years, same-store revenue growth over that time period averaged just right around 4%. Obviously, that’s through varying cycles, a period of less sophistication, the great recession, et cetera.
So I think, as you look out over the next 20, I would sit there and say, given the increasing level of sophistication, the power of brand, et cetera certainly, one should expect that through varying cycles over the next 20 years, I would think same-store revenue growth within the self-storage sector should be at that 4% or better. I think in the near-term, obviously, the short-term impact of new supply is going to affect us.
I think, as we look out on potentially signs of growing inflation, again given the short-term nature of our lease, I would think, maybe just behind lodging, our sector should be able to grow rates than at a faster clip that we are starting to see signs of inflation.
So I think not specifically able to pinpoint your answer to what’s going to happen in 2019 or 2020, but I think over the long-term, our expectations would certainly be higher than what we expect to achieve here in 2018. And I think, 2019 possibly could be impacted by growing signs of inflation, which certainly would create an opportunity for us to be a little more aggressive on rate.
And then you had mentioned supply, I mean, as you look at – out to next year, do you actually have a view at this point? I don’t know if it’s too early to tell that supply as you look into 2019 stabilizes from where it is from here? Do you think it actually gets a little better or worse?
Our view has been that to the best of our visibility, which at this point in 2018, in many markets, I would say is not particularly clear. Certainly, stores could – people could take down land, and stores could be constructed and opened next year that aren’t on our radar yet today. But based on all of the data that we have available and the conversations that we have, it does feel like, that rolling three-year supply in 2019 shouldn’t see the same levels of growth that we saw certainly in 2018.
Thanks, Chris.
Our next question comes from Nick Yulico from UBS. Please go ahead with your question.
Hi, good morning. This is Trent Trujillo on for Nick in. Thanks for taking the question. Just to follow-up a little bit on the same-store revenue topic guidance embed [ph] about 150 basis points deceleration from the fourth quarter level, and I know you’re mentioning that you managed to net effective rent growth. But could you maybe talk a little bit more about how you’re thinking about the different components that make up same-store revenue, maybe any occupancy assumption changes to existing customer rent increases and how you’re thinking about rate versus discounting?
Hey, it’s Tim. The individual components of the revenue growth are – will vary based on market conditions, and our revenue management system is designed to maximize revenue using any of those variables. So we tend not to guide to nor focus individually on those components. What is different about 2018, of course, is that we expect now that 40% of our stores are impacted by new supply, where last year it was 25%.
So individual components of revenue drivers, not all that relevant, although I did – my comments touched on the fact that our ability to gain physical occupancy on average throughout 2017 weighing from 40 basis points in the first quarter, down to flat in the fourth quarter.
And so looking at occupancy moving forward, we expect very little, if any, benefit from physical occupancy in 2018 over 2017. And so the rate – the revenue growth that we’re going to get on the top line is entirely going to come from growth in net effective rate.
And this is Chris. Just to do a little color on discounting. The discounts as a percentage of rent in Q4, it was an identical 30 basis point reduction at about 3.2% that we saw compared to 4Q 2016 at 3.5%. That 30 basis point further reduction was consistent with what we had seen in 3Q 2017, compared to 3Q 2016.
So that helped sequentially. Again, as we talked about last quarter, those are historic lows for our portfolio. And again, we wouldn’t expect to be able to squeeze much more out of the discounting line in 2018.
Okay, fair enough. Very, very helpful to have that detail. And since we’re roughly halfway through the first quarter, is there any indication that you can provide as to how things have been trending so far year-to-date?
Yes. Year-to-date has been trending very consistent with the ground-up process that Tim articulated. Our occupancies on the new same store pool have been running basically around 10 basis points higher than where we were at – in the first, what are we like, 45, 50 days of 2018 compared to 2017. We continue to have positive growth in our rental rates and our discounting remains pretty consistent with levels that we would have seen thus far comparing 2017 to 2016 on this pool.
So market continues to be good. We have had some bad luck with weather in certain markets, where we’ve had either frigid temperatures or snow, it has happened to be on a Friday or a Saturday. But again, those customers have a need and they tend to come back when things clear up.
They also humorously don’t tend to move out when it’s that cold either, so that’s positive.
Good point. Well, thank you very much for the color.
Thank you.
Our next question comes from Ki Bin Kim from SunTrust. Please go with your question.
Thanks. Thanks for all the detail you gave it on guidance. But maybe you can help bridge the gap a little better on a 2.5% same-store revenue guidance. How much of it is due to the ground-up where you do it versus just the management being a little bit conservative, given that it’s a seasonal product and we’re not in a spring leasing season yet, so you don’t really know. So I’m just trying to understand how much is – how much wiggle room you have in your guidance?
So, Ki Bin, we take a consistent approach to how we think about the upcoming year at this time every year. We do an asset-by-asset ground-up process, as I mentioned, the same as we’ve always done. And as we sit here in mid-February without visibility to where rates are going to be in the main part of the summer leasing season, without visibility to competitive pricing actions, without visibility to exactly what levels of consumer demand are going to be there for us throughout the year, it is as challenge in a 30-day lease business, and we have limited visibility.
I think, we have a track record for providing a guidance range that encapsulates all of the potential outcomes that we see coming over the next 10.5 months. And all I can tell you is that it’s a consistent approach that we have taken for nearly 10 years.
And what were the street rates in January/February?
Street rates running basically somewhere between 1% and 2% over a similar day in 2016.
And so you said in 2018 most of the growth will come from rental rate growth. But if I look at your street rates over the past year on January/February of, call it, flattish maybe little positive 1% or 2%. It would indicate that eventually the same-store rental rates would have to come down towards that level. Where would I maybe wrong on that assessment?
I’m not sure I follow your assessment. Tell me again?
Well, I mean, your same-store revenue is 2.5% to 3%, so you’re still getting some type of benefit from the flow-through from last year is good news or existing customer rate increase program, but your Street rates are still kind of zero to 2% positive. It would somewhat indicate that over time, the same-store revenue might should go towards that zero to 2%, not 2% to 3% over time. So do you think that’s correct, or am I missing a lever or ingredient there?
I think, it’s over a long period of time. And I think, there are – I think, Street rates fluctuate. I think your own survey would suggest the Street rates can fluctuate in a relatively volatile manner assuming that your survey results are indicative of the way pricing works. We have provided the guidance range that we think best reflects our expectation for what our performance is going to be in 2018.
Okay. Thank you, guys.
Thank you.
Our next question comes from [indiscernible] from Bank of America. Please go ahead with your question.
Hi, this is Juan Sanabria. Just on the same-store guidance, what’s the expected trajectory of growth throughout 2018? And should we be assuming that, that 30 basis point lower concession that you saw in the second-half of 2017 carries through as a tailwind in the first-half of 2018?
Hey, Juan, it’s Chris. I’ll start off. Consistent with the way we think about this, and as Tim has described the process we go through, you certainly have more visibility into Q1 and then increasingly less visibility given the nature of our customer base as we go throughout the year.
So, again, not that different than sitting here at this point. Last year, we would expect that your occupancy opportunity is going to range plus or minus 10 to 20 basis points over the course of the year. The discounting, we would certainly expect will increase as we go through the year, as we would expect Street rates to increase. And again, given the sort of nature of how this business operates, your same-store revenue growth we would expect would be higher in the first-half of the year than in the second-half of the year.
Okay. But do you expect to carryforward the benefit that you saw in the first-half that was like a 30 basis point tailwind to lower concessions year-over-year second-half 2017 versus second-half 2016 into the first-half of 2018, or are you just saying, as a whole, concessions in a higher supply environment that’s just going to generally trend higher?
Yes. I think what we are saying is that – as that concessions for record lows for us, our expectation is, they have a lower probability of continuing to trend lower in our expectation today than the fact that they would either stay flat or increase. But again that can change tomorrow, because we’re managing, as Tim has stated, to an affective rent.
And so if the right answer tomorrow is to provide no concession and lower asking rent, then that’s the approach we will take to maximize revenue. If the right answer tomorrow is to grow our asking rents meaningfully and also be a little more liberal with concessions, then that’s the action we will take to maximize revenue.
And on that pricing strategy and the flexibility there, are you seeing any opportunity to kind of take advantage of the fact that customers maybe tend to stay longer than they anticipate when they start and maybe offer some upfront concession that would put them on a higher starting Street rate that will last longer than they expect?
Consistent with the way we have analyzed pricing in our business over the last many years, yes, all of those things come into consideration as we’re looking at the right mix that maximizes revenue.
Okay. And just a quick follow-up on that. What’s the average length of stay now you said it ticked up a bit?
The average length of stay in the fourth quarter was right around 14 months.
Thank you.
Thanks.
Our next question comes from Smedes Rose from Citi. Please go ahead with your question.
Thank you I wanted to ask you just on the expense side you mentioned pressure on real estate taxes specifically as a driver of that line item. Are there any markets that you can call out specifically that where you’re seeing a significant uptick, or expecting a significant uptick in real estate taxes, or is it just generally across the Board?
Hey, Smedes, it’s Tim. It’s – but it sounds like I answered this question the exact same way every single year, because the answer is the exact same every single year. We see broad pressure across most of our markets. In particular, we feel like there’s additional pressure in Illinois, Chicago, in particular, as well as Texas and Florida. And all of our work and all the work we do with outside consultant suggests that there’s still the potential for additional pressure there not only in 2018, but probably for the next couple of years.
And so we – as we indicated our fourth quarter 2017 results were helped a little bit, those expenses came in the fourth quarter. So ultimately, 2017, tax bills came in a little bit lower than we were expecting, which creates a little bit tougher comp leading to percentage increases in 2018 that might be a little bit higher.
So we’ve experienced on that line item over the past three or four years growth from a high 3%, call it, 3.8% to almost 8%. And so that 4% to 8% type growth over the past three or four years, I believe, is probably pretty indicative of what you’ll see not only for CubeSmart, but probably across the sector here again for the next couple of years.
Okay. And then just looking at Houston, you saw, I mean, it’s pretty high same-store NOI growth in the fourth quarter. Could you just maybe talk about the sort of lingering impact or the overall impact from hurricane activity. And how you think that might play out in that market over the course of the year?
Hey, it’s Chris. So Houston, through yesterday continues to hold up pretty well asking rents plus 4-ish percent occupancy, 250 to 300 basis points over last year. But the customers are gradually no longer having a need for the space. So we’d expect that would just be a slow vacate for those who determine ultimately that they no longer have a need for the product. That contrast a bit with Florida, where I think, we’ve already seen the overwhelming majority of customers that we provided the service to as a result of the weather conditions there have left us.
Okay. And then just a final one for me, you kind of touched on this. What’s – what is the spread, I guess, between your asking rates and your in-place rent at this point just across the portfolio?
Yes. If you take a look at where we are today, we’ve got about a little bit more than half of our customers are at rates. Well, it’s almost 50-50 between customers whose rates are below current street and those customers who – whose rates are above current street.
Okay. Okay, thank you.
Our next question comes from Todd Thomas from KeyBanc Capital Markets. Please go ahead with your question.
Hi, thanks. Good morning. First question, Tim. The change in 2018 with 40% of the portfolio being impacted from new development versus 25% last year. How does that impact the revenue management system and pricing model, specifically as you kind of think ahead?
So, Todd, I thought your first question was going to be whether I consider playing Fly, Eagles Fly, but I thought that was just a – like that was a little bit too much. So we reverted back to Steve Miller’s Fly Like an Eagle. So I’m disappointed on what’s your first question.
But to answer your question, in that ground-up process, we certainly look at how we budget for stores that have new competitive properties within their trade ring differently than we look at how we budget and forecast the 60% of the stores that don’t have new competition.
So, we look at trailing data. We look at how stores have performed, when they compete against new supply and build that into the ground-up process to develop the expectations for those stores just like we do all stores. So different inputs to get to the answer.
Okay. And then, I’m just thinking about the trajectory of growth at this point in 2018, but with some of the comments that you said around the guidance. But I’m also curious, if I look back last quarter, you raised your revenue growth forecast for the full-year from 3.75% to 4.75% to 4.25% to 4.75%. And you’re almost halfway through the fourth quarter and you came in just below the midpoint there.
And I’m just trying to gauge whether December was a little bit more challenging than you anticipated, maybe I’m reading into it a little too much. But maybe you could talk about the quarter itself breaking out sort of the performance you saw on October, November and maybe talk about what happened then in December in the back-half of the quarter perhaps?
Yes. Hey, Todd, it’s Chris. Within a few basis points, we came in as we would have expected. I would say that from a rental volume perspective, we’re probably little more optimistic at the date of the call on how the back-half certainly of November and December will perform, and December was a little bit light for us. I think, again, back to my previous commentary, I think, a good deal of that just had to do with our markets in the way the weather pattern worked in December. So we saw a portion of those customers come back in January. So I think, a bit of it was just timing on when those customers elected to rent.
Okay. And you have seen some of that recovered in January so far?
Some of it, yes. We’ve had equal weekends with some bad weather here in some of our markets in the snow areas as well in January. But January is all in all came out pretty well in the first part of February continues to be solid.
Okay. And just lastly, on the acquisitions, can you provide a cap rate for the wholly-owned properties that you acquired in the quarter?
Sure. The assets – the couple of assets that we bought during the quarter are a mixture of where they are in their stage of the lease-up, but came in right around 5.5%.
Okay. Thank you.
Our next question comes from David Corak from B. Riley FBR. Please go ahead with your question.
Hey, good morning, guys. Just sticking with the cap rates for a second, have you seen any material movement in cap rates or a change in the bid-ask spread? And then on your development deals, has there been any – have you made any changes or change any assumptions as to kind of what your stabilized yields are going to end up looking like?
Hey, David. On the cap rate environment, we really haven’t seen any change in cap rates and that’s pretty consistent with the last couple of quarters. I think as the reads have been a little bit less acquisitive, you’ve seen a variety of private capital move into the space, particularly in the secondary and tertiary markets and are being fairly aggressive in deploying funds that they had raised.
So I think that combination has kept cap rates relatively unchanged. I think, it takes a while for moves in treasuries to ultimately filter their way through. Certainly, if we continue to see upward pressure on rates, one would expect to see some pressure on cap rates, as we move forward.
On the development side for those stores that we have placed in service or even those that are under construction, our actual performance, if you just look at cash flow, has overall exceeded our expectations. As we move forward, again, we continue to underwrite very cautiously and haven’t adjusted our expectations based on the fact that those stores have performed a little bit better than we would have anticipated.
Okay. And I don’t know if you have this number updated, but based on everything that you have today, including in lease-up and still coming out of ground, what percentage of total NOI book will stem from the boroughs and the New York MSA in total on kind of a stabilized basis?
Ultimately, when everything is finished, and if you consider that we don’t add stores in other markets, which certainly we are going to continue to grow in other markets as we finish out the stores in New York City, I would expect that the NOI there is going to be somewhere in that 12% to 15% contribution range.
Okay, great. Thanks, guys.
Thanks.
Our next question comes from George Hoglund from Jefferies. Please go ahead with your question.
Hey, guys. Just a couple of questions here. One, when you look at same-store NOI growth by market, where would you expect the greatest variances relative to 2017 both positively and negatively in 2018?
Yes. So much of that on the NOI, George, is tough, because it’s related to where we’re going to see an usual burden on taxes. So the market that Tim spoke about that have the greatest pressure on taxes, we would expect would have the greatest downward possibilities on NOI. I think, when you look at the other markets, there’s not one particular market that’s going to pop out as being an outlier.
Okay. And then so I maybe also infer from that or maybe your greatest possibility of kind of outperforming or coming in towards the high-end of your same-store NOI guidance would be basically beat on taxes?
I think, it’s potentially beat on taxes on the expense side. I mean, of course, there’s a 2% to 3% range on revenues. And so to the extent that, we are able to come in at the higher-end of that range on the revenue side. There’s certainly an opportunity there as well. It’s just a little bit less visibility on the revenue side than on many items on the expense side.
Okay. And then just one last one. And so in looking at kind of primary versus secondary market, I guess, anecdotally we’ve been hearing of kind of more aggressive pushing or revenue management in the secondary markets just more broadly speaking that’s having an impact, where better NOI generation from secondary markets. Is that something consistent with what you’re seeing in your portfolio?
No, I think when we look at our portfolio, we would frame that to say, there’s obviously a bifurcation between the supply markets and the non-supply markets. And that to us is more evident than necessarily primary, secondary or tertiary.
All right. Thanks, guys.
Thanks.
Our next question comes from Jackson [indiscernible] from Wells Fargo. Please go ahead with your question. And Jackson, your line is open. Is it possible your phone is on mute.
Sorry, I hit the mute button thinking I was taking it off, but I put it on. Yes, first on your third-party management platform. Can you guys remind me of some of the economics around that? How do you charge and then manage those stores? Is it a percent of revenue or flat fee? And then I guess, given the recent growth, what does that now account for as a percentage of total revenue?
So on the first part of that question, the contractual relationship with an owner is overwhelmingly a percentage of revenues with a floor to the extent that it’s a brand-new store and lease-up model, that’s consistent with the way the contracts have been structured for the last several years.
I think it was – we were following some best practices and we put information in our supplemental package with a few more inputs on the guidance range one of which is our expectation of management fees. So I would refer you to that table included in the supplemental, which I think will help with getting a sense of what we expect as a management fee contribution in terms of gross revenue to our 2018 expectations.
And specifically, the range that’s included in that table is an expectation in 2018 of property management fees in the $19 million to $21 million range. As a percentage of our total revenues, that puts us just a little bit north of 3% of our total revenues. We expect to come from fees generated from third-party management.
Got it. Thank you. And then on the C/O those stores, how is lease-up trending there and how’s that compared to, say, a year ago?
So on our few stores that we have acquired that were purpose built for us and then also on our overall development openings, we continue to see performance, particularly if you cut to the chase on the cash flow that has been superior to our expectations. Specifically, looking at the C/O stores, they continue to lease-up add or a little bit better than our expectations going in each individual store and each individual market has its own idiosyncrasies. But overall, we continue as we said in the opening remarks continue to see good solid demand for the product in our market.
Great. Thank you.
Our next question comes from R.J. Milligan from Baird. Please go ahead with your question.
Hey, good morning, guys. I wanted to follow-up on Smedes’ question on Houston, not sure if you guys have this. But do you have where Houston occupancy was at the beginning of the fourth quarter versus the end of fourth quarter?
Houston occupancy at the beginning of the fourth quarter versus the end of the fourth quarter.
RJ, I’ll look for that. If you have a – if you have another question, let me see if I can find that, while you ask another question.
Great. Yes, sure. For the incremental 15% of your properties that are going to be competing with new supply in 2018, can you talk about what’s your top markets is that going to be most concentrated in?
Yes, it is more impactful, as you would expect in those markets that we’ve been talking about that we’ve been talking about for quite a while in terms of new supply. So the more impact in Miami and Dallas, Washington D.C., Atlanta. Boroughs in New York less impactful in California in Boston. I think Austin, we’ve actually seemingly stabilized there. We seem to have stabilized a bit in Houston, a little bit more supply in Phoenix, fairly stable in the Philadelphia, North and South Jersey markets.
Hey, RJ, on the Houston question, our same-stores in Houston ended the third quarter at physical occupancy of 94.8% and ended the year at 92.1%.
Okay. And my last question – thanks for that, Tim. My last question…
Sure.
…if last year you guys saw 25% of your properties competing with new supply, 2018 is expected to be 40%. Would it be fair to assume that the number in 2019 would be higher than 40%, given that 2017 deliveries will likely still be in lease-up?
Well, 2017 deliveries will be included in both, right? So in our 40%, we’re really looking at deliveries in 2016, 2017 and 2018 contribute to the 40% number. So when we do that calculation a year from now, we’ll be looking at deliveries from 2017, 2018 and 2019. So the 2017 delivers will be in both populations.
So the overall question is, do we think the 40% goes up or down to Chris’ comments, I think in his opening remarks really difficult to have visibility into what deliveries are going to look like in many of our markets in 2019, it’s just – it’s pretty far out, given the time it takes to get the approvals done and get construction done. You could absolutely start a project today and have it delivered in 2019.
So it’s hard to have perfect visibility into that. What we do think though is that, we went from 25% of our stores impacted last year to 40% this year. I think, whether it goes up or down from the 40%, our expectation is that, it won’t be as far from 40% up or down as the move we saw this year going up from 25% to 40%.
So could your frame that to say, we would expect it to be somewhere between 35% and 45%, as we sit here today. But boy, that’s a big guess, because the crystal ball is awfully fuzzy on that one.
Gotcha. So the real question is, is 2019 going to be greater than 2016 and that…
I think, that’s the right question, yes, and it’s a little bit too early to call that.
Gotcha. And then my last question is, there was a little bit of a decel in California in some of those markets there. I don’t know, if there was any extra color there. Is that just a little bit of new supply, or just inability to push rate? What’s – it wasn’t significant, but it was noticeable in a couple of markets?
Yes. Hey, RJ, it’s Chris. I think, you’re just starting to see the weight of many, many years of significantly above average rate growth. And so we’re not really seeing any new supply there at all. But we may have gotten a little bit too far out over our SKUs in terms of the magnitude and the cumulative magnitude of rate growth there.
Excellent. Thanks, guys.
Thanks.
Our next question comes from Rob Simone from Evercore ISI. Please go ahead with your question.
Hey, guys, good morning. Thanks for taking the question and most of my questions on the operational side have been answered. So I just wanted to focus on the financing side a little bit. Your guidance on interest expense is a little higher than we would have expected. I guess, could you maybe talk about your financing plans for the year and then maybe how much of that change is maybe attributable to rising rates this year?
Sure. So it’s not a lot of moving parts in the – on the balance sheet for the guidance and the underlying assumptions that we put forth. We certainly have exposure to the short end of the curve, 15% to 17% of our debt is variable rate. And so there’s certainly an expectation that those – that the short-term rates are going to move. We also have a portion of our term loan borrowings that is currently hedged in that hedge. You may or may not have in your model that hedge burns off midyear, so that could be something that would impact perhaps your model projections versus our expectations.
Got it. And could you maybe talk about any plans later in the year? I mean, obviously, this is contingent on market conditions. But would the plan kind of be to term out your line effectively, as you potentially borrow against it to fund development costs?
Yes. Our playbook is pretty straightforward over the past five, six, seven years on how we like to finance the debt portion of our capital stack. We have an adequately sized line of credit art $500 million, which allows us to use that as we grow, as we fund our developments as we – as we’re opportunistic on the external growth front allows us to utilize, say, up to half of that amount and we get to a critical mass.
We can start to think about really one of two likely paths that we would use term that out and fix the rate on that debt. One path would be to go to the end of the maturity stack and look again, to think about an index eligible 10-year bond issuance at some point at the $300 million size.
The other alternative that we’ve used in the past that at times can be very attractive on a relative basis is to look at the bank on secured term loan market. And that that would allow us to most likely look at a five or seven-year type term. And the market has been pretty volatile over the last few years. There are times in the cycle, where the term loan component is much more attractive than the bond market. There are certainly been times, where the bond market is more attractive in the other direction.
But to get that term – to get that 10-year term to continue to elongate and keep our average years to maturity above five, which is our – which is one of our objectives. I think, we’re currently a little bit more than the six. Being able to move a maturity out to the end of the stack is strategically important to us. So ideally the bond market would be there for us to be able to turn that out on a longer-term basis.
Great. Thanks, Tim. I appreciate it.
Sure. Thanks.
And our next question is a follow-up from Ki Bin Kim from SunTrust. Please go ahead with your follow-up?
Thanks. Just a quick one on New York City, your largest market. If this market falls in that category of the 40% of markets being impacted by new supply. How should we think about the same-store revenue growth potential for this market?
So to be clear, Ki Bin, the 40% is not 40% of markets, it’s 40% of the stores.
Yes.
And the – I don’t have the number in front of me. But I believe that our same-stores in New York is a number that’s more like 80% of our stores – of our same-stores in New York, I think, it’s more like 80% of those are impacted by supplies. So it’s obviously more heavily weighted of the stores that are in that 40% within that market, it’s a lot more in New York on a relative basis to that market. So what was the second part of your question? I’m sorry.
So if it’s 80% of stores in New York, is it reasonable to expect, like you said, maybe 300 basis points less growth for those type of that stores, or is something – is there something different about New York City, where that falloff would be better or worse?
I think, you’re going to have individual stores that are going to fall – within the burrows that are going to fall below that range. You’re going to have some that they’re going to fall above that and it’s going to – it’s really asset by asset specific in that. If I have a store that enjoy the benefit of not having a competitive store in its trade ring, and now, all of a sudden, I have two, that’s a much different impact than if I have a store that’s impacted by a new store that was delivered in 2016 and in 2016 and it’s one of 15 competitive stores in the market.
So even in the boroughs, even in stores that are four miles apart from one another, you – it’s really, really difficult to generalize. And that’s why it’s so important. We believe to do that asset by asset look and think about very specifically what we expect the impact to be on a store by store basis to roll up to those overall numbers that we’re providing in which we just caution against overgeneralizing some of the numbers that we provide.
Okay. All right. Thank you.
Thanks.
And ladies and gentlemen, we have reached the end of today’s question-and-answer session. At this time, I’d like to turn the conference call back over to Chris Marr for any closing remarks.
Thank you very much for participating in our year-end 2017 call. I think, as you can tell, we are and remain confident in our business plan. The balance sheet that we have provides us with great flexibility. As Tim mentioned, no need to raise additional equity capital to fund our known commitments. We have great access to a variety of different forms of capital and we will continue to be judicious and how we deploy that capital, both on balance sheet and in ventures.
From an internal growth perspective, again, supply is a reality. Our expectation for 2018, frankly, is very consistent with how we would have talked about it a year ago. And again, we believe the quality of our platform, people and assets will continue to create a opportunity for us to outperform on a relative basis and continue to maximize the opportunity that is presented to us. That is – our objective has always been our objective and will continue to be our objective.
So thank you very much for participating, and we look forward to speaking with you at upcoming conferences, or on our first quarter 2018 conference call. Have a great day.
Ladies and gentlemen, the conference has now concluded. We do thank you for attending today’s presentation. You may now disconnect your lines.