CubeSmart (CUBE) Q1 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to the CubeSmart First Quarter 2012 Earnings Release Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to the CEO of CubeSmart, Mr. Dean Jernigan. Please go ahead, sir.

Thank you. Good morning, everyone. Today's company 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 files with the SEC, specifically Form 8-K, together with earnings release filed with the Form 8-K in the Business 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 on the company's website. Good morning again. Thanks for joining us today. As usual, Chris Marr, our President and Chief Investment Officer is here with me; and Tim Martin, our Chief Financial Officer. I will kick it off by making a few comments and then turn it over to Chris and Tim and then we'll get to Q&A. First of all, let me start off by just saying that we're pleased with the healthy results that we've reported last night, despite the challenging economic times that we still find ourselves in. We're very pleased with how we remain positioned for long-term value creation for this company and within our business plan. I would call our results good, not great, during the quarter. But as we go forward, we think we have our company positioned for many, many good and some great quarters ahead. I don't often brag or talk about our robust operational platform, but that is what gives me the comfort and enthusiasm for how I see our company moving forward. Those of you who've had the opportunity to visit us here in Pennsylvania, you have seen, and I want to comment, on our areas that have really caused this company to be positioned for the future. Our revenue management department, as you all know, we manage to revenue, not rate or not occupancy. Very pleased with the sophistication of that department as we move forward. Our call center, which we call our sales center, second to none. I will put our sale center up to compare against any sales center in the country. We're very pleased with those results. Our real-time operations and financial reports that we get, and, of course, last but not least, the very sophisticated Internet marketing programs that we enjoy here in the company. This platform has been built during these last 5 years, and so I would compare it to any in our sector and in fact any in the real estate investment trust world. Very pleased with where we're positioned today with our platform going forward. As far as our external growth initiatives, we've spoken many times about our Storage Deluxe acquisition, but also our other properties that we have been buying over the last couple of years. And I'm happy to report that the results were remarkably consistent with our expectations. Long term, we feel like we're very positioned to take advantage of the industry consolidation, which is happening today, and I'll speak more about that in a minute. But with our healthy balance sheet and our broad access to capital and our disciplined investment process and our competitive third-party management platform, that consolidation opportunity is big and is real and is right before us. But more immediately, we've seen demand trends in the last few weeks that have energized us and give us confidence as we head into the rental season. A couple of years ago, I think it was, I said on this call that I really couldn't comment about what I thought the rental season was going to bring us because it was just too uncertain at that point in time. Looking back on it, I think I was right to make that comment. But today, I'll tell you, we do have confidence, I'm sure -- and Chris will speak to that as we move into the rental season. But going back up to 30,000 feet for a minute and looking at the crystal ball that I continuously gaze into, I think last quarter, I commented about how well I thought all storage REITS would do this year compared to the RMZ, and I still feel good about that prognostication as this quarter has played out in, of course, on into Q2. I look back this morning at some transcripts of when we went into the recession and what we talked about in those days. And in Q2 '09, I jokingly talked about I felt like we were in an L-shaped recovery, meaning, of course, no recovery. And I talked about different markets at that point in time, how many were not -- did not feel like we had reached the bottom of that recovery. In Q2 '10, approximately 2 years ago, I talked about how I thought we were going into a recovery that looked like a check mark, a precipitous drop with a long-tail recovery, but very low and very slow. And as I look at the jobs report that we heard this morning and look at the GDP growth that we are barely enjoying, between 2% and 2.5%, I think that guess a couple of years ago continues -- it looks good at this point in time. So those look like going forward, I'm afraid it's more of the same. I think the economy has a lot of work ahead of it. I saw Mr. Buffett on TV this morning, saying that he thought home building would be what brought us out of -- or put us in a much better improving GDP number, a growing economy. But I don't see that happening. It was reported this week that our homeownership ratio or percentage had dropped onto 65.4%, and that is a more normalized level than what we've experienced here in the last few years when it peaked at 69.2%. But I see that continuing to drop and go through that 65% level, which is good news for the multifamily guys, and I think that's good news for us as well, more people moving -- people downsizing in smaller units, housing units. But it's not so good for the economy. But I think there is a silver lining in that 2% to 3% GDP growth for our economy over the next 2 years, if I'm right about that. And that is the consolidation opportunity that I spoke about a few minutes ago. I think the smaller players are struggling today. They've been struggling for the last 3 or 4 years, and they're going to continue to struggle. And the public companies with healthy balance sheets and good access to capital are going to be able to grow our companies dramatically, I think. So this company, with a robust operating platform with our balance sheet, I think we're perfectly positioned to continue to grow on an organic basis. But even more importantly, as we go forward, we're going to grow dramatically externally, I believe, over the next few years. So with that, I'll put my crystal ball away and turn it over to Chris Marr.

Thanks, Dean. So I'm going to use my time today to touch on operational investment and technology highlights from the first quarter. Operationally, strong performance leading up to the end of the quarter and continuing on into April has provided us with a positive tailwind and does give us confidence heading into the busy rental season. As we disclosed on Page 16 of our supplemental package, our 2012 same-store pool, its physical occupancy was sequentially unchanged. We are at 78.7% at the end of December 2011, and at that same 78.7% at March 31, 2012. On a quarter-over-quarter basis, we gained 190 basis points of occupancy, comparing March 31, 2011 to March 31, 2012. First quarter rentals were up approximately 6% over the first quarter of last year, and that momentum picked up nicely towards the end of the quarter. Vacates began the year up, but tapered off, ending the quarter more in line with historical patterns. Our strongest markets in terms of both occupancy and revenue growth where in the corridor between Washington, D.C., and Boston, in the Dallas, Austin, San Antonio markets, as well as in our Inland Empire stores in Southern California. Our weakest part of the country was Arizona, with Tucson posting relatively flat occupancy and revenue compared to Q1 of '11, and Phoenix, with declines in revenue and occupancy. We've been very pleased with the integration of the 2011 acquisitions, including our Storage Deluxe assets. The NOI on this pool is running approximately 2% ahead of our underwriting. We have added disclosure on Page 18 of our supplemental package that shows our Q1 yield along with other details about our non-same-store assets. The debt assumption process on the final Storage Deluxe pool has taken longer than we had modeled, and we remain in process to close on the final store. This pushes the impact of certain positive synergies into Q3. And as Tim will discuss, given the last store's closing, our high occupancy stores, being acquired with the lowest cost of capital, the delay is a bit FFO dilutive to our modeled assumptions going into the year. From a Superstore update perspective, we have 64 Superstores open and fully functional. The cost to implement a Superstore is approximately $47,000 per store, slightly lower than our estimate of $50,000 per store. We have performance attributes from the 25 Superstores that were rolled out in Phase 1, as this group was functional for the entire first quarter of the year. 23 of these stores are a subset of our same-store pool. When comparing growth in rentals, occupancy and revenue, these 23 superstores outperform the overall same-store pool in each category. We also compared the 23 Superstores' performance relative to the performance of all of our stores in their respective markets, and again, our Superstores outperformed. From a branding update, 88% of our own stores have completed their rebranding, with the balance in permitting or in sign manufacturing. Costs continue to be in line with over $4.5 million to $5.5 million estimate, and we have also completed 15 of 44 managed property conversions to the CubeSmart brand. Turning to the investment front, we continue to acquire assets in core markets with strong demographics and rental rates. The assets, excluding Storage Deluxe, that have closed or are under contract this year, have asking rents that averaged $19 with physical occupancies of approximately 81%. We continue to see strong deal flow and remain confident that we will be within our targeted ranges for acquisitions and dispositions. From a technology perspective, we deployed our new customer relation management software in early April. This was a product that we developed in connection with another software company and has been installed to replace the prior CRM system that we had in place the last couple of years. Our new system has reduced complexity, streamlined processes and has resulted in increased efficiency and productivity in our sales center and enhanced our ability to analyze customer behavior and trends. The system has improved integration with key CubeSmart systems, including our website, billing systems, property management system, all of which is resulting in enhanced reporting and improved targeting of potential customers at a lower cost than our prior system. Another exciting technology introduction is the Envirotrol system we have installed in 10 of our stores. This system allows us to set and hold a peak demand level on our gas and electric usage by cycling necessary equipment and not allowing it to be active at the same time. We've been testing the system at our one of New Jersey stores, and we have now operated it through 4 seasons, and the return on investment is a bit north of 200%. In summary, we are confident in our people processes and pricing and we are focused and well prepared to enter the prime rental season. With those comments, I'll turn it over to Tim Martin.

Thanks, Chris, and thanks to everyone for joining us today and for your continued interest and support. Our financial performance for the first quarter slightly outpaced our expectations as we reported FFO per share of $0.16 and same-store NOI growth of 7.4%. Same store revenues grew by 2.7% and same-store expenses declined 4.3%. The first quarter expense reduction was due to the timing of our marketing spend and also largely due to the mild winter, which resulted in much lower snow removal and utility cost this year compared to last year. Our investment activity over the last year has led to a larger pool of assets that are not included in our same-store results. And we've added some additional disclosures, as Chris mentioned, in our supplemental information package on Page 18 to provide some insight into the performance of those assets. During the first quarter, our non-same-store results were right in line with our expectations and with our underwriting at 5.4% NOI return on the weighted average investment basis. We expect the return on that portfolio to grow throughout the year and also to be impacted positively by the additional closings of the remaining stabilized Storage Deluxe assets. We were active during the quarter, closing on the acquisition of 6 facilities for an investment of $86.4 million. You'll recall that the $560 million Storage Deluxe portfolio acquisition that we announced last fall had a stage closing with 16 unencumbered assets with the purchase price of $357.3 million closing back in early November, and the remaining 6 encumbered assets valued at $202.7 million to follow in 2012. During the first quarter, we closed on the acquisition of 4 of the 6 remaining Deluxe assets for $74.4 million, leaving us with 2 assets to close for a purchase price of approximately $128 million. We acquired one of those assets in late April, and as Chris mentioned, we continue to work through the loan assumption process on the final asset and expect to close that property by the end of the second quarter. We funded the $86.4 million of first quarter investments through the assumption of $34.9 million of mortgages and borrowings under our revolving line of credit that had $50 million drawn at quarter end. Subsequent to quarter end in April, we drew the remaining $100 million, 5-year unsecured bank term loan that was part of our new $600 million bank facility that we closed back in December. The proceeds from drawing that $100 million term loan were used to repay amounts drawn on the line and also to fund the closing of the additional Storage Deluxe property in April. From a balance sheet perspective, we have capacity under our facility to fund all of our 2012 debt maturities. That said, as we've discussed for several quarters, we remain focused on accessing the public debt markets with a debut 10-year bond issuance this year. The size, timing and pricing of an offering remain meaningful variables to our full year earnings guidance. Transitioning to guidance then, we raised the low end of our 2012 FFO per share guidance, as detailed in our release. We expect full year 2012 FFO per share of $0.68 to $0.73. And we also introduced second quarter FFO guidance to $0.16 to $0.17 per share. The underlying assumption of our guidance are detailed in the release, but in summary, core portfolio assumptions remain unchanged as our performance year-to-date is directly in line with our initial expectations. We continue to expect same-store NOI growth of 3% to 4%, on revenue growth of 3% to 3.75%, and expense growth of 2.25% to 3.25%. Our newly acquired properties in 2011, including the Storage Deluxe assets, also performed consistent with our underwriting, and our expectation on the full year performance on those assets remains unchanged. We have 2 areas that our assumptions have changed since last quarter that largely offset one another from an FFO perspective. Having a positive impact to earnings guidance, we lowered our expectation on the coupon on a debut 10-year bond issuance, to 5.5% of the midpoint. And the negative impact to our previous earnings guidance comes from the timing of the closings of the Storage Deluxe assets I mentioned, as those closings have taken longer than our previous expectation as we work through the loan assumption process. Overall, we had a straightforward first quarter that was focused on executing on the fundamentals, and the results were consistent with our expectations. We are well positioned, confident and energized, as Dean mentioned, as we enter our prime rental season. And our strong balance sheet continues to provide us flexibility and access to capital that will support our disciplined external growth strategy. So I'll pause there. Thanks again for taking the time to join us this morning, and at this point, Dean, I'll turn the call back to you.

Okay, thanks, Jim. I think we're ready for questions. Denise, if you want to go with our first question?

[Operator Instructions] Our first question this morning will come from Gaurav Mehta of Cantor Fitzgerald.

I just want to go back to your comments, Dean. You've said that storage REITS would do good this year. I was just wondering what that implies for pricing power in the industrial as well as discounts for the year?

You wonder about what that implies for pricing power and what?

Discounts.

Discounts. Okay. I think we're starting to see some glimmer of hope there. I think from the other company's reporting, I see a focus on revenue versus occupancy, which is great. That means to me that we'll see fewer promotions going forward. We've seen some pricing power. We aren't there yet because we're still -- we still have some occupancy gains. We're using all levers at all times, but we will draft in behind everyone that's pushing REITs to new customers. So I'm encouraged, is the bottom line.

Secondly, and question for Chris. Chris, you gave us some stats on the Superstore program, and that's very helpful. I was just wondering if you could provide us some update on if there is an increase in commercial customers in those particular Superstores and which services are being used more than others?

Sure. From a -- again, we've got -- the 23 stores or 25 stores that have been open for the entire first quarter, we see a -- certainly an increased amount of interest in many of the services from our commercial customer base. But given the fact that the program has been -- has really been out there at that pool for just a quarter, nothing yet where we are able to really see a material change in our commercial base versus our residential base. In terms of the types of things that we see a high interest in, it relates to around the logistical services that we are offering. So the ability to have a pack, a UPS pack and ship station that allows commercial customers and residential customers to both have us receive goods and put them in their unit and/or package up material and ship it out, has been very popular. From a shredding perspective, both commercial customers and residential users have shown a significant amount of interest in that service. And then from a use of moving services, whether that be our courier service or our relationships with Two Men and a Truck, Simple Moving Labor, et cetera, that has been of high interest. Every service that we have to offer has been used and has a good amount of interest, at one level or the other. But the ones I touched on are the ones that are showing the most interest at the moment.

That's helpful. And lastly, can you provide us the new and renewal rates both for first quarter and fourth quarter?

If your question is where are we renting units for the new customer coming in versus the rent that the old customer was paying as they vacated, for the average for the first quarter, those 2 were right on top of each other. There was very little change between the 2.

And did you see the same trend in your peers as well?

Yes.

Our next question will come from Christy McElroy from UBS.

I just wanted to go back to that Page 18 of the supplemental that, Tim, you mentioned and the yields on the Storage Deluxe portfolio and the 2011 acquisitions. To get from that 5.4% in the first quarter to 6% on average for the year, the NOI would have to increase by about $1 million a quarter on average, and the portfolio would have to average about 6/2 yield, if my math is right, for the remainder of the year. I understand that a lease-up component, but some of the nonstabilized properties in that Storage Deluxe portfolio have been open for, I think, a year or a couple of years. I'm just wondering if you could be a little bit more specific about what CubeSmart will be doing that Storage Deluxe was not able to do to get that occupancy and those revenues higher?

Christy, let me take the first part of the question. The 5.4% that's disclosed on Page 18, you just need to keep in mind that, that is on a weighted average investment basis of just under $500 million and that does not include the full quarter impact of the 4 Deluxe assets that were acquired during the quarter, nor does it include the 2 assets that closed -- the one that closed in April and the one that has yet to close. And all of the 6 encumbered Deluxe assets that are to close in 2012 are all stabilized. So our first quarter results don't have the benefit of a full quarter of 4 of the stabilized assets nor do they have the benefit of the 2 that hadn't been acquired at all.

So I guess what would be the pro forma number, the pro forma yield, including all of that stuff?

Well, pro forma for the year, our expectation is consistent at 6%. If -- had we owned those -- don't have that right in front of me, but you would've had a yield that would have been higher than 5.4% but not quite 6%, so it would've been in the mid to, I would guess, 5.5% to 5.7% range. And then you are going to see growth over that -- in that portfolio throughout the year, partially due to assets being leased up and partially just due to the seasonality of the performance of having a rental season impacting the second and third quarter and then holding into the fourth quarter numbers. So your math is correct in that you do need north of a 6% return on average for the following 3 quarters to get up to the 6% number. But that is consistent with our underwriting and consistent with our expectations.

And, Christy, from what are we doing differently, first thing we have is scale. So with the addition of these assets as well as with the portfolio we had in place in the greater New York area, we clearly benefit from that. And just the operating platform, as Dean touched on, that we bring to those assets in terms of a much larger and more sophisticated platform starting with our call center, our sales center, going all the way through all of the technology that we have in place, which allows us to both benefit on the revenue line as well as on the synergies, on the operating expenses. We're also able to market, given the size of the platform we have in New York City, much more aggressively both online and on the street. So those of you who move around in the various boroughs may have seen or expect more campaign that rolled out April 1 in New York City, where we are advertising CubeSmart and our presence, both on subway as well as on bus, billboard, et cetera, which has created additional organic search results from a web perspective and has, in the early goings of that campaign, been very beneficial in terms of rental activity.

Okay, that's helpful. And then, Dean, just wanted to follow-up on your comments about growing externally. Given your obvious interest in the New York metro area, I'm wondering if you've looked at the storage post portfolio, which Acadia has expressed interest in monetizing. And how would you compare that portfolio to the assets you bought from Storage Deluxe?

Yes, Christy, this is Chris, I'll take that. Obviously, you've hit the nail in the head. We are interested. We love that market. We have looked at every asset, I think it's fair to say, in that market, and it's a fine-quality portfolio that obviously is not core to their business on a long-term basis. And if and when they were ever to decide to monetize that investment, we would certainly be very interested.

And then, Chris, just lastly, you talked about vacates tapering off during the quarter, but can you actually just quantify the changes, the year-over-year changes in move-outs and vacates in Q1? And how does that compare to those same metrics in 2011?

Yes. If you look at -- I think I touched on in my comments that we had a 6% gain in our move-ins. Our vacates were up just about 8% in Q1 compared to Q1 of the prior year. But that was, as I said, that started off not surprisingly to us at a higher percentage than that as we had significant move-in activity 6 months prior to January and February. And we knew that based on our average length of stay that, that was going to happen, and then that tapered off as we went through. We had a very, very strong March that continued into April in terms of great increases in move-in activity, and that continued tapering off of vacates. So as I said on my comments, it has caused us to be quite optimistic and confident as we go into the busy rental season.

The next question will come from Eric Wolfe of Citi.

It's actually Nick Joseph here with Eric and Michael. Given the fact that you already have $37 million of dispositions on the contract, you're already at the low end of your guidance. So could you see yourself exceeding the high end of the guidance and redeploying the capital in the core markets, given the consolidation opportunities you spoke about earlier?

Yes, absolutely. We continue to look at opportunities throughout the portfolio. And as Tim alluded to, we have certain CMBS pools that are maturing, which is the use for a debut bond offering. And there are assets in those pools that are now more efficient for us to dispose of as they become unencumbered here in the summertime.

Okay. So by the end of 2012, what percentage of your NOI do you think will come from these noncore assets versus, I guess, the core portfolio?

I think we're looking at, that 60% core is the pro forma '12. So as we go into '13 -- again, you're getting a bit of a benefit from the disposition, although those are lower rent markets. And assuming we efficiently deploy that capital into the core markets, that will tick up. It takes a large transaction to move that meaningful. So I think that 60%, as we go into '13, we'll move up 62% to 65%, depending upon what we're able to find on the acquisition side.

Okay. And then, finally, you mentioned that you expect to grow over the next few years. Are there any markets that you'd like to enter that you're not currently in? Or do you expect this growth to come in existing core markets?

I would expect that it would come largely from existing core markets. We have a few markets where we're not in scale, but I can't think of any off the top of my head that we're not in at all.

Our next question would come from Todd Thomas of KeyBanc.

Chris, do you have an update on where occupancy is as of the end of April?

Yes. We are, as of today, 219 basis points above where we were on this day last year.

Okay. All right, great. And then, you mentioned your revenue management system. And, Dean, I know in the past, you've sort of discussed maintaining a comfortable 200 basis points spread year-over-year. So you know you're there as of the end of April. But during the quarter, it slipped back below, and on average it was around 180 basis points. I'm just wondering sort of how comfortable you are with your revenue management system today and whether you feel that you've calibrated it properly to continue the trajectory of really increasing occupancy over the next 2 years?

Yes. Todd, I want to point out that I only said between 150 and 200. I know you've neatly gone -- gravitated to the 200, but that's okay. At the end of April, we were exactly -- we were 211 bps ahead. I told the guys, sitting around preparing for this call, I think we're perfectly calibrated. To use an old term, I think we're hitting on all 8 cylinders right now, and I'm extremely pleased going into the rental season as to where we're positioned.

Okay. And then just one last question. You mentioned in your prepared remarks that you're happy to see that the industry is sort of firming up on rates a bit. And I'm just wondering, with where your occupancy is today, how you're thinking about the trade-off between occupancy and increasing rates in your portfolio sort of in the context of -- is there a short-term trade-off that you're foregoing by trying to maximize revenue each quarter, whereas in the long term, maybe having a higher occupancy level sort of at the expense of lower revenue growth today, but in the future provide more pricing power and help improve margins. Can you just comment on that balance today?

Sure. That's the age-old art of retailing, right? We are focused on maximizing the bottom line, in other words in this case, revenue. And so you have those levers -- we're very pleased that we have the occupancy lever. I think all of you are pointing out in your notes that you recognize that now. We have that occupancy level. We will push rates -- as you know, we push rates to existing customers. We've been very aggressive at doing that, not too concerned about the move-outs because there's a greater benefit there. And we'll continue to push rates to new customers as well. We can't get out there by ourselves, though, and that's why I used the word draft. That's the reason I'm excited to see some of the other companies starting to push rates. So we will push rates to new customers and we will also gain occupancy. And we will have lower discounting, fewer promotions as we go forward. So it's an art -- I can't tell you exactly what the formula is, but I'm very pleased with how we're positioned going into this rental season.

And, Todd, this is Chris. I know you're aware of it, when you look at a macro numbers, you need to focus in on the fact that it really is market specific in terms of how we adjust those levers. So that within those macro numbers, there are certain markets where we may in fact have the opportunity to be much more aggressive on asking rents because the market, as a whole, is more aggressive and/or our particular assets are performing exceptionally. And then there are markets where we're less aggressive on asking rents on a daily basis because of their characteristic.

Okay. Yes, I guess the question really is what's sort of preventing you from discounting a little more, lowering rate. Increasing occupancy would sort of come at the expense of maybe maximizing revenue a bit in the short term. But as you kind of look ahead to 2013, having a higher occupancy level, would that benefit you in the future with pricing power and improving your margins overall? So I guess -- I know it's a delicate balance, but is there a short-term versus long-term impact? That's sort of what I'm thinking about.

Well, you can take it to the extreme, Todd. You can have a short-term impact. And we could have had a short-term impact in Q1, for example, if we had discounted dramatically, but it wasn't due for the future. This is a long-life real estate asset that we have here. We have to manage this company for the long term. And so it's the reason I said we have a lot of good quarters and we have some great quarters ahead of us because of the way we've managed it in the past. And so, sure, you can boost the numbers early, but that's not in the best interest of our long-term shareholders, and that's who we manage this company for. And so it is an art -- you'll see it as we go forward. We'll be increasing occupancy as I've described. We will be always increasing rates to existing customers. And hopefully, as the markets firm up, and especially as those competitors of ours who advertise on the Internet start to give away less in the way of free rent and they start to raise rates to existing customers, we will be right there with them. And you can rest assured that we will be managing that result as best we can to result in the most revenue we can possibly bring in for our shareholders.

Our next question will come from Ki Bin Kim of Macquarie.

I just want a couple -- ask a couple of quick follow-ups first. If you do pursue a larger acquisition like the Storage Post deal out there, how do you think about funding it given where your cost of capital is? Would it be more prudent to get a JV partner? Or how do you think about potential large-scale acquisitions?

Ki Bin, it's Tim. From -- we've been pretty consistent with how we expect to fund the growth of the company, whether in the invested dollars or a portion of a joint venture or wholly owned. We would expect to fund our growth in a manner that's consistent with the metrics that are supportive of our investment-grade credit rating. So if we're going to invest money to grow the company over time, we'll use free cash flow, we'll use -- and then we'll use an appropriate amount of permanent financing through equity to fund a portion of the growth that maintains our leverage ratios and our debt-to-EBITDA and all of the other metrics that will be consistent with that rating.

So does that mean 50-50?

It depends on what metric, but I mean right now, our leverage is in the high 30s, low 40s as a targeted amount. So over time, we would use free cash flow as the first part of the equity. That's our cheapest source of capital. And then to the extent we needed to supplement that growth with some equity raise to keep those metrics consistent, that's what we would intend to do.

Okay. And then going back to your quarterly same-store revenue results. I get the whole occupancy gain story, but on a revenue -- from a revenue standpoint, it's still; you guys still trail with your peers pretty significantly. I know it's a quarter -- 1 quarter event, but also maybe you could provide some color on what does it do to maybe the timing and movements? I know you say it was up 6% year-over-year. Did that all happen in March, where you haven't been able to clip that coupon yet in terms of rental revenue? And just -- if you could provide some more color on -- if it's more of a kind of onetime anomaly? And especially because it seems that you guys are comfortable with where your pricing systems are calibrated, which means to me that if you're up 2.7% year-over-year and you're comfortable with the calibration, then that's what we could expect going forward?

Ki Bin, this is Chris. I think if you step back and start with the fact that the way we saw the year unfolding, our first quarter results are consistent with those expectations. In terms of then the quarter itself, as I've said in my comments early on, we definitely saw a buildup of rental activity throughout the quarter. March was clearly our best month of the quarter. And then from a vacate perspective, we did see a gradual tapering off, where January was our worst month of the quarter in terms just the volume of vacate. So with your comment of is this a buildup during the quarter that we have an opportunity to take advantage of, assuming the trends in length of stay are consistent in Q2 and Q3, that would be accurate. In terms of relative to peers, we don't comment on others. We look at our portfolio and what we believe we can maximize in terms of revenue from our portfolio. And we appreciate the fact that we don't operate in the same markets. We don't have the same exposure in the markets in which we operate. We all have a different view on how we introduce new assets into our same-store pool. We have different views on how we account for Internet marketing spends. So there's a lot of difficulties that we count on you and others to work through to sort of put the companies on an apples-to-apples basis.

Okay. If I can ask it at a different way, can you provide what your same-store revenue growth was in April?

No.

Okay. What are your surveys [ph] versus the last year? Are they up, down, flat?

Yes, we put that disclosure in our supplemental package to try and be helpful. Again, if you look at Page 16, which has the 2012 same-store pool, and we go back and then show the results for that pool going 5 quarters back so people can compare our asking rents at the -- for the first quarter of '12 averaged $12.37 a foot, and our asking rents a year ago for first quarter of 2011 were $12.35. So our asking rents are effectively consistent to the first quarter last year.

Okay. I wasn't sure if -- yes, has been scheduled per square foot. I wasn't sure if that was only captured if clients moved in. But...

That's our asking rent.

Okay. But how do your rents compare if you look at all your markets compared to the competitors? Are you, in any given market, usually a little bit above competitors, where maybe you're losing some of that incremental client or tenant?

Yes. It really depends upon -- it's not really market, it's submarket and it depends upon who we're competing against in that particular market, whether it be a another REIT who has a presence on the Internet that we need to be cognizant of, or whether it's a local or a smaller operator who doesn't. If you look at it from a macro perspective, we would be at or competitive to our larger competitors in a particular market. And where we have an opportunity to draft in behind, we would take advantage of doing that. But generally speaking, our pricing model contemplates us being obviously competitive to what the asking rents are in that market. We think that positions us in the best -- best to be able to maximize both occupancy and revenues at that particular store.

Okay. And just last question, what's in the other expense bucket, which had a very favorable comp year-over-year?

There's a host of things in there. One of the line items in there that creates a favorable comp is credit card fees. A lot of the changes, legislative changes, that have been enacted to reduce the transaction fees on credit cards have helped us with a year-over-year comp. That's probably the -- that's probably a big driver in there. And then the balance in that line item is the snow removal.

Our next question will come from R.J. Milligan of Raymond James.

Tim, I was wondering -- I think you had mentioned that due to the timing of advertising spend that expenses were down this quarter. Do you anticipate them ramping back up next quarter? And is that going to, at least for next quarter, affect the same-store NOI number?

Yes, it'll -- well, certainly while comparing it to the same quarter a year ago, our expectations for marketing spend for the year is an increase over the last year. But marketing is so heavily dependent upon the Internet spend, and the Internet spend, we really can push down on the gas pedal or pull up every day or even within a day. So we are very mindful of spending those dollars in the most effective manner. It worked out that in doing so, both from a strategic standpoint, that we were spending a little bit less in the first quarter and intend to spend a little bit more as we entered into April and May. That creates a little bit of a comparison issue versus last year when we had a little bit of a different approach to it. So we were -- we have a very favorable comp in the first quarter because we spent less, but we do expect to spend more in the second quarter from a marketing perspective than we did last year.

Okay. And then if you could -- I don't know if you could provide a little bit more detail in terms of the guidance. You maintained the same-store revenue expectations and the same-store growth expectations. I just was wondering how you see that ramping for the remainder of the year.

Which line item? NOI? Revenue?

Revenues. Separately, revenues and expenses.

Yes, we really don't provide that on a quarterly basis. It's a -- I would characterize it as relatively consistent throughout the year from a revenue perspective. The expenses jump all over the place due to the marketing, as I've mentioned, as well as some other line items. So we do not provide quarterly guidance on expense revenue or NOI growth.

Our next question will come from Paula Poskon of Robert W. Baird.

Are you seeing any indications yet that these supercenters are accomplishing the goal of deeper small business penetration?

Paula, this is Chris. Anecdotally, yes, in terms of the services that our new customers are telling us that they are interested in. We have a relatively small pool in terms of 25 of the stores that were open and then we really had data just for the first quarter of this year. So it's early, but the early signs are positive.

And then also noting the higher level of rentals you had in the first quarter, are you hearing anything anecdotally about what's driving that? Is it residential -- individual customers moving more or more small business activity? I just wonder if you had any color on what might be driving that.

Well, the feedback that we're getting from our managers, it's all of what you describe. We're seeing some movement in certain parts of the country. We're seeing some positives from a housing perspective, in terms of movement in certain parts of the country. The small contractor is, again, starting to show some signs of life in, again, in Florida in particular. And then as we look at use of our product, we're also seeing the effect of some of our marketing campaigns and of our Superstore concepts, which to one extent or another, we have rolled out at all of our stores in terms of some of the offerings that are indicative of a Superstore, also very relevant to other non-Superstores. And we are seeing that create some new demand from customers who heretofore would've had a different use or had found some other alternative besides our product for their short-term flexible warehouse needs.

The next question will come from Todd Stender of Wells Fargo Securities.

Just focusing on other ways to boost occupancy, focusing on the properties teed up for sale. What's the occupancy on that group? And what kind of impact do you think these sales will have on your overall occupancy?

Todd, this is Chris. The assets that are currently under contract for disposition, their occupancies are not materially different than the overall same-store pool occupancy, so that hasn't been a focus. The focus on how those assets rise to the top of the list from a disposition perspective is more related to kind of our long-term expectations of revenue growth and yield appreciation in those particular markets, given their underlying characteristics. So at the margin, I would not expect that disposition activity would be a significant driver of occupancy growth.

Okay. And any timing expectations on these, just for modeling purposes?

Yes. I would expect that from a closing perspective, call it the midpoint, would be around the latter part of July, assuming everything continues on pace.

Okay. And how about just the spread cap rates on these sales relative to stuff that you're acquiring in Houston and Atlanta?

Yes. It continues to be in that 100 basis point range that we've seen in terms of the gap between exiting these stores and where we're entering in markets. That would be a little bit wider than what we would expect to enter in, in the Washington, D.C., area in New York.

Okay. And I didn't see this, did you use your ATM in the quarter to tap equity?

Todd, it's Tim. We did not.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Dean Jernigan for any closing comments.

Okay, thanks. Thanks for joining us today. I've got 3 takeaways I'd like for you to get off this call with, I think. One is we will continue to perform and provide and put up solid financial performances going forward for you. We're going to continue to grow this company with good underwriting principles, and we're excited as we move in to this rental season. So I hope that works for you. We look forward to talking to you at the next quarter. Have a good day.

Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.