CubeSmart (CUBE) Q4 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to the CubeSmart Fourth Quarter 2012 Earnings Conference Call and Webcast. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Daniel Ruble, Vice President of Finance. Please go ahead.

Thank you, Laura. Hello, everyone. Good morning from Wayne, Pennsylvania. Welcome to CubeSmart's Fourth Quarter 2012 Earnings Call. Participants on today's call include Dean Jernigan, Chief Executive Officer; Chris Marr, President, Chief Operating Officer and Chief Investment 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 factors -- or 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 in 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 at www.cubesmart.com. I will now turn the call over to Dean.

Okay, thanks, Daniel. Good morning to everyone. Thanks for joining us today. I want to start off by talking about the news release that went out from the company on Wednesday afternoon. Nothing was more exciting for me this week than announcing to the world that Chris is going to be my successor effective January 1, 2014. I know all of you -- well, none of you were really surprised by that announcement, probably. Chris has been -- really, Chris has been in the queue for CEO of a public company for many, many years now. And all -- and really all the way back to my -- our Storage USA days, if you will, it seems as though it was only a succession ladder in those days. But when we announced my retirement last summer, Chris has been working very hard in running operations for us and getting prepared to take my position January 1, and we're all very delighted. And as a shareholder, going forward, I cannot be more pleased to have anyone running this company any more than Chris Marr. So I know, with the crush of e-mails that have come in over the last couple of days congratulating Chris, I know most, if not all, of you are totally pleased as well. With that, I would like to make some predictions. I think it was last year on this call that I predicted that our storage sector would do very well for 2012 and outperform the RMZ, which we did handily. I think I also predicted that I thought all 4 companies would outperform the RMZ, and I think I got that one 75% correct. But it was a great year. And I know Tim and Chris will cover more of the year as it relates to us. But I want to talk about 2013, and in fact, I have a number of predictions for you here today. I guess, with the way they say on, I guess, the TV shows, this is -- these are my predictions, not necessarily the predictions of the company. These are personal to me. But I want to talk about sequestration and recession. As you -- as we all know, we started our perhaps a new recession in Q4, with having a slightly down Q4 quarter 2012. And with sequestration now right around the corner from us, it could be that we will be double-dipping into recession territory here in the quarter we're in right now and maybe even for the rest of the year. My prediction is, with sequestration and with recession even for all of 2013, that will not materially impact the results of our sector. Note we have no discretionary customers today. So the storage sector is providing solutions for people who need space, downsizing, trying to control cost. And so a recession, even if it runs the length of the year, will not materially impact the real results of our sector. Second prediction is that we have -- we'll have no new supply that will start to -- or new supply will not start to significantly impact our sector until 2015. Over the years, I've talked about my crystal ball being pretty good for 18 months, and sometimes I can push it out to 24 months. And that's what I'm doing here. Of all the information we have today, new supply will not impact us this year certainly, probably not next year, will not impact us until 2015. Third prediction is, with technology and revenue management skills now that the sophisticated companies have, I think we're all in a position where we're going to be able to add 200 to 300 basis points to our annual average occupancy levels and run our portfolios on up into the low-90% range. This is a big change for me because I've been, for all these years, insistent that the proper place to run your portfolio is in the high 80s. You should be pushing rents. And just with the normal churn of our properties, the way it would normally work: people would move out on or around the first day of the month and we would take the balance of the month to backfill those vacant units. So therefore, your normal churn would take 8 percentage points or so, 10 percentage points off of your occupancy, and it would be very difficult to run them in the low 90s. But now with technology and revenue management, especially the piece where the majority of our customers are coming to us today with a reservation in hand, we can match those reservations with move-outs and not have the month that it has taken in the past to backfill those units. We'll be able to backfill those units much quicker going forward. So that's prediction number three. Number four, with that same technology and revenue management sophistication, the REITs are now able to take most, if not all, of the seasonality out of our business. I've talked about seasonality at some point in time coming out of our business and I really thought it would come from more commercial customers. And of course, that is happening and will happen as we go forward. But it now appears that we can hold -- or more or less hold our occupancies in Q4 and Q1 just by taking market share. And I think, if you look at the results presented by all 4 public companies in this Q4 and, I think, what you'll see in Q1 as well, the seasonality more or less has left our sector this year. And I think we will be able to manage that going forward. The fifth prediction is that ownership and operational consolidation will become even more obvious as the performance gaps continue to widen between the public companies and the other 90%. The public companies own about 10% of the properties, storage properties, across the country. And as those performance gaps continue to widen, we'll have more and more people either wanting us to manage their properties for them or wanting us to buy their properties from them. And so the sector continues to grow dramatically, and that consolidation continues to be more real as we go forward. The last prediction is on performance. I mentioned what I predicted last year on performance for the sector. I'm going to predict that our sector again will outperform the RMZ or the Bloomberg REIT Index. I think we'll outperform the S&P index as well. If you look back over the years and you look at the last 3 years, last 5 years, last 10 years or last 15 years, the Bloomberg storage index has outperformed the Bloomberg REIT Index by a wide margin and the S&P index in even more significantly wide margin over those periods. And so, I am -- my prediction is that we will continue to outperform as a sector during 2013 and for 2013 and that sector performance will be led by our company in 2013. With that, I'll turn it over to Chris.

Thank you, Dean. We continue to execute towards our long-term vision of maximizing the cash flows at our owned assets, having a more significant amount of that cash flow being generated by properties located in our core markets and prudent capital allocations, continuously improving our balance sheet, driving down our cost of capital and migrating our long-term credit rating upward to BBB, BAA2. We are focused on moving rapidly towards nailing a series of short-term goals that will lead to the achievement of our longer-term vision. One of those goals is to enter the upcoming rental season with a same-store spread in our physical occupancy at or greater than the 360-basis-point spread that we reported at June 30, 2012. Last evening, we reported our same-store pool to 84.6% physical occupancy at December 31, '12, resulting in a 550-basis point-positive spread to our occupancy at December 31, '11. We are very comfortable that we will continue to execute against this goal and be well positioned as we enter the spring. In connection with occupancy objective, our goal is to achieve those occupancy results with an asking rent structure at or better than the scheduled rents per square foot we had at June 30 of '12. We have executed against that goal, with scheduled rents at the end of the fourth quarter slightly exceeding the benchmark. We are making consistent progress against our goal of increasing the percentage of our cash flow being generated from our core markets with prudent allocations of capital into acquisitions in our core markets and selective dispositions. In 2013, we exited our ownership in Michigan, the Gulf Coast, Southern New Mexico and Central Ohio. In total, we sold 26 properties for proceeds of approximately $60 million. We redeployed that capital into 22 assets that we acquired in our core markets for an investment of approximately $128 million. In addition, we acquired our partner's interest in 2 JVs, brining our ownership up to 100% in 31 assets for an investment of approximately $112 million. And we closed on the 6 Storage Deluxe encumbered assets. We funded this growth primarily through retained cash flow, proceeds from our ATM program and disposition proceeds, consistent with our goal of using our external growth as a component of our overall balance sheet improvement. Finally, we are executing against our objective to be a leader in providing management services to third-party owners, growing our managed store account by nearly 30% even after considering our acquisition of 14 properties from that platform. Switching to look at performance by market. If we're comparing the fourth quarter of '12 to the fourth quarter of '11 for same stores in the markets, the stronger-performing markets include our 12 stores in Colorado and Utah, primarily Denver and Salt Lake, which achieved 8.7% revenue growth driven by a 740-basis-point increase in physical occupancy and a 1.1% sequential gain in asking rents. Our 4 Boston area stores and our 17 assets in Connecticut generated 7.8% revenue growth driven by a 310-basis-point increase in physical occupancy and relatively flat sequential rents. Our Atlanta portfolio of 9 assets posted 7.1% revenue growth and a 700-basis-point occupancy gain and a slight increase in sequential asking rents. The New York-North Jersey portfolio posted 6.9% revenue growth driven by a 9.5% growth in the 5 New York City stores, with a 1% increase in sequential rents, offset somewhat by 2.9% growth in North Jersey. Consistent all year has been our strong performance in Southern California and our major Texas markets. On the other side of the coin, our most significant laggard is our El Paso market, with revenue down 13.3% on a 280-basis-point decline in physical occupancy and a sequential decline of 5% in asking rents. Other challenging markets include our 15 Tucson stores, with just shy of 1% revenue growth; and our 9 stores in Sacramento, with 1.6% revenue growth. The El Paso market negatively impacted our overall same-store performance, as revenue growth would have been 30 basis points higher at 5.5% and NOI growth would have been 40 basis points higher at 7.8% were it not for those stores. However, it does appear as if the bleeding has stopped in El Paso. Physical occupancy at yearend is 81%. Our sequential decline in revenue was muted. And we have experienced a solid start to 2013, with occupancy currently up 285 basis points over last year. We continue to see a recovery in Phoenix building off of a strong September momentum to post 6.9% revenue growth in the fourth quarter. Looking forward, we feel very positive about the first 2 months of the year. The absence of the typical seasonal declines experienced in the fourth quarter continues into the first quarter of this year. Asking rents continue to remain stable. Tim will discuss guidance in detail, but our pattern of sequential acceleration of same-store revenue growth, we can clearly see continuing through the first half of the year. We will prudently use our capital to pursue selective acquisitions in core markets. Our team is focused on objectives, and we very much look forward to updating you on our progress throughout the year. I wish to take a moment and thank all of you who called or sent notes of congratulations on my appointment as CEO, upon Dean's retirement. I believe I've been preparing for this assignment for 20 years since I joined Dean and the team at Storage USA after having served as the audit manager on the IPO. In addition to Dean and myself, we have a talented group of 14 officers who will have an opportunity to grow in their careers and another 1,400 associates here in Wayne and throughout the country, who will all work cohesively together to ensure a smooth transition. Thank you, all, again. And I'll turn the call over to Tim Martin.

Thanks, Chris. And thank you to everyone on the call for your continued interest and support. As Chris mentioned, we've remained keenly focused on fundamental execution, and I'm pleased to say that the fourth quarter performance capped off a very strong 2012 for CubeSmart. Full year FFO per share, as adjusted, of $0.74 topped the high end of our original guidance range and represents healthy double-digit growth over 2011. This was supported by accelerating core portfolio performance that resulted in same-store NOI gains of 6% for the full year and 7.4% for the fourth quarter. On the revenue side, occupancy gains across our portfolio continue to be the primary driver of growth, as Chris had mentioned. Same-store physical occupancy ended the year up 550 basis points. Notably, sequential occupancy performance in the fourth quarter was unseasonably strong as ending same-store occupancy declined by only 20 basis points from the end of September. Our expense results included meaningful savings in credit card fees and real estate taxes, combined with the impact of a mild 2012 winter season, that resulted in reduced utility expenses and snow removal costs. The full year same-store expense decline in 2012 marks the third year in the past 4 years that we've reported negative same-store expense growth. Looking ahead to 2013, we expect fundamental strengths to continue in the sector and for CubeSmart specifically. We included in last evening's release our FFO guidance range of $0.80 to $0.86 per share for the full year and $0.19 to $0.20 per share for the first quarter. As is our practice, our FFO guidance ranges are on an as-adjusted basis and exclude the impact of acquisition-related costs given the unpredictability and nonrecurring nature of those costs. At the midpoint, our 2013 FFO per share guidance represents 12% year-over-year growth. Embedded in our same-store revenue growth guidance, that's 5% at the midpoint, is the assumption that occupancy gains will once again be the dominant driver of growth, with very little impact coming from pricing power. With regard to expense guidance, some of the line items that have helped reduce expenses in recent periods are expected to shift in the other direction in 2013. Over each of the past few years, we've been pleasantly surprised on the real estate tax line item, but we expect that trend to reverse this year. We aggressively appeal assessed values of our properties when there are opportunities to do so, and we've had a lot of success over the years. That said, this is an area that is ultimately uncontrollable. With reassessment scheduled in certain key markets and generally strained municipal budgets across the country, we expect meaningful real estate tax increases in several markets this year. Additionally in 2013, we expect to face difficult comps for snow removal costs and more normalized comps for utilities and credit card processing charges. Our 2013 same-store pool includes 20 new stabilized assets, bringing the same-store property count from 313 up to 333. This includes 8 stabilized assets that were acquired in conjunction with the first closing of Storage Deluxe back in November of 2011. From a balance sheet perspective, 2012 marked the culmination of our strategic repositioning efforts as we solidified the strength and flexibility of our unsecured balance sheet with our debut $250 million bond offering. During the year, we reduced levels of secured debt by $130 million, bringing our ratio of secured debt to gross assets down from 16.3% at the end of last year to 9.1% at the end of this year. Overall leverage levels ended the year with debt-to-gross assets of 40.9%. Our debt maturity schedule has never been stronger. Our weighted average length of maturity has grown to over 5 years, and we have only $131 million or 12.8% of our debt maturing over the next 2 years. We ended the year with $255 million available under our unsecured credit facility. In 2012, we not only improved our balance sheet profile, we also simplified our ownership structures through the purchase of the remaining interest in 2 of our joint ventures which held 31 properties or more than 8% of our portfolio. As we execute on our external growth initiatives, we remain committed to funding growth in a manner that's focused on maintaining our strong credit metrics and, as Chris had mentioned, is consistent with our ultimate objective of achieving a BBB-, BAA 2-rated balance sheet. In that light, with our above-targeted investment activity in 2012, we were actively using our ATM program throughout the year. We raised net proceeds of $36.8 million in the fourth quarter and $102.1 million in total during 2012. Looking forward, with the acquisition and disposition targets that we've outlined, we expect to be able to fund the equity component of targeted acquisition levels with free cash flow and disposition proceeds. If we find attractive opportunities to grow beyond our targeted levels, we're very comfortable with our ability to opportunistically and effectively access a broad array of capital sources to support our disciplined growth initiatives. On a final note, our dividend increased 37.5% in December to $0.11 per share, reflecting a continued focus on sharing growth in our cash flows and profitability with our shareholders while being mindful of retaining an appropriate amount of capital to support the company's growth. That concludes my remarks. Thanks for joining us again this morning. And at this time, Laura, we're prepared to begin the Q&A portion of the call.

[Operator Instructions] And our first question is from Christy McElroy of UBS.

Chris, I just wanted to say congratulations. And Dean, I know we have you for the rest of the year, but you will be missed. Since you reset your same-store pool quarterly, I think the Storage Deluxe properties are going to sort of gradually influence your comps throughout the year. Are you expecting those properties to outperform your broader portfolio because of the inherent lease-up in the portfolio? And if so, are you able to sort of quantify how much these properties are adding to the same-store revenue growth rate in the year?

Christy, it's Tim. Just for clarification: Our policy and past practice has always been to reset our same-store pool only annually at the beginning of the year, so we -- so bringing in 8 of the 22 assets is -- will be the impact for the year. So we brought in not only those 8 assets but also all of our -- all of our other 2011 acquisition activity. Overall, those properties that were added to the pool had an uplifting effect on the overall new pool in the range of 30 to 40 basis points.

Okay. And then since you break it out in your supplemental, what are you expecting the Storage Deluxe portfolio to end in 2013 in occupancy and yield?

Yes, we broke that out for '12 and so now we've got the different components flowing through in '13 -- this is Chris -- between the stabilized and the lease-up. So we're not setting specific year-end occupancy and revenue targets for that pool.

Okay. Can you quantify your discounts in Q4 and maybe the full year of 2012? So just in terms of absolute promotion dollars, what was the percentage change year-over-year? And what are you expecting for 2013?

Yes, when you think about discounts, the absolute promotion dollars is -- are obviously going up because we've rented a significant more quantity of units. The way we think about it is discount dollars per new rental, and so if you look -- because that really measures the impact per rental of -- whether you're increasing or decreasing your discounts. And so when you think about Q4 '11 to Q4 '12, the discount dollars per new rental were down 12.5%. So in absolute dollars, we were offering a discount per new rental of just shy of $89 in the fourth quarter of '11. It's now about $79 in the fourth quarter of '12. I think that percentage in the third quarter we quoted was down about 10%. So as you would expect, as the portfolio leases up, you just have fewer cubes available that warrant a discount. And as a result, the discounts per rental, we would hope, can continue to come down.

Okay. And so would you expect kind of 12% to 13% reduction in discounts per rental this year as well? Or would you expect to accelerate that decline?

Yes, if you think about what's baked into our plan, it's consistent with that type of decline that I describe. Now I think, when you get to the back half of the year, and it's just hard to have that visibility at this point, I think the upward opportunity to our expectations would come largely from either an acceleration in the reduction of discounts or in Street rent increases, both of which we're not -- well, the Street rate increases, we're not counting on at the moment.

And just related to that, I mean, if I look at the difference between sort of your in-place and your contract -- or contractual rents versus your realized rents, it's about 92% a foot or about 7% now. Given that you expect to accelerate that decline in discounting, would you expect that spread to narrow kind of throughout the year?

I -- macro speaking, yes. I mean, obviously, it depends upon the pricing opportunity at the individual store, but in big picture, yes.

And our next question is from Gaurav Mehta of Cantor Fitzgerald. Gaurav Mehta - Cantor Fitzgerald & Co., Research Division: You mentioned in your prepared remarks that, for 2013, you're expecting same-store revenues to be driven by occupancy growth, and by limited pricing power. So why are you seeing limited pricing power? Is it because you want to push occupancy spots [ph]? Or is it because of industry-specific conditions in your markets?

Yes, this is Chris. Again, submarket by submarket. And as we talked about, in the markets that we're performing, we've seen some markets that can handle Street rent increases. You think about, sequentially, the New York portfolio, up 1% from Q3 to Q4, is a good example of that. However, as we look out across the entire portfolio, there just hasn't been an opportunity for the ability to push Street rents and have -- and either have everyone else follow or kind of come in with us. And so I think, until we see the willingness of other operators to also push Street rents or until we get to a higher average level of physical occupancies, we just haven't seen it stick. And as a result, we're not baking that into our expectations. Gaurav Mehta - Cantor Fitzgerald & Co., Research Division: Okay, that's helpful. Second question I have is on the transactions. So it appears that you're planning to acquire 1 -- $75 million to $125 million in acquisition this year and selling $20 million to $40 million in disposition. So how are you expecting -- how are you planning to fund the gap between acquisition and dispositions?

I think, if you just look at it big picture and you say at the midpoint of $100 million of acquisitions and $30 million of dispositions $30 million of free cash flow and then 40% of that 100% in the form of leverage, we -- that -- at that level, we're self-funded, so to speak, and we maintain the leverage levels that Tim talked about it. To the extent as we've done historically, we find opportunities that push us above those stated acquisition opportunities without related disposition proceeds. That's where we've looked outside of self-funded to tap into other sources of capital. Gaurav Mehta - Cantor Fitzgerald & Co., Research Division: Okay. And then -- and lastly, has your underwriting criteria changed at all compared to 2012 in the sense at what kind of rent growth and occupancy gains you're underwriting in your target properties?

No, not materially. We've been focused on a small number of markets that we know very well and feel very comfortable given our current position in those markets, that we have a good handle on what we can do with rents, where we see operating expenses going, et cetera. So not any significant change.

And the next question is from Jana Galan of Bank of America Merrill Lynch.

Chris, I also wanted to congratulate you on your new role. And I was curious if you plan to continue some of the responsibilities of CIO and COO or if you're looking to break up those positions or change the management structure.

Yes, as I said, I -- thank you, Jana. As I said, the bench is very deep. We've got 14 other officers and 1,400 people behind there that this will present an opportunity for folks to stretch and to do other things. So I -- we'll add, as we always do, as it makes some sense, but I'm -- I mean, we're confident that the team here is well prepared. And we've had a very thoughtful series of plans that have been -- being put in place over the last few years so that we're ready for this day.

And can you help me understand how you think about stabilization of an asset? I know you moved 8 of the original 16 Storage Deluxe into your 2013 same-store pool. I'm just looking that, when the deal was first announced, it looked like the portfolio had about 84% occupancy ranging from 66% to 85% -- or 88%. So I was just kind of curious where you think stabilization is. And have these been pretty stable in terms of occupancy? Or have you been able to make gains?

Yes, thanks. That's a good question. So if you look at it from 30,000 feet, our fundamental belief is that the same-store reporting is really vital to understanding our business, much like it would be in retail or the restaurant business, so that you can really measure what's happening fundamentally at the store in the markets. So we've always felt like we want to make that as fair as possible in terms of making that analysis. And so there's not a bright-line test that says, "Okay, at this level of physical occupancy or some other measure, we would consider all assets to be stable." So principally, we need to own the asset for all of the prior fiscal year, so that's obviously step one. And then step two is, relative to our assets in that market and the size of the asset, where is it from an occupancy revenue perspective, and is it representative of those more mature assets in that market? And if that answer is yes, we bring it into the same-store pool. And so as a result, I believe we believe we have a very good group of properties that represent what's happening fundamentally in those markets. So whether that -- property could be stable at 80% physical if it's an unusually large asset in a particular market. A property could be stable at 83, at 85, kind of in that general range, depending upon those fundamental size of the property, et cetera, in that market. Dean, do you have anything you want to add?

No, I think we -- I think it is -- as Chris mentioned, it's a very important metric to us. And we take, I believe, an appropriate and, on a comparable basis, conservative approach to defining our same-store. And we think that it is very representative comparing a stabilized group of properties in one year to a stabilized group of properties in another year, and we've been consistent with doing that over time.

And then, Tim, maybe if you can just let us know how you're thinking about Internet spend or advertising, how that will trend in 2013.

Our expectation is that, over the past couple of years, the timing of when we spend our Internet dollars, in particular, has been a bit lumpy as we've tried some different initiatives. I -- our expectation is -- as we enter 2013 is that the timing of the spend in '13 is likely to look a lot like it did in 2012. So we believe that the quarter-over-quarter spend, from a marketing perspective, will be a bit more comparable quarter-by-quarter than it has been in the past. That said, as we see opportunities, we evaluate our marketing spend every single day and we look for at the effectiveness of that spend. And to the extent that we find opportunities to spend more because it's very effective to make that investment to drive revenues, we'll do that. To the extent that we would find ourselves in a period of time where the spend becomes less effective, we would dial it back accordingly. So our expectation is that it will look a lot more similar from a timing perspective, but that certainly could change.

And next we have a question from Todd Thomas of KeyBanc Capital Markets.

First question. I know there's nothing embedded in FFO guidance for investments, but you are targeting $70 million of net investment activity for the year. And from Dean's comments, it sounds like he's expecting consolidation to potentially accelerate in 2013 versus '12. Can you just talk a little more about what you're seeing in the market today, the number of properties on the market, where occupancy levels are for these deals that you're seeing and sort of where pricing is today?

Sure, this is Chris. The early part of the calendar year tends to traditionally be fairly slow, as you know. You've got folks who push to get deals done and they get closed in the fourth quarter and then there's generally a pause in the first. I think what we have is we're focused on a small number of markets from an acquisition perspective. And we're going to continue to be prudent as to how we allocate. So if you think about the $125 million or so, $128 million we did in 2012 in terms of single-asset or small-pool asset transaction, that's fairly consistent. I think we're a little bit north of $100 million in 2011. And that's a level that you can get pretty good visibility to at this point in the year. Those are relationship deals, largely. Those are harvesting our third-party management program. But single assets of kind of "one at a time" type things. And in the markets that we're focused in on, cap rates for that type of transaction on a stabilized asset are in the 6% to 7% range. And I think that's kind of where we begin the year. Each of the past few years, we've then had transaction or transactions present itself. That has allowed us to invest significantly more than that, but those are very, very hard to predict. As we sit here today, nothing from a portfolio perspective that is in our pipeline in any serious way. So as you start the year, I think we always look at it and say it's going to be a selective "one at a time" type year. And hopefully, we'll be pleasantly surprised with some opportunities to push that up.

Okay. And then I guess, at this time, you're expecting much of the revenue growth, it sounds like, to be from the occupancy gains. But I was just wondering where in-line rents are relative to asking rents today throughout the portfolio and just whether, on average, when tenants are moving out, if you're replacing them at higher rents or lower rents.

Yes, we're still at a point in the cycle where the tenant moving out is being replaced with a new tenant at a lower rent. And that will be in place for about the first 6 months or so of this year. It's about a 2% roll-down. As we get into the second half of the year, then that will flatten out. And then our models would have that actually going the other direction then in the latter part of the year.

Okay. What was that like last time -- last year at this time, the negative 2% roll-down?

Yes, with the higher asking rents at this time last year, but then where the customers were. It's been in that range of, call it flat, down 2% to 3% and up 1% for the last 2 or 3 years.

Okay, that's helpful. And then just last question. You commented that the conditions through the first 2 months or through this point in February, have continued to be pretty good. Just wondering whether or not you are seeing any change in rental behavior as the result of the payroll tax increase, any pushback at all on price increases? And are you doing anything internally with regard to your pricing strategies as a result?

Yes, we have only experienced positive things thus far in 2013. So the demand continues to be very good. We continue to perform. We continue to pass-along rate increases to our existing customers. Lengths of stay are generally unchanged. So all is very good. I think, again, to Dean's point, we don't have that discretionary customer. So the customer that we have is very need based, and so they aren't really thinking about it in terms of the impact on their take-home pay. They're thinking about it in terms of, can we provide a solution to their need? They have a need today and we are competitively priced and certainly very visible online, so we're really clicking along quite nicely.

And our next question is from Eric Wolfe from Citi.

Dean, you talked about in your comments that, the natural churn in your business, used to take off, I guess, about 8% to 10% automatically, that it took you about a month to backfill demand. I guess, two questions on that. I mean, how long is it taking you today to backfill customers? And then second, do you think we could see this continue to come down just through revenue management, the dynamics in the industry? Just wondering what the potential is looking forward.

Eric, it's -- you're starting to see it, but it really hasn't moved yet like it's going to in the future. In other words, this year for this company, you won't -- probably won't see it. It will be more like a next year. We've got 2 good solid years of occupancy growth left in -- at this company. And so it will be next year, I think, when you see it. But it's just really simple of matching your vacates versus your move-ins. And again, with reservations, we can do that now, whereas before, people just showed up when they showed up. And so you can look at Public Storage, the way they're running their occupancies now in the low 90s. I think that's achievable for all others. And heretofore, I always said that I thought the high 80s was the right place because you need to be pushing rates and you need to have some vacancy. Well, you can still push rates and have some vacancy if you can match your move-ins to your vacates, and that's what technology does for us. And so I think you'll start to see it more for this company in 2014.

Got you, that's helpful. And then second question, I guess for Chris or Tim. As far as your G&A guidance, can you just tell us whether there's -- what you put out for 2013 is a good run rate to assume going forward or whether 2013 is going to be a bit elevated just due to the CEO transition taking place.

Yes, there -- that's a great question. There are a few things in there that are -- that would make 2013 not a great run rate beyond 2013. So if you look at the growth at the midpoint of our guidance from 2012 to get into 2013, part of that growth relates to the full year impact of the grant that we announced mid last year to Dean, and the amortization of that grant. That ends and effective with Dean's retirement at the end of 2013. So that's a portion of G&A that will not recur then in 2014. And so there are some other line items. Our expectation at this point, we're not guiding to 2014, but I think, 2014 G&A, we certainly expect to be at levels lower than where our guidance is for 2013.

And our next question comes from Michael Knott of Green Street Advisors.

Tim, did you say that 2013 same-store pool versus maybe what the 2012 same-store pool would do this year was about 30 or 40 basis points higher? Did I hear that right from earlier?

Yes, yes.

Okay. And then a question for Dean and Chris, and this may somewhat relate to what you just talked about a little bit, but just wondering how you've thought about the dramatic churn in occupancy. It just seems like you flipped a switch in the last few quarters and up it went. Why didn't we see this sooner? What -- how did your thinking change? So just it's so dramatic, it's just I'd be curious to hear your self-assessment on that.

Michael, I've been saying the same thing now for about at least 2 years. And I've used an example many times, so I'll use it again. When I -- back in the days when you had one property on one corner that was operating very nicely at a -- call it a 90% occupancy and somebody built one across the street from you, and of course it needed to fill up, you're naturally going to lose some occupancy. And so the best you can do is to hold on and let that person fill up. And then once they fill up, you can get your occupancy back, and there's 2 ways to get it back. You can get it back through just normal course of business, or you can price below the guy across the street just for a while and steal some occupancy. That's a term I've used over the years. And so what I've said over the years is we were guaranteeing a 200 basis points growth in a year, but as things firmed up, we would price so that we could steal some occupancy, and that's all we've done here.

Mike, I thought I'd add 2 other things to that. And that's, first, under the umbrella of execution. If you think about we continually perfect particularly in terms of our online marketing but even our out-of-home campaigns that we've done in New York and in the Inland Empire, we're executing on the marketing side so we're getting more customers in the top of the funnel each month. And then we're executing from a sales center perspective, we're taking those customers in from the GMs at the store. We're taking those customers and we're continually doing and refining our approach to get them through the funnel and into a rental at the end. So I think it's a -- I think it's also a contribution from our continued perfection and execution.

And then just a couple of other quick ones. Can you comment perhaps on the other income growth? I assume insurance was a big part of that. Any other -- and I guess, can you comment also on sort of the sustainability of that or maybe what type of contribution you see in 2013 in terms of your revenue guidance?

Yes, the big drive -- this is Tim, Michael. The primary driver of that, you nailed it, relates to tenant insurance. For the quarter, we sold -- more than 92% of our new customers bought insurance. And our overall penetration rate has grown to 67%, which is up from about 60% a year ago and has been climbing steadily from 20% back in 2007. So we continue to get the benefit of improved margins and increased penetration related to tenant insurance. I think there's still some room for that to grow, but I suspect that, at some point here over the next year or 2, we'll likely get to a point where we've plateaued out from a penetration standpoint.

That said, I think that line will maybe grow double digits in 2013 and that's part of your revenue forecast for same-store.

Double digits, yes, but not in that 20% kind of range that you see in the fourth quarter. I think you have some decline in the rate of growth as we move through 2013.

Okay. And then last one for me would just be, any thoughts on the Acadia sale? I would assume you were an active bidder just given the interest in that market. Just any thoughts you have on that would be appreciated.

Yes, we think it was a good transaction for Acadia and certainly hope that our friends at Heitman do well with it. I guess we're comforted that, to some extent, it was an institutional buyer and expect that perhaps, sometime over the next many years, another opportunity may present itself.

And our next question is from Tom Lesnick of Robert W. Baird. Thomas J. Lesnick - Robert W. Baird & Co. Incorporated, Research Division: Guys, I'm filling in for Paula today. Just curious, what trends are you seeing in the private operator lending environment? And how have those trends changed, if at all, in the past few months?

For stable assets, the debt markets are wide open for private operators who are acquiring stable assets and they're wide open for private operators who are refinancing stable assets. As it relates then to trying to get any sort of financing for a new product for development, those markets remain almost closed, if not for all practical purposes, closed. So it's sort of a tale of what are you looking to accomplish. But if you're looking to finance or refinance a stable asset, you have a broad series of choices that are very attractively priced.

And our next question is from Paul Adornato of BMO Capital Markets.

Dean, you mentioned that supply is not likely to be an issue until 2015. I was wondering, do we have visibility on 2015? Or is that just because there's nothing in the ground yet?

Paul, it's not so much there's nothing in the ground. It's all anecdotal but it's from lots of conversations with people who would ordinarily be developers. It's where -- I think people aren't really out looking for sites yet. And so if you aren't looking for sites -- I mean, development of a good site takes a year in itself, and then the construction another 8 months. So I think the visibility is pretty good all the way through 2014. And I think it's probably equally good for some supply coming on-board in 2015 that will impact this to some limited degree.

And I was wondering, are you noticing an increase in children visiting the stores now that you have a cute new mascot, Cubie?

I'll take that one because I -- Cubie is my guy. No, we don't have Cubie at every store yet, but I -- perhaps you see him in our website. Cubie is very much part of our culture here at the company. And our employees love Cubie. And it's a tangible icon, if you will, for the company that we're enjoying having around.

And the next question is from R.J. Milligan of Raymond James. R.J. Milligan - Raymond James & Associates, Inc., Research Division: Guys, most of my questions have been answered. I just wanted to touch on aggregators. And as the self-storage customer moves online, you guys have enjoyed a nice competitive advantage from some of the smaller mom-and-pops. I'm just wondering what your thoughts are on your use of aggregators and if that poses a threat to the competitive advantage that you guys have enjoyed over the past couple of years.

R.J., it's Chris. Good, great question. The topic is hotly debated, yet -- I was out at a Self Storage Association event and was asking the large operators in the room, who were fairly well represented. And whilst it's a hot topic, they didn't perceive it as much of a threat as a group. We continue to -- we use them. We look at really cost per rental and where can we achieve the best performance, whether it'd be paid search, SEO or an aggregator. And as long as the aggregators continue to deliver reservations and rentals to us at a cost that makes sense to us, we're happy to enjoy that. I think, from a long-term perspective, my take would be that the nature of our business and the capitalization of these folks would seem to me that it's either a very, very long time or it's hard to see where they have the type of dominant position that you see in the hotel industry.

And next we have a follow-up question from Michael Knott.

Guys, I know you have one joint venture, I believe, in London. Just curious, your broader interest in European expansion now that you do trade, or at least on our numbers, at more of an NAV [ph] premiums, so more of a green light from the market to undertake external growth. Is that a market that you think about?

Mike, it's Chris. From a market perspective, we believe, and I think we see it in the rents that we're achieving there, that London is a very, very strong, very good self-storage market. From an opportunity set perspective, we continue to see very good opportunities here in the U.S. to execute on our vision of having the majority, vast majority, of our cash flows coming from the core markets. So we're obviously learning. We're familiar with the market. We have 2 nice assets in the greater -- in -- one in London and one in Oxford. And it's something that we would never dismiss, but I think, in the near term, we're very much focused on the United States.

Okay. And then, Chris, are you okay with Dean sort of guaranteeing that, on your tenure, you guys are going to hit 90-plus-percent occupancy?

I thought he said at the beginning that those are his personal views.

Does not necessarily represent the views of the company. Thanks, Michael.

Okay. And then lastly, it sound -- it seemed like there was not too much positive impact from the Sandy Storm, not that that was terribly surprising to anyone. Just any lessons learned from that or any takeaways?

Yes, what our analysis would suggest is that, if our -- if our customers that, to the best of our ability, we can tie back to being Sandy related, and if their length of stay is what we think, which is a little bit shy, say, 4 to 6 months, it's 5 at the midpoint of our guess just based on why they're using us and how they're using us, the net result of the entire storm would be that our costs to repair would be recovered by the rental income that we obtained.

And that will conclude our question-and-answer session. At this time, I would like to turn the conference back over to Dean Jernigan for any closing remarks.

Okay, no closing remarks, except thanks for your interest. Hope to see you all again soon. Thanks. Good day.

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