CubeSmart's (CUBE) CEO Chris Marr on Q4 2015 Results - Earnings Call Transcript

| About: CubeSmart Common (CUBE)

CubeSmart Common Shares (NYSE:CUBE)

Q4 2015 Earnings Conference Call

February 19, 2016 11:00 AM ET

Executives

Charlie Place - Director, IR

Tim Martin - CFO

Chris Marr - President and CEO

Analysts

Gaurav Mehta - Cantor Fitzgerald

Todd Thomas - KeyBanc Capital Markets

Smedes Rose - Citigroup

Jeremy Metz - UBS

Jana Galan - Bank of America Merrill Lynch

Ki Bin Kim - SunTrust

George Hoglund - Jefferies

Paul Adornato - BMO Capital Markets

Jason Belcher - Wells Fargo

Ryan Burke - Green Street Advisors

Jonathan Hughes - Raymond James

Operator

Good morning, and welcome to the CubeSmart Fourth Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please note this event is being recorded.

I would now like to turn the conference over to Charlie Place, Director of Investor Relations. Please go ahead, sir.

Charlie Place

Thank you, Chad. Hello everyone. Good morning from Malvern, Pennsylvania. Welcome to CubeSmart's fourth quarter 2015 earnings call. Participants on today's call include Chris Marr, President and Chief Executive Officer; and Tim Martin, Chief Financial Officer.

Our prepared remarks will be followed by a Q&A session. In addition to our earnings release, which was issued yesterday evening, supplemental operating and financial data is available under the Investor Relations section of the company's web site at www.cubesmart.com.

The company's remarks will include certain forward-looking statements regarding earnings and strategy that involve risks, uncertainties and other factors that may cause the actual results to differ materially from those forward-looking statements. The risks and factors that could cause our actual results to differ materially from forward-looking statements, are provided in documents the company furnishes to or files with the Securities and Exchange Commission, specifically 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 web site at www.cubesmart.com.

I will now turn the call over to Tim.

Tim Martin

Thanks Charlie and thank you to everyone for joining us this morning and for your continued interest and support. Industry fundamentals remain positive, and our operating platform continues to deliver exceptional occupancy, NOI, and FFO per share growth. Our fourth quarter was certainly a busy one, and a great way to close out a very successful 2015.

Our reported FFO per shares adjusted of $0.33 met the high end of our guidance range, and represents 17.9% growth over last year. For the full year, in 2015, our FFO per shares adjusted grew 15.7% to $1.25 per share.

Same store NOI for the quarter grew 11.1% over last year, representing the second highest quarterly growth result in our history. Drivers of the NOI growth were an 8% increase in revenue and a 0.9% increase in operating expenses. Revenue growth came mostly from gains in effective rents of 6.5%, a 20 basis point sequential increase, as well as 130 basis point gain in average occupancy during the quarter.

We remain active and disciplined in our pursuit of external growth opportunities, and we were very active during the fourth quarter. We closed on the acquisition of 13 properties for $124.2 million, and so far in 2016, we have acquired four properties for $57.4 million and have another four properties under contract for $64 million.

Also during the quarter, we established a 10% ownership position in a newly created joint venture that acquired 31 properties for $199.4 million. The venture is under contract to acquire six additional properties for $43.1 million.

On the development front, we opened for operation two JV developments during the quarter, one in Queens and one in Brooklyn for a total investment of $32.2 million. So far in 2016, we have opened an additional JV development in Queens for $32.2 million, and purchased a property at C/O in Brooklyn for $48.5 million. Details of our value creation pipeline are included in our supplemental information package on pages 26 and 27.

We also completed the previously announced disposition activity exiting our ownership position in El Paso, Texas, and our remaining asset in London. Proceeds from our disposition activity during the quarter totaled $47.7 million.

From a balance sheet perspective, we continue to focus on funding our growth in a conservative manner that's consistent with our BBB, BAA2 credit ratings. In October, we completed our third bond offering, issuing $250 million of 4% unsecured senior notes due in 2025. Additionally, we remain active, using our at-the-market equity program, selling 3.5 million shares during the quarter for net proceeds of $97.4 million.

Also during the quarter, we increased our quarterly dividend 31.3% to $0.21 per share. Even with this meaningful increase, our FFO payout ratio of 63.6% remains the lowest in the sector.

2016 guidance reflects our expectation of continued positive fundamental trends in our markets. The same store pool will grow by 54 properties in 2016, representing approximately $4 million net rentable square feet. And for 2016, we are estimating revenue growth of 6% to 7%, primarily driven by growth in net effective rents. Expense growth is expected to be 3% to 4%, primarily driven by higher property taxes. And as a result, our NOI growth is expected to be 7.5% to 8.5%.

Our FFO per shares adjusted guidance range of $1.35 to $1.40 for 2016 reflects 10% year-over-year growth at the midpoint, and captures the full year impact of our fourth quarter 2015 unsecured bond issuance, as well as our expected dilution from our new store openings.

For some additional color, let me turn the call over to Chris.

Chris Marr

Thank you, Tim. Our fourth quarter performance was certainly the capstone of a very solid 2015. Organic growth has remained robust as our strong operating platform is firing on all cylinders, and is buoyed by strong industry fundamentals to achieve exceptional results. The operating performance in the quarter was extremely strong across the vast majority of our major markets.

Overall, occupancy contributed 1.4%, increases in rents and lower discounts contributed 5.9%, and growth in ancillary revenue contributed the balance of our 8% same store revenue growth in the quarter.

Discounts as a percent of in-place rent declined about 30 basis points from last year to 3.9%. Strong markets, included our portfolio in the New York City boroughs, with 9.1% revenue growth and 240 basis points of occupancy growth. Atlanta, with 9.7% revenue growth and 140 basis points of occupancy, and Southern California, with 10.2% revenue growth and 300 basis points of occupancy growth.

We had a fantastic quarter in Houston, on our 12 asset same store pool, 8.7% revenue growth. When you add in our 27 Houston stores in our joint venture, the combined 39 stores delivered 10.2% same store growth in revenues.

A soft spot for us was in Chicago, where our 28 same store properties delivered solid quarter-over-quarter NOI growth on favorable expense comps. However, revenue growth was 3.8%, and we experienced a 30 basis point decline in occupancy. This performance can be attributed to a combination of tougher year-over-year comps, coupled with slower economic conditions, with unemployment growing 50 basis points from Q3, and a new city budget that includes a historic property tax hike.

Looking forward, we remain very bullish and believe our quality portfolio demographics and operating platform will continue to produce strong internally generated cash flow growth.

Shifting to investments, it was another productive quarter and year for us. It really was a spectacular year for our third party management platform. At the end of the year, we managed 227 facilities with 46 properties added during the quarter.

As Tim mentioned, during the quarter, we formed a venture with an institution to acquire 37 assets, in which we invested approximately $8 million net of capital for a 10% ownership, plus a promoted interest providing us with an opportunity to participate in the upside in addition to earning property management and other fees.

We looked at this portfolio, it was coming to market, the majority of these assets were not an ideal fit for our core market investment strategy on our balance sheet. Typically, as you can imagine, it's very difficult to split a portfolio up, buying select assets, and trying to find a buyer for the balance. The seller is typically much better off-selling as a portfolio.

Fortunately, we have a great longstanding relationship with our partner. We have done business with them in the past. So we put our heads together to create a venture that satisfied both of our objectives. We are able to have a modest equity investment in the assets and drive compelling returns as we receive market management fees. We are also able to leverage our operating platform and have additional assets contributing to the overall marketing machine.

Finally, at some point in the future, when our partner seeks liquidity and the venture looks to sell assets, we are in a great position to buy those assets, that fit our core investment strategy, while participating in the value creation on the balance of the assets.

We continue to invest on balance sheet and high quality demographic markets. During the quarter, we opened two joint venture development projects, one in Brooklyn and one on Queens, and added 13 acquisition properties for an investment of $124.2 million. The 13 fourth quarter acquisitions were a balance, a blend of stabilized and non-stabilized assets, the non-stabilized being in their early period of lease-up. Our investment momentum is continued into 2016 and our pipeline remains very active and very attractive.

So with that brief market and investment overview, operator, let's open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. The first question comes today from Gaurav Mehta with Cantor Fitzgerald. Please go ahead.

Gaurav Mehta

Yeah hi. Good morning. Following up on the 10% joint venture; could you provide details as to, if this JV can grow in the future or it's restricted to what they have already acquired?

Chris Marr

Hey Gaurav, good morning. This particular entry was a single portfolio transaction. That being said, again, we have an excellent relationship, repeat business with this partner. And so, to the extent that opportunities present themselves to us or to them in the future, we certainly have a structure that we think delivers great value to our shareholders particularly on a basis of return on invested capital. So the opportunity is there to certainly add to the venture or do more.

There is no commitment to do so, there is no restrictions on our ability to buy assets in any market, we so choose on balance sheet. So it is unique to this particular transaction, but I will say that an awful lot of time and energy was put into the structure, and should we want to do additional deals, the opportunity is there.

Gaurav Mehta

Okay. And then second question on the development; could you provide details on the wholly-owned development that you have in this quarter, and is that something you plan to grow, developing by yourself?

Chris Marr

So, in terms of wholly-owned development on this quarter, the assets that we placed in service in Brooklyn and Queens, and the assets that we have under development are all in ventures. Again, we have relationships in certain markets where we have partners who are experts at finding the sites and navigating through the local market condition. So our assets that are under construction in Queens, the Bronx, down in DC, North Palm Beach, and Brooklyn are all in the same typical partners and structure we have been using for the last few years.

Gaurav Mehta

All right. That's all I have.

Operator

The next question comes from Todd Thomas with KeyBanc Capital Markets. Please go ahead.

Todd Thomas

Hi, thanks. Good morning. Question on your commentary around Chicago, you mentioned the tough comps. But you have been cycling tough comps throughout the portfolio now for a couple of years. And then you mentioned the uptick on unemployment of 50 basis points. What impact did that have on operations on Chicago? I mean, what happened there specifically? Was it an increase in move-out activity and inability to raise rents?

Chris Marr

Yeah in Chicago, and again you have North Chicago and South Chicago; we have a little bit more pressure in South Chicago than we do on the North side. That portfolio was in the 91% occupancy range, at least the stores we had back in 2013. So, if I think about Chicago and DC, they are both markets that didn't suffer in the downturn as badly as some of the other high beta markets, and so coming out of that, the occupancy upside in those two markets was less than we had in others.

Chicago, specifically in this past quarter, it was a rate issue. You saw that the occupancy decline was about 30 basis points which is frankly pretty immaterial. The struggle was on the rate side; not only were we not raising rents in South Chicago, we were lowering them to generate activity.

Todd Thomas

Okay. And then, as you think about the revenue growth guidance that you provided for the year, are you expecting stronger start to the year coming off of this quarter? Any acceleration that you saw through the winter or in the model or are you expecting sort of a rather consistent growth trend throughout the year?

Chris Marr

Yeah. Todd, I think fairly consistent with the last couple of years, the momentum going into the first quarter is great. The visibility into the first and second quarter is higher at this point than it will be, will have better visibility into the busy season, or the latter half of the year as we move through. So right now, baked into our expectations, is pretty robust performance in the first half of the year, and then an assumption of some trail-off in the second half.

Todd Thomas

Okay. And just the last question on the balance sheet, no floating rate debt exposure at all this quarter. Do you anticipate drawing down on the line or letting any debt float throughout the year, or do you plan to keep it pretty close to zero?

Tim Martin

So right now -- Todd, it’s Tim. The only exposure we have to the short end of the curve is the result of borrowings that we would have outstanding on the line. Part of the timing issue is to -- we did the bond issuance in the fourth quarter, used the proceeds from that to fund among other things repaying amounts drawn on the line. So, certainly we would expect to use the line, to fund our development, to fund our external growth. That provides us some exposure to the short end of the curve. So, we expect to use the line and be comfortably underutilization of half of that, and once we would build up to half of the $500 million, that will put us in a position to evaluate terming that debt out on a longer term basis and on a fixed rate basis.

Todd Thomas

Okay. Any financing assumptions baked into the model this year, in 2016?

Chris Marr

Just financing and repayment of the modest amount of debt that matures and then financing our external growth.

Todd Thomas

Okay. Thank you.

Chris Marr

Thanks.

Operator

The next question is from Smedes Rose with Citigroup. Please go ahead.

Smedes Rose

Hi there. I wanted to ask you just kind of big picture; could you maybe comment on what you are seeing on the supply side for 2016, maybe if you have any thoughts nationwide, and then kind of what you are seeing in your market specifically?

Chris Marr

Sure. Be glad to dig into that level of detail for you. So when we look at our top seven MSAs. So in our top seven MSAs that is about -- if you include the assets in Houston that are in the venture, it's about 57% of our NOI. So we go back to 2014, and what our data tells us, is that there were 21 assets that opened in 2014 in those top seven. There were 50 that we had opening in 2015, and under construction, at this point in those, we see 95 properties in those markets. The current expectation is that, a portion of those will open in 2016, based on where they are. About 30% of those stores would be in a position where they would compete with CubeSmart. Five of those 30 were competing with ourselves. So we are either owning or managing that store. So that total that I gave you, includes stores that may be branded CubeSmart, either because we own or we manage.

So while we are seeing, again, that very slight uptick in supply, we don't see that having any impact on our 2016 performance, as evidenced by our fairly strong guidance, and as we look out into 2017, knowing that some of these stores will lag, some of these stores won't get completed on time, it to us, remains a very manageable level of supply in those top seven markets, and impact if any, potentially in 2017, maybe in 2018, but modest at best.

Smedes Rose

Okay. That's helpful. And then, I just want to ask you on the HDP JV; can you talk about these sort of going in yield on that venture, and just of the -- you mentioned that most of the properties aren't a great fit for your platform, but how many over time would you expect to maybe be able to purchase, or what percentage of it?

Chris Marr

Right. So when you look at this, and again, this is our thinking here -- is that, there are larger transactions that have to market, where we are -- they just don't fit entirely on our balance sheet and breaking it up is a challenge. You get into this issue on portfolios, where cap rates are quoted on a blended basis, but then if you dig in and you try to allocate between the cap rate paid on a A market and a cap rate paid on a B market, it’s a tough analysis.

And so, for us, we look at this transaction and of the 37 stores, and again, we are projecting out into the future, but today, about a third of those stores were in markets, principally in the Boston Area and Nashville, Tennessee, that we would have been interested in putting on our balance sheet.

In terms of a yield, these were mid 80s occupied. So I think overall, the portfolio has some nice upside. We are sensitive to disclosure, relative to our 90% partner. So let's say it was kind of low to mid six, I will give you that sort of direction on year one.

Smedes Rose

Okay. That's helpful. Thanks a lot.

Operator

The next question is from Jeremy Metz with UBS. Please go ahead.

Jeremy Metz

Hey guys, good morning.

Chris Marr

Good morning.

Jeremy Metz

Tim, you mentioned the 15% increase in the same store pool. I would think that some of the assets going into the quarter, generally still below the portfolio average in terms of occupancy and rents. So assuming that is the case, and maybe that's actually the first part of the question; but assuming it is, I just wondered if you could walk us how much impact those are having on your full year same store guide, versus where the existing 2015 same store pool growth expectations alone would have been?

Tim Martin

Yeah. So if you go back and look historically with the disclosure that we provide, showing the three year pools, you can see -- looking backwards, you can see the impact of new stores being added. We are pretty modest here looking backward. The NOI growth is pretty consistent amongst our 2015, 2014, and 2013 platforms. Looking forward, and thinking about the 50 some assets that are being added to the pool. They are, in our expectations, they do lift the overall result a little bit, on the top line, about 20 to 30 basis points of the growth comes from the addition of the new properties to the pool.

So there is new properties that are being added to the pool. We are just over 90% occupied at year end 2015. So they do have a slightly larger or a slightly higher growth profile than the balance of the same store pool.

Jeremy Metz

Great. And then, just as a follow-up, can you just let us know where things stood for that new pool at the end of January, in terms of occupancy and rents?

Chris Marr

Sure thing. This is Chris. At the end of January, on the 31st, they were 91.4% occupied and asking rents were 5.1% up over the prior January 31.

Jeremy Metz

Okay. And then just one final question here, as I look at your asking rents versus -- you're in place rents are about equal right now. And then, if I look at your asking rents versus your realized rents, there is still, call it a 5% gap there. So that's a narrower spread than we have seen here in the past few years. So I am just wondering, how we should be thinking about the convergence of those and what it means, part of it obviously is normal seasonality, but I am wondering if it's also perhaps the sign, we are getting to a point where the market is sort of pushing back on rent increases, or even the ability to drive discounts lower, sort of over at this point in time. Just curious, how to --

Chris Marr

I know you all continue to want to have that call made correct, but it is absolutely not an indication of any sort of slowdown, its seasonal. And again, we provide that disclosure of asking rents, I don't believe anybody else does in our group.

And it's what our asking rents were at the 31st of October, the 30th of November, and the 31st of December on average. So its three datapoints at time, that gives you sort of a direction of where asking rents are, but we are moving rents every day. So I wouldn't read into that extensively at all. It is just very indicative of our systems, indicating to us that we had an occupancy opportunity in Q4, I think if you look at the sequential change in our occupancy relative to some of the other reporters, our change was less, in terms of the decline from September 30.

And so, we saw that as an occupancy opportunity, we made some reductions in asking rents to some new customers during that time period. But its seasonal, and you're also looking at a delta. So you got to compare that to where were at 12/31 of 2014, where actually the systems suggestion was the opposite. We had a larger decline in physical occupancy in 2014, because we were being a little bit more aggressive in terms of asking rents.

Jeremy Metz

Thanks. Appreciate the color.

Operator

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

Jana Galan

Thank you. Good morning. I just wanted to clarify the assets under contract, that's not yet in the 2016 guidance? And then, I am sorry, is it $76 million? I think in Tim's comments, you said $64 million?

Tim Martin

So the guidance includes everything that has been announced as closed. So the assets under contract would not be included in our guidance, they are not going to have a material impact on it at that level. But that's the specific treatment in our guidance. So the only things that have been closed through today.

Jana Galan

And then, can you provide cap rates on assets acquired in 4Q and first quarter?

Chris Marr

Yes Jana, this is Chris. In the fourth quarter, that group of assets that were acquired, as I said, was a blend of stable and stores that were in lease-up. So when you look at that blend, it was low 5s. The blend there is kind of all over the place, because some of those assets were in lower levels of physical occupancy, when we acquired them. So I don't think -- if you are looking at that as a sort of a market check, I wouldn't consider that a market check, because of the different stages of growth that those stores are in.

When you look at the market in the first quarter, again, for the stabilized assets, which of the stores that we closed on in the quarter, and then subsequent, there was only four and those were again, mid-five. So I think, you continue to see a market where, call it 5% to 5.5% for a stabilized asset in an A market continues to be -- on a single asset deal, continues to be kind of the range of cap rates. Sometimes, you can find some opportunities a little bit north of that. But that's sort of where the market is.

Jana Galan

Thank you.

Operator

Next question is from Ki Bin Kim with SunTrust. Please go ahead.

Ki Bin Kim

Thanks. Are you guys noticing any change in the number of customers moving out due to rent increase letters being pushed back?

Chris Marr

No, not specifically due to -- no is the answer. We still see customers who don't have other options. So when you are looking at rent increase letters, even if you get pushed back, if the general manager of the store gets pushed back, the response is actually fairly easy for them; because if you look -- I mean, you can share with the customer that the surrounding options for them are full and their rates are in line with ours.

Ki Bin Kim

Okay. And I am not sure if you guys track this, I can't remember, but do you have a rough idea of where your average rent per square foot is, versus some of your nearby peer set, in every location, also on average, how far you are above or -- compared to the peer set?

Chris Marr

Yes.

Ki Bin Kim

And how is that looking or trending?

Chris Marr

I mean, it changes every day, Ki Bin. So in general, I would say, if you look at effective rents, so that's -- what someone is asking for a vacant cube, where they are on free rent, and where they are on any sort of online discount. Trends have been fairly consistent. We compete with one very-very large operator at the majority of our locations, the other operators, its location specific. And we are all operating within a band, that hasn't really materially changed over the last year or so. Again, the part of the issue with that analyses, is that the availability of vacant cubes is so small, that you are just not seeing a lot of datapoints. Now you are looking what inventory is available, not what the existing customers are paying. We don't have insight into that information.

Ki Bin Kim

Okay. And one last quick one, when did -- so your [indiscernible] developments, the ones that you recently developed, and the ones that you have yet to be completed, about eight of them in total are New York MSA centric. Is there any concern that, maybe you are maybe doing too much, and where it cannibalizes your own product, or do you think the market is that strong, that it can actually absorb it, and not hurt your already owned assets?

Chris Marr

So first of all, we believe that in the boroughs, you have the best stores market in the United States. We are obviously fully invested there, and continue to believe in that. As you look forward, between what Di Blasio has put forth to limit self-storage in the boroughs. When you look at where zoning is in the boroughs, you are just increasingly -- there is an increasingly few number of sites that are available to be developed. And so from our perspective, we are very interested in owning as many of those sites as we can.

And so in some instances, I would say, particularly in the Bronx, and again this is based on where zoning is, so you tend to have assets clustered together. When we open a new asset, it does compete with an existing Cube or multiple existing Cubes, which does put a little bit of near term pressure on the performance of those existing assets. But in the long run, when you look at the square foot per capita in the boroughs, when you look at all of the demographics there. In the long run, we obviously believe that it is a fantastic place for us to invest, and think we have a real competitive advantage there.

Ki Bin Kim

Okay. Thank you guys.

Operator

The next question is from George Hoglund with Jefferies. Please go ahead.

George Hoglund

Yeah hey guys. Just first question on the JV, are there any agreements in place and terms of what types of assets the JV would target, relative to what you guys buy on the balance sheet?

Chris Marr

No. Again, just to be clear, this was a portfolio that we had inside into -- it made sense for us to have a discussion with our partner. The transaction worked for both sides and that was the end. So to the extent that we elect on either side to do more, that's obviously both at our options. There is no requirement to do anymore, there is no restrictions around what Cube can do.

George Hoglund

Okay. And then just the portfolio that was purchased, were these all permanent stabilized properties, or were there some new development properties in the portfolio?

Chris Marr

No. They were all existing assets. In terms of occupancy, I think you would have seen the typical disconnect between a private operator and a public operator. So they were lower occupied than we would expect them to be in the future.

George Hoglund

Okay. And then just one question on guidance, when you look at certainly the high end of the guidance, where do you think are the factors that would most likely push you to the high end, or likely even push you above guidance?

Tim Martin

Hey George, it's Tim. The most impactful set of assumptions included in the guidance, are obviously the performance of our same store portfolio. So to get towards the high end of the FFO guidance, would imply performance at the high end of the same store revenue expense and NOI ranges that we have provided. Other factors are going to be timing of any financing or refinancing activity. Timing of when our development properties open, because as you are aware, when we open a project, it is dilutive day one, and is particularly dilutive during the first six months of opening. So to the extent, any of our projects were to open earlier, that would create a bit more drag in the year, to the extent that they were to open a little bit later, that would create an FFO, good guy, if you will, during the year.

So those are the biggest factors that come to mind. Again, the same store performance is really the biggest driver. We do of course have assets that have been acquired over the past year. The performance of those assets could outperform, and help bring us up in the range or the opposite can hold true as well.

George Hoglund

And how much of an occupancy increase are you guys assuming in 2016?

Chris Marr

Yeah George, it's Chris. I think, again, I always like to answer that question by saying, you got to look at occupancy and rate and discounts etcetera. I mean, all those levers move with each other. So the adjusting answer to that question in isolation, I think, doesn't really give the full picture.

If you look at the midpoint of our guidance, generally, it would assume occupancy in the 100 to 150 basis point range, and then to get to that midpoint of 6.5, the balance is going to be that combination of in-place rents plus discounts.

George Hoglund

Okay. Thanks guys.

Operator

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

Paul Adornato

Thanks. Was wondering if you could talk a little bit about risk management, specifically, with respect to FFO dilution and development exposure? How do you guys think about that, and how is -- I guess, as more development hits the market, development will remain front and center over the next -- for the foreseeable future. Help us understand how you guys see it and think about it?

Chris Marr

Sure Paul. This is Chris. So you start by thinking about where you would be comfortable taking that risk; and certainly, when you look at page 26 of our supplemental, on the value creation pipeline. You see the markets, Queens, Bronx, Brooklyn, Dallas, Downtown Miami, Chicago. So its high barrier to entry, great demographic markets, great real estate, so that's the first step.

Then, when we look at volumes, we are not really looking at it from a dilution perspective, we are looking at it from how much as a percentage of our gross assets are we comfortable having in that pipeline. And again, when you look at the pipeline, as it stood at December 31, between the anticipated total divestment and the developments in the facilities at CO, where you are taking a little bit different risk, none of the construction obviously, but the lease-up, that's a little bit shy of $250 million. I think that's a -- that range is a reasonable exposure for us, given the size of the company, and so as assets come out of there and get placed in service, we are looking at opportunities into 2017 and 2018 at this point. Obviously, balancing, the financing strategy on that side as well. So you are making a commitment for something that will open in the future, and we want to make sure that we continue to manage the balance sheet, so that we are in a comfortable position, thinking about that future needs.

Those are the factors that come into play, as we think about that -- those assets on page 26.

Paul Adornato

Okay. And so -- in terms of -- I think I heard you say that, this is probably the maximum level in terms of corporate overall exposure that you are comfortable with?

Chris Marr

I mean, it's plus or minus. So its $3 billion plus in gross assets. If we had 10% of that, it's around $300 million. So between 5% and 10%, depending upon where we are in the cycle, feels right to us at this point. Obviously, it also comes into play with performance, and what other opportunities are. So to the extent that our facility in Arlington, Virginia, which rapidly got to 50% occupancy. To the extent, they are all like that, we may revisit. So I wouldn't consider it a hard cap, but I think that's our thinking, as I understood the question.

Paul Adornato

Yeah sure. And finally, just looking in the recent past, are there certain developments that have taken longer than expected, or maybe if you had to do it over again, you would not choose to have that exposure?

Chris Marr

No. None of them have taken longer than expected. They have either been on track and on budget or have exceeded our expectations, and I will say that kind of combining both the lease-up and the revenue performance. So I would say, from that perspective, they have all been extremely solid deals. I think to a prior question about cannibalization in the boroughs of New York, I think our Tremont Avenue store in the Bronx, certainly was one where we have three other stores in that marketplace. And so if you had to put things self-ranked, that one would be in the category of on budget and on track for our expectations. If we look at Arlington, for example, or our store in Northern Boulevard in Queens, those are the ones that have far exceeded our expectations.

Paul Adornato

Thank you.

Operator

The next question is from Jason Belcher with Wells Fargo. Please go ahead.

Jason Belcher

Hi. Just following up on the disposition front. I know you recently sold your El Paso assets; can you give us an update on your thoughts around dispositions more broadly, and what the pipeline looks like there?

Chris Marr

Sure. So we don't have any specific dispositions baked into the 2016 expectations. We continually force rank the portfolio. We are always looking at those assets within our owned pool, that [indiscernible] ultimately are in that bottom 25%, and evaluating the long term hold opportunities. We have a few markets with -- I guess I will call them some orphan assets, where we own less than 10 assets in a market, and we need to look at what's the right answer there, long term. Can we continue to grow? And if not, is there a better use of our capital.

But we like the portfolio where it is today. We have been an extraordinarily active seller over time. We will continue to evaluate. We are not completely eliminating the possibility that we may sell some assets in 2016, but nothing's baked in at the moment. So it will be opportunistic, and I would call it more pruning than anything else.

Jason Belcher

Got it. That's helpful. Then on the operating expense management side, what are you guys doing there? Looks like you are seeing a good bit of relief, in say like the property tax and property insurance categories, as well as utilities. Anything specific, initiative-wise you all are doing to drive any of that?

Tim Martin

I think -- hey, this is Tim. It’s a continued focus on blocking and tackling and being extraordinarily focused on each and every line that adds up to the operating expenses. We are active in investing in energy efficiency initiative's, lighting programs, temperature control, investments that over time have helped to reduce and control our utility expenditures. We remain focused on trying to purchase, where and when we can. Nice of you to say, that the real estate tax line item appears to be under control. It certainly feels like one, where we continue to add pressure. So we are very active, despite that growth being, certainly more than inflationary levels. We are very active in challenging any assessments across the country and across the portfolio, and do so very aggressively, when we see an opportunity there.

So we remain focused on continuing to try to improve our margins, by keeping our credit card fees low, just a whole host of areas that we remain focused on.

One area that we have a little bit of pressure over the last two years, is that we do feel very strongly that we have incentive compensation programs down throughout our organization, down to the store levels, and to the extent that our portfolio is exceeding prior year performance and budgeted performance. We have had higher than traditional levels of store level bonus, which we are happy to have that pressure on our expense side, because it means our revenue sides -- the revenue side of the equation is outperforming.

So it will be a continued focus on making sure that we can draw expenses in every area that we can.

Jason Belcher

Great. Thanks a lot guys.

Tim Martin

Thanks.

Operator

[Operator Instructions]. The next question is from Ryan Burke with Green Street Advisors. Please go ahead.

Ryan Burke

Thank you. Chris, the Di Blasio plan, I believe, ends as a great development and will, going forward, require a special permitting. Can you just talk about, how much more difficult that will make it to build self-storage properties in the boroughs? And do you have a feel for what percentage of the geography that encompasses, of the total boroughs area?

Chris Marr

Ryan, I am not sure I can put that fine of a point on it, other than to say; it will make, what is already a very difficult process; significantly more difficult. Most, if not all of what gets done, even today in the boroughs, is owned for storage. And so, removing that will take what today has been a challenge, and I think, just make it extraordinarily challenging.

So we are obviously watching that very carefully. It's kind of a double edged sword, because we think the value add from what we can get done, is very-very significant, so that on the one side, and on the other side obviously, our position there just becomes that much more valuable. It's more difficult to get any additional product into the market.

Ryan Burke

Okay, thanks. That's helpful. And leasing in general, not only in the Bronx, but Long Island and Dallas stalled this quarter. You have touched on dynamics in the boroughs. Is it a similar dynamic in Dallas? And then, for all three of those markets, is your perception that other competitive development properties are also seeing slowing of lease-up as well?

Chris Marr

So I am looking at page 28; I mean, the growth in Dallas, Fort Worth, Arlington, from 90.2% last year to 91.8%. So I assume you are probably more looking at it -- oh sequentially, or you are just looking at the one store that we have there?

Ryan Burke

Yeah. I am not calling into question, your performance from an operating perspective in the same store pool. Its specific focus is just on the development properties. On page 20 --

Chris Marr

Got you. No, I think Dallas, without a doubt, to be clear -- in the Frisco-McKinney area, which is very high growth, you are also seeing new product coming in. So there certainly is some of that impact there. But I think in general, when you look at Q4, its back to that balance between occupancy and rate, and different strategies from the system in different markets. Its seasonal as well, you are going to get in a lease-up store, that has a variety of inventory. You just tend to get luckier and just demographically you get more of the larger units rented during the summer, than you do in October to December.

So I don't -- I think clearly, there is some supply in Dallas, but I don't think that's having a negative impact on our lease-up properties at all.

Ryan Burke

Okay. And then, would you say that both in the boroughs and in Dallas, if we did have disclosure from both public and private operators, do you think that their development properties in those areas, would have behaved similarly from an occupancy perspective?

Chris Marr

That's hard to answer again, because of the different strategies. But it's atypical to see significant movement in a new asset, in that October to December timeframe. So I don't know how I would speak to what others are seeing. But I think, what we saw was pretty consistent with our expectations.

Ryan Burke

Okay. Thank you.

Operator

The next question is from Jonathan Hughes with Raymond James. Please go ahead.

Jonathan Hughes

Hey, good morning. Thanks for taking my questions. You guys acquired nearly $300 million of assets in 2015, but G&A was actually down for the year. And I know, you touched earlier on an incentive comp at the property level, but I was wondering if you could give us some color on the corporate level, how you are able to keep that in check?

Chris Marr

It's just a real -- it’s a very scalable business from that perspective. So a lot of the back office and a lot of those costs are just very scalable. So as we add stores, given that so much of our processes are through the use of technology, which has just created an opportunity to be able to add assets. I do think it's worth noting, that in the fourth quarter, the volume of owned and managed assets that we brought on, along with the volume of new teammates, particularly at the stores that we onboarded, that we were able to do that very smoothly, in our perception at least, without significant cost pressures.

So I think -- again, it goes to -- it’s a very scalable business. I think we have got a great foundation and great technology platform. We have great people. And I think it gives us the encouragement, that if a very large transaction were to present itself, and we were fortunate to be the buyer, we can integrate a significant number of properties, we believe, without really any hiccups within that integration.

Jonathan Hughes

Yeah, that's great color. I appreciate that. And then earlier, I didn't quite follow the Chicago commentary on the tax rate hike there. Could you clarify what drove the 12% decline in operating expenses in that market?

Tim Martin

So in the fourth quarter, anytime we have a growth number, right, its either something happening in the fourth quarter this year or the fourth quarter of last year. And in Chicago in particular, we had a pretty significant increase in our real estate tax expense in Chicago in the fourth quarter of 2014. So it created an easier comp, if you think about it from a growth rate perspective, because we had been accruing to a certain amount in 2014, and then to increase that expense level late in the year, based on the assessments that we were receiving and planning on expensing. And so 2015, benefitted from 2014, having a bigger relative hit.

Chris Marr

And I am sorry, my commentary was just more macro, that Illinois in general and Chicago specifically, is having budgetary issues, and they are currently attempting to solve that through property taxes, which are already at the highest levels in the United States.

Jonathan Hughes

Okay. All right. That makes sense. And then I just had one last one, looking at C/O deals that you are seeing out there, has it become more difficult in recent months for those developers to secure financing from lenders?

Chris Marr

I think the degree of difficulty is about the same on development. You continue to see low advance rates, desire ore demand for recourse, etcetera. I think the issues in the CMBS market have seemingly created some challenges for private buyers, who rely on that market heavily to be able to finance their acquisitions.

Jonathan Hughes

Okay. All right. Thanks guys.

Chris Marr

Thanks.

Operator

The next question is a follow-up from George Hoglund with Jefferies.

George Hoglund

Hey guys. Just on the valet storage business, I mean since you guys have heavy exposure in New York, just wondering, how you view that business in terms of competition and also are there any of these sort of valet storage businesses that are actually renting space from you guys?

Chris Marr

Hey George, it's Chris. So we had experimented a bit with that concept; CubeSmart direct was the brand. What we learned was that, it tends to move fairly quickly into the moving and storage business. So the idea that the customer is interested in putting shoes in a toke and having that taken away. Moves pretty quickly into, can you move my entire one bedroom apartment, which is just back to the traditional moving storage business.

So we haven't felt a impact from that business anywhere, and not in the boroughs. But we shall see. Maybe that's, again on a cost basis, that might be a little bit more appealing in Manhattan. Although again, Manhattan is where we were testing CubeSmart Direct.

So I think in direct response to your question -- haven't seen it as a competitor. In terms of, do folks use our stores? Yeah, the moving and storage companies use us -- I am sure, if somewhere, there is a valet business that does as well. I couldn't point to specific stores or specific customers.

George Hoglund

Okay. Thanks.

Operator

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

Chris Marr

Okay. Well thank you everyone for your interest. It was a great call. Obviously, we were pleased with the quarter and off to a great start here on both the internal and external front in 2016. Look forward to speaking to you all again after our first quarter of reporting. So thank you and have a great weekend.

Operator

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

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