CubeSmart (NYSE:CUBE) Q1 2023 Earnings Call Transcript

CubeSmart (NYSE:CUBE) Q1 2023 Earnings Call Transcript April 28, 2023

CubeSmart beats earnings expectations. Reported EPS is $0.43, expectations were $0.33.

Operator: Hello, everyone. And welcome to the CubeSmart First Quarter 2023 Earnings Call. My name is Charlie, and I will be coordinating the call today. You will have the opportunity to ask the question at the end of the presentation. I will now hand over to our host, Josh Schutzer, Vice President of Finance, to begin. Josh, please go ahead.

Josh Schutzer: Thank you, Charlie. Good morning, everyone. Welcome to CubeSmart’s first quarter 2023 earnings call. Participants on today’s call include Chris Marr, President and Chief Executive Officer; and Tim Martin, Chief Financial Officer. Our prepared remarks will be followed by a Q&A session. In addition to our earnings release, which was issued yesterday evening, supplemental operating and financial data is available under the Investor Relations section of the company’s website at www.cubesmart.com. The company’s remarks will include certain forward-looking statements regarding earnings and strategy that involve risks, uncertainties and other factors that may cause the actual results to differ materially from these forward-looking statements.

The risks and factors that could cause our actual results to differ materially from forward-looking statements are provided in documents the company furnishes to or files with the Securities and Exchange Commission, specifically the Form 8-K we filed this morning, together with our earnings release filed with the Form 8-K and the Risk Factors section of the company’s annual report on Form 10-K. In addition, the company’s remarks include reference to non-GAAP measures. A reconciliation between GAAP and non-GAAP measures can be found on the company — can be found in the first quarter financial supplement posted on the company’s website at www.cubesmart.com. I will now turn the call over to Chris.

Chris Marr: Thank you, Josh. Good morning, everyone. Our first quarter of 2023 can be characterized as solid performance across all of our key performance metrics. Funds from operations per share came in at the high end of our guidance, as steady occupancy trends, coupled with our continued focus on expense control helped to generate strong same-store net operating income growth. Our customers are resiliently navigating an uncertain post-COVID economy. While the Fed pushes up interest rates to cool inflation, the unemployment rate remains historically low. Volatility in mortgage rates has created an uncertain housing market as prices remain stubbornly high, resulting in a slowing single-family home purchases and sales. We believe our portfolio focus on top markets and strong demographics has us well positioned to perform throughout all macro environments.

Low unemployment, continued wage growth and solid household balance sheets translate into historically good credit metrics across our customer base. During the first quarter, delinquency metrics such as late fees charged and receivables over 30 days past due are at levels below what we experienced in the first quarter of 2019. Another bright spot continues to be the stickiness of our existing customer base. Vacates during the quarter were down 3.3% from the first quarter of last year and down 9.5% on a comparable store basis to the first quarter of 2019. 47.9% of our customers have been with us longer than two years, up 230 basis points from this time last year. This results in a larger pool of customers to potentially receive a rate increase.

Top of funnel demand trends have been less consistent with historical patterns than we expected. We had a solid first couple of months as same-store rentals through February were consistent with the same time period last year. In March, trends slowed as weather, bank failures impacting consumer confidence and existing home sales weighed on March storage demand. March occupancy trends were mostly in line with last year, but that was driven by lower vacate activity offsetting slower-than-expected rental activity, which led us to a more cautious approach to rental rates. As we moved into April, trends have been on a more normal trajectory. Rental and reservation activity has returned back in line with last year’s levels as we have seen stabilizing signs in both the housing market and with consumer confidence.

As a result, we have grown our occupancy, narrowing the gap to last year to 141 basis points and we are moving up rental rates as the busy season begins to ramp up. We have experienced unusual trend so far this year. The demand momentum we saw in January and February slowed in March, only to show signs of reigniting in April. Recent trends have us cautiously optimistic, but as we noted during our prior earnings call, the outlook for the back half of the year is heavily dependent on performance during the next few months of the rental season. Touching briefly on market level performance. The New York MSA was our most resilient MSA, with our borough properties experiencing positive growth in both occupancy and net effective rents to new customers compared to the first quarter of last year.

This was offset somewhat by softness in supply impacted North Jersey and Long Island markets within the overall MSA. While decelerating off of their tremendous 2022 levels, we continue to experience above-average revenue growth in our Florida, Texas and Southern California markets. We experienced below average growth in the supply impacted DC, Virginia, Maryland markets and in Arizona, where COVID-induced migration has clearly waned. We continue to underwrite a good number of transactions, but seller expectations for assets that meet the quality requirements of our portfolio strategy are still disconnected from our current cost of capital. We are finding ways to accretively deploy capital within our existing portfolio as full scale redevelopments and cost saving upgrades to high efficiency building systems are proving to be the best opportunity for capital deployment in this part of the cycle.

We remain a third-party partner of choice as our reputation in the industry has consistently maintained our robust pipeline of new management opportunities. Our operating platform is prime to maximize performance, no matter the macro environment. Our differentiated strategic focus on quality across our portfolio and platform positions us well to generate shareholder value over the long-term. Thanks for listening and I will now turn the call over to Tim Martin, our Chief Financial Officer, for his remarks.

Tim Martin: Thanks, Chris. And thank you to everyone on the call for your continued interest and for spending a few minutes of your time with us today. As Chris touched on, operating fundamentals during the first quarter were largely in line with our expectations and we continue to experience a return to more normal seasonality in the business, consistent with our discussion over the last several quarters. We reported FFO per share as adjusted of $0.65 for the quarter, which was at the high end of our guidance range and represents 12.1% growth over the first quarter last year. Our continuing focus on being as efficient as we can be, along with a mild winter resulted in 1% same-store expense growth, which when combined with 6.9% revenue growth produced a healthy 9.1% growth in same-store net operating income.

Month-to-month occupancy trends during the quarter largely mirrored those of the first quarter of 2022. Our same-store portfolio gained 60 basis points of occupancy sequentially from the fourth quarter, ending the first quarter at 91.9%. We remain disciplined in our pursuit of external growth opportunities with no transaction activity to report in the first quarter. Our investment team continues to be active, although deal volume that went through our underwriting process was down about 30% compared to the first quarter of 2022. We continue to generally see a disconnect in the bid-ask spread and we are generally not seeing the high quality opportunities that we were seeing over the past couple of years. On the third-party management front, we added 25 stores in the first quarter, bringing our total third-party managed store count to 676.

In the current environment, no news is good news when it comes to corporate balance sheets and our balance sheet remains very healthy, putting us in a great position to pursue external growth opportunities when we see attractive relative returns. Our average debt maturity is 6 years, 98% of our debt is fixed rate, we have no significant maturities until November of 2025 and our leverage levels remain very low at 4.4 times debt-to-EBITDA. Details of our 2023 earnings guidance and related assumptions were included in our release last night. Our forward guidance for the year remains consistent with the guidance we provided in late February. So wrapping up, good in-line first quarter, balance sheet is in great shape, patient and ready to find attractive external growth opportunities and our team is ready and energized heading into our sector’s busy rental season here in the summer.

Thanks again for joining us on the call this morning. At this time, Charlie, why don’t we open up the call for some questions.

Q&A Session

Operator: Of course. Thank you. Our first question comes from Michael Goldsmith of UBS. Michael, your line is open. Please go ahead.

Michael Goldsmith: Good morning. Thanks for taking my question. My first question is on what you are seeing in April, it sounds like March was slower, April kind of rent returned to a more normal trajectory with run rates back in line. I guess, like, can you provide a little bit more color about where the demand is coming from, I think, you talked a little bit about the housing market, you talked about rates moving higher, can you kind of quantify that? And then as well, did your ECRIs kind of come down during the slowdown in March and how are you thinking about that back now that things are more normal in April?

Chris Marr: Sure. Thanks. That was a little bit unpacked there. Let me see if I can remember all the questions and answer them all. So, going backwards, I think, from a rate increase to the existing customer perspective, we averaged mid-teens in the first quarter. That was consistent with our average for the fourth quarter of last year and down from the high teens that we would have averaged in the first quarter of 2022. So as we expected, if you think about kind of a historical expectation, so 1Q 2019, we keep pointing to is pre-COVID metric, we averaged in around the 12% range in the first quarter of 2019. So as we have talked about, I think, earlier in the year, the expectation is that the rate increases to the existing customers will continue to outpace pre-COVID, but come down from what we saw in a historically great 2022.

In terms of customer demand, it is obviously varies a lot by market. So absolutely thrilled with the performance in the New York boroughs. There you have a portfolio construct that is just made for this type of a climate. We have a very sticky customer there and a customer there that is not so focused transactionally on moving, and so that market, as we would have expected, continues to perform quite well in the current conditions. Rest of the country, I would say that, the performance and where the customers are coming from continues to be from what you would have expected historically. Certainly, in some of the Sun Belt markets, March, we just didn’t see the shorter-term moving customer. We are starting, obviously, we have picked up the college students at this point and that will continue here for a little bit.

And again, signs in April that perhaps that moving customer is returned or March was an anomaly, we will continue to pay close attention to that as we get into May and June.

Michael Goldsmith: That’s very helpful. And my follow-up question, you talked a little bit about it, is just kind of on New York on a same-store NOI was down 300 basis points sequentially for the portfolio, but New York was up 120 basis points sequentially. Now you also added eight properties to the same-store pool. So I am just kind of curious about the trends going on in New York and is this — you have often talked about how at a time of moderation in New York is a market that outperformed, is that kind of playing out as you expected?

Chris Marr: Yeah. It is playing out in the city as we expected. Those stores, I think, on the old pool accelerated 50 basis points and the new pool as reported, the — in the city, the MSA, you are suffering a little bit of supply impact in North Jersey and out on Long Island, but the stores in the boroughs, again, we are thrilled with the performance. We expected a good year and it’s playing out so far at that expectation or better.

Michael Goldsmith: Thank you very much.

Operator: Thank you. Our next question comes from Samir Khanal of Evercore. Samir, your line is open. Please go ahead.

Samir Khanal: Thank you. Hi, Chris. So occupancy fell year-over-year, but we also saw the in-place rent decline sequentially and you haven’t seen that in a while. I think many quarters, maybe even going back to 2018. I guess how much of this decline is related to sort of normal seasonality versus the business starting to weaken here, maybe you can help us unpack this? Thanks.

Chris Marr: Yeah. On the occupancy, again, you have got to make sure you are focused on the fact that the 2023 pool, obviously, changed on January 1st. So if you think about where we started the year on an apples-to-apples basis, occupancy was down January 1 versus January 1 of last year by about the same as it was at the end of March. So the occupancy during the quarter didn’t really change, which is more normal relative to trends 2019 and earlier. If you just look at seasonality from 2017 to 2019, rates typically fall and did every quarter, every year rather from Q4 to Q1. So the patterns that you see in Q1, if you adjust for the change in the pool are very typical to pre-COVID type patterns.

Samir Khanal: Thank you for that. And I guess my second question, Tim, I just wanted to ask about expense growth. When I look at last year, you did 3% for the year, but you guided, I think, it was close to 6% as part of your initial guidance. This year you are guiding to 4.5% and you did 1% or 2% depending on the same-store pool you look at. Maybe walk us through the things you are doing from an expense control standpoint and is there more you can do that actually end up surprising us to the upside as the year goes by? Thanks.

Tim Martin: Well, I don’t know what would surprise you. It’s all relative to your expectation I suppose. But I think we are proud of the results and we have been focused, as Chris has touched upon for several quarters now on — always controlling what we can control and there are many of the line items from an expense standpoint that we can do just that. The first quarter, we saw the benefit of a mild winter which showed up in both lower-than-expected snow removal costs and lower-than-expected utility costs. I think as we think about how the rest of the year plays out, while we had a nice surprise there on winter costs, we have also had a negative surprise, I suppose that offsets it as we think about our property tax or property insurance rather, renewal process that we are going through.

Those costs are going to come in a little bit higher for the year than we would have thought even 60 days ago. So those kind of offset each other. I think you then look into the balance of the year and you think about a line item like marketing expense, we are seeing some good opportunities to deploy marketing spend with attractive returns. So that’s an area that we will continue to push on at times when it makes sense for us to do so. I think the line item that really jumps out at you over the past couple of quarters has been on the personnel side and we have continued to find ways to combine our operational platform with technology, with how we staff stores, store hours, how we are using our sales center, how we are using our online tools to help our customers rent with us and a lot of that has continued to show up in the personnel line item.

Of course, we are going to start to have more difficult comps on that line item as we get later in the year. But those are the big areas of focus, and again, we are pleased to report 1% same-store expense growth.

Samir Khanal: Thank you.

Chris Marr: Thanks.

Operator: Our next question comes from Smedes Rose of Citi. Smedes, your line is open. Please go ahead.

Smedes Rose: Hi. Thanks. I just wanted to ask you, as you go into your kind of busy asking rates, it sounds like consumers are maybe a little more cautious based on some of the remarks that you have said. So would you maybe go lower in order to sort of get folks in or how are you thinking about that?

Chris Marr: Yeah. Week-to-week, Smedes, that’s really the point of focus here as we are looking out over the next couple of months is, we have great properties in great demographic markets, and so from a customer perspective, we know they are going to see us. So when they make that decision to rent, we are really keenly focused on getting them into the top of the funnel and then making sure that our conversion of that reservation or that customer inquiry to a rental is operating as efficiently as possible and that we are then pricing in a way that maximizes that opportunity and so it’s a week-to-week decision as we go through. As we think about April, from the beginning of April through essentially today, we have increased rates about 8% and that’s about consistent with what we would have done last year.

So we are going to continue on that focus as long as the demand and conversion continues to support it. But it’s been an unusual year-to-date, and so, again, we are going to have that keen focus week-to-week and make sure we are maximizing that opportunity.

Smedes Rose: Okay. Thanks. The other thing I just wanted to ask you, I know you added 25 stores, but it looks like it was more like eight on a net basis to the third-party management platform. Are you just continuing to see volatility with just assets being sold or I am just surprised because it sounds like there hasn’t been a lot of transaction activity, so just maybe you could comment on that?

Tim Martin: Yeah. Hey, Smedes. It is — we are starting to see the pace of stores, which is a good thing, pace of stores that have our brand on them being marketed. There have been a handful over time. And again, as we said in the past, it’s one of those bittersweet things we hate to see. We hate to see our name come down off of the sign. At the same time, in those cases, we have done a good job and done what our third-party clients expect us to do, which is to help create value for them and they realize that upon a sale. Many of them we would love to keep with the CubeSmart brand and acquire them on balance sheet. We haven’t been particularly active as we touched on earlier. So I think it’s hard to predict the net number, because hard to predict when stores are going to come off the platform.

What we can control and what we have done a good job of is keeping that pipeline of new stores coming on to the platform very healthy and we do have a very healthy pipeline right now of owners who are seeking third-party management services and are viewing us as one of those premier providers of that service.

Chris Marr: And just to give you a little bit of data there. Of the stores that left the platform, I think, I know 15 of the 16 were actual sales where the stores were sold to another party who either chose to self-manage or had a different third-party management relationship. So while activity is muted, certainly, there were 15 transactions that took place that closed during the quarter.

Smedes Rose: Okay. Thank you, guys.

Chris Marr: Thanks.

Operator: Our next question comes from Juan Sanabria of BMO Capital Markets. Juan, your line is open. Please go ahead.

Juan Sanabria: Hi, guys. Thank you for the time. Just curious if you can give us the April trends. First Street rates and occupancy just kind of where the spot fits, and for Street rates, if you don’t mind giving us how that trended year-over-year throughout the quarter, just to help contextualize?

Chris Marr: Sure. So rate trends in the first quarter, net effective rates for customers compared to that same time period last year, again, bounces around week-to-week, but range down from the low to the mid-teens. When we got, again, to March, similar trend, more in the mid-teens down in March. And then in April, as I mentioned, we have pushed rates up through today 8% since the first of the month, which is just slightly more than we did last year. So the gap to April of 2022 remains in that kind of mid-teens type of range. From an occupancy perspective, we have reduced the gap to last year to — from 150 basis points, I believe, at the end of March to 141 basis points as of yesterday.

Juan Sanabria: Thanks. And then I just wanted to ask, it seems like you — maybe you are testing in some capacity, asking customers to stay for a period of time, maybe four months or so. Yeah, but I guess locking in that initial rate. Just curious on how that testing has gone, why you chose to offer that option out. Just some thought around the strategy there would be helpful?

Chris Marr: Yeah. Juan, thanks. Good question. We test quite a significant number of different strategies for two reasons. The most important of which is, we want to get a sense from the consumer as to what their behaviors are and get some additional insight through decisions they make as to how they are thinking about using our product and what’s important to them. And then obviously, the second is its always strategies around how can you maximize revenue across all of our customer segment base. That particular test would have been designed to see if a customer was more inclined to make a commitment for a longer period of time and would they be more inclined to do so knowing what could happen in terms of their rate at the end of that four-year — four months rather four-year would be awesome, four-year, four-month time period.

It’s one of many different things that we have and we will continue to test, again. It’s very helpful for us from a data perspective to just get a good sense of where that customer behavior kind of shakes out and all of these are ongoing at some point in stores throughout the portfolio.

Juan Sanabria: Okay. And just as a quick follow-up, are customers willing to sign up for the four months or I am assuming you were trying to weed out customers who were just in and out for a month, but just curious on the take-up versus expectations.

Chris Marr: Yeah. I would say, again, it is still in process in certain properties. So the absolute answer to the question, we don’t have a definitive one at this point. It certainly does attract a customer who knows or is certain at least in their own minds that their intention is to stay longer. It also has an attraction of a customer, though, who has more certainty around the move in and move out. So you tended to see the vacate down at the end of that 4-month time period. So again, it’s one of many things that we continue to test at an array of properties across the country and we will continue to do so to, again, always try to find ways to creatively maximize revenue for each customer we get.

Juan Sanabria: Appreciate it, Chris. Thank you.

Operator: Thank you. Our next question comes from Ki Bin Kim of Truist. Ki Bin Kim, your line is open. Please go ahead.

Ki Bin Kim: Thanks and good morning. So to follow up on the last question, I am curious about the cadence of demand that you saw throughout the quarter and into April. Was it a top of funnel type of dynamic where you just have less touch points coming into you guys or was it more about market share dynamic?

Chris Marr: Yeah. From our perspective, felt like top of funnel demand was, as we would have expected in January and February, and then was less than we would have expected in March. Now has returned…

Ki Bin Kim: Okay.

Chris Marr: … to expectations.

Ki Bin Kim: And so what caused to pick up in April?

Chris Marr: What caused the decline in March, right? It’s — you certainly can look at things that occurred in March on a macro basis and we can look at housing, for example. So one of the larger publicly traded homebuilders on their earnings call last week commented that March was unusually slow for them. They have now seen a pickup in demand in April. So was it weather, was it banking crisis, was it mortgage rates, don’t know. And again, we are trying to navigate through a post-COVID trends that have been anything but consistent over the last several years, 2021 was odd, 2022 was odd and certainly, March of 2023 relative to what we would have expected was a bit odd. April seems a lot more normal.

Ki Bin Kim: Okay. And second question, I want to ask about your leverage and capital allocation. Your balance sheet is 4.4 times levered, obviously in great shape and I appreciate your press release comments about being disciplined on price. Can you just help us understand what the gap is, the bid-ask spread, how wide or narrow it might be? And if you can remind us of your latest thinking on capital allocation, is it still from an asset quality or a market standpoint, is it still kind of demographically driven or has your scope widened a bit to include other assets that maybe you traditionally didn’t want to own?

Tim Martin: Yeah. It’s — we haven’t changed our areas of focus, Ki Bin. We are — as we have been focused on attractive markets, typically in the top 40 MSAs, looking for those great infill complementary opportunities to our existing footprint. There are some markets that we are not in that we would love to be, haven’t found attractive opportunities to do that. The bid-ask spread, it’s difficult, lower amount of total transaction activity. So it’s a little bit difficult to know exactly where things are, because many of the things that are out there, I think, are for sale at a price and sometimes I think a crazy price and so some of the things aren’t trading at all. So it’s a little bit difficult to know exactly where you are.

But I would say, we quite often end up being 15%, 20% off of where at least our broker transaction where our broker would suggest a deal needs to trade and so that feels like a little bit of a gap but it can change. And we are — as I mentioned in my prepared remarks, we are quite active in underwriting an awful lot of opportunities. We would love to see some high quality opportunities that were just a little bit closer to a price point that made sense for us on a risk adjusted basis. So where we are open for a wide spectrum of opportunities is at the right return, we would look at something that’s fully stable all the way to something that just came out of the ground. So we don’t have any restrictions or limitations to our desire to take on some lease up or to look at stabilized acquisitions.

But the markets and the quality of the assets that we are looking for is pretty consistent from what you have heard from us for some time.

Ki Bin Kim: That’s great color. And I was asking about these other markets, because lately the one of the changes that we have seen from the software companies, including you, is kind of touchless Internet based leasing and if that would perhaps expand, what you would want to own, like in secondary markets where you can use technology versus having a lower margin business with people? Thank you.

Chris Marr: Yeah. Kind of flavor of the day, right? I mean, to me, the idea of not having an office at a store is been around since 1968. So whether it be the phone or whether it be some use of technology, the concept is not new, and so, again, it’s been out there. We continue to look at where that might apply certainly in the more urban and the dense suburbs it’s much less applicable than it is in tertiary areas. So it’s not new, certainly, it’s got a lot of — it’s generated a lot of conversation over the last several months.

Ki Bin Kim: Okay. Thanks again.

Operator: Thanks. Our next question comes from Hong Liang of JPMorgan. Hong, your line is open. Please go ahead.

Unidentified Analyst: Yeah. Hey, guys. I guess on the personnel expense side, you talked about technology savings. Are there any further savings we should expect in that line going forward or do you think that’s largely capped?

Chris Marr: Hey. It’s Chris. We continue to look at ways to meet our customer where they want to be met in terms of closing the transaction with them. And again, no surprise, when you do focus groups and you talk to your customers, they — at this point in the life cycle, continue to be about one-third each in three categories. It’s the category of customer who is very used to using technology, is very comfortable transacting without a face-to-face interaction, it’s my kids texting from their bedroom to ask what time dinner is instead of walking down the stairs and having a face-to-face conversation. We have another third of the customers who not surprisingly are at the complete opposite end of the spectrum. They want to have a conversation.

They want to interact with the store teammate. They want to know that they can ask any questions they want to a person live as they are going through their decision-making process. And then the other third kind of fall into that digital key and a hotel kind of group of folks. They are happy to use it as long as it works the way they think it should and seamlessly, if it’s not, when you get to that 13th floor of the hotel and your phone doesn’t work at your room, you are kind of frustrated, you want to come back down to the lobby and have a conversation and have your problem solved immediately. So we are working through all of that as we do. We have obviously continued to find ways to create efficiencies we think, while also providing the level of customer service that we are known for and we will continue to do that, obviously, I think, the rate of savings or improvement there will slow as the fruit from the tree gets higher up.

Unidentified Analyst: Got it. And then as it relates to other property revenues, particularly late fees, it seems like post-COVID, there’s just been a step function down on delinquencies and late fees. Do you think that’s just the new normal given auto pay and all that?

Chris Marr: Yeah. That’s a great question. We definitely have seen on that side of the equation, lower revenues than we would have seen in some of the prior years. So it’s a two-part issue. One is, as I said, health of the customer is really good, which is a positive, receivables are down, delinquencies are down, that translates into lower late fees, but a higher quality customer per se from a credit perspective. And then on the technology side, as we can push folks into or they choose to go through smart rental or self-service rentals in some way, shape or form, talk to one of our service reps either from their phone or from a kiosk, they tend to be auto pay customers, they tend to be more ACH customers, and again, they are paying on time, which is great, but the late fee will come down.

Is that going to change as we go through economic cycles? I would suspect that at least the first part of that answer will as we see different parts of the economic cycle over the next couple of years.

Unidentified Analyst: Yeah. Thanks. Great quarter.

Tim Martin: Thank you.

Chris Marr: Thank you.

Operator: Our next question comes from Spenser Allaway of Green Street. Your name — your — sorry, your line is open. Please go ahead.

Spenser Allaway: Yeah. Thank you. We continue to hear that private market players are burdened with high interest expenses on construction loans, and as such, there could be — they could be looking to offload or sell some of these properties. Have you started to see these opportunities arise or is it still fairly quiet? I know you mentioned there were some transactions that occurred in the quarter, but just curious if you could elaborate a little bit further?

Tim Martin: Hi. Good morning, Spenser. Yeah. It is — I would say not quite yet. I mean I think there’s a little bit of chatter and I think it’s more — at this stage, I think, it’s more a discussion of you would think that there would be some of that activity. I think the reality for our sector, when you do this throughout different parts of the cycle is that what that might translate into is probably some motivation. At least there might be a more motivated seller who would look to have their store clear the market versus somebody who’s, as I alluded to earlier, somebody who will sell for a really high price. So you might have a more motivated seller. I don’t think you are going to have a desperate seller. I think our business is just too good.

I think operating fundamentals are too good and people have options. So they don’t have to — I don’t think anybody would suspect that there would be a fire sale opportunity on a whole bunch of things for folks that are like that. But perhaps, and again, maybe more wishful thinking from our perspective, but perhaps you have a little bit more motivated seller and if those were in in opportunities and markets and high quality assets that we are looking for, that would be fantastic for us.

Spenser Allaway: Okay. That’s helpful. And thank you for all the color you provided at the market level, but just maybe looking at some of the markets with lower occupancy, maybe such as Vegas and Phoenix. Just curious if you have any color on operating trends in these markets or what might be driving the lower than average occupancy?

Chris Marr: Yeah. When you think about those markets, it’s a return to more normal after seeing just a tremendous amount of movement, certainly a tremendous influx of folks in those markets. There would also be the markets where you saw the most aggressive push in 2021 and 2022 in market rate. So when you think about changes in market rate over the last couple of years, those markets in Phoenix and certainly, those markets in the Sun Belt in general, you would have saw — seen rather the most significant push in rates over that time period. So I give you a point of example, when you just think about — when you think about Sun Belt markets, Phoenix, for example, rates versus where we were in the first quarter of 2019 are still up about 30%, about 20% in Tucson, even you get into the South Florida markets, Miami, Fort Lauderdale are up about 44%.

So just some markets that would have seen really, really strong push on rates are just starting to normalize more — started to normalize. And you are not seeing — again, you are also not seeing the same movement in those markets that you would have seen in 2021 and 2022.

Operator: Thank you. Our next question comes from Todd Thomas of KeyBanc. Todd, your line is open. Please go ahead.

Todd Thomas: Hi. Thanks. Good morning. I just wanted to circle back to the trends that you discussed that you experienced in March. Was that concentrated in certain geographies or was it more broad-based across the country, across the portfolio?

Chris Marr: Yeah. It was really broad-based across the portfolio. If there’s an outlier, again, in this kind of climate, it would have been the New York City borough assets, which, as I mentioned, were the assets in the market really where we saw occupancy gains over the first quarter of last year and rental rates that were in positive territory relative to the first quarter of last year, but rest of the country all kind of moved the same.

Todd Thomas: Okay. And so, net-net, if we think about what happened, you mentioned, the volatility in move-ins and move-outs, sounded like both were down so less movement altogether, but you mentioned that asking rates or Street rates did decrease a little bit, I think, you were in the low-double digits. You mentioned March moved into the sort of mid-teens or high-teens, I believe. But, net-net, how did results compare to your budget for March, did it create a setback in any way, maybe a benefit, what happened in March as a result of that volatility?

Chris Marr: Yeah. We would have expected in March, net-net, slightly better performance than what we were able to deliver.

Todd Thomas: Okay. So results in March fell slightly below your budget sort of within the context of the year so far?

Chris Marr: Yeah.

Todd Thomas: Okay. And then just last question, just stepping back and looking at the guidance, which you maintained, you previously talked about growth decelerating gradually throughout the year, revenue growth, right? So starting the year higher, ending the year lower. Do you see potential stabilization midyear or later in the year, I guess, has your view changed around the trajectory of growth throughout the year as we sit here today at the end of April?

Chris Marr: No. I mean the view has — the view from a high level has not changed in terms of that expectation that we will continue to see some level of deceleration across the entire same-store pool as we go through the quarters. I mean, again, you look at last year, obviously, the first half of the year, the comps were more challenging than the second half.

Todd Thomas: Okay. Great. Thank you.

Tim Martin: Thanks, Todd.

Operator: Our next question comes from Jonathan Hughes of Raymond James. Jonathan, your line is open. Please go ahead.

Jonathan Hughes: Hey. Good morning. I was hoping you could talk about performance in the 73 properties that were added to the same-store pool this year, most of which I believe is the Storage West portfolio. Does that add in 50 bps or so to revenue growth, 100 basis points to NOI growth and when you back into metrics for those properties, it looks like almost all of that growth was from higher rents and expense savings on occupancy is almost 500 bps lower than the 2022 same-store pool. So maybe there was a rate versus occupancy trade off there, but I am just a little surprised by the occupancy of that portfolio. Can you just update us on the outlook maybe for occupancy recovery and those properties and Storage West was in the mid-90% range 18 months ago?

Chris Marr: Yeah. You are spot on. I mean you are talking about assets in those markets, I think, I responded to a previous call in some of the markets that saw a significant inflow of population and movement. We were very, very aggressive on rate, continued to be reasonably aggressive on rate as we went through the first quarter, saw a give back in terms of some of that occupancy. And as we go forward here, again, we will see how demand trends work in those markets, April through July and try to balance out where we are on the rate side versus where we are on the occupancy. But during the quarter, we absolutely were focused in on rate and we are willing to sacrifice some of the occupancy as a result.

Jonathan Hughes: Okay. And was the benefit from those new stores in the pool, I mean, is that in line with the expectations at the start of the year or a surprise to the upside or downside?

Chris Marr: Very much in line with the expectation at the start of the year.

Jonathan Hughes: Okay. And then on capital allocation, you mentioned the lack of high quality acquisition opportunities out there and talked about that in Ki Bin’s question in your prepared remarks. The balance sheet is in great shape, leverage near the lower end of I think the 4 times to 5 times target range, same-store NOI growth is driving organic delevering and the stock today is trading 10% below consensus NAV and a high 5% implied cap rate. So my question is, if acquisition opportunities don’t come to the market as hoped and that discounted valuation dynamic continues for the next six month or 12 months, would the Board consider repurchasing shares given you have the leverage capacity?

Tim Martin: Yeah. I think we have an in-place program to be able to repurchase shares. We have not utilized that program yet. And I think as we have discussed before, I think, there is a — certainly, there’s a time and a place to consider share repurchase program. I think for us it is — some of the ingredients that you touched on are there. I think it’s the duration for that dislocation. We are — we remain optimistic that we will be able to put our high quality balance sheet to work to find those external growth opportunities. But if we were in the environment and it were exacerbated and it were for a longer period of time, then of course, that’s something that we would look at and consider.

Jonathan Hughes: Okay. Great. Thanks. I appreciate it.

Chris Marr: Thank you.

Operator: Our next question comes from Jeff Spector of Bank of America. Jeff, your line is open. Please proceed.

Jeff Spector: Great. Thank you. Chris, my first question is just on consolidation in the industry and how you are thinking about that in terms of Cube strategy or just the industry as a whole, third-party management, what type of impacts do you expect or really minimal on your portfolio?

Chris Marr: I am sorry, Jeff, could you try that one again? So I am making sure I am answering the specific question.

Jeff Spector: Yes. Basically I was just asking about, given the consolidation in the industry, from your seat, how are you thinking about that in terms of your strategy. Does it change anything on the third-party management side or given your scale in your markets, there’s really minimal impact on your business?

Chris Marr: Yeah. I think when we think about just consolidation in general again and we can look at that from a whole bunch of different angles, because certainly, today there’s more assets under third-party management than ever. There’s certainly no shortage of third-party management providers both public and private. I think when you just think about consolidation or scale or however you want to term it, I think, there absolutely are our benefits. But again, I think over time, when you think about Cube, our strong density and scale within our markets and our focus on building a high quality portfolio in those top quality markets and our coverage within those markets, the scale and brand recognition that we have on a submarket level is quite significant and I think that’s where it’s most impactful.

I think in terms of opportunities for us, I certainly think with fewer choices, especially on the third-party side that could create a nice opportunity for us to grow that program at perhaps a rate faster than we would have anticipated as we enter 2023.

Jeff Spector: Great. Thank you. And then I just wanted to clarify kind of the thinking about the second half of the year and the initial guidance. Again, it sounds like in April things have normalized again. We have been discussing the tougher comps or decel into the second half and I can’t remember, when you provided the initial guidance, did you say that the bottom half did reflect recession or you really didn’t comment on that?

Chris Marr: Yeah. Didn’t — don’t — didn’t really tie top or bottom necessarily directly to macroeconomic conditions. I think it’s a range of outcomes really based on our expectation of consumer behavior and then how that consumer behavior translates into customers for self-storage across, however, the economy may move here, whether it and how it impacts movement basically. But nothing tied directly to one specific economic outcome.

Jeff Spector: Okay. Thank you.

Operator: Thank you. We now have a follow-up from Smedes Rose. Smedes, your line is open. Please go ahead.

Nick Joseph: Thank you. This is actually Nick Joseph here with Smedes. I appreciate you taking the call at the end. There was a question earlier on the impact of kind of regional banking and lending broadly on maybe acquisition opportunities. And so just curious kind of similar idea but on supply and new starts and how you would expect those to trend may be given the contraction in the lending environment?

Chris Marr: Yeah. Certainly, what’s going on in the lending environment directly impacts self-storage developers and how they think about starts or how they think about projects going forward. And I think you have got, obviously, the tailwind to new development being continued strong fundamentals within self-storage. I think, again, the headwind against that is cost, raw material and labor delays with supply chain and raw materials and certainly cost of capital, particularly the lending at the regional and local level. While we have seen issues with certain banks and you have seen the larger money center banks talk about overall commercial real estate exposure, I think, there are other product types that are causing a lot of problems for lenders, self-storage is not one of them.

So I think it’s a healthy balance. I think it certainly puts some headwinds in front of development and I think as a result, what we are seeing in the numbers and our expectation continues to believe that new supply will continue to slow in terms of deliveries here over 2024 and 2025, given where things are today.

Nick Joseph: Thank you very much.

Operator: Thank you. Our final question of the day comes from Juan Sanabria of BMO Capital Markets and it’s a follow-up question.

Juan Sanabria: Thanks a lot, guys. Just on one of the points that was raised at the top of the Q&A, on the net effective in-place rates for existing customers that ticked down sequentially. I guess, how should we think about that for the balance of the year in terms of what’s assumed in guidance from a modeling perspective. Is that going to now reaccelerate and tick up or should we expect that to continue to moderate or just how are you guys modeling that from your perspective?

Chris Marr: Yeah. We expect rates for the new customer to be at lower levels, I am sorry, were you — was it new customer or existing customer that you were asking about?

Juan Sanabria: Existing, the in-place rent per square foot that it ticked down sequentially this quarter, just how that should evolve for the balance of the year as per your guidance or assumptions and guidance?

Chris Marr: Yeah. So the existing — the in-place should grow as it normally does seasonally here throughout the balance of the year.

Juan Sanabria: Thank you.

Chris Marr: You are welcome.

Operator: Thank you. That’s all the questions we have time for, so I will hand back over to Chris Marr for any final remarks.

Chris Marr: Thank you and thanks for listening. Our portfolio construct we believe really shines in the types of markets that we are seeing and the type of economy that we are seeing right now in the United States. So really thrilled with the performance, particularly of our urban portfolio. We think that customer is and the customer base there really performed well in this climate. And we are looking forward to speaking to you again when we end the second quarter. So thank you and have a great weekend.

Operator: Ladies and gentlemen, this concludes today’s call. Thank you for joining. You may now disconnect your lines.