CubeSmart (NYSE:CUBE) Q3 2023 Earnings Call Transcript

CubeSmart (NYSE:CUBE) Q3 2023 Earnings Call Transcript November 3, 2023

Operator: Good morning, ladies and gentlemen, and welcome to the CubeSmart Third Quarter 2023 Earnings Call. At his time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Friday, November 3, 2023. And I would now like to turn the conference over to Mr. Josh Schutzer, Vice President of Finance. Please go ahead.

Josh Schutzer: Thank you, Aena. Good morning, everyone. Welcome to CubeSmart’s third 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 in the third quarter financial supplement posted on the company’s website at www.cubesmart.com. I will now turn the call over to Chris.

Chris Marr: Good morning, and thank you for joining the call today. Our third quarter results reflect the core attributes of our quality focused strategy. Our portfolio with its sector-leading demographics is demonstrating its resilience led by our urban markets with particular strength in New York City. Our operating team is leveraging our sophisticated technology to develop creative ways to meet our customers’ evolving needs, while simultaneously gaining efficiency and minimizing expense growth. Our balance sheet is in excellent condition with a well-staggered maturity schedule having us primed to take advantage of the external growth opportunities that inevitably arise after periods of capital market volatility. As we look ahead, we expect trends in the near to medium-term to remain less consistent with a tight housing market, macro uncertainties and a very competitive street rate environment being somewhat counterbalanced by the resilience and economic health of our existing customers.

What we experienced in the third quarter and what we expect we will continue to experience during this period of inconsistency is the relative outperformance of our properties located in the more urban markets as the demographic makeup of those customers tends to skew more towards renters and the use cases tend to lend themselves to lower churn and longer lengths of stay. Our portfolio construct combined with a continuing decline in the impact of new supply and a healthy existing customer supporting our rate increase program are positive factors heading into next year. While difficult to predict timing with any amount of certainty in the current log-jam and single-family home sales is broken through any combination of buyers and sellers coming together on pricing expectations, a relaxation of interest rate policy or a pullback in costs creating an acceleration in the construction of affordable new homes, our portfolio will most certainly experience a rapid acceleration in top line growth, as that pent-up demand creates movement and customers.

We see the same opportunity on the external growth front, as buyer and seller expectations are gradually coming closer together, along with the need for developers to refinance recent projects, our expectation is we will deliver meaningful external growth, and we have the balance sheet and team in place to capitalize on that opportunity when presented. In the meantime, we remain focused on capturing customer demand in a manner that maximizes the revenue opportunity, while controlling our costs and providing the outstanding customer service our brand is known for delivering. Thanks, and I’ll now turn the call over to our Chief Financial Officer, Tim Martin.

Tim Martin : Thanks, Chris, and thank you to everyone for taking the time to join us on today’s call. Overall, the third quarter results were in line with our expectations entering the quarter. As expected, we continue to experience the top line deceleration we’ve been seeing throughout the year, as we continue to normalize post pandemic and face headwinds from a volatile macroeconomic environment. As we move through the quarter, the pricing environment for new customers became increasingly more competitive, and more competitive than we were anticipating in our prior same-store revenue guidance. As a result, we reduced rates a bit more than we had expected in September and then into October. Net effective rates to new customers were down year-over-year 16.9% during the quarter and that gap widened out in October to 18%, reflective of a more aggressive pricing environment.

Same-store occupancy ended the quarter down 170 basis points year-over-year at 91.4% with the more aggressive pricing our year-over-year occupancy gap narrowed throughout October and we reduced the 170 basis point gap at quarter end to 130 basis point occupancy gap at the end of October. Same-store revenues increased 2.3% for the quarter and 4.5% year-to-date. Based on the impact of the more competitive pricing environment we’re seeing here in the latter part of the year we adjusted our annual expectation for same-store revenues to a range of 3% to 3.5%. We continue to see the positive impact of our technology initiatives and our focus on expense controls. For the quarter, same-store expenses grew 3% and are up just 2.6% year-to-date. For the quarter, we reported FFO per share as adjusted of $0.68, which represents 3% growth over the third quarter of last year.

From an investment standpoint, we had no acquisition activity during the quarter. We continue to take a patient and disciplined approach to capital deployment given current market conditions. As those conditions stabilize, we do believe there will be a period that presents meaningful attractive opportunities for us to invest and grow. Our balance sheet, our partner relationships, and our investment team have us well positioned to execute when the time is right. Meanwhile, our third-party management platform does give us the opportunity to leverage our operating platform in the current environment. We added 41 new stores in the third quarter bringing us to 124 stores added year-to-date and 763 total managed stores at quarter end. Our conservative balance sheet continues to be a source of strength positioning us to be opportunistic, and also to avoid headwinds or earnings pressure over the next 24 months.

Our average debt maturity is 5.6 years, 99.5% of our debt is fixed rate. We have no significant maturities until November 2025 and our leverage levels remains very low at 4.1 times debt to EBITDA. Details of our 2023 earnings guidance and related assumptions were included in our release last evening. Overall, we maintained the midpoint and narrowed the range of our full year FFO per share as adjusted and expect the year to be between $2.65 and $2.67 per share. Thanks again for joining us on the call this morning. Apologies to some of you who had a little bit of a difficulty getting in the queue but it looks like everybody is good. At this time Ynna, let’s open up the call for some questions.

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Q&A Session

Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Jeff Spector from Bank of America. Please go ahead.

Chris Marr: Jeff, if you’re asking a question, you’re on mute. We can’t hear you if you are.

Jeff Spector: Sorry about that. Can you hear me now?

Chris Marr: Yes. There you are.

Jeff Spector: I apologize. Thanks for taking my question. My first question is on New York City. You talked about the strength in New York City, this particular — this quarter. Can you talk about thoughts heading into 2024 and specifically supply pressures, like where do we stand now for New York City. And just to confirm, are you talking about the five boroughs. Thank you.

Chris Marr: Yes to confirm talking about five boroughs continue to see good but to a lesser extent strengthen in Westchester County, Long Island, a bit of supply pressure in North Jersey and we expect that to continue. But if you’re focused on the boroughs per your question, we would expect that the strength that we’re seeing in the third quarter will continue into the fourth quarter and into 2024. For all the reasons that I mentioned in my prepared remarks you have higher percentage of renters, you’re less impacted by the single-family home market. You have a use case where folks are using us more as an ancillary use to smaller living spaces and you’re still seeing good movement and good movement within the boroughs. So, pretty constructive on that.

Macro across the country, I think supply is going to be helpful to storage in 2024 and likely into 2025 and then specifically in the boroughs. We continue to see a less and less impact of supply seeing no deliveries in the Bronx. There’s a couple in Brooklyn that should be completed either this year or early next year, which will have a minimal and fast impact on the cube portfolio and similarly in Queens. I would say the only borough where we are experiencing some pressure from supply. And again just given the dearth of storage in Staten Island, it only takes one or two new but we’re actually working through that I think pretty constructively and are optimistic that we’ll see some reacceleration there as we get into the back half of next year.

So, overall from a consumer perspective, a supply perspective, pretty constructive on urban New York in particular, but we’re also seeing it in Boston and Chicago and I come back in Washington D.C. from the supply impact that we experienced there. So, constructive there. Thanks.

Jeff Spector: Thanks, Chris. Very helpful. And the second question, can you just walk through the dynamics between lowering the same-store, but maintaining FFO?

Tim Martinr: Yeah. Happy to. Great question. Ultimately there’s not one thing to point to as to the offset. But rather it’s a lot of small things that are counterbalancing the lowering of same-store NOI expectations at the midpoint and maintaining on the FFO side our non-same-store portfolio, certainly a portion of it is more urban focused and therefore that has continued to outperform our expectations that some of it within our joint ventures we’re seeing better-than-anticipated lease-up again in some of our newer joint ventures that are more urban focused. Our third-party management platform is growing a bit faster than our expectations. You could see that in the store count that we added that puts us up higher within the range of our expectation on fee income, it’s also improved our expectations as it relates to tenant insurance revenues.

Our continued focus on controlling what we can and focusing on cost efficiencies as has given us some good news on our overhead both at the operations level as well as at the corporate level that shows up in G&A. And then a lot of it just comes down to where we expect to land within those ranges of the assumptions and also within a range of ultimately of where we expect to land from an FFO perspective. So there’s no quick easy answer to that question. It’s a little bit of good news in a lot of areas that provides the offset.