CubeSmart (NYSE:CUBE) Q4 2023 Earnings Call Transcript

CubeSmart (NYSE:CUBE) Q4 2023 Earnings Call Transcript March 1, 2024

CubeSmart isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen, and welcome to the CubeSmart Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] This call is being recorded on Friday, March 1, 2024. I would now like to turn the conference over to Josh Schutzer, Vice President of Finance. Please go ahead.

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

Chris Marr: Thanks, Josh. Good morning, everybody. Last evening, we provided our solid operating results for the fourth quarter of 2023 and introduced our expectations and guidance on our key metrics for 2024. Tim Martin will provide more color and insight on both of those in his prepared remarks. At a very high level, operating trends have stabilized when comparing to the volatility that we experienced in the first 3 quarters of 2023, but price sensitivity for new customers remains elevated given the tight housing market and a particularly challenging competitive environment. Once customers enter the portfolio, they remain strong as they have elevated lengths of stay and continue to accept ECRIs and our customer credit metrics remain in line with pre-pandemic levels.

Our urban markets have outperformed the faster deceleration of our Sunbelt markets as the lower beta nature of these markets has continued to support steadier performance. The strong demographic profile for our portfolio should support performance through any phase of the cycle as New York City remains the bright spot in our portfolio with strong performance over the last year now making it our highest growth market. The transaction market remains quiet as the recent rise in rates has kept the cost of capital elevated and we continue to have a bit of [indiscernible] spread between seller expectations and our expectations. Our investment-grade balance sheet is in excellent shape. No material maturities, minimal exposure of floating rate debt and significant leverage capacity, which we believe positions us to transact as attractive opportunities return to the market.

Thanks for joining the call today, and I will turn it over to Tim for additional commentary. Tim?

Tim Martin: Great. Thanks, Chris. Good morning, everyone, and thanks for taking a few minutes out of your day to spend it with us. I’ll provide a quick review of fourth quarter results and then jump into some additional color on ’24 expectations and guidance. Same-store NOI growth for the fourth quarter was 1.2%. Driving that were same-store revenues growing 0.4% for the quarter with realized rents per square foot growing 1.8% compared to last year, offset by occupancy levels dropping 110 basis points on average compared to last year. Same-store expenses declined 1.8% during the fourth quarter, driven largely by the real estate tax line item as we received some significant refunds and tax reductions in the fourth quarter. We reported FFO per share as adjusted of $0.70 for the quarter, representing 4.5% growth over last year.

During the quarter, we also announced a 4.1% increase in our quarterly dividend up to an annualized $2.04 per share. On yesterday’s close, that represents a 4.7% dividend yield. On the external growth front, in the fourth quarter, we acquired one store for $22 million. We partially opened one of our JV development stores, and we added 43 stores to our third-party managed portfolio, bringing us to 167 stores added for the year and 795 third-party stores on the platform at year-end. As Chris mentioned, our balance sheet position remains strong. All of our debt, except for our revolver, is fixed. So less than 1% of our outstanding debt was variable rate as we started 2024. We faced no significant maturities until November of ’25, and we have a weighted average debt maturity of 5.4 years.

We further reduced our leverage levels during ’23 and ended the year at 4.1x debt to EBITDA, giving us ample capacity and liquidity to finance future growth when attractive opportunities present themselves. Looking forward, details of our 2024 earnings guidance and related assumptions were included in our release last evening, our 2024 same-store property pool increased by just 6 stores this year. Consistent with prior years, our forecasts are based on a detailed asset-by-asset ground-up approach and consider the impact at the store level, if any, of competitive new supply delivered in ’22, ’23 as well as the impact of 2024 deliveries that will compete with our stores. Embedded in our same-store expectations for ’24 is the impact of new supply that will compete with approximately 27% of our same-store portfolio.

For context, that 27% is down from 30% of stores impacted by supply last year and down from the peak of 50% of stores impacted back in 2019. The midpoint of our revenue guidance range assumes that the housing market improves marginally off of 30-year lows but remaining well below historical norms. This would lead to negative year-over-year gaps in both occupancy and rate, reaching parity in the fall and then growing slightly from there. The high end of our revenue guidance range implies more of an improvement in the housing market, driving seasonality closer to historical levels. This improved demand environment would lead to year-over-year gaps in both occupancy and rate to reach parity in mid-summer and then flip positive in the back half of the year.

And then the low end of our revenue guidance range assumes another year of largely frozen housing mobility driving another year of muted seasonality throughout the spring and summer. This slower demand environment would mean a continued lack of pricing power causing the negative year-over-year gaps in occupancy and rate to persist through most of 2024, albeit at narrowing spreads from current levels. Shifting to same-store expenses. We’ve had a lot of success in controlling our operating expense growth here over the last 2 years, averaging expense growth of only 2.2% compared to 6% expense growth for our storage peers over the same period. That’s great news for 2022 and 2023 but sets us up for some pretty tough comps in 2024. We introduced same-store expense growth in a range of 5.5% to 7% growth in ’24.

On an absolute basis, there are a few line items that are pressuring expense growth into ’24. The biggest driver is real estate taxes. As I mentioned earlier, this quarter’s guidance beat was largely driven by some significant refunds and tax reductions, again, great news for ’23, but creates a really difficult comp for 2024. Overall, we’re expecting real estate taxes to grow in the high single digits this year as a result. Property insurance is another line item that will continue to see pressure. Our annual insurance policy resets on May 15 of each year, and we had a 43% increase in cost last year. So that continues for the first 4.5 months of ’24. And then beyond that, we’re anticipating another 20-plus percent increase in our renewal, again, this year.

The third area of pressure comes from winter-related expenses, primarily snow removal costs. We had a very favorable winter in 2023 from that perspective and our guidance assumes a more normal level of those costs in 2024. So overall, expenses are, again, expected to grow 5.5% to 7%, but taking out real estate taxes, property insurance and snow removal costs, all other expenses combined are expected to grow plus or minus at inflationary levels. Our FFO guidance does not include the impact of any speculative acquisition or disposition activity as levels of activity and timing are difficult to predict. To wrap up, thanks to our entire CubeSmart team for a really productive year in 2023. We’re excited about our position to execute our business plan in 2024.

Thanks again for joining us on the call this morning. At this time, Joanna, let’s open up the call for some questions.

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Q&A Session

Operator: [Operator Instructions] The first question comes from Kassandra Fieber from Truist Securities.

Kassandra Fieber: So your acquisition activity was pretty muted in 2023. In your 2024 guidance, you’re assuming acquisitions of $100 million to $200 million. You touched on this a little bit in your prepared remarks. Can you share what you’re seeing in the acquisition market? And then also, are there any markets that you’re focused on specifically?

Tim Martin: As we sit here today, we don’t have a whole lot of visibility in the range above the range as it relates to external growth. There’s very little product on the market as we sit here today, although we’ve certainly heard from brokers in recent months that there were a number of BOVs on the shelf, and there was seemingly some activity that was stirring up here when we saw rates move downward a little bit. I think there was some excitement that there was going to be a wave of potential opportunity that seems to have cooled off for the moment. So difficult to predict. What we do know is that our team is ready. We’re still underwriting every opportunity that we can get our hands on our availability of capital, we’ve never been in a better position from a leverage perspective to take advantage of external growth opportunities they present themselves.

All that said, we fully expect to remain patient and wait for the right opportunities for us to jump in and start to be more acquisitive than we have been here over the past year, 1.5 years.

Kassandra Fieber: Okay. That’s helpful. And then can you talk about what you’re seeing in New York in terms of demand trends in January and February? And then given that New York is one of your strongest markets [indiscernible], how doing 2024 prospects compared to the overall guidance you provided for 2024?

Chris Marr: Thanks for the question. This is Chris. Demand trends in January and February were seasonally consistent in the New York MSA as we would have expected based on historic trends, so it continues to be a solid market for us. And as we think about New York as an MSA and each of the individual components of that certainly expect the boroughs to outperform again in 2024, our expectations of kind of the broader portfolio from a revenue perspective. And that’s going to be the boroughs at one extreme and then pressure in North Jersey. I’m sure you’ve heard this from others as a result of a greater impact of new supply in some of our North Jersey markets than the MSA as a whole. So we’ll continue to be a top market for us in ’24.

Operator: The next question comes from Eric Wolfe at Citi.

Eric Wolfe: You mentioned in your prepared remarks that when you get customers in the door are showing signs of strength. So I was curious, when you put bigger discounts in place or promotions in place like first month 3 and 40% off, what is usually assumed in terms of getting those discounted tenants to market? Like how long did you take on average? What’s the probability that they accept versus those that are coming in closer to market?

Chris Marr: Yes. I think if you just look at it because it’s kind of a customer-specific question. But if you look at it across the portfolio, obviously, the use of a first month free there’s a lot of put and take there. So very attractive to the customer. Obviously, they get to market in month 2 when full rent kicks in. They tend to be a more volatile customer because there’s obviously an appeal to having that first month be free. And over an entirety of that population or that cohort, they tend to be a lower quality customer in terms of length of stay and credit. When you think about Internet discounting, again, there’s not a one size fits all. It’s going to depend upon the behavior we expect from that specific customer. So typically, you may have rate increases that get you all the way back to market within the first 4 months, sometimes that’s the first 6 months really depends upon the customer.

But that’s the typical cadence and difference at a macro level between those two cohorts.

Eric Wolfe: Got it. That’s helpful. And then I was also just wondering sort of as you look at things today, what do you think are sort of the best leading indicators for street rates, meaning those that have the highest correlation to future changes in those street rates. You talked about how you don’t expect much improvement in the housing market. But if I’m trying to calculate where your street rates are today, it kind of looks like they’re in the 13. So it seems like you need to see a reasonable amount of improvement to kind of get up to that level that you discussed were things crossed over in the fall. So I was just trying to understand what you’re looking at today that helps you sort of form that guidance.

Chris Marr: Yes, very nuanced question and a nuanced answer. So part of it, obviously, is what happened last year, right? So when we talk about getting back to parity or crossing over, a part of that is what was a very unusual and pretty tepid demand profile in 2023, especially as we got later into the year, and we really did not have a typical busy season last year at all. When you think about, again, the various puts and takes as it relates to this year, movement, ultimately, is the answer. We rely somewhat on housing to create that seasonal uplift in demand, but there are, obviously, other drivers that relate to that as well. So we look for that mobility, which, again, in the next couple of weeks, you start to look for an opportunity to seasonally move rate up and so March 15 to June 1, June 15, are going to be pretty telling as we think about how this year is going to play out.

The health of the consumer seems really good. I mean our customer metrics are continue to be high quality. And we continue to see our existing customer base be pretty solid. So that’s a positive for us. So really, it’s going to come down to just that general mobility, and we’re going to know a lot more starting mid-March through June to see how ’24 is going to play out.

Operator: The next question comes from Jeff Spector of Bank of America.

Elizabeth Doykan: It’s Lizzy on for Jeff. I was hoping for more color on your lower-performing Sunbelt market and primarily Florida, that was kind of touched on at the start of the call. Can you speak to any common themes you’re noticing across your Sunbelt markets really more so on move-in rate trends? And then also curious to hear how the existing customer is responding to your ECRI program today? Thanks.

Chris Marr: Yes. So taking it from the end of the beginning, if the question was that, is there any different behavior in Sun Belt markets where the existing customer base then that answer is there is not any different behavior in the Sunbelt markets than it is in the rest of the country. Again, healthy consumer, healthy customer and the rate increase process pretty consistent with what we saw certainly in the last 6 months of last year. From an occupancy and demand perspective, generally across the Sunbelt, you’ve got markets that are higher volatility than the markets that are more urban. You have markets that rely more on housing than you do in the more urban markets. West Florida, you have a continued bit of an impact from a benefit from hurricanes that has make comps a little bit more difficult.

You’ve obviously got a little more of an impact of supply in the Sunbelt markets than you do in the more urban markets. I think those are kind of the high-level reasons why you’re seeing some difference in performance. And in this stage of the cycle, you would expect that the Chicagos, New Yorks, et cetera, are going to perform a bit better because they just rely less on that housing movement and more on other drivers of demand.

Elizabeth Doykan: Great. Thank you. And I was also curious maybe this was touched on earlier in someone’s question as well, but back in the fall, you guys really spoke to sort of the website upgrades you were making and how that was translating into top of the funnel demand. Are you able to quantify how that’s impacted your conversion rate for bringing in new customers into year-end and into as we sit in February?

Chris Marr: Yes. The impact of those changes improved modestly the conversion rate of customers. Again, it’s difficult to isolate that relative to other market forces. Obviously, we continue to see trends in marketing spend that are bouncing all over the place, depending upon who we’re competing against in those particular markets. And so that puts pressure on us from the other side of the equation, and we’re seeing a little bit different customer behavior. But all these continuous improvements in terms of making the experience for the customer as simple, easy and intuitive as possible. We believe and they will continue on as we move into ’24 and beyond to continue to drive us towards meeting that customer where they want to be met.

Our data would tell us and our focus groups that third of our customers are perfectly happy with a self-service model, but equally, we have another third who continue to want an in-store teammate who is going to help them with their storage needs and walk them through the process in a very personalized way. So our focus is on how do we capture all those customers at either extreme in the way that they want to be served and not just try to create kind of a one-stop one way of doing things because we don’t think that will produce the right answer over the long term.

Operator: The next question comes from Todd Thomas from KeyBanc Capital Markets. Apologies from Juan Sanabria from BMO Capital Markets.

Juan Sanabria: Just hoping you could share your thoughts on kind of one big question that we kind of consistently get from investors with regards to the move-in, move-out spread and how that’s been fairly negative and how that should not be a point of concern for an eventual recovery here. There’s clearly a benefit from ECRIs that helps offset that negative new lease spread. But if you could share your thoughts and just general views on the offsets and why that isn’t a point of concern longer term, I guess, for the business given the pricing pressure on new customers?

Chris Marr: I’ll start. I mean I think part of it is that if we had our [indiscernible], we’d much rather see that be positive. I think the reality is, is that we’re still adjusting asking rates to pandemic levels and coming off of post-pandemic levels. And then I think you compare those to pre-pandemic levels and overall rates look on a compounded growth rate basis, to be here in ’23 and heading into ’24, kind of where you would think they would have been had you asked us that question pre-pandemic. That said, clearly, there are drivers that we’ve talked about for several quarters and others have talked about the overall levels of demand due to the housing market are a little bit lower than you would normally expect them to be.

So I don’t know how to answer the question from the standpoint of is there a concern asking rate, there’s always a roll down. It’s just the roll down today is a little bit greater than it typically is when comparing customers who are leaving the platform versus customers who are coming in.

Juan Sanabria: Can you give a sense of how the move-in rates are compared to last year for kind of the fourth quarter, the trend did December end better? And how are January and February going and maybe juxtapose that with move-in, move-out spreads?

Chris Marr: Yes. So if you think about rates to new customers, they were down in October, about 18% when we average out the quarter and kind of the exit, it was around 14%. And then here, the average for the first 2 months of the year expanded about 100 basis points, it’s around 15% negative.

Juan Sanabria: And how about the spreads for new customers? Is that steady or contracted at all?

Chris Marr: Yes, stayed relatively steady, and it’s about negative 34%.

Operator: The next question comes from Michael Goldsmith at UBS.

Michael Goldsmith: My question is on the same-store revenue guidance. Can you just talk a little bit about or what is assumed in the guidance in terms of the gap between the urban and more suburban markets and the trajectory through the year? It seems right, like the New York market has clearly been outstanding relative to the rest of your markets. So I’m wondering how you’re thinking about kind of similar-ish urban markets and how the gap is positioned relative to some of the other markets that you have exposure to? Thanks.

Chris Marr: Yes. I think consistent with some commentary to a previous question, our macro expectation is that those markets that rely less on housing change to drive demand will outperform over the course of the year, the other markets that depend more on that customer. So it’s going to vary across region and across the portfolio, again, also related to how 2023 played out. But overall, I think the markets that showed strength in the fourth quarter, we would expect to continue to show strength as we go throughout 2024. And I think some of the markets that had some greater weakness in the fourth quarter have bottomed out and will be better performing, albeit not as strong as the urban markets through ’24 and the other markets somewhere in the middle.

Michael Goldsmith: I appreciate that, Chris. And my follow-up is, last year, you had 70 properties under the same-store pool, and there’s been a clear benefit do with the gap between the 2023 and 2022 same-store pools. This year, you only have 6 properties entering the same-store pool, but I was wondering how are you thinking about the 2023, the new entrants in 2023 that had that drove a lot of outperformance this year, what is the expectation for 2024 as you kind of do your asset-by-asset buildup? Thanks.

Tim Martin: So just to be clear, your question is the stores that entered the ’23 pool, what is their continued contribution into ’24. Is that the question?

Michael Goldsmith: Yes. Can we continue to sustain momentum? Is there still upside? And are they still kind of underperforming kind of like the entire same-store pool?

Tim Martin: I think overall, they are performing a little bit better than the overall same-store pool, but it’s a mix. So if you think about the Storage West portfolio, we have — and that was the biggest chunk of the stores that were added this past year. Overall, for that portfolio, the San Diego and Las Vegas properties are performing really well. The stores in Phoenix, consistent with Chris’ commentary earlier, Phoenix is one of the Sunbelt markets that has put a little bit more pressure due to housing and some supply issues there. So overall, the contribution from those stores relative to the portfolio average, it’s a positive, but less positive in ’24 than it was ’23. And then the 6 stores that are added this year are negligible. So they really don’t have any impact.

Operator: The next question comes from Keegan Carl at Wolfe Research.

Keegan Carl: I know this one was touched on a little bit, but just curious, one for Tim, how are you kind of embedding your marketing expense growth in ’24, just given as Chris alluded to it’s kind of market by market, but I would love to have more color there.

Tim Martin: How we’re approaching it? Is that your question?

Keegan Carl: Yes. I guess just what are your expectations for marketing expense growth? Obviously it can be volatile, just at least your initial guidance where you have it set up.

Tim Martin: It certainly can be. At the midpoint of our expense guidance, it would assume that marketing expenses is plus or minus inflationary type expenses. As you have seen in the past, we tend to be a little bit steadier on marketing spend relative to some others. We tend to press the pedal down a little bit when we see great returns on that spend, and we tend to pull it back a little bit when we don’t. And so that can create some volatility from quarter-to-quarter. But overall, our expectation is that marketing expenses and that bucket of expenses that is more inflationary in nature not like the ones that I mentioned in my preamble of taxes, insurance and snow.

Keegan Carl: Got it. And another one for you, Tim. Just kind of curious on snow removal. We’re now in March. So just what would be driving concerns kind of the rest of the quarter here?

Tim Martin: The concerns are that it was virtually zero last year, and it can snow. We’re a little bit more heavily weighted to the Northeast markets than some others and there are years that it snows in November and December, too. So we don’t know what those are going to look like here in the fourth quarter of ’24. It doesn’t take a lot of snow events for it to add up.

Operator: The next question comes from Spenser Allaway at Green Street.

Spenser Allaway: Maybe just shifting back to property taxes for a second. Do you have a sense of what percent of the portfolio is currently within tax abatement burn off, and if so, do you also have a sense of what the magnitude of the increase in property taxes that those properties would incur?

Tim Martin: Sorry, the percent of stores that are — can you just repeat that —

Spenser Allaway: Yes, no problem. The percent of the portfolio that is currently within like a tax abatement burn-off?

Tim Martin: So we have some stores in New York that are in that phase, but that’s really the only place that we have it across the portfolio. So overall, it’s a really small percentage as you think about it from the entirety of the portfolio.

Spenser Allaway: Right. Yes. Of course, yes, small percentage. But then are you guys, do you have a set magnitude of step-up in property taxes is going to be over the next several years?

Tim Martin: We do. I think we disclosed the impact that we saw from ICAP burn-offs in our SEP as we always do. I think that number, I’m trying to pull it here, but I think it was $600,000, I believe, plus or minus for the fourth quarter. That number will continue to grow a little bit into ’25 and ’26 and then I think it largely levels off after that. So it has an impact. We have historically disclosed that impact. It’s on Page 17 of the sup. See in the fourth quarter, it was 678,000 was the impact of those ICAPs burning off. I’m sorry, 678,000 for the whole year, not for the quarter.

Spenser Allaway: Yes, yes. No, of course. I was just trying to get a sense of what you guys might have been underwriting for what was coming down the pipe here in the next year or two, but I appreciate the color.

Operator: The next question comes from Samir Khanal of Evercore ISI.

Samir Khanal: Chris, in your opening remarks, I believe you just mentioned that operating trends have stabilized. Maybe give a little bit more color on that comment as we try to assess your guidance here. Thanks.