CubeSmart

Good morning. Thank you for attending today's CubeSmart first quarter 2022 earnings call. My name is Nate and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on the telephone keypad. I would like to now pass the conference over to our host, Josh Schutzer, VP of Finance with CubeSmart. Josh, please go ahead.

Thank you, Nate. Good morning, everyone. Welcome to CubeSmart's first quarter 2022 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 risk 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 first quarter financial supplement posted on the company's website at www.cubesmart.com. I will now turn the call over to Chris.

Thank you, Josh. Thank you all for participating as we launch the earning season for the self-storage sector. We consider the first quarter to have been a very solid one, as evidenced by our 23.4% growth in quarterly FFO per share and 21.4% same-store net operating income growth. as we continue to execute on our business plan. Our consumer demand trends remain very healthy. We experience positive rental trends across all of our markets. Those positive demand trends have continued into April, and we are optimistic for a successful, busy spring and summer rental season. Tim will provide detail and color on our financial results and our improved outlook for the balance of the year. Looking beyond quarterly results, we believe the self-storage industry and Cube specifically are uniquely and perhaps best positioned to benefit from the current uncertain economic climate. An inflationary cost environment combined with a rapid escalation in real interest rates should create a bit of a headwind that will limit future new self-storage developments to only those markets and locations that developers believe can grow rental rates sufficient to generate attractive pro forma returns. What we are seeing and hearing from folks currently in market bidding out new construction projects is that hard costs have escalated above inflationary levels and continue to escalate, and rates on construction financing are now in the 5 percent range and rising. This hypothesis, if proven correct, should create a smooth path for owners of existing self-storage assets to continue to enjoy solid performance over the next several years. In the event the aggressive Fed actions push the economy into a recession, we believe our Q portfolio, given our focus on high-quality assets and primary markets with lower volatility, should outperform those portfolios that have benefited from the exposure to lower-quality markets during the recent cycle. Pandemic-induced consumer trends have created an environment in which we in the self-storage sector and Qube specifically have outperformed other real estate classes We believe that the current macroeconomic environment, when combined with our sophisticated operating platform, has the potential to lead to continued outperformance relative to other sectors. With that, let me turn it over to Tim for some color on our results.

Thanks, Chris, and thank you to everyone on the call for your continued interest and support. As Chris touched on, operating fundamentals remain very strong, as expected, And our first quarter results came in at the high end of our guidance. Same-store performance included headline results of 15.6% revenue growth and 2.9% expense growth, yielding NOI growth of 21.4% for the quarter. Average occupancy in the first quarter was 93.6%, and we ended the quarter with physical occupancy of 94.1%. We reported FFO per share has adjusted a 58 cents for the quarter, representing 23.4% growth over last year. We remain active and disciplined in our pursuit of external growth opportunities, and after an extremely active fourth quarter, we were a little less active in the first quarter, closing on one wholly owned store for 32 million. On the third party management front, we added 33 stores in the first quarter, Transitioning to the balance sheet, we continue to focus on funding our growth in a conservative manner that's consistent with our investment grade BBBAA2 credit ratings. Our balance sheet is in great shape with an average debt maturity of 6.8 years. Over 94% of our debt is fixed rate and we have no debt maturities in 2022 and only 31 million of maturities in 2023. As you'll recall, we called our 2023 bonds and refinanced those at the end of last year. So we're really well positioned from a balance sheet perspective, which is a good place to be given all of the recent market volatility. Details of our 2022 revised earnings guidance and related assumptions were included in our release last night. Based on the strong operating fundamentals we've discussed and our positioning entering the spring leasing season, we've increased our guidance range for the full year FFO per share by a penny at the midpoint. We also improved guidance for same-store revenue growth same-store expense growth, and same-store NOI growth as detailed in our release. So we're off to a great start here in 2022. Thanks again for joining us on the call this morning. At this time, Nate, let's open up the call for some questions.

Absolutely. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you are using a speakerphone on today's call, please remember to pick up your handset before asking a question. We will pause here briefly as questions are registered. Our first question goes to Smides Rosa with Citi. Smides, your line is open. Please go ahead.

Hey, good morning. This is Smides. I really just was interested in hearing what you guys are seeing, I guess, in occupancy levels now thus far in the second quarter and kind of how you're thinking about occupancy trends over the course of the year and any changes from kind of how you've talked about it previously. It seems like, at least from my perspective, occupancy is maybe a little more sticky than we had initially anticipated, but I'm interested in your thoughts.

Hey, it's me, it's Chris. So, as of yesterday, I believe, the physical occupancy here at the end of April, 94.6 in the same store pool, which is, I think, the same 10 basis points difference to last year's 94.7, same 10 basis points as we would have experienced at the end of March. So occupancy has been very solid. It is performing a little bit better than how we thought about it from just our planning for the year. But again, broken record, we don't manage to that occupancy number. It's really an output of how we think about pricing. But I would say from a volume perspective, Rental activity since January has been very good and quite strong. We saw it good here again in April. And on the vacate side, a little bit elevated from last year, which was what we would have anticipated. And again, as we move here into April, things are coming in right about on plan as we think about the pace of vacates. All in all, I would say, as I noted in my opening remarks, it's a pretty constructive environment for storage, and nice to get the first three, almost four months behind us, and we're cautiously on it as we go into the rental season.

In your updated guidance, you brought down the expense expectations a little bit. I was just wondering, was there anything in particular driving that?

Yeah, part of that, Smedes, is the first quarter.

First quarter had a little bit of good news on real estate taxes and some other efficiencies. And I mean, it's a modest improvement in that range. So overall, no material changes in our expectations. I think the pressure over the balance of the year that will bring the rate up into closer into the guidance range is going to be a little bit of pressure on real estate taxes as we have a tough comp at the end of the year, in the back half of the year. and then a little bit higher growth in personnel expenses as we continue deeper into the year.

Okay. Thank you, guys.

Thanks, Smith. Thank you, Smith. Our next question goes to David Ballagher with Green Street. David, your line is open. Please go ahead.

Good morning. Just wanted to touch on movement rates. Obviously, last year was special in the sense that there was that positive releasing spread out there. Can you update us on where that spread is today and how that looks moving forward? Sure. Good morning.

As we sit here today, that negative spread is better than what we would have experienced historically. But that positive spread split to the more historical pattern of a negative spread. The first quarter is always the deepest in terms of that negative spread. And in the quarter, it was about 10%. Great.

Thank you. And I just wanted to touch on cap rates. Obviously, with interest rates rising rapidly and a more hawkish stance from the Fed, Have you seen any change in cap rates out there in the transaction market? It seems like there'd be some, perhaps a negative carry for a lot of the more levered buyers out there. Just curious on that.

Yeah, great question. I think it's a little too early to see it show up in the transaction market. At some point, you would think that there would be an impact of higher borrowing costs, but it's still today a pretty aggressive market out there. There are a lot of bidders who want to grow their portfolio of self-storage holdings, and so I think it would take a little bit longer time for it to show up in the transaction market.

Great. Thank you. Thanks.

Thank you, David. Our next question goes to Juan Tanabria. Juan, your line is open. Please go ahead.

Hi, thanks. I just wanted to ask about rental bumps, the ECRIs, if there's any signs of any stress with the consumer. It doesn't sound like it, but I just wanted to sanity check. I mean, we're hearing some signs of consumers pulling back on discretionary items like Netflix or whatnot. So just curious on that. how the markets reacted to different tests you're running on rent bumps.

Yeah, Juan, good morning. It's Chris. We have not seen any change in our customers' behavior in their reaction to receiving an increase in their monthly rent. We continue to test. We have pretty significantly closed the gap to the spread between the in place and the asking for a new customer. I think psychologically, I've said this before, when you're going to the gas pump and paying $5 a gallon or you're going to the grocery store and being shocked by what the what the bill looks like as you check out. I think getting a rate increase is just another fact of the current inflationary environment. So we continue to test, haven't seen any change at this point in vacate rate or other communications from our customer compared to what we've seen over the last few years.

Great. I know CapEx really doesn't get a lot of attention, but just curious on what the budget is on a dollar per square foot basis given the inflationary environment and what you noted in the intro on development costs.

Yeah, in terms of like a per square foot on the CapEx side, no real move. When you think about it, it's the large dollar items are always when you have to paint every so often depending upon the climate, repairing or replacing the roof, and then seal coating the drive aisles. Those are the three big drivers. We've seen cost increases certainly, but nothing when you look at it across the overall portfolio that has really changed that number in any meaningful way. On the construction side, yeah, to your point, you're seeing 20% to 40% increases in construction costs overall. Again, specific to the type of construction you're doing, but certainly it's gotten to be a lot more expensive on a per square foot basis to build than it was even 12 months ago.

And then in addition to the recurring type of CapEx, we do have some specially focused investments Over the past two years, we had some upgrades in air conditioning systems, which are disclosed and part of our ESG efforts, solar investments, as well as some lighting upgrades that are consistent both with our objectives under ESG and also provide some cost savings and some relatively short payback periods over time.

And Tim, if I may just prod the solar and HVAC equipment stuff, is that materially keeping down your utility costs relative to what you would see given the inflationary environment today? Just trying to understand the payback there.

No, I wouldn't say it's materially impacting short-term. You're looking at a return. If you're looking at a return on those investments measured in multiple years, three, four, five years over time, certainly those do have an impact on helping to reduce our energy costs energy costs on the solar side, repair and maintenance expenses on the air conditioning investment. So there is a payback that is helpful. I wouldn't say that it's material to a quarter or to a year, but helpful on the margin.

Thank you. Thanks. Thank you, Juan. Our next question goes to Jeff Spector with Bank of America. Jeff, your line is open. Please go ahead.

Good morning. One follow-up based on the prior questions. What is the current length of stay? I know that's been increasing for a number of years now. What's happening now in the portfolio with length of stay?

Good morning. It's Chris. It continues to grow in terms of the existing customers and about how long they have been in the portfolio. And right now it's in that kind of 15, 16 month type of range. And I think about 40, almost 46% of our customers have been with us longer than two years. And clearly that's pushing out that length of stay. On the median side, when you think about the reality that we have a whole bunch of really short-term customers and then we have that 46% or so who have been with us for quite a long period of time, we did see a trend at the end of last year with an increase in the short-term customer. which was kind of interesting. I think it likely related to what was going on in the housing market at the end of last year. I think we saw a lot of customers who had delays in their homes or new homes or remodeling, whatever it was, being completed, and they needed unexpectedly self-storage for a month or two. That's normalized a bit here as we've gotten into 2020. And then, you know, we do expect in certain markets that the college student will be back in a more normalized way this year as well.

Okay. Thanks, Chris. And then, Chris, I guess if we could dig a little bit more into April, maybe tying that into the increase in the same store core guidance, because the guidance, new guidance was well above our estimate, and I'm assuming the streets. but clearly the market is a bit concerned of maybe what will transpire as the year continues.

Yeah, I mean, April, again, we have, what, 60 days since we initially provided the guidance. So, you know, at the margin, we've seen support from our customers on the move-in side, and we've seen vacates that have been in line with expectations. That gives us comfort. that the lower end of our range of expectations is likely not in that area that we originally provided. Obviously, nature of our business is when we're back together in July, we will have significantly more certainty as to how the rest of the year goes. Feeling good about customer behavior here, as I think was noted in a different question, the back half of the year, last year, rental rates were continuously pushed and quite elevated. So what will play out here over May and June is just giving us a sense for how that summer season is going to play out, what the market looks like from a rental rate perspective, and I think that will influence how we think about, you know, how we think about updating guidance for the back half of the year.

Okay, thank you. And then my last question, Chris, you commented, you know, that some markets may have benefited more over the past few years than others. Any particular watch markets?

No, I think just macro, you know, the concept and thesis is that the market the smaller markets have experienced greater volatility than the larger, better demographic markets. And I think you can see that in Tucson. You can see that in, boy, off the top of my head, I'm not coming up with other smaller markets we're in, but you can see it in markets like that. I think in the current environment, if you look forward, I think the better demographic markets that have less volatility are likely to benefit from the way the economy seems to be shaping up.

Great. Thank you.

Thank you, Jeff. Our next question goes to Sameer Kunal with Evercore. Sameer, your line is open. Please go ahead.

Thanks so much.

So, Chris, when I look at New York, it held up pretty well in the first quarter. And maybe just kind of, you know, just provide a bit more color in how you think that New York MSA plays out for the balance of the year, both from an occupancy and rate growth standpoint. Just trying to see if your views have changed, you know, from the last time you provided guidance here.

Yeah, thanks for the question. So at the margin, New York is performing a bit better than what our view would have been 60 days ago. I think for, again, rolling here into April, occupancies continue to be up nicely over last year, 90, 80, 90 basis points or so, which is the continued strength of the consumer across the entire MSA and each of the boroughs. So that's given us some comfort. You know, you continue to have supply pressure in Queens, you have supply pressure in Brooklyn, nothing new, and we're navigating through that. I think from a performance perspective, we had 20 basis points of acceleration from Q4 to Q1 in New York, that is with the change in the same store pool. I think, I don't have the data right here in front of me, but if we look at the old pool, Q4 to Q1, I think that would have gone the other direction. We would have had 20, 30 basis points or so of deceleration. So plus or minus, the stores in New York are performing at about an 8% top line growth from that perspective, and we feel pretty good about that. Again, I think I've said before, when you think about the pace and the shape of the rest of the year, those markets that have had 25, 20% same-store revenue growth are going to decelerate throughout the year at a more rapid pace than New York. And we feel pretty constructive about it at this point, recognizing that the supply that we're navigating through does continue to impact us specifically in those two boroughs.

And then I guess my second question is around transactions. I know you said there hasn't been much change on sort of cap rates at this point, but have you seen any changes on sort of product coming to market where sellers are saying, look, this is maybe the time to to load off some of these assets because valuations may have come down a little bit, but who knows what happens over the next six to nine months. Are you seeing more products sort of come in the market now?

We're still seeing quite a bit of opportunity to underwrite and evaluate potential acquisitions. It's still very, very active from a quantity standpoint, not at the level it was last year. Last year was an exceptional level of volume. but it's still a very, very active market. To get deeper into your question as to the motivation, I don't know everybody's motivation as far as why. It's hard to say why somebody's selling when they're selling, but certainly there is an awful lot of stuff that's out there. I think there will be some portfolios that will come to market here as the year progresses, and it's an interesting backdrop because there is a lot of volatility in the market, and at some point, You know, that's going to impact some buyers more than others as to how they think about their returns, their utilization of leverage, and the like. So it's going to be an interesting couple months here to see how all of the stores and the portfolios that are out there, you know, work through the process.

Thanks very much.

Thanks. Thanks. Thank you, Samir. Our next question goes to Key Ben Kim with Truist. Key, your line is open. Please go ahead.

Thanks. Just to go back to a prior question, when you said after adjusting for the change in your theme store pool in New York City, that there was actually a 20 to 30 basis point deceleration, were you referring to theme store revenue? Yes. Okay. And this I guess higher level, New York City included. What are you seeing in terms of the COVID-induced demand from last year and the prior year, how that's changing, and are you seeing any notable trends in people moving out quicker?

No, again, the vacate rate right in line with our with our budget as we think about the year to date, especially here in April, and that's across all markets. So we expect that it's slightly elevated just given those customers that moved in in 2020 will have been in the portfolio for quite a period of time. And then we're seeing, as I mentioned before, last year we saw that uptick in the pace of the short-term customer, which again, we attribute to the housing market So overall, I think the impact of COVID tends to be, if we think about the variant back in January, we just didn't see a lot of activity in some of the more urban markets, like Chicago or downtown LA, New York City, Boston. You didn't see quite the pace of move-ins. You didn't see any move-outs. variant and the impact started to wane you saw a bit of a return to more normal patterns uh and i think that uh you know that that's kind of the market that's kind of our expectation as we go forward here hopefully you know brighter days are ahead uh so so no no trends at this point other than uh you know we continue to see i think positive impact from the pressure in multi-family rents that you see in most markets across the country, I think it is starting to impact folks that are living in smaller square foot apartments, they're getting a roommate, et cetera. And that naturally just lends itself to using our product as an ancillary use.

And I might have missed this, but did you comment on the street rates year over year in the quarter and maybe in April?

Nope, I don't think anybody asked that. We were up around 10% year over year in the first quarter. And then that trend that you think about the pattern of how rates moved last year, that top gets tougher and tougher. So as we sit here in April, it's pretty flat to 21, still up about 31% to 2019.

Okay, thank you.

Thank you, Heath.

Our final question goes to Mike Muller with JPMorgan. Mike, your line is open. Please go ahead.

Yeah, hi. Thanks. So you have two developments that look like they're opening this quarter. I'm curious, what are you budgeting for stabilized returns, and how do you think that return expectation has changed relative to when you initially started to underwrite the projects?

What we typically target over time for a new development is a stabilized yield that's 200 to 250 basis points higher than what a cap rate would be in that market. And that's been relatively consistent. I would say if you go back six, seven, eight years ago, you probably would have been able to achieve a wider spread than that. But that's about where we are on our developments and have been for the last couple of years. Nothing has really changed. The projects that we have haven't had any material changes in cost. Our expectation of cash flow has improved a little bit from when we would have committed to those projects, given what's happened here with rates and occupancy and market fundamentals here over the last 18 months or so. So the growth in cash flow expectation is probably a little bit more than offset the growth in costs. Timing has been a little bit of an issue for us and many others to get things approved through local governments and then to deal with labor issues and getting projects done. They've tended to take a quarter or two longer than we would originally plan, but from all other aspects, they're very much in line.

Got it. Okay. That was it. Thank you.

Thank you. Thank you, Mike. We have a follow-up question from Keybin Kim with Truist. Key, your line is open. Please go ahead.

Thanks for taking me back. Just a quick one here. Longer term, going back to your rate question, being flat in April, I know the comps are really tough, but even when you compare it to 2019, up 31%, I think that's actually down a little bit when you compare to rate growth versus 19. Eventually, for the sector to continue to perform well, we need rate growth to come back, right? Not just off of comps, but we want real rate growth to come back as we grow through the year. Given what's happening in the macro picture and trends that you're seeing, what do you think the probability is for the sector to continue to produce real rate growth? year-over-year.

Yeah, I feel good about that, even in terms of the inflationary environment certainly that we're in right now, that there is that opportunity to continue to grow. If you think about going back in time and saying, what has been the The overall growth, if you go back to kind of compound growth back to, say, post-recession January of 2009, in terms of same store revenues, if you index back to that, it's in the 5% to 6% range. So from that perspective, you think about the consumer still has, it's not like we've outpaced broader trends in costs to the consumer. I have comfort that we are in a good spot relative to where rates are. I don't know how to quantify the amount as we go forward, but I think the ability to continue to grow rates, real rates, not necessarily the growth over the prior period, is there for the for the sector.

Okay, thank you again.

Thank you, Keith. There are no further questions registered at this time, so I'll turn the conference back over to the management team for any closing remarks.

Okay, well thank you all for participating as we launch the self-storage sector first quarter earnings season. Look forward to Seeing many of you at the conferences that are coming up over the next several months and tours and other things that are going on as life starts to be a little sunnier. And we look forward to talking to all of you at the end of our second quarter results call. And thank you very much and have a great day.

That concludes today's CubeSmart first quarter 2022 earnings talk. Thank you for your participation. You can now disconnect.