CubeSmart

At this time, I'd like to turn the call over to Josh Schuetzler, VP of Finance.

Thank you, Christina. Good morning, everyone. Welcome to CubeSmart's second quarter 2024 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 8K we filed this morning, together with our earnings release filed with the Form 8K, and the risk factor section of the company's annual report on Form 10K. 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 second quarter financial supplement posted on the company's website at www.qsmart.com. I will now turn the call over to Chris. Thanks, Josh.

Good morning. Thank you all for joining the second quarter earnings call. Overall operating trends for CubeSmart during the quarter were largely in line with our expectations. Our same store portfolio experienced a 1.8% increase in rentals compared to the second quarter of 2023. Vacates in the same store portfolio were flat to the second quarter of last year. Asking rates in that same store pool began the quarter down Roughly 13% to the prior year and ended June, negative 9.8% compared to the end of June last year. Same store occupancy ended June, 91.9, gaining 150 basis points during the quarter. We historically reached our seasonal peak in early August. Over the last few years, those peaks had been shifting earlier in July, and this year it now appears that peak occurred in late June. This aligns with the macro trends in the economy, housing, and the consumer. Performance trends by market were consistent with the first quarter. The urban markets of New York, the DMV, District of Columbia, Maryland, Virginia, Northern Virginia, and Chicago were all stronger performers across key metrics, while we continue to see softness along the west coast of Florida and Atlanta and Tucson, Arizona. Within New York City, the boroughs continue to outperform the overall MSA, as we are still feeling a bit of the residual impact of supply on our Long Island, Westchester, and North Jersey stores. Our third-party management program continues to grow, and our balance sheet remains in excellent condition. I'd like to now turn the call over to our Chief Financial Officer, Tim Martin.

Tim? Thanks, Chris. Good morning, everyone. Thanks for taking a few minutes out of your day to join us. No big surprises in the second quarter as our results were right in the middle of our expectations. Same store revenues grew 0.3% compared to last year, with average occupancy for our same store portfolio down about 110 basis points to 91.5%. Same store operating expenses grew 4.2% over last year, driven by continued pressure on property insurance, as well as a bit of a timing issue related to repair and maintenance costs relative to the timing

of those costs last year.

So, 0.33 percent revenue growth combined with 4.2 percent expense growth yielded negative 1.2 percent same-store NOI growth, and we reported FFO per share as a just of 64 cents for the quarter, which was the midpoint of our guidance range.

From an external growth perspective, we opened two development projects in New York for a total cost of $61.8 million. We continued our disciplined approach to finding external growth opportunities on balance sheet. On the third-party management front, we had another productive quarter, adding 39 stores to our platform, bringing us to 879 stores under management at quarter end. Our balance sheet position remained strong, 4.3 times debt to EBITDA and effectively no floating rate exposure. We're really well positioned to support external growth opportunities with our available line of credit, access to liquidity, and our leverage capacity. Looking forward to the second half of the year, details of our 2024 earnings guidance and related assumptions were included in our release last night. We narrowed the guidance ranges for same-store revenue expenses and NOI. The high end of our initial revenue guide implied an improvement in the housing market, which hasn't materialized. Taking that along with our performance through the rental season resulted in us narrowing our revenue guide to our current outlook of negative 0.75% to positive 0.25% growth for the year. We improved our expectation for same store expense growth based on year-to-date results, as well as some slightly improved expectations for real estate taxes this year. When you bring those components down to same store NOI, the result is a narrowing of that range from negative 4% to 0% growth down to the middle of that range with our revised guidance at negative 3% to negative 1% growth. And then a very similar narrowing of our range on FFO per share as a result. That concludes our prepared remarks. Thanks again for joining us on the call this morning. At this time, Christina, let's open the call for questions.

Thank you. At this time, I would like to remind everyone, in order to ask a question, please press star followed by the number one on your telephone keypad. Again, if you do have a question at this time, you can press star one. And please hold while we compile the Q&A roster. Thank you. Your first question comes from the line of Josh Dennerlein from Bank of America. Your line is open.

Josh, are you there?

Josh, just to make sure your line's not muted on your end. Again, your line is open. Okay, we're going to move on to the next question. Josh, if you would like to ask a question again, you can press star 1. And your next question comes from the line of Spencer Alloway from Green Street Advisors. Your line is open.

Thank you. Thanks for all the color in regards to move-in rates during the quarter. Can you provide an update on where move-in rents have trended thus far in the 3Q? And if you have any additional call you could share on how ECRIs have been trending and customer sensitivity, that'd be great.

Sure. Thanks, Spencer. So the rate gap in July to last year's July, moved out about 100 basis points from where we ended June, so high negative 10% range. In terms of the existing customer base, the existing customer continues to be pretty healthy. We see lengths of stay. Customers who have been with us for longer than two years continue to be higher than pre-pandemic levels the auction activity that we see receivables and write-offs while all slightly increasing from what we saw at this point last year all remain at or in line with pre-COVID levels so at this point in the year

continue to feel positive about the health of our existing customer base.

Okay, great. Thanks. That's all for me.

Thanks.

Your next question comes from the line of Steve Sackwa from Evercore ISI. Your line is open.

Hi there. Good morning. Thanks for taking my question. I'm Sanket on for Steve. We had a question around expense growth. You guys lowered the guidance for expense growth. Can you elaborate more on different components where you're seeing less pressure on the expense side?

Yep. Thanks for the question. So on our revised and improved expense guidance, part of it is our year-to-date performance is reflected in there. And then the forward-looking item that has changed a bit is what I mentioned in prepared remarks, which is on the real estate tax line item. We have a bit of additional information in three of our large states that gives us a revised outlook for real estate tax growth to not be quite as high as we would have included in our original guidance range.

Sounds good. Thank you. That's it for me. Thanks so much.

Your next question comes from the line of Eric Wolf from Citigroup. Your line is open.

Thanks. It's Nick Chesip here with Eric. Just following up on the ECRI question, has there been any change in customers' willingness to accept the higher ECRIs?

We're hearing about a small drop off made on the consumer, so just curious. Certainly, it's something that we pay very, very close attention to, but expect to see some deceleration in the New York market as we move through the balance of this year, just who are long-term customers. We certainly see softness in New York as it relates to the locker size, the smallest size cubes particularly in Manhattan. on those really small-sized cubes, but outside of revenue growth in the second quarter, consumer behavior and demand. And certainly, I think Manhattan is a little bit of a different animal at impact.

Still have a little ways to go in Long Island, and Westchester is doing fine. So that's kind of the New York MSA and the boroughs in a nutshell.

Thank you. That's very helpful.

And your next question comes from the line of Michael Goldsmith from UBS. Your line is open.

Good morning. Thanks a lot for taking my question. As the new customer is seemingly more price sensitive, are you seeing any major changes to conversion rates or balking at the final page of online checkout?

With that, how has... seen that be fairly constant over the last three or four quarters of how we thought about back in February and kind of where we are today. And so it just, sort of navigate as you would expect of new supply along with a little bit less demand and then movement inquiries in that Tampa Naples corridor has made that west coast of Florida particularly challenging here over the last couple of months. Yeah, I mean, I guess on a relative basis, it has a little bit more proportionality.

impact there, but it's similar trends across the portfolio. The changes that we have made are universal across all markets.

Thank you very much. more to potentially get more inbound and more customers?

Yeah, thanks for the question.

So I think it depends upon the lens that you view that spend through. If you think about our spend and how we do it seasonally, but also as

seasonal move I've said all along I would expect that when we get to the end of the year the marketing spend will be at a cost below the lifetime value of that customer for us to

to increase spend and pockets, we've seen that. At times we've seen that when it is, we'll be aggressive. And when that opportunity is not there, we've tended to pull back a little bit.

Got it. And for my follow-up, if there's been a lot higher expectations of the Fed cutting rates going into the end of the year, do you think that's enough for street rates to potentially break even next year?

So you could be, you know, does that translate into what drives

mortgage rates and if we see a decline in mortgage rates as a result there is a pent-up and I they believe for single-family home transactions and and this could be a you know could be the catalyst for

folks to feel alive. Yes.

The past few calls about a pretty wide did ask Brad maybe narrowing a little bit, but it seems like most in the industry have said that activity is still relatively quiet. So what does your pipeline look like today?

Where are you seeing capital? Good morning, Eric. Thanks for the question. I wish I had something. something new and exciting off of higher occupancy levels and peak rates for the year. So back half of the year, alternative forms of capital that are coming out of our Storage West acquisition a couple of years ago. There are some nice opportunities that we continue to pursue that make sense for us. And we've been patient. We'll remain patient and are optimistic that Juan Sanabria from BMO Capital Markets. Your line is open. Your line is open. Yeah. Typically, our . of our business and the strength of the realm. Do you expect to hit parity?

Yeah, I'll jump in. Yep, thanks. So, again, I think when you look at the volatility that

and certainly in the market. This morning, it just goes. It's incredibly difficult to predict. As I said, if today's movements are indicative of any sort of relief on the mortgage side, you can press star 1. your telephone keypad. Again, if you do have a question, please press star 1 on your telephone keypad. And then, sorry if I missed it, but did you speak about occupancy in July and how that compares year over year? Thanks, Todd. seasonality a little bit earlier. Okay. 31st of last year, it was down 1.3%. You talked about some of the components there, some

Is that all in the same store, your comments about?

My comments are focused on the same store component. The tenant insurance that you referred to is not in our same store.

fees, the variety of fees that I mentioned, the solar credits are in same store and they were what I was alluding to, tenant insurance, not so much.

Okay, got it. And then I'm just curious about the growth in that line for the same store. In the first quarter, there was not really a big contribution to same store revenue growth. This quarter, it did have a big impact and it increased $2 million sequentially. So, had a decent impact on the growth rate year-over-year, but also just the run rate in general.

Did something happen specific to the quarter, and is it expected to be maintained in the second quarter? Your line is open. for our stores in 2025.

But I think, again, we're going to be fortunate to have more information here August, September,

that you're pushing AB tested to kind of fill out where customers are. Increasingly disclosed. as it relates and that really ties and convenience fees are all disclosed at the time and are highly visible to the customer.

What are the opportunities to increase rates to existing customers, be it just fall into that same category? You're constantly looking for continued refinement and optimization across all of those different revenue streams.

And, you know, we found... Great. Thanks, Tim. Appreciate it.

Your next question comes from the line of Josh Denerline from Bank of America. Your line is open.

Yeah, hey, guys. Thanks for the time.

I guess I'm just trying to think through any kind of gives or takes we should think about on how this metric goes up and down from here.

Yeah, Josh, ultimately, for the industry, we need to see the rate for the new customer moving in go up. Again, absent seeing that, you're going to see overall results, and that can .

What's going to be the current rates for new companies?

nice blend of new customers coming in at a higher rate year over year and the growth that you get from that.

That also then tends to have a bit of a positive effect. Ultimately, we need to see the you know, the combination of those . when we were reporting for the