CubeSmart (NYSE:CUBE) Q1 2024 Earnings Call Transcript

CubeSmart (NYSE:CUBE) Q1 2024 Earnings Call Transcript April 26, 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’s First Quarter 2024 Earnings Call. At this 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, April 26, 2024. I would now like to turn the conference over to Mr. Josh Schutzer, Vice President of Finance. Please go ahead, sir.

Josh Schutzer: Thank you, Lara. Good morning, everyone. Welcome to CubeSmart’s first 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 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.

Christopher Marr: Thank you, Josh. Good morning and thank you all for joining the call. As it was well into the first quarter when we shared our thoughts on our 2024 and first quarter guidance as one would expect our first quarter performance metrics were in line with our expectations. Rental rates to new customers followed their historic pattern, reaching their seasonal low in mid-February before beginning their gradual move up into the end of March. Our key metrics related to consumer health, those being write-offs, receivables, units at auction, all remained in line with historic norms. Against the backdrop of a healthy consumer and typical first quarter seasonality and asking rates, our existing customer rate increases during the quarter were consistent in both timing and magnitude.

Demand activity during the quarter varied by market. Our more urban-oriented markets such as the New York MSA and its Connecticut suburbs, Chicago and Boston experienced growth in year-over-year rentals. San Diego County also experienced positive year-over-year rental volumes, no doubt continuing to benefit from the Storage West transaction. Sunbelt markets such as Atlanta and all of our major Florida markets experienced a decline in year-over-year rentals. Some supply-impacted markets, such as Northern Virginia and Nashville, seem to be bottoming out from that supply impact and are beginning to show signs of stabilization. Phoenix is also showing signs of turning the corner with positive year-over-year growth in rentals and occupancy, albeit at rental rates well below 2023 levels, while Tucson continues to struggle to find its footing while being impacted by new supply.

New York continues to be our top-performing market with consistent positive performance metrics across the boroughs and positive and improving performance in supply-impacted Staten Island and North Jersey. Overall trends are more constructive in our urban stores, which tend to attract a customer solving for their smaller living space. As we move through April, trends thus far have our negative rate and occupancy gaps to last year narrowing from their first quarter levels. As we expected entering the year, the environment over the next three months will be highly impactful on how the entire year plays out. The macroeconomic data over the last few months has certainly been very volatile. It seems every week we receive conflicting data, most recently an unexpected slowdown in first quarter GDP growth.

Other industries, such as inter-modal transportation, warehouse leasing, used car dealers, home retailers have expressed cautionary views on consumer demand. One factor that makes our business so resilient is that there are countless life events that create demand for self storage. Obviously one demand driver of the many for our industry is single-family home sales. Over the last few months, the housing data has also been inconsistent. According to realtor.com, the number of homes actively listed for sale in February was 15% higher than the same month last year. They also note that the week of April 14 is the optimal time to list your home for sale as the third week of April brings the best combination of housing market factors for sellers.

On the other hand, March home sales were disappointing and mortgage rates have climbed above 7%. Then you have yesterday’s Commerce Department report and a possible positive sign for the housing market. Residential investment surged 13.9%, its largest increase since the fourth quarter of 2020. So while housing stats are certainly volatile, consensus remains for modestly increased activity over the historical lows experienced in 2023. Another of the many demand drivers for our product is movement within multifamily housing. In the multifamily sector, headwinds from new supply are contributing to rents that are flat or slightly declining in Sunbelt markets. According to RealPage, rents are down year-over-year in Atlanta, Nashville, Austin, Dallas, Orlando, and Fort Lauderdale, which may spur existing apartment renters to move or increase demand from first-time renters.

Both are good for our industry. On the supply side of the equation, new store openings in our top markets continue their pattern of declining every year since their 2019 peak. In short, the period between now and the end of July will be both illuminating and impactful on our expectations for full-year 2024 performance. We remain confident in the long-term fundamental drivers of our business, continuing to generate solid growth. Thank you for listening, and I will now turn it over to Tim Martin, our Chief Financial Officer, for his insights into our first quarter. Tim?

Timothy Martin: Thanks, Chris. Good morning, everyone. Thanks for taking a few minutes out of your day to spend it with us. First quarter results were right down the middle of what we were expecting for the quarter. Same-store revenues were flat compared to last year, with average occupancy for our same-store portfolio down about 130 basis points to 90.4%. Same-store operating expenses grew 5% over last year, driven by continued pressure on property insurance as well as a good bit more snow removal costs this year when you compare that to last year. Offsetting those were lower marketing expenses relative to last year, but as we’ve discussed in past quarters, that’s a line item that will bounce around a little bit depending on what opportunities we are seeing in the market to be efficient and to maximize our return on that spend.

Flat revenue growth, combined with 5% expense growth, yielded negative 1.9% same-store NOI growth for the quarter, and we reported FFO per share at the midpoint of our range at $0.64 for the quarter. On the external growth front, we closed on the previously announced acquisition of a two-store portfolio in Connecticut for $20.2 million. We continued our disciplined approach to finding external growth opportunities that make sense for us on balance sheet. On the third-party management front, we had a record first quarter, adding 68 stores to our platform. That’s the most third-party stores added in a quarter since our debut in the third-party management business 14 years ago. As a result, our third-party platform grew to 860 stores under management at quarter end.

Balance sheet remains in excellent shape, nothing to do there in the short to medium-term other than to continue to look for growth opportunities to utilize the liquidity and leverage capacity we’ve created over the last several years. Details of our 2024 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. Thanks again for joining us on the call this morning. At this time, Lara, why don’t we open up the call for some questions?

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Q&A Session

Operator: Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Spenser Allaway from Green Street. Please go ahead.

Spenser Allaway: Yes. Thank you. I was just wondering if you could provide some color on how move-in rents are trending this far into the second quarter, and just any color you can share, just if there’s any trends geographically. But yes, just any color on move-in rents will be great. Thank you.

Christopher Marr: Sure, Spenser. Thanks. So new customer rates in April are down 11% from last April and improvement from the 13% at the end of Q1 and they were at 14% negative in Q4. So we’re seeing a combination of what occurred last year and obviously a little bit of improvement this year in that negative GAAP on new customer rates.

Spenser Allaway: Okay. Great. Thank you. And then are you able to provide or share the initial cap rate on the two assets that are required in the quarter?

Christopher Marr: Yes, they’re stabilized assets that we know well, and it’s in the low sixes.

Spenser Allaway: Okay. Thank you so much.

Operator: Our next question comes from the line of Michael Goldsmith from UBS. Please go ahead.

Michael Goldsmith: Good morning. Thanks a lot for taking my question. My first question is just on demand and how that trended through the quarter. I think when you reported – fourth quarter, you provided guidance, you had good visibility into what seemed like solid trends. How did the rest of March play out and what have you seen on the demand side during April?

Christopher Marr: Yes, Michael, as I said, it’s market-by-market as it went through the quarter. We saw consistently strong demand in those more urban-oriented markets. So growth quarter-over-quarter, continuing into April, on the positive side in the New York MSA and Connecticut suburbs, Chicago, Boston, San Diego County, Phoenix, and then the markets that you’re having a little bit more challenge on the demand side, primarily all the major Florida markets, Atlanta, and then some of the smaller Sunbelt markets. So again, if you think about it, the markets that had the largest uplift through COVID are now the ones that are closer to the bottom of that chart and those markets that were more lower beta during COVID are at the top of that chart.

Michael Goldsmith: Thanks for that, Chris. And my follow-up is just on the guidance. First quarter came in in line with expectations. Just given what you’ve seen now, given what you’ve seen kind of since you last guided, how has that environment changed your outlook for the year? You didn’t move it, but as you think about the moving pieces of it, has anything changed on how you expect the rest of the year to play out or is it just still too early given kind of like the week-to-week nature of the business recently and which doesn’t provide you the level of insight you need to really update your expectations.

Christopher Marr: Yes. Michael, the latter part of your question is exactly where we are. We provided that guidance with a range of expectations six weeks ago and nothing’s happened in the last six weeks that would cause us to change that view. As we sit here, still in April, we have the whole summer rental season ahead of us, as Chris mentioned and you alluded to. And so we still have that range of expectations that we introduced six weeks ago.

Michael Goldsmith: Thank you very much.

Operator: Our next question comes from the line of Samir Khanal from Evercore ISI. Please go ahead.

Samir Khanal: Hey, Chris. Maybe on guidance, again, I know in the last call you spoke about the high end, assuming, it assumes some sort of improvement in the housing market. I guess given what rates have done, I mean, how do you think about the high end today? And my question is if the housing market does not improve, do you feel that there’s enough in that sort of ECRI push to make up for that difference? Thanks.

Christopher Marr: As I mentioned in my earlier preface remarks, the housing market is one driver. And the beauty of our business and why we’re so resilient is that everyday life events are what creates a demand for storage. And so those everyday life events and certainly movement within multifamily continue to exist. So our focus is on attacking what we can control, which is making sure we’re efficient in capturing the customers who have identified a need for self-storage and converting them to become a CubeSmart customer. So again, the housing market is one of those factors. Our range of expectations certainly implies varying degrees of demand across the spectrum at both ends. And as we sit here, again, at the very, very early stages of the busy season, we still see those bookends of our expectations as where we think the likely outcome for the year will be.

Again, as I mentioned, the facts, as I understand them, the third week of April is your peak listing for existing home sales. If you think about the house sales quickly, you’re closing late May. It sits on the market for a couple of weeks. You’re well into June. And that’s when we would expect to see the busy season for us, May, June, July. And obviously, as Tim said, that’s going to be very impactful on how we see the whole year play out.

Samir Khanal: Okay. Got it. And I guess my second question, Tim, is on the advertising expense. I mean, that was down roughly about 15%. That was a little bit surprising to me, given that demand is – still remains challenged. I guess maybe talk around that strategy. Thanks.

Christopher Marr: Yes, sorry. I’ll jump in for Tim there. When you think about the evolution of our investments over the last couple of years and continuing as we go forward into refining the technology and the customer data platform that we have, that CDP is increasing efficiency of paid for new customer acquisition and we’re beginning to see the fruits of that. So we’re able to avoid wasted advertising on those obvious suppression segments, exclude those customers for whom, again, they’re within a set amount of time of rental. We’re able to be more targeted through automated personalization, using AI, using machine learning to make sure that we can try and segment and identify that customer on the front end and target the response to their inquiry that has the highest potential conversion rate and we’re seeing the benefits of that in the ROI that we’re achieving on marketing.

Now all that being said, I would not – it does not mean to imply that over the course of the year that our marketing spend will not grow from the levels that we had in 2023, but it absolutely is reflective of all of the investment we’ve made in our CDP and other things over the last couple of years starting to bear fruit.