CubeSmart (NYSE:CUBE) Q4 2022 Earnings Call Transcript

CubeSmart (NYSE:CUBE) Q4 2022 Earnings Call Transcript February 24, 2023

Operator: Good morning. Thank you for attending today’s CubeSmart Fourth Quarter 2022 Earnings Call. My name is Alicia, and I’ll be your moderator for today’s call. I would now like to pass the conference over to your host, Josh Schutzer, Vice President of Finance with CubeSmart. You may now proceed.

Josh Schutzer: Thank you, Alicia. Good morning, everyone. Welcome to CubeSmart’s Fourth 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 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, everyone. Thanks for joining. Our fourth quarter results capped off another excellent year of performance by our CubeSmart platform, and I thank all of our teammates for their dedication and outstanding customer service. Same-store revenue growth for the year came in at the high end of our guidance. Our focus on operational excellence contained expense growth to an annual rate of 3%, resulting in same-store NOI growth at 16.7% for the year coming in above our guidance. As we have performed our business planning and the related financial forecast, each of these last 3 years, we certainly have had to do so facing significant uncertainties surrounding the impact of COVID and the resulting changing consumer behaviors.

Entering 2023, while many aspects of our business, such as seasonality and delinquency have returned to more typical historical patterns, we certainly are faced with domestic economic uncertainty and the potential for geopolitical shocks. We believe that our strategy of owning a high-quality portfolio in the best markets, maintaining a high-quality balance sheet with conservative leverage and well-staggered fixed-rate maturities and the fact that we foster an innovative culture consisting of high-quality people and systems will over the long term produce above-average risk-adjusted returns throughout economic cycles. Our message today will therefore sound familiar to those of you who have been valued stakeholders in Cube over these last few years of robust outperformance.

We believe our high-quality stores located in submarkets with sector-leading demographics have us in an excellent position entering 2023. The New York MSA, our largest market, is beginning to positively experience the waning impact of new supply. Operational performance remained steady, and we are starting to see the green shoots from recent supply deliveries leasing up nicely and the new delivery pipeline has almost been exhausted. Our expectation is for absolute levels of growth to remain steady. And by the back half of the year, the New York City boroughs will be performing above the portfolio average. We’re 1 year on from the Storage West transaction, and we couldn’t be more pleased with the assets and the strategic fit on our platform.

As expected, despite the stabilized occupancies of the assets, there was significant upside to rents on our platform. These properties saw accelerating growth through the back half of ’22 and they are well positioned for continued growth into 2023 and beyond with an expectation that they will be achieving a mid-4s yield by the end of the year and generating meaningful accretion given that we were able to lock in long-term capital at exceptional low rates, including our $1 billion bond deal, which had a weighted average yield of 2.45% and an average tenure of 8.4 years. We entered 2023 with 98% of our debt being fixed rate, with a weighted average maturity of just over 6 years and net debt-to-EBITDA of 4.3x. We have and will continue to focus on being operationally excellent.

We entered 2022 with a thesis that businesses that operate lean and agile will be best positioned to succeed during the period of economic uncertainty. Our sector low expense growth and margin expansion in 2022 and our outlook for 2023 are reflective of that focus on operational efficiency. Such heady times, as we’ve experienced over the last few years can make many strategies appear . We are seeing the benefit of our strategy as our sector-leading portfolio demographics continue to generate stable growth. While secondary and tertiary markets may generate elevated growth in boom times, there is increased risk and volatility to those cash flows during times of uncertainty, and we believe our focus on a high-quality portfolio in top markets will generate the most attractive, long-term risk-adjusted returns.

There is no doubt that when viewed through a historical lens, 2021, 2022, and in my opinion, 2023 will be judged among the best years for our business. In spite of uncertainty in the world, I believe that the industry and Cube specifically are well positioned entering 2023 to produce operating metrics above the historical 20-year average. We think this makes us an attractive option for investors, and we appreciate our valued stakeholders’ support. With that, please allow me to turn it over to Tim Martin, our Chief Financial Officer, for additional commentary on the quarter and on the year ahead.

Tim Martin: Thanks, Chris. Good morning, everyone. Thanks for taking a few minutes out of your day to spend it with us. Piling on to Chris’ commentary, results in the fourth quarter reflected a continuation of what we’ve seen throughout the year, a steady return to more normal seasonal patterns and overall solid operating fundamentals. Headline results included same-store revenue growth of 9.5%, expenses grew 2.3%, and NOI was — growth was at 12.1% for the quarter. Same-store occupancy levels remain very healthy, down 120 basis points compared to last year as we expected given the continuing return to more normal seasonality. . Same-store occupancy averaged 92.8% in the fourth quarter and ended the quarter at 92.1%. Our consistent focus on managing what we can control on the expense side showed up in our results all year and the fourth quarter was no exception.

Same-store expense growth of 2.3% for the quarter was better than expected, with the main drivers being continued efficiencies and personnel costs, and some nice wins from all the work we do to challenge our property tax assessments across the country. We reported FFO per share as adjusted of $0.67 for the quarter, representing 16% growth over last year. During the quarter, we also announced a 14% increase in our quarterly dividend, up to an annualized $1.96 per share. On yesterday’s close, that represents a 4.4% dividend yield. On the external growth front, in the fourth quarter, we saw a continuation of what we talked about last quarter, a slowdown of transaction activity and a lack of attractive opportunities for us. Our team remains busy looking to find deals that fit our model at pricing that works.

Our disciplined investment strategy has naturally resulted in us being less transactional over the last year where the return profile of available opportunities does not meet the necessary risk-adjusted returns required in today’s elevated cost of capital environment. On the third-party management front, we added 28 stores in the fourth quarter and ended the quarter with 668 third-party stores under management. Our balance sheet position remains strong as we continue to focus on funding our growth in a conservative manner that’s consistent with our BBB/Baa2 credit ratings. As discussed last quarter, in October, we closed on a new expanded revolving credit facility. The size of the revolver grew to $850 million, the maturity was extended to February of 27 and the pricing improved by 17.5 basis points based on our current credit ratings and leverage levels.

Our conservative balance sheet and financing strategy has really paid dividends as we entered into the current volatile capital market environment. All of our debt, except the revolver is fixed. So as Chris mentioned, that’s only 2% of our outstanding debt was variable rate as we started 2023. We face no significant maturities until November of 2025 and have a weighted average maturity of 6.3 years. Our leverage level is very low at 4.3x debt-to-EBITDA, and we have ample capacity and liquidity to finance future growth opportunities when attractive ones present themselves. Looking forward, details of our 2023 earnings guidance and related assumptions were included in our release last night. Our 2023 same-store pool increased by 73 stores, including 57 stores from the Storage West portfolio acquisition that we closed in late 2021.

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 2021, ’22 as well as the impact of ’23 deliveries that will compete with our stores. Embedded in our same-store expectations for 2023 is the impact of new supply that will compete with approximately 30% of our same-store portfolio. For context, that 30% is down from 35% of stores impacted by supply last year and down from the peak of 50% of impacted stores back in 2019. 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. Wrapping up, thanks to all of our hard work and talented teammates to help lead us to the successful execution of our business objectives throughout 2022, as a team, we’re in a great position to continue our pursuit of operational excellence and to maximize on the opportunities we see in 2023.

Thanks again for joining us this morning on the call. At this time, Alicia, why don’t we open up the call for some questions.

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Q&A Session

Operator: The first question comes from the line of Jeff Spector with Bank of America.

Jeff Spector: Great. Can we talk about, I guess, what you’re seeing through February, Chris and Tim, you’re Clearly — there’s a lot of confidence here as you’ve started ’23. Your approach to guidance does seem to be a bit different than a couple of your peers. Just trying to figure out if that’s more company-specific, industry-specific or again, just recognizing you’re not seeing right now any signposts of recession. .

Chris Marr: Yes. Thanks, Jeff. So I can’t comment on other portfolios or how they’re viewing their outlook. I think from our consumer perspective, we continue to see pretty good signs of strength. I think our portfolio and its construct, the lengths of stay continue to elongate, pattern of vacates has been relatively muted. So we’re encouraged by that. I think the outlook, obviously, as I said in my opening remarks, the outlook as you get past the second quarter is a little bit less certain. We’re certainly trying to think about what the back half of the year may look like. Same challenge we had in in ’21 and ’22. And I think our guidance ranges capture the expectation of how our consumer will react in the back half of the year.

I think from a more macro perspective, we don’t really do our planning by thinking about whether we’re going to enter into a recession or we’re not at a macro level. I think we look more at how will our consumer respond throughout the year in terms of their need for our product, which, as we all know, is created by a whole host of life events that may or may not have anything to do with what the broader economy is doing at that time. So I think our process is a bottoms-up process. And I think we’ve kind of captured a range of outlook for the year. And I think, certainly, I’m sure everybody is looking at it to say the first half is a little bit more clear and the back half is a little more cloudy, but we feel good about where we are today. In February and January, the results were at or better than what our expectations were when we started the year.

So that’s encouraging off to a good start, and we’ll see how the quarter evolves and really looking forward to the beginning of the busy season, which I think will tell us a lot about how we think the balance of the year will unfold.

Jeff Spector: That’s very helpful. My second question, Chris, can we dig in a little bit more on your comments about demographics versus, let’s say, tertiary, secondary markets. We get lots of questions on that, the importance of demographics versus market positioning. Can you talk a little bit more about what you were referring to in terms of the strength of your demographics versus, let’s say, tertiary, secondary markets? And I guess, are you seeing or hearing of issues in tertiary or secondary?

Chris Marr: Yes. So when we look at long-term risk-adjusted returns, markets with significant populations, lower levels of supply of self-storage on a square foot per capita basis, good household incomes and a good percentage of our customers living in rental housing versus homeownership. Those tend to create a backdrop of stable cash flow over a longer period of time. And again, I think you could use as an example, when you think about as we sit here today of our major markets, the market where we have physical occupancy, higher today than where we were at this point last year is the New York City assets. When you think about a market that has net effective rents on new customers that are higher than where we were at this point last year, that’s New York City.