Q3 2020 CubeSmart Earnings Call
Good morning, and welcome to the Q Smart third quarter 2020 earnings call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded.
I would now like to turn the conference over to Josh shut their senior director of Finance. Please go ahead.
Thank you Hello, everyone. Good morning from out I'm wondering from Malvern, Pennsylvania, welcome to <unk> third quarter Twentytwenty earnings call participants on today's call include Chris Marr, President and Chief Executive Officer, and Tim Martin Chief Financial Officer.
Our prepared remarks to be followed by Q and 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 Dot keep smart dotcom like.
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 there.
The risks and factors that could cause our 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 factor section of the company's annual report on form 10-K. In addition, the company.
His remarks include reference to non-GAAP measures a reconciliation between GAAP and non-GAAP measures can be found in the third quarter financial supplement posted on the company's website at www Dot Cubesmart Dot Com I will now turn the call over to Chris.
Thanks, Josh and good morning, everyone [laughter], the self storage industry.
Provides a convenient and efficient solution.
To a wide range of our customers' requirements and as such has proven yet again to be an exceptionally resilient business.
At Cubesmart.
Coming off significant pandemic related challenges in the second quarter.
Our best in class portfolio demonstrated the strong recovery in the third quarter and that positive momentum continues into November.
Our physical occupancy remains at record highs.
With the same store occupancy gap to last year, expanding and ending October at a positive 211 basis points.
Demand from high quality customers remains extremely solid and our average length of stay continues to elongate.
Strong consumer demand lower Vacates and elevated occupancy is are being reflected in gains in year over year average offered net effective rates the.
The percentage rate gap expansion to last year continued building throughout the third quarter.
Across our major markets as we end October the percentage gap to last year ranges from the low teens to the mid Twentys.
Our New York portfolio had a very solid quarter, posting occupancy and revenue growth above our overall same store average and that strength has accelerated into the fourth quarter.
Strong demand trends have helped accelerate the lease up of recently opened stores in many markets.
Hoping to stabilize the operating environment.
The supply outlook continues to gradually slow as the number of properties in the pipeline declines.
After a pause our investment activity also picked up steam during the quarter.
In addition to our previously announced agreement to acquire eight of the highest quality stores in Brooklyn, Bronx, and Queens from storage Deluxe. We also noted in our earnings release.
Now we have nine additional property is located in Florida Long Island, Nevada, Texas under contract and we expect to close by year end.
We continue to be pleased with the positive impact our technology initiatives are having on our operating results.
On average approximately 30% of our rentals are coming through smart rental are quick convenient contact free rental system.
We introduced our cube smart mobile app during the quarter and industry, leading tool that provides our customers the ability to access their date codes pay their bills managed care settings and receive important notifications all in the palm of their hands.
In summary, the self storage industry continues to demonstrate its resilience at.
At Cubesmart, we are proud to be able to offer innovative solutions that serve our customers in the manner. They sign most comfortable.
My continued thanks and appreciation to our over 3000 teammates who.
Who strive to provide those innovative customer solutions with the spirit of genuine care.
With that I will turn the call over to Tim Martin, Our Chief Financial Officer for his comments Tim.
Thanks, Chris and thank you to everyone on the call for your continued interest and support.
Picking up on Chriss comments operating fundamentals in the self storage sector have rebounded and and rebounded in a pretty big way demand for our product is strong as evidenced by historically high levels of physical occupancy and solid pricing power.
Overall for the quarter, we reported FFO per share of 44 cents.
Same store revenue growth of 8.1% same store expense growth of 4.2% and same store NOI growth at negative 1.6% in.
And there are some encouraging trend lines in those numbers same store revenue growth for our portfolio was 1.7% in the pre cobot first quarter of the year, followed by a 2.2% decline in the most heavily covered impacted second quarter. So our our 0.1% growth in the third quarter that 230 basis point improvement sequentially.
Actually Joe.
Driven by our ability to largely resuming normal operating practices and areas like lean sales and an existing customer rate increases throughout the quarter.
Combined with a considerably stronger consumer demand on a seasonal basis.
All of these signs are positive and point to continued strength heading into the fourth quarter from a same store revenue growth perspective.
Our teammates have been fantastic as Chris mentioned, we were quick to adjust to the challenges presented to our business from the pandemic longstanding practices and policies had to be adjusted quickly to adapt.
Pricing and marketing strategies had to adapt how we attract customers and provide excellent customer service had to adapt we.
We quickly developed and rolled out new technologies with our online smart rental program in our Q smart customer at.
Just as importantly, as things shifted in a more positive direction, we quickly pivoted again.
Our systems were quick to identify changing trends and we adjusted pricing upward accordingly.
We were swift and resuming this traditional practices of consumer customer rate increases and lean sales where appropriate.
Sometimes it takes some disruption in chaos for these things to become more evident.
We have a strong team sophisticated systems and a very high quality portfolio.
And when combined with a nimble approach I believe has led to some real outperformance on a relative basis over the last six months.
Collections and accounts receivable have returned to normal historical levels and again speak to the quality of the cash flows in our sector and the quality of the self storage customer and the high levels of customer diversification in our business.
In the third quarter from an external growth perspective, we added 37, new stores to our third party management platform and while we didnt close on any acquisitions. We were certainly very busy getting a significant amount of transactions lined up for closing in the fourth quarter.
We have under contract and expect to close by year end the acquisition of 17 stores for an aggregate investment of 643.9 million.
Part of that total is the eight properties storage deluxe transaction, we announced early last week.
We provided a good bit of detail on that transaction in an investor presentation that can be found on our website.
Of the $540 million purchase price 201.7 million will be paid in cash 154.6 million through the assumption of existing debt and notably 183.7 million and operating partnership units.
We expect to close that transaction in two pieces during the month of December.
Outside of that transaction, we have nine additional stores under contract and those stores are located in Florida, Texas, Nevada, and ER and on long Island.
We were also busy after quarter end on the balance sheet on October six we closed a $450 million unsecured bond issue with a long 10 year term maturing in 2031, and a yield to maturity of 2.1%.
This offering demonstrates our ongoing commitment to this market and we appreciate the strong support we received from our fixed income investor base.
The bond deal was partially opportunistic from a refinancing perspective, and partially to create capacity to support external growth.
On the opportunistic side, we use proceeds to support the redemption of our debut $250 million bond offering from back in 2012 that had a coupon of 4.8%.
That redemption was completed on October Thirtyth and included a 17.6 million make whole payment.
The balance of the proceeds were used to repay amounts drawn on our revolver and provide funding for much of the extra mile growth you've talked about.
So we've been busy on the external growth and balance sheet fronts, we remain very healthy and are well positioned to fund our near and medium term commitments and we also have plenty of capacity financial flexibility and access to attractive capital to support the pursuit of additional external growth opportunities.
Thanks, again for taking the time to join us for today's call.
At this point highly let's open up the call for some questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you're using a speakerphone please pick up the handset before pressing the keys.
Withdraw your question. Please press Star then tail off.
Our first question today comes from Juan Sanabria with BMO capital.
Hi, good morning, Thanks for the time I'm, just hoping you could talk a little bit about street rate trends and how those are trending throughout the quarter ended just September and if you can give maybe some color on how new York, specifically is trying to get within that.
Sure. This is a this is Chris why good morning, I'll take that question. So if you think about [noise].
Average asking net effective rents throughout the quarter. The average for the quarter was plus 9.3% on a year over year basis same store that number.
You know really felt throughout the quarter heading September we are about plus 15.
ER as we sit here in October.
Yeah, that's about plus 20% 19.6 to be exact.
Hi, if you're looking in New York City or specifically.
Yeah, the the New York City.
Yes, that's in Brooklyn, the Bronx in Queens, Iran, a bit better than a than those numbers that I, just referred to and as we sit here today.
In the city were up about 20% 20.3 to be exact.
And in the suburbs slightly higher than that.
All right perfect. Thank you and then yeah, clearly everybody's been more bold up on the acquisition side, you guys a bit to the.
Storage deluxe transaction, congrats on that but if you could talk a little bit more broadly about what you're seeing kind of going forward into the fourth quarter, Oh, God, where you've already got energy 21 about.
Just the quality of the pipeline, it's a more stabilized assets development or lease up assets and thoughts on cap rates.
Hey, Juan it's it's Tim Thanks for the question.
Yes, as it relates to the fourth quarter were were pretty filled up here given where we are on the calendar. What we have what we have in assets under contract is likely to be where we land not enough time really to get a whole lot much more queued up for the fourth quarter.
Big picture are you seeing.
You've seen a combination of things you have a you have a traditionally busier time of year coming out of the summer months when folks tend to want to put together and listings and be.
And be transacting from a seller's point of view, that's nothing new I. Thank you combine that here with.
With the improvement and ER and the stability that you're seeing from an operating fundamental standpoint, I think that's really been part of whats driven the the flurry of activity here that we've seen not only for us but for for others as well.
And then and of course, you have to be a pretty low costs are certainly a debt capital.
Available, which is a which is I think spring on some of the energy from a from the buyer side of the equation from a cap rate perspective, we haven't seen a whole lot of movement.
Yeah, I think they simply transaction and obviously, the acquirer of that being being new to the space.
Yeah, I think certainly is a is it going to support cap rate trends remaining where they are if not being.
Pushed pushed further down.
I think the product on a relative basis to other product types remains incredibly attractive, which will continue to attract capital into our sector.
I think those trends are likely to to two.
No to to continue into the early part of 2021. So I think it's it's a good time to be in the sector I think others want to be in the factor I think people are generally pretty well capitalized I think visibility into the performance of that product.
Is is much better than it was three to six months ago, or so I think that's going to be conducive to additional transactions and certainly a lot of interest.
Hey, Scott.
Thanks.
Our next question comes from Todd Thomas with Keybanc capital markets.
Hi, Thanks, Good morning, I first first question on the the storage deluxe deal what would you expect the overall yield to be in 2021.
Yeah, we haven't well we've been what we've been talking about is that that transaction for us We believe Oh, Hey, we're really excited about it.
From a yield perspective, we looked at our underwriting is targeting what we believe to be a market cap rate, which is in the mid force that mid fours insight is where we would expect to be at stabilization and and were not there in 2021, we have for the assets are in some stage of Lisa to are not are not there from a physical auction.
And see perspective to others of the eight are not fully stabilized from a rate perspective. So.
So we're not at a stabilized yield in 2021 and aren't quite there in 2022, either we're really looking at stabilization in our underwriting occurring in 2023, So I would characterize 2021 and 22 to be a yield that gets us to the point, where we're roughly FFO neutral.
In the in the early stages here, but you know from a strategic standpoint.
From how it fits nicely into the rest of the portfolio. Obviously, we've had the benefit of operating the stores, we've been managing them since they opened up but to bring those on balance sheet and to really round out our.
Our market leading position in Queens Bronx, Brooklyn, we're incredibly excited about the about really the same then there's something for us that started 10 years ago.
All right and that's helpful. And then can you can you talk about the funding plan for investments you've you've historically funded investments.
Two thirds equity one third debt looks like a little more.
Debt funding for you know.
The storage deluxe deal on and what's under contract.
Is that still the right funding mix or is that the right way to think about.
Capitalizing these investments are you contemplating additional equity to fund these investments and what else might be on the pipeline.
Yeah I appreciate that the overall I mean, we think about our balance sheet in a very consistent way from what you've seen from us for for a very long period of time, we are a triple B B W. Two rated company and and we think about managing the balance sheet within the within the metrics that are that are appropriate for that investment.
Credit rating and so.
From a from a funny on how we're going to close the transaction, we've we've put that and kind of sources and uses way in our disclosures so at closing.
For instance, in the deluxe transaction like I indicated that we need right around $200 million cash to close we've obviously built up a fair amount of capacity in our credit metrics that we can fluctuate leverage level up a little bit down a little bit and we're not tied in the transactions while there while there are sizable transactions and we're excited about it.
They're not size more to the point, where theyre going to meaningfully have any movement on any of our balance sheet metrics over the long haul we would expect to continue to to manage the balance sheet in a manner that you've seen from us consistently in the short term, we have a tremendous amount of flexibility as to as to how and when we use leverage.
The time period in which we ultimately get to the credit metrics that we're comfortable at ideally for US. We would we would still have credit metrics that are on the conservative side of the.
Of the ranges or for our rating.
So that we are in a position in the future at some point to take advantage of of transactions. Despite perhaps a short term disconnect in equity or debt valuations and cost of capital.
Okay and just one one other question here on the development pipeline.
Pipeline. So you added valley stream this quarter, it's been a few quarters I think since you've added a new development property. You know you are you seeing more opportunities there should we expect to see additional ground up developments added to the pipeline and and you know are you are you sensing that development activity is just picking up.
Again, a little bit more broadly I'm, just given the the rebound we've seen here in fundamentals.
Hey, Todd, it's Chris I think to the last part of your question.
Not yet so fundamentals you know rebounded pretty quickly incredibly resilient business, but there are a lot of other elements that go into making.
Making decisions to put a shovel in the ground. So again have not seen really any change and and behavior from the markets that we are.
That we observe and then from our feedback from our third party owners.
From our own perspective.
Opportunities or continue to be more.
More challenging to find Uh huh.
In terms of.
Areas for us that makes sense that we can get comfortable around the.
Around the costs and the rents are.
On the yields that that are produced from there. So I think it will be more likely than not that you know that the volume that we have under construction.
<unk> continues to shrink as opposed to expand.
Okay. Thank you.
Thanks Todd.
Our next question comes from Smedes Rose with Citi Group.
Hi.
I just wanted to ask you in the quarter I mean, what we're hearing from other you know companies is that move out activity was relatively subdued and move in activity picked up I was wondering if you saw something similar and maybe what are your thoughts about kind of moving move out activity returning to more.
Normalized levels it doesn't sound like you're seeing that but would you expect that or do you think maybe that's not an issue.
[noise] Ace me this Chris so so the I would say the move out activity.
For US has been lower for example in a in October Vacates or.
We're down about 4%.
Relative to October of last year.
I think I think the reality of our business is is we cannot for somebody to say Oh once they have moved in however, I think we have all discovered that.
I know that it is an incredibly sticky business once once one of our customers find us and moves and and starts to appreciate the joy of of having a a or a less crowded.
Crowded home environment.
How self storage can really assist in helping them with their lifes needs are they tend to stay.
At some point, whether we've seen a real shift and it and and and the normal pattern just don't revert back to sort of the traditional mean.
Don't know at this point I mean, the the the customer we have.
It is in some form of movement. Many of them just the traditional forms of movement that we've seen in the past some of them pandemic related movement and I think we're going to have to see how all of this plays out I think what we know is is the customer is a once in is a is very sticky.
Okay, and you mentioned that the length of stay was increasing <unk>. What is the average length now and I guess you know maybe you can put some context around it of maybe where it was a year ago or just kind of what have you seen.
Sure. It's I mean, it's it thinking increasing Ah Ah you.
You know by days not by months Bye.
You know overall you know.
Our average length of stay continues to be in that right around 14 months and I would say that that's a that's probably elongated out.
You know meaningfully.
Days over the last you know over the over the course of 22020.
Okay I'm just other last thing I wanted to ask you is what's your pro forma exposure to two New York moving up here is there any kind of.
No upward limit I guess of how much exposure to New York City that you would want to have or is it more just dependent if you are able to find deals that you like.
Yeah. So so again, we we really do look at the the markets that we're in as you know three distinct markets and then within those markets multiple distinct submarkets, so the Bronx, Brooklyn, and Queens or.
To some extent, we own an asset and manage assets in Staten Island, and we own an asset in Manhattan, but the predominant exposure is in is in that three out larger outer boroughs each of which is unique and each of which has a unique submarkets within it.
So there's no there's no set parameter around it we we have the highest quality portfolio, we have a very significant market share.
There are other store in those markets.
You know the reality of zoning in in the boroughs is that stores tend to be clustered. So you know we would look at any future opportunities do they fill in a submarket for us. These eight that were under contract.
Really do complement or or expose us to sub markets that we.
Had not been in prior men will continue to look at any of those opportunities that may come up or it's it's really are not something that at this stage that we would be aggressively going after it would be you know is there are there things that come to us that that makes sense from a from a portfolio.
Folio management perspective, obviously, we have nine properties under contract in areas outside of New York City and overtime.
The the obviously the the opportunity set is significantly greater in in markets outside of the of the three boroughs of New York M.S.A. and we'll continue to expand in those in.
In those other parts of the country.
Great.
Okay. Thank you guys.
Thanks Nate.
If you have any further questions. Please press star and then one to join our Q.
Our next question comes from hung John with JP Morgan.
Yeah, Hey, guys I was wondering if you have a general sense of how much of your occupancy gains have been driven by I guess direct Kobe disruption such as work from home.
Yeah.
[laughter] impossible to to to break it down into <unk> and into that type of we have consumers coming to us from for so many different reasons, but I would think even.
Even if you tried to characterize this as something that is co bid related I mean covered related it could be I want I I'm moving I'm a I.
I need extra space or for a home office I need.
I need to free up room for for all kinds of different things. It's in part we certainly don't have any day signing up their leases, saying I mean cobot related customer. So it's a it's a lot of anecdotal information I think what what a pandemic does or has done here to demonstrate again that we have a.
Product that fills a consumers need for a temporary and safe place to store their belongings and and this is just one of many many things that happened over time that creates demand for our product type.
Got it and I guess, you said you had people move and during the middle of walk Downs, where rates were down double digits and you also positive rent increases during that time. So do you have a sense of how long it would take to move those people back to more market rents.
So we you know, we reengaged, a where where feasible.
The rate increase process or.
To add to all of our customers and that was all happening by September 30, If you think about those who moved in at probably the lowest point, which would have been in April a you know those customers will be eligible for a rate increase and not yet.
Six months later, and then 12 months after that if you think about the rates.
And where rates debt in April a you would be plus or minus that second grade increase so at month 18.
You would be getting them back up to.
You know kinda back up to par and then if you look at where we are today. It would take another it would probably take another two rate increases to get them to where we are in terms of today's rates.
Got it thank you.
Thanks, so much.
This concludes our question and answer session I would like to turn the call back over to Chris Marr for any closing remark.
Okay. Thanks, everybody for participating I know, it's been a long earnings season, but self storage, particularly ended on a high note I hope for all of you.
Hi, and Cubesmarts performance in the quarter and I'm confident as we go into the fourth quarter will continue to.
I continue to be a very very good. So thank you all for listening stay safe and look forward to talking to you next year.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.