Q1 2021 CubeSmart Earnings Call
[music].
Good day and welcome to the Cube Smart first quarter 2021 earnings conference call.
All participants will be unless only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to a charter question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Josh It Sir.
Vice President of Finance. Please go ahead.
Thank you Ian Good morning, everyone welcome to coupons for first quarter 2021 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 Dot keeps smart dot com companies.
The company's remarks will include certain forward looking statements regarding earnings and strategy that involve risks uncertainties and other factors that may cause 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 the documents the company furnishes to or files with the Securities and Exchange Commission specifically the form 8-K, we filed this morning.
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 Dot keeps smart dot com I will now turn the call over to Chris.
Thanks, Josh and good morning, everyone. Thanks for joining the call.
I'm pleased to report that fundamental trends.
In the self storage industry continue the positive momentum that began in the second half of last year.
Going back to the mid second quarter of 2020 and continuing through today. Our strategy here at Cube was then continues to be a fairly aggressive approach.
So effective rates for new customers.
Continuing that rate strategy in 2021 reflects our belief that the strong demand and net rental trends will continue through the traditional spring and early summer busy season.
Place that in perspective during the first quarter. Our average offered net effective rates for new customers in the same store pool were up over the first quarter of last year in the high 20 per cent range and ended the quarter up over 40 per cent compared to the end of the first quarter of last year.
Given the disruption and uncertainty we have all experienced over the last four quarters or six 7% first quarter same store revenue growth and.
And our above sector average same store revenue growth over the last four quarters. We believe is a reflection of our high quality systems and dedicated marketing business intelligence and operations teams.
Our external growth teams are also extremely busy and focused on executing on our strategy of disciplined growth and high quality assets.
Our third party management team onboard at 31, new stores to our platform during the quarter.
Split roughly 70 30 between newly developed <unk>.
And existing open and operating stores.
Pipeline of future opportunities continues to remain very robust.
Our expectation is that in 2021 supply deliveries continue to decline from their 2019 peak in our core markets.
Interestingly when looking at our population of third party management opportunities for proposed new developments, we are continuing to see a gradual shift away from the top 25, msas and towards Msas 26 through 100.
We remain disciplined in our underwriting on acquisitions after an extremely busy fourth quarter for on balance sheet acquisitions, our activity during the first quarter occurred with our long standing partner for both in existing and our newly formed joint venture, we anticipate continuing to utilize our joint ventures, primarily to acquire self storage.
Facilities that are more recently developed and that have not yet reached economic stabilization.
We are very positive about our first quarter performance and strong April trends.
And we believe we are well positioned heading into the busy rental season.
Thanks for listening and I will now turn the call over to our Chief Financial Officer, Tim Martin Tim.
Thanks, Chris and thank you for everyone on the call for your continued interest and support.
As Chris touched on from an operational standpoint, we posted a very strong quarter in our reported results.
Same store for phone. It's included headline results from six 7% revenue growth and 2% expense growth, yielding NOI growth of eight 9% for the quarter.
Average occupancy for the first quarter was 93, 8%, which was up 280 basis points year over year.
And quarter, ending occupancy was $94 four per cent.
Couple that with the higher net effective rents to new customers that Chris walked through.
And it results in a very strong six 7% growth in same store revenues.
Same store expense growth for the quarter again came in line with our expectations at 2% year over year.
We continue to experience strong performance across our non same store portfolio and our third party management business and combining all of that internal growth, we reported <unk> per share as adjusted of <unk> 47 for the quarter and that represents 14, 6% growth.
Compared to 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 quiet on that front in the first quarter on a wholly owned basis we.
We opened up the second phase of our development in Arlington, Virginia during the quarter and we have a couple more development opening in the second quarter.
And on the co investment front, we were active in three separate ventures that acquired stores in Minnesota, Florida, Connecticut and Maryland.
We have a group of five stores in Illinois under contract that will close in the second quarter.
So the team continues to be busy underwriting a lot of opportunities and we will remain disciplined in our approach.
On the third party management front, we were busy adding 31 stores during the quarter.
Transitioning them to the balance sheet, we continue to focus on funding our growth in a conservative manner consistent with our triple B B double a credit ratings.
We continue to raise equity capital through our aftermarket equity program during the quarter following a busy fourth quarter on the investment front.
So in the first quarter, we raised net proceeds of $99 7 million under the ATM program.
We repaid a few of our secured loans early during the quarter and at this point have no debt maturities in 2021 or 2022.
Our weighted average debt maturity is now six seven years, and our conservative leverage levels have us well positioned to pursue external growth opportunities.
Details of our 2021 revised earnings guidance and related assumptions were included in our release last night and based on strong operating fundamentals that we've discussed and are positioning entering the spring leasing season, we've increased our guidance range for full year <unk> per share by nearly 2% or <unk> <unk> per share at the midpoint.
Much of that guidance increase is based on an improved outlook on our same store revenue growth for the year, which we've increased to a range of 475% to 575% growth over 2020 levels.
So we're off to a really solid start in 2021, our results in the first quarter and our improved earnings outlook are reflective of the strong current operating environment.
And we believe.
Also that.
This provides strong clear evidence of how well our team did in managing through the first several months following the onset of the pandemic, we believe our systems and our platform on the pricing marketing and operations fronts really outperformed in a rapidly changing environment, leading to very strong relative performance.
So with that thanks again for joining us on the call. This morning and at this time, Ian Let's open up the call for some questions.
We will now begin the question and answer session traffic questionnaire for Star then one on your telephone keypad.
You're using a speakerphone please pick up your handset before pressing the keys for Charlie a question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
And our first question comes from Todd Thomas of Keybanc. Please proceed.
Hi, Good morning. This is Ravi behavior on the line for Todd Thomas I Hope, you're all doing well.
There's been a pickup in the movement back to New York, both the boroughs in the overall MSA in recent months.
Are you seeing any impact as a result, and as it reopens continues do you anticipate any volatility regardless of these things for your assets in this market.
Good morning, I, Yeah, it's Chris I'll take that question.
No we are not seeing.
Any volatility in the boroughs or at our store in Manhattan.
As the city.
And activity starts to pick back up.
And frankly throughout the pandemic the the pattern of that.
Move ins and move outs.
And length of stay in the urban markets has been a key.
Quite similar to those in the surrounding suburbs. So.
It's something that we continue to watch.
But I would say for the last 13 14 months there has not been any deviation.
Of any significance in the urban markets versus the more suburban markets.
Got it thanks.
Just one more here advertising expense was only up three 1%.
We expect this to trend throughout the year.
Yes, that's a great question and that's obviously a a line item in our process that we looked at on a on a daily and weekly basis and things can swing around based on what we're seeing.
What we're seeing in the market, we continue to expect that.
For the full year 'twenty, one we will see our <unk>.
Marketing and advertising expense.
At a level higher than inflationary.
We were able to get some good synergies and efficiencies in Q1, we shifted some anticipated spend into the current quarter.
We are doing a little bit more certainly than last year out of home.
And some of the markets that we paused last year so.
I think in general continue to expect that to be a little bit higher than inflationary levels as we go through the year.
Thank you I appreciate it.
Your next question comes from Samir can all for Evercore. Please proceed.
Okay.
Good morning, everyone I guess, Tim can you provide a little bit more color on the revised guidance for how youre thinking about occupancy rate growth.
Maybe to the low end or the high end of everybody's guidance here.
To state the obvious we think.
Our outlook has improved.
As we sit here and think about our first quarter, our first quarter performance and how well positioned we are heading into the into the busy leasing season as you know we don't provide.
Insight or guidance to the individual components of it.
But I think what Chris was walking through in his prepared remarks, it's pretty telling in that throughout the first quarter.
We were able to see not only occupancy levels that are.
Still yet for the first quarter at record high levels.
But we think we've done a really good job of of of having some capacity.
As we start the rental season.
Have some.
Some some good units available to rent and we're doing so at prices that averaged.
Are asking net effective rents as Chris touched on we're in the mid twenties on average throughout throughout the first quarter and we're pushing up at right around 40% as we ended the quarter. So we're we're coming into the rental season extremely well positioned even better than we thought we would have been back.
Back when we provided initial guidance so.
And both in both areas.
Can drive.
Five revenue growth, we feel really good about it.
And all of them.
Sure I'm, sorry, just to add on that.
That as we sit here today.
The same store pool is 95% occupied the GAAP for the last year has expanded.
Which again has given us some comfort that that the traditional busy season.
Has arrived and will and will continue and I expect that we will continue.
Continue to make some gains.
In our in our occupancy at these at.
At these very attractive rental rate levels.
But is there a way to give more color on kind of the cadence of occupancy over the next few quarters as we think about it.
The first half in the second half here.
Well I mean, I think I think youre going to youre going to see.
What you would typically see obviously has higher levels of physical occupancy in the summer months I think we will see that but I mean.
Quite candidly there is not a whole lot of room for show up even higher than where we were at the end of the at the end of the first quarter. I think then we would expect.
Seasonally when you get past the primary rental season, you'll start to see.
Youll start to see occupancy levels start to decline as they typically would I think everyone's guess as to what that actually looks like when we get into the fall and early winter.
As to how how normal that looks relative to prior cycles I think we have.
Elevated occupancy levels, certainly on our platform and what we can see it from from the rest of the sector.
So I think occupancy is I think it's an interesting question and I think it's.
I think it's an area that we could be pleasantly surprised and it holds in there.
It really really high level throughout the balance of the year, because we're seeing really really strong demand I think if occupancy levels start to return to seasonally more normal.
Again, I think our platform has demonstrated the ability to be nimble and to.
Be advantageous as we think about the combination of occupancy and rate and whichever direction. The occupancy takes us in the back half of the year.
Okay and then my final question here I guess, Chris is.
It sounds like Youre pretty active busy on the acquisition front, you talked about external growth.
Surprised that Youre kind of midpoint was 150 million for acquisitions I'm, just trying to see how much.
There is upside risk to that that range you provided.
Yeah, it's a hard it's a hard one to identify unless you happen to have.
You know things things in your in your pocket going into the year, because it's for us with a really busy fourth quarter we had.
We got everything closed by year end.
And therefore, we're starting as we typically do all over again pipeline is incredibly robust on the acquisition side plenty of opportunities. We're just going to as we always are be very disciplined in.
And our underwriting and look to be opportunistic.
In our in our acquisition, so very difficult to judge.
Frame that in a way that's very mathematical but again, that's our that's our best estimate.
Where are we are likely to end up on balance sheet.
And we'll just continue to update that as we go through the year.
Okay. Thank you.
Our next question comes from one Santa Maria of BMO capital markets.
Please proceed.
Hi, This is leading Polish once on a very at good morning, guys.
<unk> third party management it looks like you add it for you want the worst by lots. They please go away for a quarter or is there any color you could provide on that I think with.
Any kind of Chunkier loss expected for the rest of from here.
Yeah.
Yes. Thanks for the question appreciate it yes, we had a we had a very positive and an active quarter and adding stores as I mentioned in the opening remarks on a net basis, we did have stores leave the platform.
The majority of which were stores that were acquired by.
Stores that were acquired enough left our platform the biggest of which was the 30 store 37 store.
Jay kind of a portfolio and those are difficult to predict.
When they leave your platform.
I think the way we think about it is that our third party owners rely on us and count on us to.
To use our operating platform to grow their cash flows and to increase value for their assets. They entrust us with that responsibility and so when we have stores leave the platform.
With mixed emotions, we hate to see keeps smart flags come down but at the same time, we're incredibly proud of the value creation.
That we were able to help provide to our third party owner customers.
So it's good news Bad news. Good news is we're doing a great job.
The bad news is is that we continue to have a robust pipeline and we'll replace those stores and get some get some new stores across the country with with cube smart signs on them.
Thank you very helpful.
And it looks like you achieved great.
Increasing your customer effective rate range.
With high high 20 up year over year and ended the quarter with 40%. So what you see is any kind of material restrictions lacking replace with regulations being liftgate for Costco portfolio is there any kind of easing assumed in your guidance.
So.
We were not just given the construct of our portfolio.
As significantly impacted by some of the municipalities.
Regulations that were put in place.
And to some extent remain in place. So so for us those restrictions really have not had a real meaningful impact on our.
On our growth for our expectations going forward.
So as we sit here today there are still a few.
In the western part of the United States restrictions in place for the most part many of them have eased.
And we don't expect that it really hasnt had an we don't expect that to have much of an impact on our on our future we have we.
We have been addressing existing customers.
And rate increases to them at a consistent pattern.
From the past.
Several years.
Thank you.
And our next question comes from Santa Rose of Citi. Please proceed.
Hi, Thanks.
Just looking at your market level results for quite a few markets I think more than what we would normally see did see a decline in your operating costs year over year and I was just wondering.
Is there anything youre seeing in particular.
Cross markets, either with just maybe more efficient labor structuring or anything happening on the tax side, that's helping keep those costs in check.
Yeah, Smedes, it's Chris.
The lumpiness in some of those markets.
<unk>.
Is it just what you described it's taxes, primarily when you think about.
Just some changes in real estate tax expectations as we.
As we looked at this quarter relative to the fourth quarter or the first quarter of last year. There is some timing.
And this will continue through the second quarter due to that.
Due to the impact of COVID-19 last year on on repair and maintenance items, where last year. It just wasn't feasible to get things done. So we do expect to see that'd be a little bit.
Choppy on the personnel side, it's just been a continued focus on.
On on staffing on ours.
How we how we do business there throughout.
Throughout the country, and we began to see some benefits of that plus the.
The increased use of smart rental late in the first quarter of last year and then those trends continued through through this quarter.
Okay. Thanks for that.
Smart rental I guess, probably helps reduce your flavor cost a little bit or does it not meaningful okay.
And I just wanted to ask you on the.
External growth opportunities it sounds like Youre looking at more.
Lease up facilities versus.
Mature properties.
Has that changed at all I guess with the industry doing so well I mean are there fewer opportunities out there or are people willing to wait longer and same thing kind of make it to the other side or kind of maybe any changes youre seeing there.
I don't think we may have mischaracterize, something there I think we're seeing opportunities both on both on stable assets and on.
On assets that are in some stage of lease up I think we're what we're seeing is a very robust environment for an awful lot of opportunities and we expect that once.
We've talked about it before but but.
Transactions.
And owners coming to market to sell their stores tends to have the same seasonality as our customers do which is we have more we have more owners come.
Market to sell their stores in the summer months people tend to like to bring their store to market. When they are at peak occupancy levels and when rental rates tend to be at their highest.
Which is somewhat comical because.
I mean of course, we all underwrite the fact that that's why they come to market, but in any event.
We're starting to see a really good.
Pipeline.
Things coming across our investments teams desk to take a look at and to underwrite I think it's going to be a very very busy year from a transactional standpoint for the sector. I think it gets very difficult for us to predict a Christmas earlier response is to try to predict how often we're going to be the highest bidder or how often some of those deals are going to come in our direction.
This year is as cloudy as.
As it has been in quite some time, given the fact that obviously cap rates continue to compress you have some pretty aggressive bids out there in the market when things do when things are trading and so we'll remain disciplined I think we will have plenty of opportunities come our way, it's just a really difficult year to predict how many.
Okay I appreciate that thanks.
And our next question comes from.
Kevin Kim of truth.
Please proceed.
Thanks.
Good morning.
Just going back to that previous question when you talk about the robust acquisition environment.
Yeah.
I can see a scenario where does love the deals happening, but are there a lot of deals happening that are within our strike zone.
And how is that changing your strategy in terms of like what type of assets or markets.
Or whether it's stabilized or from kind of value add things that youre looking at.
I'm not sure how to how to answer that without being completely redone that I would say in the fourth quarter. We had a lot of things that were in our strike zone that we felt like we made pretty good contact on and in the first quarter not so much.
I think we look at we like to think that we see almost every deal in the market. There are the occasional deals that trade that.
We see that perhaps others don't get to look at and certain that that happens and in the inverse.
But obviously in the first quarter and here in the very short term and then the last couple of months.
We've underwritten quite a few opportunities we've we've gotten to.
Some we haven't even gotten into the second round embedding because pricing.
Pricing levels relative to our underwriting and our return thresholds didn't make a ton of sense.
I'm optimistic that we will find opportunities as the year progresses. It's just again, it's just very very difficult to predict I mean, we can love and asset and based on the underwriting. We we establish a price that we think makes sense to us and to our shareholders for us to create value on a long term risk adjusted basis and if somebody comes in 20% above that then.
When we look at the next deal.
Okay.
No.
Stating the obvious but I mean, it makes sense for occupancy and rates are moving in a similar direction over the course of any time period.
I think a lot of them part of the self storage operators are assuming fourth quarter occupancy is a negative comp which makes sense.
But is there a scenario that you think is building where.
Perhaps the elevated rents are stickier and may not move in lock step with it.
A return to normalization that might be apparent in the occupancy.
The SaaS by fourth quarter and next year.
Yeah I think.
The I can be occupancy question is just a really difficult one to answer because it's hard to it's just hard to tell what's going to what the back half is going to look like it's all it's all dependent upon we've obviously seen as an industry. We have seen an incredible surge in demand over these past three now three plus quarters.
And what's different about it is that we had customers coming to us.
Hum.
In waves at times that seasonally they they haven't historically.
So the real challenge then is is in a normal year pre pandemic.
Were remarkably accurate at being able to predict vacates for the.
The following year and oftentimes it just becomes a mathematical exercise and that customer behaviors tend to repeat themselves in customers that move in and in March tend to stay a certain length of time in the year after year after year those those things tend to repeat themselves the biggest challenge for 2021.
Is that a 2020 was so abnormal as to when people moved in.
Our tried and true measures in our in our historical.
Data driven approach to predict those vacancies.
We just don't have as high a degree of confidence in it because because we haven't it's our first pandemic because we like to say and so try to trying to think about where occupancies are going to be in the back half of the year is a challenge I think there is there is certainly a bull case.
That that many of those customers that came to us over these past three or four quarters, perhaps they have a very long length of stay it's just too early to tell for sure.
And if that's true and you couple that with our rental season that has a typical length of stay customer than the back half of the year could be very highly occupied and we'll have to we'll have to manage through through that if if customers that moved in last year as we start to get more insight into their vacate patterns and into their length of stay.
If if those move outs start to come but we don't expect them to come in in a big way, but if they start to pick up.
And then again to my earlier point I think our I think we've proven over these past several quarters that are our pricing methodology, our marketing approach will serve us very well in changing times just like it did last year.
I think on the rate side I think when you look at rates and where they are we're not wildly disconnected youre going to see some eye popping numbers in the second quarter across the industry as to rates in the second quarter compared to rates.
And in the second quarter of last year.
I think we did a pretty good job of holding onto a good bit of rate in the second quarter of last year and I think we did in hindsight I think we did a better job than than than some or many and holding rate. So our our increase we're going to have a much more difficult comp, but whether you have an easy comp or or a more difficult comp the rate growth.
In the second quarter 'twenty, one versus the second quarter of 'twenty or they're just gonna be eye popping numbers, and then youll start to revert back a little bit but at the pricing levels. We're seeing right now if you go back over the course of 345 years, we're not wildly disconnected or we're not wildly above.
Where rates would have been peak rates over that same time period. So I think theres. Another bull case that the rates that we're seeing right now could hold in there and you don't have some type of a reversion from a rate perspective.
Yeah and.
That's an interesting point you brought up.
Does recur, probably they're up big from a year over year comp standpoint, but from a.
Previous peak standpoint, with ex <unk> 16, or 17, its probably not up.
To a degree with that customers are being priced out and it sounds like that's what you're saying.
So that was what I was attempting to say so thank you for clarifying.
[laughter] alright, thank you.
Thanks Steven.
Our next question comes from Jeff Spector of Bank of America. Please proceed.
Good afternoon, and thank you.
My first question I, just wanted to ask on new renters. If you survey them just curious in the last month or two any change it or reasons can you explain what they are looking to rent for just trying to get a feel for the winter.
Winter's more recent renters. The main reason that they are looking for storage.
Hey, they're not not not a specific reason, but again the gamut of.
Of reasons that that probably is intuitive to you we have quite a number who are.
Home improvement or.
Some sort of home activity that is creating a need for storage obviously the.
The twin impact of an incredibly robust.
Market for.
For resale of single family homes, where you're I'm sure reading about the bidding wars and everything else.
And then the challenges on the construction of new homes from a cost of lumber.
Im sure Youre seeing every day in the papers labor cost and availability.
Is creating that that perfect situation for our industry, where you're selling your home much quicker than perhaps you ever would have thought and then your new home is not going to be completed.
On time or on schedule and later than you thought and so therefore, you have that need for for.
For storage in the interim period.
And then we're continuing now to see a bit of a more normal and some of our markets.
College.
Set of activity and then just all the life events that typically happen over the busy April to August timeframe.
Okay. Thank you and then my second question is on.
Chris your comments on supply.
Some of the I think you referred to some third party data gradual shifts to Msas 26 to 100 to confirm are you talking about 'twenty two.
And what are your thoughts on 'twenty two even in your markets. What are you what are you seeing out there.
Yeah. So so declaring to clarify my comment I was referring to.
Where we're having interactions with potential new <unk>.
Third party customers, who are considering developing a self storage facility for us to manage out into the future.
We are seeing a shift from from those potential customers focusing that development are bringing an opportunity for us to talk about in the top 25, msas to being more increasingly in Msas 26 to 100, so I sort of interesting.
Point I guess I was trying to make was that we are starting to see that.
That shift from some of the markets say like a Chicago that saw.
Self storage development in 2016, really really pick up and I think our expectations for example in that in that MSA for 2000.
21 deliveries I think are two new stores being delivered so you're seeing a shift from from those top 25 to 26 through 100. Although again. This is just based on op.
On a sample size of third party.
Potential third party customers, who are Tom U S overall thoughts on supply.
Again, we've been pretty consistent that that our data suggests that 2019 was the peak in our top.
Our top markets and that it has continued to decline and we think it'll decline again here in 2021, and our top 12 markets plus or minus.
Our expectations are about 200, new stores coming in which is which is down from from where we were in the last couple of years.
Thank you that's helpful and then.
My last question is just I guess on that that supplier.
With all the demand we've seen are we.
Past.
Pressure from that supply for.
Our new new newly developed assets leasing up quicker than the normal two to three year timeframe I feel like the industry.
Discusses in terms of leasing up for new development.
So so two different things there I think from a lease up of our newly constructed stores.
Certainly they were all the beneficiary of.
Of the robust activity that we've seen here for the last few quarters and so as you see the record high Occupancies in folks same store pools.
Those customers, who can't find what they're looking for in a mature store are finding it in a in a newly constructed store and so the physical lease up is it's moving in a more positive direction than it was pre pandemic and the rate is coming along with that so that's.
A positive it's obviously a help.
And the lessening the impact those new stores have on the existing stores in those in those markets.
I think it's I think again it goes to the commentary that Tim shared about the challenges.
What the next 12 months to 18 months look like if we continue in a very robust pattern. As we are then yes, those lease ups to maturity will.
Will can can contract and that will be obviously very beneficial.
Maybe a little bit too early to the plant that black.
Thanks for just one last question on acquisitions.
Acquisitions and competition, who are you losing two is it is it private equity.
Or is it public peers.
Okay.
It's the gamut I mean, I think you have.
You have large transaction, where those folks who bang the drum about replacement cost seemed not to care about replacement cost if it's a transaction over a certain size.
On the one off transactions.
Good.
You tend to see you too.
Tend to see.
The full gamut, it's the it's the rates, it's the larger private operators in the folks who.
Family Office.
As you would expect it.
The performance of the of this of the of the industry combined with.
It's still a relatively attractive.
Cash on cash yield compared to some other product types is drawn.
Has drawn significant interest to our sector.
And then I think Brian the other thing the only other thing that's interesting is not only.
Who who youre, losing too if you want to use that term.
But why right and it could come from from two different vantage points. It could come from the fact that somebody might just have a lower return threshold or want to structure, it differently utilizing leverage or otherwise or or perhaps you also have folks that just have much different underwriting than you have.
And obviously in our view in those cases that go in a different direction.
It comes down from our perspective, either somebody had a view that they that they're looking at a lower a lower return threshold that makes sense from their perspective than from ours.
Or they have underwriting assumptions.
That are not in line with the hours that are just much more aggressive than ours and so to us it's trying to figure out oftentimes.
Why are or what was the component of that more so than then who are the nature of who of who that person was ultimately the winning the winning bidder. So I think thats I think thats an interesting thing that we try to look at and try to figure out and it's not an exact science, but that's part of it.
Thats part of doing this from deal to deal to deal to make sure that that we're looking at deals even that don't go our way in and use all the data that we have to then go back and evaluate the performance of.
Those assets that we didn't transact on to make sure that we're not missing something.
<unk>.
Im pleased to say that when we go back and do that exercise I don't think we are there are certainly are if you go back over the past five years, there are certainly deals.
We wish in retrospect, we had been more aggressive on as we see how that market performed or that assets performed but but the overwhelming majority of the cases, we go back and look at that data and it proves out the fact that that.
Our disciplined approach paid off and we made the right call from our perspective.
Great. Thank you very much.
And our next question comes from Mike Mueller of Jpmorgan, Mike. Please proceed.
Yes, Hi, just two quick ones sticking with rates for a second and can you give us any color in terms of as you're pushing out rate increases to existing tenants, what what the either pushback or acceptance you're seeing is now compared to core I.
I don't know pre pandemic norms.
Yes.
I would describe the entirety of the <unk>.
Rate increases to existing customers. If you takeaway if you takeaway the component which are there certain areas that.
There were limitations around around what you could do as an industry I would say our approach more or less has been pretty consistent.
We certainly have an array of of increases that we pass through based upon a pretty wide variety of different criteria from a customer.
Arranging a full gamut of variables that you could probably.
You could probably take a pretty good stab at what they are.
The receptivity to those increases has been virtually unchanged.
And the entirety of that approach is based on the fact that we're trying to pass along rate increases that don't have any type of material impact.
In and vacate rates based on what we have expected a customer length of stay to be so we're trying to find that sweet spot always.
Passing along rate increases that increase our profitability increase our cash flows in a way that's not disruptive to ultimately being the.
The the the thing that has somebody move out because you pushed too hard sometimes you want a customer move out there if they're too far below market and they don't want to to come closer to market. If they leave and you can go rented at a higher at a higher price too.
To a new customer, especially given high occupancy levels.
Then that's the right answer from a portfolio management standpoint, but the simple answer to your question is really not much change.
Got it but it sounds like what maybe a little different is the formula and the magnitude of the increase it sounds like you may have a lot more variability from market to market than you normally would otherwise is that fair.
Well I think I think where you have more variability is the fact that rates have changed so much in a relatively short period of time that you. If you had a customer for instance that moved in and in April of last year.
At a rate that was a little bit that had been a little bit reduced given given where we were in the <unk>.
As the pandemic is playing out well that customers is going to be in a much different scenario.
Then a customer that had moved in three months prior to higher rental rate I'm going to be much different than a customer that moved in three or four months later at a higher rental rate. So there's more variability in and the fact that we have a lot of different customers that came in at different price points.
Not a lot of variability in our approach is consistent you just have a lot of different.
Customer types.
Got it okay that makes sense that was it thank you.
Thank you.
Next question comes from David Balaguer Green Street. Please proceed.
Good morning, Thank you.
Just wanted to go back for the comments that you had on third party management that you've seen a lot more activity outside of the top 25 market.
Knowing that cap rates are continuously compressed nationally would.
Would you say that change has been more pronounced outside of the top 25 markets year over year or do you think it's been somewhat comparable.
Yeah, I think I think it's been comparable and that's again another thing that's that's different versus.
How we always used to think about.
About yields.
From the the the markets that would be considered a market to a b market to see market. There is really been.
Sort of cap rate compression across the board.
And again part of that goes back to what is your other alternative if you're if you're an investor in in and across multiple <unk>.
The industry has multiple real estate opportunities.
Hi.
Strength of the cash flow that was proven through the recession and now through the pandemic of of self storage has drawn.
A significant amount of.
Capital to the space and we've said it before there it's obvious the the introduction of <unk>.
Of of third party management platforms.
That are.
That have scale in that and that are able to deliver great results has also.
Made it a little bit easier for folks to to assemble a small portfolio of self storage across bearing markets.
Thank you that's helpful. And then just one other question just going back to the supply I know development costs have increased quite a bit.
But at the same time it seems like there's been some some capital rotation into this sector.
To what extent do you think that supply might increase just.
Obviously, the operational outlook is very strong over the next 12 to 18 months do you think that there's a potential that we could see supply in some of the out years pick up quite a bit.
Yeah. That's a great question I think I think you hit on the on the on the Yin and Yang of the answer is on the one hand.
Fundamentals have been very solid.
And therefore folks looking at our product versus other opportunities.
I, certainly see that and react on the on the opposite side you have raw material cost that are escalating you have labor both cost and shortage.
You continue to have challenges in end markets relative to zoning and entitlement. So.
I think you have both of those that will to some degree offset one another in some markets, but but ultimately.
Yeah.
Forage market is healthy.
And you can make it pencil in and I'm sure there will be deals that do you will continue to see.
A level of development I do think the theme of shifting around from from those markets that saw supply early and often and those were mostly the larger msas to to moving to some of the smaller Msas will continue and as we've always said some level of development is healthy it indicates that the economy.
As healthy that business is good for storage.
We've been able to absorb it I think as an industry pretty pretty smoothly I think we'll continue to to be able to do so on a on a macro basis across all the markets.
Thank you that's very helpful.
And our next question comes from Jonathan Hughes of Raymond James Financial. Please proceed.
Hey, good morning.
You mentioned, the aggressiveness with rates over the past year, that's driven strong revenue growth.
And given the easy comp coming up in this second quarter why not get more aggressive with revenue growth guidance I think you know.
Everyone listening to this call can can see that revenue growth will almost certainly.
Sequential here you said multiple times, we're going to see eye popping right growth for next few months, yes. The upwardly revised full year revenue growth guidance actually implies a D cell in the rest of the year.
So is the revised guidance more reflective of concerns and uncertainty about the second half of the year, just an extreme level of conservatism I'm just trying to reconcile your comments today with guidance from last night.
Thanks, Jonathan.
I think the nuance there in that question is that my comments were specifically to the second quarter Youre going to see some eye popping growth because.
I think from the companies, who reported public publicly and it provide a commentary on it I think in the second quarter last year. You saw you saw asking rates drop anywhere from 10 to upwards of pushing 30% down in the second quarter last year.
And then following that at varying degrees of pace.
So each of the platforms start to get that pricing back and then to push beyond that and then you get to where we are right now.
And so I think.
My commentary was based on the second quarter.
Asking rates are going to be eye popping keep in mind that as we turn between five and 6% of our portfolio every month.
Youre going to see some you're going to see some nice revenue growth that will that will be with you for quarters to come based on customers that move out.
That moved in in the first quarter for second quarter of last year that you were placed with with customers that are high rents. This year once you get to the third quarter and the fourth quarter. Those those easy comps go away because we were all pushing rate, we certainly were pushing rates.
Starting a little bit earlier than some and so when we get to the third quarter and the fourth quarter you get into much more difficult comps both from a rate and an occupancy standpoint, so it's really a tale of.
Two halves of the year.
Actually three completely different things, but for the first quarter that we just reported on is comparing against effectively a pre pandemic first quarter of last year.
The second quarter of this year is going to be the easiest comp that probably the industry has ever seen at least from a rate perspective second quarter 'twenty versus second quarter of 'twenty, One and then when you get in the back half a day or much more difficult comp because for operating fundamentals were so strong in the back half of last year. So I think all of that I.
I appreciate the fact that it's a lot of moving pieces.
And I appreciate the fact that we're looking at all the detail and we're trying to build that up and presented in a way that's helpful.
From an investor standpoint.
We're very comfortable with the with the guidance that we've provided.
I think in that range being able to being able to improve that guidance from where we were just a quarter ago. I think is awfully positive and and again a lot of moving pieces I think we're we're optimistic as to how the rest of the year plays out.
Okay.
Yeah look I'm not trying to discredit and all the hard work that's been done over the past year Im just trying to understand how you guys are thinking about the cadence from now until year end.
And so I mean, if we look at the <unk> 'twenty revenue comp I mean that was it.
Secondly, flat revenue growth back then I mean, if rates are still kind of in the for probably four five.
Range on an in place effective anywhere you lose even a little bit of occupancy I mean that even is above what's implied in guidance. So.
That's kind of one <unk>.
For the question.
I appreciate your thoughts on it maybe we'll follow up offline.
Happy to do that I appreciate the question.
Thanks.
This concludes our question and answer session. At this time I would like to turn the conference back over to Chris Marr for any closing remarks.
Alright, thanks, everybody for participating.
Really positive about the quarter positive about.
How the second quarter has started off here in the month of April and look forward to.
Speaking and seeing on the screen hopefully many of you at NAREIT virtually in June so thanks, everyone and enjoy the rest of your day and your weekend take care.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
Sure.
[music].
Okay.