Q2 2022 CubeSmart Earnings Call
Hello, everyone and welcome to the keep small second quarter Chi pause in 'twenty two earnings call. My name is Victoria, and I will be Canadian pool today, if you'd like to ask a question. During the presentation. Please press star one on your telephone keypad. If you are joining US online. Please press the red flag icon.
I have to ask a question. Please ensure that your line is on mute the likely.
And I'll pass over to Josh It's up Vice President of Finance to begin. Please go ahead.
Thank you Victoria Good morning, everyone. Welcome to <unk> second quarter 2022 earnings call participants on today's call include Chris Marr, President and Chief Executive Officer, 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.
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 filed 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.
In addition, the company's remarks include reference to non-GAAP measures a reconciliation between GAAP and non-GAAP measures can be found in our second quarter financial supplement posted on the company's website at www Dot keeps smart data.
I will now turn the call over to Chris Alright, Thank you, Josh and good morning to everybody.
Another strong quarter for cube smart.
Our results were very solid across all of our key performance metrics, reflecting our high quality portfolio system and teammates.
Highlights for the second quarter include 19% same store NOI growth and 24% funds from operations per share growth, Tim will share more details and color on our financial results for the quarter are significantly improved outlook on the strength of our balance sheet during his prepared remarks.
Looking across all of our markets, we saw consistent performance.
Up and down the cole.
And throughout the central part of the United States.
So self storage continues to be.
Performing quite well our consumer continues to be pretty.
Pretty healthy and were very encouraged by the first half of 2022 and look forward to a very successful second half as well.
When you look at market performance.
Certainly all of our Florida markets have demonstrated.
Significant strength throughout the quarter, we continued to experience.
Drawing demand.
Both coast of Florida.
And we see the related occupancy and rate strength that comes along with that strong demand.
As we foreshadowed.
Earlier in the year, Washington, DC continues and is our most challenging major market.
With new supply.
Significantly impacting all of our stores in the district of Columbia.
We've been able to maintain market occupancy and navigate the challenging rate environment, and what will likely be several more quarters of impact from that supply again, I think positives to cube into self storage is that the consumer and the demand for our product continues to be strong.
Rob.
Our New York City assets, where spreads were very steady performers during the quarter.
We are closely monitoring economic conditions with rising interest rates commodity shortages due to the war in the Ukraine and supply chain issues all of US are certainly experiencing the impact personally.
Our self storage customers continue to demonstrate the resilience we have experienced historically as.
As we expected entering the year.
We are gradually experiencing trends resembling pre pandemic norms and our forward guidance assumes those trends continue into the end of the year.
So in short great quarter, very bullish on the back half of the year and I think we're set up.
Very well entering 2023 and have high expectations that the.
That's the magic of self storage will continue into next year. So thank you for participating and I'll now turn the call over to Tim for his comments. Thank.
Thanks, Chris and thank you to everyone on the call for your continued interest and support.
As Chris touched on operating fundamentals were very constructive during the second quarter and are continuing into the back half of the year.
And that strength showed up in our earnings release last evening as we reported a strong beat the second quarter expectations and a meaningful raise in our guidance for the year.
Same store performance as Chris touched on included headline results of 14% revenue growth and two 5% expense growth, yielding NOI growth of 19% for the quarter.
Average occupancy in the second quarter was 95, 1% and quarter ending occupancy was 95, 3%.
Strong demand continues to be evidenced not only in physical occupancy, but also and strong pricing power. Both the net effective rates to new customers as well as in existing customer rate increases.
All of that contributing to the 14% growth in same store revenue for the quarter.
Same store expense growth for the quarter at two 5% year over year continues to demonstrate good overall expense control.
We continue to see pressure in line items, including property taxes and utility costs, but those were offset by efficiencies in personnel and advertising during the quarter.
We reported <unk> per share as adjusted of <unk> 62 cents for the quarter, representing 24% growth over last year.
We remain active and disciplined in our pursuit of external growth opportunities and while we're not seeing the same elevated levels of deal volume that we were seeing a year ago. Our team remains busy underwriting a lot of potential opportunities we.
We continue to find select opportunities that we find attractive that fit our disciplined investment strategy. We opened up one new development in the quarter in Vienna, Virginia, We closed on one wholly owned store acquisition for $23 million.
And on the co investment front, we closed on one store in New Jersey for $33 2 million.
On the third party management front, we added 35 stores in the second quarter and ended the quarter with 683rd party stores under management.
Our balance sheet position remains strong as we continue to focus on funding our growth in a manner, that's conservative and consistent with our triple BBB <unk> credit ratings.
Our conservative leverage levels, our revolver capacity or low levels of floating rate debt and lack of any near term maturities have us well positioned to pursue external growth opportunities.
Details of our 2022 revised earnings guidance and related assumptions were included in our release last night.
Based on the strong operating fundamentals we've discussed we've increased our guidance range for full year <unk> per share by 4% or nine and a half.
<unk> per share at the midpoint.
Much of that guidance increase is based on an improved outlook for our same store performance.
Guidance for our same store revenue growth for the year increased by 275 basis points to a new range of 11, 5% to 12, 5% growth.
Our outlook for same store expense growth improved to a range of three five to four 5%.
And those combined to result in an improvement to our expected same store NOI growth of 450 basis point improvement at the midpoint to a new range of 15% to 16%. So clearly we're sitting here in a great position at the halfway point of the year.
Our team continues to work hard to best position our portfolio in our company for growth in all parts of the cycle.
And we believe our results continue to validate the strength of the cube smart brand and the strength of the cube smart platform.
So thanks again for joining us on the call. This morning at this time, Victoria why don't we open it up for some questions.
Of course, we will now start our Q&A session, if you'd like to ask a question. Please press star one on your telephone keypad.
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Bank to ask a question. Please ensure that your line is on mute locally.
Our first question comes from Jeffrey Spector of Bank of America. Please go ahead.
Hi, Good morning, it's <unk> on for Jeff.
I just wanted to ask about what you're seeing in terms of health of the consumer.
Are there any signposts.
Weakness thank you.
Notice.
Hi.
Our income level across markets for any.
Any any kind of sign post based on region.
Thanks for that question as I as we look across.
As we look across the country.
Our consumer and their behavior.
It is consistent.
Market by market.
We constantly look at.
Look at trends.
In payment.
One of the signs.
Any potential impact from what's going on in the macro.
The economy.
I would say at this point.
What we have seen it.
Seems to be more of just signs of a return to that pre pandemic norm as I said, we see a little bit of an uptick.
Auctions are a little bit of an uptick.
Write offs, a little bit of an uptick in receivables.
All of which however are aren't yet back to what we would have bought as normal in 2017 18 19, So continue to monitor.
In particular, given everything thats going on in the backdrop of the economy.
But I would say at this point the self storage customer continues to be continue.
<unk> continues to appear to be on pretty solid footing economically.
And continues to be pretty resilient and that's true across across markets across urban and.
Suburban properties.
Great.
Follow up on that.
I'm wondering if you've seen any difference than what drove moving trends or the demand in new.
New York market.
Yes, New York.
New York activity has been.
Very steady I would say probably the steadiest market that we have in the country.
Continue to see.
Elongated and length of stay.
Continuing to see good demand I think it was.
It was a market, where our same store occupancy actually ticked up a bit year over year.
And I would say on the rate side, it's also been.
A less volatile rate market.
So the consumer seems pretty healthy I think when you look at.
When you look at the cost of housing in New York and I know a lot of this is Manhattan specific which really only impacts our one store, but even when you get out into <unk> into.
Into Brooklyn, and Queens, clearly, it's more expensive.
To find housing for folks and.
I think I think the silver lining to that for storage as it does tend to have folks think about smaller.
While our apartments are perhaps having a roommate et cetera, and I think thats been beneficial to us.
Thank you and separately.
I was wondering about the supply picture that you can talk about for for D. C.
There anything new in terms of that.
<unk> deliveries.
You haven't discussed before or is this all this.
Has been expected you know Derek just waiting to hit it.
It's been in the pipeline.
And if you could comment on anything new to share there.
Yes, there is not anything that has opened new.
Actually I don't think anything has opened new in the last two quarters. These are stores that were delivered.
Largely in 2021.
There were there were several that came on at one time.
And they all are in.
In an area, where they have an impact to some degree on on every one of our stores in the district of Columbia. So we knew this going into the year I think when we talked at the end of last year and introduced guidance for this year, Washington, DC Metro was going to be our one of our markets on our list that we had.
Had an expectation going into 'twenty, two was going to be challenged by the impact of that supply.
Positive is I think given market conditions, the supply is leasing up.
We just have to get we.
We have to get rental rates for those new stores to come up the market to help stabilize things.
Okay. Thanks for the color.
Yeah.
Wow.
Thanks. Thank you for your question.
Our next question comes from Keegan call at <unk> capital markets. Please go ahead.
Hey, guys. Thanks for taking the time, maybe first just one expense growth guidance for the back half of the year could you give us a little bit more color and what what improvements in particular are you seeing with your prior expectations.
Which I'm, sorry, Kian, which line items.
Yeah Yeah.
Okay.
Yes, okay. So.
Overall, two 5% expense growth for the quarter and an improved outlook down to that three five to four 5% range and when you take the expense grouping in and think about the two largest drivers. The two the two biggest components of same store expenses being property taxes and personnel.
I have kind of a tale of two cities there taxes continue to be under pressure, we have historically say in place above inflationary levels, but I'm not sure.
Sure that's the right term anymore, but we've experienced over the last several years as a sector that line item, increasing and that kind of 5% to 8% range and we're still looking at that type of a range here for for 2022 offsetting that though is the personnel line item for us where we have found in <unk>.
To find a lot of efficiencies.
Utilizing technology and utilizing.
Some staffing efficiency models to to reduce some store hours and reduced coverages.
That have us in a really good position from a year over year perspective on the personnel line item and then after you get beyond those two big categories.
A whole host of other things that also you have some going in one direction some going in the other under pressure.
Line item would be utilities of course with the cost of.
Electricity and natural gas and the like that will certainly be at the higher end of.
Pressure is.
Pretty good news on property insurance accounting that a bit.
Under pressure on a line item like credit card fees.
Get some relief on that on a line item like advertising, where we were.
Pretty aggressive in 2021, so we have a little bit of an opportunity.
On a comparative basis too.
To have some some help.
And the overall expense pool on the advertising line item. So a lot of things going in different directions, but overall pretty pleased at our ability to control expenses pattern that three five to four 5% range for the year.
Got it that's very helpful and just if we think about your length of stay how is that trending and I guess relative to last quarter, and just kind of going forward, where where do you see things sort of normalize in that year.
Yeah. The the length of stay continues to elongate both stickiness of the customer as well as the obviously the longer we.
Own assets.
That does tend to cause.
<unk> to move out over time, when you think about.
From a <unk>.
Customer perspective.
It's elongated out.
Two.
To a point, where we've got about.
64% of our total customers have now been with us for greater than one year and about 46, and a half have been with us greater than two years.
Got it thanks, guys appreciate it.
Thank you.
Thank you for your question. Our next question comes from one set of data at BMO capital markets. Please go ahead.
Good morning, just hoping you could talk a little bit about the guidance assumptions for the back half of the year, what's assumed for an occupancy decline.
And and maybe what the ending point is to think about how 23 may start at least.
Hey, Juan I'll start and then Tim can.
Tim can provide additional detail as it's appropriate I think its probably say well first of all let me start with the statement that we always make we don't manage to occupancy we manage to maximize the revenue from each customer.
That being said.
For sake of some some guideposts, we would expect.
That hour.
Our occupancy in December is probably down.
Plus or minus 150 basis points from.
From where we were last year is what's kind of baked in and in terms of how we think about.
Starting 'twenty three we would have said Wow, we would assume we end of 'twenty, two and get into 'twenty three with high single digit.
Same store revenue growth.
And then just hoping for maybe some commentary on spot numbers for July for both occupancy and as well as maybe.
The street rate trends through the second quarter and into July if you could just give us a sense of.
The snapshot of how we're doing today and how that trended through the second quarter.
Yeah. So.
<unk> trends in the second quarter.
Net effective rates for our new customers averaged down about about a percent.
And that trend went from.
Modestly positive in April and then and then declined down a bit in May and June to get us to that.
To get us to that average of about down a percent.
As we've gone into July and the comps from last year get increasingly more difficult.
That's in that 3% to 4% range here in July .
And occupancy at the end of July is basically flat to where we were at the end of June .
Yes.
Thank you very much.
Thanks.
Thank you. Our next question comes from Foundation.
Evercore ISI. Please go ahead.
Yeah.
Hey, good morning, everybody I'm Chris.
Much focus on 'twenty to 'twenty, three I guess I mean, how do you feel about it.
The supply picture and kind of your top markets like New York.
Call. It maybe over the next 12 to 18 months as we think about growth for next year.
Okay.
Yeah. It continues to be continue to be very constructive about deliveries in 2023.
I think again, you got to have the inevitable.
Slippage if thats a word from projects that are supposed to deliver in the fourth quarter of this year that drag out into next year, but if you take that Symantec aside.
I think the.
I think the uncertainty and in construction costs, certainly the escalation of cost the supply chain issues I referred to.
I think are all creating.
Some headwinds for supply.
I think that I think that will benefit.
Those of Us who.
Yes.
As we get into 'twenty three.
<unk>.
And so our outlook on.
On new openings in 'twenty three is.
He has not significantly changed from where we were at the end of last quarter. We could take you to think it will be quite muted in New York.
Specifically as we look out.
Into next year.
Again, the outlook is consistent with what we would have talked about.
A quarter ago, we have.
We have an expectation.
Hum.
One the store I think is still left to be opened either later this year and next year in the Bronx.
Hi.
Two or so.
And later this year in Brooklyn, and then as I think I talked about last call Queens has.
<unk> has five or so but I think those are pretty spread out in the borough and not necessarily all are impactful to Q.
And then as we get into next year as we've talked about in New York I think the impact of supply continues to be more muted as we go through 'twenty three and I think.
Based on everything we see today late 'twenty three 'twenty four.
We would expect that the material impact of supply on our.
Our stores in the outer boroughs.
Has dissipated.
Got it and I guess switching gears on on the transaction front.
I think you've done under $100 million. So far this year and I think the upper end of your guidance is about close to 300 million I'm just curious.
You know what are you what are you seeing on the pipeline.
And then you know.
The ability to kind of hit that high end this year.
Hey, it's Tim So we have as I mentioned in my opening remarks, we continue to see an awful lot of opportunities to evaluate.
Yeah.
We are we are in remained very very focused on our strategy of finding complementary high quality assets in the markets that we're focused on.
Yields and returns.
That makes sense that makes sense to us and thus far this year, we found just a handful of such opportunities.
Super hard to predict super hard to predict what's going to come across our desk next week and.
I would say overall not only are the or the overall number of opportunities lower this year than they were last year, which is not a surprise because last year was was very abnormal.
Abnormally high.
As it relates to deal volume and opportunities as you know but.
It's also a difference.
This year is the quality of what we're seeing isn't the same high quality of the assets and the portfolios that traded last year. So it's really a combination of those things and.
We tried to provide that guidance to be helpful in directional.
If we find if we find opportunities that make sense to us that fit our strategy.
To get to the high end of that range, great. If it's double that range great. If it's not another deal for the rest of the year then so be it.
But we will be we will be disciplined and we know what we're looking for.
And when we find those opportunities we'll transact.
Thank you.
Thanks.
Thank you for your question.
Our next question comes from Kai Pan Kim at Trust. Please go ahead.
Thanks, Good morning.
So it's interesting to see your vacate activity up only 3% year over year.
That increase is much lower than many of your peers.
So my question is.
Can you update us on what the E. C. R. I program. It looks like today in terms of frequency and level of increases and does that moderate level vacate activity alter your thinking.
Hey, Kevin So we can't speak for our peers, but certainly we are very happy with the impact our rate increase program is having.
We've gotten more aggressive progressively over time and are more dynamic than what had been a very programmatic approach. So the average increase has grown consistently month to month over the last year will continuously testing different timing and amounts to capture more customers quickly.
And we think we still have some room.
To continue to push that in the back half of the year. So if you think about upside cases for us that certainly would be one of them in the back half of the year.
And can you update us on where your in place rents are today versus market.
Yes.
Yes throughout the second quarter, our in place customers averaged about four 4% higher than new customer rates.
Okay. Thank you.
Yeah, Yeah, and just a little more detail on that question.
The number as you think about the trend throughout the year that that.
That differential push positive in June and July and then has now reverted back again negative here in early August so again return to.
Some of the more traditional cyclical.
The types of.
Of impacts that we see in storage prepaying debt.
Thank you.
Okay.
Okay.
Thank you. Our next question comes from Michael Mueller of Jpmorgan. Please go ahead.
Yeah, Hi, just a couple a couple of quick ones here I guess as a follow up to the prior question on do you see your eye can you give us a rough idea of the magnitude of what the increases have been on average this year say compared to last year and then just for clarification, Chris did you mention.
When you talked about entering 2023 with high single digit revenue growth.
Should we.
Assume that that is kind of a same store revenue.
Outlook for 2023 or were you intending for that to come across as something else.
Yeah, let me take that in reverse order. So so we were merely giving a guidepost for how we thought we would wrap up 2022 and begin 2023, what happens then from that.
Entry point of a high single digit.
<unk> store revenue growth through the end of 2023, we're not providing any sort of guidance around that at this point and not surprisingly it will absolutely depend upon.
How the U S economy is situated.
Situated not only as we enter 2003, but as we navigate through.
Through the year, which certainly theres, a theres a significant amount of uncertainty around that as we sit here today.
In terms of.
In terms of the magnitude of the existing customers. It really is dynamic.
Both in timing and in our mail.
And so it tends to be.
Pretty broad range I mean, we have customers.
Who have.
Who experienced quite a small increase because of how long they've been with us and.
The increases they received over time.
<unk> two at the other end of the spectrum, some folks that we push on more aggressively.
Because of the occupancy of that particular cube, there in that market as well as the history that they have had with you. So it is again.
I want to say, it's it's a very dynamic and as a result.
I was.
I think an average doesn't really tell the true story.
I think what we are focused in on is the is also.
And combining with the with the ability to push along increases is that customer experience.
I think I think I think it's dangerous to have something that's more bait and switch to a customer where they don't understand.
Why theyre getting such a large increase potentially so soon and their experience when they hadn't had that shared with them on the front end. So you know it is a balance of providing a great customer experience while also.
Trying to maximize revenues.
Got it okay. Thank you.
Okay.
Thank you at this time there are no further questions and I'd like to pass back over to Chris Maher.
Alright, well. Thank you all we obviously experienced a solid rental season fundamentals for storage or strong demand continues to support pricing power as I mentioned, we do see further normalization of trends, but as.
As we answered in a question that lower impact of supply.
We think is a very supportive backdrop going forward.
We believe that the companies that will navigate this period of economic uncertainty.
In the in the best manner possible are those that are focused on being lean and agile.
And certainly we believe that applies the cube smart we continue to make sure that our.
That our operating structure and our cost structure.
Fit that definition of lean and agile and I think that will serve us well regardless of what direction. The economy takes here over the next 18 months. So thank you all for participating in the second quarter conference call and we do very much look forward to speaking to you again at the end of the third quarter have a great rest of your summer.
Thank you everyone for joining today's call you may now disconnect.
Yes.
Yeah.
Okay.
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