CubeSmart (CUBE) 2014 Q2 法說會逐字稿

Good morning and welcome to CubeSmart's second-quarter 2014 earnings conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Mr. Charlie Place, please go ahead, sir.

Thank you, Betty. Hello, everyone, and good morning. Welcome to CubeSmart's second-quarter 2014 earnings call. Participants on today's call include Chris Marr, President and Chief Executive Officer; and Tim Martin, Chief Financial Officer. Our prepared remarks will be followed by a Q&A session. In addition to our earnings release, which was issued yesterday evening, supplemental operating and financial data is available under the Investor Relations section of the Company's website at www.cubesmart.com.

The Company's remarks will include certain forward-looking statements regarding earnings and strategy that involve risks, uncertainties and other factors that may cause actual results to differ materially from those forward-looking statements. The risks and factors that could cause our actual results to differ materially from forward-looking statements are provided in documents the Company furnishes to, or files with, the Securities and Exchange Commission. Specifically, the Form 8-K we filed this morning, together with our earnings release filed with the form 8-K, in 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 second quarter financial supplement posted the Company's website at www.cubesmart.com.

I will now turn the call over to Chris.

Thank you, Charlie. We continue to execute on all phases of our business plan, delivering robust, organic and external growth for shareholders. Same-store results remain at very high absolute levels of performance, while the portfolio achieved new peak occupancy levels. The competitive environment remains favorable with minimal new supply entering the market. Industry fundamentals remain strong in our target markets, and we expect organic performance to remain above historical averages for the foreseeable future.

Same-store growth metrics continued to accelerate. Notably, are year-over-year same-store revenue and NOI growth rates increased by 60 and 70 basis points, respectively, from the already strong levels reported last quarter. We achieved all-time highs in physical occupancy, hitting 92.4% at June 30. Our momentum continued into July, and our same-store portfolio continued to gain occupancy, growing 60 basis points from June 30, to reach peak occupancy of 93% on August 2. The components of our same-store revenue growth are shifting. While occupancy gains continue to positively impact our growth rate, a trend that we expect to continue through 2015, revenue per occupied square foot was the primary contributor to our same-store revenue growth of 7.6%. We anticipate this trend will continue in the coming quarters as we reap the benefits of higher rental rates and lower discounts.

Our gains in our net effective rents are coming from a combination of increases in asking rents to new customers and decreases in discounting. Asking rate increases have accelerated throughout the year, a trend that has continued into July. A month in which we levered our high occupancy to be even more aggressive with our street-rate increases. Asking rent growth does vary by submarket, ranging from increases of 9% in Houston and 7.5% in Miami, to reductions in asking rents in Albuquerque and El Paso.

On a same-store basis, discounts were 4.2% of in place rents during the second quarter, compared with 5.4% in the second quarter of 2013. Our external growth focus remains on finding high quality acquisition opportunities in our target markets. We have closed on $247 million through today. We continue to mine our managed portfolio with four of our nine second-quarter acquisitions being assets from our third-party management platform.

We are also focused on our development and acquisition at CO pipeline. We have four joint venture projects in various stages of planning or construction with expected 2015 deliveries. We spent a lot of time over the last 18 months looking for partners in specific markets, who we have confidence can help us deliver on our value creation pipeline. We also have three assets we have committed to acquire completion with expected closings ranging from the third quarter of this year to the second quarter of 2015.

Our joint venture development and acquisition at CO pipeline consists of assets located in the highest quality locations, in extremely attractive submarkets in the boroughs of New York, the Washington, DC Metro, and North Dallas. Ultimately, we are focused on delivering solid cash flow growth to our shareholders on a conservatively leveraged basis. Our funds from operations per share growth of 17.4% during the quarter is a result of our execution on that objective. We are confident, based on the way we executed in the first half of the year and the continued strength that we are seeing in the market place, that we are well-positioned for the second half of 2014 and into 2015.

I will now turn the call over to Tim, who will put that confidence into context, as he updates you on the details of our increases and our guidance. Tim?

Thanks, Chris, and thank you to everyone on the call for your continued interest and support.

As Chris touched on, our second-quarter results reflect a continuation of very compelling same-store performance as our revenue growth accelerated from 7% in the first quarter to 7.6% this quarter, as we achieved all-time highs in occupancy for our portfolio. Same-store NOI growth also accelerated from 9% in the first quarter, to 9.7% this quarter. We reported FFO per share adjusted of $0.27 for the quarter, which beat the high end of our guidance range. The beat to our guidance range came from contribution from multiple areas, including better than planned occupancy and effective rates, as well as modestly lower operating expenses compared to our plan.

On the external growth front, during the quarter, we closed on acquisition of nine facilities for $127.4 million, and another two facilities in July for $15.8 million. This activity brings our year-to-date acquisition volume up to $246.5 million. To fund our growth, we announced several updates to our capital raising activity, both on the debt and equity funds. On the debt side in December of last year, you recall we acquired 35 property portfolio of primarily Texas assets through a 50-50 partnership. When we closed on that transaction, we did so without any debt financing at the venture level with a plan to but modest levels of debt in place in the future.

We completed the plan financing of the venture in May, obtaining $100 million secured loan, with a seven-year term and a fixed interest rate of 3.59%. The net proceeds of the loan were distributed to us and to our partner based on our respected 50% ownership levels. Earlier this week we completed the amendment of one of our $100 million unsecured bank term loans. The amendment extended the maturity of the loan from June 2018 to January 2020, fitting nicely into our debt maturity schedule.

Pricing on the loan was also amended to reduce the spread over LIBOR. Based our current BBB-minus/BAA3 credit rating, our spread over LIBOR on the loan decreases 60 basis points from 2% down to 1.4%. We remained active using our at-the-market equity program during the quarter, we sold 4.5 million shares, at an average sales price of $18.05 per share, for net proceeds totaling $80.1 million. We remain focused on funding our growth in a manner that's consistent with our objective of obtaining investment-grade credit ratings at the BBB/BAA2 ratings level.

In last evening's earnings release, we updated and improved our guidance ranges on both FFO per share and on our same-store operating metrics. Our FFO per share guidance increased to a revised range of $1.03 to $1.06, representing a 4% increase in guidance at the midpoint. We also introduced third quarter 2014 FFO per share guidance of $0.26 to $0.27. As a reminder, our FFO guidance ranges are on an as-adjusted basis and exclude the impact of acquisition related costs given the unpredictability and nonrecurring nature of those costs. As mentioned, our core portfolio performance has been exceptional year-to-date, and our summer rental season has outpaced our prior expectations.

As a result, we're increasing our same-store guidance. Same-store revenues are now expected to grow 6.75% to 7.25%, up 125 basis points compared to the midpoint of our prior guidance range. We tightened the high end of our expected expense growth range and the resulting NOI growth expectation has been increased 175 basis points at the midpoint to a revised range of 8.25% to 9.25%. Very compelling growth on top of last year's 9.3% same-store NOI growth. Our targeted acquisition volume of $250 million to $300 million for the year remained unchanged and consistent with our historical practice, we include the impact of announced transactions in our FFO guidance, but exclude the impact of future speculative activity.

With that, thanks again for joining us today, and Betty, why don't we go ahead and open up the call for questions.

(Operator Instructions)

Christine McElroy, Citigroup.

Chris, just have some questions on the development stuff as you mentioned, you've got $80 million in projects and works with JVs and then another $102 million of CFO deals, a bunch of projects coming online in 2015. How involved are you in the construction progress for the JV development projects or is it more a more financial initially and then operationally later? And do you expect to buy out your JV partners upon completion?

We're heavily involved. These are typically structured in a 90/10 relationship where CubeSmart is 90% of the equity capital, our partner is 10%, and the partners that we have established in these markets, they're bringing the submarket knowledge, the uniqueness of the entitlement process in those markets, finding the sites, et cetera. They are overseeing the construction, but we are involved in that oversight.

We're involved in the approvals on the design and the unit mix at the individual sites, and then ultimately, we take over as manager of the store when it achieve its CFO. In the long run, the relationships are set up to provide our partners with optionality. They may certainly stay in for their ownership interest and enjoy the cash flow coming from the store over time, if they wish to monetize their investment, there are procedures set up within the documents for them to do that.

My sense on the JV development is it will be probably a combination in the early stages, at least, of both of those. Some folks will choose to stay in for the duration, some folks may choose to monetize the early deal so they have capital to continue to help us grow.

And then including both the JV development project and the CFO deal, how big do you expect the pipeline to get? And if you look out, 2015 and beyond, what level of annual FFO dilution are you expecting as these projects start to spill over?

I think we look at them in two different buckets. The CFO acquisition opportunities are our more opportunistic for us, and we tried to limit the duration that we're making a commitment. Obviously in those instances, we're not taking the development risk.

We certainly are accepting the lease up risk, and the capital risk of making a commitment for something that won't close until some point in the future. Those are more optimistic or opportunistic in how we find them and how we source them, so that volume will ebb and flow based on the opportunity. The joint venture development program, if you look at it over a continuum, right now, we're looking at having, on average, about $75 million worth of openings in any given year.

So we're a little bit north of that in 2015, but if you look at it on average over time, that's the target, and I'll let Tim address dilution for you.

On the development side the -- kind of a full first year impact of the drag from the development is in the neighborhood of $0.02 a share of dilution. For the first batch as you -- if this becomes a more programmatic, if the opportunities and the risk-adjusted returns continue in the future, as they look today and this becomes more programmatic, then that $0.02 builds a little bit when the second batch comes on, and then it levels out as the first group leases up and gets stabilized and you kind of get into a cycle of that type of program, if that's the path we ultimately take. So I would think about $0.02 of dilution in year one.

And, Chris, you mentioned 93% occupancy at August 2. What is that year over year and how do you expect that year over year delta to trend in the back half of the year?

That was about a 200 basis point spread over the same-store peak last year in that last week of July, beginning of August. Clearly, then, as we get into the back half of this year, that number begins to shrink a bit. And obviously next year, while we still have revenue growth coming from our occupancy, it becomes a much lesser impact on the overall growth rate and the effective rate rents become even more greater.

Todd Thomas, KeyBanc.

Just a couple follow-ups on the development. I was just wondering if you could talk about your -- what you expected the stabilized yields are for these projects, and what the timeframe to get the stabilization looks like in your underwriting?

On the joint ventured developments, we're targeting stabilized yields that are 275 to 300 basis points north of the acquisition yield in those underlying submarkets. For the deals that we are buying at certificate of occupancy, those targeted yields are a little bit lower, given that we're taking less risk, and from the stabilization perspective, we're still underwriting to a three-year lease up on these properties.

We'll continue to adjust that as we see the Tremont deal in the Bronx that we recently opened that's sitting at 38% occupied today. And our store here in Melbourne, although a very small store, went from empty in January to about 87% occupied today, so we're not quite yet ready to adjust the underwriting, but we feel good about the parameters I described.

If these projects do begin do show that they're leasing up at a faster than expected timeframe, I mean is there a desire to build on the pipeline and have more than $75 million of openings per year? I mean would that be sort of the view, I mean, are you willing to take on more risk?

I think again it comes down to risk-adjusted returns and performance of this -- of these more recently added stores, so I think it's a value add opportunity. I think it absolutely is a growth engine for us as we go forward, and in the boroughs in New York, Metro DC, certain other markets, particularly in the boroughs, where the quality of assets that eventually could be available for acquisition, many don't meet our criteria. So this is an excellent way for us to continue to add in a market that we obviously really like.

So I think the answer to that question is it depends. Certainly if it's a successful program on all fronts, we would look at this type of program to be something that's a growth engine for us over the continuum.

And then it sounds like these are sort of separate or individual partners that you're working with. If we look at the development JVs, the two Queens deals, the deal in Brooklyn, are any of these -- are you working with any of the same partners on any of these transactions or are there four separate partners on these deals?

There are three separate partners on the four deals.

Okay. Just one last questions. In terms of operations, and sort of heading back into the back half the year here, can you just talk a little bit about the pricing strategy? It sounds like some others are talking more and more about smoothing out some of the seasonality in the business, and in terms of trying to keep occupancy flatter during the off-peak season.

Should we expect to see that from Cube, given your comments that you're still seeing pretty nice occupancy gains, but increasing asking rents, it sounds like at high single digit rates.

As we get into the balance of August here through the end of the year, focus is going to be on maximizing revenue, obviously, but keeping as much of that physical occupancy as we can, and I think the lever that -- both levers will be tweaked, asking rents, as well as the levels of discounting. Certainly as you get into the slower rental months, you will open up the discounting to be able to attract more than your share of the rental activity that's out there.

Glenn Clark, ISI. (Technical difficulties)

We seem to have an open line on the call. Is there anyway we that we can close that down? Thank you.

Jana Galan, Bank of America Merrill Lynch.

Chris, I know you talked about the supply environment is very limited right now, but maybe you can just let us know what you're seeing in terms of new supply in some of your major markets?

Sure. When you look out at the major markets, you're still seeing very, very minimal amounts of activity. I think if you had to pick two areas that are seeing a little bit more than minimal, you would look in the major Texas markets and in the boroughs of New York City, so there -- and Chicago, so there's definitely talk in those. Again, to put it in perspective, we've seen 7 properties open in the top 5 MFA's this year and about another 20 that are currently under construction.

So, there is some activity out there, but it is by all measures very, very minimal, and we just don't see it having an impact on our portfolio through the end of next year. And, again, I think this comes back to the challenges that are out there in terms of getting financing.

I think when you look at all of the newer roles and regulations and capital requirements for financial institutions, the incentive to lend on speculative development is not there, and for other than just very highly capitalized developers, it's a real big challenge to get anything done, which is obviously great for those of us in the industry.

In those kind of more major markets in New York and Texas, and Chicago, what are your partners saying in terms of the permit environment? Municipalities being a little bit more generous or is it still acting as also a limited addition to capital?

In the major markets it still acts as a limiter. There's just -- for the reasons that we've discussed for a while, the small number of jobs that we create, the fact that we're not creating sales tax, et cetera, just has a tendency to make storage a little more difficult to get accomplished, and again, that's to the benefit of the existing owner, certainly.

(Operator Instructions)

Paul Adornato, BMO Capital Markets

Thanks. Just a follow up on the development again. So, just trying to understand if your JV partners -- if you do not enter into an agreement with your partners, would those projects get built? Like are there multiple sources of financing, even perhaps among your competitors?

Yes. Possibly. Again, I think we've taken our time, spent a good amount of effort in identifying folks who have a very like-minded philosophy to CubeSmart, and so when deals are presented, we have a pretty good meeting of the minds and an understanding of what we're both looking for. So I would expect that the majority of the deals that are presented will make sense for us, and ultimately will be CubeSmart deals.

In the event that it doesn't work for us, for whatever reason, our partners do have the opportunity to seek a deal elsewhere, although, again, that comes with some challenges because if I were in the other party's shoes, the first question I would ask is why did your partner, CubeSmart, not want to do it.

And has the development landscape changed the third-party management business at all? That is, the ability for you guys to source, or the ability of owners to put properties into a third-party management business?

Yes. A bit. One of the things that we're seeing is a pretty good pipeline of third-party managed opportunities for us where the developer, even before they've attempted to get the financing, has come to Cube and asked if we would be their manager and help them through the process So I think it's additive on both fronts.

Todd Stender, Wells Fargo.

The interest rate you got on the $100 million loan for HHS was done at 3.59%. I have to assume that Cube's wide range of debt options, your investment great balance sheet led to that rate and term. It really adds to the value that you guys bring to a JV partner.

How does that value show up in the economics of the JV, just for you guys? If it does at all?

That loan, Todd, was completely and is completely nonrecourse to Cub, so that loan was negotiated solely on utilizing the assets in the venture as collateral. We have a very high quality partner, along with us in that venture, so I wouldn't give all the credit for the terms of that debt to ourselves. It was a combination effort between ourselves and our partner, and it is a very attractive piece of paper.

I would tell you that the leverage on that loan is pretty low. The objective of the venture was to have modest leverage, and so the level of leverage certainly was helpful to achieve a very low fixed-rate over a seven year term.

What is the LTV, Tim?

It's in the -- well, depending one CO of value, it's in the 30% to 40% range.

You're also in good shape as far as debt maturities coming up, really only near-term stuff is -- our mortgage is coming due next year. What point can they be paid off just looking at prepayment penalty options, and do you have any plan there?

Our next big opportunity from a secured debt standpoint is the final remaining CMBS loan that has a stated maturity of December of 2015. That has a 90 day period in which you can prepay without penalty, so that's our next sizable opportunity. All of our bank term loan debt has the ability to be prepaid without any penalty.

We do have all of those term loans hedged and swapped to fixed-rate, so you have some cost associated with breaking the interest rate swaps, but on the secured debt side, most of our loans have a -- anywhere from a 30 to a 90 day window in advance of that maturity that we can repay without penalty. Any loans that we have been able to repay, we certainly already have done that and will continue to do so.

(Operator Instructions)

Russ Nussbaum, UBS securities.

I'm wondering if you've been tracking, I guess, maybe what I would call quality of your Internet capabilities, and I guess what I mean by that is, if I go in and click on a property by me and I say I want to rent a 10 x 10 and a give you my name and my e-mail and my phone number, do you track -- how quickly does a manager call me back? Do you track your response rates, the time it takes for your people to get in touch with potential customers and how that's been trending?

We do. So the -- when you do that, the reservation ends up on the screen at the store, and then our store teammates are incentivized to reach out to you, make that personal connection, schedule your visit and ultimately close the reservation to a rental.

The times on that, depending upon what's going on the store, the general parameters are to get back to you that day, and ideally within a few hours. We continue to use that as a point of focus, both in incentive compensation, as well as in performance reviews, et cetera, because obviously that conversion of that reservation to a rental is primary important to us.

So it -- do you have a sense of what that average is? I'm just curious. Is it an hour, is it half a day?

The average across the country at this point would be somewhere between three and five hours.

And do you have a sense of what percentage -- is anybody getting closed on the phone versus -- they have to come into the store, right?

At that point, almost everyone chooses to come into the store. Again, you've got folks who are using the product for the first time, do sometimes have challenges understanding the amount of space that they need and trying to translate a 5 x 5 or a 10 x 10 into what that exactly means relative to their possessions.

And the closing rates, can you give us a sense of what have the closing rates been off the Internet reservations, say this quarter, versus a year ago?

For obvious reasons, we don't get into what the exact closing rates are. I will say just on a relative basis from a year ago, we're closing about 5% to 6% more reservations to rentals than where we were at this point last year.

(Operator Instructions)

And as there are no more questions, this appears to end our question and answer session. I would now like to turn the conference back over to, Chris Marr, for any closing remarks.

Thank you. Thank you all for being on the call. I'm sure you can tell from our tone we are extraordinarily excited about the opportunities that we have here at CubeSmart. Obviously, from an internal growth perspective, fabulous rental season, we are very bullish on the balance of the year.

As we look out to next year, the limited amount of supply in our target markets, the high quality of our portfolio, the high quality of our balance sheet, we believe has us well-positioned for continued outsized growth. We look even further out, and the beginnings here of a value added pipeline, we think will also contribute to long-term growth for our shareholders, not only in cash flow, but in NAV accretion, as well.

We are extraordinarily excited and thankful for your support, and we look forward to speaking with you again at the end of the third quarter. Thanks, and have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your line.