CubeSmart (CUBE) 2015 Q1 法說會逐字稿

Good morning, and welcome to the CubeSmart first quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Charlie Place. Please go ahead.

Thank you Kate. Hello everyone. Good morning from Malvern, Pennsylvania. Welcome to CubeSmart's first quarter 2015 earnings call. Participants on today's calling include Chris Marr, President and Chief Executive Officer, and Tim Martin, Chief Financial Officer. Our prepared remarks will be followed by a question-and-answer session. In addition to our earnings release which was issued yesterday evening, supplemental operating and financial data is available under the Investor Relations section of the Company's website, at www.cubesmart.com.

The Company's remarks will include certain forward-looking statements regarding earnings and strategy that involve risks, uncertainties, and other factors that may cause the actual results to differ materially from these forward-looking statements. The risks and factors that could cause our actual results to differ materially were 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 a 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.cubesmart.com. I will now turn the call over to Tim. Tim.

Thanks Charlie Thank you to everyone on the call for your continued interest and support. All of the details supporting the release of our first quarter results is included in our earnings release and supplemental information package from last evening. Big picture, we continue to execute on all phases of our business plan. Same-store results continued to reflect historically high level (technical difficulty) and with continued favorable industry fundamentals, both on the demand and supply side combined with our robust operating platform, we expect results to continue at levels well above historical averages.

We are pleased with our first quarter print with results slightly outpacing our expectations. Our reported FFO per share as adjusted of $0.28 was a penny better than our guidance, and represents 12% growth year-over-year. 9.5% NOI growth in our same-store portfolio was driven by 7% revenue growth, and 2% growth in operating expenses. Occupancy levels were up 180 basis points over last year, to end at 91.2% for the quarter. But once again in-place rents continue to be the primary driver of our revenue growth, a trend we expect to continue for the next several quarters. On the investment front, we closed on the four remaining assets that were part of our Harrison Street transaction, as well as three additional assets for total acquisitions of $49.3 million during the quarter. We also continue to make great progress on our $200 million value creation pipeline. The details of our JV development projects and our C/O deals are included on pages 23 and 24 of our supplemental package. Post-quarter end we closed on the purchase of one of our C/O deals in Dallas, and our JV development in Arlington, Virginia is scheduled to open this month.

On the financing front, we remain focused on funding our growth with an appropriate blends of long-term capital. During the quarter we sold 1.2 million shares under our at-the-market equity program for net proceeds of $29.4 million, and last week we closed on an amendment to our bank facility that expanded our revolver from $300 million to $500 million. The additional borrowing capacity better matches our increased size, and further enhances our ability to execute on our growth strategy.

In addition to the increased size of the revolver the amendment improved our pricing and extended the term out five years, from closing to April 2020 from a prior maturity that was June of 2017. Our first quarter results and solid position entering the prime leasing season are the basis for our improved outlook and guidance for 2015. We improved guidance for same-store revenue, expenses and NOI, and adjusted our FFO as adjusted range up to $1.15 to $1.19 per share. That concludes my portion. Thanks again for joining us this morning, and at this point Chris, I will turn it over to you for your remarks.

Okay. Thank you Tim. Just about 60 days ago when we spoke regarding our fourth quarter and full year 2014 results, we articulated that a backdrop of improving consumer confidence and minimal new supply, pointed to another solid year for self-storage owners. The CubeSmart team entered the year with a theme of continued focus on the details, to achieve superior execution in what we believed was going to be a very favorable environment. With our very solid first quarter results in the books and a very strong April pointing towards a successful prime rental season, our confidence in 2015 being another successful year in self-storage continues to increase.

Operating fundamentals are strong across all markets. We are gaining occupancy while reducing discounts and increasing street rents, as evidenced by our 5% increase in our realized rent for occupied square foot. New supply while continuing to grow, remains at very low historical levels, and we do not expect it to materially impact overall results. Capital Markets remain attractive, and we continue to favor financing our growth with long-term Capital Sources. The acquisition market ebbs and flows as it historically always has. We are seeing good deal flow, we are confident in our underwriting, and remain focused on quality assets and quality markets. With that, I thank you. Operator, let's open the lines for questions.

We will now begin the question-and-answer session. (Operator Instructions). At this time we will pause momentarily to assemble our roster. The first question is from Jeremy Metz of UBS. Please go ahead.

Hey. Good morning guys. I guess starting operationally, could you just give us maybe an update on where occupancy stands today versus last year at this time, and then just where at this stage after the good first quarter, where you see it peaking out?

Sure. So occupancy as of the end of the day yesterday, end of April is now 200 basis points ahead of April 30 of last year, so it's continued to expand a bit further from where we were, in terms of that gap at the end of March for our same-store pool. So April was a very solid month, continued to be very positive on fundamentals. From a peak perspective, again we answered that question in the context of maximizing revenue from our existing customers, so not entirely focused on just that occupancy component. Obviously focused on trying to squeeze down our discounts, grow our rates to new customers and existing customers, and get that effective rent as high as we can. So at a 200 basis points gap last year the peak was 93, so I think it's very conceivable that this year's peak is higher than last year's. I wouldn't predict today that it's going to be that full 200 basis points, but all signs are pointing towards a new record peak for the CubeSmart portfolio.

That's great. So I guess as we think about maximizing revenue here, you had really solid realized rate growth of 5%, it seems like what you're looking at right now things should still be good in the foreseeable future. Is that a number or range where you could anticipate maintaining that similar level as we progress through 2015?

Yes. I mean again, I hate to answer it depends, but it really does, because that's a combination of again pushing the street rates to the new customers, and squeezing the discounts, and you play each one of those levers relative to occupancy, depending upon the submarket, so I think what I would characterize is that the environment is such, that in almost every market of CubeSmart across the country, the opportunity is there to continue to gain physical occupancy, continue to push street rates to new customers, and continue to bring down the amount of discounts that you need to offer. So where that all shakes out, I think kind of is encaptured in our overall same-store revenue guidance, but the backdrop in which we're operating is very, very strong.

If I could just one more switch to investments. Could you just talk about the acquisition environment, how is your pipeline looking today, are you finding competition in pricing becoming more challenging? And then, do you have anything actually under contract as we sit here today?

The market is very competitive. Again, I think we continue to be disciplined in our underwriting, continue to look for those assets in quality markets, and quality assets that make sense for us. It is challenging, but it was challenging last year as well. Again, I think this time of year it tends to be one that's always been a little bit slower. As of the end of the quarter we had one property under contract for about $7 million. I think off the top of my head that is in due diligence, and that's what we have at this time.

Alright. Thank you. Good quarter.

Thanks.

The next question is from Smedes Rose of Citigroup. Please go ahead.

Hi. Thanks. I wanted to ask you, just given how strong fundamentals are, are you seeing any changes in the amount of time it takes to lease-up a new portfolio, or any kind of shortening I guess to stabilization?

So Smedes, good morning. We have seen that significantly shorter than historical expectations. For the last couple of years. If you go back to the store that we acquired in October, November of 2011 on Bruckner Boulevard in the Bronx, that leased up to stabilization in about two years, which was obviously shorter than the three to four that we had historically expected. We've seen stores that we have purchased at low occupancies, that have achieved stabilization over a much more rapid time period than we expected, but again the data points are not significant. It's a store in New York, another store in New York, a store in Texas. So we continue to be underwriting to that three solid rental seasons for our store to go from empty to first level of stabilization, but our results to-date have pointed towards a faster lease-up.

Okay. And then I was just for your development it looks like a few of them moved out maybe a quarter or so in terms of expected openings. Is there anything going on there, or is that just sort of normal course of business for them to sometimes get delayed?

Yes. It's two things. One is weather. So we have some stores in the northeast that were under construction, that were setback a little bit by the activity over the winter, and it had to slow up a little bit on some things we would have done had the weather been more cooperative. And then again, we're developing in these very high barrier to market, to enter markets where you're seeing the bureaucratic infrastructure be fairly stretched, in terms of what they have to accomplish in signing off on things, and issuing permits, et cetera, and we have just seen some delays there. So the actual construction, and obviously the costs continue to be in line with our expectations. Some things have just slipped a bit, and again we provide quarterly disclosures, so in some instances, the slip is as little as 30 days.

All right. Thank you.

Your next question is from Gaurav Mehta of Cantor Fitzgerald. Please go ahead.

Thank you. Good morning. Just following up on the development question, as you look at your occupancy pipeline and your development, and you have been given 3 times valuation number for 2015, but as you look beyond 2015 what is your comfort level in the amount of dilution you willing to take as you grow that pipeline?

So again, we have not ever been as focused as much on that dilution as we have been on what percentage of our balance sheet in terms of that investment is appropriate on a risk-adjusted basis for our size. So we continue to believe that kind of the size of the pipeline that we have today makes sense for us given our size today, and we're very focused on looking at late 2016 and 2017 to find opportunities to keep that pipeline healthy so that implication then, is that dilution that we're expected to have about $0.03, which again we look at it as a near-term bit of dilution for a long-term asset quality improvement market presence and JV growth, is reasonable trade off and that's kind of $0.03 if you think about it that way, stabilizes then in theory if we continue to have that same level of investment and that same $0.03 then tries to basically repeat itself in 2016 and 2017. Okay. And then I see in the press release you mentioned that you acquired a land parcel next to your Brooklyn development. Is the plan to develop that land parcel in the JV as well?

Yes. We had an opportunity to acquire an adjoining land parcel to an existing JV development, and that land parcel allowed us to expand the size. It's adjacent to so it joins with our existing parcel, so it allows us to reconfigure the design, add a bit of square footage, have better access to the office, and better off-street parking. So it won't be a different facility, but we have an opportunity to expand and improve the existing investment. We're very excited about it.

Okay. And last question I have is on the rent growth. If I look at your realized rent growth of 5%, and the schedule of 3.3% (inaudible) schedule it seems like it's higher than what you have reported in last four or five quarters. Is this is there something to read into that? Can you provide details?

Yes. The scheduled rent is an average of our rents for the quarter. So again, you think about the trend relative to the seasonality in the business. If you go back, you start in October, November, December, there's some more bias towards a reduction in street rates than an increase in street rates. That continues into January, and then you begin to grow in February and March. So that was the quarterly average, at the end of March our asking rents for new customers were up 4.5%. So the gap there is a little bit tighter. So again, that's the growth. That's not the actual increase that we're passing along to new customers. In that instance we have markets and submarkets where we're getting double-digits increases in asking reasons for new customers. We have other market that are closer to that 4.5%.

Okay. Thank you. That's all I had.

Thank you.

Thank you.

The next question is from Todd Thomas with KeyBanc. Please go ahead.

Hey. Good morning. This is Grant Keeney on for Todd. I was just curious how many of your in place customers are currently eligible for rent increases?

We average passing along a rate increase to about 6% of our customers every month. That's pretty consistent over time.

Okay. And then I was just looking for maybe an update on the discounting. As a percent of the portfolio, how many customers are receiving a discount? And as a follow-up I guess just how much more room do you have to reduce promotions, and just eliminate free rent overall?

Sure. So a similar number of customers received a discount in the quarter, but the value has declined, as we've obviously tightened up on our promotion strategy in offering less than a full month of free rent to many of those customers. We've always articulated that if you look at discounts as a percentage of in-place rents in the first quarter of 2014, that percentage was 5%, and in the first quarter of 2015, it had declined to 4.3%. Okay. That's helpful. Thanks.

Thanks.

The next question is from George Hoglund of Jefferies. Please go ahead.

Yes. So two questions. I guess first one on what you're seeing in new development out there in the markets. Are there any markets in particular where you guys are seeing any pressure from close by new deliveries?

So last quarter we talked about 18 stores in some form of develop in the top ten MSAs that directly compete with CUBE, with some concentrations in the major Texas markets, Chicago, boroughs in New York, and particularly Miami. That number has grown to 28. Right now we're looking at about 12 that are scheduled to open in 2015. Not all of them will make that deadline, and 16 stores that have projected 2016 openings, so a little bit of growth as I said in supply. Same markets. And we continue to watch as that pipeline grows, and I expect it will continue to grow, and again, I think it's going to come down to size of the store, amount of square footage coming in, how many come in at one time, but certainly you're seeing a lot of activity in South Florida.

And any color on who's developing, or who will be operating these facilities?

Yes. Hopefully CubeSmart will be operating all of them, but the majority of what we see have retained an outstanding third-party manager such as ourselves. The developers continue to be largely, that entrepreneur who has experience in self-storage, or is getting interested in developing self-storage. As well as we see obviously a few of the other REITs out there doing some development. I would say all of the other REITs doing some form of development.

Okay. So would you say maybe out of the ones that are scheduled to open in 2015, it's possible that you guys would be managing more than half of them?

Well, I wouldn't want to give a percentage. I would say it depends on the market ,so obviously if you're a smart developer and you're looking to open in New York City, why would you go anywhere else, but as you get out of New York it's a little more evenly spread amongst all of the operators.

Okay. And then just one last one. Since in your third-party management since you guys are the I guess only REIT that doesn't require new assets to be re-branded as CubeSmart, have you noticed a difference in terms of performance of assets that are re-branded as CubeSmart, versus that retain their original branding?

Yes. It's really interesting because as of the end of the month last month, our third-party platform, which is quite robust, 4% of the stores that we manage are not branded CubeSmart. So while we do not require it, most of our customers eventually come to the conclusion that the benefits of being in the brand, far outweigh the cost of the sign, and they self-elect to adopt the CubeSmart brand.

Okay. But there's no sort of quantitative or qualitative sort of opinion on how much of a difference there is when you do re-brand? I mean in terms of maybe on a same-store NOI basis or anything, where there might be a pickup to re-brand CubeSmart?

So difficult to be quantitative, because there are multiple other reasons. Obviously with the brand comes better presence on the website. The drive-by customer recognizes you as part of a bigger brand. So there's a lot of qualitative reasons why one would do it, and for those handful of CubeSmart managed stores that haven't yet done it, I will be surprised if they all don't ultimately come to that conclusion.

Alright. Thanks, guys.

Thanks.

(Operator Instructions). The next question comes from Todd Stender of Wells Fargo. Please go ahead.

Thanks. And Chris just to stay on that theme on third party management industry trends of course have been excellent for some time. Can you just comment on the general demand for REIT managements to manage private facilities on a third-party basis, any trends you are generally seeing?

Yes. I think on the activity, the activity obviously has been very strong. We added 13 stores to our platform during the quarter. The overwhelming majority of our pipeline right now are future development sites, and it's back to the prior question, folks who are interested in developing a self-storage facility have fully realized the benefits of brand, the benefits of scale, and are coming to a sophisticated third-party owner manager rather, in advance of trying to find financing for their store. So we have a pipeline right now about 30 stores, that assuming they ever get built will be branded and managed by CubeSmart.

Okay. Thanks. And then just back to the land parcel investment in Q1. A few questions baked into that. How big is the parcel? Was this part of your original plans for that development, and then was it part of an existing option you had?

So we're doing a project in one of the boroughs and the joint venture development, and got an opportunity after we began construction, to acquire land and building that is immediately adjacent to our parcel, and it offered a chance to do off-street parking, consistent with what you will have seen in our other borough stores, better access, better loading, a bigger office. So we elected to acquire with our partner that parcel, modified our plan for that store. It will have no impact on the construction timeline. Just we will end up with a much better product than what we had originally designed.

But it wasn't part of the original plans to acquire it nor was it an option that you had?

No. It was not for sale, and once we began construction, so we're going to scrape the old building that's there, and then use that space as I described. So no, it was something that was presented to us after we had begun construction.

Okay. Thanks. And finally just looking at the acquisition pace you guys are on, and probably can be said for a lot of the REITs, as you guys and the others participate more certificate of occupancy deals, can you just talk about some deals or acquisitions that you are passing on, if any, that doesn't make sense, just to kind of hear your thoughts about what to market perhaps, or occupancies just don't make sense right now?

Yes. So I think on the acquisition side you're seeing some transactions where obviously the buyer saw something different than what we did, because what we're seeing is fairly well occupied stores, that in order to make sense of the going in yield, which is in some instances extremely low, you have to believe in double-digit, solid double-digit increases in rent growth, and you have to believe those are going to be there through 2017. On our numbers. And so those are deals where we're being, we're not coming to a price that the deal is ultimately trading for. On the C/O deals, similar. The question is, if you want to get paid today for all of the work that the buyer is going to have to do over the next 18 to 36 months, to get to a yield that seems reasonable given the risk, those seem unusually pricey to us, and we're not competing.

Okay. Thank you.

Thanks, Todd.

This conclude our question-and-answer session. I would like to turn the conference back over to Chris Marr for any closing remarks.

Thank you. Thank you everybody for your participation and continued interest. The quarter was very strong, as I said April was off to a great start. We're confident and looking forward to May. And we are very excited to see many of you at NAREIT in June, and look forward to reporting second quarter. Self-storage continues to be a fabulous business, and we thank you for your support. Have a great weekend.

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