CubeSmart (CUBE) 2015 Q3 法說會逐字稿

Good morning and welcome to the CubeSmart third quarter 2015 earnings conference call. All participants will be in listen only mode. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Mr. Charlie Pace, Director of Investor Relations. Please go ahead.

Thank you, Danielle. Hello, everyone. Good morning from Melbourne, Pennsylvania. Welcome to CubeSmart's third quarter 2015 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 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 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 Factor 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 third quarter financial supplement posted on the Company's website at www.cubesmart.com.

I will now turn the call over to Chris.

Thank you, Charlie. As I enter my 22nd year in the business, I find myself more excited and energized than ever about the opportunities in our industry. Against the backdrop of limited new supply, our people, commitment customer service, and our systems are producing consistently strong same-store results. Our investment team continues to source attractive acquisition opportunities in our core markets.

Our value creation pipeline of purchase at CO and JV development deals continue to outperform our underwriting. Our third party management platform has grown to now having 191 stores under management and we are on track to our most successful year in that program's history. Our 1,800 teammates here at Cube are certainly pleased with the solid third quarter results, but rest assured we are not satisfied. We will continue to focus on being the storage company of choice for our customers, the buyer of choice for our sellers, and the investment of choice for our shareholders and bondholders.

I will now turn it over to Tim who will speak in more detail about our financial performance during the quarter, our successful bond offering, and our upward guidance revisions. Tim?

Thanks, Chris and thank you to everyone on the call for your continued interest and support. As Chris touched on, industry fundamentals remain favorable and continue to be a tailwind. Our operating platform continues to deliver cash flow growth well in excess of historical levels, generating record occupancy levels and solid NOI and FFO per share growth. Our reported FFO per share as adjusted for $0.34 for the quarter was a penny higher than our guidance range and represents 21.4% growth over last year. I would describe the beat to our expectations to be a very high quality beat, as it came almost entirely from revenue outperformance across both our same-store and non-same-store portfolios.

Again, this quarter we continue to have gains in physical occupancy drive a portion of our 7.4% same-store revenue growth. But the more impactful driver to revenue growth at this point is through gains and net effective rents. Strong core portfolio performance year to date leads to a significantly improved outlook on our expectations for the full year 2015. Included in our release last evening, 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 our advised range of $1.24 to $1.25, representing a meaningful 4% increase in guidance at the midpoint. We also introduced fourth quarter 2015 FFO per share guidance of $0.32 to $0.33. 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.

Strong core portfolio performance through our summer rental season has led us to increase our same-store guidance again this quarter. Same-store revenues are now expected to grow 7% to 7.25%. Our NOI growth expectation has been increased 87.5 basis points at the midpoint to a revised range of 8.75% to 9.5%.

Our investment pipeline continues to build and we're raising our targeted acquisition volume for the year to a range of 275 million to 325 million. Additionally, subsequent to quarter end, we sold all seven of our owned assets in El Paso, Texas, our last remaining asset in London, England and one asset in Jacksonville, Florida for aggregate sales proceeds of $47.1 million. Consistent with our historical practice, we include the impact of announced transactions in our FFO guidance, but exclude the impact of future speculative activity.

On the balance sheet, we remained active using our aftermarket equity program, raising 80.2 million under the plan during the quarter. Additionally, subsequent to quarter end, on October 26, we completed our third investment grade rated bond issuance rating, 250 million of 4% senior unsecured senior notes due November 2025. The bond deal allowed us to lock in attractively priced long-term unsecured debt and to extend our well-staggered maturity schedule, moving our weighted average years to maturity from 5.3 years to 6.4 years.

We received tremendous support from our existing fixed income investors and also had some new names participate in the deal. So thank you to those who participated and welcome to the new investors. We look forward to keeping you updated on our business plan execution as we go forward. Net proceeds from the offering were used to repay the outstanding balance on our credit facility with the remainder earmarked to fund a portion of our investor pipeline.

Echoing Chris's earlier comments, our industry and our portfolio continue to perform at record high levels. We continue to execute on all phases of our business plan, delivering strong internal cash flow growth, a disciplined external growth strategy, and a conservative capital structure that we believe will continue to allow us to create value for our shareholders.

That concludes our prepared remarks. Thanks again for joining us today and Danielle, let's go ahead, and open up the call for questions.

We will now begin the question and answer session. (Operator Instructions) The first question comes from Gaurav Mehta of Cantor Fitzgerald. Please go ahead.

Yes, thanks. Good morning. A couple of questions on transactions. You raised your acquisition guidance for 2015. I was wondering if you could discuss what you're seeing in America as far as product flow is concerned?

Sure, good morning. Yes, we're seeing quite a good amount of opportunity being stirred up by our investment team. Again, a mixture of single asset transactions and small portfolios. So we're doing quite a bit of underwriting at this point, and obviously our upward provisioning guidance contemplates that we will be able to get a few of those transactions that ultimately make sense to us across the finish line.

So not atypical for the business. We tend to see a surge of activity in the October to December timeframe, folks who have calendar motivations, or tax motivations, et cetera, and this year is no different. So actually pretty pleased with what we've been able to dig up and our team is doing a great job.

Are you seeing any large portfolios or these are one-off transactions?

It's a mix. So nothing significantly large, but it's a combination of single asset deals, two or three stores in a market and a couple of opportunities out there of a little bit larger size.

Okay. And then lastly on the sales side, you sold some assets and exited (inaudible). Can you discuss if there are any other markets on your radar that you may exit in the future?

Well, we're always looking at the portfolio. We've sold just shy of about $500 million of assets since 2010. So it's a constant evaluation. In terms of exiting markets, nothing else is on the near term radar but we'll continue to look at the portfolio for opportunities to redeploy.

The next question comes from Todd Thomas KeyBanc Capital Markets. Please go ahead.

Hi, thanks. Good morning. Just first question, I saw there were no additions to the [CFO] or development pipelines in the quarter. Is it becoming harder to find new deals?

No, it's becoming a little bit more challenging to find deals that make sense, but we are in process on a good number of things that we're underwriting and taking a look at. So I wouldn't read into that. It's more just timing.

Okay, and then I guess following up on that one property, in particular, the Bronx facility. I know overall in a historical context, the lease up there is taking place at a fairly rapid pace. But relative to last quarter occupancy, only increased 160 basis points. What's happening at that facility? Is there anything to read through from that in terms of the competitive landscape in the Bronx, either from existing properties or other new developments?

Yes, I think you can read through that we're competing with ourselves. And so that store by historical standard, doing well. In comparison to some of the spectacular performance, we've seen in Arlington and Long Island City, certainly looks a little bit weaker. But again, as you pointed out, if you look at it historically, it's performing quite well. But we're just competing with ourselves. We have quite a few stores around there and we contemplated that when we underwrote that deal. So I think how Tremont Avenue is doing at this point, pretty consistent with our underwriting.

All right. And then just one more, if I could, Tim. The Company has been an active user, the ATM, over the last couple of years. If we think out over the next several years, is the plan more of the same? I think you're throwing off about $75 million of free cash flow this year, probably a higher number next year. Do you get to a point where you turn off the ATM? What's the longer term thinking here?

Yes, I think it's completely dependent upon our pace of external growth. Obviously, the free cash flow is effectively the first source of equity with quotation marks around it. And to the extent that our external growth surpasses our ability to fund the equity portion of our growth through free cash flow, then we need to support that growth with equity.

The ATM program has continued to prove to be an extremely valuable tool, because our growth tends to be, as you know, steady and less large, massive portfolio driven transactions. So the ATM allows us to effectively match fund and to dollar cost average our equity issuances over time. And so hard to predict how attractive external growth opportunities will be and at what volume they'll come in the future. But if history is a predictor, you would think that that external growth would continue to be supported by equity rates through the ATM program. That would be my expectation.

The next question comes from Jeremy Metz of UBS. Please go ahead. Hello, Jeremy. Is your line on mute? The next question comes from Ki Bin Kim of SunTrust. Please go ahead.

Thanks. Could you just comment on if supply stays at this level, and I know that's a hard number to get to, but let's call it one percent-ish, how long do you think this trajectory of high and elevated (inaudible) kind of last in this sector? I mean can it go 2016, 2017? When do you think the curve starts to level off and maybe get back to normal?

Hey, Ki Bin. It's Chris. So I guess if we start by defining normal as a 20-year average, which is same-store revenue right at around 4%, and then you look at, again, if supply stays low as you described, you think about the fact that for Cube, at least, our rental rates today are only about 5% higher than they were in 2008. So again, we have -- it's not like it's a customer who's paying astronomically higher for our product than they were now almost eight years ago.

So I think if you assume low supply, you assume no material impact to the wallet of our customer. I think you can continue to see very, very strong revenue growth into -- through 2017. My eyesight doesn't go out much longer than that. Do I think it continues in the mid-7s? I think that's challenging. I don't see it reverting though back to the 20 year norm, mostly because you've got a lot more sophisticated platform and customer capture, and a big difference today between the smaller operator and the larger operator in terms of performance.

Okay, and just to follow-up on a previous question, on your acquisitions could you comment on I guess what you maybe call forward your one cap rate? And even your guidance that was increased up to $300 million in acquisition guidance that implies that there's probably more in the fourth quarter even beyond what you announced and what you announced at subsequent events. What is out there that wasn't in the press release?

Yes, so it does imply that. The fact that it wasn't in the press release implies that we're not prepared to articulate exactly what it is, but there are opportunities out there that we're underwriting and hopeful about. So that point, you're spot on. In terms of cap rates going into year one on what we have acquired that was not an empty asset when we bought it, year one, right around six.

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

This is a question on the asset sales. What was the driver of those sales in those particular markets, and what were the cap rates on the sales?

Sure. The cap rate on the sale right around 6.25, 6.5, in that range. The driver, again, when you think about core markets for Cube, where we want to have a concentration, that was just not a market that fit our criteria. We had some CMBS that were encumbering those assets that had been paid off earlier in the year. So we saw an opportunity in the marketplace to exit ownership in that market and we transacted.

And those cap rates, are those on a trailing basis or forward?

Basically, let's call it in place.

Okay. Got you. And then just on the expense side, going forward, I guess obviously there will be some pressure on real estate taxes. But in terms of the other expense line items, since portfolio is getting close to full so that I wouldn't expect too much of an increase in marketing and expenses, where might we see other expense pressures or further expense savings going forward?

I think you characterized the environment pretty well. I think short of real estate taxes, if you combine all the other expenses, you're going to have seasonal items that relate to harsher or milder winters with snow removal costs or utilities. Longer term, I don't really see it for necessarily near term 2016 issue. But longer term, the jobs report was very strong. Certainly, we're going to be in competition more so going forward for our store level. Team A will become -- there will be a more competitive environment for our store level teammates going forward. So you could think that at some point that is going to create some potential for some more than inflationary type wage pressure.

Other than that, it's almost an entirely fixed cost business that we're in. Marketing costs, I mean I would caution there. We still need to rent a lot of units to maintain our occupancy levels. So I wouldn't expect to see a material change in our marketing spend either. So I think all of the things are generally inflationary with the exception of real estate taxes, which are certainly not.

The next question comes from John Pawlowski of Green Street Advisors. Please go ahead.

Thanks, good morning. A follow-up on the El Paso sales. Obviously, a lot of them were encumbered so you may have not been able to sell until recently. But any sense for the cap rate you could have achieved call it this time last year on the seven assets?

Not in terms of some exact number, but I certainly think that the cap rates a year ago would have been wider than what we were able to achieve today.

Wider by 10-20 BIPS?

My gut would tell me wider more like by 25 to 50.

Next question comes from Jonathan Hughes of Raymond James. Please go ahead.

Looking at the asset sales, were these sold in the package or individually? And did they approach you or did you market this portfolio?

They were sold as a package. We marketed the opportunity and ultimately, the buyer was interested in retaining Cube as the manager. So we will continue to manage these properties going forward.

And just to be specific, the package was the El Paso and the Florida asset. The London asset was in a separate transaction.

Okay, that's helpful. Thanks. And then looking at the JV development pipeline at $123 million, your commitment. I'm just curious how big that will get if you plan on one day taking it completely on balance sheet.

In terms of size, we've been pretty consistent that in that 5% of gross assets, 7% of gross assets range that's a comfort level we have for that type of activity. In terms of ultimately bringing it entirely in house, that is not on our radar screen.

Okay. And then I guess one more. Any update on spreads on maybe CEO deals you're looking at now versus some stabilized assets?

No, things haven't -- we're looking at underwriting and what we're comfortable with. Things haven't really changed that much. I would say the competition for assets being constructed for sale is certainly higher and more competitive today than it would have been a year ago.

Okay, so spreads are maybe, say, 150, 200 basis points versus stabilized assets?

Yes, that's a fair range.

Our next question comes from Paul Adornato of BMO Capital Markets. Please go ahead.

Thanks. Was wondering if there were any infrastructure items on your list, be it systems of technology that you're either undertaking or planning to?

Sure, Paul. There's always a very, very long list of improvements that we can make to systems both at the store level as well as in the back office and at the operating level. And that's not new. They don't come and go away. They're just constantly being refreshed. So it's an ongoing process. Our income statement and our balance sheet reflects an ongoing process of investing in technology and that will continue.

Any lumpiness in that spend or will it be pretty steady?

Pretty steady.

Okay. And just looking at new development, appreciate the comments that you've made so far, but was wondering if you could tell us your assessment of total development nationwide either as a percentage of existing stock or number of facilities? Do you venture a guess as to how much is being built?

I think that 1% of existing stock seems to be a percentage that I think captures at least those stores that are in the top 30 or so MSAs. And again, I think it's just incredibly difficult to get things done. We see it on the third party side where we have contracts in hand to manage stores when they're completed that are getting further and further behind in getting their approvals and permits. We see it on a regular basis with our JV development pipeline. We see it even on where we're doing enhancements or complete renovations to existing stores. It's just a very difficult, time consuming, and elongated process.

The next question come from Todd Stender of Wells Fargo. Please go ahead.

Thanks, guys. Your same-store rents per square foot, you're now in the $15 range. It may actually be over $15 with the El Paso sale. But then your scheduled rents are exceeding 16. What does the portfolio look like this time next year? And is this a metric you point investors to when investors want to talk about the quality of portfolio that you have relative to, say, extra space?

Hey, Todd. It's Tim. I think certainly it is a metric that gives one a good sense of on a weighted average basis across the country, the higher that number, the higher the weighting in higher rent markets. And higher rent markets generally are the markets that lead to higher operating margins. It's not a perfect metric to gauge portfolio quality, but I certainly think it's something that we look at over time and to have moved that number up in our portfolio significantly from where we were back in say 2008 I think certainly is mostly reflective of an increase in the quality of our portfolio on average over that period of time.

I think then relative to comparing one year to the next year, I think that is going to reflect solid growth in both asking rates. I think it represents solid growth in net effective rates, which then is an indicator of the quality of our ability to generate revenue growth through right across the portfolio.

That's helpful. And then just looking at straight acquisitions and also CFO deals, what's your appetite to go outside of your historical push to stay in more the top 25 MSAs? Do you have any feel for that? Maybe acquisitions are getting a little more competitive and that's going to push you maybe out into other markets?

That's a great question, something that we look at. To date, we've chosen to be very focused on those top 20, 25 MSAs in our acquisitions. I think if we move out of that, what it ends up being is we see a portfolio opportunity and a few of the assets in that portfolio may be out of that range. But we can get comfortable with the sub-market or the market. But I would say our focus continues to be, and I think will continue to be in the core MSAs.

(Operator Instructions) The next question comes from Jeremy Metz of UBS. Please go ahead.

Hi, good morning, guys. Had a little bit of technical difficulties there early. Apologize for that. Obviously, you've been focused on pushing rents. It's clearly coming through here and you've realized rent growth and the asking rent side as well. And based on prior calls, it does sound like that remains a focus. So I'm just wondering now that we're going into the slow releasing season here, will you look to pull back a little on the rent side in order to preserve occupancy?

Yes, as we get into this part of the season, we're definitely looking at opening up the funnel on discounts or interest rates, looking at street rates. So the combination of levers that we have that boil down to net effective rents in order to hold onto as much of the occupancy gain that we got over the summer as possible.

Okay. And I guess as a second part to that, I'm guessing the portfolio was close to 94% in its peak this year, if not even above that. So just in terms of average occupancy, obviously you can pick up some further gains there. But how much absolute occupancy do you think is left at these levels? Do you see Cube getting to 95% next year?

Yes, I think that's possible. Again, it's going to come down to that mix of occupancy driven growth relative to rate driven growth. But I think when you look at where we got to this year and those markets that have one more leg, assuming nothing unusually negative happens in those markets that have one more leg, I think that's not out of the realm of expectation.

Okay, and Chris, if I could just ask one more on a bigger picture question here. Given how well the portfolio has done and is continuing to do, do you look back and at all regret not being more aggressive on the acquisition front? And if so, just how is that influencing how aggressive maybe you're going after a deal today, if at all?

Yes, when we look back and you think about opportunities that you didn't elect to pursue at the time, there aren't many. I mean I could name, but I won't, one or two specific opportunities in really great markets that we just didn't elect to pursue at the time, that may now in hindsight have made some great sense for us.

But I think in general, we're pleased with the discipline and intend to remain so going forward.

We have a follow-up question from George Hoglund with Jefferies. Please go ahead.

Hey, guys. I had a question just on new development in your markets. Just this new supply that's coming, do you see a large difference in the impact on your existing portfolio depending on who the -- basically the operator is of that asset? Meaning basically whether it's an asset that you guys own or control versus an asset that is managed by or owned by one of the other public REITs, versus the sort of mom and pop or smaller, less sophisticated operator?

Hey, George. This is Chris. Marginally If a new store comes into the market and it's built in a good location, and it's a good quality, and it can get market rents, we see -- obviously see the impact to some extent on occupancy, generally more so just on a lid on our ability in that existing store to continue to grow rent until the new store gets to some level of stabilized occupancy.

We would just prefer to compete with folks who are savvy and know what they're doing. You can imply that that means whether we're running the store or a larger operator is better. But there are a few small or local, regional operators who do a nice job and can help the market. So I think it's really specific to the underlying assets and the underlying operator more than thematic.

And when you look across your markets, where you seeing your new supply coming on, are the operators of these assets would you say more so your public peers or is it more so kind of the second tier operators?

It's really sub-market specific. Certainly, in the very high barrier to entry markets, it tends to be the public tiers. In Texas, you tend to have Texas-based operators. Those are probably the two extremes.

A follow-up question from Ki Bin Kim of SunTrust. Please go ahead.

Thank you. Just a couple quick ones. First, it seems like the kind of (inaudible) very few weaker markets you had in your portfolio was Chicago on the same-store revenue front. I guess (inaudible) not surprising, Chicago being Chicago. But could you comment on what is causing the somewhat weaker than expected performance? Or weaker than average performance?

In Chicago?

Yes.

So it's not necessarily weaker than expected, but certainly it's lower than the same-store average on the revenue side, not inconsistent with our other public peers who disclose market specific information. For us, I would say it's a combination of two things. One, north side of Chicago, stronger demographics, performing well. South side of Chicago, a little bit weaker demographics, performing a little bit less than the north. Supply in that market certainly has occurred . Ownership in that market has changed so you see more REIT presence in Chicago than ever and you've got some new supply coming on both from managed by the REITs as well as by some pretty savvy Chicago based or heavy Chicago investment operators.

So I think it's a combination of south side underperforming the north for Cube, new supply, and even the existing supply being operated by more sophisticated owners.

Like you said, ESR also had a similar trend in the Chicago portfolio. So I was just curious if that was maybe a lead indicator for a market where maybe supply does come in. Is that what we can expect if it happens to all the markets, right.

I'm not sure I would go entirely down that path only because, again, when you think about it, if you go back in time an obviously the growth rate is impacted by what happened last year, Chicago not unlike Dallas, not unlike Washington DC Metro has been a continued very strong performer for the last five years.

So I think what you're also seeing is just a little bit of the lower beta.

Okay. Got it. And just last one. Could you provide any kind of quick update on November stats, whether it be scheduled rents year-over-year or occupancy year-over-year?

No, we're not digging into that at that time. I would say at the end of October, we're -- same-store occupancy was 100 basis points higher than October of last year. So we continue to see really solid performance. When you think about it from a revenue perspective, if you look back over the last few years and you say the 2013 same-store pool, the revenue performance continues to be very, very strong, consistent with what we saw in the third quarter.

A follow-up from Jonathan Hughes of Raymond James. Please go ahead.

Hey, guys. Just one quick one. Looking at the (inaudible) deals that you're seeing out there, are you seeing any more lenders enter the marketplace looking to make development loans? Or is that still holding off new supply?

Same lenders. At the margin, same issues. It's -- for the traditional lenders, the local and regional banks, it's a difficult loan to make. And at a 70% LTV it's still a reasonable sized equity commitment for that developer.

So haven't seen much relaxation at all in lending standards. Certainly easier to get debt financing on cash flowing assets than it is on new development.

This concludes our question and answer session. I would now like to turn the conference back over to Mr. Marr for closing remarks.

Okay. Thanks everyone for participating today. Obviously, we are incredibly enthused about our industry and our business, and we look forward to seeing many of you in a few weeks at NAREIT. Thanks and have a great rest of your day.

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