CubeSmart (CUBE) Earnings Call Transcript & Summary

Hello, and welcome to CubeSmart's June 2020 NAREIT Virtual Presentation. We appreciate everybody's attendance today, and we thank you for your continued interest in our company. So as a brief introduction to CubeSmart, we are one of the largest self-storage operators in the United States, currently own or manage 1,231 properties across the United States. Our mission quite simply is to simplify the organizational challenges of our customers and pre pandemic, we were certainly well-known for doing that with genuine care and unparalleled service. We've built upon this as we operate in the COVID-19 world by coming up with innovative solutions that you will hear more about through this presentation, continue to deliver to our customers, both our current and new, an unbelievable level of service and genuine care, recognizing their needs and meeting them on a daily basis. Our value creation strategy really begins with the fact that self-storage is one of the few industries in commercial real estate where the sophisticated operating platform incredibly value add. We utilize our sophisticated platform, combine it with a very experienced management team and layer that on top of a sector-leading portfolio to create and maximize shareholder returns over the long term. We enhance that with a balance sheet that is incredibly solid and is well prepared for us to weather all conditions.

Storage as a real estate sector has proven to be one of the most stable cash flowing sectors across the REIT spectrum. As a needs-based business, we serve our customers who are in need of a safe, secure place to store their belongings and will provide flexibility in size, location and lease term. The need for our product comes most typically from household uses driven by everyday events like buying a new house, moving to a new apartment, downsizing, marriage, divorce, having a baby, clearing out space for home office, among many others. Small businesses use our space for storing equipment and inventory. We're effectively their warehouse, again, with flexibility to expand or contract the size of their space as their business changes. The diversity of our customer base and the many, many reasons that our customers need a temporary place to store their goods has proven to make the storage sector one of the best performers throughout the economic cycles as consumers need our product in both good times and in tough times. These attractive fundamentals have not gone unnoticed by both public and private investors. The strong relative performance throughout the global financial crisis was followed by several years of very little new supply, providing a 3- to 4-year period where the industry saw incredibly strong NOI growth and margin expansion. Over the last 3 years, that strong performance has attracted quite a bit of interest, as you'd expect. We've seen a return to new supply being added across many markets and product awareness continues to grow. We've seen an influx in private capital wanting to invest in both stabilized cash flowing storage properties as well as investments in new development opportunities. The benefits of the larger sophisticated platforms like ours continue to be evident to investors, owners and developers. We manage over 700 stores for third-party owners, allowing us to grow and expand the CubeSmart brand, enjoy operational efficiencies and have a pipeline of acquisition opportunities in the future. More recently, we're all adapting to the impact of the COVID-19 pandemic. At CubeSmart, we've been focused on keeping our store teammates and our customers safe, while continuing to provide our product to both new and existing customers. The self-storage sector was deemed an essential business across all of the states in which we operate. So we remained open across the country, albeit with quite a few operational changes. We temporarily paused our delinquency process, our -- as well as passing along rate increases to existing customers starting in mid-March. We quickly adapted our service delivery model for new customers, providing multiple ways for a customer to rent with us in a contactless manner. 100% of our rentals are now contactless. We've launched our SmartRental platform, which provides a completely automated online experience for our customers, allowing them to transact online, show up at our store and access their storage queue without needing to interact in person with our teammates. That tool has quickly led to over 20% of our rentals coming from the SmartRental platform. We're proud of how quickly our team was able to shift and adapt to serve our customers, the ability to pivot and get our online rental platform up and running quickly and smoothly is a testament to our talented internal teams across IT, business intelligence, marketing and operations. It's also a testament to the many investments we've made over the last several years behind the scenes to have proprietary systems that are customer-centric, integrated and able to support growth and adaptability as we continue to solidify our position as having a market-leading operating platform.

Thank you, Tim. Tim and I have been together for so long. I often forget and think he doesn't need an introduction, but for those of you new to the company, our last speaker, Tim Martin, our Chief Financial Officer. Switching gears to our high-quality operating platform. The -- as I mentioned in my introductory comments, the platform itself is a significant point of differentiation between the self-storage industry and many other real estate product types, but also is a point of differentiation between the major real estate investment trusts to operate in the self-storage industry. At CubeSmart, we have a fully integrated focus that we believe creates the best service delivery to our customers. It begins with our marketing function. How do we attract a customer for whom our product is used as part of their everyday life events. Our customers -- and one of the reasons why self-storage is so particularly resilient are our customers who use us because of things that happen to them every day across all cycles. It may be a marriage or a birth. It may be a new job or it can be different kinds of stress, a relocation, an elderly parent moving in, sending children off to school. All of these things create an opportunity for us to provide a valuable product, which is a safe and secure space, flexible lease terms and flexible size to meet your needs. And so since the fact that the majority of our customers start their journey online, our ability to market effectively to a broad customer base is integral to our success. Our data scientists, PhDs and revenue management professionals, then very dynamically and sophisticatedly, make pricing decisions designed to attract that persona and maximize the revenue from that transaction. And that's a combination of delivering various things to that customer that allow them and create an opportunity for them to continue through the funnel from reservation to rental. Technology is the backbone of everything we do. The ability to have a solid platform that is both scalable and adaptable is key and never more so during these current times. And then ultimately, we're in a people business. And so how our teammates interact with our customers on a regular basis, listening to them, meeting their needs is key to being able to maintain a solid customer base and to obtain referrals from our existing customers, which is another area that is very key to our success. So digging in a little bit more to that operational sophistication that I referred to. The proprietary systems that we have at CubeSmart are one of the reasons why we are an industry leader. Again, it begins with research. When your customer is everyone, segmenting them is incredibly challenging. So how we look in terms of our digital marketing efforts is key. So our teams are focused on SEO content, how can we combine both national and local marketing efforts and using channels outside of those that folks think of off the top of their head as the norm, to be able to capture that customer's interest when they are searching for the product and get them into the top of the funnel. The next piece of the puzzle then is how are we making sure that CubeSmart is relevant when those customers are looking for self-storage. Most of our customers tend to want to rent within a 3-mile ring of their home. And so keyword bidding and other marketing efforts as well as having a sophisticated and easy-to-use website are very, very important in terms of how we continue to move that customer through the funnel. Ultimately to convert that customer to a rental is what we are incredibly focused on, both digitally and in-person, and so having that ability to satisfy every customer's needs whether that be through a call to our sales center, whether that be ultimately a walk-in, talk to the general manager at the store or as we talk about with SmartRental, the ability to have a fully online rental process. So adapting to changing circumstances, as I described, over a period of weeks, not months, not years. We were able to roll out SmartRental, addressing the current situation, creating an opportunity for our customers to have a contactless rental process going from selecting their store to selecting their cube, to obtaining an access code, to entering using a map technology, finding their cube and moving in all without having to have contact with a store teammate if that is what the customer desires. Our point-of-sale program is really key to making all this happen. It's nimble, adaptable, scalable and I think our technological prowess has never shined more bright than it has in the last several weeks. At the end, we have a customer, that customer is in place using our product. We want to continue to satisfy their needs, whether that be accepting deliveries for them, whether that be assisting them with referrals to local movers or multifamily complexes, et cetera. And then ultimately, for our customers who do tend to stay around 14 months on average, we do have a process of passing along rate increases to those customers and that tool, which was internally developed is very sophisticated to, again, look at the persona of that customer and, utilizing proprietary data, evolve to a rate increase that we think makes sense for that customer and that will continue to have that customer stay with us throughout their need. When you think about the real estate platform itself, while we have a customer base that is everyone we want to be and rents within, on average, 3 miles of their home or business, we want to be in that core market with that customer and making sure that we're convenient to them. So our top 12 markets are able to address the majority of the U.S. population. And we do have a focus on those markets where we believe that concentration gives us the benefit of brand presence, gives us operational scale, gives us service delivery scale and helps with our margin. And so we continue to build out our platforms in those core markets through a combination of acquisition, selective development and as important, our third-party management program, where we will continue to manage stores for our owners. Our best-in-class portfolio, again, we go to the fact that given where our customers come from, and given the fact that our customers represent all of society, the demographics in our markets is incredibly important to us. And so our sector-leading portfolio focuses in on a couple of key factors. We want our assets to have very strong population bases within the trade rents. Again, if you're thinking about renting 600 self-storage cubes, certainly would like to be in a market with 600,000 people relative to 60,000 people, your statistical probability of attracting a customer, especially in a portfolio like ours that has scale in those markets, is significantly higher. We're looking for strong household incomes, we're looking for a good percentage of rentals, rental housing in our markets as people who rent tend to move more often than people who own their home. And all of these factors go into a proprietary model that we have that we believe allows us to select the best locations to develop or acquire to continue to enhance our ability to get more than our share of the market and customers in that market. And then once that customer is part of our portfolio, all of our process and technology will kick in, and we will maximize the value of that customer over their lifetime. New York City, we believe, is the most attractive storage market in the United States. And when we think about New York, people do have a bit of a tendency to lump all of the boroughs together and look at them collectively. We tend to look at them individually. When you think about a borough like Brooklyn, with a population not unlike a city like Denver, it really is unique relative to the Bronx or Queens, both in how people move around the types of households that they live in, where they work, et cetera. And so when we look at each of the boroughs individually and then collectively, those incredibly strong demographics in terms of the metrics that I described, household incomes, population densities, percentage of renters, all combined to create a market that we are incredibly bullish on and we believe will produce the best long-term cash flow growth of any of our markets. The low existing supply in New York, additive to everything that I just described, significantly lower than the industry average, given some embedded hurdles that Tim will talk about, we are confident going forward that, that combination of low existing supply and strong demand drivers has and will continue to generate the highest rental rates in the country.

Because the market is so attractive, as Chris laid out, the operating fundamentals have been so strong. It certainly has been a market that has attracted some new investment and some recent development. The supply -- new supply has certainly been evident in the boroughs. We have been a big participant of that through several joint venture developments and if you take the Queens, Bronx and Brooklyn as the 3 boroughs that we have the largest presence, we have between 30% and 40% of the market in each one of those boroughs. So we have obviously made a big investment in what we believe to be the most attractive storage market, albeit at a time where you have seen a bit of new supply. And you've seen during that period of time, the square foot per capita grow from 1.8 square feet per capita before this development cycle, and we expect that it's going to grow to about 2.4 square feet per capita. So on one hand, you've seen a relatively significant amount of supply here over the past several years. On the other hand, at 2.4 square feet per capita, it's still an incredibly attractive market from a supply/demand ratio perspective compared to the national average of 8 square feet per capita and even relative to some other "low" supply markets like L.A. and San Francisco and some others that are in the mid-4s per square foot. So it's an attractive market. More recently, a couple of things have happened. Back in 2017, there were some regulations that limited the areas that storage was approved by right to be developed in. These were known as IBZs or industrial zones that were targeted to allow self-storage and other product types to be built to incentivize job creation and industrial jobs. And back in 2017, self-storage was eliminated as an approved by right type within the IBZ. So that represented about half of the land area in New York was no longer, by right, approved for our product. More recently, something that was even more impactful happened as it relates to the ICAPs and ICAPs, Industrial Commercial Abatement Programs apply to all product types, not just self-storage. And they effectively provide an abatement of property taxes on the dollar amount that one spends to develop in New York. And so you still have a tax bill -- if you're under an ICAP program and you develop, you're still under a -- you still have a tax bill on the value of the land, but you effectively had an abatement for -- a complete abatement on the value of the improvements that you construct typically for about 15 years. And then beyond that, there's a 10-year period of time in which that tax bill mentioned -- assessed value effectively gets phased in. And so back in April, the legislation was passed that eliminates self-storage from the ICAP program, we're no longer eligible as a sector for ICAPs. ICAPs though still exist. So for other product types, they're still able to achieve ICAPs, just not self-storage for any -- for any projects that aren't permitted by July 1 of this year. So effectively, what that does is it dramatically impacts the economics of a potential new self-storage development and for all intents and purposes, puts an end to this development cycle and well beyond for self-storage in the boroughs of New York. So as the largest participant with the largest market share in the boroughs of New York, having this ICAP restriction, effectively making it economically not all that attractive to build anymore puts us in an excellent position as we continue to absorb the new supply that's come on, that will still take another year or so until the impact is -- starts to wane, but beyond that, pretty clear waters ahead of us from a new supply perspective in New York, a big limitation. So that's a big benefit for us, and that's a pretty recent development. More broadly, external growth continues to be a strategic area of focus. And for CubeSmart, that focus remains on a strategy that enhances and supports our position of having the highest quality portfolio in the sector. We focus on markets with strong demographics, as Chris mentioned, including population, population growth, household incomes, among many others. These markets are best positioned to provide superior risk-adjusted returns throughout real estate cycles. We've been disciplined and very active over the past 5 years, investing over $1.1 billion in wholly owned acquisitions and over $600 million in new developments. We've invested strategically with joint venture partners and have been a market leader in expanding our third-party management platform. While our external growth strategy has been focused on quality, I'd describe our balance sheet strategy in the same way. We have consistently demonstrated our commitment to a conservative investment-grade balance sheet. We're currently rated Baa2 by Moody's and BBB by S&P, with debt to gross assets at 39%, net debt-to-EBITDA at 4.6x and EBITDA coverage of 5.4x. Our various credit metrics are on the conservative side of those ratings. Our focus on having a strong balance sheet puts us in a great liquidity position as the market shifted recently and times are a bit more uncertain. We're well positioned from a liquidity perspective, only 3% where 56% of our debt is coming due in 2020 and 2021 combined. And our existing development commitments are another $68 million, and we have over $680 million of capacity under our $750 million revolver. So that puts us in position to be focused on being opportunistic and looking for attractive investment opportunities coming out of the recent disruption. In addition to our retained cash flow and revolver capacity, we have access to a variety of capital sources. We historically have been active issuing equity under our at-the-market equity program and have been a regular issuer in the bond market and have a solid fixed income investor base.

So switching gears a bit to how we're thinking about ESG. We are a product type that has a very light footprint in general. We are very low usage of energy, very low impact on the environment in general, but it's a point of focus for us, and we continue to look for those opportunities where they present themselves. So particularly from an environmental perspective, many years ago, we went to a paperless lease process, saving an incredible amount of paper and waste. We have for a very, very long time, offered our customers an option to plant a tree with each rental and have planted over 123,000 trees since we began that program and from an overall energy perspective, we're very active in solar installations, where we can and where it makes sense. We continue to focus in on our lighting as limited amount of time as it's used. We do focus in on ways to retrofit and save, similarly on the HVAC and energy management side of our business. So while not quite the environmental impact from storage that you see in many other real estate products, we do continue to focus on doing what we can to aid the environment. From a social perspective, also very focused on how do we engage across the spectrum. And that's a range of using our over 3,000 strong teammate base to get involved in local communities and volunteer as well as using our product and our capital where we can to be assisting local and national charities and obviously, focusing in on how can we continue to develop our teammates and enhance their leadership qualities, their business acumen and their social awareness in as many ways as we can. And finally, from a corporate governance perspective, incredibly proud of the strong and independent Board that we have. Our chairwoman is a fabulous leader, along with the rest of the Board in helping guide strategic decisions for the company. We have best-in-class Board practices and shareholder rights. So with that, I'll wrap up. I want to thank everyone for joining us for today's presentation. We greatly appreciate your time and interest in CubeSmart. I think what you've heard is that we are a company who can respond in all situations. If you look back to the Great Recession and use that as a primer for some of the things that the world is currently going through, I think the strength of our balance sheet, the strength of our operating platform and the resilience of our customer base makes self-storage, and in particular, CubeSmart, a company that is well prepared to navigate through these waters. When you think about our innovation, best-in-class technology and a demonstrated ability to pivot into all circumstances, again, I think we're best-in-class in terms of rolling out in reaction to the current situation, a complete contact-free rental process where recent trends have seen us go from, obviously, 0 customers utilizing that product in mid-April to approximately 25% of our rentals currently being done through SmartRental. And there's more to come. So we're incredibly pleased. We think we're well positioned and deserving of a good look at CubeSmart as you think about your investment strategies, particularly given the facts and circumstances that we are all operating through. We hope everyone is safe. We hope your families are safe, and we thank you for your interest in CubeSmart. Everybody, enjoy the rest of NAREIT.