CubeSmart (CUBE) Earnings Call Transcript & Summary

Good morning and thank you for participating in the virtual CubeSmart presentation. We're pleased to be with you today. I hope everyone remains safe and healthy. As the pandemic hit us in the spring, we looked to our mission as a guidepost, rapidly creating innovative solutions such as SmartRental, our completely contactless rental option, to serve our customers and demonstrate genuine care. Our third quarter operating metrics are a tangible demonstration of how our mission differentiates us from our peers and produces sector-leading results. We have a talented management team who has been together through multiple cycles and are fortunate to operate in a tremendously resilient sector. Combine that with our highest-quality portfolio and balance sheet, and we believe we will continue to be best positioned to maximize long-term shareholder value.

The self-storage sector has demonstrated over several decades that it is an attractive and very resilient asset class. And interestingly, the disruptions caused by the global financial crisis back in 2009 and now the impact of the COVID-19 pandemic really bring that front and center, reminding some investors that what we know very well, which is our product, is to provide temporary storage with flexible terms to our customers who often find themselves in some type of transition. And that transition can be -- can come from many, many different life events, making demand for our product pretty consistent throughout economic cycles. As a sector, we've averaged 17% returns over the last decade. We have one of the most diverse customer bases in the REIT sector, again, leading to strong performance throughout cycles. Our short-term lease structure allows us to quickly respond to changing conditions, and the low CapEx requirements of self-storage lead to strong operating margins that average in excess of 70%. At CubeSmart, we remained focused on executing our business plan for many, many years. That focus has led to an industry-leading operating platform that is based on an intensive customer service approach, sophisticated pricing and sophisticated marketing systems and the highest-quality portfolio in the sector. By focusing on a strong operating platform and combining that with disciplined investments that align with our high-quality portfolio strategy, we've been able to generate strong and steady growth in key metrics over the last 5 years: FFO per share growth at nearly 8% per year, dividend per share growth of nearly 17% per year and total shareholder return of over 10% per year.

The operating platform distinguishes self-storage from many other asset classes in that it is a very intense customer service business. We invest heavily across our platform in our marketing efforts, attracting the customer; in our revenue management efforts, maximizing the lifetime value of that customer; in our technology, providing our customers with a way of using our product that is safe, effective, meets their needs and meets how they wish to be served; and in the core value of customer service, where we are focused in on folks who generally are in some form of move, and some form of move usually creates some form of stress, and we go out of our way to try to relieve that stress by making the use of our product as simple and easy as possible. The physical nature of our product is simple. The process of obtaining and maximizing the lifetime value of our customer is very complex. This slide walks you through, at a high level, the sophistication of our platform as we attract a customer to our store through our brand presence and targeted marketing efforts, convert that customer inquiry into a rental and provide our award-winning service to obtain favorable reviews and referrals. We've spoken about our culture of innovation that has a shift from a primarily in-person customer service model to a contact-free rent offering within 6 to 7 weeks of the pandemic. Our CubeSmart mobile app is a unique offering within self-storage that builds upon SmartRental to allow the customers to manage all of their storage needs from the palm of their hand. Ultimately, our mission, our innovation and our quality needs to translate into results. The connection between our stated objectives and the resulting performance is tangibly demonstrated through our outperformance in same-store and FFO per share growth over the last 5 years.

For well over a decade, we have been executing on our external growth strategy. Underpinning that strategy is a goal to have the highest-quality portfolio in the sector, which we believe will lead to the strongest returns in the sector on a risk-adjusted basis. We've complemented our on-balance sheet investments with the fastest-growing third-party management business in the sector. Our investments have been heavily weighted to the top 40 MSAs. These markets have demographics and characteristics that support strong consumer demand for our product and the ability for us to concentrate ownership in a way that provides us with operational advantages. Our top 12 markets generate nearly 70% of our revenue and provide us significant operating leverage in the Northeast United States, Florida, Texas, Chicago, Arizona and Southern California. As mentioned, our focus has been to concentrate our investments in premier assets located in markets that have the strongest demographics. That focus has led us to have the best-in-class portfolio as measured by many different metrics. We are not spread out or heavily invested in tertiary markets as 74% of our assets are in the top 25 MSAs. The self-storage business is a very, very localized business. Over 85% of our customers come from within a 3-mile radius of a self-storage property. So it's logical then that the more population within that 3-mile ring, the more customers you can draw from who are having those life events, driving the need for our product. Our stores on average have far higher populations and high levels of median household incomes within that 3-mile trade ring of our stores. We recently announced a transaction that is directly aligned with our long-term strategy of investing in the top MSAs. In late October, we entered into an agreement to acquire 8 of the highest-quality assets in the outer boroughs of New York City for $540 million: 5 properties in Queens, 2 in Brooklyn and 1 in the Bronx. We've managed these stores since their respective openings, and currently, 4 of the assets have stabilized, and we expect the other 4 to fully stabilize in 2023. Consideration for the transaction includes the assumption of $154.6 million of secured debt as well as the issuance of $183.7 million in operating partnership units. This strategic transaction fits directly with our objectives and solidifies and enhances our competitive advantage in Queens, Brooklyn and the Bronx. And it expands our presence in high-growth submarkets with strong demand drivers. It provides us the ability to deploy a meaningful amount of capital to grow the company in a transaction with significantly lower underwriting and operational risks given our specific knowledge of these assets as well as our market-leading presence in these markets. And we're able to fund the transaction in a manner that's consistent with our conservative balance sheet strategy with attractive capital, the large portion of which -- of the consideration is being paid in these OP units that demonstrates the confidence the seller has in the CubeSmart platform and their continuing investment in CubeSmart.

Our strategy creates opportunities for us to grow externally through all cycles. We target acquiring stable assets that enhance our brand presence and market share in the top 40 MSAs. We selectively develop in risk-mitigating joint venture structures with long-term trusted partners in markets where it is challenging to acquire assets that meet our quality criteria. We acquire nonstabilized assets with established partners, allowing us to diversify our capital and market risk. And we are a trusted partner to over 200 owners through our third-party management program, a program that is a valuable source of acquisition opportunities. As I mentioned, the third-party platform is a valuable way for us to expand our brand without a significant capital investment. The relationships we build through our program often lead to opportunities for us to acquire stores with a lower underwriting risk as they have been operated by us and operating under our brand.

We've spent some time talking to you about our high-quality, best-in-class operating platform. And then we've told you about our high-quality portfolio. We'd be remiss if we didn't spend a slide or 2 and talk about the third leg, which is our high-quality, conservative balance sheet. We have an investment-grade balance sheet that is rated Baa2 by Moody's and BBB by S&P. Our balance sheet metrics are on the conservative side of metrics associated with those credit ratings, with debt to gross assets of 39%, net debt-to-EBITDA at 4.6x and EBITDA coverage of 5.4x. We believe our positioning provides us with the ability to access a wide spectrum of attractive capital, which allows us to grow the company while also providing us the flexibility to execute on our growth strategy by utilizing a modest amount of leverage. We have been active and consistent in accessing the unsecured bond market and believe that a heavily unsecured model works best in our industry. On October 6, we closed a $450 million unsecured bond issue with a long 10-year term maturing in 2031 and also has a yield to maturity of 2.1%. This offering demonstrates our ongoing commitment to this market, and we appreciate the strong support we received from our fixed-income investor base. The bond deal was partially opportunistic from a refinancing perspective and partially to create capacity to support external growth. On the opportunistic side, we used proceeds to support the redemption of our debut $250 million bond issue from back in 2012 that had a coupon of 4.8%. That redemption was completed on October 30. The balance of the proceeds were used to repay amounts drawn on our revolver and provide further funding for external growth. We have a well-staggered debt maturity schedule, access to attractive capital and the capacity and flexibility to focus on identifying attractive external growth opportunities.

In closing, we believe that our mission, our operating results and our cash flow growth validates our consistent strategy of investing in our people and systems, operating and investing in the highest-quality portfolio in the highest-quality markets and doing so with a disciplined capital allocation strategy. Thank you very much for your participation in this virtual presentation. We wish you a great NAREIT conference and hope one day to be able to see everybody in person. Take care.