CubeSmart (NYSE:CUBE) Q4 2023 Earnings Call Transcript March 1, 2024
CubeSmart isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, ladies and gentlemen, and welcome to the CubeSmart Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] This call is being recorded on Friday, March 1, 2024. I would now like to turn the conference over to Josh Schutzer, Vice President of Finance. Please go ahead.
Josh Schutzer: Thank you, Joanna. Good morning, everyone. Welcome to CubeSmart's fourth quarter 2023 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 the 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 fourth quarter financial supplement posted on the company's website at www.cubesmart.com. I will now turn the call over to Chris.
Chris Marr: Thanks, Josh. Good morning, everybody. Last evening, we provided our solid operating results for the fourth quarter of 2023 and introduced our expectations and guidance on our key metrics for 2024. Tim Martin will provide more color and insight on both of those in his prepared remarks. At a very high level, operating trends have stabilized when comparing to the volatility that we experienced in the first 3 quarters of 2023, but price sensitivity for new customers remains elevated given the tight housing market and a particularly challenging competitive environment. Once customers enter the portfolio, they remain strong as they have elevated lengths of stay and continue to accept ECRIs and our customer credit metrics remain in line with pre-pandemic levels.
Our urban markets have outperformed the faster deceleration of our Sunbelt markets as the lower beta nature of these markets has continued to support steadier performance. The strong demographic profile for our portfolio should support performance through any phase of the cycle as New York City remains the bright spot in our portfolio with strong performance over the last year now making it our highest growth market. The transaction market remains quiet as the recent rise in rates has kept the cost of capital elevated and we continue to have a bit of [indiscernible] spread between seller expectations and our expectations. Our investment-grade balance sheet is in excellent shape. No material maturities, minimal exposure of floating rate debt and significant leverage capacity, which we believe positions us to transact as attractive opportunities return to the market.
Thanks for joining the call today, and I will turn it over to Tim for additional commentary. Tim?
Tim Martin: Great. Thanks, Chris. Good morning, everyone, and thanks for taking a few minutes out of your day to spend it with us. I'll provide a quick review of fourth quarter results and then jump into some additional color on '24 expectations and guidance. Same-store NOI growth for the fourth quarter was 1.2%. Driving that were same-store revenues growing 0.4% for the quarter with realized rents per square foot growing 1.8% compared to last year, offset by occupancy levels dropping 110 basis points on average compared to last year. Same-store expenses declined 1.8% during the fourth quarter, driven largely by the real estate tax line item as we received some significant refunds and tax reductions in the fourth quarter. We reported FFO per share as adjusted of $0.70 for the quarter, representing 4.5% growth over last year.
A row of self-storage units in a self-storage complex, showing the affordability and security offered by the company.
During the quarter, we also announced a 4.1% increase in our quarterly dividend up to an annualized $2.04 per share. On yesterday's close, that represents a 4.7% dividend yield. On the external growth front, in the fourth quarter, we acquired one store for $22 million. We partially opened one of our JV development stores, and we added 43 stores to our third-party managed portfolio, bringing us to 167 stores added for the year and 795 third-party stores on the platform at year-end. As Chris mentioned, our balance sheet position remains strong. All of our debt, except for our revolver, is fixed. So less than 1% of our outstanding debt was variable rate as we started 2024. We faced no significant maturities until November of '25, and we have a weighted average debt maturity of 5.4 years.
We further reduced our leverage levels during '23 and ended the year at 4.1x debt to EBITDA, giving us ample capacity and liquidity to finance future growth when attractive opportunities present themselves. Looking forward, details of our 2024 earnings guidance and related assumptions were included in our release last evening, our 2024 same-store property pool increased by just 6 stores this year. Consistent with prior years, our forecasts are based on a detailed asset-by-asset ground-up approach and consider the impact at the store level, if any, of competitive new supply delivered in '22, '23 as well as the impact of 2024 deliveries that will compete with our stores. Embedded in our same-store expectations for '24 is the impact of new supply that will compete with approximately 27% of our same-store portfolio.
For context, that 27% is down from 30% of stores impacted by supply last year and down from the peak of 50% of stores impacted back in 2019. The midpoint of our revenue guidance range assumes that the housing market improves marginally off of 30-year lows but remaining well below historical norms. This would lead to negative year-over-year gaps in both occupancy and rate, reaching parity in the fall and then growing slightly from there. The high end of our revenue guidance range implies more of an improvement in the housing market, driving seasonality closer to historical levels. This improved demand environment would lead to year-over-year gaps in both occupancy and rate to reach parity in mid-summer and then flip positive in the back half of the year.
And then the low end of our revenue guidance range assumes another year of largely frozen housing mobility driving another year of muted seasonality throughout the spring and summer. This slower demand environment would mean a continued lack of pricing power causing the negative year-over-year gaps in occupancy and rate to persist through most of 2024, albeit at narrowing spreads from current levels. Shifting to same-store expenses. We've had a lot of success in controlling our operating expense growth here over the last 2 years, averaging expense growth of only 2.2% compared to 6% expense growth for our storage peers over the same period. That's great news for 2022 and 2023 but sets us up for some pretty tough comps in 2024. We introduced same-store expense growth in a range of 5.5% to 7% growth in '24.
On an absolute basis, there are a few line items that are pressuring expense growth into '24. The biggest driver is real estate taxes. As I mentioned earlier, this quarter's guidance beat was largely driven by some significant refunds and tax reductions, again, great news for '23, but creates a really difficult comp for 2024. Overall, we're expecting real estate taxes to grow in the high single digits this year as a result. Property insurance is another line item that will continue to see pressure. Our annual insurance policy resets on May 15 of each year, and we had a 43% increase in cost last year. So that continues for the first 4.5 months of '24. And then beyond that, we're anticipating another 20-plus percent increase in our renewal, again, this year.
The third area of pressure comes from winter-related expenses, primarily snow removal costs. We had a very favorable winter in 2023 from that perspective and our guidance assumes a more normal level of those costs in 2024. So overall, expenses are, again, expected to grow 5.5% to 7%, but taking out real estate taxes, property insurance and snow removal costs, all other expenses combined are expected to grow plus or minus at inflationary levels. Our FFO guidance does not include the impact of any speculative acquisition or disposition activity as levels of activity and timing are difficult to predict. To wrap up, thanks to our entire CubeSmart team for a really productive year in 2023. We're excited about our position to execute our business plan in 2024.
Thanks again for joining us on the call this morning. At this time, Joanna, let's open up the call for some questions.
