CubeSmart - Q1 2023

Transcript

Operator (participant)

Hello, everyone, and welcome to the CubeSmart First Quarter 2023 Earnings Call. My name is Charlie, and I'll be coordinating the call today. You will have the opportunity to ask a question at the end of the presentation. If you'd like to register a question, please press star followed by one on your telephone keypads. I will now hand over to our host, Josh Schutzer, Vice President of Finance, to begin. Josh, please go ahead.

Josh Schutzer (VP of Finance)

Thank you, Charlie. Good morning, everyone. Welcome to CubeSmart's First 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 first quarter financial supplement post on the company's website at www.cubesmart.com. I will now turn the call over to Chris.

Chris Marr (President and CEO)

Thank you, Josh. Good morning, everyone. Our first quarter of 2023 can be characterized as solid performance across all of our key performance metrics. Funds from operations per share came in at the high end of our guidance as steady occupancy trends, coupled with our continued focus on expense control, helped to generate strong same-store net operating income growth. Our customers are resiliently navigating an uncertain post-COVID economy. While the Fed pushes up interest rates to cool inflation, the unemployment rate remains historically low. Volatility in mortgage rates has created an uncertain housing market as prices remain stubbornly high, resulting in a slowing single-family home purchases and sales. We believe our portfolio focus on top markets and strong demographics has us well-positioned to perform throughout all macro environments.

Low unemployment, continued wage growth, and solid household balance sheets translate into historically good credit metrics across our customer base. During the first quarter, delinquency metrics such as late fees charged and receivables over 30 days past due are at levels below what we experienced in the first quarter of 2019. Another bright spot continues to be the stickiness of our existing customer base. Vacates during the quarter were down 3.3% to the first quarter of last year and down 9.5% on a comparable store basis to the first quarter of 2019. 47.9% of our customers have been with us longer than two years, up 230 basis points from this time last year. This results in a larger pool of customers to potentially receive a rate increase. Top-of-funnel demand trends have been less consistent with historical patterns than we expected.

We had a solid first couple of months as same-store rentals through February were consistent with the same time period last year. In March, trends slowed as weather, bank failures impacting consumer confidence, and existing home sales weighed on March storage demand. March occupancy trends were mostly in line with last year, but that was driven by lower vacate activity offsetting slower than expected rental activity, which led us to a more cautious approach to rental rates. As we've moved into April, trends have been on a more normal trajectory. Rental and reservation activity has returned back in line with last year's levels as we've seen stabilizing signs in both the housing market and with consumer confidence.

As a result, we have grown our occupancy, narrowing the gap to last year to 141 basis points, and we are moving up rental rates as the busy season begins to ramp up. We have experienced unusual trends so far this year. The demand momentum we saw in January and February slowed in March, only to show signs of reigniting in April. Recent trends have us cautiously optimistic, but as we noted during our prior earnings call, the outlook for the back half of the year is heavily dependent on performance during the next few months of the rental season. Touching briefly on market level performance, the New York MSA was our most resilient MSA, with our borough properties experiencing positive growth in both occupancy and net effective rents to new customers compared to the first quarter of last year.

This was offset somewhat by softness in supply-impacted North Jersey and Long Island markets within the overall MSA. While decelerating off of their tremendous 2022 levels, we continue to experience above average revenue growth in our Florida, Texas, and Southern California markets. We experienced below average growth in the supply impacted D.C., Virginia, Maryland markets and in Arizona, where COVID induced migration has clearly waned. We continue to underwrite a good number of transactions, but seller expectations for assets that meet the quality requirements of our portfolio strategy are still disconnected from our current cost of capital. We are finding ways to accretively deploy capital within our existing portfolio as full-scale redevelopments and cost-saving upgrades to high-efficiency building systems are proving to be the best opportunity for capital deployment in this part of the cycle.

We remain a third-party partner of choice as our reputation in the industry has consistently maintained our robust pipeline of new management opportunities. Our operating platform is primed to maximize performance no matter the macro environment. Our differentiated strategic focus on quality across our portfolio and platform positions us well to generate shareholder value over the long term. Thanks for listening, and I will now turn the call over to Tim Martin, our Chief Financial Officer, for his remarks.

Tim Martin (CFO)

Thanks, Chris, and thank you to everyone on the call for your continued interest and for spending a few minutes of your time with us today. As Chris touched on, operating fundamentals during the first quarter were largely in line with our expectations, and we continue to experience a return to more normal seasonality in the business, consistent with our discussion over the last several quarters. We reported FFO per share as adjusted of $0.65 for the quarter, which was at the high end of our guidance range and represents 12.1% growth over the first quarter last year. Our continuing focus on being as efficient as we can be, along with a mild winter, resulted in 1% same-store expense growth, which when combined with 6.9% revenue growth, produced a healthy 9.1% growth in same-store net operating income.

Month to month occupancy trends during the quarter largely mirrored those of the first quarter of 2022. Our same-store portfolio gained 60 basis points of occupancy sequentially from the fourth quarter, ending the first quarter at 91.9%. We remain disciplined in our pursuit of external growth opportunities with no transaction activity to report in the first quarter. Our investments team continues to be active, although deal volume that went through our underwriting process was down about 30% compared to the first quarter of 2022. We continue to generally see a disconnect in the bid-ask spread, and we're generally not seeing the high-quality opportunities that we were seeing over the past couple of years. On the third-party management front, we added 25 stores in the first quarter, bringing our total third-party managed store count to 676.

In the current environment, no news is good news when it comes to corporate balance sheets. Our balance sheet remains very healthy, putting us in a great position to pursue external growth opportunities when we see attractive relative returns. Our average debt maturity is six years. 98% of our debt is fixed rate. We have no significant maturities until November 2025, and our leverage levels remain very low at 4.4x debt to EBITDA. Details of our 2023 earnings guidance and related assumptions were included in our release last night. Our forward guidance for the year remains consistent with the guidance we provided in late February. Wrapping up, good inline first quarter. Balance sheet's in great shape, patient and ready to find attractive external growth opportunities.

Our team is ready and energized heading into our sector's busy rental season here in the summer. Thanks again for joining us on the call this morning. At this time, Charlie, why don't we open up the call for some questions?

Operator (participant)

Of course. Thank you. If you'd like to ask a question via the telephone lines, please press star followed by one on your telephone keypad now. If you'd like to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure you're unmuted locally. As a reminder, star followed by one on your telephone keypad now. Our first question comes from Michael Goldsmith of UBS. Michael, your line is open. Please go ahead.

Michael Goldsmith (Equity Research Analyst)

Good morning. Thanks a lot for taking my question. My first question on what you're seeing in April. You know, it sounds like March was slower. April kind of has returned to a more normal trajectory, with rental rates back in line. I guess, like, can you provide a little bit more color about where the demand is coming from? You know, I think you talked a little bit about the housing market. You talked about rates moving higher. Can you kind of quantify that? Then as well, you know, did your ECRIs kind of come down during this slowdown in March, and how are you thinking about that back, now that things are more normal in April?

Chris Marr (President and CEO)

Sure. Thanks. That was a little bit to unpack there. Let me see if I can remember all the questions and answer them all. Going backwards, I think from a rate increase to the existing customer perspective, we averaged mid-teens in the first quarter. That was consistent with our average for the fourth quarter of last year and down from the high teens that we would have averaged in the first quarter of 2022. As we expected, if you think about kind of a historical expectation, 1Q 2019 we keep pointing to is a pre-COVID metric. You know, we averaged in around the 12% range in the first quarter of 2019.

As we have talked about, I think earlier in the year, the expectation is that the rate increases to the existing customers will continue to outpace pre-COVID, but come down from what we saw in a historically great 2022. In terms of customer demand, it is obviously varies a lot by market. Absolutely thrilled with the performance in the New York boroughs. There you have a portfolio construct that is just made for this type of a climate. We have a very sticky customer there and a customer there that is not that is not so focused transactionally on moving. That market as we would have expected, continues to perform quite well in the current conditions.

Rest of the country, I would say the, you know, the performance and where the customers are coming from continues to be, you know, from what you would have expected historically. Certainly in some of the Sun Belt markets, March, you know, we just didn't see the shorter-term moving customer. We're starting, obviously, we've picked up the college students at this point, and that will continue here for a little bit. Again, signs in April that perhaps that moving customer is, you know, returned or March was an anomaly. You know, we'll continue to pay close attention to that as we get into May and June.

Michael Goldsmith (Equity Research Analyst)

That's very helpful. On my follow-up question, you talked a little bit about it. It's just kind of on New York, you know, same store NOI was down 300 basis points sequentially for the portfolio, but New York was up 120 basis points sequentially. You also added eight properties to the same store pool. I'm just kind of curious about the trends going on in New York. Is this, you know, you've often talked about how at a time of moderation, New York is a market that outperforms. Is that kind of playing out as you expected?

Chris Marr (President and CEO)

Yeah. It, it is playing out in the city as we expected. You know, those stores, I think on the old pool accelerated 50 basis points, and the new pool as reported the, in the city, the MSA, you know, you are suffering a little bit of supply impact in North Jersey and out on Long Island. The, the stores in the boroughs, you know, again, we're thrilled with the performance. We expected a good year, and it's playing out so far, you know, at that expectation or better.

Michael Goldsmith (Equity Research Analyst)

Thank you very much.

Operator (participant)

Thank you. Our next question comes from Samir Khanal of Evercore. Samir, your line is open. Please go ahead.

Samir Khanal (Equity Research Analyst)

Thank you. Hi, Chris. So occupancy fell year-over-year, but we also saw the in-place rent decline sequentially. We haven't seen that in a while, I think many quarters, maybe even going back to 2018. I guess how much of this decline is related to the sort of normal seasonality versus you know, the business starting to weaken here? Maybe you can help us unpack this. Thanks.

Chris Marr (President and CEO)

On the occupancy, again, you've got to make sure you're focused on the fact that the 2023 pool obviously changed on 1 January. If you think about where we started the year on an apples-to-apples basis, occupancy was down, you know, 1 January versus 1 January of last year by about the same as it was at the end of March. The occupancy during the quarter didn't really change, which is more normal relative to, you know, trends 2019 and earlier. If you just look at seasonality from 2017 to 2019, rates typically fall, and did every quarter, every year rather, from Q4 to Q1.

The patterns that you see in Q1, if you know, if you adjust for the change in the pool, are very typical to pre-COVID type patterns.

Samir Khanal (Equity Research Analyst)

Thank you for that. I guess my second question, Tim, I just wanted to ask about expense growth. When I look at last year, you did 3% for the year, but you guided, I think it was close to 6%, as part of your initial guidance. This year, you're guiding to 4.5%, and you did 1%-2% depending on the same store pool you look at. Can you walk us through the things you're doing, from an expense control standpoint? You know, is there more you can do that could actually end up surprising us to the upside, as the year goes by? Thanks.

Tim Martin (CFO)

I don't know what would surprise you. It's all relative to your expectation, I suppose. I think, you know, we're proud and of the results, and we have been focused as Chris has touched upon for several quarters now on always controlling what we can control. There are many of the line items from an expense standpoint that we can do just that. The first quarter, we saw the benefit of a mild winter, which showed up in both, you know, lower than expected snow removal costs and lower than expected utility costs.

I think as we think about how the rest of the year plays out, you know, while we had a nice surprise there on winter costs, we've also had a negative surprise, I suppose, that offsets it as we think about our property tax, or our property insurance rather, renewal process that we're going through. Those costs are gonna come in, you know, a little bit higher for the year than we would have thought even 60 days ago. Those kind of offset each other. I think you then look into the balance of the year, and you think about a line item like marketing expense. We're seeing some good opportunities to deploy marketing spend with attractive returns.

That's an area that we'll continue to push on at times when it makes sense for us to do so.

Chris Marr (President and CEO)

I think the line item that really jumps out at you over the past couple quarters has been on the personnel side, and we've continued to find ways to combine our operational platform with technology, with how we staff stores, store hours, how we're using our sales center, how we're using our online tools to help our customers rent with us. And a lot of that has continued to show up in the personnel line item. Of course, we're gonna start to have more difficult comps on that line item as we get later in the year. But those are the big areas of focus and again, we're pleased to report 1% same-store expense growth. Thank you. Thanks.

Operator (participant)

Our next question comes from Smedes Rose of Citi. Smedes, your line is open. Please go ahead.

Smedes Rose (Director of Equity Research)

Hi. Thanks. I just, I wanted to ask you, as you go into your kind of busy asking rates, it sounds like consumers are maybe a little more cautious based on some of the remarks that you've said. Would you maybe go lower in order to sort of get folks in? How are you thinking about that?

Chris Marr (President and CEO)

Yeah. Week to week, Smedes, that's really the point of focus here as we're looking out over the next couple of months is, you know, we have great properties and great demographic markets. From a customer perspective, we know they're gonna see us. When they make that decision to rent, we're really keenly focused on getting them into the top of the funnel and then making sure that our conversion of that, you know, of that reservation or that customer inquiry to a rental is operating as efficiently as possible and that we're then pricing in a way that, you know, maximizes that opportunity. It's a week-to-week decision as we go through. As we think about April, from the beginning of April through, you know, essentially today, we've increased rates about 8%.

You know, that's about consistent with what we would have done last year. We're gonna continue on that focus as long as the demand and conversion continues to support it. It's been an unusual, you know, it's been an unusual year to date. Again, we're gonna have that keen focus week to week and make sure we're maximizing that opportunity.

Smedes Rose (Director of Equity Research)

Okay, thanks. The other thing I just wanted to ask you, I know you added 25 stores, but it looks like it was more like eight on a net basis to the third-party management platform. Are you just continuing to see volatility with just assets being sold? I'm just surprised because it sounds like there hasn't been a lot of transaction activity. Just maybe you could comment on that.

Chris Marr (President and CEO)

Yeah. Hey, Smedes. It is. We're starting to see the pace of stores, which is a good thing, pace of stores that have our brand on them, you know, being marketed. There have been a handful over time. Again, as we said in the past, it's one of those bittersweet things. We hate to see our name come down off of the sign. At the same time, we've, you know, in those cases, we've done a good job and done what our third-party clients expect us to do, which is to help create value for them. They realize that upon a sale. Many of them, we would love to keep with the CubeSmart brand and acquire them on balance sheet. We haven't been particularly active, as we touched on earlier.

I think, you know, it's hard to predict the net number because, hard to predict when stores are gonna come off the platform. What we can control and what we've done a good job of is keeping that pipeline of new stores coming onto the platform very healthy. We do have a very healthy pipeline right now of owners who are seeking third-party management services and are viewing us, you know, as one of those premier providers of that service. I mean, just to give you a little bit of data there, of the stores that left the platform, I know 15 of the 16 were actual sales, where the stores were sold to another party, who either chose to self-manage or had a different third-party management relationship.

While activity is muted, certainly there were 15 transactions that took place, you know, that closed during the quarter.

Smedes Rose (Director of Equity Research)

Okay. Thank you, guys.

Chris Marr (President and CEO)

Thanks.

Operator (participant)

Our next question comes from Juan Sanabria of BMO Capital Markets. Juan, your line is open. Please go ahead.

Juan Sanabria (Managing Director)

Hi, guys. Thank you for the time. Just curious if you can give us the April trends for street rates and occupancy, just kind of where the spot sits. For street rates, if you don't mind giving us how that trended year-over-year throughout the quarter, just to help contextualize.

Chris Marr (President and CEO)

Sure. Rate trends in the first quarter, net effective rates for customers compared to that same time period last year, again, bounces around week to week, but range down from the low to the mid-teens. When we got, again, to March, similar trend, more in the mid-teens down in March. In April, as I mentioned, we've pushed rates up through today 8% since the first of the month, which is just slightly more than we did last year. The gap to April of 2022 remains in that kind of mid-teens type of range. From an occupancy perspective, we've reduced the gap to last year to from 150 basis points, I believe, at the end of March to 141 basis points as of yesterday.

Juan Sanabria (Managing Director)

Thanks. I just wanted to ask, it seems like you maybe are testing in some capacity, asking customers to stay for a period of time, maybe four months or so, but I guess, locking in that initial rate. Just curious on how that testing has gone, why you chose to offer that option out, and just some thought around the strategy there would be helpful.

Chris Marr (President and CEO)

Yeah. Juan, thanks. Good question. We test a quite significant number of different strategies for two reasons. The most important of which is, you know, we wanna get a sense from the consumer as to, you know, what their behaviors are and get some additional insight through decisions they make as to how they're thinking about using our product, you know, and what's important to them. Then obviously the second is it's always strategies around, you know, how can you maximize revenue across all of our customer segment base.

You know, that particular test would have been designed to see if a customer was more inclined to make a commitment for a longer period of time, and would they be more inclined to do so knowing what could happen in terms of their rate at the end of that four year, four month rather. Four year would be awesome. Four year, four-month time period. It's one of many different things that we have and will continue to test. Again, it's very helpful for us from a data perspective to just get a good sense of where that customer behavior, you know, kind of shakes out. All of these are, you know, ongoing at some point in stores throughout the portfolio.

Juan Sanabria (Managing Director)

Just as a quick follow-up, were customers willing to sign up for the four months, or I'm assuming you were trying to weed out customers who were just in and out for a month, but just curious on the take-up versus expectations.

Chris Marr (President and CEO)

I would say, you know, again, it is still in process in certain properties, so the absolute answer to the question, we don't have a definitive one at this point. It certainly does attract a customer who knows or is certain, at least in their own minds, that their intention is to stay longer. It also has an attraction of a customer though who has more certainty around the move in and move out. You tended to see the vacates then at the end of that four-month time period. Again, it's one of many things that we continue to test at an array of properties across the country and, you know, we'll continue to do so to again, always try to find ways to creatively maximize revenue for each customer we get.

Juan Sanabria (Managing Director)

Appreciate it, Chris. Thank you.

Operator (participant)

Thank you. Our next question comes from Ki Bin Kim of Truist. Ki Bin Kim, your line is open. Please go ahead.

Ki Bin Kim (Managing Director)

Thanks, good morning. To follow up on the last question, I'm curious about the cadence of demand that you saw throughout the quarter and into April. Was it a top of the funnel type of dynamic where you just had less touch points coming into you guys, or was it more of a market share dynamic?

Chris Marr (President and CEO)

Yeah. From our perspective, felt like top of funnel demand, was as we would have expected in January and February, and then was less than we would have expected in March. Has returned to expectation.

Ki Bin Kim (Managing Director)

What caused the pickup in April?

Chris Marr (President and CEO)

What caused the decline in March, right? I. It's, you know, you certainly can look at things that occurred in March on a macro basis. And we can look at, you know, housing, for example. One of the larger publicly traded home builders on their earnings call last week commented that March was unusually slow for them. They've now seen a pickup in demand in April. Was it weather? Was it banking crisis? Was it mortgage rates? Don't know. Again, we're trying to navigate through a, you know, post-COVID trends that have been anything but consistent over the last several years. You know, 2021 was odd, 2022 was odd, and certainly March of 2023 relative to, you know, what we would have expected was a bit odd. April seems a lot more normal.

Ki Bin Kim (Managing Director)

Okay. Second question, I want to ask about your leverage and capital allocation. You know, your balance sheet is 4.4 times levered, obviously in great shape. I appreciate your press release comments about being disciplined on price. Can you just help us understand what the gap is, the bid-ask spread, you know, how wide or narrow it might be? If you can remind us of your latest thinking on capital allocation, is it still from a asset quality or market standpoint, is it still kind of demographically driven, or has your scope widened a bit to include other assets that maybe you traditionally, you know, didn't want to own?

Chris Marr (President and CEO)

Yeah, We haven't changed our areas of focus, Kevin. We are, as we have been, focused on attractive markets, typically in the top 40 MSAs, looking for those great infill complementary opportunities to our existing footprint. There are some markets that we're not in that we would love to be. Haven't found attractive opportunities to do that. The bid-ask spread, it's difficult. Lower amount of total transaction activity, so it's a little bit difficult to know exactly where things are because many of the things that are out there, I think are for sale at a price and sometimes I think a crazy price. Some of the things aren't trading at all, so it's a little bit difficult to know exactly where you are.

I would say, you know, we quite often end up being 15%, 20% off of where at least our broker transaction, where our broker would suggest a deal needs to trade. You know, that feels like a little bit of a gap, but it can change. You know, we are, as I mentioned in my prepared remarks, we're quite active in underwriting an awful lot of opportunities. We would love to see some high-quality opportunities that were just a little bit closer to a price point that made sense for us on a risk-adjusted basis. Where we are open for a wide spectrum of opportunities is at the right return. You know, we would look at something that's fully stable all the way to, you know, something that just came out of the ground.

We don't have any restrictions or limitations to our desire to take on some lease up or to look at stabilized acquisitions. The markets and the quality of the assets that we're looking for is pretty consistent from what you've heard from us for some time.

Ki Bin Kim (Managing Director)

Yeah. That's great color. I was asking about these other markets because, you know, lately the changes that we've seen from the self-storage companies, including you, is kind of touchless, you know, internet-based leasing, and if that would perhaps expand, you know, what you would want to own, like in secondary markets where you can use technology versus, you know, having a lower margin business with people. Thank you.

Chris Marr (President and CEO)

Yeah. Kind of flavor of the day, right? I mean, to me, the idea of not having an office at a store is, you know, been around since 1968. You know, whether it be the phone, or whether it be, you know, some use of technology, the concept's not new. Again, it's been out there. We continue to look at where that might apply. Certainly in the more urban and the dense suburbs, it's much less applicable than it is in tertiary areas. It's, it's not new. Certainly, it's generated a lot of conversation over the last several months.

Ki Bin Kim (Managing Director)

Thanks again.

Chris Marr (President and CEO)

Thanks.

Operator (participant)

Our next question comes from Hong Zhang of JPMorgan. Hong, your line is open. Please proceed.

Hong Zhang (VP of Equity Research)

Yeah. Hey, guys. I guess on the personnel expense side, you talked about technology savings. Are there any further savings we should expect in that line going forward, or do you think that's largely tapped?

Chris Marr (President and CEO)

Hey, it's Chris. You know, we continue to look at ways to meet our customer where they wanna be met in terms of closing the transaction with them. You know, again, no surprise, when you do focus groups and you talk to your customers, they at this point in the life cycle, continue to be about one-third each in three categories. It's just the category of customer who's very used to using technology, is very comfortable transacting without a face-to-face interaction. It's, you know, it's my kids texting from their bedroom to ask what time dinner is instead of walking down the stairs and having a face-to-face conversation. You know, we have another third of the customers who, not surprisingly, are at the complete opposite end of the spectrum. They want to have a conversation.

They wanna interact with a store teammate. They wanna know that, you know, they can ask any questions they want to a, you know, to a person live as they're going through their decision-making process. The other third kind of fall into that, you know, into that digital key at a hotel kind of group of folks. They're happy to use it as long as it works the way they think it should and seamlessly. If it's not, you know, when you get to that 13th floor of the hotel and your phone doesn't work at your room, you're kind of frustrated. You wanna come back down to the, you know, back down to the lobby and have a conversation and have your problem solved immediately. We're working through all of that as we do.

You know, we've obviously continued to find ways to create efficiencies, we think, while also providing the, you know, the level of customer service that we're known for. We'll continue to do that. Obviously, I think, you know, the rate of savings or improvement there will slow as the, you know, as the fruit from the tree gets higher up.

Hong Zhang (VP of Equity Research)

Got it. Then as it relates to other property revenues, particularly late fees, it seems like post-COVID, there's just been a step function down on delinquencies and late fees. Do you think that's just the new normal given AutoPay and all that?

Chris Marr (President and CEO)

Yeah. That's a great question. We definitely have seen on that side of the equation, lower revenues than we would have seen in some of the prior years. It's a two-part, a two-part issue. One is, you know, as I said, health of the customer is really good, which is a positive. Receivables, you know, are down. Delinquencies are down. That translates into lower late fees, but a, you know, a higher quality customer per se from a credit perspective. You know, on the technology side, as we can push folks into or they choose to go through SmartRental or self-service rentals in some way, shape, or form, talk to one of our service reps, you know, either from their phone or from a kiosk, they tend to be AutoPay customers.

They tend to be more ACH customers. Again, they're paying on time, which is great, but you know, the late fee will come down. Is that, you know, is that gonna change as we go through economic cycles? I would suspect that at least the first part of that answer will, as we see, you know, differing parts of the economic cycle over the next couple of years.

Hong Zhang (VP of Equity Research)

Got it. Thanks. A great quarter.

Tim Martin (CFO)

Thank you.

Chris Marr (President and CEO)

Thank you.

Operator (participant)

Our next question comes from Spenser Allaway of Green Street. Spenser, Sorry, your line is open. Please go ahead.

Spenser Allaway (Senior Equity Research Analyst)

Yeah, thank you. We continue to hear that private market players are burdened with high interest expenses on construction loans, and as such, there could be, you know, they could be looking to offload or sell some of these properties. Have you started to see these opportunities arise, or is it still fairly quiet? I know you mentioned there were some transactions, you know, that occurred in the quarter, but just curious if you could elaborate a little bit further.

Tim Martin (CFO)

Good morning, Spenser. It is, I would say not quite yet. I mean, I think there's a little bit of chatter. At this stage, I think it's more discussion of, you know, you would think that there would be some of that activity. I think the reality for our sector, you know, when you do this throughout different parts of the cycle is that, you know, what that might translate into is probably some motivation. At least there might be a more motivated seller who would look to, you know, to have their store clear the market versus, you know, somebody who's, as I alluded to earlier, somebody who will sell for a really high price. You might have a more motivated seller. I don't think you're gonna have a desperate seller.

I think our business is just too good. I think operating fundamentals are too good, and people have options, so they don't have to, I don't think anybody would suspect that there would be a fire sale opportunity on a whole bunch of things for folks that are like that. Perhaps, and again, maybe more wishful thinking from our perspective, but perhaps you'll have a little bit more motivated seller. If those were in, you know, in opportunities and markets and high quality assets that we're looking for, that would be fantastic for us.

Spenser Allaway (Senior Equity Research Analyst)

Okay. That's helpful. Thank you for all the color you provided at the market level. Just maybe looking at some of the markets with lower occupancy, maybe such as Vegas and Phoenix. Just curious if you have any color, you know, on operating trends in these markets or what might be driving the lower than average occupancy.

Chris Marr (President and CEO)

Yeah. When you think about those markets, it's a return to more normal after seeing just a tremendous amount of movement, certainly a tremendous influx of folks, you know, in those markets. They would also be the markets where you saw the most aggressive push in 2021 and 2022 in market rate. When you think about, you know, changes in market rate over the last couple of years, you know, those markets in Phoenix, and certainly those markets in, you know, in the Sun Belt in general, you would have seen rather the, you know, the most significant push in rates over that time period. You know, give you a point of example.

You know, when you just think about, when you think about Sun Belt markets, Phoenix, for example, rates versus where we were in the first quarter of 2019 are still up about 30%, about 20% in Tucson. You know, even you get into South Florida markets, Miami, Fort Lauderdale are up about 44%. Just some markets that would have seen really strong push on rates are just starting to normalize more, you know, starting to normalize. You're not seeing, again, you're also not seeing the same movement in those markets that you would have seen in 2021 and 2022.

Operator (participant)

Thank you. Our next question comes from Todd Thomas of KeyCorp. Todd, your line is open. Please go ahead.

Todd Thomas (Managing Director)

Hi, thanks. Good morning. I just wanted to circle back to the trends that you discussed that you experienced in March. Was that concentrated in certain geographies, or was it more broad-based across the country, across the portfolio?

Chris Marr (President and CEO)

Yeah. It was really broad-based across the portfolio. You know, if there's an outlier, again, in this kind of a climate, it would have been the New York City borough assets, which, you know, as I mentioned, were the assets in the market really where we saw occupancy gains over the first quarter of last year and rental rates that were in positive territory relative to the first quarter of last year. The rest of the country all kind of moved the same.

Todd Thomas (Managing Director)

Okay. net-net, you know, if we think about what happened, you know, you mentioned the volatility in move-ins and move-outs. Sounded like both were down, so less movement altogether. you mentioned that asking rates or street rates did decrease a little bit. I think you were in the low double digits. You mentioned March, you know, moved into the sort of, you know, mid-teens or high teens, I believe. you know, net-net, how did results compare to your budget for March? Did it create a setback in any way? Maybe a benefit? What happened in March as a result of that volatility?

Chris Marr (President and CEO)

We would have expected in March, net-net slightly better performance than what, than what we were able to deliver.

Todd Thomas (Managing Director)

Okay. Results in March fell slightly below your budget, sort of within the context of the year so far.

Chris Marr (President and CEO)

Yes.

Todd Thomas (Managing Director)

Okay. Just last question, just stepping back and looking at the guidance, which you maintained. You previously talked about growth decelerating gradually throughout the year, revenue growth, right? Starting the year higher, ending the year lower. Do you see potential stabilization midyear or later in the year? I guess, has your view changed around the trajectory of growth throughout the year as we sit here today, you know, at the end of April?

Chris Marr (President and CEO)

No. I mean, the view from a high level has not changed in terms of that expectation that we will continue to see some level of deceleration across the entire same-store pool as we go through the quarters. I mean, again, you look at last year, obviously, the first half of the year, the comps were more challenging than the second half.

Todd Thomas (Managing Director)

Okay. Great. Thank you.

Chris Marr (President and CEO)

Thanks, Todd.

Operator (participant)

Our next question comes from Jonathan Hughes of Raymond James. Jonathan, your line is open. Please go ahead.

Jonathan Hughes (Managing Director)

Hey, good morning. Was hoping you could talk about performance in the 73 properties that were added to the same-store pool this year, most of which I believe is the Storage West portfolio. You know, those added 50 basis points or so to revenue growth, 100 basis points to NOI growth. When you back in the metrics for those properties, it looks like almost all that growth is from higher rents and expense savings, but occupancy is almost 500 basis points lower than the 2022 same-store pool. Maybe there was a rate versus occupancy trade off there, but I'm just a little surprised by the occupancy of that portfolio. Can you just update us on the outlook, you know, maybe for occupancy recovery in those properties since Storage West was in the mid-90% range 18 months ago?

Chris Marr (President and CEO)

Yeah. You're spot on. I mean, you're talking about assets in those markets. I think I responded to a previous call in, you know, some of the markets that saw a significant inflow of population and movement. We were very, very aggressive on rate, continued to be reasonably aggressive on rate as we went through the first quarter. Saw a giveback in terms of some of that occupancy. As we go forward here, again, we'll see how demand trends work in those markets, you know, April through July and try to balance out, you know, where we are on the rate side versus where we are on the occupancy. During the quarter, we absolutely were focused in on rate, and we're willing to sacrifice some of the occupancy as a result.

Jonathan Hughes (Managing Director)

Okay. Was the benefit from, you know, those new stores in the pool, I mean, was that in line with the expectations at the start of the year or a surprise to the upside or downside?

Chris Marr (President and CEO)

Very much in line with the expectation at the start of the year.

Jonathan Hughes (Managing Director)

Okay. Then on capital allocation, you mentioned the lack of high-quality acquisition opportunities out there and talked about that in Kevin's question in your prepared remarks. You know, the balance sheet's in great shape, leverage near the lower end of, I think, the 4 to 5 times target range. Same-store NOI growth is driving organic de-levering, and the stock today is trading, you know, 10% below consensus NAV and a high 5% implied cap rate. My question is, if acquisition opportunities don't come to market as hoped and that discounted valuation dynamic continues? For the next six or twelve months, would the board consider repurchasing shares given you have the leverage capacity?

Chris Marr (President and CEO)

Yeah, I think we have an in-place program to be able to repurchase shares. We have not utilized that program yet. I think as we've discussed before, I think there is certainly a time and a place to consider share repurchase program. I think for us it is, you know, some of the ingredients that you touched on are there. I think it's the duration for that dislocation. We remain optimistic that we'll be able to put our high-quality balance sheet to work to find those external growth opportunities. If we were in the environment and it were exacerbated and it were for a longer period of time, then of course, that's something that we would look at and consider.

Jonathan Hughes (Managing Director)

Okay. All right, thanks for the time. Appreciate it.

Chris Marr (President and CEO)

Thank you.

Operator (participant)

Our next question comes from Jeff Spector of Bank of America. Jeff, your line is open. Please proceed.

Jeff Spector (Managing Director)

Great. Thank you. Chris, my first question is just on consolidation in the industry and how you're thinking about that in terms of Cube strategy or just the industry as a whole, third-party management. What type of impacts do you expect or are really minimal on your portfolio?

Chris Marr (President and CEO)

I'm sorry, Jeff. Could you try that one again so I'm making sure I'm answering the specific question?

Jeff Spector (Managing Director)

Yes. Basically, I was just asking about given, you know, the consolidation in the industry, you know, from your seat, how are you thinking about that in terms of your strategy? You know, does it change anything on third-party management side? Or given your scale in your markets, there's really minimal impact on your business?

Chris Marr (President and CEO)

I think when we think about just consolidation in general, you know, again, we can look at that from a whole bunch of different angles, because certainly today there's, you know, more assets under third-party management than ever. There's certainly no shortage of third-party management providers, both public and private. You know, I think when you just think about consolidation or scale or however you wanna term it, you know, I think there absolutely are, you know, benefits. Again, I think over time, when you think about Cube, you know, our strong density and scale within our markets and our focus on building a high-quality portfolio in those top-quality markets and our coverage within those markets, you know, the scale and brand recognition that we have on a sub-market level is quite significant.

I think that's where it's, you know, most impactful. I think in terms of, you know, opportunities for us, I certainly think with fewer choices, you know, especially on the third party side, that could create a nice opportunity for us to grow that program at perhaps a rate faster than we would have anticipated, you know, as we entered 2023.

Jeff Spector (Managing Director)

Great. Thank you. Then I just wanted to clarify kind of the, you know, thinking about the second half of the year and the initial guidance. You know, again, it sounds like in April, things have normalized again. We've been discussing, you know, the tougher comps or decel into the second half. I can't remember, you know, when you provide the initial guidance, did you say that the bottom half did reflect recession or you really didn't comment on that?

Chris Marr (President and CEO)

No, didn't really tie top or bottom necessarily directly to macroeconomic conditions. I think it's a range of outcomes, really based on our expectation of consumer behavior and then how that consumer behavior translates into customers or self-storage, you know, across, you know, across however the economy may move here, and how it impacts movement, basically. Nothing tied, you know, directly to one specific economic outcome.

Jeff Spector (Managing Director)

Okay, thank you.

Operator (participant)

Thank you. We now have a follow-up from Smedes Rose. Smedes, your line is open. Please go ahead.

Nick Joseph (Managing Director)

Thank you. This is actually Nick Joseph here with Smedes. Appreciate you taking the call at the end. There was a question earlier on the impact of kind of regional banking and lending broadly on maybe acquisition opportunities. Just curious, kind of similar idea, but on supply, and new starts and how you'd expect those to trend, maybe given the contraction in the lending environment.

Chris Marr (President and CEO)

Certainly what's going on in the lending environment directly impacts self-storage developers and how they think about, you know, how they think about starts or how they think about projects going forward. I think you've got obviously the tailwind to new development being continued strong fundamentals within self-storage. I think again, the headwind against that is cost, raw material and labor, delays with supply chain and raw materials, and certainly cost of capital, particularly, you know, the lending at the regional and local level. While we've seen, you know, issues with certain banks and you've seen the larger money center banks talk about overall commercial real estate exposure, I think there are other product types that are causing a lot of problems for lenders. Self-storage is not one of them.

I think it's a healthy balance. I think it certainly puts some, you know, some headwinds in front of development. I think as a result, you know, what we're seeing in the numbers and our expectation continues to believe that new supply will continue to slow in terms of deliveries here over, you know, 24 and 25, given where things are today.

Nick Joseph (Managing Director)

Thank you very much.

Operator (participant)

Thank you. Our final question of the day comes from Juan Sanabria of BMO Capital Markets. It's a follow-up question.

Juan Sanabria (Managing Director)

Thanks for the time, guys. Just on one of the points that was raised at the top of the Q&A on the net effective in-place rates for existing customers that ticked down sequentially, I guess how should we think about that for the balance of the year in terms of what's assumed in guidance from a modeling perspective? Is that gonna now re-accelerate and tick up, or should we expect that to continue to moderate, or just how are you guys modeling that from your perspective?

Chris Marr (President and CEO)

Yeah. We expect rates for the new customer to be at lower levels. I'm sorry, Was it new customer or existing customer that you were asking about?

Juan Sanabria (Managing Director)

Existing. The in-place rent per square foot that had ticked down sequentially this quarter, just how that should evolve for the balance of the year as per your guidance or assumptions and guidance?

Chris Marr (President and CEO)

Yeah. The existing, the in-place should grow, as it normally does seasonally here throughout the balance of the year.

Juan Sanabria (Managing Director)

Thank you.

Chris Marr (President and CEO)

You're welcome.

Operator (participant)

Thank you. That's all the questions we have time for. I'll hand back over to Chris Marr for any final remarks.

Chris Marr (President and CEO)

Thank you. Thanks for listening. You know, our portfolio construct, we believe, really shines in the types of markets that we're seeing and the type of economy that we're seeing right now in the United States. Really thrilled with the performance, particularly of our urban portfolio. We think that customer is and the customer base there really performs well in this climate, we are, you know, we are looking forward to speaking to you again when we end the second quarter. Thank you and have a great weekend.

Operator (participant)

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your line.