Good morning, and welcome to the CubeSmart Third Quarter 2020 Earnings Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Josh Schutzer, Senior Director, Finance. Please go ahead.
Thank you. Hello, everyone. Good morning from Malvern, Pennsylvania. Welcome to CubeSmart's Third Quarter 2020 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 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 third quarter financial supplement posted on the company's website at www.cubesmart.com. I will now turn the call over to Chris.
Thanks, Josh. Good morning, everyone. The self-storage industry provides a convenient and efficient solution to a wide range of our customers' requirements and as such has proven yet again to be an exceptionally resilient business. At CubeSmart, coming off significant pandemic-related challenges in the second quarter, our best-in-class portfolio demonstrated a strong recovery in the third quarter, and that positive momentum continues into November. Our physical occupancy remains at record highs with the same store occupancy gap to last year expanding and ending October at a positive 211 basis points. Demand from high-quality customers remains extremely solid, and our average length of stay continues to elongate. Strong consumer demand, lower vacates, and elevated occupancies are being reflected in gains in year-over-year average offered net effective rates.
The percentage rate gap expansion to last year continued building throughout the third quarter across our major markets as we end October, the percentage gap to last year ranges from the low teens to the mid-20%s. Our New York portfolio had a very solid quarter, posting occupancy and revenue growth above our overall same-store average, and that strength has accelerated into the fourth quarter. Strong demand trends have helped accelerate the lease-up of recently opened stores in many markets, helping to stabilize the operating environment. The supply outlook continues to gradually slow as the number of properties in the pipeline declines. After a pause, our investment activity also picked up steam during the quarter.
In addition to our previously announced agreement to acquire eight of the highest quality stores in Brooklyn, the Bronx, and Queens from Storage Deluxe, we also noted in our earnings release that we have nine additional properties located in Florida, Long Island, Nevada, and Texas under contract, and we expect to close by year-end. We continue to be pleased with the positive impact our technology initiatives are having on our operating results. On average, approximately 30% of our rentals are coming through SmartRental, our quick, convenient, contact-free rental system. We introduced our CubeSmart Mobile App during the quarter, an industry-leading tool that provides our customers the ability to access their gate codes, pay their bills, manage their settings, and receive important notifications, all in the palm of their hands. In summary, the self-storage industry continues to demonstrate its resilience.
At CubeSmart, we are proud to be able to offer innovative solutions that serve our customers in the manner they find most comfortable. My continued thanks and appreciation to our over 3,000 teammates who strive to provide those innovative customer solutions with a spirit of genuine care. I will turn the call over to Tim Martin, our Chief Financial Officer, for his comments. Tim?
Thanks, Chris, and thank you to everyone on the call for your continued interest and support. Picking up on Chris's comments, operating fundamentals in the self-storage sector have rebounded in a pretty big way. Demand for our product is strong, as evidenced by historically high levels of physical occupancy and solid pricing power. Overall for the quarter, we reported FFO per share of $0.44, same-store revenue growth of 0.1%, same-store expense growth of 4.2%, and same-store NOI growth of -1.6%. There are some encouraging trend lines in those numbers.
Same-store revenue growth for our portfolio was 1.7% in the pre-COVID first quarter of the year, followed by a 2.2% decline in the most heavily COVID-impacted second quarter. Our 0.1% growth in the third quarter is a 230 basis point improvement sequentially, driven by our ability to largely resume normal operating practices in areas like lien sales and existing customer rate increases throughout the quarter, combined with a considerably stronger consumer demand on a seasonal basis. All of these signs are positive and point to continued strength heading into the fourth quarter from a same-store revenue growth perspective. Our teammates have been fantastic, as Chris mentioned. We were quick to adjust to the challenges presented to our business from the pandemic. Long-standing practices and policies had to be adjusted quickly to adapt. Pricing and marketing strategies had to adapt.
How we attract customers and provide excellent customer service had to adapt. We quickly developed and rolled out new technologies with our online SmartRental program and our CubeSmart Mobile App. Just as importantly, as things shifted in a more positive direction, we quickly pivoted again. Our systems were quick to identify changing trends, and we adjusted pricing upward accordingly. We were swift in resuming those traditional practices of customer rate increases and lien sales where appropriate. Sometimes it takes some disruption and chaos for these things to become more evident. We have a strong team, sophisticated systems, and a very high-quality portfolio. When combined with a nimble approach, I believe has led to some real outperformance on a relative basis over the last six months.
Collections and accounts receivable have returned to normal historical levels, again, speak to the quality of the cash flows in our sector, the quality of the self-storage customer, and the high levels of customer diversification in our business. In the third quarter, from an external growth perspective, we added 37 new stores through our third-party management platform. While we didn't close on any acquisitions, we were certainly very busy getting a significant amount of transactions lined up for closing in the fourth quarter. We have under contract and expect to close by year-end the acquisition of 17 stores for an aggregate investment of $643.9 million. Part of that total is the eight-property Storage Deluxe transaction we announced early last week. We provided a good bit of detail on that transaction in an investor presentation that can be found on our website.
Of the $540 million purchase price, $201.7 million will be paid in cash, $154.6 million through the assumption of existing debt, and notably, $183.7 million in the form of operating partnership units. We expect to close that transaction in two pieces during the month of December. Outside of that transaction, we have nine additional stores under contract, and those stores are located in Florida, Texas, Nevada, and on Long Island. We were also busy after quarter end on the balance sheet. On October 6th, we closed a $450 million unsecured bond issue with a long 10-year term maturing in 2031 and 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 crea te capacity to support external growth.
On the opportunistic side, we used proceeds to support the redemption of our debut $250 million bond offering from back in 2012 that had a coupon of 4.8%. That redemption was completed on October 30th and included a $17.6 million make-whole payment. The balance of the proceeds were used to repay amounts drawn on our revolver and provide funding for much of the external growth we've talked about. We've been busy on the external growth and balance sheet fronts. We remain very healthy and are well-positioned to fund our near and medium-term commitments, and we also have plenty of capacity, financial flexibility, and access to attractive capital to support the pursuit of additional external growth opportunities. Thanks again for taking the time to join us for today's call. At this point, Hailey, let's open up the call for some questions.
We will now begin the question-and-answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up the handset before pressing the keys. To withdraw your question, please press star then two. Our first question today comes from Juan Sanabria with BMO Capital.
Hi. Good morning. Thanks for the time. Just hoping you could talk a little bit about street rate trends and how those are trending throughout the quarter and into September, and if you can give maybe some color on how New York specifically is trending within that.
Sure. This is Chris. Juan, good morning. I'll take that question. If you think about average asking net effective rents throughout the quarter, the average for the quarter was + 9.3% on a year-over-year basis same store. That number really built throughout the quarter. Heading September, we were about + 15%. As we sit here in October, that's about + 20%, 19.6 to be exact. If you're looking in New York City, specifically, the New York City assets in Brooklyn, the Bronx, and Queens ran a bit better than those numbers that I just referred to. As we sit here today in the city, we're up about 20%, 20.3% to be exact, and in the suburbs, slightly higher than that
Very effective. Thank you. Clearly everybody's been more bulled up on the acquisition side. You guys did the Storage Deluxe transaction. Congrats on that. If you could talk a little bit more broadly about what you're seeing kind of going forward into the fourth quarter, beyond what you've already gotten into 2021 about just the quality of the pipeline. Is it more stabilized assets, development or lease-up assets? Thoughts on cap rates.
Hey, Juan. It's Tim. Thanks for the question. Yes, as it relates to the fourth quarter, we're pretty filled up here given where we are on the calendar. What we have announced is under contract is likely to be where we land. Not enough time really to get a whole lot, much more queued up for the fourth quarter. I think big picture, you've seen a combination of things. You have a traditionally busier time of year coming out of the summer months when folks tend to want to put together listings and be transacting from a seller's point of view. That's nothing new. I think you combine that here with the improvement and the stability that you've seen from an operating fundamental standpoint. I think that's really been part of what's driven the flurry of activity here that we've seen, not only for us, but for others as well.
Of course, you have pretty low costs, certainly with debt capital available which is, I think, spurring on some of the energy from the buyer side of the equation. From a cap rate perspective, we haven't seen a whole lot of movement. I think the Simply transaction and obviously the acquirer of that being new to the space, I think certainly is going to support cap rates remaining where they are, not being pushed further down. I think the product, on a relative basis to other product types, remains incredibly attractive, which will continue to attract capital into our sector. I think those trends are likely to continue into the early part of 2021. I think it's a good time to be in the sector. I think others want to be in the sector.
I think people are generally pretty well-capitalized, and I think visibility into the performance of the product is much better than it was three to six months ago. I think that's going to be conducive to additional transactions and certainly a lot of interest.
Sounds good. Thanks.
Our next question comes from Todd Thomas with KeyBanc Capital Markets.
Hi, thanks. Good morning. First question on the Storage Deluxe deal. What would you expect the overall yield to be in 2021?
Yeah. What we've been talking about is that transaction for us, we believe, A, we're really excited about it. From a yield perspective, we looked at our underwriting is targeting what we believe to be a market cap rate, which is in the mid-fours. That mid-fours is where we would expect to be at stabilization. We're not there in 2021. We have four of the assets are in some stage of lease up. Two are not there from a physical occupancy perspective. Two others of the eight are not fully stabilized from a rate perspective. We're not at a stabilized yield in 2021 and aren't quite there in 2022 either. We're really looking at that stabilization in our underwriting occurring in 2023.
I would characterize 2021 and 2022 to be a yield that gets us to the point where we're roughly FFO neutral in the early stages here. From a strategic standpoint, from how it fits nicely into the rest of the portfolio, obviously we've had the benefit of operating the stores as we've been managing them since they opened. To bring those on balance sheet and to really round out our market-leading position in Queens, Bronx, and Brooklyn, we're incredibly excited about really just seeing the end of something for us that started 10 years ago.
All right. That's helpful. Can you talk about the funding plan for investments? You've historically funded investments 2/3 equity, one-third debt. Looks like a little more debt funding for the Storage Deluxe deal and what's under contract. Is that still the right funding mix? Is that the right way to think about capitalizing these investments, or are you contemplating additional equity to fund these investments and what else might be in the pipeline?
Yeah. Appreciate that. The overall, I mean, we think about our balance sheet in a very consistent way from what you've seen from us for a very long period of time. We are a BBB, Baa2-rated company, and we think about managing the balance sheet within the metrics that are appropriate for that investment-grade credit rating. From a funding on how we're going to close the transactions, we've put that in kind of a sources and uses way in our disclosures. At closing, for instance, in the Deluxe transaction, I indicated that we need right around $200 million of cash to close. We've obviously built up a fair amount of capacity in our credit metrics that we can fluctuate leverage levels up a little bit, down a little bit, and we're not tied in the transactions.
While they're sizable transactions and we're excited about it, they're not sizable to the point where they're going to meaningfully have any movement on any of our balance sheet metrics. To manage the balance sheet in the manner that you've seen from us consistently. In the short term, we have a tremendous amount of flexibility as to how and when we use leverage, and the time period in which we ultimately get to the credit metrics that we're comfortable with. Ideally, for us, we would still have credit metrics that are on the conservative side of the ranges for our rating, so that we are in a position in the future at some point to take advantage of transactions, despite perhaps a short-term disconnect in equity or debt valuations and costs of capital.
Okay. Just one other question here on the development pipeline. You added Valley Stream this quarter. It's been a few quarters, I think, since you've added a new development property. Are you seeing more opportunities there? Should we expect to see additional ground-up developments added to the pipeline? Are you sensing that development activity is just picking up again a little bit more broadly, just given the rebound we've seen here in fundamentals?
Hey, Todd, it's Chris. I think to the last part of your question, not yet. Fundamentals rebounded pretty quickly, incredibly resilient business. There are a lot of other elements that go into making decisions to put a shovel in the ground. Again, have not seen really any change in behavior from the markets that we observe and then from our feedback from our third-party owners. From our own perspective, opportunities continue to be more challenging to find in terms of areas for us that make sense that we get comfortable around the costs and the rents, and the yields that are produced from there. I think it will be more likely than not that the volume that we have under construction continues to shrink as opposed to expanding.
Okay. Thank you.
Thanks, Todd.
Our next question comes from Smedes Rose with Citigroup.
Hi. I just wanted to ask you in the quarter, what we're hearing from other companies is that move-out activity was relatively subdued and move-in activity picked up. I was wondering if you saw something similar, and maybe what are your thoughts about move-out activity returning to more normalized levels? It doesn't sound like you're seeing that, but would you expect that, or do you think maybe that's not an issue?
Smedes, this is Chris. The move-out activity for us has been lower. For example, in October, vacates were down about 4% relative to October of last year. I think the reality of our business is we cannot force somebody to stay once they have moved in. However, I think we have all discovered that it is an incredibly sticky business. Once one of our customers finds us and moves in and starts to appreciate the joy of having a less crowded home environment, how self-storage can really assist in helping them with their life's needs, they tend to stay. At some point, whether we've seen a real shift and the normal patterns don't revert back to sort of the traditional mean, don't know at this point.
The customer we have is in some form of movement, many of them just the traditional forms of movement that we've seen in the past, some of them pandemic-related movement, and I think we're going to have to see how all of this plays out. I think what we know is the customer who's once in is very sticky.
Okay. You mentioned that the length of stay was increasing. What is the average length now? I guess maybe you can put some context around it of maybe where it was a year ago or just kind of what have you seen?
Sure. It's increasing by days, not by months. Overall our average length of stay continues to be in that right around 14 months, and I would say that that's probably elongated out meaningfully days over the course of 2020.
Okay. Just the other last thing I wanted to ask you is, with your pro forma exposure to N.Y. moving up here, is there any kind of upward limit, I guess, of how much exposure to N.Y. City that you would want to have? Is it more just dependent if you are able to find deals that you like?
Yeah. Again, we really do look at the markets that we're in as three distinct markets, and then within those markets, multiple distinct sub-markets. The Bronx, Brooklyn, and Queens. To some extent, we own an asset and manage assets in Staten Island, and we own an asset in Manhattan. The predominant exposure is in the three larger outer boroughs, each of which is unique and each of which has unique sub-markets within it. There's no set parameter around it. We have the highest quality portfolio. We have a very significant market share. There are other stores in those markets. The reality of zoning in the boroughs is that stores tend to be clustered. We would look at any future opportunities. Do they fill in a sub-market for us?
These eight that were under contract really do complement or expose us to sub-markets that we had not been in prior. We'll continue to look at any of those opportunities that may come up. It's really not something at this stage that we would be aggressively going after. It would be, are there things that come to us that make sense from a portfolio management perspective? Obviously, we have nine properties under contract in areas outside of New York City, and over time. Now, obviously, the opportunity set is significantly greater in markets outside of the three boroughs of New York MSA, and we'll continue to expand in those other parts of the country.
Great. Okay. Thank you, guys.
Thanks, Pete.
If you have any further questions, please press star and then one to join our queue. Our next question comes from Hong Zhang with JPMorgan.
Hey, guys. I was wondering if you have a general sense of how much of your occupancy gains have been driven by just direct COVID disruption, such as work from home.
Yeah. First, it's impossible to break it down into that slide. We have consumers coming to us for so many different reasons that I would think even if you tried to characterize this as something that is COVID-related, COVID-related could be, I'm moving, I need extra space for a home office. I need to free up room for all kinds of different things. We certainly don't have anybody signing up or at least saying, I am a COVID-related customer. It's a lot of anecdotal information. I think what a pandemic does or has done here is to demonstrate again that we have a product that fills a consumer's need for a temporary and safe place to store their belongings. This is just one of many things that happen over time that creates demand for our product type.
Got it. I guess you had people move in during the middle of lockdowns where rates were down double digits, and you also paused rent increases during that time as well. Do you have a sense of how long it would take to move those people back to more market rents?
We reengaged, where feasible, the rate increase process to all of our customers, and that was all happening by September 30. If you think about those who moved in at probably the lowest point, which would have been in April, those customers will be eligible for a rate increase six months later and then 12 months after that. If you think about the rates, and where rates dipped in April, you would be ± that second rate increase. At month 18, you would be getting them kind of back up to par. If you look at where we are today, it would probably take another two rate increases to get them to where we are in terms of today's rates.
Got it. Thank you.
Thanks so much.
This concludes our question- and- answer session. I would like to turn the call back over to Chris Marr for any closing remarks.
Okay. Thanks, everybody, for participating. I know it's been a long earnings season. Self-storage particularly ended it on a high note, I hope, for all of you, and CubeSmart's performance in the quarter. I'm confident as we go into the fourth quarter, we'll continue to be very good. Thank you all for listening. Stay safe, and look forward to talking to you next year.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.