Thad Interviews Guy Middlebrooks VP CubeSmart

That is correct for CubeSmart. You know, one of the largest operators of self-storage in the country, really well-respected third-party management.

Well, thank you. I appreciate it. Those are fine compliments. It's a pleasure. We're in a fun business and a fun industry, I guess we'll talk about that a little bit. So yeah, I'm happy to join you, and I appreciate that compliment.

Yeah, I'm happy to do that, and I love reminiscing about that. At first, I'll mention CubeSmart. Those on the call may or may not know, we provide third-party management services. We manage approximately 750 storage facilities around the country for other owners like Legacy and other companies, other investors and developers. And then we own approximately 650 storage facilities as part of the publicly traded REIT CubeSmart. So we're the third largest self-storage operator in the country. Our headquarters and where I live is in Pennsylvania, just outside of Philadelphia. We operate in I believe approximately 30 states around the country. That's just a high level of CubeSmart. My career here, I'm just starting my 18th year at CubeSmart and in self-storage. It's the only company in storage that I've worked at. Before that, I had a good 20-year career at Winn-Dixie supermarkets down in Jacksonville, Florida, and did everything from bag boy in high school all the way up to a regional director, store manager, district manager in that business. When I was ready to make a change, our company CubeSmart, under a different brand at the time, had gone public and was growing rapidly, and they were aggressively looking for experienced retail multi-unit managers. They didn't have to know self-storage but needed to know how to run a business and to hire, staff, train, and do the operator, profit and loss, marketing, and so forth. So I ended up finding a new career, and I've been here at this company ever since. Just entering my 18th year. I started as a district manager in Jacksonville, Florida, moved up pretty quickly, and was moved to the corporate office here in Pennsylvania. I was a director of operations, Vice President of Operations, but I've been in my current role overseeing our third party management platform, working with developers and investors, for 10 years now. So I found my niche in this role. Time has sure flown.

Yeah, you make a good point. The approximately 750 stores that we manage, I believe we have about 220 ownership groups. So some have even more than a hundred stores for one owner, quite a few in that 30, 40, 50 range, or two, three, or four, and then a lot of one-store-only owners that we manage for. So everything in between. It's definitely a relationship business. Anyone that's been in storage knows it's competitive, but it's a friendly industry in many ways. People are happy to help each other because typically when we do that, it means success for everyone. So 220 different owners. When you think about why CubeSmart or others provide third-party management services, it's not easy because we're working with so many different ownership groups, many of them have different opinions on things and different priorities depending on their investment. But it's more than just an income stream. We make money and revenue doing it, but it allows us to grow store count as a company, which gives us some scale when it comes to marketing and other expense negotiating. From an internal cultural perspective, it allows us to promote people and hire more people, promote them from within, create new district managers, and grow our call center, our national sales center. As we grow, we're able to grow and develop others within the company, and that's something we see as a positive. But the relationships, I don't want to quote a number, but it's over a billion dollars in the last 10 years that we have acquired self-storage facilities directly from the owners that we manage for. So from a relationship pipeline, it doesn't mean that owners don't go out to market or hire a broker sometimes, more often than not they do. But still, those relationships do matter when it comes to the acquisition pipeline.

It is hard to put a percentage on there. Many times we'll get a first phone call from an owner who's considering selling, but they're still going to take it to the market and go out there, and we may or may not be the buyer. It's hard to put a number on that, but I would say because of the relationships we build with our owners, we get that first call pretty often. Then it's just a matter of does it make sense and are we going to be the highest bidder. So it's fairly frequent.

CubeSmart has a great reputation for doing what we say we're going to do when it comes to acquisitions and investments. Managing the store, we have access to all of the reporting. We can ask our district manager about the store, it's easy to go visit. So it puts us in a very good position, especially if moving quickly is important in that particular opportunity, because we have all of that insight. There's usually still a process though. Brokers have their process that they go through. But if it's a direct deal, we are able to move probably much quicker than most could because we already managed the store.

Yes, that's right.

That's right, yep. You've done your homework.

Well, I think like any business, whether it's real estate or self-storage or anywhere else, anytime you face a recession, there's a tightening of the belt. So operationally, we absolutely looked at every expense, looked at our org chart, looked at how we operated, and where we could cut at the store level and corporate level. So we absolutely addressed that and made some changes like most any other industry would do. What was interesting back then, and if you look back at historical charts, you can absolutely see a dip in occupancy and a dip in NOI and revenue for a short period of time during the recession. The dip was much less severe than other real estate types for sure, and it was much shorter-lived. What we saw back then was interesting. You have some customers who are using storage for their toys, for their extra things. When it comes time to cut back on monthly expenses, some of those customers cut back and vacated, moving their things back into the garage or to the house. But at the same time, there were downsizings and foreclosures and other housing-related issues that caused people to need self-storage when they wouldn't have otherwise. So we did see a customer base of folks who were in a bit of distress, and they moved maybe back home with their parents if they're younger, maybe bought a smaller place, maybe moved into an apartment, and it actually created demand for storage. That helped balance out some of the folks that vacated to cut back on their expenses. Through it all, the industry as a whole and CubeSmart in particular came through it relative to a lot of other places, safe to say a little bit less scalded than some other asset classes, especially in real estate. I would say so. I think one of the things that we absolutely saw post that recession was during that time there was very little development. Lending slowed down, developers weren't able to get the deals done. So coming out of that recession, as the economy improved and things seemed to normalize, you saw self-storage facilities, the population continued to grow, people use self-storage, so you saw occupancies and rents grow nicely coming out of the recession, which set up that development cycle after that. Not to get too far ahead, but coming out of it, there were some benefits to the industry with the lack of new supply deliveries during that time.

Yeah, we've seen, well, we're coming out of a pandemic that from a results perspective helped our industry. When people began working from home instead of the office, folks that would have normally not needed storage and vacated, they didn't. And that allowed much of that new supply that delivered during that peak season that you mentioned to finish leasing up. Rates, or when you're full and have high occupancy, you're able to push rates. So rates went up in a way that we have never really seen before. We didn't know what was going to happen heading into that pandemic, but it actually helped benefit some of those stores that were open late in that development cycle that maybe weren't leasing up as quickly as we would want. So we saw that. But it's interesting now. I think savvy developers that know how to find good sites in good growth locations where it's undersupplied will still be able to find those sites, and that makes sense. But we have seen a bit of a slowdown in just recent months, I would say most likely it's interest rate related or construction cost related. But that's good for those developers who are active no matter what and are out there looking, because I think their opportunities will pop up with fewer out there being as active.

Well, when you think back to March of 2020 when we all realized we're definitely in a pandemic situation, there's so much uncertainty because we've never been through anything like that. But it did not take long, just a matter of weeks, not months, for our industry to be deemed as needed and required. Because of who we do business with, we're storing with emergency workers, plumbers, electricians, vendors, pharmaceutical representatives, folks that need to be out there doing their job. So once we realized that we're going to be okay and we're going to be able to stay open, then we also started seeing very quickly that folks weren't vacating like normal. They had slowed down. There was a slow time, I can't say for sure, but somewhere about four to six weeks or so when COVID had really hit, that people were afraid or concerned to even go out of the house. That's back when people were wiping down their groceries when they got back from the supermarket. So there was a time where things slowed down. But once we were deemed essential and we knew we could stay open in every state, things started turning a different direction pretty quickly after that.

Hard for me to comment on stock price, there's so many variables.

I think initially, I don't know that anyone out there could have ever predicted how the pandemic would affect the self-storage business in the positive way that it did. We watch results so closely, and it's real time. Our reporting and the way we're able to make changes and pivot, it's very impressive. When we see a trend, it absolutely advanced our necessity to roll out our contactless rental, smart rental, and many of the other companies did something similar. So customers could find a storage unit online, select it, select the location, the size, sign up for the unit, sign their lease, enroll in their insurance, and actually get an email with instructions on how to get into the property, all of that being done in a contactless manner. The whole pandemic early on pushed us and others to really move quickly. Fortunately, we had already been contemplating having contactless rental in the future, it just sped up the whole process. But hard to say that anyone could have predicted how it worked out for us.

I would say that the public companies in the next several weeks or so will be releasing their Q4 and year ending results. Some of those companies may even publish guidance for 2023. So I would say we need to watch for that from the public companies, and that'll give us a really good idea of what happened towards the end of the year. I think what I am able to say and what we've talked about is we saw a bit of a normalization, if that's a word, of vacates in the fall. If you think back historically, self-storage is seasonal. You do have a peak season of spring and summer. Typically peak occupancy is around August 1st, and then as students start returning to school and families finish their moves and their relocations, you start to see some vacates in August and September. Historically, you then see occupancy drop from that peak and then level out by November or so through the winter, and then it starts all over again in the spring. I believe it seems like we're going to see that more normal trend versus back in 2020 and 2021, when all the companies reported record high occupancy and in some cases there was no occupancy loss in the fall at the end of the summer because of strong demand and muted vacates. But I would suggest we'll see some normalization after the two years of those very different results that we saw.

Well, it's interesting. When I started, one of our goals was to be at 88% occupancy. That was the goal. Historically over the years, that was considered fully stabilized. As more of the general public continues or starts to use self-storage, we did see during that 2015-16, occupancy on same store stabilized stores year over year get into that 90, 91, 92%. But then COVID, the average occupancies were somewhere in the mid 90s. So we saw that bump. If things went back to pre-COVID, I would say they'd go back into that 92%, 90 to 92% average occupancy, with some stores peaking higher than that during the summer and then dropping off.

Yeah, the business has changed a lot. The way the facilities look from the original, like you said, long drive aisles with garage door after garage door and gravel or maybe paved concrete, to now where you have multi-story beautiful facilities with elevators, you have climate controlled product, not just non-climate. So that's been an evolution. When you think about why that would happen, some of it is just purely customer demand. You have certain belongings like your leather furniture or your piece of art or your pictures and photos, you have to put it in climate control. You have concerns otherwise about dirt, dust, humidity, and so forth. So just what people store has changed. Also, municipalities wanting self-storage to look better and look more like other buildings, so when getting approvals. But then if you want a prime piece of land with land costs over the years going up, and you still want to be on Main and Main, sometimes the only way to make the deal work and make it pencil out is you have to get a smaller parcel and go up to get the size that you need and the amount of square footage that you want to build. You can't afford to be on Main and Main and build all single story, it takes too much land and acreage. So it's absolutely changed. It's always good when you see a facility that has both some level of climate controlled space and some non-climate, then you're able to serve two different customers' needs. If you only have one, you're going to be focused just on that one customer's needs. Some facilities even have room for some parking in the rear, which gives you another revenue stream. It all depends on the size of the parcel and what you can get approved.

Absolutely. And in different parts of the country, depending on climate and humidity and weather, you would want a different unit mix depending on where you're located. In New York City, obviously multi-story climate controlled, small average size unit. But out in the suburbs, some non-climate and some climate, and some larger size units make sense.

Yeah, I would say, and I say this in a positive way, it may come across otherwise, we all need to stay in our lane. If you hire a management company that's a professional, proven management company, trust them to manage the business. That's why you hired them. Most likely, if you're a developer, you're a construction guy, you're a feasibility expert, you're good at getting approvals and entitlements, and you're great at developing and working with architects and engineers. It doesn't mean you're going to be an expert running day-to-day self-storage. It's actually a more complicated business than most realize. I think folks will look at a self-storage facility and think how easy is this, it's three metal walls and a concrete floor and a garage door, and you just collect the rent. But there are absolutely complications. There's a lot of sophistication in today's self-storage business, and operators are very smart in how they do their business. There's also legal aspects, delinquency, selling a customer's goods at an auction if they haven't paid, a lot of risk there. So you have to trust your manager. Find a manager who's somewhat like-minded and spend a lot of time vetting the relationship before you make the decision. That way, when the store does open up, you're going to be on the same page on how things should go. So those are just some pieces of advice. There are some owners or developers or investors that are probably best suited to self-manage because personality-wise they need to be very involved and they have strong opinions. We always try to find out ahead of time if that's going to be the situation and make recommendations accordingly. Some will value the manager and the experience that folks like CubeSmart and others have. It's very interesting. And not to change the subject, it seems like every owner has a little bit of different take on what their end goal is, whether it's to hold long term, to sell sooner than later, some want to see occupancy growth as fast as possible so they can show their investors that they picked a great site, even if it's at the cost of rent rates or promotions and giveaways. Some would much rather see the higher rent rates even if it's a little slower lease up and fewer promotions. Some are more focused on cash flowing and getting to break even, some are most concerned about covering their debt. So every owner seems to have different priorities, and a good management company will work with that owner to figure out what those priorities are and do our best to help get you there.

No, I think we've seen in previous cycles. During the last big cycle, when the deliveries were hitting in 15, 16, 17, and 18, there were some markets that prior to that were undersupplied. They had not had much new supply, rent rates were very high, occupancies were very high. But a lot of developers went in and found locations, and they all seemed to deliver not only close to each other physically, but from a time period they all opened within months of each other. We absolutely saw what happens to rent rates and occupancies when too much gets built at one time. Many developers learned a little lesson there, and we all did. So when you think about the risk of self-storage, oversupply is the big risk. There are only so many people that need self-storage in a given day, so you have to do your homework and understand what's happening in that market and how many other starts are out there. So there is that piece. The biggest risk I would say is oversupply in a particular market. The unique thing about storage is it is a three mile radius business. Approximately 80% of our customers at each storage facility live within about three miles. The other 20% are probably within five miles. The higher the population density, the that radius shrinks. In New York City, you may have 80% in a mile and a half. In more rural or suburban areas, 80% maybe in four miles or five. But that three mile radius rule really is accurate because we're able to take our rent roll at our facilities and map out where they live. So there can be a market with a lot of supply, but there may be a pocket in that particular market or MSA that has not had any supply, and it's an opportunity. But back to development, we for the most part rely on developers that know their local markets. They know the local governments and how to get through the process and get approvals. We do some expansions at some of our current existing facilities, but typically on development projects where we invest, we do it through another developer who's an expert at developing.

The industry for many years has looked at how much existing rentable square feet per capita is in place in a three mile radius or whatever that radius is. I would suggest that it's important to understand that and to use that as one of your criteria. But there are a lot of other things, not only population density, what percentage of renters versus homeowners, what are the incomes. Most importantly, are the existing self-storage facilities full year round? Are they highly occupied, and what are their rent rates? Not just today's rates, but 12-month average or 24 month rolling average rent rate. Those are the things that are also very important. Then understanding the supply that may be coming, whether you use software and pay for one of the reports, whether you have a consultant that does a market study, however you track it, maybe you go to the local building office and just ask if anyone else is planning. But understanding what's coming is really, really important.

Every market's different, but I've been watching these lease ups and these new openings for quite a few years now. If there can be a full year or so between openings, it really does help because you'll gain the most occupancy during your lease up during year one. You start at zero, you have no vacates, so all your rentals become net positive rentals. But by the time you're open six, eight months, a year or two years, folks that have moved in no longer need the storage, so they're moving out. It makes it harder to grow that last 50 or 40% of occupancy. So when you have another competitor that's also opened up fairly close by that you compete with at the same time, that just puts even more pressure on achieving those rentals that you need to get that first year of success.

Yeah, we've talked about most of the main important things. So supply, what is the right brand, who is the right manager. Every market's a little bit different. Many developers who have multiple sites, like your group, you will use different managers because it's not always one manager fits all opportunities. So I think being open to figuring that out. One thing that I will be very frank with you, you don't necessarily want multiple stores of the same brand on the same website too close together because they can compete with each other, and that's a concern. So when considering a manager, I always say call me or my team because we'll tell you the truth. Is it best that this is a CubeSmart, or is it probably not in the best interest of the developer that it's a CubeSmart? You have to have some folks that you can trust to have those conversations. When you think about opportunities, and this is more personal, I believe that getting greedy can be dangerous. Even when highly occupied, I think we ought to be measured and be smart about our existing customer rate increases and how hard we push. I think we want to be smart when it comes to when things aren't as good, we still need these customers in these storage buildings. So being a little, because you can push the rates doesn't mean you necessarily should all the time. But when you have a platform that's able to test all those things to see what works and what doesn't, how the customer responds, and I know we do a lot of testing, A/B testing, ABC testing, whether it's on promotions and pricing and existing customer rate increases, website presentation, what customers see on their phone, we're constantly testing. That helps us determine what makes the most sense long term. We have a long-term view. We're not sellers, so we operate stores for the maximum revenue over time.

Thank you so much. It's been my pleasure. Thank you, thank you. Appreciate it. Have a great one. Bye-bye.