Q3 2023 CubeSmart Earnings Call
Good morning, ladies and gentlemen, and welcome to the Cube Smart third quarter 2023 earnings call. At this time all lines are in a listen only mode. Following the presentation. We will conduct a question and answer session. If at any time during disclosure required immediate assistance. Please press star.
Zero for the operator this call is being recorded on Friday November three 2023.
And I would now like to turn the conference over to Mr. Josh Spitzer Vice President of Finance. Please go ahead.
Thank you Dana good morning, everyone. Welcome to keeps March 3rd quarter 2023 earnings call participants on today's call include Chris Marr, President and Chief Executive Officer, and Tim Martin Chief Financial Officer.
Repaired 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 Dot keeps mark Dot 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 copies of 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 Dot Cube Smart Tycho I will now turn the call over to Chris.
Good morning, and thank you for joining the call today.
Our third quarter results reflect the core attributes of our quality focused strategy our portfolio.
With its sector, leading demographics is demonstrating its resilience led by our urban markets with particular strength in New York City.
Our operating team is leveraging our sophisticated technology to develop creative ways to meet our customers' evolving needs, while simultaneously gaining efficiency and minimizing expense growth.
Our balance sheet is in excellent condition with a well staggered maturity schedule, having is primed to take advantage of the external growth opportunities that inevitably arise after periods of capital market volatility.
As we look ahead.
We expect trends in the near to medium term to remain less consistent with a tight housing market.
Macro uncertainties, and a very competitive street rate environment being somewhat counter balanced by the resilience and economic health of our existing customers.
What we experienced in the third quarter and what we expect we will continue to experience.
During this period of inconsistency.
Is the relative outperformance of our properties located in the more urban markets.
As the demographic makeup of those customers tends to skew more towards renters.
And the use cases tend to lend themselves to lower churn and longer lengths of stay.
Our portfolio construct combined with the continuing decline in the impact of new supply.
And a healthy existing customer supporting our rate increase program are positive factors heading into next year.
While difficult to predict timing with any amount of certainty in that.
Current log jam in single family home sales is broken.
Or any combination of buyers and sellers coming together on pricing expectations, a relaxation of interest rate policy or a pullback in costs, creating an acceleration in the construction of affordable new homes.
Our portfolio will most certainly experienced a rapid acceleration in top line growth as that pent up demand creates movement and customers.
We see the same opportunity on the external growth front.
As buyer and seller expectations are gradually coming closer together.
Along with the need for developers to refinance recent projects. Our expectation is we will deliver meaningful external growth and we have the balance sheet and team in place to capitalize on that opportunity when presented.
In the meantime, we remain focused on capturing customer demand in a manner that maximizes the revenue opportunity, while controlling our costs and providing the outstanding customer service our brand is known for delivering.
Thanks, and I'll now turn the call over to our Chief Financial Officer, Tim Martin.
Thanks, Chris and thank you to everyone for taking the time to join us on today's call.
Overall, the third quarter results were in line with our expectations entering the quarter.
As expected we continue to experience the top line deceleration we've been seen throughout the year as we continue to normalize post pandemic and face headwinds from a volatile macroeconomic environment.
As we moved through the quarter the pricing environment for new customers became increasingly more competitive.
And more competitive than we were anticipating in our prior same store revenue guidance.
As a result, we reduced rates a bit more than we had expected in September and then into October.
Net effective rates to new customers were down year over year 16, 9% during the quarter.
And that gap widened out in October to 18% reflective of a more aggressive pricing environment.
Same store occupancy ended the quarter down 170 basis points year over year at 91, 4%.
With the more aggressive pricing or year over year occupancy gap narrowed throughout October and we reduced the 170 basis point gap at quarter end to 130 basis point occupancy gap at the end of October.
Same store revenues increased two 3% for the quarter and four 5% year to date.
Based on the impact of the more competitive pricing environment, we're seeing here in the latter part of the year, we adjusted our annual expectation for same store revenues to a range of 3% to three 5%.
We continue to see the positive impact of our technology initiatives and our focus on expense controls for the quarter same store expenses grew 3% and our up just two 6% year to date.
For the quarter, we reported <unk> per share as adjusted of <unk>, 68, which represents 3% growth over the third quarter of last year.
From investment standpoint, we had no acquisition activity during the quarter.
We continue to take a patient and disciplined approach to capital deployment given current market conditions.
Those conditions stabilize we do believe there will be a period that presents meaningful attractive opportunities for us to invest and grow our.
Our balance sheet, our partner relationships and our investment team have us well positioned to execute when the time is right.
Meanwhile, our third party management platform does give us the opportunity to leverage our operating platform in the current environment. We added 41, new stores in the third quarter, bringing us to a 124 stores added year to date and 763 total managed stores at quarter end.
Our conservative balance sheet continues to be a source of strength positioning us to be opportunistic and also to avoid headwinds or earnings pressure over the next 24 months. Our average debt maturity is five six years 99, 5% of our debt is fixed rate, we have no significant maturities until November of 2025.
And our leverage levels remain very low at four one times debt to EBITDA.
Details of our 2023 earnings guidance and related assumptions were included in our release last evening overall, we maintained the midpoint and narrowed the range of our full year <unk> per share as adjusted and expect the year to be between $2 65 and.
And $2 67 per share.
Thanks again for joining us on the call. This morning, apologies somebody who had a little bit of a difficulty getting in the queue, but it looks like everybody is good at this time Ina, let's open up the call for some questions.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press Star then the number one on your telephone keypad you will hear.
Rob acknowledging your request questions will be taken in the order received and should you wish to cancel your request. Please press. The star followed later too if youre using a speakerphone. Please pick up your handset before pressing any keys one moment. Please for your first question.
Your first question comes from the line of Jeff Spector from Bank of America. Please go ahead.
Jeff if you're asking the question you're on mute we can't care.
If you are sorry about that can you hear me now.
Yes, they are.
Apologize thanks for taking my question.
You talked about the strength in New York City.
This particular this quarter can you talk about thoughts heading into 'twenty, four and specifically supply pressures like where do we stand now for New York City and just to confirm are you talking really about the five boroughs. Thank you.
Yes to confirm talking about the five boroughs.
Continue to see.
Continue to see good but to a lesser extent strength in Westchester County long island, a bit of supply pressure in North Jersey, and we expect that to continue but if you're focused on the boroughs per your question.
We would expect that the strength that we're seeing in the third quarter will continue into the fourth quarter and into 2024.
For all the reasons that I mentioned in my prepared remarks, you have higher percentage of renters. You are less impacted by the single family home market you have a use case where folks are used.
Using us more as an ancillary used to smaller living spaces, and you're still seeing good movement.
And good movement within the boroughs, so pretty constructive on that.
Macro across the country I think supply is going to be helpful to storage in in 'twenty, four and likely in the 25 and then specifically in the boroughs.
We continue to see.
A lesson the less impact of supply, saying no deliveries in the Bronx.
Theres a couple in Brooklyn that should be completed either this year early next year, which will have a minimal at best impact on the cube portfolio and similarly in Queens.
I would say the only borough.
Where we are experiencing some pressure from supply.
And again, just given the dearth of storage in Staten Island. It only takes one or two new but we're actually working through that.
Pretty constructively and are optimistic that we'll see some reacceleration there as we get into the better the back half of next year. So overall from a consumer perspective, a supply perspective.
Pretty pretty constructive on an urban New York in particular, but we're also seeing it in Boston and Chicago and come back in Washington D. C from the supply impact that we experienced there so.
Constructive there thanks.
Thanks, Chris very helpful and the second question can you just walk through the dynamics between lowering the same store, but maintaining SFO.
Yes happy to Great question. Ultimately there is there's not one thing to point to as to the offset.
But rather it's a lot of a lot of small things that are counterbalancing the.
The lowering of the same store NOI expectations at the midpoint and maintaining on the <unk> side, our non same store portfolio.
Certainly a portion of it is more urban.
<unk> and therefore that has that has continued to outperform our expectations that some of it within our joint ventures, we're seeing better than anticipated lease up again in some of our newer joint ventures that are more urban focused.
Our third party management platform is growing a bit faster than our expectations you can see that in this in the store count that we added that.
That pushes.
Higher within the range of of our expectation on fee income. It also improves our expectations as it relates to tenant insurance revenues.
Our continued focus on controlling what we can and focusing on cost efficiencies is.
It's given us some good news on our overhead both at both at the at the operations lever as well as at the corporate level that shows up in G&A.
And then in a lot of it just comes down to where we expect to land within those within those ranges of the assumptions and also within the range of.
Ultimately a board we expect to land from an <unk> perspective, So there's no. There's no quick easy answer to that question.
It's a little bit of good news and a lot of areas that provides the offset.
Okay. Thank you.
Certainly thank you.
Thank you and your next question comes from the line of Spenser <unk> from Green Street. Please go ahead.
Thank you.
I understood your comments in regards to the.
The environment being a little bit difficult in terms of the transaction market and you guys have obviously been disciplined.
To date, but can you just comment on like the broader cap rate environment. What are you guys seeing to the extent that you are looking at deals.
Yes, that's right.
It's a continuation of what we've been talking about all year, which is there certainly has been a bid ask spread we talked about earlier in the year, maybe two calls ago, we talked about that for most things that we were looking at that were of interest to us that that bid ask spread from our perspective was kind of like 20% ish.
Last quarter, we were we were talking about the fact that it was at least moving in the right in the right direction, but we were still off call call. It 15%.
As we progress through the year.
We are.
Getting a little bit more optimistic that we're going to find some opportunities. We did we did put something under contract that we expect to close in the fourth quarter.
And so obviously, we finally found something that works for us.
That was attractive both from an opportunity standpoint.
As well as as the price at which that opportunity come so getting a little bit closer.
But but still yet for most deals that we're looking at there is still a little bit of that there is a little bit of a gap. We are super optimistic though that that there is as I mentioned in my prepared remarks, there is a time coming here.
That we believe that we are super well positioned both from a balance sheet standpoint, our teams ready ready and.
Willing and able to go when we when the time's right to start pulling the trigger on a more on a more frequent basis.
We think there is some good opportunity coming ahead here of sellers start to get a little bit more realistic about where.
Where the market is and where buyers need to be.
Okay. Thank you and then maybe just lastly on the operations. Brian you commented that some of the more urban markets Youre seeing more strength. There how are you feeling about cri.
Here is an ability to push rates and in some of your other markets outside of the more urban markets.
Yes, Spencer across across all of our markets.
The trend has been consistent here for the last several months.
When we think about.
Opportunities that presented themselves steering the.
During the very robust times of 21 in the first couple of months of 'twenty two.
We had gotten up to around call it 20% on average across the portfolio in terms of the amount of the increase.
Market pricing has gotten more competitive.
As we've seen the results that we've seen.
Throughout this year that had come back.
Bye.
May June of this year into that 15% range still higher than that.
10%, we would have quoted on average pre pandemic, but down from the peak and that's been consistent here during the during.
During the third quarter and as I mentioned in my prepared remarks, our current R. R.
Current customers continue to exhibit signs of good health.
And we we think there'll be.
A little bit of downward on that 15%. If we continue to be in such a challenging market from pricing to new customers, but on a relative basis still feel pretty constructive about the contribution that that will make two to growth as we go forward.
Okay, great. Thank you so much.
Thanks.
Thank you and your next question comes from the line of Smith Rose from Citi. Please go ahead.
Hi, Thank you.
Just wanted to ask you in markets where.
You see the combination of LSI in ESR have you seen any kind of significant changes in the strategy. There I mean like in New York Miami I think what you have I mean I know you.
We're competing with the individual assets already.
Any changes that you are having to respond to where it changes your strategy going forward.
I think as we look at as we look at our competition.
Across all brands in.
And really all of our markets.
Varies.
Again by market.
We see rate most constructive in.
In New York and some of those other urban markets that I discussed we see more pressure in <unk>.
Some of the southwest and southeast markets that had the big run up.
As migration patterns.
Change pretty quickly and dynamically during COVID-19.
So no particular brand to point to that's operating any different than any other.
We have to just be cognizant of.
Yes, the competition in the micro market for the store that we own or manage whether it would be.
Our national brand, our regional brand or a local brand and react accordingly.
Okay. Thanks, and then you talk a little bit about New York supply, but could you just talk a little bit about supply coming online next year for your portfolio.
Other folks who kind of suggested that maybe supply outlook is probably overstated and that we could see more.
Development falling out of the pipeline are you seeing that or do you agree with that notion.
Yes, I think I think the challenge with.
With some of that.
Third party data.
On storage supply is that.
Our observation at least is that.
Potential new developments.
<unk> tracked entered the entered the database.
But theres not theres not.
Process, that's equally efficient to remove.
Potential sites from the database as they grow stale and it becomes obvious that the that the developer as either paused for any elongated period or abandon the project. So I think that the.
The third party data.
Perhaps overstates, we would we would agree with the with your premise that it overstates the the.
The actual amount of potential deliveries.
Our outlook is is that the overall impact of supply for the obvious reasons cost capital cost of the labor cost of raw materials.
The inconsistent rate environment for new customers in many markets all of that is.
Is putting a bit of pressure on.
The local developers.
Interest and ability to cole.
To pull a permit and get started so we.
We would again think the new supply environment will be constructive for storage fundamentals and 24.
Given the timing and many market is hard to say how long into 'twenty five but it would feel like at least the <unk>.
First half of 'twenty five you can see that same constructive environment. So again as I mentioned in my in my prepared remarks, I think supply along with the current health of our customer our two positives for storage as we go into next year.
Great. Thank you I appreciate it.
Thanks Smedes.
Thank you and your next question comes from the line of Doug Thomas from Keybanc Capital markets. Please go ahead.
Hi, Thanks. Good morning first question in relation to your comments about pricing in the quarter, just being a little softer than you previously anticipated.
Any sense, whether there was a change.
In top of funnel demand from new customers or was that more related to competitor pricing, which impacted your ability to drive customers into the portfolio.
Yes, I would say it was it was it was more reflective of a pricing environment that was that was more aggressive than we would have anticipated when we sat here three months ago, while we were seeing at the time.
Over the last call was obviously the levels of overall demand were were declining from where they had been over the last couple of years, but the demand that we were seeing.
And then that we were capturing at the pricing that we were capturing it at.
Was.
Was it was in our expectations what changed and it really started to change in a meaningful way in September and then into October.
As was the pricing environment from competitors.
So.
Our systems and our reaction to that necessitated.
Necessitated us moving our pricing to new customers lower than we would have thought necessary three.
Three months ago.
Okay and.
And then you mentioned that you were down.
Call back a little bit of occupancy at the end of October down 130 basis points, what was the occupancy rate in the same store.
In October at the end of October.
The actual occupancy at the end of October the print was 91, 3%.
Okay. That's helpful and then.
Just just back last question back to New York, the strength that you're <unk>.
Discussing or the stability in the New York.
Segment of the portfolio.
The data experience revenue growth overall did experience at.
20 basis points.
Deceleration from last quarter and I'm just curious.
We think about New York. It is the overall New York portfolio for you, which is a pretty sizable at 'twenty 'twenty. One 'twenty, 2% just curious if you see potential to hold occupancy and rate and perhaps maintain revenue growth at current levels or if you're expecting growth to decelerate.
Just at a more modest level relative to the balance of the portfolio I'm. Just curious if you could sort of comment on that a little bit.
The latter so we would expect that.
There will be some D cell and the rate of revenue growth in the same store portfolio.
In New York broadly.
I think we printed in the high fives in the quarter.
Three our three main Burroughs, Brooklyn, Bronx, Queens, where we're fairly significantly higher than that in terms of their contribution and then it was offset by.
Bye bye.
By North Jersey, which looks a lot more like the overall same store pool.
But broadly we would expect more muted.
<unk> and the New York MSA over the next couple of quarters, but still some some modest degree of diesel.
Okay on the 11 or 12% of revenue in the borrower specifically are you are you seeing.
<unk> are you actually seeing revenue growth gains in that segment of the New York portfolio.
Yes.
And it will vary by by borrow in that the Bronx with no new supply.
We had a really good third quarter, Brooklyn and Queens.
Also after the quarter, but on a relative basis, a little bit lighter.
Then the Bronx, but I think overall.
We would expect in those three boroughs again to what degree and how de Minimis, but I would err on the side of expecting some very modest DSL versus versus flatter accelerated.
Okay. That's helpful. Thank you.
Thanks Todd.
Thank you and your next question comes from the line of Michael Goldsmith from UBS. Please go ahead.
Good morning, Thanks, a lot for taking my question it seems as though the storage west portfolio is providing a nice benefit to the overall same store portfolio given.
The performance of the different same store pools I guess.
My question is how does the portfolio compare now to the overall portfolio and does this create.
Is it performing more in line with the overall portfolio. This has created a bit of.
We will just not be as much of a tailwind next year or does it remain healthy.
A healthy gap with the rest of the portfolio that you continue to support growth in 2024.
Yes, I think the performance of the storage west portfolio will over time look more and more like the rest of the portfolio. It's continued to continue.
Continued to grow at a higher pace because there is a.
I'm, just kind of a compounding impact of the improvements that we see when we bring things onto our platform and so those improvements are more meaningful early on for the first year or two.
That we have.
That we have a store or a portfolio of stores onto our platform and I think over time, then that that benefit diminishes and starts to look more and more like all else being equal looks more and more like the portfolio.
The whole.
Thanks for that Tim and then my follow up question is on advertising. It seems like that expense has been flat year over year.
Despite kind of D. Overall environment, it seems like youre not overly pushing that as a lever to drive demand can you talk a little bit about your philosophy, there and then related to that.
Have you seen any change in the cost of Google banner ads or or some of the advertising.
Or are some of your competitors pushing harder on this and pushing the costs to advertise higher thank you.
So our approach.
Two marketing and specifically in search.
Over the last couple of quarters has been too.
Be consistent.
In terms of how we've thought about.
<unk> from quarter to quarter.
We haven't had.
Very much lumpiness to that spans.
Over the last four quarters.
But it's a week a week to week decision in terms of how we think about allocating particularly on the paid search side in both.
Overall led to individual markets.
And so again.
It will be what it will be depending upon where we see the opportunities and we had pretty significant spend in the third quarter of last year and so that the change. This this quarter wasn't.
Wasn't that significant I think as we go forward the answer will be will be.
Incurring costs on that side of.
Our marketing efforts based on the returns that we.
I believe that we can generate.
Competitors have an impact on that.
And again that can vary week to week and month to month.
Overall.
Costs continue to go up certainly from the.
From the search side than offset by efficiencies.
In terms of our bidding and how we go about.
Our strategy on customer capture so.
Long winded answer, but that's kind of the state of the.
Of the Union on that.
Thank you very much good luck in the fourth quarter.
Thank you.
Thank you and our next question comes from the line of you Juan Sanabria from BMO. Please go ahead.
Hi, Good morning, just wanted to go back to one of Jeff's questions at the top with regards to.
The same store carton, changing but not necessarily earnings.
Tim I think you made an allusion to the correct me if I'm wrong that may be just within the ranges for both same store and earnings debt.
The Delta is between those maybe explain why are you able to maintain one but not the others. So maybe just hoping you could.
Expand upon your comfort level with them.
The revised ranges for both earnings and same store just so we can get a little bit more clarity on how you can really see things both at the core operating level at the earnings level. Thank you.
Sure, Yes, I mean, I don't know how to answer the question any different than I asked than answered before I guess to the comfort level. We are we are comfortable certainly when you provide annual ranges in and.
And you get closer and closer to the end of the year and we're sitting here with pretty.
Pretty much October results in hand, we have we have 10 to 12. So the answer at this point, so where we are.
We're pretty comfortable with the.
With the ranges that we have provided and and again I think it's.
There are a lot of ranges of individual assumptions that underline that under Leigh and support the.
The overall <unk> <unk> per share range.
And so it's yes, it's really simply the offset is where we expected to land in each one of those provided ranges and then and then where we expect to land at from an overall standpoint. So we're.
We're comfortable with the revised guidance as we as we always are given what we know at the moment that we provided.
Fair enough, Okay, and then just.
Maybe just a broader question.
What are your guys thoughts are when these price for us for a lack of a better term might end.
What would be the catalyst to see things change to be.
Less competitive.
It seems like it's kind of caught everybody by surprise.
I think the catalysts as we look out.
Again going to be around consumer movement, and certainly the easy one to look at is.
The single family home environment, I think in August, which I believe is the last reported data new home transactions were down 37%. So it's fairly clear out there that.
Homebuilders are using a big buy down.
As the loss leader by down in the mortgage if they have a mortgage subsidiary is the loss leader to try to incentivize folks to purchase new homes.
And in most markets Youre, just not seeing transactions occur on the existing onsite so that certainly would be.
I think a catalyst to create some.
Some meaningful improvement.
And overall fundamentals for storage.
Again I think.
If we see again interest rate policy move to be more accommodative, rather than restrictive I think not only does that impact the single family home, but it obviously impacts.
Your interest rate on your credit card and other consumer borrowings I think that would be a catalyst towards movement I think in the long run.
Obviously, we think this is a fabulous business has been for the 29 years I've been in it I think it'll be fabulous for the next 29 years, because we have a consumer in the United States too.
<unk> possessions.
Moves around.
Obviously.
Very motivated to own.
And move up and down the latter on a single family home perspective.
So feel pretty constructive about it I think when that happens.
Crystal ball is not that good I think you add to that debt that you are in a period of change here getting from the abnormal levels that we all enjoyed 442 years and we've talked about it now for the past 12 or 18 months that were on that return to return to normal or return to the new normal, which we think is a little bit better than the old <unk>.
Normal ultimately, but during that change.
Certainly youre going to have you're going to have different strategies to try to.
Capture your share or more than your share of what overall as a declining level of overall consumer demand for the product and so I think I think during that period of change.
We're seeing noise and we're seeing.
We're seeing actions taken by by by some and reactions from others and I think ultimately when you see it start to stabilize as win when we get to.
That new normal and then folks take a step back and say, Okay, where do we go from here. We go back to Chris's point, we go back to where we've been forever as a sector and say now that we have more stability and we have better insight into consumer demand and we've kind of reset then I think pricing strategies go back to what they what they have always been which is which.
From there you grow and from there you maximize revenues and that is a sector. We've been we've been pretty good at doing that.
Okay. Thank you.
Sure.
Thank you and your next question comes from the line of Cassandra <unk> from <unk> Securities. Please go ahead.
Good morning, Thanks for taking my question one for you given the intensified competitive landscape that you've already talked about.
The current existing customer rate increases and what kind of pace are you thinking as we look at 'twenty 'twenty four and also have you noticed any changes in customer behavior recently that has changed your ability to push rate.
Rate increases now in 2024, if you could share your thoughts around that.
Thanks Cassandra.
Been averaging.
Over the last quarter and here into this month of October and November right around 15% in terms of the average increase.
Track the customers as they receive an increase again some zero sum.
The amounts vary but that's the average.
We have not seen any changes in the consumer behavior as a result of that program.
We think our consumer and our customer continues to be very resilient.
We think the.
Make up of our portfolio leads us to a customer who has a tendency to stay longer.
And so all positives on that front as we go out into 'twenty four.
We don't anticipate any major changes in.
In that environment.
Yes.
So that's kind of as we're thinking about things going out into next year at this point.
So.
Thanks for the question I think I think that answers it.
Okay, Yes, that's helpful and then.
You mentioned that you have.
As a result of the increasing competition and we've seen street rates continue to decline.
And if you could share if you know where street rates today versus 2000 2019 level and then also.
Click here what percentage of your total customers are below in place rents currently.
Sure. So the first question I believe was rates today.
Relative to 2019 levels for age today are up.
About 17% versus those 2019 levels.
On your second question was the percentage of customers who are currently below street.
Mhm.
Yes.
Yes don't don't have don't don't.
Don't have that number down and track that number.
Thats something we tend to focus in on because it's a factor of again when you came into the portfolio.
As street rates move around so don't have an <unk>.
Exact percentage on that list.
Okay no problem, thanks for answering my questions.
Thank you.
Thank you and your next question comes from the line of Steve <unk> from Evercore. Please go ahead.
Yes, Thanks, Chris I just wanted to clarify.
One thing you said earlier just to make sure when you talked about $16 nine going to <unk> was that the roll down of kind.
New customers again expiring customers or was that something different and if that is the case do you feel like that 18% roll down as kind of the bottom or do you expect that to move a bit lower moving forward.
Hey, Steve It's Tim that was actually from <unk>.
Starting those numbers out there so the 16, 9% and 18% were where net effective rates that we're achieving compared to the net effective rates. We were achieving last year. The 16, 9% was the change third quarter. This year versus third quarter last year, the 18% was saying as we got into October rates in October net effect.
Our rates to new customers were 18% down.
As we would have thought about that as we talked about on earlier calls our expectation several months ago was that we would be able to start to.
To narrow that gap year over year and that the 16, 9% gap in the third quarter would start to narrow throughout the fourth quarter and in fact as we sit here today, it's actually gapped out a little bit more but that's what we were referring to in those numbers that's the context.
Got it okay. So it sounds like it's gotten a bit worse and maybe get to us in November December again.
The 2018.
We will see yes, I mean, its little bit little bit little bit too early to tell definitively, but it certainly it certainly net effective rates are worse relative to last year than we would've thought a couple months ago for certain.
Great. Thanks, and then just on the acquisition front I mean, obviously you guys are well positioned with the balance sheet just help us think through like what would be an appropriate or acceptable rate of return and I realized cap rates can be all over the board. If you are buying.
Empty buildings or newly newly developed buildings, but how do you think about kind of a stabilized yield or an IRR on things that you would want to buy just given where your stock's trading and where debt costs are like how high did the returns need to be against your cost of capital.
Yes, I think I think there's really two buckets to answer that question I think there is a there's a bucket of.
Of opportunity that's measure then call it.
$50 million to $150 million type of opportunity.
Which is largely funded with with our free cash flow, we think about that.
And our targeting.
Stabilized yields in the low to mid sixes thats kind of where we are we're looking at the moment.
I don't think low to mid sixes for US right now would would work and we wouldn't be interested in doing $1 billion worth of activity at those types of returns given our cost of capital. So it's kind of it.
It's kind of one bucket that is that.
That is the bucket that we can pursue that is not relying upon us raising.
External capital either debt or equity and then theres the bucket beyond that where those returns obviously would have to be.
Higher than that to be accretive.
If we were out raising capital in the current environment.
Okay, and just as a quick follow up are there any markets that you think there'll be more distress in the urban markets or is it more of the suburban.
Kind of migration markets that maybe people chased and built into.
Yes, I'm not sure I'm not sure necessarily it's hard to predict that.
Distress or at least the motive seller motivation I'm not sure of that.
I'm not sure that we have a house view on geographies, where we would expect to see more seller motivation.
I think it's more unique to an individual situation.
And individual seller.
Drivers be it whether its whether its debt.
Debt Thats maturing interest rate hedges that are burning off other liquidity needs I'm not sure. It's a geographic driver as much as it's to many many other factors.
Great. Thanks, a lot thats it for me.
Sure. Thank you Steve.
Thank you and your next question comes from the line of Keegan Karl from Wolfe Research. Please go ahead.
Yes, thanks for the time guys.
To belabor the point on <unk> I know, we touched a lot on the magnitude, but just kind of curious what your thoughts are specifically on cadence and then how do you think about your two different buckets of customers. For example, the longer term customers versus those that have moved into within the last year.
Yes on that.
On the cadence.
The.
The overall process is dynamic.
For the existing customer as it is for the for the new customer coming into the portfolio and that the system is going to get a lot of varying inputs.
Which would include amongst others.
You came into the portfolio.
Whether thats, whether thats paid search whether that's walking into the store.
Did you come in through mobile or did you come in through desktop did you call.
How are you paying us what form is that payment taking is it.
Is it a debit as a credit is cash.
When we think about the occupancy of the <unk>.
Individual cube that you are in both in that store in that sub market.
When we look at our forecast for re renting that cube should you choose to vacate where do we where.
Where do we see that.
Demand coming from so there's a variety of factors, which then translates into pretty dynamic sense of timing for those increases.
Pending upon those factors so it could be.
It could be in that four to six month range could be once a year. It really does depend so that's been pretty.
Evolutionary here over the last couple of years as the systems.
And the machine learning keep getting smarter and smarter and providing us with more and more insights.
I think as we.
As we look across the portfolio, obviously its going to depend upon.
The fundamental performance in those markets is one component of what's going on with.
With existing pricing in those markets, where you have.
Super changes between last year and this year in terms of asking rate for new customers, that's going to have an impact versus those more urban markets that have seen less steep change in price from from last year to this year. So.
So, yes, that's kind of how we think about it.
Yes.
Got it and then shifting gears to occupancy just kind of curious where you expect your year over year occupancy delta versus last year to trend for the balance of the year.
Yes, I think as Tim mentioned, we were 130.
Down at the end of October 117 yesterday.
No.
I think that number is going to be between that 120 basis points.
<unk> from last year to 150.
It is likely the area that will.
Will end December.
Great. Thanks for the time guys.
Thanks.
Thank you and your next question comes from the line of Hong Zhang from Jpmorgan. Please go ahead.
Yes, Hey, guys.
You've done a really good job at keeping personnel expenses low throughout this year I was wondering if you could touch on what initiatives you have been doing to achieve that and I guess for lack of better words, how sustainable is that going forward.
Yes, thanks for the question so so the efficiencies there.
Really come to the macro question of how does our customer want to be served.
Interestingly as we do a lot of.
Studies conjoined surveys.
In focus groups, having a team made in the store is.
<unk> is a top priority for most of our customers.
And so as we think about rising rising wages and benefit costs. It comes down to how can you be the most efficient.
Scheduling staffing.
And thinking about providing as close to that experience, perhaps as you can in the event that.
For whatever reason there is not a teammate who can serve the customer as quickly as they would like so implementing technology, where you can.
Come into the vestibule at the store and access a team made virtually through a screen and have <unk>.
Phase timeline conversation, where they can take you not only through your question, but but if you desire through the entire process of renting a cube so.
It's more on the efficiency side.
Rising that we continue to see upward pressure on wage and benefits I think as Tim likes to say the low hanging fruit in the tree has been picked.
So it will get more challenging to continue that kind of negative expense growth on that line as we've seen over the last several quarters, but we do think between technology.
And understanding our customer.
We will continue to have a clue.
<unk> focus on making sure we're delivering the kind of service they expect and the way they expect as efficiently as possible.
Got it thank you.
Thank you Mr. Chris Martin There are no further question at this time. Please proceed.
Thank you everybody for joining us today I am sure we will see many of you in a few weeks in Los Angeles and look forward to continuing the dialogue at that time stay safe have a great weekend.
Ladies and gentlemen that does conclude our conference for today. Thank you all for participating you may all disconnect.