CubeSmart - Q2 2023
August 4, 2023
Transcript
Operator (participant)
Good morning and afternoon, ladies and gentlemen, and welcome to the CubeSmart Second 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 this call you require immediate assistance, please press star zero for an operator. Also, note that the call is being recorded on Friday, August fourth, 2023. I would like to turn the conference over to Josh Schurer, Vice President of Finance. Please go ahead, sir.
Josh Schutzer (VP of Finance)
Thank you, Sylvie. Good morning, everyone. Welcome to CubeSmart's second 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 second quarter financial supplement posted 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, and good morning to everyone. Thanks for joining the call. We remain confident that CubeSmart is well positioned to continue to grow our position as a leader in the self-storage market. We believe in the power of our scale within top demographic markets, our high-quality portfolio, and our differentiated platform. Over the past decade, we have executed on our disciplined investment strategy, which positions us to drive superior long-term cash flow growth. This strategy is rooted in growing our leading market positions in the top 40 MSAs, enhancing our state-of-the-art technology, and continuing to strengthen our unwavering commitment to customer service. We also believe the excellent demographics inherent in our portfolio will continue to provide a strong demand backdrop into the future. Our second quarter results highlight the value of our differentiated platform.
Our urban and close-in suburban lower-beta portfolio provided growth and stability during the quarter. As expected, our high-beta markets that were reliant upon household movement came down off of their COVID-induced population inflow and were impacted by a significant slowdown in the existing home sale market, largely due to rapidly rising mortgage rates. In the boroughs of New York, which is our dominant market, overall demand trends and elongated lengths of stay should continue to support modestly positive pricing for new customers relative to 2022 levels. This favorable pricing environment, in combination with physical occupancies remaining slightly above 2022 levels, has helped us drive same-store revenue growth in our most important market. Supporting these trends is a more favorable supply environment as the headwinds from stores and lease-up, especially in Brooklyn, have been less impactful than anticipated.
We expect our New York market will continue to benefit from these trends for the balance of the year. We continue to be disciplined in our approach to evaluating growth opportunities. Currently, many of the acquisition opportunities available in the market are of inferior quality and would be dilutive to our current portfolio quality. As a result, we are being patient and disciplined, waiting to deploy capital until we are confident in the ability to realize attractive risk-adjusted returns. As buyer and seller expectations adjust, there will be attractive opportunities to deploy capital, and we will be ready. In the meantime, we continue to grow in other ways, adding new stores to our platform. During the first half of 2023, we added 83 new stores to our management platform, and we continue to have a robust pipeline of future new stores.
Owners of self-storage facilities seeking a third-party manager have many brands from which to choose. Our operational expertise, differentiated platform, and winning culture make us a preferred third-party management provider. At CubeSmart, we have always put our customer first, and we attribute our outsized success in the 3PM business to our unwavering commitment to that customer service. For example, during the quarter, we rolled out our latest version of our state-of-the-art data portal, which gives our owners access to every key performance indicator relevant to their property at a click of a button. Turning to guidance for the year, as noted in our earnings release, demand during the rental season has been very price sensitive. We have adopted what we believe is a prudent and realistic posture on guidance for the balance of the year.
Looking further out into next year, there are several encouraging signs for a positive backdrop for self-storage in 2024. A stabilization in mortgage rates, along with continued household formation, could lead to an increase in existing home sales. Continued relief in the supply chain and cost of raw materials may accelerate the delivery of new homes, and the ongoing decline in openings of new self-storage facilities will be a positive contributor.... We believe CubeSmart's balance sheet portfolio and operating platform are well positioned to navigate through these dynamic market conditions, just as we have done historically. We are excited to continue delivering differentiated performance from our uniquely focused and well-positioned assets, and to extend our track record of superior value creation. Thanks for that, and now I'd like to turn the call over to Tim Martin, our Chief Financial Officer.
Tim Martin (CFO)
Thanks, Chris. Thank you to everyone for taking the time to join us on today's call. The second quarter saw the continuation of the expected deceleration off of the highs over the past two years. That natural deceleration, when combined with an uncertain macro environment, led to pretty inconsistent trends from week to week. Demand is there, with more price sensitivity for new customers than the optimistic range of our expectations would have contemplated. For the quarter, we reported FFO per share as adjusted of 0.66, which represents 6.5% growth over the second quarter last year. Same-store NOI growth of 5% for the quarter was driven by a 4.6% increase in same-store revenues and a 3.6% increase in same-store expenses.
The strong demographic profile of our portfolio continues to support performance throughout all phases of the cycle. Our expense control initiatives continue to bear fruit, even against tough comps and in an inflationary environment. We were quiet again in the second quarter, as Chris mentioned, on the external growth front, at least with on-balance sheet acquisitions. There weren't that many high-quality opportunities in our target markets that have traded this year. We're starting to see a little bit of a pickup here in recent weeks, but overall, we expect to remain disciplined and work hard to find great opportunities that have risk-adjusted returns that make sense and enable us to create shareholder value. On the third-party management front, we continue to add to the platform.
We've added over 130 third-party managed stores in each of the last six years. We're on pace to surpass that number again here in 2023. We added 58 new stores in the quarter, bringing us to 83 stores added year to date. Our conservative balance sheet positions us well to pursue attractive opportunities when we find them. Of course, has also positioned us well to avoid near-term earnings pressure, as we have a very well staggered maturity schedule and very modest exposure to floating rate debt. Our average debt maturity is 5.8 years. 98% of our debt is fixed rate. We have no significant maturities until November of 2025. Our leverage levels remain very low at 4.3 times debt to EBITDA.
Details of our 2023 earnings guidance and related assumptions were included in our release last night. Our updated guidance reflects where we are positioned coming out of the summer rental season, with pricing power consistent with the lower half of our prior guidance range for same-store revenues. Thanks again for joining us on the call this morning. At this time, Sylvie, let's open up the call for some questions.
Operator (participant)
Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touchtone phone. You will then hear a three-tone prompt acknowledging your request. If you would like to withdraw from the question queue, please press star followed by two. If using a speakerphone, you will need to please lift the handset before pressing any keys. Please go ahead and press star 1 now if you have any questions. Your first question will be from Todd Thomas at KeyBanc Capital Markets. Please go ahead.
Todd Thomas (Equity Research Analyst)
Hi, thanks. Good morning. First question, I, I just wanted to ask about the revised same-store revenue guidance. You're, you're at 5.7% year-to-date, and the guidance assumes, you know, a, a rather modest deceleration in the back half of the year here, I guess, particularly versus some of your, your peers that have reported so far. I realize New York City, which is a little more than 20% of the same store, is expected to be more stable than other markets, but can you speak to what's embedded in the guide for the New York City segment of the portfolio and the balance of the portfolio that, that gives you comfort around the back half and, and a little bit of a less severe deceleration that you're, you're forecasting?
Chris Marr (President and CEO)
Hey, Todd, it's Chris. As it relates specifically to New York, you know, we expect that, you know, trends there continue to be constructive. We see You know, as I mentioned in my opening remarks, you know, it is the market where we are still seeing opportunities to have price for new customers at levels modestly above what we were able to achieve last year. We continue to have physical occupancies that are slightly above where we were in 2022. Again, I think that's to the unique nature of, of a customer in that market. We, we tend to see, you know, obviously less of the pure seasonal household mover.
We've seen, you know, a very low vacate rate in that market, so remain pretty constructive there, and I think the positive trends we've seen in, in New York, we're pretty confident will continue into the third and fourth quarter of this year. I think for the balance of the portfolio, obviously, some continued modest deceleration overall, as we go into the third and fourth quarter. I think for our portfolio, perhaps, you know, that, that deceleration flattens out as we get into, as we get into the fourth quarter of this year.
Todd Thomas (Equity Research Analyst)
Okay. You, you characterize the environment as, you know, uneven or, you know, maybe a little bit volatile, I guess it sounds like, you know, maybe month to month. You know, how, how does this impact your revenue management system and, and all of the tools that you use, you know, whether for, for pricing and, and just revenue management in general, and, and, and really also, you know, for, for budgeting purposes, you know, how, how, how different, you know, are these patterns? Has this cycle been relative to, you know, the last 10 or, or 15 years? You know, which, which I guess, you know, I, I suspect is, you know, a lot of the data and information that, that the system's relying on.
Chris Marr (President and CEO)
Yeah. I've, I've used the word, you know, and, and inconsistent, and, you know, the only consistent thing we've seen here in, in 2023 has, has frankly been inconsistency. It was an odd March. It was an odd June. It has been a, by historical standards, a, a bit of a positively unusual July in the first, you know, four days here of August. You know, as we noted in the release, we saw occupancy trends in July, you know, quite positive, certainly relative to the gap to last year. That's continued here into August, where, you know, I think today the gap to last year is now down a little bit below 130 basis points. It's just been very, very inconsistent.
To, to direct to your question, it has made it very challenging from a data science perspective to, you know, to forecast. You know, we, we deal with this on a week-to-week basis, sometimes a day-to-day basis, and you're trying to find that balance in market between, you know, between price, relative to your competitors who are, you know, finding the same challenges and are, are making, you know, changes to their pricing models in real time, just as we are. You know, I think the answer, the short answer to your question is, it's made it very difficult to, you know, to, to, to manage on that side of the business, relative to certainly, you know, pre-2019 levels. I would say, you know what?
Over the last, over the last five years, I'm not sure, you know, I, I'm not sure any year has been, quote, "normal," as it relates to, you know, my almost now 30 years in the business. 2018 and 2019 were abnormal due to just the volume of supply that we saw coming on all at one time, and then obviously the first half of 2020 with COVID, and then the back half of 2021 and 2022 being just spectacular years for self-storage. We've been dealing with this for two years, and I think we've been dealing with it pretty well, considering the fact that it's been so inconsistent by historical standards.
Todd Thomas (Equity Research Analyst)
Okay. Are you responding to competitor price cuts by, by dropping, you know, decreasing rates in your portfolio? Do you feel that the price cuts are, are having a positive impact on, on driving move-in demand?
Chris Marr (President and CEO)
Yeah, I think, I think macro, you know, we're, we're as an industry coming down off of, you know, again, that, that 2021 and 2022 of just spectacular COVID-related demand, which created historically high occupancies. As an industry, as we're coming down off of those historical high occupancies, there's more inventory, there are more cubes than as a result, available for a customer at, at stores, which gives the customer more optionality and more choice. One tool, one lever, to capture, you know, that customer into your portfolio is, is price. Across the board, whether it be a, a, a large operator or regional operator or small operator, how they choose to...
how we all choose to put pressure on that lever varies, and we need to factor in within the micro market of our store, you know, how we see pricing move by our competitors, you know, what our inventory looks like, what do we have available at our particular store, and then put that into the, into the system accordingly. Those data points are used to produce the recommended price for that, you know, for that day or that week. We have to take everything into consideration. I think if you take your question up to the high level, we're just working through a period here of where there's just more availability relative to last year. You know, that will be the case here for a, for a, a couple more weeks or so.
Then I think you do see, you know, as you saw last year, trends started to normalize pretty sharply in mid-August of last year. So I think the comps get easier as you go forward here after the next week or so.
Todd Thomas (Equity Research Analyst)
Okay. Thank you.
Operator (participant)
Thank you.
Chris Marr (President and CEO)
Thanks.
Operator (participant)
Next question will be from Juan Sanabria at BMO Capital Markets. Please go ahead.
Juan Sanabria (Equity Research Analyst)
Hi, thanks for the time. Could you guys just comment on the street rate trends, you guys saw throughout the second quarter and into July, just maybe backing off of Todd's question?
Chris Marr (President and CEO)
Yeah, I mean, trends, trends relative to last year, if you just look kind of month by month throughout the quarter, pretty consistently for new customers, basically down relative to last year in the mid-teens. That, that % didn't, didn't deviate all that much as we went through the quarter, you know, there was a, there was a stretch in June, where we, we, we were pushing rate a little more aggressively. You know, the reality is what we saw was a slowdown in rental volume.
Juan Sanabria (Equity Research Analyst)
Okay. Then just a question on in-place rents in the same-store portfolio. You had like a straight quarter of sequential decline. Just curious, what's baked into guidance for the back half of the year with regards to average in-place same-store rents? And is, is that being impacted by the move-in rates, or has there been any diminution in, in ECRIs, given softer street rate trends than, than you'd expected in the peak leasing season?
Chris Marr (President and CEO)
The sort of take it from the back and, and, and, and work backwards. You know, the, the, the expectation in terms of pricing from a macro perspective for the balance of the year is that we will continue to see, you know, price being the lever that folks are, are using to try and get, to try and get rentals. You know, again, as we noted in the release, the, the expectation is that, you know, price will continue to be an issue and therefore, you know, the, the adjustment in our, in our guidance range.
As you, as you, as you sort of compare that then to last year, I think as I noted in my, in my response to the prior question, we, we did start to see a fairly sharp decline in asking rents for new customers about mid-August of last year, and then that continued on for the balance of the year. We continue to expect some narrowing of the gap between where rates will be, you know, from August to December of this year and where they were last year. The, the biggest impact on the metrics that you, that you had in your question is, is lower move-in rates. The, the ECRI program continues to be pretty strong and strongly ahead of, of where we were last year. You know, as you saw in the disclosure, the vacate rate from that hasn't changed.
I think part of that is, is the unique nature of, of our portfolio. You know, I think, I think the range of outcomes, you know, for in-place rent is gonna be, you know, the, the driver as we do expect move-in rates to, you know, gradually close that gap to last year throughout the course of the balance of the year.
Juan Sanabria (Equity Research Analyst)
Thanks, guys.
Operator (participant)
Thank you. Next question will be from Michael Goldsmith at UBS. Please go ahead.
Michael Goldsmith (Equity Research Analyst)
Good morning. Thanks a lot for taking my question. Chris, in, in your opening remarks, you said that the demand is there, but with more price sensitivity for new customers. How, how is that translating? like how, how is that or how, how is that like playing out for the customer? Is it that they're being less receptive to promotions or they're requiring a lower, lower rate in order to move in? You know, our perception has always been that this has been a product type that is need-based, and so when you need it, you, you need it, and so you take the price that's available. How, how is that exactly playing out for you guys?
Chris Marr (President and CEO)
Yeah, I think you've got a, you've got a couple things there to unpack. I think, I think depending upon the market and the sub-market, you know, you do have an impact of that need-based, as you pointed out. Again, I think in the, you know, in the, in the more outer suburban stores, who typically have relied on that more seasonal customer who arrives in May and exits in August because of a household change, you know, you're definitely seeing the impact of this frozen existing home market, situation.
I think, you know, not to sound like a retailer, but certainly in some of the Southwest markets, you can't discount the temperatures, you know, above 110 degrees for 30 or 40 consecutive days, not impacting the marginal storage customer who may have a choice to move in, but also obviously a choice to move out on, you know, brutally hot days. I think that's got to be playing into some of the Southwest activity. Overall, you have more inventory due to the fact that, you know, you're seeing occupancies coming down across the industry, so a customer has, you know, more optionality in terms of trying to find what they believe they need to store their possessions. You're reacting to some degree to, you know, overall price in the marketplace.
All those dynamics are at play that result in, you know, the, the situation we're in, which is, you know, if you are price competitive, you know, you're gonna get more than your share of customers because you're definitely gonna get them from the smaller operators who don't have the marketing budgets to be top of funnel and get those customers in. That's kind of the situation that we're working ourselves through here at the moment. To your promotion question. Promotions are down in our portfolio, but there's definitely more competition than for, you know, those customers that exist in that marketplace.
Michael Goldsmith (Equity Research Analyst)
Thanks for all the detail, Chris. My follow-up is: you know, you've talked about some of the positive catalysts for 2024, like the potentially lower rates and greater housing turnover. I guess, you know, you've been seeing decelerating trends on the operating metrics this year, and that's kind of continued through the first half, and the guidance supply that continues through the back half. What is the impact on 2024 numbers from some of the pressures that you're seeing now?
Chris Marr (President and CEO)
I think there's just, you know, any time, any time in any business, where you have, the rapid increase in both price and, you know, utilization, or in our case, occupancy, that you saw in 2021 and 2022, as those trends normalize, the deceleration is just the output of that. I think as, as I said, the back half of last year is where you began to see that normalization. As we get into 2024, your year-over-year comparisons, you know, will eventually become more traditional, more normal. You go to the just general health of our customer, and I think the health of our customer remains quite, quite strong. You know, we certainly see it in, in lengths of stay. We see it in, payment history and auctions, et cetera.
Gives you confidence that you have a consumer who, you know, still seems to be pretty healthy. You have certain things going on, particularly in the housing market, which I do think have a bit of a headwind in the near term to self-storage in general. If you start to see normalization there, plus a healthy consumer, plus more normal year-over-year comparisons, I think you can paint a backdrop for a fairly constructive, you know, 2024 for the self-storage industry.
Michael Goldsmith (Equity Research Analyst)
Thank you very much. Good luck in the back half.
Chris Marr (President and CEO)
Thank you.
Operator (participant)
Next question will be from Samir Khanal at Evercore. Please go ahead.
Samir Khanal (Equity Research Analyst)
Hi, good morning, everyone. Just on the expense side, Tim, I know you lowered the, the guide for the year. Maybe talk around the drivers for that. It looks like personnel may, may have been a factor. Then as a follow on, maybe talk about, as we think about the pressures and demand here and into next year, I mean, how do we think about personnel, you know, marketing costs, and, and even insurance costs into next year? Thanks.
Tim Martin (CFO)
Thanks, Samir. Yeah, it, largely, on the personnel side, we continue to, we continue to squeeze out some efficiencies. I think, as we've discussed in prior quarters, that fruit gets higher and higher up in the tree. Although, although we're still, we're still finding some, you know, some good opportunities there to be even more efficient as to how we staff stores and combine that with still providing great customer service. We've talked in the past about the pressure on, from a, from an insurance, property insurance perspective. That's certainly gonna create a little bit more pressure in the back half of this year, than the front half. Marketing expense is always the wild card.
When we find great opportunities to spend, we do, and when we find less compelling opportunities from a return on that spend, we tend to dial it back. Overall, nothing, nothing really new from a, you know, where, where the drivers are. From a real estate tax perspective, this year, we're, we're doing a little bit better than we would have thought entering the year. We've had some success there, with some, some appeals and the like, which have marginally helped, the real estate tax number being a little bit better from a, from a growth year-over-year perspective than we would have thought starting the year.
Samir Khanal (Equity Research Analyst)
Got it. And then just in terms of the external growth opportunities that, that you mentioned, I know your guide is still at, kind of 100 million-200 million for acquisitions. Maybe walk us through or talk about what that pipeline looks like, at the current time, considering that, that it's August. I'm just trying to figure out, what, what that pipeline looks like for you. Thanks.
Tim Martin (CFO)
Yeah, the traditional deals, you know, we've talked on, on prior calls also, that there's a lot of seasonality in, in the, in the typical acquisition market. Most sellers, certainly private sellers, believe that they are best positioned to sell their store at peak occupancy and peak rates in the middle of the summer. Not unusual for there to be a, a more opportunities in kind of mid-July through late August, is when, if somebody's coming to market, traditionally, that's seasonally when, when more stores are brought to market than other parts of the year, and that, that is true again this year. Up to this point, we haven't seen a whole lot of compelling opportunities of high quality assets in markets that we, that, that we are attracted to.
We, we are seeing some of those opportunities present themselves. The wild card right now is, will they trade at a number that makes sense to us from a risk-adjusted return standpoint relative to our cost of capital? That's very difficult to predict. We're starting to see some things in the market that we like. Not sure that we will like the price at which the seller will be interested in selling them to us. A lot of uncertainty around around what our, our ability to actually transact here in the back half of the year is. We have an appetite to do so, but at a return that it's hard to predict whether, whether that'll make sense for both buyer and seller.
Chris Marr (President and CEO)
Thank you. Thanks.
Operator (participant)
Next question will be from Smedes Rose at Citi. Please go ahead.
Maddie (Analyst)
Hey, good morning. This is Maddie on for Smedes.
Chris Marr (President and CEO)
Good morning, good morning.
Maddie (Analyst)
Just wanted to ask about supply. We've been hearing that there could be some new supply coming to Manhattan's West Side, just wondering if you're seeing any other pockets of supply growth across your markets overall, maybe just some updated thoughts on supply more generally.
Chris Marr (President and CEO)
Sure. Overall, supply continues to be more muted for, you know, all the reasons that you, you can surmise. You have, you know, an operating backdrop that is normalizing off of the spectacular few years that we experienced. You have a supply chain still creating issues as it relates to raw materials and labor. You have inflationary pressures on those raw materials and labor that have not abated. You're seeing a significant number of hypothetical opportunities out there that are not being moved forward or are pausing. No change. You know, I think that those trends continue, which I think, you know, makes us quite constructive on overall supply. In the New York market, again, take Manhattan, and I'll take that question separately.
In the New York market broadly, you know, remain very positive on the decline in supply there. In the boroughs, in particular, you're just seeing, you know, the couple of deals that I talked about last quarter, you know, working their way to completion. Then I think very, very minimal, if any, going forward for a while here at least. Manhattan, a little bit of a different beast in that you never had, you know, the tax incentives there, and the Opportunity Zones there that you had in the outer boroughs. The removal of those beneficial zones, or at least the more difficult opportunity for storage in those zones, never, you know, isn't an impact in Manhattan. You are seeing some supply, certainly in Manhattan.
I think the for better or worse for us, you know, we have the one store on Fifth and Fifth Street, and frankly, it's been performing incredibly well here over the course of 2022. We are thrilled with that 2023, sorry, that we're thrilled with that store. Yeah, you are seeing at least some talk and a couple of new stores that have been on in planning and have been known to be being built there in Manhattan. That's gonna put some pressure on some other operators in that market.
Maddie (Analyst)
Great, thanks. Are you seeing any increase in conversion properties, given what seems to be an uptick in big box vacancy?
Chris Marr (President and CEO)
Yeah, there's an awful lot of talk and not a lot of action in terms of, of that concept. You know, it's, it, it's in the office business, you know, for those poor folks, fighting through this existing time, they're just scratching and clawing to try to figure out how to get, you know, somebody to use their product. There's always the conversation about self-storage. It's just challenging from a floor load and a, you know, and a, and the ability to have a loading area, et cetera. A lot of talk, haven't seen any particular uptick in action.
Maddie (Analyst)
Great. Thank you.
Chris Marr (President and CEO)
Thanks.
Operator (participant)
Next question will be from Jeff Spector at the Bank of America. Please go ahead.
Jeff Spector (Equity Research Analyst)
Great. Thank you. Chris, just trying to think about the positives and negatives you've laid out and, and really what's changed, I guess, since we saw you and the team early June, and appreciate very much some of the, you know, the uncertainty and difficulties to, you know, forecast, especially given the tough comps. I guess, you know, bottom line, I guess to be blunt, how comfortable are you now with this latest guidance? I know I'm sure it was disappointing to cut. You know, how do you feel about this latest guidance, given some of the comments you've made about, you know, I guess we're finishing peak leasing season, et cetera?
Chris Marr (President and CEO)
Yeah. Thanks, Jeff. Appreciate the question. You know, the way we, the way we think about expectations in, in what has been, you know, a very inconsistent year, frankly, inconsistent years, you know, we, we established a range of expectations back in the beginning of the year that contemplated the scenarios that we could envision playing out from a customer demand perspective and from a pricing perspective, et cetera, for the balance of the year. We went through the, you know, our busiest time of the year. It was a very oddly sort of slow June. As I mentioned, things have picked up here in July, but it is a very price-sensitive customer.
When we, when we looked at those range of expectations, we were clearly still comfortable that the bottom end of what we had expected in terms of establishing a range back in February was still valid, and we still had confidence in, you know, that part of the range. That the top end, which contemplated a more robust environment, seemed out of reach. You know, we can use the word cut. We prefer to use the word that we, we simply lowered the top end of our expectations, dealing with the reality of what we've seen here so far for the first seven months.
Jeff Spector (Equity Research Analyst)
Fair. Thank you. Just to clarify an earlier question again on, you know, the impact, potentially the lower street rates are having on ECR to confirm, I believe you're saying there's no impact on the ability to push on existing?
Chris Marr (President and CEO)
The, the ability to push hasn't been impacted. The, the current street rate, you know, in that store, in that market at the time that your systems are producing recommended increases to the existing customers, input is going to be, you know, where are current market rates trending. So that will put some, you know, pressure on the magnitude per se, but again, if you want to look at it year-over-year, we were seeing, you know, that pressure, if not more, you know, in the back half of 2022 as well. The, the relative % doesn't move all that much.
Jeff Spector (Equity Research Analyst)
Thank you. Then to confirm on, you, you know, you talked about in July again, you know, more price-sensitive customer lowering the rate. Just and obviously, occupancy has moved higher. Are you, you know, just, is it, is it working? Are you pleased with, I guess, the results you're seeing into August on how, you know, you are, you know, pulling in new customers and competing?
Chris Marr (President and CEO)
Yeah, I think we've, we've felt like through the whole year, we've been, you know, we've been quite pleased with what we've been able to generate in terms of, you know, rate increases to the existing customers and, you know, revenue growth overall with the backdrop that we're, you know, competing in. We're trying, to an earlier question, you know, week to week, day to day, you're trying to fine-tune everything to find that sweet spot between asking rate and promotion and, you know, what the demand that you achieve from that is. Obviously, in July, we were, we were, we were in a, a, a decent spot from getting that demand at price. We'll continue to see where there are opportunities, you know, for the, for the rest of the year to, you know, continue down that path.
Certainly feel as if things kind of balanced out more in July. The inconsistencies have been have been there all year, and we can go back to the first quarter and say March was, you know, a, an oddly slow month, and then April picked up really, really nicely. It's just been a very inconsistent year.
Jeff Spector (Equity Research Analyst)
Okay. Thank you.
Operator (participant)
Thank you. Next question will be from Cassandra Socha at Truist Securities. Please go ahead.
Cassandra Seibert (Equity Research Analyst)
Hi. Thanks for taking my question. A follow-up on the external growth. Could you talk a little bit more about what do assets need to have to meet your quality standards? Could you offer more specifics what your return thresholds are?
Chris Marr (President and CEO)
Yep. Thanks for the call. Good morning. You know, pretty, pretty consistent answer as to, as to what our strategy has been for, for more than a decade. You know, we, we focus on, on Class A facilities in the top 40 MSAs. We are a little bit snobbish when it coming to quality. Quality both of market and quality of asset. We are-- we're trying to find opportunities to expand our footprint and, and have good competitive market share, if not leading market share in some of those top 40 MSAs. We're trying to find assets that complement our existing footprint.
That's. My comments earlier were, were alluding to the fact that year-to-date, in the back half of last year, we just weren't finding that many opportunities for things that were for sale, or we weren't able to convince folks to be sellers for, for assets that fit that description at, at price tags that make sense to us versus our cost of capital. If you think about where interest rates were, when we had been more active from an investment standpoint, and you think about the move from where, from where interest rates are today relative to then, and our cost of equity capital, clearly, our, our return needs to be a little bit different. The cap rate, the, the yield requirement for us to buy those attractive assets is certainly gapped out.
You know, we've been talking here for several quarters about having a disconnect. It was 20%, and we talked last quarter about it being kind of a 15% gap between where we see, where we see an opportunity to invest in those attractive assets at, at returns that make sense to us on a risk-adjusted basis versus where sellers' heads were or where other buyers were. Our, our optimistic view here for the back half of the year is that we start to find some of those opportunities at price tags that make sense for us. No guarantees. Hard to, hard to predict, how, how successful we'll be. What, what we can say is that we will continue to be disciplined. We will continue to be mindful of... We won't grow for growth's sake.
We'll grow in a way that is complementary to our strategy and in a way that we can create shareholder value.
Spencer Alloway (Equity Research Analyst)
Okay, great. Thank you. Bye.
Chris Marr (President and CEO)
Thanks.
Operator (participant)
Next question will be from Keegan Carl at Wolfe Research. Please go ahead.
Keegan Carl (Equity Research Analyst)
Yeah, thanks for the time, guys. You mentioned that more operators are looking for third-party managers to navigate a challenging operating environment. I know you mentioned it seems like it's a good thing for the pipeline. I guess I'm curious, one, what your expectations are for the balance of the year, and then two, how much market share do you actually think you can gain?
Chris Marr (President and CEO)
Hey, great question. When you think about, you know, Tim, Tim mentioned numbers in his remarks around what we have done historically, and, you know, I think we would expect to be able to generate, you know, those similar type additions to the portfolio of third-party managed assets when we get to the end of this year for the full year, as we have, you know, in the past, and I think that's roughly been adding, you know, plus or minus around 150 or so stores per year. I think what you see if you, if you think about this business, is that you have two drivers. You have the development cycle, where you have, you know, a brand-new store and that, and that developer is looking for a professional third party to manage.
They interview varying folks, and you have an arrangement and, you know, assuming the store gets built, you know, that's an addition to the platform. We certainly have a pipeline of new developments that are continuing to that will continue to come into the program, albeit that pace, obviously, as we've talked about, supply in general is slowing. The existing open and operating stores, you know, they tend to move somewhat with the business cycle. If, you know, operating results for that owner are very solid and, you know, quite frankly, business is easy, they're a little bit less inclined to be thinking about the idea of turning over the management to to a to a to a larger operator.
As you get into a more, you know, a, a more challenging, competitive, I'll call it, market, you start to see more of those folks, thinking about it and, and having the conversations with us. We're seeing that, you know, happening in our pipeline, and I think that gives us some, some good confidence as we go through the balance of this year and then also into next year, that, you know, we'll continue to be able to grow that at a, at a nice pace and, and make it, you know, continue to be very additive, given the, you know, the fact that we don't have to allocate capital in order to, to get those points of distribution within our system.
Keegan Carl (Equity Research Analyst)
Two powerful color, and maybe one for Tim here. Can you just remind us what sort of macroeconomic backdrop is embedded in your guidance range?
Tim Martin (CFO)
Yeah, we discussed at the beginning of the year that, that we, we weren't really focused on providing guidance, trying to be predictive of, of broad macro environment because that environment tends to not have a direct short-term impact on, on storage fundamentals. It's a little bit, little bit longer term as it relates to whether we're soft landing or, or not in 2023. Probably has more of an impact on 2024 performance than it does on 2023. We weren't, we weren't trying to, to, in our initial guidance, trying to build in whether there was gonna be a recession, how many interest rate hikes there were gonna be. We took a view to say over the next 12 months, we think realistically this is a, you know, this is the range in which we think the business will perform.
As we've talked about here multiple times during this call, you know, we're, we're, we're still in that range. We're just at the, at the more conservative end of a lot of those underlying assumptions than, you know, than we were six months ago.
Keegan Carl (Equity Research Analyst)
Got it. Thanks for the time, guys.
Tim Martin (CFO)
Appreciate it.
Operator (participant)
Next question will be from Spencer Allaway at Green Street. Please go ahead.
Spencer Alloway (Equity Research Analyst)
Hi, thank you. Not to belabor the ECRI questions, but you did note that there's been a bifurcation in market performance, with some of those higher beta markets come down off the highs of the last 2 years. Can you just comment a little more specifically on how wide the range in terms of the magnitude of ECRI is across different MSAs?
Chris Marr (President and CEO)
Yeah, interesting question. Thank you. It actually, the delta or the range between, in terms of just % increases to those existing customers, you know, at this point is not, you know, has not gapped out all that much because the range, you know, to customers overall is pretty broad, right? Because you've got an array of customers who are getting personalized increases based on a variety of factors within the MSAs, then it's not, it's not that, it's not that broad per se.
Spencer Alloway (Equity Research Analyst)
Okay, thank you. Then, just as you guys are kind of sitting on the sidelines a little bit more right now as it relates to acquisition activity, any thoughts in regards to redevelopment or expansion opportunities in terms of just, like, your capital allocation priority list? Just curious if there's anything or any opportunities in the portfolio you could kind of take advantage of, given that acquisitions are a bit slower.
Tim Martin (CFO)
Yeah, they're those tend to be very attractive opportunities when they make sense and they pencil out. They tend to be really nice returns oftentimes, because if you think about comparing it to doing something ground up on a separate parcel, you already have the land, and so your land basis is fairly-
Chris Marr (President and CEO)
... you know, it's, it's already a, a, a fixed cost. You already have it. We look for those opportunities all the time for expansions. There are some of those opportunities. They're not needle-moving, I wouldn't say, but at this point in time, they are, they are the best use of our of our capital for those reasons. When we can find opportunities that are complementary, that add square footage, where it makes sense to add square footage, focused on it all the time. Wish we had a bigger opportunity for more of them. Certainly, on our legacy portfolio, we would have taken advantage of a lot of those opportunities over time. We are, we are deep in exploring many opportunities that came with our portfolio acquisition in late 2021.
The Storage West portfolio, does have, have some embedded opportunities for us to do some expansions and some improvements, that have some nice returns. Just, you know, it's not hundreds of millions of dollars of opportunity, but, but the returns on the opportunities that we do find are pretty attractive.
Hong Zheng (Equity Research Analyst)
Okay, great. Thank you, guys.
Chris Marr (President and CEO)
Thanks.
Operator (participant)
Next question will be from Eric Luebchow at Wells Fargo. Please go ahead.
Eric Lubica (Equity Research Analyst)
Hi. Thanks. Thanks for taking the questions. Maybe you could touch on the average length of stay dynamics in the portfolio today. It sounds like it's still at or around record levels. Do you think it can stay at those record levels or any signs of some of the move-out activity happening, happening with some of your longer-tenured customers? Just trying to think how that could impact some of the rental rolldowns that you typically see from move-outs versus move-ins.
Chris Marr (President and CEO)
Yeah. The, the length of stay has definitely begun to stabilize versus, you know, the, the, and well ahead of obviously, of where we were with the pre-pandemic norms. The customers here, greater than a year, is, you know, about in the mid 60% range, two-year customers in the mid 40% range. You know, down a bit seasonally from Q1, but certainly ahead of historical averages. You know, our focus from a pricing perspective on reducing the, the discount usage has helped us to attract, you know, what we would call a more... you know, kind of a higher quality customer in terms of length of stay metrics. And that's been, you know, a purposeful strategy for a while.
I also think, you know, again, the more, the higher demographic nature of our portfolio, you know, the use case of our customers tends to lend itself to, to a, to a longer length of stay. I think the, the, the inconsistent trends here in 23 from certainly, you know, June, where you would see a lot of seasonal, you know, May, June, where you would see a lot of, of more seasonal customers who are, you know, highly likely to vacate after a relatively short length of stay, you know, that could, that could have a positive impact then, as we get into the back half of the year. You know, you won't see that, you know, you won't see that churn, perhaps that, that we had seen, you know, in more historic, normal times.
Eric Lubica (Equity Research Analyst)
Okay, great. Thanks for that color. Just one follow-up. One of your peers alluded to this yesterday, that we haven't really seen kind of a normal storage year since maybe 2018. Does the fact, you know, seasonal occupancy didn't move up quite as drastically as it has, in the spring and summer months, perhaps suggest, you know, we, we may not see as much of a seasonal downturn later in the year? Is it just too difficult to say? We're just trying to figure out if we shouldn't expect the same degree of, of seasonality that, that we're typically accustomed to. Thank you.
Chris Marr (President and CEO)
Yeah, I think it's a, it's a really challenging question to answer, given the inconsistencies throughout the year. To my, you know, my prior comment, the fact that you may have seen, you know, customers coming into the portfolio, not, not the quantity of that more seasonal customer, could lead to a, you know, a, a bit of an unusual lack of vacate activity than in the, in the third or fourth quarter, which could, you know, overall kind of smooth things out. I, I think. Unfortunately, I'm just going to tell you, you got a range going into the back half of, you know, could be the more traditional kind of, of seasonality. It could in fact be less seasonal, just given the activity that has taken place thus far this year.
Eric Lubica (Equity Research Analyst)
Okay, great. Thanks for taking the question.
Chris Marr (President and CEO)
Thanks.
Operator (participant)
Thank you. Next question will be from Hong Zhang at JPMorgan. Please go ahead.
Hong Zheng (Equity Research Analyst)
Yeah. Hey, guys. I have to imagine you and your peers are leaning more toward online to acquire customers at this point, and if there's more competition, it would naturally raise the cost of online advertising. I was wondering if you could talk a little bit about your expectations for the remainder of the year.
Chris Marr (President and CEO)
Yeah, not necessarily a big shift in how we think about attracting customers and, and, and getting them into the portfolio. You know, it's a, it's a need-based product, as you know, and so the customer self-identifies that they need a safe and secure place to store their valuable possessions for a period of time. They begin that process generally with a digital search. From, from that perspective, it's a lever, along with price and promotion, to, you know, drive revenue growth. We look at, you know, we look at marketing on a very data-driven basis as we look at all aspects of our business. When there are opportunities to utilize an increased allocation of capital to marketing and get attractive ROIs on that, you know, we certainly will do that.
We look at that lever in conjunction with price and discounts, to try to get that balance that drives the, you know, the, the, the highest level of revenue maximization from that customer at that store. You know, I think it is one of those areas that's very dynamic. You know, we look at it again week to week, day to day, and toggle accordingly. It's another area, much like, much like price and promotion, where we need to be cognizant of what other storage operators are doing, you know, in the markets in which we operate and try to find opportunities to maneuver where we can, you know, take advantage of, of whatever actions we may see in the bid market and, you know, produce some attractive returns.
We, we also obviously use, you know, other means of customer attraction, that, whether that be social, et cetera, that, you know, we can get good returns out of as well. Certainly we allocate spend there as appropriate. It's a, it's a, again, it's an interesting time and, and I think, you know, what, what we do very well and, and what we focus on is being, you know, data-driven and nimble and being able to move and, and, and do what we think makes sense to drive ultimately maximization of that revenue from that each, you know, individual customer.
Ki Bin Kim (Equity Research Analyst)
Got it. Thank you.
Operator (participant)
Next question will be from Ki Bin Kim at Truist. Please go ahead.
Ki Bin Kim (Equity Research Analyst)
Thanks. Good morning. My first question relates to how long it takes for the changes in street rates to be fully impacted in same-store revenue. If we assume the street rate comps are, you know, basically flat from here on out, I guess when you start looking forward, how much does the deceleration in street rates before that start to bleed into next year's results? Meaning even if market rents are flat, does same-store revenue start off -two, -three, if you get my drift?
Tim Martin (CFO)
Not sure I do get your drift. I'm trying to keep up with you. I mean, part of it-
Ki Bin Kim (Equity Research Analyst)
Well, one thing is that.
Tim Martin (CFO)
It's gonna come down to the mathematical exercise of thinking about lengths of stay. So, you know, a shorter-tailed customer is gonna have, is gonna have a shorter-term impact. A longer-term customer is gonna have a longer-term impact. I would think that the ultimate answer to your question is, it's gonna take well in excess of, the average length of stay, I would think.
Ki Bin Kim (Equity Research Analyst)
Okay, and where are your street rates today versus 2019 level?
Chris Marr (President and CEO)
Yeah, versus, versus 20... Hold on 1 second. High teens, low twenties, greater than 2019.
Ki Bin Kim (Equity Research Analyst)
If you compared where your same-store revenue is versus 2019, I'm just trying to get a sense of like what the, you know, what the fall in same-store revenue could be to get to that number. Do you, do you have that handy?
Chris Marr (President and CEO)
Trying to pull it here. Same-store revenue growth?
Ki Bin Kim (Equity Research Analyst)
No, same-store revenue, just absolute levels year versus 2019. If street rate starts up 20, but same-store revenue is up 30, then maybe, you know, one can assume that there's a 10% gap.
Chris Marr (President and CEO)
I don't-
Ki Bin Kim (Equity Research Analyst)
Just trying to get that sense.
Chris Marr (President and CEO)
Yeah, I don't have that handy. Ki Bin, I think some of these questions are probably better served if you wanna give Josh a call offline and work through some of this minute detail.
Ki Bin Kim (Equity Research Analyst)
Okay. All right, thank you.
Operator (participant)
Thank you.
Tim Martin (CFO)
Thanks.
Operator (participant)
At this time, we have no further questions registered. Please proceed with closing remarks.
Chris Marr (President and CEO)
Okay. Thank you everybody for joining us this morning. Certainly, it has been an interesting first half of 2023. We look, we look out and can promise you that we will continue to do what we always have, which is focus in on controlling what we can control, making sure that we're operating as efficiently as we can, continue to focus in on ways to generate incremental value for our shareholders through how we position the portfolio, to how we capture and maximize value from each individual customer, and how we make sure that we're keeping our costs under control. All things that historically we've been very good at and would anticipate continuing to focus in on delivering on that promise going forward.
Thank you very much for joining us, and we look forward to speaking with everybody after we report our third quarter results. Take care.
Operator (participant)
Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending, and at this time, we do ask that you please disconnect your lines.