Q3 2023 CubeSmart Earnings Call
Participants
Christopher P. Marr; CEO, President & Trustee; CubeSmart
Joshua Schutzer; Director of Financial Analysis; CubeSmart
Timothy M. Martin; CFO & Treasurer; CubeSmart
Hongliang Zhang; Analyst; JPMorgan Chase & Co, Research Division
Jeffrey Alan Spector; MD and Head of United States REITs; BofA Securities, Research Division
Juan Carlos Sanabria; MD & Senior U.S. Real Estate Analyst; BMO Capital Markets Equity Research
Kassandra Fieber; Research Analyst; Truist Securities, Inc., Research Division
Keegan Grant Carl; Research Analyst; Wolfe Research, LLC
Michael Goldsmith; Associate Director and Associate Analyst; UBS Investment Bank, Research Division
Smedes Rose; Director & Senior Analyst; Citigroup Inc., Research Division
Spenser Bowes Allaway; Senior Analyst of Self-Storage & Net Lease; Green Street Advisors, LLC, Research Division
Stephen Thomas Sakwa; Senior MD & Senior Equity Research Analyst; Evercore ISI Institutional Equities, Research Division
Todd Michael Thomas; MD & Senior Equity Research Analyst; KeyBanc Capital Markets Inc., Research Division
Presentation
Operator
Good morning, ladies and gentlemen, and welcome to the CubeSmart Third Quarter 2023 Earnings Call. (Operator Instructions) This call is being recorded on Friday, November 3, 2023.
And I would now like to turn the conference over to Mr. Josh Schutzer, Vice President of Finance. Please go ahead.
Joshua Schutzer
Thank you, [Ena]. Good morning, everyone. Welcome to CubeSmart's Third 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 third quarter financial supplement posted on the company's website at www.cubesmart.com.
I will now turn the call over to Chris.
Christopher P. Marr
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 us 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 counterbalanced 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 a 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 the current logjam and single-family home sales is broken through 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 experience 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.
Timothy M. 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 seeing throughout the year as we continue to normalize post pandemic and face headwinds from a volatile macroeconomic environment.
As we move 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, our 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 2.3% for the quarter and 4.5% 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 3.5%.
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 are up just 2.6% year-to-date.
For the quarter, we reported FFO per share as adjusted of $0.68, which represents 3% growth over the third quarter of last year.
From an 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. As those conditions stabilize, we do believe there will be a period that presents meaningful attractive opportunities for us to invest and grow. 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 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 5.6 years, 99.5% of our debt is fixed rate. We have no significant maturities until November of 2025 and leverage levels remain very low 4.1x 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 FFO per share as adjusted and expect the year to be between $2.65 and $2.67 per share.
Thanks again for joining us on the call this morning. Apologies to some of you who had a little bit of a difficulty getting in the queue, but it looks like everybody is good.
At this time, [Ena], let's open up the call for some questions.
Question and Answer Session
Operator
(Operator Instructions) Your first question comes from the line of Jeff Spector from Bank of America.
Christopher P. Marr
Jeff, if you're asking a question, you're on mute we can't hear you, if you are.
Jeffrey Alan Spector
Sorry about that. Can you hear me now?
Christopher P. Marr
Yes. There you are.
Jeffrey Alan Spector
I apologize. My first question is on New York City. You talked about the strength in New York City this particular -- this quarter. Can you talk about thoughts heading into '24 and specifically, supply pressures, like where do we stand now for New York City? And just to confirm, are you talking really about the 5 boroughs.
Christopher P. Marr
Yes, to confirm, talking about the 5 boroughs, continue to see good, but to a lesser extent, strengthen 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're less impacted by the single-family home market. You have a use case where folks are using us more as an ancillary use 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 '24 and likely into '25 and then specifically in the boroughs. We continue to see a less and less impact of supply, seeing no deliveries in the Bronx. There's a couple in Brooklyn that should be completed either this year or early next year, which will have a minimal and fast 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 1 or 2 new, but we're actually working through that, I think, pretty constructively and are optimistic that we'll see some reacceleration there as we get into the back half of next year. So overall, from a consumer perspective, a supply perspective, pretty constructive on urban, New York in particular, but we're also seeing it in Boston and Chicago and I come back in Washington, D.C. from the supply impact that we experienced there. So constructive there.
Jeffrey Alan Spector
Very helpful. And the second question, can you just walk through the dynamics between lowering the same-store, but maintaining FFO?
Timothy M. Martin
Yes, happy to. Great question. Ultimately, there's not one thing to point to as to the offset. It's -- but rather, it's a lot of small things that are counterbalancing the lowering of same-store NOI expectations at the midpoint and maintaining on the FFO side, our nonsame-store portfolio, certainly, a portion of it is more urban focused, and therefore, 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 could see that in the store count that we added, that puts us up higher within the range of our expectation on fee income, it's also improved our expectations as it relates to tenant insurance revenues.
Our continued focus on controlling what we can and focusing on cost efficiencies has given us some good news on our overhead, both at the operations level as well as at the corporate level that shows up in G&A. And then a lot of it just comes down to where we expect to land within those ranges of the assumptions and also within a range of ultimately of where we expect to land from an FFO perspective. So there's no quick easy answer to that question. It's a little bit of good news in a lot of areas that provides the offset.
Operator
Your next question comes from the line of Spenser Allaway from Green Street.
Spenser Bowes Allaway
Understood your comments in regards to the environment being a little bit difficult in terms of the transaction market, and you guys have obviously been disciplined year-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? And what is the prevailing bid-ask spreads look like today?
Timothy M. Martin
Yes, Spenser, 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 2 calls ago, we talked about that for most things that we were looking at there were of interest to us that, that bid-ask spread from our perspective was kind of like 20%-ish. Last quarter, we were talking about the fact that it was at least moving in the right direction, but we were still off, 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 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 the price at which that opportunity comes. So getting a little bit closer, but still yet for most deals that we're looking at, there's a little bit of a gap.
We are super optimistic though that there is, as I mentioned in my prepared remarks, there's a time coming here that we believe that we are super well positioned both from a balance sheet standpoint. Our team is ready and willing and able to go when we -- when the time is right to start pulling the trigger on a more frequent basis. We think there is some good opportunity coming ahead here as sellers start to get a little bit more realistic about where the market is and where buyers need to be.
Spenser Bowes Allaway
Okay. And then maybe just lastly on the operations front. You commented that some of the more urban markets, you're seeing more strength there. How are you feeling about ECRIs and ability to push rates in some of your other markets outside of those more urban markets?
Christopher P. Marr
Yes, Spenser, across all of our markets, the trend has been consistent here for the last several months. When we think about opportunities that presented themselves during the very robust times of '21 and the first couple of months of '22, we had gotten up to around, call it, 20% on average across the portfolio in terms of the amount of the increase as market pricing has gotten more competitive.
And as -- we've seen -- the results that we've seen throughout this year, that had come back by May, June of this year into that 15% range, still higher than the kind of 10%, we would have quoted on average pre-pandemic, but down from the peak. And that's been consistent here during the third quarter. And as I mentioned in my prepared remarks, our current customers continue to exhibit signs of good health. And we think there will 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 to growth as we go forward.
Operator
And your next question comes from the line of Smedes Rose from Citi.
Smedes Rose
I just wanted to ask you, in markets where you see the combination of LSI and EXR, have you seen any kind of significant changes in the strategy there? I mean, like in New York and Miami, I think where you have -- I mean, I know you were competing with the individual assets already. But -- any changes that you're having to respond to or changes to your strategy going forward?
Christopher P. Marr
I think as we look at competition across all brands in really all of our markets, it varies, again, by market, we see rate most constructive in New York and some of those other urban markets that I discussed, we see more pressure in some of the Southwest and Southeast markets that had the big run-up as migration patterns changed pretty quickly and dynamically during COVID.
So no particular brand to point to that's operating any different than any other. We have to just be cognizant of the competition in the micro market for the store that we own or manage, whether it be a national brand, a regional brand or a local brand and react accordingly.
Smedes Rose
Okay. And then you talked a little bit about New York supply. But could you just talk a little bit about supply coming online next year for your portfolio? And some of other folks that kind of suggested that maybe supply outlook is probably overstated and that we could see more developments falling out of the pipeline? Are you seeing that? Or do you agree with that notion?
Christopher P. Marr
Yes. I think the challenge with some of the third-party data on storage supply is that our observation at least is that potential new developments get tracked, entered the database, but there's not a process that's equally efficient to remove potential sites from the database as they grow stale and it becomes obvious that the developer has either paused for an elongated period or abandoned the project. So I think that the third-party data perhaps overstates, we would agree with your premise that it overstates the actual amount of potential deliveries.
Our outlook is that the overall impact of supply for the obvious reasons, cost of capital, cost of labor, cost of raw materials, the inconsistent rate environment for new customers in many markets. All of that is putting a bit of pressure on the local developers interest and ability to pull a permit and get started.
So we would, again, think the new supply environment will be constructive for storage fundamentals in '24. Again, given the timing in many markets, hard to say how long into '25, but it would feel like at least the first half of '25, you can see that same constructive environment. So again, as I mentioned in my prepared remarks, I think supply along with the current health of our customer are 2 positives for storage as we go into next year.
Operator
And your next question comes from the line of Todd Thomas from KeyBanc Capital Markets.
Todd Michael Thomas
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?
Timothy M. Martin
Yes, I would say it was more reflective of a pricing environment that was more aggressive than we would have anticipated when we sat here 3 months ago. What we were seeing at the time of the last call was, obviously, the levels of overall demand were declining from where they had been over the last couple of years. But the demand that we were seeing and that we were capturing at the pricing that we were capturing it at was -- it was in our expectations, what changed and really started to change in a meaningful way in September and then into October was the pricing environment from competitors. And so our systems and our reaction to that necessitated us moving our pricing to new customers lower than we would have thought necessary 3 months ago.
Todd Michael Thomas
Okay. And then you mentioned that you were down -- so you called back a little bit of occupancy at the end of October down 130 basis points. What was the occupancy rate in the same store at October -- at the end of October?
Christopher P. Marr
The actual occupancy at the end of October, the print was 91.3%.
Todd Michael Thomas
Okay. That's helpful. And then just back -- last question, back to New York, the strength that you're discussing or the stability in the New York segment of the portfolio. It did experience revenue growth, overall did experience a 20 basis point deceleration from last quarter.
And I'm just curious as we think about New York, it is the overall New York portfolio for you, which is pretty sizable at 20%, 21%, 22%. 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.
Christopher P. Marr
The latter. So we would expect that there will be some decel in the rate of revenue growth in the same-store portfolio in New York broadly. I think we printed in the high 5s in the quarter. The 3 -- our 3 main boroughs: Brooklyn, Bronx and Queens were fairly significantly higher than that in terms of their contribution, and then it was offset by North Jersey, which looks a lot more like the overall same-store pool. But broadly, we would expect more muted deceleration in the New York MSA over the next couple of quarters, but still some modest degree of decel.
Todd Michael Thomas
Okay. On the 11% or 12% of revenue in the boroughs specifically, are you seeing strength? Are you actually seeing revenue growth gains in that segment of the New York portfolio?
Christopher P. Marr
Yes. It's -- I mean, again, it will vary by borough and that the Bronx with no news supply had a really good third quarter. Brooklyn and Queens, also had fairly good third quarter, but on a relative basis, a little bit lighter. Then the Bronx. But I think overall, we would expect in those 3 boroughs again, to what degree and how de minimis, but I would err on the side of expecting some very modest decel versus flat or accelerating.
Operator
And your next question comes from the line of Michael Goldsmith from UBS.
Michael Goldsmith
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 that portfolio compare now to the overall portfolio? And does this create -- is it performing more in line with the overall portfolio? Does this create a bit of -- will this not be as much of a tailwind next year? Or does there remain kind of a healthy gap with the rest of the portfolio that should continue to support growth in 2024?
Timothy M. Martin
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 grow at a higher pace because there is -- as 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 2 that we have a store or a portfolio of stores onto our platform. And I think over time, then that benefit diminishes and starts to look more and more like -- all else being equal, looks more and more like the portfolio on a whole.
Michael Goldsmith
And then my follow-up question is on advertising. It seems like that expense has been flat year-over-year. So is it your -- despite kind of the overall environment, it seems like you're not overly pushing that as a lever to drive demand. So 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 some of the advertising like -- are some of your competitors pushing harder on this and pushing the costs to advertise higher?
Christopher P. Marr
So our approach to marketing and specifically in search over the last couple of quarters has been to be consistent in terms of how we've thought about spend from quarter to quarter. We haven't had very much lumpiness to that spend over the last 4 quarters. But it's a week-to-week decision in terms of how we think about allocating particularly on the paid search side both overall and to individual markets. And so again, it will be what it will be depending upon where we see the opportunities. We had pretty significant spend in the third quarter of last year. And so the change this quarter wasn't that significant.
I think as we go forward, the answer will be incurring costs on that side of our marketing efforts based on the returns that we 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 search side, then offset by efficiencies in terms of our bidding and how we go out our strategy on customer capture. So long-winded answer, but that's kind of the state of the union on that.
Operator
Your next question comes from the line of Juan Sanabria from BMO.
Juan Carlos Sanabria
I just wanted to go back to one of Jeff's questions at the top with regards to the same-store guidance changing, but not necessarily earnings. And Tim, I think you made an allusion to, and correct me if I'm wrong, that maybe just within the ranges for both the same-store and earnings that the delta between those maybe explain why you were able to maintain one but not the other.
So maybe just hoping you could expand upon your comfort level within the revised ranges for both earnings and same-store just so we can get a little bit more clarity on how you really see things both at the core operating level and the earnings level?
Timothy M. Martin
Sure. Yes. I mean I don't know how to answer the question any different than I answered it before. I guess to the comfort level, we are comfortable, certainly when you provide annual ranges and you get closer and closer to the end of the year, and we're sitting here with pretty much October results in hand.
We have [10, 12], so the answer at this point. So we're pretty comfortable with the ranges that we have provided. And again, I think it's -- there are a lot of ranges of individual assumptions that underline -- that underlie and support the overall FFO per share range -- and so it's really -- simply the offset is where we expect to land in each one of those provided ranges and then where we expect to land from an overall standpoint. So we're comfortable with the revised guidance as we always are, given what we know at the moment that we provided.
Juan Carlos Sanabria
Fair enough. Okay. And then just -- maybe just a broader question. What are your guys' thoughts on when these price wars for a lack of a better term, might end? And what would be the catalyst to see things change to be less competitive? It seems like it's kind of caught everybody by surprise.
Christopher P. Marr
Yes. I think the catalyst as we look out are, 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 buy down in the mortgage if they have a mortgage subsidiary as the loss leader to try to incentivize folks to purchase new homes. And in most markets, you're just not seeing transactions occur on the existing home side. So that certainly would be, I think, a catalyst to create some meaningful improvement in 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 will be fabulous for the next 29 years because we have a consumer in the United States who likes possessions, moves around, obviously, very motivated to own and move up and down the ladder on a single-family home perspective. So feel pretty constructive about it. I think when that happens, my crystal ball is not that good.
Timothy M. Martin
I think you add to that, that you're in a period of change here, getting from the abnormal levels that we all enjoyed for 2 years, and we've talked about it now for the past 12 or 18 months that we're on that return to normal or return to the new normal, which we think is a little bit better than the old normal ultimately.
But during that change, certainly, you're going to have different strategies to try to capture your share or more than your share of what overall is a declining level of overall consumer demand for the product. And so I think during that period of change, it's -- we're seeing noise, and we're seeing actions taken by some and reactions from others.
I think ultimately, when you see it start to stabilize as 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' when 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've always been, which is from there you grow. And from there, you maximize revenues. And as a sector, we've been pretty good at doing that.
Operator
And your next question comes from the line of Kassandra Fieber from Truist Securities.
Kassandra Fieber
So I'm curious, given the intensified competitive landscape that you've already talked about, what has been the current existing customer rate increases? And what kind of pace are you thinking after we look at 2024? And also, have you noticed any changes in customer behavior recently that has changed your ability to push your rate increases now in 2024 view? If we could share your thoughts around that.
Christopher P. Marr
Thanks, Kassandra. We've been averaging over the last quarter and here into this month of October, November, right around 15% in terms of the average increase. We track the customers as they receive an increase, again, some 0, some -- 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 makeup 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 '24, we don't anticipate any major changes in that environment. 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 that answers it.
Kassandra Fieber
Okay. That's helpful. And then -- you mentioned that you've cut rates as a result of the increasing competition, and we've seen the street rates as they continue to decline. If you could share if you know what are the street rates today versus 2020 -- '19 levels? And then also if you could share what percentage of your total customers are below in-place rent currently?
Christopher P. Marr
Sure. So the first question, I believe, was rates today relative to 2019 levels, rates today are up about 17% versus those 2019 levels. And your second question was the percentage of customers who are currently below street?
Kassandra Fieber
Yes.
Christopher P. Marr
Yes. Don't have that number. I don't track that number, not something we tend to focus in on because it's a factor of, again, when you came into the portfolio and as street rates move around. So I don't have an exact percentage on that one for you.
Operator
And your next question comes from the line of Steve Sakwa from Evercore.
Stephen Thomas Sakwa
Chris, I just want to clarify one thing you said earlier just to make sure. When you talked about 16.9% going to 18%, was that the roll down of kind of new customers against expiring customers? Or was that something different? And if that is the case, do you feel like that 18% roll down is kind of the bottom? Or do you expect that to move a bit lower moving forward?
Timothy M. Martin
Steve, it's Tim. It was actually from -- I was telling those numbers out there. So the 16.9% and 18% were 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 same as we got into October, rates in October, net effective rates of new customers were 18% down.
As we would have thought about that, as we talked about on earlier calls, our expectations several months ago was that we would be able to start 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. That's what we were referring to in those numbers. That's the context.
Stephen Thomas Sakwa
Got it. Okay. So it sounds like it's gotten a bit worse and maybe gets worse in November, December against the 18%?
Timothy M. Martin
We'll see. Yes, I mean it's a little bit too early to tell, definitively, but it's certainly net effective rates are worse relative to last year than we would have thought a couple of months ago for certain.
Stephen Thomas Sakwa
Great. 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 realize cap rates can be all over the board, if you're buying empty buildings or 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 stocks trading and where debt costs are, like how high does the returns need to be against your cost of capital?
Timothy M. Martin
Yes. I think there's really 2 buckets to answer that question. I think there is a bucket of opportunity that's measured in, call it, $50 million to $150 million type of opportunity which is largely funded with our free cash flow. We think about that in our targeting stabilized yields in the low to mid-6s. That's kind of where we're looking at the moment.
I don't think low to mid-6s for us right now 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's kind of 1 bucket that is the bucket that we can pursue that is not relying upon us raising external capital, either debt or equity. And then there's 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.
Stephen Thomas Sakwa
Okay. And just as a quick follow-up, are there any markets that you think there'll be more distressed in? Is it the urban markets? Or is it more of the suburban kind of migration markets that maybe people chased and built into?
Timothy M. Martin
I'm not sure necessarily -- it's hard to predict the distress or at least the seller motivation. 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 it's debt that's 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.
Operator
And your next question comes from the line of Keegan Carl from Wolfe Research.
Keegan Grant Carl
I kind of hate to (inaudible) on ECRIs. I know we touched a lot on the magnitude, but just kind of curious where your thoughts are specifically on cadence? And then how are you thinking about your 2 different buckets of customers for example, the longer-term customers versus those that have moved in, say, within the last year?
Christopher P. Marr
Yes. On the cadence, the overall process is dynamic for the existing customer as it is with 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, how you came into the portfolio, whether that's 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 debit? Is it credit? Is it cash?
When we think about the occupancy of the individual cube that you're in, both in that store, in that submarket, when we look at our forecast for rerenting that cube, should you choose to vacate, where do we see that demand coming from? So there's a variety of factors, which then translates into a pretty dynamic sense of timing for those increases depending upon those factors.
So it could be in that 4- to 6-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 look across the portfolio, obviously, it's going to depend upon the fundamental performance in those markets as 1 component. What's going on with existing pricing in those markets where you have steeper 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 last year to this year. So yes, that's kind of how we think about it.
Keegan Grant Carl
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?
Christopher P. Marr
Yes. I think as Tim mentioned, we were 130 down at the end of October, 117 yesterday. So I think that number is going to be between that 120 basis points down from last year to 150 is likely the area that will end December.
Operator
Your next question comes from the line of Hong Zhang from JPMorgan.
Hongliang Zhang
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've been doing to achieve that? And I guess for lack of better words, how sustainable is that going forward?
Christopher P. Marr
Yes. Thanks for the question. So the efficiency is there really come to the macro question of how does our customer want to be served. Interestingly, as we do a lot of studies, conjoint surveys and focus groups, having a teammate in the store is a top priority for most of our customers. And so as we think about rising wages and benefit costs it comes down to how can you be the most efficient in scheduling, staffing and thinking about providing as close to that experience, perhaps as you can in the event that for whatever reason, there's not a teammate 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 mate virtually through a screen and have a FaceTime-like conversation where they can take you not only through your question, but if you desire through the entire process of renting a cube.
So I think it's more on the efficiency side, recognizing 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'll continue to have a keen focus on making sure we're delivering the kind of service they expect and the way they expect as efficiently as possible.
Operator
Mr. Chris Marr, there are no further questions at this time. Please proceed.
Christopher P. Marr
Thank you, everybody, for joining us today. I'm 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.
Operator
Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may all disconnect.
