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. Also note that the call is being recorded on Friday, August 4, 2023. And I would like to turn the conference over to Josh Schutzer, Vice President of Finance. Please go ahead, sir.

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.

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 closed-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 length of stay should continue to support modestly positive pricing for new customers relative to 2022 levels. This favorable pricing environment, in combination with physical occupancy 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 to choose from. 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.

Thanks Chris, and 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 but 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, so 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 and 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, and 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 and 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.

Thank you, sir. And your first question will be from Todd Thomas at KeyBanc Capital Markets. Please go ahead.

Hi, thanks. Good morning. First question, I just wanted to ask about the revised same-store revenue guidance. You're at 5.7% year-to-date and the guidance assumes a rather modest deceleration in the back half of the year here, I guess particularly versus some of 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 gives you comfort around the back half and a little bit of a less severe deceleration that you're forecasting?

Hey, Todd, it's Chris. As it relates specifically to New York, we expect that trends there continue to be constructive. We see as I mentioned in my opening remarks, 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 a customer in that market. We tend to see, obviously, less of the pure seasonal household mover. We've seen a very low vacate rate in that market, so remain pretty constructive there. And I think the positive trends we've seen 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. But I think for our portfolio perhaps that deceleration flattens out as we get into the fourth quarter of this year.

Okay. And you characterized the environment as uneven or maybe a little bit volatile I guess it sounds like maybe month-to-month. How does this impact your revenue management system and all of the tools that you use whether for pricing and just revenue management in general and really also for budgeting purposes? How different are these patterns? And has this cycle been relative to the last 10 or 15 years which I guess I suspect is a lot of the data and information that the system's relying on?

I've described the situation as inconsistent. The only thing we've consistently noticed in 2023 has been this inconsistency. March was unusual, June was odd, and July, by historical standards, has been rather unusual, especially in the first few days of August. As mentioned in our release, July showed positive occupancy trends compared to last year, and this has continued into August, with the gap to last year now slightly below 130 basis points. It has been very inconsistent, making it quite challenging to forecast from a data science perspective. We are managing this on a week-to-week, sometimes day-to-day basis, trying to balance our pricing against competitors who are facing the same challenges and adjusting their pricing models in real time. In short, this has complicated management compared to pre-2019 levels. Over the past five years, I can’t say any year has been 'normal' compared to my nearly 30 years in the industry. Both 2018 and 2019 were atypical due to an influx of supply, and the first half of 2020 was affected by COVID, while the latter half of 2021 and 2022 were exceptional for self-storage. We've been navigating this situation for a couple of years and, considering its historical inconsistency, I think we’ve handled it fairly well.

Okay. Are you responding to competitor price cuts by dropping decreasing rates in your portfolio? And do you feel that the price cuts are having a positive impact on driving move-in demand?

I believe the industry is experiencing a decline from the remarkable COVID-driven demand we saw in 2021 and 2022, which led to unprecedented occupancy levels. As we move away from those record highs, there's more inventory available for customers, providing them with increased options. One way to attract customers to our offerings is through pricing. Different operators, whether large, regional, or small, have varied approaches to adjusting prices. It's essential to consider local market conditions, competitor pricing, and our inventory levels to inform our pricing strategies. We utilize this data to recommend daily or weekly prices. Overall, we're currently navigating a period of increased availability compared to last year, and this trend is expected to continue for a few more weeks. Historically, we saw a normalization of trends around mid-August last year, so I anticipate we will face easier comparisons moving forward after the next week.

Okay. Thank you.

Thank you. Next question will be from Juan Sanabria at BMO Capital Markets. Please go ahead.

Hi. Thanks for the time. Can 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?

Yeah. I mean 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 percentage didn't deviate all that much as we went through the quarter. There was a stretch in June, where we were pushing rate a little more aggressively. And the reality is what we saw was a slowdown in rental volume.

Okay. And then just a question on in-place rents in the same-store portfolio. You had straight quarter of sequential decline. So 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 that being impacted by the move-in rates, or has there been any diminution in ECRIs, given softer street rate trends that you'd expected in the peak leasing season?

The sort of take it from the back and work backwards the expectation in terms of pricing from a macro perspective for the balance of the year is that we will continue to see price being the lever that folks are using to try to get rentals. And so our – again as we noted in the release, the expectation is that price will continue to be an issue and therefore the adjustment in our guidance range. As you sort of compare that then to last year I think as I noted in my response to the prior question, 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. So we continue to expect some narrowing of the gap between where rates will be from August to December of this year and where they were last year. The biggest impact on the metrics that you had in your question is lower move-in rates. The ECRI program continues to be pretty strong and strongly ahead of where we were last year. And as you saw in the disclosure the vacate rate from that hasn't changed. Again, I think part of that is the unique nature of our portfolio. So I think the range of outcomes for in-place rent is going to be the driver as we do expect move-in rates to gradually close that gap to last year throughout the course of the balance of the year.

Thanks, guys.

Thank you. Next question will be from Michael Goldsmith at UBS. Please go ahead.

Good morning. Thanks a lot for taking my question. Chris, in your opening remarks you said that the demand is there but with more price sensitivity for new customers. So how is that translating – like how is that – or 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 rate in order to move in? Our perception has always been that this has been a product type that is need-based and so when you need it you need it and so you take the price that's available. So how is that exactly playing out for you guys?

Yes. I think you've got a couple of things there to unpack. I think depending upon the market and the submarket, you do have an impact of that need-based as you pointed out. So again, I think in the more outer suburban stores, who typically have relied on that more seasonal customer, who arrived in May and exits in August because of a household change, you're definitely seeing the impact of this frozen existing home market situation. I think – not to sound like a retailer but certainly in some of the Southwest markets, you can't discount the temperatures 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 brutally hot days. So I think that's got to be playing into some of the Southwest activity. But overall, you have more inventory due to the fact that you're seeing occupancies coming down across the industry. And so a customer has more optionality in terms of trying to find what they believe they need to store their possessions. And you're reacting to some degree to overall price in the marketplace. And so all those dynamics are at play that result in the situation we're in, which is if you are price competitive, you're going to get more than your share of customers because you're definitely going to get them from the smaller operators, who don't have the marketing budgets to be top of funnel and get those customers in. And 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 then for those customers that exist in that marketplace.

Thanks for all the detail, Chris. In your remarks, you mentioned some of the positive catalysts for 2024, such as potentially lower rates and increased housing turnover. However, it seems you've been observing a slowdown in the operating metrics this year, which appears to have persisted through the first half and is likely to continue in the second half. What effect do you anticipate these current pressures will have on the 2024 figures?

I believe that whenever there is a rapid rise in both pricing and occupancy, as experienced in 2021 and 2022, the subsequent normalization leads to a slowdown. As I mentioned, the latter part of last year marked the beginning of this normalization. Moving into 2024, the year-over-year comparisons will likely shift back to more typical levels. When examining the overall health of our customer base, it remains robust. This is evident in the length of stay, payment history, and auction activity, which instills confidence in the vitality of our consumers. However, there are certain challenges, especially within the housing market, that may pose short-term obstacles for self-storage. If we witness normalization in that sector, alongside a strong consumer base and more standard year-over-year comparisons, I believe we can expect a positive outlook for the self-storage industry in 2024.

Thank you very much. Good luck in the back half.

Thank you.

Next question will be from Samir Khanal at Evercore. Please go ahead.

Hi. Good morning everyone. Just on the expense side, Tim, I know you lowered the guide for the year. Maybe talk around the drivers for that. It looks like personnel may have been a factor. And then, as a follow-on maybe talk about as we think about the pressures in demand here into next year. I mean, how do we think about personnel marketing costs and even insurance costs into next year? Thanks.

Thanks, Samir. On the personnel side, we have continued to find efficiencies, and while it’s becoming more challenging to identify new opportunities, we are still managing to enhance how we staff our stores while maintaining excellent customer service. We have discussed before the pressures we face from property insurance, which will likely increase in the latter half of this year compared to the first half. Marketing expenses can vary; we invest in opportunities that offer good returns but pull back when we find less promising options. Overall, the drivers remain consistent. From a real estate tax standpoint, this year we are performing better than anticipated. We have had success with some appeals, which has positively impacted our real estate tax figures, leading to a more favorable year-over-year growth than we initially expected.

Got it. And then, just in terms of the external growth opportunities that you mentioned. I know your guide is still at kind of $100 million to $200 million for acquisitions. Maybe walk us through or talk about what that pipeline looks like at the current time considering that it's August. I'm just trying to figure out, what that pipeline looks like for you. Thanks.

Yeah. The traditional deals we've talked on prior calls also, that there's a lot of seasonality 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. So not unusual for there to be more opportunities in kind of mid-July through late-August is when if somebody is coming to market traditionally that's seasonally when more stores are brought to market than other parts of the year. And 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 are attracted to. So 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? So that's very difficult to predict. So 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. So, a lot of uncertainty around what 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 that will make sense for both buyer and seller.

Thank you.

Next question will be from Smedes Rose at Citi. Please go ahead.

Hey, good morning. This is Mattie on for Smedes.

Yeah. Good morning.

So I just wanted to ask about supply. We've been hearing that there could be some new supply coming to Manhattan's West Side. And so just wondering if you're seeing any other pockets of supply growth across your markets overall. And maybe just some updated thoughts on supply more generally.

Sure. So overall supply continues to be more muted for all the reasons that you can surmise. You have 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. And so you're seeing a significant number of hypothetical opportunities out there that are not being moved forward or pausing. So, no change, I think that those trends continue, which I think 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 remain very positive on the decline in supply there. In the boroughs in particular you're just seeing the couple of deals that I talked about last quarter working their way to completion. And 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 the tax incentives there and the opportunity there that you had in the outer boroughs. So the removal of those beneficial zones or at least the more difficult opportunity for storage in those zones never is an impact in Manhattan. So, you are seeing some supply certainly in Manhattan. I think the for better or worse for us we have the one store on 55th Street and frankly it's been performing incredibly well here over the course of 2022. So we are thrilled with that store. But yes, you are seeing at least some talk in a couple of new stores that have been on in planning and known to be being built there in Manhattan. So, that's going to put some pressure on some other operators in that market.

Great. Thanks. And are you seeing any increase in conversion properties given what seems to be an uptick in big box vacancy?

Yeah. There's an awful lot of talk and not a lot of action in terms of that concept. It's in the office business for those poor folks fighting through this existing time they're just scratching and clawing to try to figure out how to get somebody to use their product. And so there's always the conversation about self-storage. It's just challenging from a floor load and the ability to have a loading area et cetera. So a lot of talk. Haven't seen any particular uptick in action.

Great. Thank you.

Next question will be from Jeff Spector of Bank of America. Please go ahead.

Great. Thank you. Chris, just trying to think about the positives and negatives you've laid out and really what's changed I guess since we saw you and the team early June and appreciate very much some of the uncertainty and difficulties to forecast, especially given the tough comps. But I guess 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. How do you feel about this latest guidance given some of the comments you made about, I guess, we're finishing peak leasing season et cetera?

Thank you, Jeff, for your question. We’ve had a challenging and inconsistent year. At the beginning of the year, we set a range of expectations based on various scenarios we anticipated affecting customer demand and pricing. After going through our busiest period, we experienced an unexpectedly slow June. However, July has seen an uptick in activity, although our customers remain very price-sensitive. After reviewing our expectations, we feel confident that the lower end of our initial range from February still holds true. However, the upper end, which represented a more favorable market, now seems unattainable. Rather than saying we cut our expectations, we view it as adjusting the upper end of our forecast to better reflect the reality of the first seven months of the year.

Fair. Thank you. And just to clarify an earlier question again on the impact potentially the lower street rates are having on ECRI to confirm, I believe you're saying there's no impact on the ability to push on existing.

The ability to push hasn't been impacted. The current street rate in that store in that market at the time that your systems are producing recommended increases to the existing customers and input is going to be where our current market rate's trending. And so that will put some pressure on the magnitude per se. But again, if you want to look at it year-over-year, we were seeing that pressure if not more in the back half of 2022 as well. So the relative percentage doesn't move all that much.

Thank you. To confirm, you mentioned in July that more price-sensitive customers are reducing the rate. Occupancy has increased as well. Are you finding that your strategies are effective? Are you satisfied with the results you are observing in August regarding how you are attracting new customers and competing?

Yes. I think we've felt like through the whole year. We've been quite pleased with what we've been able to generate in terms of rate increases to the existing customers and revenue growth overall with the backdrop that we're competing in. And so, we're trying to an earlier question, week-to-week day-to-day, you're trying to fine-tune everything to find that sweet spot between asking rate and promotion and what the demand that you achieve from that is. Obviously, in July, we were in a decent spot from getting that demand at price. We'll continue to see where there are opportunities for the rest of the year to continue down that path. So certainly feel as if things kind of balanced out more in July. Again, the inconsistencies have been there all year and we can go back to the first quarter and say, March was an oddly slow month and then April picked up really, really nicely. So, it's just been a very inconsistent year.

Okay. Thank you.

Thank you. Next question will be from Cassandra Cyber at Truist Securities. Please go ahead.

Hi. Thanks for taking my question. A follow-up on the external growth. Could you talk a little bit more about what your assets need to have to meet your quality standards? And could you offer more specifics what your return thresholds are?

Thank you for the call. Good morning. Our strategy has remained consistent for over a decade, focusing on Class A facilities in the top 40 MSAs. We prioritize quality in both the market and our assets. We are looking for opportunities to expand our presence and aim for a strong competitive market share in those top 40 MSAs, preferably leading in some areas. We seek assets that enhance our current footprint. Recently, we haven't found many suitable opportunities for purchase or been able to persuade sellers to part with assets that align with our criteria at prices that are viable for us compared to our cost of capital. Given the current interest rates and their comparison to those when we were more actively investing, our expected returns must shift. The cap rate we require for these desirable assets has increased. We have noted a disconnect for several quarters, with a gap around 15% to 20% between our target returns on a risk-adjusted basis and the sellers' expectations. Our hopeful outlook for the latter half of the year is to identify opportunities at reasonable price points, though there's no guarantee of success. We will remain disciplined and will not pursue growth for its own sake. Our growth will align with our strategic objectives and aim to enhance shareholder value.

Okay. Great. Thank you.

Thanks.

Next question will be from Keegan Carl at Wolfe Research. Please go ahead.

Yes. Thanks for the time, guys. So 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. So 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?

That's a great question. Tim discussed our historical performance, and we expect to add a similar amount of third-party managed assets to our portfolio by the end of this year, about 150 stores annually. This business has two key drivers. First, there's the development cycle where a new store developer seeks a professional third party to manage operations, leading to an addition to our platform if the store is built. We have a pipeline of new developments, although the pace is slowing due to general supply issues. Second, existing operating stores tend to respond to the business cycle. When owners are doing well and the business environment is favorable, they are less likely to consider shifting management. However, in a competitive market, more owners contemplate these changes and engage in discussions with us. This trend in our pipeline gives us confidence for continued growth at a healthy pace into this year and next, allowing us to expand our distribution without needing to allocate capital.

Super helpful color. And maybe one for Tim here. Can you just remind us what sort of macroeconomic backdrop is embedded in your guidance range?

Yes. We discussed at the beginning of the year that we weren't really focused on providing guidance trying to be predictive of broad macro environment because that environment tends to not have a direct short-term impact on storage fundamentals. It's a little bit longer term as it relates to whether we're soft landing or not in 2023. Probably has more of an impact on 2024 performance than it does on 2023. So we weren't trying to in our initial guidance trying to build in whether there is going to be a recession how many interest rate hikes there were going to be. We took a view to say over the next 12 months we think realistically this is the range in which we think the business will perform. And as we've talked about here multiple times during this call we're still in that range. We're just at the more conservative end of a lot of those underlying assumptions than we were six months ago.

Got it. Thanks for the time, guys.

Appreciate it.

Next question will be from Spenser Allaway at Green Street. Please go ahead.

Hi. Thank you. Not to belabor the ECRI questions, but you did note that there's been a bifurcation in market performance so some of those higher beta markets come down off the highs of the last two years. Can you just comment a little more specifically on how wide the range in terms of the magnitude of ECRI rises across different MSAs?

Yes. Interesting question. Thank you. It actually the delta or the range between in terms of just percentage increases to those existing customers at this point has not gapped out all that much because the range 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 that it's not that broad per se.

Okay. Thank you. And then just as you guys are kind of sitting on the sidelines, a little bit more, right now I think as it relates to acquisition activity any thoughts in regards to redevelopment 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 little bit slower?

Yes. Those opportunities tend to be very attractive. When they make sense and are financially viable, they often yield nice returns because we are comparing them to new developments, where we would need to acquire land. Since we already have the land, it's a fixed cost for us. We are constantly looking for expansion opportunities. While they may not significantly impact our overall performance, they currently represent the best use of our capital. We aim to find complementary opportunities that allow us to add space where it makes sense. We wish we could pursue more of these opportunities. Over time, we would have taken advantage of many such prospects within our legacy portfolio. We are actively exploring various opportunities that came with our portfolio acquisition in late 2021. The Storage West portfolio includes some promising prospects for expansion and improvement that can yield attractive returns. Although the scale isn't huge, the returns from the opportunities we are uncovering are quite appealing.

Okay. Great. Thank you, guys.

Thanks.

Next question will be from Eric Luebchow at Wells Fargo. Please go ahead.

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? Are any signs of some of the move-out activity happening with some of your longer-tenured customers? Just trying to think, how that could impact some of the rental roll downs that you typically see, from move-outs versus move-ins.

The length of stay has started to stabilize and is ahead of the pre-pandemic norms. Customers who have been with us for over a year make up about 60%, and those over two years are around 40%. While these numbers have dipped slightly compared to Q1, they still exceed historical averages. Our strategy to reduce discounts has successfully attracted higher-quality customers, reflected in better length of stay metrics, and we have been intentional about this approach for some time. Additionally, the demographic profile of our portfolio and the needs of our customers generally favor longer stays. In 2023, trends have been inconsistent, especially during June, which typically sees a higher number of seasonal customers who tend to leave after a short period. However, as we move into the second half of the year, we may not see the same level of churn that was common in previous years.

Okay. Great. Thanks for that color. And 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. So does the fact seasonal occupancy didn't move up quite as drastically as it has in the spring and summer months perhaps, suggest 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 seasonality that we're typically accustomed to. Thank you.

Yes. I think, it's a really challenging question to answer, given the inconsistencies throughout the year, to my prior comment. The fact that you may have seen customers coming into the portfolio, not the quantity of that more seasonal customer could lead to a bit of an unusual lack of vacate activity than in the third or fourth quarter, which could overall kind of smooth things out. So I think you've got to unfortunately, I'm just going to tell you got a range going into the back half of, could be the more traditional kind of seasonality. It could in fact be less seasonal just given the activity that has taken place thus far this year.

Okay. Great. Thanks for taking the question.

Thank you. Next question will be from Hong Zhang at JPMorgan. Please go ahead.

Hi, 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, will naturally raise the cost of online advertising. I was wondering, if you talk a little bit about your expectations for the remainder of the year.

There isn't a significant change in our approach to attracting customers and incorporating them into our portfolio. As you are aware, this is a need-based product. Customers recognize their need for a secure place to store their valuable items temporarily, typically starting that journey with a digital search. Therefore, we view this as a tool, along with pricing and promotions, to drive revenue growth. Our marketing strategy is highly data-driven, encompassing all facets of our business. When we identify opportunities to invest more in marketing and achieve strong returns on that investment, we pursue them. We analyze this strategy alongside pricing and discounts to establish a balance that maximizes revenue from each customer at our locations. This area is quite dynamic, and we reassess it weekly, even daily, making adjustments as needed. It's essential for us to be aware of what other storage providers are doing in our markets and seek opportunities to navigate competitive actions in order to produce favorable returns. We also employ various methods of attracting customers, including social media and other channels, to generate positive returns, allocating our budget accordingly. In summary, this is an intriguing period, and our strength lies in being data-driven and agile, allowing us to adapt and implement strategies that maximize revenue from each customer.

Got it. Thank you.

Next question will be from Ki Bin Kim at Truist. Please go ahead.

Thank you, good morning. My first question is about how long it takes for changes in street rates to fully affect same-store revenue. If we assume that street rate comparisons remain flat from this point forward, how much of a deceleration in street rates would impact next year's results? In other words, if market rents are flat, would same-store revenue start off at a decline of 2% or 3%?

I'm not sure, I do get your drift. I'm trying to keep up with the...

Well, one thing is that...

Part of it is going to come down to the mathematical exercise of thinking about lengths of stay. And so, a shorter-tailed customer is going to have a shorter-term impact a longer-term customer is going to have a longer-term impact. So I would think that the ultimate answer to your question is, it's going to take well in excess of the average length of stay I would think.

Okay. And where are your street rates today versus 2019 levels?

High teens to low 20s above 2019.

And if you compare where your same-store revenue is versus 2019, I'm just trying to get a sense of like what the fall in same-store revenue could be to get to that number. Do you have that handy?

Trying to pull it here. Same-store revenue growth?

No, same-store revenue just absolute levels here versus 2019. So if street rates are at up 20%, then same-store revenue is up 30%, then maybe one can assume that there's a 10% gap. Just trying to get that sum.

Yes, I don't have that handy, Ki Bin. I think some of these questions are probably better served if you want to give Josh a call offline and work through some of this minute detail. Thanks.

Okay. All right. Thank you.

Thank you. And at this time we have no further questions registered. Please proceed with closing remarks.

Okay. Thank you everybody for joining us this morning. Certainly, it has been an interesting first half of 2023. 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. So, thank you very much for joining us and we look forward to speaking with everybody after we report our third quarter results. Take care.

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.