Earnings Call Transcript
CubeSmart (CUBE)
Earnings Call Transcript - CUBE Q3 2023
Operator, Operator
Good morning, ladies and gentlemen, and welcome to the CubeSmart Third Quarter 2023 Earnings Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. 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.
Josh Schutzer, Vice President of Finance
Thank you, Aena. 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. 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. 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. I will now turn the call over to Chris.
Chris Marr, CEO
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.
Tim Martin, CFO
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 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 2025 and our leverage levels remain very low at 4.1 times debt to EBITDA. Details of our 2023 earnings guidance and related assumptions were included in our release last evening. Overall, we maintained the midpoint and narrowed the range of our full year 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, let's open up the call for some questions.
Operator, Operator
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Your first question comes from the line of Jeff Spector from Bank of America. Please go ahead.
Chris Marr, CEO
Jeff, if you're asking a question, you're on mute. We can't hear you if you are.
Jeff Spector, Analyst
Sorry about that. Can you hear me now?
Chris Marr, CEO
Yes. There you are.
Jeff Spector, Analyst
I apologize. Thanks for taking my question. My first question is on New York City. You talked about the strength in New York City, this particular quarter. Can you talk about thoughts heading into 2024 and specifically supply pressures, like where do we stand now for New York City? And just to confirm, are you talking about the five boroughs? Thank you.
Chris Marr, CEO
Yes, to confirm talking about five boroughs continue to see good but to a lesser extent strength in Westchester County, Long Island, a bit of supply pressure in North Jersey and we expect that to continue. But if you're focused on the boroughs per your question, we would expect that the strength that we're seeing in the third quarter will continue into the fourth quarter and into 2024. For all the reasons that I mentioned in my prepared remarks, you have higher percentage of renters, you'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 2024 and likely into 2025 and then specifically in the boroughs. We continue to see 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 one or two 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. Thanks.
Jeff Spector, Analyst
Thanks, Chris. Very helpful. And the second question, can you just walk through the dynamics between lowering the same-store, but maintaining FFO?
Tim Martin, CFO
Yeah. Happy to. Great question. Ultimately there's not one thing to point to as the offset, 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 non-same-store portfolio, certainly a portion of it is more urban focused and therefore that has continued to outperform our expectations. 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.
Jeff Spector, Analyst
Okay. Thank you.
Tim Martin, CFO
Certainly. Thank you.
Operator, Operator
Thank you. And your next question comes from the line of Spenser Allaway from Green Street. Please go ahead.
Spenser Allaway, Analyst
Thank you. 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 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?
Tim Martin, CFO
Yeah, 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 two calls ago we talked about that for most things that we were looking at there were interests 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 are some good opportunities 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 Allaway, Analyst
Okay. Thank you. 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 the ability to push rates in some of your other markets outside of those more urban markets?
Chris Marr, CEO
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 2021 and the first couple of months of 2022. We had gotten up to around 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.
Spenser Allaway, Analyst
Okay. Great. Thank you so much.
Operator, Operator
Thank you. And your next question comes from the line of Smedes Rose from Citi. Please go ahead.
Smedes Rose, Analyst
Hi. Thank you. I wanted to ask if you've noticed any significant changes in strategy in markets where LSI and ESR are combined, like in New York and Miami. I know you've been competing with individual assets, but are there any adjustments you are making or plan to make in response to those markets?
Chris Marr, CEO
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, Analyst
Okay. Thanks. 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?
Chris Marr, CEO
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 2024. Again, given the timing in many markets, hard to say how long into 2025, but it would feel like at least the first half of 2025 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 two positives for storage as we go into next year.
Smedes Rose, Analyst
Great. Thank you. Appreciate it.
Chris Marr, CEO
Thanks, Smedes.
Operator, Operator
Thank you. And your next question comes from the line of Todd Thomas from KeyBanc Capital Markets. Please go ahead.
Todd Thomas, Analyst
Hi, thanks. Good morning. First question, in relation to your comments about pricing in the quarter just being a little softer than you previously anticipated. Any sense whether there was a change in top-of-funnel demand from new customers? Or was that more related to competitor pricing which impacted your ability to drive customers into the portfolio?
Tim Martin, CFO
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 three 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 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 three months ago.
Todd Thomas, Analyst
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?
Chris Marr, CEO
The actual occupancy at the end of October, the print was 91.3%.
Todd Thomas, Analyst
That's helpful. Regarding New York, the strength and stability you've mentioned in that part of the portfolio did show revenue growth, but we saw a 20 basis point slowdown compared to last quarter. I'm wondering about the overall New York portfolio, which is quite significant at around 20 to 22%. Do you believe there's potential to maintain occupancy and rates while keeping revenue growth steady, or should we expect growth to slow down to a more modest pace compared to the rest of the portfolio? I'd appreciate any insights you could provide on that.
Chris Marr, CEO
We anticipate some slowdown in the rate of revenue growth for the same-store portfolio in New York overall. In the last quarter, we recorded growth in the high 5s. The three key boroughs—Brooklyn, Bronx, and Queens—performed significantly better in terms of their contributions, while North Jersey aligned more closely with the overall same-store average. Generally, we expect a more gradual slowdown in the New York MSA over the next few quarters, but there will still be some slight deceleration.
Todd Thomas, Analyst
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?
Chris Marr, CEO
Yes, it will vary by boroughs, and the Bronx, with no new supply, had a really good third quarter. Brooklyn and Queens also performed well during the third quarter, but relatively, they were a bit lighter than the Bronx. Overall, we would expect some modest deceleration in those three boroughs, although the extent might be minimal. I would lean towards anticipating a slight slowdown rather than flat or accelerating growth.
Todd Thomas, Analyst
Okay. That’s helpful. Thank you.
Josh Schutzer, Vice President of Finance
Thanks, Todd.
Operator, Operator
Thank you. And your next question comes from the line of Michael Goldsmith from UBS. Please go ahead.
Michael Goldsmith, Analyst
Good morning. Thank you for taking my question. It appears that the storage West portfolio is positively impacting the overall same-store portfolio based on the performance of the various same-store pools. My question is how this portfolio compares to the overall portfolio now. Is it performing similarly to the overall portfolio? Will it not be as much of a boost next year, or is there still a significant gap with the rest of the portfolio that will support growth in 2024? Thank you.
Tim Martin, CFO
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 a compounding impact of the improvements that we see when we bring things onto our platform. And so those improvements are more meaningful early on for the first year or two that we have in 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 it looks more and more like the portfolio on a whole.
Michael Goldsmith, Analyst
Thank you for that, Tim. My follow-up question is about advertising. It appears that the expenses have remained consistent year-over-year. Given the overall environment, it seems that you are not aggressively using this as a strategy to drive demand. Can you share your thoughts on this approach? Additionally, have you noticed any changes in the cost of Google banner ads or related advertising? Are some of your competitors increasing their efforts, thereby raising advertising costs? Thank you.
Chris Marr, CEO
Our marketing strategy, particularly in search, has focused on maintaining consistency in our spending habits from quarter to quarter. We haven't experienced much fluctuation in our expenditures over the past year. However, allocating funds, especially for paid search, is a decision we make on a weekly basis and varies for individual markets based on opportunities that arise. Last year's significant spending in the third quarter meant that this quarter's changes weren't particularly drastic. Moving forward, we'll incur marketing costs based on the expected returns we can achieve, while monitoring how our competitors influence this, as it can fluctuate regularly. Overall, search-related costs are rising, but this is balanced by efficiencies in our bidding strategy and customer acquisition approach. That sums up our current situation regarding marketing.
Michael Goldsmith, Analyst
Thank you very much. Good luck in the fourth quarter.
Tim Martin, CFO
Thank you.
Operator, Operator
Thank you. And your next question comes from the line of Juan Sanabria from BMO. Please go ahead.
Juan Sanabria, Analyst
Good morning. 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 explains 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 at the earnings level? Thank you.
Tim Martin, CFO
Sure. I don't think I can answer the question any differently than I have before. We are certainly comfortable with the annual ranges, especially as we get closer to the end of the year and have more information, like our results through October. At this point, we have a solid understanding of where we stand. We are comfortable with the ranges we've provided. There are numerous individual assumptions that support the overall FFO per share range, so we are focused on how we expect to land within those ranges and from a broader perspective. We feel good about the revised guidance given our current knowledge.
Juan Sanabria, Analyst
Fair enough. Okay. And then just maybe a broader question, what are your thoughts on when these price wars might end? What would be the catalyst for a shift towards less competition? It seems like it's caught everyone by surprise.
Chris Marr, CEO
Yeah. 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 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.
Tim Martin, CFO
I believe we are currently experiencing a transition from the unusually high demand levels that persisted for two years. We've been discussing this shift towards a new normal for the past year and a half, which we anticipate will ultimately be an improvement over the previous normal. However, during this transition, there will be varying strategies to capture or exceed market share amidst a general decline in consumer demand for our product. Thus, it is natural to encounter fluctuations and responses from the market. Once we reach a more stable phase, we can reflect on our next steps. We will return to our historical approach as a sector, focusing on stability and gaining better insights into consumer demand, which would allow us to reset our pricing strategies. This could lead to revenue growth, as we have a strong track record in this area.
Juan Sanabria, Analyst
Okay. Thank you.
Operator, Operator
Thank you. And your next question comes from the line of Kassandra Fieber from Truist Securities. Please go ahead.
Kassandra Fieber, Analyst
Good morning, and thanks for taking my question. 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 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 your thoughts around that?
Chris Marr, CEO
Thanks, Kassandra. Over the last quarter and into October and November, we’ve seen an average increase of about 15%. We monitor our customers as they experience these increases, which vary from none to different amounts, but the average holds steady. There have been no noticeable changes in consumer behavior due to this program. We believe our consumers and customers are quite resilient. The composition of our portfolio leads us to retain customers for a longer duration. Overall, we view these developments positively as we approach 2024, and we do not expect any significant shifts in that environment. That summarizes our thoughts as we consider next year. Thank you for the question; I believe that addresses it.
Kassandra Fieber, Analyst
Okay, yeah. That's helpful. And then you mentioned that you've cut rate as a result of the increasing competition and we've seen Street rates as they continue to decline. If you could share, if you know what are Street rates today versus 2020-2019 levels? And then also if you could share, what percentage of your total customers are below in-place rent currently?
Chris Marr, CEO
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, Analyst
Yes.
Chris Marr, CEO
Yeah. I 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.
Kassandra Fieber, Analyst
Okay, no problem. Thanks for answering my questions.
Operator, Operator
Thank you. And your next question comes from the line of Steve Sakwa from Evercore. Please go ahead.
Steve Sakwa, Analyst
Yes. Thanks, 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?
Tim Martin, CFO
Hey, Steve, it's Tim. I was looking at those numbers. The 16.9% and 18% represent net effective rates we are achieving compared to last year's rates. The 16.9% reflects the change from the third quarter this year versus the third quarter last year. The 18% indicates that as we entered October, the net effective rates for new customers decreased by 18%. Previously, we anticipated that we would begin to close the gap year-over-year, and that the 16.9% gap in the third quarter would start to narrow throughout the fourth quarter. However, as we sit here today, that gap has actually widened slightly. That's the context.
Steve Sakwa, Analyst
Got it. Okay. So it sounds like it's gotten a bit worse and maybe gets worse in November December against the 18%?
Tim Martin, CFO
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.
Steve Sakwa, Analyst
Great. Thanks. And then just on the acquisition front. I mean obviously you guys are well positioned with the balance sheet. Just help us think through like what would be an appropriate or acceptable rate of return? And I 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?
Tim Martin, CFO
Yes. I believe there are two main categories to consider. The first category contains opportunities estimated between $50 million and $150 million, primarily funded by our free cash flow. We aim for stabilized yields in the low to mid-6s. At this time, yields in that range wouldn’t be viable for us, as we wouldn’t pursue $1 billion worth of activities with those types of returns considering our cost of capital. This category is one we can explore without needing to raise external capital, whether through debt or equity. The second category would require higher returns to be beneficial if we were to seek external capital in the current market conditions.
Steve Sakwa, Analyst
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?
Tim Martin, CFO
I'm not sure it's possible to predict the level of distress or the motivations of sellers. We don't have a clear perspective on specific areas where we might expect to see increased seller motivation. This situation appears to be more dependent on individual circumstances and the specific drivers for each seller, such as maturing debt, interest rate hedges expiring, or other liquidity requirements. It seems to be influenced by a variety of factors rather than being primarily geographic.
Steve Sakwa, Analyst
Great. Thanks a lot. That’s it for me.
Chris Marr, CEO
Sure. Thank you, Steve.
Operator, Operator
Thank you. And your next question comes from the line of Keegan Carl from Wolfe Research. Please go ahead.
Keegan Carl, Analyst
Yeah. Thanks for the time guys. I kind of hate to belabor the point on because 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 two different buckets of customers, for example the longer-term customers versus those that have moved in say within the last year?
Chris Marr, CEO
Yeah. 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 four to six month range, could be once a year it really does depend. So that's been pretty evolutionary here over the last couple of years, as the systems and the machine learning keep getting smarter and smarter and providing us with more and more insights. I think as we look across the portfolio obviously, it's going to depend upon the fundamental performance in those markets as one 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 Carl, Analyst
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?
Chris Marr, CEO
Yes, I think as Tim mentioned we were 130 down at the end of October, 117 yesterday. So, 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.
Keegan Carl, Analyst
Great. Thanks for the time guys.
Chris Marr, CEO
Thanks.
Operator, Operator
Thank you. Your next question comes from the line of Hong Zhang from JPMorgan. Please go ahead.
Hong Zhang, Analyst
Hey guys. You've done a really good job at keeping personnel expenses low throughout this year. I was wondering if you could touch on what initiatives you've been doing to achieve that? And I guess for lack of better words how sustainable is that going forward?
Chris Marr, CEO
Yes. Thanks for the question. So, the efficiencies are 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 teammate 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.
Hong Zhang, Analyst
Got it. Thank you.
Operator, Operator
Thank you. Mr. Chris Marr, there are no further questions at this time. Please proceed.
Chris Marr, CEO
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, Operator
Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may all disconnect.