Earnings Call Transcript - CUBE Q2 2025

Operator, Operator

Thank you for joining us. My name is Jeannie, and I will be your conference operator today. I would like to welcome everyone to the CubeSmart Second Quarter 2025 Earnings Call. I will now hand the call over to Josh Schutzer, Vice President of Finance. Please proceed.

Joshua Schutzer, Vice President of Finance

Thanks, Jeannie. Good morning, everyone. Welcome to CubeSmart's Second Quarter 2025 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.

Christopher P. Marr, CEO

Thank you, Josh. Good morning, everyone, and thanks for joining us. We posted a very solid beat and raise second quarter. The stabilization trends we experienced in the first quarter continued their positive momentum throughout the second quarter and into the month of July. Year-to-date, our key performance indicators have exceeded the expectations we articulated entering the year. Our expectation of an anemic housing market and the absence of any catalyst for a sharp recovery have proven accurate. Our belief in the continued health of our customer base, the resiliency of our product and the gradual improvement of fundamentals have been directionally accurate, albeit the impact of new supply and the pace and magnitude of improvement in new customer move-in rates have been more positive compared to our base case assumptions. Digging a bit deeper into performance through the busy season, our trough-to-peak occupancy grew 190 basis points compared to 180 basis points last year. Our net effective rates for new customers grew 28.3% compared to 15% in 2024. Overall, rate trends have been very constructive. In the first quarter, move-in rents were down 8.3% over the first quarter of last year. That gap in the second quarter contracted to 4%. And in July, the gap was 3.3% and has been narrowing throughout the month. We are experiencing similar solid trends in occupancy with the gap to last year narrowing further in July. Continuing one further layer deeper and looking at major market performance, our urban markets along the Acela Corridor, along with the stores in Chicago continue to be our top performers, indicative of the more muted reliance on housing transactions and a stickier customer base. The laggards are the markets across the more volatile Sunbelt, primarily Florida and Arizona, which are more reliant on housing mobility and are still absorbing new supply. Our New York MSA continues to shine with solid sequential acceleration in net rental income from the first quarter. The boroughs continue to lead the way, benefiting from the reduction in new supply and the broad base of consumer and small business demand, followed by very good performance in Long Island, while Northern New Jersey continues to gradually improve as the supply is absorbed. Looking ahead, we expect the baseline for occupancy and move-in rates should approach parity by the end of the year. Naturally, given the fact that we turn over approximately 5% of our cubes in any given month, it will take time for all of that positive momentum to flow through the revenue algorithm. We recognize that there remains a risk of volatility with the consumer as they have likely not fully absorbed the impact of ongoing governmental and monetary policy decisions. While acknowledging that risk, our results through our busy season, along with more recent trends have made us increasingly more confident that our operational trends will continue to steadily improve through the back half of 2025, putting us on much better footing as we head into 2026. Thank you. And I'd now like to turn the call over to Tim Martin, our Chief Financial Officer.

Timothy M. Martin, CFO

Thank you, Chris. Good morning, everyone. And as always, thanks for taking a few minutes out of your day and spending it with us. Second quarter results reflect exactly what Chris was touching on, the continuation of stabilizing operating trends that we talked about back in the first quarter. Same-store revenue growth was down 0.5% over last year, with average occupancy for our same-store portfolio down 80 basis points to 90.6% during the quarter. From a rate perspective, our move-in rates during Q2 were down about 4% year-over-year, improving from down 8% in Q1 and from down 10% back in Q4 of last year. Same-store operating expenses grew 1.2% over last year, again, this quarter, trending a bit better than our expectations. We've had sector-leading expense controls over the past 3 years, and our team's focus in this area continues to show up in the results. I'll expand on some of the expense line items in a moment when discussing changes to our full year guidance ranges. Revenue growth of negative 0.5% combined with 1.2% expense growth yielded negative 1.1% same-store NOI growth for the quarter. We reported FFO per share as adjusted of $0.65 for the quarter, which was at the high end of our guidance range entering the quarter. We were quiet this quarter as it relates to on-balance sheet investments. The team continues to evaluate a healthy volume of acquisition opportunities, but returns on marketed transactions haven't reached compelling levels on a risk-adjusted basis from our perspective. We remain well positioned with plenty of capacity when we do find attractive deals. We added 30 stores to our third-party management platform during the quarter, bringing that total to 873 stores at quarter end. We have seen some churn in the third-party portfolio from larger transactions, including our acquisition of 28 stores from our joint venture last quarter as well as a handful of portfolios that our third-party owners have sold this year. Balance sheet metrics remain strong with net debt-to-EBITDA at 4.7x. Our $300 million of 2025 senior unsecured notes mature in November of this year. So we will be actively monitoring the market in the coming months with a focus on issuing long-term unsecured debt and effectively pushing that debt out to the end of our maturity schedule. Details of our 2025 earnings guidance and related assumptions were included in our release last evening. Second quarter results, combined with the continuation of stabilizing operating trends were the primary drivers of our improved FFO per share and our same-store operating estimates. Overall trends, as we've mentioned, continue to move in a positive direction with all key operating metrics seeing better-than-forecasted performance through July. The negative occupancy and rate gaps have narrowed throughout the year. The cadence and pace that these improving trends have on year-over-year revenue growth as we look at the balance of the year are impacted by a variety of things, including the timing of changes we made in our fee structure mid last year, the timing related to rate increases to existing customers and how that flows through revenue year-over-year as well as the reality that only about 5% of our customers churn on a monthly basis. Embedded in our expectations for third quarter results is our expectation that same-store revenue growth will be slightly more negative than it was in the second quarter and then improving as we get into the fourth quarter. So while we're very encouraged by the positive trends in operating fundamentals, I just want to manage expectations that these improvements will take a little bit of time to flow through. On the expense front, as I mentioned, we had a really good first half of 2025 as we continue to be laser-focused on improving expense efficiencies. Our improved expectations that led to our improved expense growth guidance range were driven by a variety of line items, but the leading areas of improvement were the much better-than-anticipated insurance renewal in May, successful property tax appeals and the impact of efficiency-focused projects at our stores, including staffing and telecom initiatives. That wraps up our prepared remarks for this morning. Thanks again for joining us on the call. And at this time, Jeannie, let's open up the call for some questions.

Operator, Operator

Your first question comes from the line of Samir Khanal with Bank of America.

Samir Upadhyay Khanal, Analyst

I guess, Chris, thanks for the color on July. It looks like you are seeing positive trends, which is good to see. Just curious on the revenue side, you took the midpoint up, which was good, but you also took the top end down slightly. So I guess what were you assuming at the top end that you felt was sort of out of reach based on your assumptions?

Timothy M. Martin, CFO

Samir, it's Tim. Yes, the top end would have assumed a stronger improvement in overall levels of demand. And we're just reining in the high end of those expectations as a result of that's not how the busy season played out. We just don't see that the high end is in the cards. So we brought it down. But again, I would much rather focus on the fact that we raised guidance in the midpoint than the part that you're pointing out that we narrowed the top end.

Samir Upadhyay Khanal, Analyst

Okay. Got it. And then I guess on the revenue growth as it relates to New York, still very strong versus the portfolio, but did decelerate a little bit. Maybe provide some color around the New York boroughs and kind of what you're seeing maybe in the Northern New Jersey area. Any color would be helpful.

Christopher P. Marr, CEO

Yes. So the positive trends across the portfolio are also embedded in the New York MSA as a whole. So net rental income accelerated from Q1 to Q2 fairly nicely. The overall total revenue came down a bit, again, back to Tim's comments at the beginning related to changes we made last year in fees, et cetera, that had a very difficult comp, particularly given the nature of the customer in the boroughs, difficult comp for Q2. So very encouraged by net rental income growth continue to move in a really positive direction in both the boroughs as well as in Long Island. I think as it relates to North Jersey, that same-store cadence, net rental income there, we're seeing continued movement in a good direction, albeit it does remain slightly negative year-over-year and therefore, is a bit of a drag on the MSA as a whole. But no real meaningful supply being delivered. The supply in North Jersey is being absorbed. And so overall, really pleased with New York, the cadence of New York, continued stickiness of the customer base there and our position on a relative basis to our peers and our outperformance relative to other operators in that market during the quarter.

Operator, Operator

Your next question comes from the line of Michael Goldsmith with UBS.

Michael Goldsmith, Analyst

You mentioned twice on the call that the monthly turnover of your customers is 5%. And then can you help us tie that to just the pace of recovery in that the third quarter is going to be a little bit more negative than the second quarter and just how street rates continue to close the gap and get better, but then it just takes time for that to flow through. Can you kind of just tie that all together and just provide a picture of how the recovery and the stabilization should take place?

Timothy M. Martin, CFO

Yes. Thanks, Michael. So it is the reality that the operating fundamentals, all of the key metrics that we look at, whether it's levels of demand, pricing to new customers, narrowing the occupancy gap, all of those things are improving. The reality is that probably the most encouraging thing about 2025 is it's feeling more normal from day-to-day, week-to-week, month-to-month, certainly more normal than it has been over the last 2 years. As we've talked about for the past several quarters, if not the past 2 years, it's just been a little bit bumpy here as we've gone through post-pandemic and kind of the reset that we've all been through the last 3 years. And so what that does is it creates a little bit of that volatility that we saw last year creates interesting comps year-over-year. And so it just doesn't naturally flow through in a steady and programmatic way, the way everybody that's building a model would like it to. And so that's why we're pointing out that there still is a little bit of volatility in how all of that flows through. The 5% is just a reminder that even if we have a really good month, it's a really good month that churns 5% of the portfolio, right? And so it just takes time as all that goes through. We touched upon some of the things that are creating the bumpiness and perhaps, I guess, the unpredictability from your perspective on how all that flows through related to what we did with fees, what we did and what we continue to do with rate increases to existing customers. And all of those things create a little bit of noise in how all of the positive fundamentals flow through to the bottom line. Ultimately, all of this is gearing towards the ultimate stabilization and kind of the end of the reset and I think we're going to be in a great spot here as we think about where we're starting 2026.

Michael Goldsmith, Analyst

And then just as a follow-up. First quarter, you were able to acquire out of a JV, little activity in the second quarter. So can you provide a little color on what you're seeing in the transaction market? Is there a lot on the market is what does pricing look like? It sounds like it hasn't been too favorable to your appetite. So can you just provide a little more color on that.

Timothy M. Martin, CFO

Yes. Thanks, Michael. Not a lot has changed from what we've talked about in the prior handful of quarters. We continue to underwrite. I would say deal volume is up from where it was last year. The number of opportunities that we're underwriting is a little bit higher than where we were this time last year. But the result remains the same, which is we're competitive on some deals. We're not as competitive on others. And just on a risk-adjusted basis, where it makes sense for us to invest based on our outlook for an individual opportunity and our cost of capital, just not quite there yet, just not able to transact in any meaningful way.

Operator, Operator

Your next question comes from the line of Todd Thomas with KeyBanc Capital Markets.

Todd Michael Thomas, Analyst

Yes. I was just wondering, just following up a little bit on your comments around same-store revenue growth stabilizing and beginning to recover in the fourth quarter later in the year. You talked about the New York City Metro. I'm curious if you can speak to the operating trends in the Sunbelt markets where it's been a little bit weaker, Texas, Phoenix, Atlanta. Is the inflection that you're anticipating later in the year consistent with what you would expect to see in those markets? Or will those markets take a little bit longer to recover still?

Christopher P. Marr, CEO

Yes, Todd, the positive trends are evident across various markets. For example, if we look at the acceleration from the first quarter to the second quarter, some of the Sunbelt markets, like Orlando, Miami, and Atlanta, are showing improvements. Six of our top twenty markets have seen some acceleration, even though it remains negative overall. On one hand, things seem to be improving, but we also have to consider the high level of supply that is set to be delivered. Although some projects may delay until next year, they will eventually come to market. Atlanta, Houston, Dallas, and Phoenix still have significant deliveries planned. While these are large metropolitan areas with the potential for storage construction without being too close to existing products, I believe it will take a longer time for the harder-hit supply markets to recover, though I do see trends improving.

Todd Michael Thomas, Analyst

Okay. It seems pretty broad-based. The other question I had was this morning, we got a little bit of a weaker jobs report and uncertainty around the economy and consumer has been high for a little while in general. As you think about your ECRI program and revenue management, do you shift your strategy at all in sort of a proactive way to consider a potentially weakening macro or economic backdrop? Does anything change? Or do you let the system continue to manage it based on demand?

Christopher P. Marr, CEO

Yes. I think fundamentally, because of the nature of the product is just one in which the need is so broad-based, which is why it's so resilient. The systems will identify the need and the expected demand and then sort of match those two up and lather rinse, repeat. I do think we watch, again, the health of the existing customer relative to kind of what's going on macro. But as I think we've said to date, the existing customer continues to remain pretty healthy.

Operator, Operator

Your next question comes from the line of Juan Sanabria with BMO Capital Markets.

Juan Carlos Sanabria, Analyst

Apologies if I missed this, but I guess what is the main driver of the expected deceleration in same-store revenue in the third quarter versus second quarter? Is it a product of tougher comps in kind of the other ancillary revenue line? Or is it something else?

Timothy M. Martin, CFO

I'm sorry, Juan. Just to reiterate, it's a combination of the timing is to really just how things flow through and show up in revenue. It's the timing of when we made adjustments to some of the fees earlier in 2024. It's the reality as to how the rate increases to existing customers just flow through revenue and the timing of that, the volatility that we are seeing less of now, but we did see volatility last year, which creates a little bit of bumpiness in a variety of different comps. And then just the reality that as fundamentals continue to improve, you get a little bit of that help in each month, but only a little bit given the churn. So it just takes time for all this to flow through. We're super positive about the direction of all of the trends in operating fundamentals. Just want to make sure that we're telegraphing how we think it's all going to flow through ultimately into the revenue result that you should expect to see for the balance of the year.

Juan Carlos Sanabria, Analyst

And then just you noted 3PM business saw some churn. I guess what's the expectation in the second half? Are there any other large chunkier portfolios that are being sold away from you guys that could see that number of third-party managed stores actually go down? Or just curious on what visibility you have there?

Timothy M. Martin, CFO

Yes, not a great deal of visibility. Obviously, the stores that are leaving our platform as they're sold that we know about, we're incorporating that into our expectations. We've talked about it in the prior quarters, one of the benefits that we've had from a relatively sluggish transaction market over the past 18 to 24 months has been that we had been experiencing less churn as a result of a slow transaction market. Now that it's starting to pick up at least a little bit, we're starting to see some stores leave the platform. And part of the business, we try to do a great job for our owners. I think we do. And oftentimes, that positions them to accomplish their objectives, which is to maximize the cash flow and be in a good position to transact and realize a profit. So part of the business, what we can do to control it is to continue to do a great job of onboarding stores, 30 more stores onboarded to the program this year. That's the part that we have a little bit more control over. The rest of it is kind of a result.

Operator, Operator

Your next question comes from the line of Eric Wolfe with Citi.

Nicholas Gregory Joseph, Analyst

It's Nick Joseph here with Eric. You touched on the high non-deliveries in some of the markets and the continued impact that you're feeling there. Are there any indications of construction starts picking up in any of your markets? Obviously, you're dealing with the residual of starts that have already occurred?

Christopher P. Marr, CEO

No, I think it's actually the opposite. For the most part, as you would expect, raw material costs are up, and land values certainly have not gone down. Labor is challenging to obtain and expensive. Additionally, the cost of borrowing, if it's available for speculative development, is tight, making it difficult to achieve returns that make sense for potential equity investors in the current market. Although some deals are progressing or have already been completed, I think as we look further ahead to 2026 and 2027, we will likely see many delays and projects that won't get started until some of the factors I've mentioned are resolved more favorably. Therefore, I believe supply will remain generally constructive, though certain markets may continue to face some challenges.

Nicholas Gregory Joseph, Analyst

That's helpful. How much do in-place rents need to increase before supply starts to become viable?

Christopher P. Marr, CEO

Yes. That situation is very specific to micro markets. It ultimately ties back to the cost aspect as well. If you own the land, factors like how long you've owned it and your investment basis come into play. Given the current interest rates compared to those in 2020 or 2021, when some developers began to focus on these projects, I believe we still have a ways to go.

Operator, Operator

Your next question comes from the line of Spenser Glimcher with Green Street.

Spenser Bowes Glimcher, Analyst

Can you just provide an update on the Texas JV you entered into at the beginning of the year? I'm just curious how these properties have been trending from an operational standpoint.

Timothy M. Martin, CFO

The Hines portfolio in Dallas has been progressing exactly as we anticipated. That portfolio was particularly appealing to us because the locations were ideally situated to enhance our existing presence in the Dallas market. The integration of those stores has gone very smoothly, and the pricing has aligned with our expectations, complementing our current assets effectively. Overall, we're very pleased with the transaction, and its performance has been consistent with our projections.

Spenser Bowes Glimcher, Analyst

Okay. Great. Are you able to share maybe what the occupancy and/or rental gap is between those assets and then the same-store pool?

Timothy M. Martin, CFO

I don't have that right in front of me. Happy to follow up with you.

Spenser Bowes Glimcher, Analyst

Okay. And then maybe just kind of shifting gears. I know you guys already talked about the Sunbelt quite a lot. But maybe just more specifically, and I know it's a smaller market, but if you could just share a little color on the Austin market dynamics. I'm just curious what drove operating expenses so high in the quarter?

Christopher P. Marr, CEO

Yes. Austin on the operating expense side is taxes. So that's just the nature of timing and getting information from the state, et cetera. Overall, Austin is impacted by supply as is Dallas. Again, one of those markets where 5 years ago, everybody would have told you that you can't build another self-storage facility. And here we are today with a lot more self-storage facility. So good market long term under some supply pressure at the moment. And then on the operating expense side, as I said, just a...

Timothy M. Martin, CFO

And specifically on taxes, it's not bad news this year. It was good news last year. We had a refund. We had a nice refund last year, which creates a difficult comp when comparing this year's expenses to last year's.

Operator, Operator

Your next question comes from the line of Michael Griffin with Evercore ISI.

Michael A. Griffin, Analyst

I'm curious if you can unpack the same-store expense guidance a bit. Obviously, you guys have done a good job controlling expenses and about 1% year-to-date in the first half. Looking ahead, I mean, this acceleration, I guess, expected in guidance, probably about 3% in the back half. Is that a timing issue? It seems like comps from the second half of '24 may be more favorable. I don't know if there's kind of anything you can add there about why you're expecting that acceleration to get to the revised midpoint.

Timothy M. Martin, CFO

Yes. The part of it is what we talked about last quarter, we had some of our beat in the first quarter was timing related, but some of it was better-than-expected seasonal type expenses. So that was some good news that we talked about last quarter that we're not expecting to repeat itself or we don't have the opportunity for it not to snow in August and have that help our results. Part of it is some of the efficiencies that we've seen on personnel expense. We've been fortunate to be able to capture a lot of efficiencies, as I mentioned, over the past going now north of 3 years. But at some point, those efficiencies kind of lap and you're back to kind of normal inflationary type growth in those line items. Some of the cadence between what we experienced in the first half of the year versus the back half of the year is timing related. We are going to have a little bit heavier repair and maintenance. Our expectation is that our repair and maintenance expense will be a little bit higher in the second half of the year than it has been in the first, in line with our expectations, but a lot of that comes down to timing. Marketing is always the wildcard as to we're going to spend based on the opportunities that we see and the returns that we get on that incremental spend. We also have a little bit of a difficult comp in the fourth quarter related to real estate taxes, some refunds that we had last year, relative to an expectation of not very many, who knows? Maybe we get some across the finish line in the fourth quarter, but that's not our expectation as we sit here. The biggest driver on the positive side when you think about the back half is on the insurance renewal. I mentioned it briefly, but we had a very favorable property insurance renewal back in May. That was better than what we expected. Our risk management team did a great job there, and we're in a much better position than we thought we were going to be from an insurance standpoint.

Michael A. Griffin, Analyst

That's some helpful context. And then maybe just on the new customer acquisition front. Obviously, kind of Google searches and search engine optimization has been a priority over the past couple of years. But as we get this emergence of AI or GPT and usage there, do you have a sense of how many prospective customers are starting to use these AI tools to find storage units? Or is most of the traffic still coming in from traditional Internet searches.

Christopher P. Marr, CEO

Yes. Most of the traffic is still coming in through traditional Internet searches. The LLMs are evolving. And when you think about the utilization and the types of queries, you can get your mind around those queries that involve some form of additional information, judgment. For example, you could see using an LLM to say, which college would be appropriate for my daughter because you're going to get that interaction then with a follow-up to say, well, can you help me by giving some more information? What is she interested in? What part of the country? What your what's your affordability index, et cetera. Compare that to self-storage near me, there's just not that same level. And so I think we were with our partners, our agency and our friends at Google last week digging into all this and the use of Gemini and how one can get ahead of the curve here, and it's moving fast. Our marketing team is all over it. But I would say to date, the traditional sort of self-storage near me on a map continues to dominate.

Operator, Operator

Your next question comes from the line of Ki Bin Kim with Truist.

Ki Bin Kim, Analyst

Just a follow-up on that previous question. Let's say, more of that search gets funneled through AI agents. Do you think that leads to price discovery becoming a bigger factor for customers?

Christopher P. Marr, CEO

Yes. Ki Bin, I think at this point, it really does seem that that interaction through a more AI-driven search, the underlying tenets of what gives the response, again, you're looking for that response that regardless of the form is meant to deliver the best answer for the query. I still think you're going to come down to things like reviews, like the speed and validity of your website, like anything that gives your product higher validity, higher respect within the answer that whatever engine is trying to get you to. So at the moment, there are going to be some things that change. They always do in the search environment as they always have as Google has changed its priorities and algorithms over the years. But again, fresh off of this summit, I think at the moment, it's a work in progress. And again, will video be more important? Will other things get higher priority in terms of the responsiveness, probably, but exactly what they are today, work in progress.

Ki Bin Kim, Analyst

Okay. And just a broader question. Do you think the sector's software rents can grow something closer to inflationary levels even if housing doesn't come back, given that we are probably lapping some of that? And assuming supply is kind of static, do you think the rents can rise in this group?

Christopher P. Marr, CEO

Yes, I believe that once you establish a baseline that reflects the current demand, the next step is to manage the churn. After you've reestablished that baseline, you can start to grow from there. I think we are on that path for both Cube and the industry as a whole.

Ki Bin Kim, Analyst

Okay. Chris, if I can ask a third question, I'm curious as to why you have a BBB rating from S&P Global, while EXR, which has more leverage, has a better rating. From what I see, your pricing doesn't seem to be higher, but are you missing out on potential earnings by not having a better rating?

Timothy M. Martin, CFO

Man, I might have you join my next call with our friends at S&P and Moody's. I think you make some valid points there. I think part of the disconnect, certainly from a consistency of credit metrics and conservative credit metrics and continued access to our unsecured bondholders. We have an awful long track record with this strategy, and I think that goes a long way down that path. I think size becomes part of it. Part of the differentiator. But I would agree with the premise of what you're suggesting and certainly something that we're aware of and think about and talk about. I think at the end of the day, though, Ki Bin, when we do transact, I do think that there's the view of S&P and Moody's and there's the rating. And then there's ultimately, as with anything, there's how investors look at us and look at that rating. And I do think we get credit for all of the metrics that you're referring to in how our bonds trade. So it's not like there's a specific point where you say you have this rating, therefore, this is your pricing. I think our investors in our bonds do look at all of the things that you're looking at as they think about how to price our bonds, both our existing bonds and future issuances.

Operator, Operator

Your next question comes from the line of Mike Mueller with JPMorgan.

Michael William Mueller, Analyst

I guess, Chris, when you look back over the past 30 years or so in the business, have there been any clear triggers or catalysts that cause stagnant market move-in rates to move up outside of housing cycles? I mean we know significant supply kind of does the opposite, but just curious about on the upside.

Christopher P. Marr, CEO

Well, I think to the sharpness of the upside, certainly, the period in the second half of '20 through the very beginning of '22 in my 30 years was the sharpest of the up driven by the various factors related to the pandemic. I think when you look back, you're right, supply is always going to be the headwind. Macro events that cause the consumer to freeze in place, COVID, Lehman bankruptcy, 9/11, those tend to cause a short-term blip that freezes demand. It generally, when you take out supply and you take out Black Swan events, pricing has always tended to sort of move up at or a little bit higher than inflation. I think the last several years, as we've had a variety of differing strategies across the sector as to how to price the new customer, I think that's created a bit of volatility that we did not have in the past.

Michael William Mueller, Analyst

Got it. Okay. And second question, how has ECRI pushback been recently compared to, say, the past couple of years?

Christopher P. Marr, CEO

No change. I think we are still in an environment where the existing customer remains pretty healthy. The stickiness of them and the nature of the product has supported the ECRI process. As Tim discussed, we are testing different strategies regarding the timing and amount of price increases, which has caused some fluctuations that we have mentioned for some time. However, overall, the general reaction from customers is unchanged.

Operator, Operator

Your next question comes from the line of Ravi Vaidya with Mizuho.

Ravi Vijay Vaidya, Analyst

I wanted to ask about the transaction markets. I think that we might see more product coming to market in the second half of the year here. Maybe can you describe your appetite to execute on acquisitions and maybe some of your funding sources? And what are some of the IRRs or benchmark returns that you're looking to target as you make these decisions?

Timothy M. Martin, CFO

Yes, thank you. As I mentioned earlier, the transaction market has seen a slight increase in the number of opportunities for underwriting compared to a year ago. Typically, this market begins to pick up during the coming months as many sellers aim to navigate one more busy season, along with any growth in rates or occupancy, before selling their assets. This time of year often prompts sellers to prepare to bring their properties to market. From our standpoint, we are focused on identifying opportunities that align with our overall portfolio growth strategy, primarily concentrating on high-quality assets located in the top 40 Metropolitan Statistical Areas. In terms of returns, for stable acquisitions, we are interested in pricing that enhances our earnings. For less stable opportunities that show potential for significant growth under our operating platform, we assess expected stabilized returns and how the acquisition would complement our existing portfolio. We're evaluating various factors; however, currently, given our cost of capital and return expectations, we're not seeing high-quality assets available at price points that suit us. This could change at any moment, possibly even tomorrow, regarding our funding approach. We have an $850 million line of credit and easy access to various capital sources. We have established a leverage level that offers us substantial capacity. If a wave of opportunities arises, we would not solely rely on issuing equity since we have some balance sheet capacity that allows us to utilize debt for attractive investments for a period of time. Our significant annual free cash flow could also support these opportunities. Overall, even sector-wide, as we emerge from a development cycle, we expect many stores developed in the last few years by merchant builders and short-term investors may soon come to market. We anticipate a surge of potential sellers who have been waiting for a favorable moment to gain liquidity. They are looking for the right timing, just as we are as buyers, to find situations where the financial aspects align with our goals and benefit our shareholders.

Operator, Operator

There are no further questions at this time. I will now turn the call back over to Chris Marr for closing remarks.

Christopher P. Marr, CEO

Thank you, everyone. It was a very solid quarter here at Cube. Those stabilizing trends continued into July, which gave us comfort and confidence to raise our guidance expectations for the year. So we believe we're in a good position here as we navigate the back half of '25, and we're optimistic about what 2026 will hold for us. I think we'll continue to see reduced levels of deliveries, reduced impact from supply. The existing customer continues to be quite healthy. So a good backdrop as things stabilize here and we begin to see more positive opportunities as we move into next year. So thank you all for listening. Enjoy the rest of your summer, and we will look forward to speaking with you on our third quarter earnings call.

Operator, Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.