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CubeSmart
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Good morning, ladies and gentlemen, welcome to the CubeSmart Third Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, this event is being recorded.
At this time, I would like to turn the conference over to Charlie Place, Director of Investor Relations. Please go ahead, sir.
Thank you, Denise. Hello, everyone. Good morning from sunny Malvern, Pennsylvania. Welcome to CubeSmart’s third quarter 2018 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 those forward-looking statements. The risk and factors that could cause our actual results to differ materially from forward-looking statements are provided in documents the company furnishes to or files with the Securities and Exchange Commission, specifically, the Form 8-K we filed this morning, together with our earnings release filed with the Form 8-K, and the Risk Factors section of the company’s Annual Report on Form 10-K. In addition, the company’s remarks include reference to non-GAAP measures. A reconciliation between GAAP and non-GAAP measures can be found in the third quarter financial supplement posted on the company’s website at www.cubesmart.com.
I will now turn the call over to Chris.
Thanks, Charlie. A very solid third quarter report, as our entire CubeSmart team continues to execute against our business plan. Our high-quality portfolio and our best-in-class platform continue to serve as well, as we remain focused on maximizing the opportunities in the markets we serve.
Looking across our top 12 MSAs, supply began to appear in Chicago in 2014, began in Dallas in 2015, and by 2016 was ramping up in all of our top markets apart from those in California.
Following peak same-store revenue growth in the first quarter of 2016, we have seen a fairly consistent and relatively modest quarter-to-quarter deceleration in our same-store revenue growth through this quarter’s growth of 3%. That 3% same-store growth by the way is the envy of many CEOs of other property types.
As we analyze our proprietary supply data in our top 12 MSAs, we observed some interesting trends. Overall, we currently see fewer deliveries for 2019 than we’re projecting for 2018, or than we saw in 2017. MSAs that saw an earlier start to the development cycle, specifically Chicago and Dallas, are expected to report even more significant declines in 2019 new store openings, compared to expected 2018 openings.
When looking at our top 12 MSA at the three-year rolling trend of new store openings, we observed a 30% increase from the three-year period ending in 2016 to the period ending in 2017, and we currently project a 44% increase from 2015-2017, compared to that 2016-2018 rolling three-year period.
Looking forward, we are currently anticipating only about a 5% increase in the rolling three-year supply comparing 2016 to 2018 to 2017 to 2019. In the previously mentioned markets of Chicago and Dallas, we expect a modest decline in the rolling three-year totals comparing those 2016 to 2018 periods to 2017 to 2019.
Digging in even further, we observed that even in an MSA like Washington, D.C., where the absolute levels of rolling three-year new supply have been growing, the new store openings directly impacting an existing CubeSmart store have not been increasing. This supply data dovetails with our most recent operating results in which we experienced sequential same-store revenue acceleration in both Chicago and Washington, D.C. MSAs.
The New York MSA also experienced sequential same-store revenue growth acceleration, driven in part by strong reacceleration in the Bronx, which is an excellent example of the power of a demographically strong submarket to absorb the impact of new supply.
I will leave you with four observations based on the information I just shared. First, the impact of new supply does not appear as if it will have the draconian impact on same-store revenue growth that some have feared.
Second, it is starting to look like we may, over the next year, be getting deep enough into this development cycle that we will feel the peak impact of the supply in the major markets and reach an inflection point.
Third, markets with higher than average square footage per capita going into the development cycle that experienced significant levels of new supply and are relying on population growth to balance out supply and demand, will likely recover more slowly.
And fourth, well-located assets in strong demographic markets will be able to more smoothly navigate through the impact of new supply.
I will now turn the call over to Tim for color on our third quarter results, external growth activities and our increased guidance ranges. Tim?
Great. Thanks, Chris, and thanks to everyone joining us on the call for your continued interest and support. Another solid quarter to report. We reported third quarter 2018 results last evening, including a headline result of $0.43 per share of FFO, as adjusted, which was a $0.01 beat to our guidance range.
The quarter’s results were largely in line with our expectations with some good news on several line items in property operating expenses. 3% growth in same-store revenue and 0.6% growth in same-store expenses yielded same-store NOI growth of 3.9% during the quarter.
Same-store occupancy ended the quarter at 92.7%, down from 93.5% last year. You’ll recall that last year’s occupancy print was inflated by rentals in Texas and Florida associated with hurricane activity. Expense growth of only 0.6%, was driven by continued pressure on real estate taxes and higher advertising costs, offset by savings over last year on utility costs, as well as repair and maintenance costs, largely due to timing.
The pace of our external growth ticked up a bit, as we found several opportunities to grow that fit our investment criteria. On a wholly-owned basis, we acquired three stores during the quarter for just under $60 million, one in Washington, D.C., one in Las Vegas and one in Charlotte. And then in October, we closed on the purchase of a store in Los Angeles and one in Houston. So we’re finding good opportunities, largely single-asset transactions to grow and expand in our target markets.
Our HVP IV venture that is focused on lease-up asset acquisitions added two more stores during the quarter for just over $20 million, and we expect to add another two stores during the fourth quarter to that venture for around $15 million.
Right at the end of the quarter, we opened one of our development projects on Exterior Street in the Bronx. With that store coming online, we currently have six projects remaining in our development queue, with deliveries expected throughout 2019, as detailed in our supplemental package on Page 23.
Our third-party management platform continued adding stores in a meaningful way, as we added 60 stores in the third quarter, bringing our year-to-date total to 148 stores added this year. This growth allows us to further leverage our operating platform, expand the CubeSmart brand and likely will provide some attractive acquisition opportunities down the road.
On the balance sheet front, during the quarter, we issued 420,000 shares under our at-the-market ATM program, raising $12.9 million at an average price of $31.38 per share. Our revised earnings guidance and the underlying assumptions are detailed in our release from last evening.
Highlights include a narrowed full-year range of FFO per share as adjusted of $1.63 to $1.64, which at the midpoint is a $0.005 raise in guidance, as well as an improved outlook for same-store revenue, expenses and NOI. We introduced fourth quarter FFO per share as adjusted guidance of $0.41 to $0.42.
Wrapping up, 2018 continues to play out very much in line with our expectations. Our results continue to validate the strength of our operating platform. We continue to execute on a disciplined external growth strategy and fund that growth in line with our BBB, Baa2 investment-grade balance sheet.
So thanks, again, for joining us on the call this morning. At this point, Denise, why don’t we open up the call for some questions?
I would be happy, too, Mr. Martin. We will now begin the question-and-answer session. [Operator Instructions] And the first question will be from Juan Sanabria of Bank of America. Please go ahead.
Hi, good morning.
Good morning.
Just hoping you could talk a little bit about your strategy and what you’re doing on rent bumps to existing? Are you increasing the pace or the magnitude of the increases to help offset any weakness in the new leases to tenants in street rates?
Hey, Juan, it’s Tim. We haven’t had any meaningful change to our strategy on customer rate increases. We continue to – from a timing perspective, we continue to pass along rate increases to our customers as they reach their six-month anniversary and then every 12 months thereafter, the range of increase that we have provided fluctuates a bit, but tends to still be in that high single-digit range.
Okay. And then just on the street rates, could you give us a sense of what the average street rates were year-over-year on a net effective basis in the third quarter and trends to date in the fourth quarter if you’ve seen any deterioration? And if so that’s been related to the hurricane comp issue, or just increased softness due to supply?
Hey, Juan, it’s Chris. I’ll take that from both directions. So during the quarter-ended September, we were renting cubes at about 1% increase over the face rate from the prior year. If you think about the hurricane impact, the – we are 80 basis points lower spot physical occupancy at September 30.
That was in large part contributed to from the hurricane activity last year and Houston and in Florida. Today, that 80 has shrunk to about a 40 basis point number. And if you think about where asking rents are today, if you adjust for the impact, last year on rates in October from the hurricane activity in Houston and Florida, they’re about flat.
Thank you.
The next question will be from Todd Thomas of KeyBanc. Please go ahead.
Hi, thanks. Good morning. Chris, I appreciate the comments on new supply. One of the four takeaways you mentioned was that you expect to feel the peak impact of new supply in your major markets, but didn’t get a sense of the timeframe there. So when do you expect that peak impact to be realized? Then – and the 5% increase in the rolling three-year supply pipeline that impact from Cubes portfolio that you mentioned. Does that mean you’re expecting 45% of the portfolio to be impacted in 2019, or was there – was that sort of a comment about something else?
Yes. So it does not mean, we expect 45% of the portfolio to be expected to impact competition in 2019. We will share our analysis as we have historically when we release fourth quarter earnings and provide our update on expected guidance for 2019. So the 5% was just the raw numbers of stores that, that we think are going to open in the three-year rolling period ending in 2019 versus in 2018 in our top 12 markets.
In terms of peak, I think, my exact quote was that over the next year or so, again, I would suspect, we’re going to see relatively similar impact on results in 2019 from the new supply, as we’ve felt in 2018.
Okay, that’s helpful. And then I just wanted to dig in a little bit on the operating strategy just, because top line in the quarter was a little bit better than expected and the revision to the same-store guidance reflects that. But occupancy fell from 2Q to 3Q. You cited the hurricanes a little bit in those – in Florida and in Houston. But that’s the first time that, that’s happened in your portfolio since the company went public and it slipped a little bit more at quarter-end. It’s improved a little bit since then it sounds like, but can you just provide some color on the operating strategy across the portfolio a little bit more broadly, maybe explain what happened there? And how you’re managing to rate versus occupancy here heading into the off-peak season?
Sure. Yes, Tim will get into the detail. I think, the impact of the hurricane in Houston and Florida was in the third quarter, almost entirely felt in the physical occupancy. And so an overwhelming majority of that occupancy delta at September 30 was largely artificial, because those customers in Florida, in particular, all moved down in October of last year.
So if you think about our guidance at the beginning of the – well, we don’t provide guidance. If you think about the commentary at the beginning of the year of 2018, where physical occupancy is plus or minus 10 basis points from what we saw in 2017 if you pull out the impact of the hurricane. It basically is continuing to trend exactly as we would have expected, but I’ll let Tim give you a little bit more detail on all that.
I don’t have a whole lot to add to that. I mean, the reality is the occupancy number is up against a really difficult comp certainly in the latter-half of the third quarter, largely, if not, entirely attributable to the hurricane activity. So your deeper question of what is our strategy and what’s our operating focus, really no change at all, just a resulting tough comp given the hurricane activity a year ago.
And so, so far that occupancy delta has improved a little bit. But I guess, I would have thought the fourth quarter would have been an even more difficult occupancy comp across the portfolio from that standpoint. Do you expect to see occupancy continue to improve a little bit from here throughout the balance of the year?
Yes, I think, what you see is the occupancy – tough occupancy comp at the very beginning of the fourth quarter is most difficult and then the impact of the hurricane starts to diminish. As those who moved in a year ago, start to move out. Move outs related to that started in – certainly in Florida within 30 days of those folks moving in and they started to move out.
And so the difficult occupancy comp wanes throughout the quarter. And by the time you get to the end of the year, there will be some impact from a tougher comp standpoint, but not nearly the same as it was here at the end of the third quarter.
Okay. Thank you.
Sure.
The next question will be from Smedes Rose of Citi. Please go ahead.
Thanks. I wanted to ask you, I know you said you’re going to give a more formal supply update. But maybe you could just talk about just kind of what you’re seeing specifically in the New York markets and that is so important for you and kind of how you think supply? Any updates on supply outlook over the next year and maybe the following year, particularly in light of the new Zoning Legislation that I think is either in place or shortly about to be put in place? And just what are you seeing in terms of asking rates in New York?
Smedes, first of all congratulations, I got your first name correct. So that is a huge plus for you. The New York supply, given the amount of time it takes for things to get going and along construction period, those numbers really haven’t changed that much from what we would have talked about going back three months or so.
We saw the impact first in the Bronx. And I think it’s an interesting case study on how we see things sort of move over time. If you think about that as how we would view the supply that we think is going to be increasing a bit in Brooklyn, my expectation is that, that Brooklyn will play out going forward the way the – that the Bronx has looking backwards.
As we look at supply in the Bronx really picking up in 2015 and 2016, and I would say by the third quarter of 2016, we began to feel its impact on our occupancies in our nine, I think at that time same-stores in the Bronx and we saw the occupancy decline. Q3 2016, about 100 basis points and it peaked in the first quarter of 2017 and had declined about 340 basis points.
The occupancy then began to come back in the second quarter of 2017. By the third quarter of 2017, we are back 100 basis points of the positive. And we’ve been up first quarter of this year, 360 basis points, and we’re still close to 200 basis points higher in physical occupancy than we were a year ago.
Rate lagged the impact on asking rate lag. So we began to see asking rates drop to the negative in the fourth quarter of 2016. That negative drop peaked in the second quarter of 2017 and then we began to recover and today asking rents are up over the same period last year and in positive territory.
So I think, as we look out to supply going forward, we’ve talked about Brooklyn, that’s where we would expect to see the most material increase in new supply as we look out on a rolling three-year period. But even to that, we’ve got – we feel like we’ve got our arms around it.
We like the fact that in markets like New York, you are not relying on population growth, as you are frankly in every Texas market to backfill that new supply. The population is there, the capacity per square foot is low and population uses storage just like they do in the rest of the country.
So we do suspect, we will see the impact, the headwind from supply in our Brooklyn portfolio in 2019 to a lesser extent in Queens and then to a lesser extent in the Bronx and currently we don’t see anything impacting Staten Island at all.
Okay. And then just on your third-party management pool, what number of facilities do you have some sort of a minority equity interest in versus just go on sort of unaffiliated, just a third-party contract?
Hey, Smedes, let us pull that. I don’t have that right at my fingertips, but we’ll get you an answer to that question here. I’ll interject at some point here and give you that answer.
All right. Thank you.
Sure.
That’s it.
The next question will be from Ki Bin Kim of SunTrust. Please go ahead.
Thanks. Following up on that last question on your three-year supply, could you just kind of wrap it up for us for all the boroughs like water deliveries in 2017, 2018 and what you expect in 2019, just so we get a sense of when this might abate?
Yes. So total new openings, we – I guess, on a rolling three-year basis, 2016 through 2018, we would expect to see 38 new openings in all the boroughs. And then on a rolling basis 2017 to 2019, that number is 50.
You said 15 or 50.?
50.
Okay. And similar to your kind of national commentary, do you think 2019 should be the peak in New York?
Yes.
All right. And your FFO growth for the quarter was about 2% year-over-year FFO per share, if that is something that’s impacted by the dilution from new development starts or openings. If I look at 2019 deliveries, you have about $160 million. So when I put those two pieces together, should a net of dilutive impact increase or decrease in the $0.06 to $0.07 differ this year?
Kim, it’s Tim. So let me understand the question, again. The impact – the dilutive impact of the development pipeline, and you’re comparing 2018 to 2017 or 2018 prospectively forward looking?
Looking forward?
Looking forward, I think, it’s relatively flattish, will likely be where we come out when we provide guidance in 2019, because the amount of non-stabilized product that has come from our development pipeline is likely to be relatively similar in 2019 as it has been in 2018. So I think the dilutive impact is relatively stable here as we think about transitioning from 2018 to 2019.
Okay. Thank you.
Sure. And hey, before go to the next question, Smedes, just back to your question. We have 582 manage stores, 127 of those 582 CubeSmart have some ownership percentage ranging from as little as 10% to in our one venture the 10% that count 50% So 127 of 582 is the answer to that question. Denise, I think, we’re ready for the next one. Thank you.
Very good. The next questions will come from Jeremy Metz of BMO Capital Markets. Please go ahead.
Hey, guys. I just wanted to go back to your opening supply commentary. If I heard it correctly, it sounded like you were saying 2019 deliveries will be less than 2018 and less than 2017. This feels like a lower forecast and maybe prior, thinking, the release what the market maybe have been thinking. So anything in particular impacting supply pipelines out there that you can point to, maybe overall returns moving lower or tougher lending, anything in?
Yes, Jeremy. So yes, just to be clear, this is our top 12 MSAs. I did, in fact, say right now based on all the data in 2019, delivery is less than 2018 and 2017. That’s not different than what we would have thought last quarter, so not new news. I will caveat all this with, again, something it’s delivered on December 28th of 2018 or January 5th of 2019, we’re going to count the year has delivered. The impact to the existing stores is the same, whether it opened in – on December of 18 or January of 19.
So these numbers will continue to move around a little bit year-to-your as people hit delays, et cetera. I think, in general, while the expectation is consistent, the themes, again, I think, you saw certain markets see a large impact of supply early. I touched on Chicago and Dallas. And those are the type of markets, where you’re starting to see a fairly good drop off. I think it’s a combination of factors primarily.
You’ve seen a pretty significant increase in new supply will pick a market like Dallas. You just didn’t have one year. So, you had 28 new openings in 2016, 29 in 2017, 35 expected this year. So it’s been a compounding effect, which has had a significant ramp down than in rental rates in a market like Dallas.
So if you’re looking today, I just think it’s harder to find those sites that are zoned or available for storage. And when you look at where rental rates are in that market, cost of land, construction costs going up, tariffs impacting that, hard time finding labor, I think all of those factors combine to make the returns be pro forma less.
I also think you’re finally getting those stores that were built and opened in 2016 and 2017, they’re starting to mature. And I’ll guarantee you that anybody in any submarket where there was significant new supply that their occupancy, physical occupancy, I’m sure, are meeting or exceeding their very original pro forma from four or five years ago, but their rental rates are down. And in a market like Dallas, I’m sure they are down in the mid-teens.
So, you’re just starting to accept the fact that while eventually you may meet that stabilized return that you penciled out many years back, it’s likely not going to be in year three or four, it may be in year five or six. And I think that disappointment sort of trickles through the market over time.
Yes. That color is helpful. So it doesn’t sound like you necessarily on one side haven’t seen any increase in broken deals or lending dry up necessarily, just more – sorry? Go ahead.
That’s right. I mean, again, I don’t think you’re going to see distress in self-storage. It’s just the product is too darn resilient. I think you’ll just see some folks who were just a little bit disappointed in the outcome relative to their hopes when they first put pen to paper.
All right. And then you had a pretty good pickup in acquisition activity in the quarter and after the quarter. Anything in particular driving that? And then if you can give a little color on the profile of what you bought in terms of occupancy and rents relative to your existing assets in those markets. Just wondering what the opportunity looks like for those?
HI, Jeremy, nothing has changed from a strategic standpoint. I think, what we found here over the last three, four months in particular is that all the work that we do to try to find opportunities in key markets and target markets and assets that fit our quality criteria, we’ve actually just found a few at this point. They’re largely one-off individual transactions, which tends to be where we transact.
The three stores that we bought here during the third quarter and the two that we closed on here subsequent to quarter-end, they are a mix in that three of them are acquired on a more stabilized basis, two of them are still in the early stages of lease-up. And so the three that are stabilized were largely acquired at cap rates that are in line with market in those areas, which would include the stabilized asset that we bought in Las Vegas.
And then subsequent to quarter-end, our Los Angeles and Houston stores that we acquired were largely bought on a stabilized cap rate. And then the store in Washington, D.C. and the store in Charlotte were both in early stages. So what was the back-half of your question, Jeremy, I’m sorry?
No, it was really on that part. And then just anything on the activity front? I mean, anything increasing activity out there? It sounds like this is more nuanced than any sort of pickup in overall market activity?
Yes. I think that’s a fair characterization. Yes.
And sorry, just to go back in terms of the cap rates on the stabilized deals. Is there any change in what that cap rate was or would have been for those three relative to, say, a year ago?
Not in any meaningful way. No.
All right. Thanks, guys.
The next question will be from Eric Frankel of Green Street Advisors. Please go ahead.
Thank you. Can you just comment a little bit on the third-party management business a little bit further and talk about the competition in the marketplace for that? It looks like you added 60 stores, maybe partially through some JV acquisitions and maybe it look – also looks like you lost about 13. So maybe you can comment on what that business looks like?
Hey, Eric, thanks. Yes, the business – we continue to be very active at trade shows. We continue to be very active in receiving phone calls that many of which come from referrals from existing owners that we manage for who are referring others to us and our platform. 50 to 60 stores a quarter has been our run rate here for the better part of two years. And I think it’s a real – it continues be a great validation of our platform and our people and our processes that more and more folks are coming to us for third-party business.
We are starting to see more recently a little bit of a shift in having a more – a little bit more proportional interest coming from open and operating assets that are more stabilized as opposed to had been getting more newly opened stores were making up the overwhelming majority of what we’re adding to the platform. It’s getting to be a little bit more balanced now.
As far as the stores that come off the platform, many of our owners sell their assets and leave in small numbers for various other reasons. But we continue to focus on adding new stores to the platform and continuing to grow that, because it is a meaningful part of what we do and that we have a lot more stores with the CubeSmart brand. We have a lot more pins on the map. It allows us to leverage that size and scale of our platform. It makes it more efficient from a marketing perspective.
And so we continue to be delighted at our ability to grow that. It is competitive there. We certainly have others that are in this business that are also trying to grow their platforms. Despite that competition, the terms and the economics of the business haven’t really changed much at all here over the past couple of years. And so we continue to get out there and our team does a great job of answering all those questions and showing those owners who we are, what we are all about and the value of the platform and the value we can help create for them.
Thank you for that color. Just one more quick question, we’ll go back into the queue. Just regarding supply, specifically, the availability of financing. I can certainly appreciate how there’s maybe a little bit of a second derivative deceleration in the growth of supply. But given the sector’s popularity, it seems like both the sources of equity and debt are increasing.
So do you feel like there’s a possibility that supply going to 2019, 2021, you could still see some really healthy levels as a result of the sector’s popularity and the amount of financing available, or do you think that the surprise that developers have witnessed in terms of not hitting their pro forma the last couple of years that’s going to drive supply to where it was a couple of years ago?
Yes. Hey, this is Chris. I mean, at its heart, right, if developers can obtain the financing, they are going to develop. I think, I just think it’s markets, right? So our commentary is on our top 12, some of which, as I pointed out, we’re the first to see the impact of new supply and I think are now the first to see that start to dry up. And I think it’s not because financing isn’t available. I think, it’s when they look at the returns and a lot of the prime sites have already been built on in those markets. But it will just move from market to market.
So I can’t imagine today that you could make numbers work very easily in Raleigh or in Denver, parts of Denver, Nashville, where you’re just seeing a large influx of openings pushing down rental rates. But that developer in Nashville isn’t going to put their tools in the back of their truck and drive to Little Rock and develop in Little Rock. They’re just going to move on and do something else.
But in other markets, particularly some of the secondary markets where you haven’t seen levels of new supply, the financing is available and deals may make sense in some of those markets, doesn’t have any impact really on us. So we don’t spend a whole lot of time sort of analyzing that. There’s data providers trying to help you all out with what’s going on in a more national scale that might be more constructive.
Okay. Thank you.
The next question will be from Barry Oxford of D.A. Davidson. Please go ahead.
Great, guys. Thanks. Real quick, when it comes to issuing equity, your ATM, I know that you did just a very, very, very small amount. And it’s minuscule, it doesn’t really matter. But from a big picture type of question, looking at your debt ratios by any measure, you guys arguably could be in an over-equitized position, why even issue just a small amount? So how do you guys think about that going forward?
Hey, Barry, it’s Tim. That’s a lot of verys and miniscule. You hurt my feelings.
Well, I just wanted to be clear that, look, I realize it’s a very small amount. So I’m not really harping on that issue as much as I’m the bigger picture?
I appreciate that.
Yes.
And we think about funding the balance sheet in a manner that is consistent with our BBB, Baa2 credit rating. Completely acknowledge the fact that today, if you look at the credit metrics at which we are operating, they are at the very conservative end of credit metrics that would be typically associated with that rating. We look a lot more like a BBB+ company today than a BBB.
And the strategic rationale for that remains that we want to be opportunistic at the appropriate time and have the capacity to be opportunistic if and when we see something out there that’s attractive and allows us to execute on our external growth plans. So could there come a day where we find something interesting to us at a time perhaps that the equity valuation is not attractive, we’ve built in the ability to continue to execute on our external growth plan.
And so when we monitor the ATM program, when we find a time where we feel like the equity valuation is attractive to us, we do certainly recognize the fact that we continue to have a plan to grow. And that growth at some point can be funded internally with cash flow and adding an appropriate amount of leverage to that free cash flow. But a lot of that is committed to funding our development commitments today. So then we think about growing beyond that. Ultimately, we do need capital – equity capital to support that growth. And so we’re opportunistic when appropriate.
Great, thanks for that color. Looking at the development pipeline, you guys alluded to how it cost a little bit more. But if supply is actually kind of peaking, would you guys be looking to have more projects in the development queue than you guys have today? Would that make sense, or look, Barry, because of the increase in cost and stuff, the risk-adjusted returns, we feel just aren’t there, so we’re still going to be very choosy about our development projects?
Hey, this is Chris. Yes, Barry, I think, we have been – we have had a small number of markets in which we’ve been interested in that risk-adjusted return. And I think the amount of projects we have and the dollar investment from Cube is about right-sized for how we think about it.
So I would not expect on a move-forward basis, again, as we sit here today and the way things are – have shaped up that we would be expanding that program. I think, if you had to make a guess going out over the next couple of years at the margin, my sense is it probably starts to slow down a little bit.
Okay, great. Thanks for that color. I’ll jump back in the queue.
Thanks, Barry. Great.
The next question will be from Jason Belcher of Wells Fargo. Please go ahead.
Just wondering about your third-party management platform. As you continue to gain scale there, can you give us a sense of the leverage that you’re getting in adding incremental third-party customers at this point versus, say, a couple of years ago? And how much incremental cost is associated with adding new 3PM customers? And any sense you can give us around margins for – margins that you’re achieving on that management fee income stream would be helpful.
Hey, Jason, it’s Tim. Thanks for the question. The – when we add an individual store to the third-party platform, it can really range all over the Board as to – on an individual asset basis what the incremental margin is on that one store, because, for instance, if we add a store, if we add a managed store in a market where we have the capacity for a DM to take on one more store, then that one, 100% of the fee would drop to the bottom line, because we’re really not adding any incremental costs.
Now the reality is that as you continue to add storage, you have to add district manager oversight. Ultimately, you get to a critical mass that you start to have to add other things like additional staff in accounting, additional staff in other functional areas. And so overall, the margins on that business haven’t really changed much for us over the past couple of years. It’s still roughly, we would say, about a 50% margin business when you factor it in, we are adding 50 or 100 stores at a time.
From a capacity standpoint, the systems, the scalability of our operating platform. I guess, I wouldn’t say there’s no limit, but there’s no limit in sight. That’s a restrictor on our ability to continue to add 60, 70 stores a quarter if we’re able to continue at that pace. And so the operating efficiencies that we achieve don’t really necessarily increase the margin of the profitability of that business.
But what they do is, the more stores we add, the more incremental benefit all stores on the platform get, not only the stores that we manage, but also our own stores, largely from a marketing cost perspective and then our ability to just leverage our existing platform from all of the different functions that support our operating team.
That’s helpful. Thank you. And then just one more if I could please. As we head into the softer rental season, can you give us an update on where discounting is year-over-year and what we should expect going through the quarter there?
Sure. Hey, it’s Chris. So for the third quarter of this year on the same-store pool, discounts as a percentage of rents was 3.2%, which was a 20 basis point increase over what we experienced in the same pool in the third quarter of last year. So I think, macro, and again, we have obviously multiple levers to pull and we pull them in different ways depending upon the market and what’s going on.
But I think macro discounts, as I would have said at the beginning of the year, we felt were about as tight and low as they were going to get. And so I don’t see them materially changing up or down. I think, we’re just going to be in that band, where I’m going to be flat to up kind of that 20 basis points or so versus the prior year.
Thanks a lot.
Thanks.
The next question will come from Tayo Okusanya of Jefferies. Please go ahead.
Yes, good morning. The same-store OpEx for this quarter, again, you guys kind of kept that pretty tight. Most of it looks to be lower maintenance expense. I’m just curious how sustainable that would be on a going forward basis?
Yes, not sustainable at all. Largely, the impact of the comparability of third quarter this year versus third quarter last year is largely timing of when that capital was spent, a little bit heavier in the third quarter of last year and a little bit lighter this year. So overall, our full-year expectation for repair and maintenance costs hasn’t changed.
But your same-store OpEx guidance for the year has though?
It has – that, that less related to R&M costs, that change is more related to some continued good news that we’re receiving on – from a utility cost perspective. Our utility costs were lower in the third quarter than we expected them to be. That was part of the improved guidance. And then real estate taxes, while still high, aren’t quite as high as we thought they were going to be. And so those two areas are what really combined to provide the improved thoughts on our guidance range, not really the R&M line item.
Okay. That’s helpful. And then, again, just kind of focus a little bit more on OpEx growth as well. The advertising expense growth was pretty decent. But you do still have occupancy at the end of the quarter lower than the average occupancy for the quarter. I’m just kind of curious, is that just less occupancy as you’re kind of going into the seasonally slower period of the year or kind of what’s kind of causing occupancy to kind of dip down towards the end of the quarter?
Yes. We spoke earlier about the occupancy comp being tough because of the hurricanes from a year ago. And so the occupancy wasn’t anything other than what we expected it would be for this time of the year. It’s just up against a really difficult comp.
Gotcha. Okay, that’s fair. All right. Thank you.
Thank you.
And your next question will be follow-up from Ki Bin Kim of SunTrust. Please go ahead.
Thanks. So if I think about your surveys for the past couple of years, it’s been marginally up. I would think for customers that have received maybe their second or third rent increase letter, that gap between what they’re paying versus market mathematically will probably be larger now. Are you seeing any stress points with those type of customers in terms of like maybe increased level – changes in the increased level like move-outs or non-acceptance of the letters?
Ki Bin, we haven’t seen any meaningful change in consumer behavior. Everything that you just described would have been the case a year ago, three years ago, five years ago. Really nothing has changed from that perspective.
Okay. And any color on New York City surveys that you saw this quarter year-over-year?
Yes, up nicely in the Bronx, as I talked about earlier, flattish in Queens and down in Brooklyn.
So when you net that all out, does that turn to basically flat?
Flat, little bit down.
Okay. Thank you.
Thanks.
The next question will be follow-up from Juan Sanabria of Bank of America. Please go ahead.
Hi, thank you. Just wanted to follow-up on a prior question of mine on the street rates. To date, in the fourth quarter, you talked about a number ex the hurricane impact. Just wondering what that street rates would have been had you included Florida and Houston, the benefit you got there?
Yes. They’re down about 2%, 2.5%.
Okay, great. And then the – you kind of talked about acquisitions a bit, kind of continuing to look at opportunities in the press release. Just wondering if you’re seeing any portfolios of interest, either for acquisition on-balance sheet or through the joint venture. And how important maintaining or improving, if at all, the quality of the demographics of your asset base is when thinking about larger acquisitions?
Sure. There haven’t been a whole lot of portfolios that have been out there that have been particularly compelling from our perspective. We are very focused on the quality of our on-balance sheet owned portfolio. And so if we think – if a hypothetical portfolio came to market, it’s a tough one for us if only 15% or 20% of the assets in that portfolio met our investment criteria, meaning, they were in the right markets, they were well positioned.
If a hypothetical portfolio came to market and you had half or more than half of the assets fit that, could we think about some creative way to focus on on-balance sheet, acquiring the assets we want, thinking about taking on some assets maybe longer term that they were not as interested in and thinking about disposing of those somewhere in the future or having those in some type of co-ownership vehicle.
We could think about a lot of those things. So I don’t think, we’re certainly not going to not look at a portfolio because of the asset quality, but it’s going to severely influence how complicated it might need to be from our perspective to meet our longer-term portfolio quality objective.
Thank you.
Thanks.
And next will be a follow-up from Eric Frankel of Green Street Advisors. Please go ahead.
Great, thanks. This is Ryan Lumb. Thanks for taking another follow-up. Under a scenario, where your cost of capital remains roughly where it is today, what does your outlook look like for continued external growth, specifically acquisitions looking forward into 2019?
Yes, based on where our equity capital is today, I guess, the outlook isn’t super bright. Our valuation continues to be a bit disappointing to us certainly relative to our peers, given our continued ability to demonstrate the quality and – of our operating platform. But ultimately, the answer to that question comes down to, what are we using the proceeds of some pro forma equity raise to do.
And so if we found some compelling opportunity that were mispriced relative to where the market seems to be today at an equivalent or greater level to where we believe our equity is mispriced to where the value should be today, then if there’s a trade there that creates a positive arbitrage and allows us to build and grow our NAV and have that be accretive from that perspective, then that might be interesting to us. That’s far – fetched hypothetical that I just gave you, of course.
So ultimately, if we continue to have – if we continue to trade at a discount to NAV, that certainly will have an impact on our appetite longer-term to think about external growth on-balance sheet.
Sure, that’s helpful. And just one more. Maybe if we assume that current pricing and outlook stays the same for markets across the country, would it be your interest in growing your exposure or decreasing your exposure to New York relative to, say, the rest of your portfolio?
Yes. So given the fact that we have a long-term view on our business and again, back to my description of the Bronx, the metrics and demographics in New York, we would look at – we would continue to look at New York as an incredibly desirable place for us. I think, the opportunity to grow through acquisition there is probably in a bit of a hiatus.
We own a significant amount of market share of the highest-quality assets and we wouldn’t want to dilute that. I think, some of the projects that have been developed in the last year or two that aren’t CubeSmart, shame on them, we would certainly look at those as acquisition opportunities at some point in the future. But we are heavily interested in continuing to dominate that market.
Great. Thank you.
And ladies and gentlemen, this will conclude our question-and-answer session. I would like to hand the conference back over to Christopher Marr for his closing remarks.
Okay. Thank you all for your interest and your questions. We look forward to seeing many of you in San Francisco at NAREIT and speaking with you again, when we report year-end next year. So thank you very much. Have a happy Halloween.
Thank you, sir. Ladies and gentlemen, the conference has concluded. Thank you for attending today’s presentation. At this time, you may disconnect your lines.