CubeSmart

NYSE:CUBE

Earnings Call Transcript 2022-Q4

[Operator]

Good morning. Thank you for attending today's CubeSmart Fourth Quarter 2022 Earnings Call. My name is Alicia, and I'll be your moderator for today's call. [Operator Instructions]

I would now like to pass the conference over to your host, Josh Schutzer, Vice President of Finance with CubeSmart. You may now proceed.

[Josh Schutzer, Vice President, Finance]

Thank you, Alicia. Good morning, everyone. Welcome to CubeSmart's Fourth Quarter 2022 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 fourth quarter financial supplement posted on the company's website at www.cubesmart.com.

I will now turn the call over to Chris.

[Chris Marr, President and CEO]

Thanks, Josh. Good morning, everyone. Thanks for joining. Our fourth quarter results capped off another excellent year of performance by our CubeSmart platform, and I thank all of our teammates for their dedication and outstanding customer service. Same-store revenue growth for the year came in at the high end of our guidance. Our focus on operational excellence contained expense growth to an annual rate of 3%, resulting in same-store NOI growth at 16.7% for the year coming in above our guidance.

As we have performed our business planning and the related financial forecast, each of these last 3 years, we certainly have had to do so facing significant uncertainties surrounding the impact of COVID and the resulting changing consumer behaviors. Entering 2023, while many aspects of our business, such as seasonality and delinquency have returned to more typical historical patterns, we certainly are faced with domestic economic uncertainty and the potential for geopolitical shocks.

We believe that our strategy of owning a high-quality portfolio in the best markets, maintaining a high-quality balance sheet with conservative leverage and well-staggered fixed-rate maturities and the fact that we foster an innovative culture consisting of high-quality people and systems will over the long term produce above-average risk-adjusted returns throughout economic cycles.

Our message today will therefore sound familiar to those of you who have been valued stakeholders in Cube over these last few years of robust outperformance. We believe our high-quality stores located in submarkets with sector-leading demographics have us in an excellent position entering 2023.

The New York MSA, our largest market, is beginning to positively experience the waning impact of new supply. Operational performance remained steady, and we are starting to see the green shoots from recent supply deliveries leasing up nicely and the new delivery pipeline has almost been exhausted.

Our expectation is for absolute levels of growth to remain steady. And by the back half of the year, the New York City boroughs will be performing above the portfolio average. We're 1 year on from the Storage West transaction, and we couldn't be more pleased with the assets and the strategic fit on our platform. As expected, despite the stabilized occupancies of the assets, there was significant upside to rents on our platform.

These properties saw accelerating growth through the back half of '22 and they are well positioned for continued growth into 2023 and beyond with an expectation that they will be achieving a mid-4s yield by the end of the year and generating meaningful accretion given that we were able to lock in long-term capital at exceptional low rates, including our $1 billion bond deal, which had a weighted average yield of 2.45% and an average tenure of 8.4 years.

We entered 2023 with 98% of our debt being fixed rate, with a weighted average maturity of just over 6 years and net debt-to-EBITDA of 4.3x. We have and will continue to focus on being operationally excellent. We entered 2022 with a thesis that businesses that operate lean and agile will be best positioned to succeed during the period of economic uncertainty. Our sector low expense growth and margin expansion in 2022 and our outlook for 2023 are reflective of that focus on operational efficiency.

Such heady times, as we've experienced over the last few years can make many strategies appear [indiscernible]. We are seeing the benefit of our strategy as our sector-leading portfolio demographics continue to generate stable growth. While secondary and tertiary markets may generate elevated growth in boom times, there is increased risk and volatility to those cash flows during times of uncertainty, and we believe our focus on a high-quality portfolio in top markets will generate the most attractive, long-term risk-adjusted returns.

There is no doubt that when viewed through a historical lens, 2021, 2022, and in my opinion, 2023 will be judged among the best years for our business. In spite of uncertainty in the world, I believe that the industry and Cube specifically are well positioned entering 2023 to produce operating metrics above the historical 20-year average. We think this makes us an attractive option for investors, and we appreciate our valued stakeholders' support.

With that, please allow me to turn it over to Tim Martin, our Chief Financial Officer, for additional commentary on the quarter and on the year ahead.

[Tim Martin, Chief Financial Officer]

Thanks, Chris. Good morning, everyone. Thanks for taking a few minutes out of your day to spend it with us. Piling on to Chris' commentary, results in the fourth quarter reflected a continuation of what we've seen throughout the year, a steady return to more normal seasonal patterns and overall solid operating fundamentals.

Headline results included same-store revenue growth of 9.5%, expenses grew 2.3%, and NOI was -- growth was at 12.1% for the quarter. Same-store occupancy levels remain very healthy, down 120 basis points compared to last year as we expected given the continuing return to more normal seasonality. .

Same-store occupancy averaged 92.8% in the fourth quarter and ended the quarter at 92.1%. Our consistent focus on managing what we can control on the expense side showed up in our results all year and the fourth quarter was no exception. Same-store expense growth of 2.3% for the quarter was better than expected, with the main drivers being continued efficiencies and personnel costs, and some nice wins from all the work we do to challenge our property tax assessments across the country.

We reported FFO per share as adjusted of $0.67 for the quarter, representing 16% growth over last year. During the quarter, we also announced a 14% increase in our quarterly dividend, up to an annualized $1.96 per share. On yesterday's close, that represents a 4.4% dividend yield.

On the external growth front, in the fourth quarter, we saw a continuation of what we talked about last quarter, a slowdown of transaction activity and a lack of attractive opportunities for us. Our team remains busy looking to find deals that fit our model at pricing that works.

Our disciplined investment strategy has naturally resulted in us being less transactional over the last year where the return profile of available opportunities does not meet the necessary risk-adjusted returns required in today's elevated cost of capital environment. On the third-party management front, we added 28 stores in the fourth quarter and ended the quarter with 668 third-party stores under management.

Our balance sheet position remains strong as we continue to focus on funding our growth in a conservative manner that's consistent with our BBB/Baa2 credit ratings. As discussed last quarter, in October, we closed on a new expanded revolving credit facility. The size of the revolver grew to $850 million, the maturity was extended to February of 27 and the pricing improved by 17.5 basis points based on our current credit ratings and leverage levels.

Our conservative balance sheet and financing strategy has really paid dividends as we entered into the current volatile capital market environment. All of our debt, except the revolver is fixed. So as Chris mentioned, that's only 2% of our outstanding debt was variable rate as we started 2023. We face no significant maturities until November of 2025 and have a weighted average maturity of 6.3 years.

Our leverage level is very low at 4.3x debt-to-EBITDA, and we have ample capacity and liquidity to finance future growth opportunities when attractive ones present themselves. Looking forward, details of our 2023 earnings guidance and related assumptions were included in our release last night. Our 2023 same-store pool increased by 73 stores, including 57 stores from the Storage West portfolio acquisition that we closed in late 2021.

Consistent with prior years, our forecasts are based on a detailed asset-by-asset, ground-up approach and consider the impact at the store level, if any, of competitive new supply delivered in 2021, '22 as well as the impact of '23 deliveries that will compete with our stores.

Embedded in our same-store expectations for 2023 is the impact of new supply that will compete with approximately 30% of our same-store portfolio. For context, that 30% is down from 35% of stores impacted by supply last year and down from the peak of 50% of impacted stores back in 2019. Our FFO guidance does not include the impact of any speculative acquisition or disposition activity as levels of activity and timing are difficult to predict.

Wrapping up, thanks to all of our hard work and talented teammates to help lead us to the successful execution of our business objectives throughout 2022, as a team, we're in a great position to continue our pursuit of operational excellence and to maximize on the opportunities we see in 2023. Thanks again for joining us this morning on the call.

At this time, Alicia, why don't we open up the call for some questions.

[Operator]

[Operator Instructions] The first question comes from the line of Jeff Spector with Bank of America.

[Jeff Spector, Bank of America]

Great. Can we talk about, I guess, what you're seeing through February, Chris and Tim, you're Clearly -- there's a lot of confidence here as you've started '23. Your approach to guidance does seem to be a bit different than a couple of your peers. Just trying to figure out if that's more company-specific, industry-specific or again, just recognizing you're not seeing right now any signposts of recession. .

[Chris Marr, President and CEO]

Yes. Thanks, Jeff. So I can't comment on other portfolios or how they're viewing their outlook. I think from our consumer perspective, we continue to see pretty good signs of strength. I think our portfolio and its construct, the lengths of stay continue to elongate, pattern of vacates has been relatively muted. So we're encouraged by that.

I think the outlook, obviously, as I said in my opening remarks, the outlook as you get past the second quarter is a little bit less certain. We're certainly trying to think about what the back half of the year may look like. Same challenge we had in in '21 and '22. And I think our guidance ranges capture the expectation of how our consumer will react in the back half of the year.

I think from a more macro perspective, we don't really do our planning by thinking about whether we're going to enter into a recession or we're not at a macro level. I think we look more at how will our consumer respond throughout the year in terms of their need for our product, which, as we all know, is created by a whole host of life events that may or may not have anything to do with what the broader economy is doing at that time.

So I think our process is a bottoms-up process. And I think we've kind of captured a range of outlook for the year. And I think, certainly, I'm sure everybody is looking at it to say the first half is a little bit more clear and the back half is a little more cloudy, but we feel good about where we are today.

In February and January, the results were at or better than what our expectations were when we started the year. So that's encouraging off to a good start, and we'll see how the quarter evolves and really looking forward to the beginning of the busy season, which I think will tell us a lot about how we think the balance of the year will unfold.

[Jeff Spector, Bank of America]

That's very helpful. My second question, Chris, can we dig in a little bit more on your comments about demographics versus, let's say, tertiary, secondary markets. We get lots of questions on that, the importance of demographics versus market positioning. Can you talk a little bit more about what you were referring to in terms of the strength of your demographics versus, let's say, tertiary, secondary markets? And I guess, are you seeing or hearing of issues in tertiary or secondary?

[Chris Marr, President and CEO]

Yes. So when we look at long-term risk-adjusted returns, markets with significant populations, lower levels of supply of self-storage on a square foot per capita basis, good household incomes and a good percentage of our customers living in rental housing versus homeownership. Those tend to create a backdrop of stable cash flow over a longer period of time.

And again, I think you could use as an example, when you think about as we sit here today of our major markets, the market where we have physical occupancy, higher today than where we were at this point last year is the New York City assets. When you think about a market that has net effective rents on new customers that are higher than where we were at this point last year, that's New York City.

You can contrast that with some of the markets in the Southwest where you're just seeing that shift as the COVID demand had waned and you're seeing a bit lower occupancy than where you were last year and a bit lower [ asking ] rents than we were last year. So I think you then delve into secondary and tertiary and our expectation is, over time, they're more susceptible to new supply, and they're just more volatile markets. And so as we expect things to more normalize, I think the strong demographic markets will outperform.

[Operator]

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

[Michael Goldsmith, UBS]

Digging into New York a little bit more sequentially, the MSA underperformed the portfolio average on same-store revenue growth, but maybe outperformed sequentially on same-store NOI growth. So as you think about the outlook for this market in the upcoming year, are you thinking if this is going to be an outperformer due to the stability of the market as trends sort of moderate? Or is there another thought process that you have on this key MSA for you.

[Chris Marr, President and CEO]

I think as we look out, I think the strength of the New York market is a combination of waning supply impact, the positive demographics, as I answered in response to the previous question create a customer profile that is stickier than in other parts of the country.

I think you've got a good backdrop in terms of demand drivers. And I think the portfolio is obviously best-in-class and is well positioned to capture the demand that exists in that market. So I think it's going to continue to get better. I think we talked about on the third quarter call, we had a relatively easy comp in '21 in the third quarter.

So the third to fourth quarter, slight deceleration was not 100% everything we expected it to do. I would say the portfolio in Q4 in the New York MSA more broadly exceeded our expectations just a bit. So ending on a high note, starting in a real good spot here for January and February and just again think about as other high-flying markets return to more normalized levels, New York will bubble up to the top of our performers.

[Michael Goldsmith, UBS]

That's really helpful. And you kind of noted that the percentage of your portfolio impacted by supply is expected to be down 5 percentage points this year. Is there a good benchmark of how -- how much this can add to same-store revenue growth? Is that a -- despite like this 500 basis point -- as that moves down, does that translate to 50 or 100 basis points of same-store revenue growth? And do you have the number of the change in supply impacting your locations in the New York Metro.

[Chris Marr, President and CEO]

Okay. That was a lot to unpack. Let me track some of these. The impact of that decline from 35% exposure to 30% is difficult to quantify in any way. When we think about doing it from a budgetary perspective, it's a range. It can go from -- frankly, it's such a wide range. We have some properties that have the impact of new supply that actually outperformed for market, submarket, local market reasons.

And then we have other properties that are more directly impacted. It's largely also dependent upon the brand of the competitor, and their pricing strategy as they try to lease up assets, so that can have an impact positively or negatively. So it's hard to put a specific number of basis points on that impact.

When you think about New York City and -- I'll answer it by just focusing in on the expectation in '23, I think by borough, the Bronx, the impact of new supply has been and is in the rearview mirror. We don't expect any of our Cube stores to be impacted by new supply in '23. In Brooklyn, we're getting closer to the end. And I think that's part of the narrative of continued improvement throughout 2023.

I think there's one new opening in '23 that will compete with an existing Cube. And then Queens, I think we'll continue to have declining, but there will be an impact in 2023 on our stores. I think there are 2 new openings in Queens that will -- that we expect to have an impact on an existing CubeSmart. So as I said in the opening remarks, that's really starting to wane and we're very excited about the future there.

[Operator]

The next question comes from the line of Spenser Allaway with Green Street Advisors.

[Spenser Allaway, Green Street Advisors]

Can you provide a little color on what's being underwritten for occupancy at both the high and low end of guidance?

[Chris Marr, President and CEO]

Yes, Spenser, we don't normally, again, broken record guidance -- occupancy rather, is the output, not the input. I think we got browbeat last year into throwing out a number as to where we finished the end of the year. And as Tim noted, we beat that by a pretty good amount.

So it will depend. I think the expectation and for the new pool is that will range from occupancy being down 150 basis points to what it was in the prior year, and then that will narrow as we go throughout the year. And I think we'll end the year within 50 basis points or so of where we ended in 2022 on that new pool.

[Spenser Allaway, Green Street Advisors]

And then maybe just circling back to supply again for a second. Maybe without focusing on NOI expectations, but can you just comment on whether there are any markets that stand out as more concerning due to current pricing power in those markets or current occupancy levels of utilization.

[Chris Marr, President and CEO]

Yes. I think the impact of supply both the volume of new stores and then the brands of those new stores and their approach to how they want to lease those stores up will likely we felt the most in our portfolio in the greater Philadelphia area, where it is, in fact, sunny today in Malvern; the Washington, D.C. area; and then pockets of Northern Virginia -- I'm sorry, pockets of Northern New Jersey.

[Operator]

The next question comes from Alina Juan Sanabria with BMO Capital Markets.

[Juan Sanabria, BMO Capital Markets]

Just wanted to hit on the cadence of growth? And is -- should we expect as you report the quarters that growth will accelerate or decelerate throughout the year? And if you can comment within a subset of that, how New York would fare as part of that answer.

[Chris Marr, President and CEO]

Yes. I think for our portfolio and then as you're trying to look at, obviously, rates of growth, so comparing to what the cadence was in 2022, we would expect that our same-store revenue growth will be at its peak in terms of the growth in Q1 and then a steady deceleration as we go out through 2023. .

Obviously, we have the most clarity into Q1 and the least clarity into the Q4 results. So we'll see how the busy season starts out and progresses here. For New York City, the overall trend would be consistent with that, just that again, we would expect that market will then end up outperforming on a relative basis, the overall pool as we get into the back half of the year.

[Juan Sanabria, BMO Capital Markets]

And then I just wanted to switch gears to the investments or acquisitions. You sounded a bit more enthusiastic about opportunities in your press release -- correct me if I'm wrong, I don't want to put words in your mouth. But I guess, what's the confidence you could invest capital? And what types of opportunities are you looking at? Is it more lease-up or stabilizing? Any sense of the geographic focus -- you seem to be talking at more of your existing coastal markets versus at least the Southwest for some of your comments earlier in the call.

[Tim Martin, Chief Financial Officer]

Juan, I think from a where are we looking, it shouldn't be any surprise. We've been awfully consistent in the markets in which we're looking to grow and expand primary focus in many, many of top 40 MSA continues to be our focus in high quality, solid demographic markets. I'm not sure that our expectation of that was included in our release is optimistic or pessimistic.

I think we think it's achievable, but market conditions are awfully volatile out there as you know. And if 2022 is an indicator, as I believe it is, we expect to be pretty disciplined. We hope and expect that we'll be able to find some opportunities here or there. But the guidance range or the external growth number that we put in the release is not a giant number. It's something that will be -- the team is working hard.

We're looking for opportunities that fit our investment strategy, it yields that make sense to us relative to our cost of capital. And our hope, if it's maybe more hope and expectation is that we'll find a little bit more opportunity to have some external growth in '23 than we did in '22.

[Juan Sanabria, BMO Capital Markets]

And if I could just sneak extra one in here. Can you just comment on the street rates or net effective rates in the fourth quarter and what you've experienced year-to-date?

[Chris Marr, President and CEO]

Certainly. So net effective rents for new customers in the fourth quarter were down over the same period in '21, about 10%. They were down in December about 10%. And for the month of February as of yesterday, we've been running down just a little bit below 9%.

[Operator]

The next question comes from the line of Smedes Rose with Citi.

[Unidentified Analyst]

This is Natty [ph] on for Smedes. Could you talk a little bit about the components of cost increases. How are you thinking about labor and benefits increases, property taxes, other line items?

[Tim Martin, Chief Financial Officer]

Yes. Thanks for the question. We continue to probably anticipate the most pressure on operating expenses in the insurance area. Property insurance renewal for us comes up in May. We certainly expect there to be pressure on property insurance, probably consistent with most of the real estate industry. We continue to express -- easy for me to say, we continue to expect pressure on the utility line item as cost of utilities, electric gas continue to be higher than inflationary levels. .

I think from a personnel cost standpoint, there's certainly pressure on wage, but we continue to have a great focus on finding continued opportunities to drive efficiencies and margin improvement, primarily in that line item and are doing more with less from an efficiency standpoint as we staff stores. And so that has helped us a lot from an expense control standpoint in 2022, and we expect many of these initiatives will continue to bear fruit as we get into 2023.

Real estate taxes, of course, are an area that are -- it's an awful big line item, and it's difficult to predict at times, but we think that is an area that will continue to be in that range that we've talked about for several years in that 4% to 7% range of pressure on real estate tax increases.

[Operator]

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

[Todd Thomas, KeyBanc Capital Markets]

First, I was just wondering. Apologies if I missed this. But are you able to share where occupancy in the portfolio is today and what that looks like year-over-year from the new same-store pool?

[Chris Marr, President and CEO]

Yes. You didn't miss it. So for the new same-store pool as of yesterday, the occupancy in that portfolio is running around at the end of January, rather, at 91.3%, which is down about 130 basis points from that new pool's occupancy at the end of January 22.

[Todd Thomas, KeyBanc Capital Markets]

Okay. And so that's a little bit of a sequential decrease from where you are at the end of the year. When is occupancy starting to pick up a little bit at this point ahead of the peak rental season. I know the peak rental season doesn't really begin for a little bit longer here. But are you starting to see that uptick in occupancy and also in rents?

[Chris Marr, President and CEO]

Yes. We haven't really seen the beginnings of the rental season yet. February, obviously, still dealing with weather and all sorts of other things. I mean, it's hard to say that -- I don't think your statement that's sequent -- and it is factually correct that sequentially. That's 10 basis points there. We used to have an entirely different -- a pretty different pool. So it's kind of apples to oranges.

But yes, and I haven't seen it yet. March, early March, mid-March, I think, is when we typically start to see the spring moving season start to kick in. I think on the rent side, as I think I answered in the prior question, you are starting to see the positive movement in rents as we've moved past January.

[Todd Thomas, KeyBanc Capital Markets]

Okay. And then back to New York City, I hear the comments around new supply diminishing a little bit, having a positive impact there on activity. Can you talk a little bit about rental rate to New York City and rental demand and what you're expecting in terms of occupancy trends there throughout the year?

[Chris Marr, President and CEO]

Yes. I think again, the answer to some prior question, occupancies are up basis points or so over last year in the New York City same stores. It's the only market with positive occupancy versus prior year. Rents are up to new customers, about 3%, and it's one of a small number.

And I think the only of the top 5 markets where we've got rents that are in positive place at this point relative to what we were doing in January and February of '22. So demand is pretty good. Occupancies are good. Vacate pattern there continues to be very constructive.

[Todd Thomas, KeyBanc Capital Markets]

Will you be able to increase rents to existing customers in the New York portfolio sort of an outsized rate relative to the balance of the portfolio this year and also relative within New York relative to what you did last year?

[Chris Marr, President and CEO]

Yes, I'm not sure necessarily at any higher rate than what we did in '22, but I do think relative to other markets that are seeing a different shift in the way population is moving. I think we have a greater opportunity in the urban markets, New York in particular than we do in some of those suburban markets. .

[Operator]

The next question comes from the line of Keegan Carl with Wolfe Research.

[Keegan Carl, Wolfe Research]

Maybe first one here, just what's your anticipated cadence and magnitude of ECRI throughout '23? And how is that going to stack out [ versus ] what you guys did in '22.

[Chris Marr, President and CEO]

Yes. Our process there, I would call, is quite dynamic. So every day, we've got a customer in our portfolio who is having a rate increase proposed to them. So from a cadence perspective, predynamic, Don't expect significant change, but we are testing a wide variety and continue to of both timing and amount throughout the portfolio by market.

In terms of the kind of general magnitude of our expectations for those, it will continue to be above the historical average, but our expectation embedded in our guidance is that we would be passing along on a percentage basis lower than what we did last year, and I think that's just reflective of the fact that we're seeing that normalization as we described, of demand coming out of what was incredible, robust '21 and first half of '22.

[Keegan Carl, Wolfe Research]

Got it. Maybe shifting to your third-party management platform. Just kind of curious where you're seeing demand at for it today and kind of what the expectations are going forward. I know one of your peers mentioned that year-to-date, their demand is better than expected. Just curious if you guys are seeing the same.

[Tim Martin, Chief Financial Officer]

Yes. We have a nice pipeline of potential opportunities to add new stores to add new management contracts. We're certainly continuing to see a shift that as a percentage of those, a little bit less in -- by way of new developments as I think the development cycle gets a little further away from the peak. .

But we have a high level of interest from a number of third-party owners who are looking for us to be able to come in and add our platform to help create value for their storage property. I think what we also expect to see in 2023, which is a little bit of a result of earlier commentary on the transaction market is, we do expect to see less churn in the portfolio as there are just fewer sales of properties going on. So perhaps stores that are on our management platform we'll stay on our platform a little bit longer as the transaction market has cooled off a bit.

[Operator]

The next question comes from the line of Steve Sakwa with Evercore.

[Steve Sakwa, Evercore]

Just circling back on the transaction market. Chris, can you maybe just talk about where the bid-ask spread is today? How has pricing changed? And I guess, how close do you think you are to finding sellers willing to accept what are presumably higher expected yields from public companies such as yourself?

[Tim Martin, Chief Financial Officer]

Steve, it's Tim. Yes. I think there are just fewer overall transactions in the market right now and the -- and of the deals that are out there, the hit rate on how many of those are closing and being able to bridge that gap between buyer and seller expectations. It's a little bit cloudy. Certainly, a whole different world today than it was back certainly in 2021.

And we tend to find ourselves from where we believe things that trade. Often, we're off by 15% to 20% on many deals that trade. And it's hard to know for sure whether that's the exact right number. It's also hard to know what's driving that. Is that a difference in the way somebody's underwriting expectations for that particular opportunity relative to the way we're underwriting expectations? Is it a difference in their cost of capital or return expectations relative to ours, really difficult for us to triangulate through all that.

And then combine it with -- from our perspective, the things that have been in the market, frankly, just haven't been on average of as high quality as the opportunities that have presented themselves in a couple of years that preceded the last 12 to 18 months. So it's a combination of a lot of things that led to us being fairly low on our investment opportunities in 2022, whereas I mentioned earlier, we're hopeful that we start to see some things that fit our strategy and can find those opportunities at pricing that makes sense to us relative to our cost of capital.

[Steve Sakwa, Evercore]

Okay. And then maybe just circling back, I know there was a question on expense growth. And Chris, you talked -- touched a little bit on the employee side. But I'm just curious, from a technological perspective and as you kind of use more technology, I guess, how much more cost savings or FTE savings do you sort of get at the property from here going forward. .

[Chris Marr, President and CEO]

Yes. That's the evolving question. I think it relates on both sides. What and how does the consumer of our product, what do they want to use and how do they want to be engaged with. And we are doing an awful lot of work and an awful lot of testing to figure out that balance.

It's not surprising, and it's not necessarily entirely demographically related, but there's a portion of our customers who are entirely comfortable with a self-service model, no different than our kids texting from upstairs asking what time dinner is. And there's a segment of our population who absolutely want that in-person service and want to know that there's a store team made available to assist them with their storage needs. And to try to find that balance is what we've been really focused in on, and it's a combination of video, it's a combination of chat and it's using smart rental more efficiently.

So we're going to continue to navigate through that. To date, we've been able to find some really good operational efficiencies through the testing that we've done, and we're just going to continue to attack that here in 2023. I just don't think our model ever ends up being one where it's entirely self-service. I don't think we ever end up in a model where it's entirely an in-person store teammate. I think ultimately, it will vary by market and by property and we'll find that balance. I think there's still good opportunity though for us to continue to be more efficient.

[Operator]

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

[Ki Bin Kim, Truist]

Just a couple of questions on the expense front. In 4Q, your personnel expenses were down 9%. I'm curious if that's an efficiency-driven type of metric? Or were you just not fully staffed? I'm just trying to understand kind of the forward path for that line item?

[Tim Martin, Chief Financial Officer]

Yes. I wouldn't overread into that being a forward path that has a little bit to do with the comp issue from last year. So I think it's less to do with what we were doing this year and a little bit more to do with what we were doing last year and creating an easier comp.

[Ki Bin Kim, Truist]

Okay. And your expense growth in 2023 was only 3%, beating your guidance and even for 2023, your expense guidance is lower than your peers. So I'm curious if you think that's a little bit of a geographic-driven item? Or going back to your other comments, is it other things you're working on that are keeping those expenses lower.

[Chris Marr, President and CEO]

Ki Bin, it's Chris. I can't comment on what our peers are doing. You have to ask them for what their focus is. But back to my opening comments, we had a thesis at the beginning of '22 that those companies that focusing on operational excellence, being lean and agile are going to be best positioned to navigate through uncertain economic times. And institutionally, we had a keen focus on just doing things more efficiently, operating smarter.

And I think you combine that with the answer to the previous question in terms of how do you think about -- how do you think about how the customer wants to be served. And I think we found ways to continue to be as lean as we possibly can. I think we've got some continued possibilities there in 2023, we will -- as we always do, we will test and try a variety of different techniques. And some of them will work, some of them will not, we'll learn and learn from those that don't and move on. So it's -- for us, it's just a focus. And if you focus on something put the right people on it, you can do great things.

[Ki Bin Kim, Truist]

And your repairs and maintenance expenses in your same-store pool account for about 1% of total revenues. That's at the lower end when I look at some other competitors that might be as high as 3%. I'm curious if that's like a weather-driven snow removal cost driven type of item or some other things that you've been working on?

[Chris Marr, President and CEO]

Yes. Again, don't have any idea what -- how to answer what other folks do. You'd have to ask them why theirs is, and I'm sure they'll help you out. From our perspective, we take -- we have great properties, obviously, best-in-class in our industry. We take great care of them. And so when things need to be repaired, we repair them immediately and perhaps that saves us from having to incur incremental costs over the longer term by trying to ignore those day-to-day things.

So it's always been a point of focus. Our facility services team is world-class. And obviously, we believe in providing our customer with an excellent product and part of being an excellent product is making sure you're maintaining your stores in the best way possible.

[Operator]

The last question comes from the line of Mike Mueller with JPMorgan.

[Mike Mueller, JPMorgan]

Chris, I guess your comment earlier on about New York performance being a little bit better than the portfolio average. I guess, was that more of a 2023 comment as you move through 2023? Or is that intended to be a little bit more of a multiyear outlook for the next few years?

[Chris Marr, President and CEO]

The back half of 2023, the boroughs, as I said in the opening comments, I think will outperform. And I think that, again, in our expectation for a more normalized environment versus what we saw in '21 in the first couple of months of '22, I think the low beta, high-quality demographic markets, the more urban markets will tend to outperform some of the markets that saw great performance in '21 and into the beginning of '22.

[Mike Mueller, JPMorgan]

Got it. Okay. And then -- last question. You have a couple of developments coming online beginning of next year. Can you talk about the pipeline? Are we likely to see any starts this year? How do you think that will evolve?

[Tim Martin, Chief Financial Officer]

Mike, it's Tim. It's an area that we look at. And if you look historically, our development pipeline has been very focused on just a handful of markets. And the markets that we have been focused on have seen a fair amount of -- have seen a fair amount of new supply, and we think that new supply will continue to diminish.

We are focused though on trying to find opportunities that are great infill locations for us that are complementary to our existing portfolio where there is a need or a pocket so that we can expand and enhance an already dominant position in the handful of markets that we've developed in the past.

So hard to predict whether we'll be able to find opportunities to add to the development pipeline. But clearly, it's tapered off here over the past several years. but we don't expect it to taper off to 0. We're looking for opportunities, and you shouldn't be surprised to see a couple of projects pop up on that list as the year plays out.

[Operator]

There are no further questions registered. So at this time, I'll pass the conference back to management team for closing remarks.

[Chris Marr, President and CEO]

Thank you, everyone, for joining us today. Our high-quality properties, balance sheet people, an industry that is just simply wonderful and the great teams that we have serving our customers and our stores throughout the country have us well positioned for 2023. We look forward to another successful year. We appreciate your continued support and look forward to speaking to many of you over the coming weeks and months. Thanks for your participation.

[Operator]

That concludes today's conference call. Thank you for your participation. You may now disconnect your lines.