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CubeSmart
Earnings Call Analysis
Q4-2023 Analysis
CubeSmart
Looking at the latest trends, certain aspects of the market have shown seasonal consistency, particularly in New York, with January and February performing as expected. However, North Jersey is feeling the pressure of new supply, which has impacted the market more significantly than others, suggesting the need for investors to keep a keen eye on regional supply dynamics when evaluating performance.
Promotions, such as the offering of the first month free, have been leveraged to attract customers. While these discounts bring customers in, those customers tend to reach market rate in month two and can be more volatile in terms of length of stay and credit quality. On the other hand, more nuanced Internet discounting looks to move rates toward market levels within four to six months depending on the customer, demonstrating the company's calibrated approach to promotions and customer retention.
The question of street rates and their recovery remains complex. Last year's demand was unusually low, with an atypical busy season. Now, the focus is on harnessing demand driven movements that happen seasonally between mid-March and mid-June. Positively, the customer base remains robust, which bodes well for potential seasonal improvements in rate, even as the broader housing market does not show significant signs of improvement currently.
The Sunbelt region, especially Florida, has seen varying performance. Factors contributing to this include higher volatility in more housing dependent markets and supply impacts. Notably, no different customer behavior has been observed in the Sunbelt markets compared to other regions, indicating customer resilience despite market variations.
A significant customer base has adapted well to self-service models, although an equal portion of customers continue to prefer in-store assistance, illustrating the company’s need to maintain a flexible model that caters to diverse consumer preferences.
The company's ECRIs are seen as a beneficial offset to the negative new lease spread, reflecting the balance management aims to strike between short-term incentives and long-term tenant value. Analysis of growth rates shows a healthy trend notwithstanding immediate new customer pricing pressures.
Rental rates to new customers started with a downward trend, declining by approximately 18% in October and then stabilizing around 15% negative in the following few months. This information is pivotal for evaluating short-term revenue dynamics and how rate strategies adapt to market conditions.
Urban markets less dependent on housing changes are expected to outperform others throughout 2024, displaying an ongoing divergence in market performance based on geographic properties and customer characteristics. Markets showing strength in Q4 are predicted to extend this momentum, with others potentially following suit, albeit to a lesser extent.
The outlook on acquisition opportunities suggests a market less active than 2021, with the company remaining ready for transactional opportunities as they arise. Meanwhile, share repurchases are also on the table, potentially playing a role if leverage continues to decrease without corresponding asset growth and if there exists a significant valuation gap between public shares and private market values.
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Good morning, ladies and gentlemen, and welcome to the CubeSmart Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] This call is being recorded on Friday, March 1, 2024.
I would now like to turn the conference over to Josh Schutzer, Vice President of Finance. Please go ahead.
Thank you, Joanna. Good morning, everyone. Welcome to CubeSmart's Fourth Quarter 2023 Earnings Call. Participants on today's call include Chris Marr, President and Chief Executive Officer; and Tim Martin, Chief Financial Officer. Our prepared remarks will be followed by a Q&A session.
In addition to our earnings release, which we issued -- 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.
Thanks, Josh. Good morning, everybody. Last evening, we provided our solid operating results for the fourth quarter of 2023 and introduced our expectations and guidance on our key metrics for 2024. Tim Martin will provide more color and insight on both of those in his prepared remarks.
At a very high level, operating trends have stabilized when comparing to the volatility that we experienced in the first 3 quarters of 2023, but price sensitivity for new customers remains elevated given the tight housing market and a particularly challenging competitive environment. Once customers enter the portfolio, they remain strong as they have elevated lengths of stay and continue to accept ECRIs and our customer credit metrics remain in line with prepandemic levels.
Our urban markets have outperformed the faster deceleration of our Sunbelt markets as the lower beta nature of these markets has continued to support steadier performance. The strong demographic profile for our portfolio should support performance through any phase of the cycle as New York City remains the bright spot in our portfolio with strong performance over the last year now making it our highest growth market.
The transaction market remains quiet as the recent rise in rates has kept the cost of capital elevated and we continue to have a bit of a bid-ask spread between seller expectations and our expectations. Our investment-grade balance sheet is in excellent shape, no material maturities, minimal exposure to floating rate debt and significant leverage capacity, which we believe positions us to transact as attractive opportunities return to the market.
Thanks for joining the call today, and I will turn it over to Tim for additional commentary. Tim?
Great. Thanks, Chris. Good morning, everyone, and thanks for taking a few minutes out of your day to spend it with us. I'll provide a quick review of fourth quarter results and then jump into some additional color on '24 expectations and guidance.
Same-store NOI growth for the fourth quarter was 1.2%. Driving that were same-store revenues growing 0.4% for the quarter with realized rents per square foot growing 1.8% compared to last year, offset by occupancy levels dropping 110 basis points on average compared to last year. Same-store expenses declined 1.8% during the fourth quarter, driven largely by the real estate tax line item as we received some significant refunds and tax reductions in the fourth quarter. We reported FFO per share as adjusted of $0.70 for the quarter, representing 4.5% growth over last year.
During the quarter, we also announced a 4.1% increase in our quarterly dividend up to an annualized $2.04 per share. On yesterday's close, that represents a 4.7% dividend yield.
On the external growth front, in the fourth quarter, we acquired one store for $22 million, we partially opened one of our JV development stores and we added 43 stores to our third-party managed portfolio, bringing us to 167 stores added for the year and 795 third-party stores on the platform at year-end. As Chris mentioned, our balance sheet position remains strong. All of our debt, except for our revolver, is fixed. So less than 1% of our outstanding debt was variable rate as we started 2024.
We faced no significant maturities until November of '25, and we have a weighted average debt maturity of 5.4 years. We further reduced our leverage levels during '23 and ended the year at 4.1x debt to EBITDA, giving us ample capacity and liquidity to finance future growth when attractive opportunities present themselves.
Looking forward, details of our 2024 earnings guidance and related assumptions were included in our release last evening. Our 2024 same-store property pool increased by just 6 stores this year. 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 '22, '23 as well as the impact of 2024 deliveries that will compete with our stores.
Embedded in our same-store expectations for '24 is the impact of new supply that will compete with approximately 27% of our same-store portfolio. For context, that 27% is down from 30% of stores impacted by supply last year and down from the peak of 50% of stores impacted back in 2019. The midpoint of our revenue guidance range assumes that the housing market improves marginally off of 30-year lows, but remaining well below historical norms. This would lead to negative year-over-year gaps in both occupancy and rate, reaching parity in the fall and then growing slightly from there.
The high end of our revenue guidance range implies more of an improvement in the housing market, driving seasonality closer to historical levels. This improved demand environment would lead to year-over-year gaps in both occupancy and rate to reach parity in mid-summer and then flip positive in the back half of the year.
And then the low end of our revenue guidance range assumes another year of largely frozen housing mobility, driving another year of muted seasonality throughout the spring and summer. This slower demand environment would mean a continued lack of pricing power causing the negative year-over-year gaps in occupancy and rate to persist through most of 2024, albeit at narrowing spreads from current levels.
Shifting to same-store expenses. We've had a lot of success in controlling our operating expense growth here over the last 2 years, averaging expense growth of only 2.2% compared to 6% expense growth for our storage peers over the same period. That's great news for 2022 and 2023, but sets us up for some pretty tough comps in 2024. We introduced same-store expense growth in a range of 5.5% to 7% growth in '24. On an absolute basis, there are a few line items that are pressuring expense growth into '24, and the biggest driver is real estate taxes.
As I mentioned earlier, this quarter's guidance beat was largely driven by some significant refunds and tax reductions, again, great news for '23, but creates a really difficult comp for 2024. Overall, we're expecting real estate taxes to grow in the high single digits this year as a result.
Property insurance is another line item that will continue to see pressure. Our annual insurance policy resets on May 15 of each year, and we had a 43% increase in cost last year. So that continues for the first 4.5 months of '24. And then beyond that, we're anticipating another 20-plus percent increase in our renewal again this year.
The third area of pressure comes from winter-related expenses, primarily snow removal costs. We had a very favorable winter in 2023 from that perspective and our guidance assumes a more normal level of those costs in 2024. So overall, expenses are, again, expected to grow 5.5% to 7%, but taking out real estate taxes, property insurance and snow removal costs, all other expenses combined are expected to grow plus or minus at inflationary levels.
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.
To wrap up, thanks to our entire CubeSmart team for a really productive year in 2023. We're excited about our position to execute our business plan in 2024. Thanks again for joining us on the call this morning.
At this time, Joanna, let's open up the call for some questions.
[Operator Instructions] The first question comes Kassandra Fieber from Truist Securities.
So your acquisition activity was pretty muted in 2023. In your 2024 guidance, you're assuming acquisitions of $100 million to $200 million. You touched on this a little bit in your prepared remarks. Can you share what you're seeing in the acquisition market? And then also, are there any markets that you're focused on specifically?
As we sit here today, we don't have a whole lot of visibility in our range above -- in the range, above the range as it relates to external growth. There's very little product on the market as we sit here today, although we've certainly heard from brokers in recent months that there were a number of BOVs on the shelf, and there was seemingly some activity that was stirring up here when we saw rates move downward a little bit. I think there was some excitement that there was going to be a wave of potential opportunity. That seems to have cooled off for the moment.
So difficult to predict. What we do know is that our team is ready. We're still underwriting every opportunity that we can get our hands on. Our availability of capital, we've never been in a better position from a leverage perspective to take advantage of external growth opportunities should they present themselves. All that said, we fully expect to remain patient and wait for the right opportunities for us to jump in and start to be more acquisitive than we have been here over the past year, 1.5 years.
Okay. That's helpful. And then can you talk about what you're seeing in New York in terms of demand trends in January and February? And then given that New York is one of your strongest markets, I'm curious how doing New York 2024 prospects compare to the overall guidance you provided for 2024?
Yes. Thanks for the question. This is Chris. Demand trends in January and February were seasonally consistent in the New York MSA as we would have expected based on historic trends, so it continues to be a solid market for us. And as we think about New York as an MSA and each of the individual components of that certainly expect the boroughs to outperform again in 2024, our expectations of kind of the broader portfolio from a revenue perspective. And that's going to be the boroughs at one extreme and then pressure in North Jersey, I'm sure you've heard this from others, as a result of the greater impact of new supply in some of our North Jersey markets than the MSA as a whole. So will continue to be a top market for us in '24.
The next question comes from Eric Wolfe at Citi.
You mentioned in your prepared remarks that when you get customers in the door they're showing signs of strength. So I was curious, when you put bigger discounts in place or promotions in place like first month is free and 40% off, what is usually assumed in terms of getting those discounted tenants to market? Like how long does it take on average? What's the probability that they accept versus those that are coming in closer to market?
Yes. I think if you just look at it -- because it's kind of a customer-specific question, but if you look at it across the portfolio, obviously, the use of a first month's free there's a lot of put and take there. So very attractive to the customer. Obviously, they get to market in month 2 when full rent kicks in. They tend to be a more volatile customer because there's, obviously, an appeal to having that first month be free. And over an entirety of that population or that cohort, they tend to be a lower quality customer in terms of length of stay and credit.
When you think about Internet discounting, again, there's not a one size fits all. It's going to depend upon the behavior we expect from that specific customer. So typically, you may have rate increases that get you all the way back to market within the first 4 months, sometimes that's the first 6 months, really depends upon the customer. But that's the typical cadence and difference at a macro level between those two cohorts.
Got it. That's helpful. And then I was also just wondering sort of as you look at things today, what do you think are sort of the best leading indicators for street rates, meaning those that have the highest correlation to future changes in those street rates. You talked about how you don't expect much improvement in the housing market.
But if I'm trying to calculate where your street rates are today, it kind of looks like they're in the [ $13 ]. So it seems like you need to see a reasonable amount of improvement to kind of get up to that level that you discussed were things cross over in the fall. So I was just trying to understand what you're looking at today that helps you sort of form that guidance.
Yes, very nuanced question and a nuanced answer. So part of it, obviously, is what happened last year, right? So when we talk about getting back to parity or crossing over, a part of that is what was a very unusual and pretty tepid demand profile in 2023, especially as we got later into the year. And we really did not have a typical busy season last year at all.
When you think about, again, the various puts and takes as it relates to this year, movement, ultimately, is the answer, right? We rely somewhat on housing to create that seasonal uplift in demand, but there are, obviously, other drivers that relate to that as well. So we look for that mobility, which, again, in the next couple of weeks, you start to look for an opportunity to seasonally move rate up and so March 15 to June 1 -- June 15, are going to be pretty telling as we think about how this year is going to play out.
The health of the consumer seems really good. I mean our customer metrics are -- continue to be high quality. And we continue to see our existing customer base be pretty solid. So that's a positive for us. So really, it's going to come down to just that general mobility, and we're going to know a lot more starting mid-March through June to see how '24 is going to play out.
The next question comes from Jeff Spector of Bank of America.
It's Lizzy on for Jeff. I was hoping for more color on your lower-performing Sunbelt markets, and primarily Florida, that was kind of touched on at the start of the call. Can you speak to any common themes you're noticing across your Sunbelt markets, really more so on move-in rate trends? And then also curious to hear how the existing customer is responding to your ECRI program today.
Yes. So taking it from the end to the beginning, if the question was that, is there any different behavior in Sunbelt markets for the existing customer base, then that answer is there is not any different behavior in the Sunbelt markets than it is in the rest of the country. Again, healthy consumer, healthy customer and the rate increase process pretty consistent with what we saw certainly in the last 6 months of last year.
From an occupancy and demand perspective, generally across the Sunbelt, you've just got -- you've got markets that are higher volatility than the markets that are more urban. You have markets that rely more on housing than you do in the more urban markets. West Florida, you have a continued bit of an impact from a benefit from hurricanes that has made comps a little bit more difficult. You've obviously got a little more of an impact of supply in the Sunbelt markets than you do in the more urban markets. I think those are kind of the high-level reasons why you're seeing some difference in performance.
And in this stage of the cycle, you would expect that the Chicagos, New Yorks, et cetera, are going to perform a bit better because they just rely less on that housing movement and more on other drivers of demand.
Great. And I was also curious on -- maybe this was touched on earlier in someone's question as well, but back in the fall, you guys really spoke to sort of the website upgrades you were making and how that was translating into top of the funnel demand. Are you able to quantify how that's impacted your conversion rate for bringing in new customers into year-end and into -- as we sit in February?
Yes. The impact of those changes improved modestly the conversion rate of customers. Again, it's difficult to isolate that relative to other market forces. Obviously, we continue to see trends in marketing spend that are bouncing all over the place, depending upon who we're competing against in those particular markets. And so that puts pressure on us from the other side of the equation, and we're seeing a little bit different customer behavior.
But all these continuous improvements in terms of making the experience for the customer as simple, easy and intuitive as possible, we believe and they will continue on as we move into '24 and beyond, continue to drive us towards meeting that customer where they want to be met.
Our data would tell us in our focus groups that 1/3 of our customers are perfectly happy with a self-service model, but equally, we have another 1/3 who continue to want an in-store teammate who is going to help them with their storage needs and walk them through the process in a very personalized way. So our focus is on how do we capture all those customers at either extreme in the way that they want to be served and not just try to create kind of a one-stop one way of doing things because we don't think that will produce the right answer over the long term.
The next question comes from Juan Sanabria from BMO Capital Markets.
Just hoping you could share your thoughts on kind of one big question that we kind of consistently get from investors with regard to the move-in, move-out spread and how that's been fairly negative and how that should not be a point of concern for an eventual recovery here. There's clearly a benefit from ECRIs that helps offset that negative new lease spread. But if you could share your thoughts and just general views on the offsets and why that isn't a point of concern longer term, I guess, for the business given the pricing pressure on new customers?
I'll start. I mean I think part of it is that if we had our druthers, we'd much rather see that be positive. I think the reality is, is that we're still adjusting asking rates to pandemic levels and coming off of postpandemic levels. And then I think you compare those to prepandemic levels and overall rates look on a compounded growth rate basis, to be here in '23 and heading into '24, kind of where you would think they would have been had you asked us that question prepandemic.
That said, clearly, there are drivers that we've talked about for several quarters and others have talked about that the overall levels of demand due to the housing market are a little bit lower than you would normally expect them to be. So I don't know how to answer the question from the standpoint of is there a concern. Asking rate -- there's always a roll down. It's just the roll down today is a little bit greater than it typically is when comparing customers who are leaving the platform versus customers who are coming in.
Can you give a sense of how the move-in rates are compared to last year for kind of the fourth quarter, the trend, did December end better? And how are January and February going? And maybe juxtapose that with move-in, move-out spreads?
Yes, if you're -- so if you think about rates to new customers, they were down in October, about 18% when we average out the quarter and kind of the exit, it was around 14%. And then here, the average for the first 2 months of the year expanded about 100 basis points, it's around 15% negative.
And how about the spreads for new customers? Is that -- it's steady or contracted at all or...
Yes, stayed relatively steady, and it's about negative 34%.
The next question comes from Michael Goldsmith at UBS.
My question is on the same-store revenue guidance. Can you just talk a little bit about -- or what is assumed in the guidance in terms of the gap between the urban and more suburban markets and the trajectory through the year? It seems, right, like the New York market has clearly been outstanding relative to the rest of your markets. So I'm wondering how you're thinking about kind of like similar-ish urban markets and how the gap is positioned relative to some of the other markets that you have exposure to?
Yes. I think consistent with some commentary to a previous question, our macro expectation is that those markets that rely less on housing change to drive demand will outperform over the course of the year the other markets that depend more on that customer. So it's going to vary across region and across the portfolio, again, also related to how 2023 played out. But overall, I think the markets that showed strength in the fourth quarter, we would expect to continue to show strength as we go throughout 2024. And I think some of the markets that had some greater weakness in the fourth quarter have bottomed out and will be better performing, albeit not as strong as the urban markets through '24 and the other markets somewhere in the middle.
I appreciate that, Chris. And my follow-up is, last year, you had 70 properties under the same-store pool, and there's been a clear benefit with the gap between the 2023 and 2022 same-store pools. This year, you only have 6 same-store -- or 6 properties entering the same-store pool, but I was wondering how are you thinking about the new entrants in 2023 that had -- that drove a lot of outperformance this year? What is the expectation for 2024 as you kind of do your asset-by-asset buildup?
So just to be clear, your question is the stores that entered the '23 pool, what is their continued contribution into '24. Is that the question?
Yes. Can they continue to sustain momentum? Are they still -- is there still upside? And are they still kind of underperforming kind of like the entire same-store pool?
I think overall, they are performing a little bit better than the overall same-store pool, but it's a mix. So if you think about the Storage West portfolio, we have -- and that was the biggest chunk of the stores that were added this past year. Overall, for that portfolio, the San Diego and Las Vegas properties are performing really well. The stores in Phoenix, consistent with Chris' commentary earlier, Phoenix is one of the Sunbelt markets that has put a little bit more pressure due to housing and some supply issues there.
So overall, the contribution from those stores relative to the portfolio average, it's still a positive, but less positive in '24 than it was in '23. And then the 6 stores that are added this year are negligible. So they really don't have any impact.
The next question comes from Keegan Carl at Wolfe Research.
I know this one was touched on a little bit, but just curious, one for Tim, how are you kind of embedding your marketing expense growth in '24, just given -- as Chris alluded to, it's kind of market by market, but I would love to have more color there.
How we're approaching it? Is that your question?
Yes. I guess just what are your expectations for marketing expense growth? I know it's -- obviously it can be volatile, but just -- at least in your initial guidance where you have it set up.
It certainly can be. At the midpoint of our expense guidance, it would assume that marketing expenses is plus or minus inflationary type expenses. We tend -- as you've seen in the past, we tend to be a little bit steadier on marketing spend relative to some others. We tend to press the pedal down a little bit when we see great returns on that spend, and we tend to pull it back a little bit when we don't. And so that can create some volatility from quarter-to-quarter. But overall, our expectation is that marketing expenses and that bucket of expenses that is more inflationary in nature, not like the ones that I mentioned in my preamble of taxes, insurance and snow.
Got it. And another one for you, Tim. Just kind of curious on snow removal. We're now in March. So just what would be driving concerns kind of the rest of the quarter here?
The concerns are that it was virtually zero last year, and it can snow -- we're a little bit more heavily weighted to the Northeast markets than some others. And there are years that it snows in November and December, too. So we don't know what those are going to look like here in the fourth quarter of '24. It doesn't take a lot of snow events for it to add up.
The next question comes from Spenser Allaway at Green Street.
Maybe just shifting back to property taxes for a second. Do you have a sense of what percent of the portfolio is currently within tax abatement burn off? And if so, do you also have a sense of what the magnitude of the increase in property taxes that those properties would incur?
Sorry, the percent of stores that are -- could you just repeat that part of the question. I didn't quite...
Yes, no problem. The percent of the portfolio that would -- the percent of the portfolio that is currently within like a tax abatement burn off.
Yes. So we have some stores in New York that are in that phase, but that's really the only place that we have it across the portfolio. So overall, it's a really small percentage as you think about it from the entirety of the portfolio.
Right. Yes. Of course, yes, small percentage. But -- and then do you guys -- are you guys -- do you have a sense of what like the magnitude of step-up in property taxes is going to be over the next several years?
We do. I think we disclosed the impact that we saw from ICAP burn offs in our sup as we always do. I think that number -- I'm trying to pull it here, but I think it was $600,000, I believe, plus or minus for the fourth quarter. That number will continue to grow a little bit into '25 and '26 and then I think it level -- it largely levels off after that. So it has an impact. We have historically disclosed that impact, it's on Page 17 of the sup. And you can see in the fourth quarter, it was $678,000 was the impact of those ICAPs burning off -- I'm sorry, $678,000 for the whole year, not for quarter.
Yes, yes. No, of course. I was just trying to get a sense of what you guys might have been underwriting for what was coming down the pipe here in the next year or 2, but I appreciate the color.
The next question comes from Samir Khanal at Evercore ISI.
Chris, in your opening remark, I believe you just mentioned that operating trends have stabilized. I guess, maybe talk around -- maybe give a little bit more color on that comment as we try to assess your guidance here.
So in the context of 2023, where if you recall, every quarter, the volatility just seemed to be abnormal. If you think back, we had a relatively normal January of '23. And then February was fine, and then March was really bad. And then we seem to have another repeat in the second quarter, where June was pretty disappointing. September in the third quarter was pretty disappointing. The fourth quarter was the first quarter during last year, where kind of our expectation of seasonal trends met the reality. And then we saw that continue here into January and February.
We obviously have the benefit here on March 1 of knowing how those two months went and that gives us some confidence that we're off to a start that matches up with our expectations and guidance for the full year. All that being said, as you know, and I think I answered to a previous question, you get into the latter part of this month and certainly into April, May and the beginning of June and that's where the assumptions that Tim laid out at kind of both ends of the spectrum are going to start to materialize, and we'll have obviously a lot more information, just nature of the business, as you know, from a seasonal perspective.
Got it. And I guess, just -- I wanted to ask you on occupancy and your thoughts on that. I mean if you go back to 2019, you're about 100 basis points below. So just curious on your thoughts as to how to think about occupancy through the year. Have we sort of leveled off on occupancy? Or do you think there's further sort of movement downward here in this year?
Yes. I think our kind of midpoint expectation is we generally bounce around where we are today. So there's a modest level of occupancy improvement as we get later into the year at kind of the midpoint. At the more conservative end, that doesn't materialize. And at the better end, we, obviously, as Tim said, we see a better mobility market for us in the busy season, and then that translates into some stronger occupancy.
But clearly, the experience in '23 is we just didn't see a whole cohort of customers that we expected to get going into the busy rental season, and then that trickles through the balance of the year, both from an occupancy and a REIT perspective. Supply, as Tim said, I think is a bit of our friend. It continues to come down, again, market-by-market. There are parts of the country that are going to continue to experience a little bit of pain from the supply there. I think North Jersey is probably the one that fits into that.
And then there are markets like Phoenix, where I think all the supply that came in got certainly hidden by the tremendous surge in demand from COVID. And then as things have stabilized out, I think you're just going to naturally have a kind of a lower market occupancy for a time until -- again, until that population growth backfills in that supply.
Got it. Got it. And just one last one, if I may. I think you touched on ECRIs, but I don't know if you gave the magnitude. I mean what are those increases look like today? Maybe compare them to last year at this point.
Yes. If you think about last year, again, we kind of came down in '22 and '23 from those kind of 20% type increases on average that we saw at peak COVID. They've been basically, right, averaging around 15% here for some time. And again, our kind of expectations as we go through 2024 is the cadence and magnitude will be pretty consistent at the midpoint. I think, again, in a more bullish scenario, with better mobility, we would think we could maybe extract a little bit more out of that.
The next question comes from Eric Luebchow at Wells Fargo.
You touched a little bit on the M&A environment. You said the bid-ask spread remains pretty wide. I think you talked about it being around 15% or so toward the end of last year. So maybe you could update us on that. And I guess, given where your current cost of capital is, is there kind of a way to think about which cap rate ranges may be attractive for you to start to do more transactions that fit your investment criteria?
Eric, so you're recollection is good. We saw -- through the bulk of 2023, we felt like we were generally about 20% disconnected. And then last quarter, we talked about that narrowing a bit, maybe into the 15% off the mark. And now I would say it's probably closer to 10%. So we're getting closer.
And again, from looking at it from our cost of capital for the right opportunity, we're looking -- generally speaking, we're looking for something in the 6 cap or better range. And so we're starting to find a couple of those opportunities on attractive properties that fit our criteria and what we're looking for are returns that make sense to us, but it's a trickle at this point. We're ready for it to be more of a trickle when it starts to open up.
Okay. I appreciate that. And then just one more for me. As you think about capital allocation, if it remains a trickle and you don't see a lot of acquisition opportunities, I guess, at one point -- at what point would you consider other forms of capital return like potentially repurchasing shares, which I know haven't been a big part of your plan historically. But given where your leverage is today, you, obviously, have a lot of room to bring leverage higher for other forms of capital return.
No doubt. Great question. As we think about it, our #1 objective is to -- is if we had the alternative, would be to continue to grow and expand in the markets that we want to be in with assets of that quality. If those opportunities aren't there, we tend to double down on our focus on internal opportunities for redevelopments and potentially some developments if they penciled out.
But at some point, if that is disconnected and we continue to just delever and delever and delever as we have been and there is also a disconnect in the value of our shares versus private market valuations, of course, we have that tool to consider, share repurchases. And at some point, the disconnect is big enough and the time period is long enough, then that is certainly something that we would consider.
Next question comes from Mike Mueller at JPMorgan.
Two quick ones here. One, just a clarification. I just want to make sure we're using the same terminology. When -- during the guidance discussion, when you talked about rate parity, hopefully in the fall, you're talking about new move-in rates that you're getting then on a year-over-year basis compared to those new move-in rates from last year. Is that correct?
That's correct.
Okay. And then second, on the expense side, do you have any visibility as to when, I guess, insurance growth will moderate? You talked about it being 47%. I think a 20% expectation after you kind of hit the mid-May or whatever the date was this year. But do you think it stays outsized in terms of growth for the foreseeable future? Or do you see a notable drop off in the next year or so?
Yes. Mike, it's Chris. I think that -- I wish I had that crystal ball. That would be awesome. I think there are so many variables, right? One is mother nature. One is the investment returns that the insurers are achieving and another is the entry or exit of capital into the property and casualty insurance space, particularly from the reinsurers.
And I just think we're kind of in a period where we have maybe a little bit less competition, maybe some concern about how they're matching up their assets and liabilities from a return perspective. And then we've had some events that haven't impacted our sector, but certainly have impacted commercial real estate from mother nature perspective.
So I think we're maybe a little bit optimistic based on what we hear that a moderating trend over the next couple of years is feasible. But honestly, that's one of those things that really is kind of dependent upon both the time of your renewal, ours is in May, and then what's going on with those other things outside of our control.
Got it. So you find out when you find out. Okay. That's helpful.
And the next question comes from Todd Thomas at KeyBanc.
Sorry about that, it's been a long earnings season. I'll try this again. Chris, just wanted to, I guess, follow up first on Samir's question. And I'm wondering, as you look back, whether you have any sense why operating trends were volatile like you discussed during much of '23, whether it was maybe related to pricing strategies that you're employing, customer demand, competitor pricing, if there's any light that you can really shed on that in retrospect.
Yes. I think when we look back, I think you have a whole bunch of factors. You really kind of named most of them. I think we had a -- we had weather. So I think, to some degree, you had some instances in some of those months that I rattled off as sort of oddly poor, where you just had maybe a deferral of demand in those months. And then for those customers who still had the need, perhaps they showed up in the month following.
I think we had that really odd situation in the resale of existing single-family homes where you just saw historical low activity. And I think that was an impact. I think you saw other impacts on the housing side in terms of folks willing to relocate from an apartment perspective, given how pricing was moving there.
I think competitor pricing certainly came into play to some degree on that. You had weird macro events, right? Not sure that the banking crisis or other things from a geopolitical perspective, ultimately really impact the storage customer, but to some degree, perhaps they do a little bit in terms of mobility. So a lot of anecdotal, hard to pinpoint to one item. It was just certainly, from my experience doing this for 30 years, it was a very unusual year.
Okay. In terms of competitor pricing, have you seen that become a little bit more, I guess, either predictable or just even out a little bit more?
Yes, I'm not sure I could say that it's become any more predictable. Again, week-by-week in some markets with some of the stores that we compete with, it's become a little bit more constructive and then we have other markets where quite the opposite is true. So it continues to be a very interesting competitive environment out there.
Okay. And then in terms of investments, it doesn't sound like you're seeing a lot, but some recent activity you acquired in Northern New Jersey and a couple in Connecticut. As you look ahead to the extent the transaction environment loosens up a little bit, I'm just curious how you think about deploying capital between the urban markets and the Sunbelt and whether there's a preference or not as you think about investments moving forward.
We have a pretty wide view, Todd, across all of the -- all of our target markets. There's really no -- preference in the short term is to focus energy on some of the top 40 versus other of the top 40. You're really looking for opportunities that present themselves. We wish we could bring people to market exactly where we want them to be. But the reality is, you're evaluating the opportunities that present themselves, and you don't.
There's not enough out there that you could really target to say, I want to focus on these 5 MSAs at the exclusion of the others. We're pretty wide open across the spectrum of the markets that we're interested in for high-quality assets, still interested across the gamut of very low occupied lease-up type opportunities versus stabilized opportunities so long as on a risk-adjusted basis, they make sense to us and are complementary to our strategy.
Okay. Tim, does the $100 million to $200 million assumption that's in guidance -- you mentioned that guidance does not include any unannounced acquisitions, maybe $100 million to $200 million doesn't really move the needle much, I guess, depending on the yields. But does the guidance actually include that assumption? Or is that just sort of a range around acquisition activity that you think is reasonable for the year?
Yes. Our FFO guidance does not include the impact of that $100 million to $200 million. It's more of what you described. It's an indication to try to give you a feel for where we think we can transact as we sit here today. But frankly, zero visibility into opportunities that would add up to that amount other than what we've disclosed.
It just feels like it's a year that is not going to be -- it's not going to be 2021. It feels like that's pretty much a certainty. But it does feel like we're getting a little bit more constructive when we underwrite opportunities. Again, as you mentioned, we found a couple of opportunities. Those were relationship-driven, one of our third-party management platform, one with a seller that we've transacted with in the past. So those are -- I won't say they're completely insider opportunities, but not marketed opportunities.
So you do think that there likely is a pent-up group of sellers who are looking for liquidity at some point, have been patiently waiting for that opportunity. And if we have a year from a transaction market that looks like cap rates aren't moving, you would think that at some point, there is a recognition from the seller side of the table to say, if I need liquidity, this is the market that I find myself in, so I'm going to transact. And if that happens, we could see some opportunities in that gap that we have seen that has been contracting. Perhaps that contracts a little bit further. And we find things in -- with return levels that make sense from our perspective.
And we've -- I would think sitting here today that my best guess is that we could find 1, 2 property small portfolios that would add up to that $100 million to $200 million, but they're not in FFO, they would be incremental to that. One way or the other, I mean, if we found some compelling lease up opportunities they would be a bit of a drag in the short term on our FFO number in '24.
Thank you. We have no further questions. I will turn the call back over for closing comments.
Thank you all for participating in our call. We will see some of you, I assume, next week and safe travels. And we look forward to sharing with you our first quarter results in a couple of months. Have a great weekend.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.