CubeSmart (CUBE) Q3 2017 Earnings Report, Transcript and Summary

Good day, and welcome to the CubeSmart Third Quarter 2017 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] And please note this event is being recorded. I would now like to turn the conference over to Charlie Place, Director of Investor Relations. Please go ahead.

Thank you, Nicole. Hello everyone. Good morning from Malvern, Pennsylvania. Welcome to CubeSmart’s third quarter 2017 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 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 third quarter financial supplement posted on the Company’s website at www.cubesmart.com. I will now turn the call over to Chris.

Thank you, Charlie. A very solid quarter of execution by everyone on the CubeSmart team. Our systems continue to execute more and more efficiently, and our people continue providing best-in-class customer service. We continue to be keenly focused on the details. In the third quarter, we identified an opportunity that reduced discounting to new historic lows while modestly increasing asking rents, which has a positive effect of growing our realized rent while we also generated extremely good rental activity and gains in physical occupancy. The effect of this potent combination was the generation of sequential revenue acceleration in 14 of our reported 28 same-store MSAs including our largest, the New York MSA. We have increased our annual same-store revenue growth guidance up 25 basis points at the midpoint, to reflect the impact of our performance during the first three quarters of the year along with our expectation of continued solid execution during the fourth quarter. We are thankful for the safety of all of our teammates in Texas and in Florida. They demonstrated incredible fortitude during and after Hurricanes Irma and Harvey and personified our value of genuine care. The manner in which they took care of our customers and each other made everyone in our company proud. As noted, we have recognized approximately $1.4 million in costs associated with the two hurricanes. All of our impacted stores are open and serving our existing and new customers. We remain pleased with the performance of our non-stabilized and development assets. During the quarter, we placed in service our first store in an excellent location in 55th Street in Manhattan and a new store serving the Adams Morgan, Dupont Circle, Logan Circle neighborhoods of Washington, D.C. Both stores are off to solid starts. Our overall outlook on supply remains consistent with our comments on our second quarter call. Given the typical three-year to four-year lease-up for a new development, we focus on new supply for the period 2015 to 2017 compared to the three-year 2016 to 2018 periods. We believe that our attention to the detail, our systems and people and the quality demographics in our core markets will result in Cube navigating the supply impact going forward by maximizing the opportunity available consistent with how we have navigated it thus far in the cycle. We have and we will continue to be disciplined in our approach to acquisitions. Post quarter-end, we acquired two stores in Texas, one of which was in our third-party management program, and a single asset transaction in the Fort Lauderdale area. Our third-party management program continued its outstanding growth, adding 20 existing and 22 newly developed stores during the quarter. We feel very positive about our execution during the third quarter and how we are positioned entering the fourth quarter. I will now turn the call over to Tim Martin to provide additional detail.

Thanks, Chris, and thanks to everyone joining us on the call for your continued interest and support. We’re pleased to report our third quarter results, as Chris indicated, and those results include a beat to our projected FFO per share as adjusted range as well as a raise to our annual guidance and underlying assumptions. Consumer demand for our product remained steady and broad based, although asking rent growth continues to moderate. As Chris mentioned, we had a busy September operationally with the hurricanes in Houston and throughout the state of Florida. From a financial standpoint, our net income and unadjusted FFO were negatively impacted by $1.4 million during the quarter when factoring in the storm damage and related cleanup, net of expected insurance proceeds. For comparability, we excluded those costs from our FFO as adjusted as well as our same-store results. We reported another strong quarter from an occupancy perspective with quarter-ending occupancy of 93.7%, which is up 60 basis points year-over-year. Our average occupancy during the quarter was 93.9%. Same-store revenue grew 4.1% over last year, slowing only 10 basis points from the 4.2% growth we reported last quarter. Same-store expenses grew 4.2% and were impacted by increases in real estate taxes and personnel costs. As detailed in our earnings release yesterday afternoon, we increased our full year FFO as adjusted guidance about 2% at the midpoint, revising our previous range of $1.53 to $1.57 per share to a revised range of $1.57 to $1.58 per share. We also provided updated guidance on our same-store expectations for the year, raising our same-store revenue growth guidance up 25 basis points at the midpoint, lowering our expense growth assumption by 25 basis points at the midpoint and our same-store NOI growth was raised from a range of 4% to 5% to a new range of 4.5% to 5%. Additionally, we lowered our expected G&A costs down to a revised range of $34.5 million to $35.5 million. We remain focused on the external growth front and expanding the CubeSmart footprint. At the same time, we remain keenly focused on our investment-grade balance sheet and our cost of capital. We did not acquire any assets on balance sheet during the quarter, but have closed on three acquisitions for $28 million in October. Our development pipeline continues to create shareholder value as we opened stores in Manhattan and Washington, D.C. during the quarter, as Chris mentioned. On the third-party management side, we remained extremely active adding 42 more stores during the quarter, bringing our year-to-date total to 123. We now manage 428 stores for third-party owners. A pretty quiet quarter on the balance sheet. We have no debt maturities until 2019. And as we’ve mentioned in prior quarters, we have the ability to fund our pipeline of external growth on a leverage-neutral basis without the need to issue any common equity. We have not sold any shares under our at-the-market equity program since the third quarter of 2016. Thanks, again, for joining us on the call this morning. At this point, Nicole, let’s open up the call for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Ki Bin Kim of SunTrust. Please go ahead.

Thanks and good morning, guys.

Good morning.

So usually when you reduce price – reduce discounts, you increase pricing, albeit ever slightly, I wouldn’t think that would induce more traffic or occupancy growth. So what happened during the quarter that surprised an upside?

Yes. We saw fairly broad-based demand. The system suggested that, again, we’re pricing to an effective rent. And in this particular quarter, our systems pointed to the best combination of those components to get to a price that would appeal to the consumer was to bring down the discount, but not push too hard on the Street rate and it worked. We certainly experienced positive move-ins post hurricanes in Houston. We saw some positive move-ins pre-hurricane in the major Florida markets. But I would say across-the-board, we just were able to generate good demand. So I can attribute it to asset location, asset quality, marketing, I mean, all of our people and systems just seemed to come together and it worked out a little bit better than we would have anticipated coming into the quarter.

But where did the comp for actual physical traffic come from? Was it – did you change maybe how you target customers at all with advertising spend or just a different way of doing business a little bit?

No, it was – the marketing and the channels were very consistent from 2Q to Q3.

And just, lastly, obviously, you guys raised guidance and implies that the fourth quarter same-store revenue probably accelerates or at the very least suddenly decelerate. So I’m guessing that you’re seeing that strength carry through. Is that correct? And I’m assuming that the occupancy is holding up into the quarter?

Yes, the occupancy is holding up. Clearly, we gave back some of the hurricane-created occupancies, particularly in Florida. But occupancies are holding up. I’m not – your math is correct. We would expect the fourth quarter to be fairly consistent plus or minus to the third quarter to hit within the ranges provided. Again, the components there may be a little bit different. So it might be not necessarily the same contraction on discounts. You may see a little bit more push on Street rate, but net effective growth in the quarter and we’re pretty positive about how we see trends going into the fourth quarter.

Okay. And I mean just, overall, that does seem like a change in narrative or tone, but just the way things have been trending is changing a little bit. Do you think that’s sustainable just kind of larger picture?

Yes. I mean, I think the change is, as I think we’ve seen in the last several years, is going into the year obviously the visibility to Q1 when we provide guidance is the best. The visibility into Q2 is pretty good. And in Q3 and Q4, to some extent, you’re sort of driving off of how well you think the busy rental season may go. I think if you go back to transcripts from the first quarter, we would have expected discounting to more likely gap out increase in the second half of the year. It’s, in fact, proven to be the opposite. So I think the tone is positive. Our expectation for 2017 is obviously more positive than it was six months ago. I think some of that is just related to time. How sustainable going into 2018? Stay tuned and obviously we’ll be providing our thoughts on 2018 in February.

All right, thank you.

Thanks.

Our next question comes from Smedes Rose of Citi. Please go ahead.

Hi, thanks. I wanted to ask if you could maybe just talk about performance in the New York boroughs specifically versus the overall New York MSA, the way that you define it?

Yes. The performance in the boroughs was very consistent with the performance for the overall MSA. We saw a sequential acceleration in the same-store revenue growth in the boroughs equal to the same levels of sequential acceleration we saw in the overall MSA. If you go borough by borough, then that’s going to be a result of the Bronx’s strong occupancy performance really from mid-August on. Again, as we talked about all year, the Bronx saw the brunt of the new supply impact first. And certainly from an occupancy perspective, we saw a lot of positive signs from about mid-August on. So overall improvement there for what had been a very, very challenging market all year, so we’re starting to see some – perhaps some green shoots there in the Bronx. Brooklyn just continues to power along with very significant gains in occupancy from where the same stores were last year. And then same story in Queens, and then the one store in Staten Island is extremely highly occupied so that one just kind of continues to chug along. So I would say performance in New York City very similar to what you see in the supplemental performance of the overall MSA.

Thanks. And then just – we’ve just heard a couple of different – from different folks on the supply outlook specifically for the city. Some have said that the deliveries have peaked in New York and then others have indicated that there’s a fair amount to come, and I was just wondering if maybe you could tell us what you’re seeing on that front – on the supply front?

Yes. Again, I think it’s borough by borough. So if you think about the Bronx, there we’re going to certainly feel like things are slowing down and we would expect that we will see overall that sort of 2015 to 2017 openings fairly well even out when you look at 2016 to 2018. And then going into 2019, we would expect to see those start to decline. In Brooklyn, we would expect 2018 to be peak deliveries for Brooklyn. Not going to have a huge impact on the number of CubeSmart stores that are facing new competition, but just overall in the borough, would expect 2018 is the peak for Brooklyn. In Queens, you’ve just not seen a significant amount of new openings. I think we’re looking at three this year and right now two for next year. But, again, I think that’s very similar to the Bronx. It seems like it’s starting to sort of turn the corner there if you think about supply. So overall, we would expect you’re going to see a few more stores delivered in 2018 than 2017, probably concentrated more so in Brooklyn and the impact on Cube in Brooklyn modest.

Great. Thank you very much.

Our next question comes from Juan Sanabria of Bank of America Merrill Lynch. Please go ahead.

Hi, thanks for the time. I was just hoping you could quantify the level of discounting that came off, kind of what that meant in terms of the benefits at the same-store revenue performance. And like looking forward, is that level of benefit sustainable? Or how should we think about that?

Yes. Thanks Juan, it’s Chris. So discounts as a percentage of rents in the quarter were 2.7%. That compares to 3% in the third quarter of 2016. That 3% in the third quarter of 2016 was a record low for as far as we were tracking it back 10 or so years. The 2.7% obviously a new record low, contributing about 20 basis points to the overall same-store growth within the quarter. And not to be a broken record, but I think I’ve been saying every quarter that I can’t imagine that it’s not going to flip back the other direction, and yet we’ve been able to continue to tighten. So we would expect that more likely you’re going to see some increased discounting. But again, we’re focused on that net effective rent from a pricing model perspective. So it really depends upon what is working to attract the consumer within that time period.

And looking into 2018, can you give us a sense of, I guess, what the blended discounting was year-to-date for 2017?

I don’t know the blended, but by quarter, if you go back and look at where that was quarter by quarter, it was 3.8% in the first quarter, 3.2% in the second quarter, 2.7% in the third, all of which, I think, were contractions from, off the top of my head, from a similar quarter the year earlier.

And then just moving back to supply from an earlier question. I noticed a couple of your targeted deliveries, one in the Bronx and one in Manhattan were pushed back as well as one in Waltham in Massachusetts. Can you just comment on what’s driving those delays and if you think that’s maybe something that is symptomatic of the broader industry where supply is being pushed back to some degree in terms of deliveries?

Yes, I think the science of predicting is tricky and so no specific thing to point to in any of those markets. I think it’s probably fair to say that permitting inspections, and at the back end, receiving temporary certificate of occupancy and ultimately your permanent certificate of occupancy is taking longer with each project we do. I’m sure that’s not unique to storage. I think you just have development in markets. You have an overtaxed group of folks who are working through all of this and it just seems to take longer to get all those boxes checked with each project we do. So some of it related to that, some of it weather and some of it just things slipped by 30 days and it just pushes the quarter from one quarter to the next. I would imagine that, that most developers are experiencing something similar to that in the major MSAs.

Thanks for your time.

Our next question comes from Todd Thomas of KeyBanc Capital Markets. Please go ahead.

Hi, good morning guys. This is Drew on for Todd today. Just kind of digging in a little bit more on some of the things that Ki Bin was asking about, as I look at the markets that reaccelerated this quarter from a same-store revenue standpoint, it seems to be weighted toward some of the smaller of the 28 markets, except New York obviously. Maybe you could talk about what’s happening in those markets that reaccelerated and if you’re doing anything differently from that broader lowering of discounts and slight increasing of rents market by market a little bit.

Yes, the general answer is that there’s no specifically different strategy in a market that’s experiencing acceleration relative to those that are not. I think, it goes to – obviously to growth rate. So what happened in those particular markets in the comparable period, you’ve got some markets with the supply impact that is weighing on that market a little bit more than others. But I wouldn’t – I would say when you look at a Chicago, Dallas, Atlanta, Phoenix, you are seeing the impact and the building impact of supply in those markets. When you look at a Philadelphia or a Riverside, San Bernardino, to some extent, the positive growth that continues in a Riverside, San Bernardino, there’s really no supply there at all and you’ve just been able to get incredible pricing power. In a Philadelphia, the deceleration, largely the tough comp from the year before. So it’s a variety of factors. It would really be hard to generalize.

That’s helpful. And then switching over to transactions a little bit, maybe you guys have been pretty quiet on the acquisition front this year. Maybe you can just talk about the pace, the deal flow and what you’re seeing and what you think might be affecting the market most, if it’s the bid-ask spread, where you see that right now? And then also where your appetite is kind of moving forward? And that any thoughts on dispositions, too, would be great. Thanks, guys.

Sure, yes. I think you’re seeing a few things consistent with what we’ve been talking about for a few quarters now. You have some assets coming to market for which there’s, frankly, just not a lot of juice left. They’re very, very highly occupied, rents are at market rate and seller expectations for that type of product are quite high. So there, I think, you’re just seeing a difference in bid-ask spread and either they don’t trade or at some point there just needs to be adjustment of expectations. I think for additional deal flow, you’re seeing product coming from the more secondary markets, in some cases the tertiary markets. And in those instances, I think you’re seeing the private market buyer stepping in and transacting. So I think you are seeing transactions happening. They just seem to be keyed in those smaller markets and generally go into the – either the private buyer or a public buyer who has an appetite for those type of markets in their portfolio. So we’re looking at a good volume of opportunities. They’re just obviously aren’t very many that are meeting our quality and market expectation combined with underwriting to a point where we’ve got upside. We’re not paying today for the opportunity to earn that upside. And that makes sense from a yield perspective relative to our cost of capital. So I think, again, I think we will continue to be very, very active, pick our spots. Obviously, if we found things that made sense for us, we have the financial capacity to transact. But also obviously we’ve been very disciplined and would expect to continue to be so. On the disposition side, we continue to look. I think our guidance was 0 to 50. We haven’t done anything yet this year. We continue to evaluate what may or may not make sense there. And again, if we were to find something that made sense, then we also found correspondingly very attractive opportunities to reinvest, we would transact. But at this point again, same disciplined approach to dispositions as we’ve had on acquisitions.

And do you guys have any view toward portfolio deals or one-offs in any way, any kind of commentary there?

For the smaller portfolios that have come out, again they have tended to be concentrated in the smaller markets. On a one-off basis, there’s activity out there, the deals that – the non-third- party deals. So we – one store in Texas we acquired out of our third-party platform, the store in Fort Lauderdale was a single-asset transaction, a one-off deal that made sense to fill a hole on our portfolio. So there are opportunities out there, again, I think our volume speaks to what we’ve been able to find that makes sense for us.

Got it, thank you guys. Appreciate it.

Our next question comes from David Corak of FBR. Please go ahead.

Hi, good morning guys. Just a question on supply in your top 12 markets. I think you did it on the 2Q call, that some of your data would suggest that the supply impact becomes more benign in 2019, at least in the top 12 MSAs. Has that view changed at all given kind of the events of the quarter, the hurricane and whatnot? And has any of the supply been pushed back that you’re seeing in the markets?

You have some movement from 2017 into 2018, David. We’ve had a few more things pop up in both 2017 and 2018 primarily in the markets, closer to the bottom of our top 12 from a volume perspective, Phoenix, Atlanta. But generally, again, as we look out today to 2019 and as I said on the second quarter, outside of the boroughs of New York it’s really challenging to get really much very clear visibility into 2019. But we would still expect that 2019 deliveries will be less than 2018. Again, I just – I hate to beat the drum, but we really do look at it in these rolling three-year increments because that’s how it tends to impact these stores. And I think we absolutely will have more supply in 2018 than we did in 2016 in those top 12 MSAs, so we would expect that the impact to our stores will be a little bit more in 2018 than it was in 2017.

Okay, that’s helpful. And then just turning back to the discounting, was the change in the strategy more prevalent in any specific market or markets?

No, it was really across-the-board. And again, I don’t want to mince, but I wouldn’t call it a change in strategy. I would say we go into the year with an expectation and this one just suggested there was a better approach to maximizing revenue in the quarter, but it was pretty broad across the entire portfolio.

Okay. In the 4Q, has that kind of continued in the first four weeks?

Yes. I would say in the first four weeks or so, a general trend. But again, I think I said in my opening – in my answer to the first question, a little bit more open on the discounting in the last five days or so, but also pushing up Street rate a little bit more in those – in that same time period.

And the last one for me, the Street rate revenue side, obviously just a snapshot of a few days. Can you just kind of share with us how that trended through the quarter and how it’s trending into October thus far.

Yes. It didn’t really bounce around that much throughout the quarter. Obviously, coming out of the busy season, we would have seen some reductions in Street rate as we were also bring down discounting and then somewhat impacted a little bit by the hurricane, we got some of that back in late September. I think, today, if you look at a snapshot today, Street rates are up about 1.7% from where they were on this day last year.

Our next question comes from Nick Yulico of UBS. Please go ahead.

Thanks. Hi, everyone. If I look at Page 25 of your supplemental where you have all your development completions and your C/O deals. How many of those New York properties are going to be entering the same-store next year?

Hey, Nick, it’s Tim. We don’t expect any of them to as they won’t be stabilized for comparative purposes.

Okay. And just from – can you just remind me what’s the threshold for putting the properties into the same-store?

Sure. Our policy has been and will continue to beat them. We think the same-store analysis is a useful comparison when comparing two years of state-wide performance. So for a property to enter in our pool, it needs to be – it needs to have achieved a stabilized occupancy within the respective market for the year prior to the year that they were in today. So these stores – none of these stores will have been stabilized for all of 2017, so they wouldn’t be eligible to be entered into our same-store pool next year.

Okay. Got it, thanks.

Thank you.

Our next question comes from Gwen Clark of Evercore ISI. Please go ahead.

Hi, this is a little bit unusual, but can you walk us through how you account for the third-party management income and allocate the cost of running the properties, whether it be through G&A or operating expenses?

Sure. So the third-party management fee income – let me find the right page in the supplemental package here for you. So if you look at Page 19 on our supplemental package, the property management fee income is detailed on its own line item and it’s included in the other/eliminations column of our consolidating income statement there on Page 19. And all of the costs that are associated with managing a third-party store, property specific costs including the personnel and any direct property expenses are pushed through and directly reimbursed by the third-party owner. Our – effectively, our property overhead, which would include our district manager, other property administrative costs as well as our back office costs to run the third-party stores would also be in expense under that other/eliminations column as a property operating expense.

Okay, so when we see…

Effectively, the totality of that business is in that column, other/eliminations.

Okay. So when we see that negative $3.7 million, that’s not really indicative of what’s costing the company?

No, because there are other costs in there as well. There are – all of the property overhead, all of the district manager, all of that back office property-related stuff, whether it is to support the third-party stores or our own stores, runs through that. So the third-party management business in and of itself is profitable. We have said throughout – through the years that it’s roughly a 50% margin business and then the balance of the costs in there relate to overhead, relate to running our own stores. What you also find there, Gwen, this particular quarter, that, that number might look a little bit unusual is that the $1.4 million worth of hurricane costs that we have talked about not being in our same-store our flowing through that column this quarter as well.

Okay, that’s super helpful. I think it just caused a little bit of confusion. So on a more fun note, can you just walk us through the impact of the hurricane on the major Florida markets and how you’re thinking about occupancy there over the next probably six to nine months?

Sure, Gwen, it’s Chris. So in Florida, what we saw was we actually got a pretty significant ramp-up before the hurricane. I think as a percentage basis, rentals throughout Florida were up about 88% year-over-year in the week leading up. Following the storm, we continue – there was another mini spike. Rentals were up nicely 24% for the seven days ending the 19th of September. And then things have slowed down. So I would say about half of the people seeming, based on our tracking who moved in the week prior to the hurricane at this point, have vacated. And so I would sense that the customers that we have remaining in the store are those for whom, obviously, there was some damage or other need to keep their possessions in storage for a longer period of time. But my sense in Florida is that the impact from the hurricane on occupancy and on revenue is likely to bleed out over the next three to six months at most would be our guess. Obviously, we’re going to have some customers that stay there a long time, but that’s our sense in Florida.

And then just one quick follow-up. Are there any markets within Florida that were particularly impacted or not impacted?

From a damage perspective or from a customer or both?

From fundamentally like operating perspective or have higher occupancy today.

Yes. Jacksonville and Tampa, I would say, saw on a percentage basis more of the impact on rental volume and customer interest than the other major Florida markets.

Okay. That’s really helpful. Thank you.

Thanks, Gwen.

Our next question comes from Todd Stender of Wells Fargo. Please go ahead.

Hi, thanks. The third-party management number, I guess, the 42 stores you added in Q3 seemed pretty high. Any common themes you’re seeing? Is there an acknowledgment of tougher competition because of new supply have been on the capital to compete online and any really – anything you can decipher from the quarter?

Yes. I think I don’t have the number right here in front of me for the prior two quarters, but we’re on pace for a really spectacular year this year in terms of overall growth to the third-party program. And it has run plus or minus a good split, even split, between existing stores and then stores that are in newly opened, that have just opened from a development perspective. Again, I think we’ve got a nice pipeline, even going into next year, of stores that, assuming that they are actually constructed and open, that we will manage. I think we will have another very robust – again, timing will vary in some stores that are expected to open this quarter may slip into 2018, but I think we’ll have another very robust fourth quarter. And it’s – I would say, it’s a combination of the existing owners. But if you think about a cycle, right? Coming out of the recession, we saw an awful a lot of open and operating store owners coming to us because folks were really struggling and they were having a very tough time transitioning, their marketing model, et cetera. As we experienced some pretty spectacular years here in the storage industry, we saw a lot of those owners of existing stores who are also doing well. And I think what we’re seeing now is that the occupancy gains are no longer there. The stores are relatively full. So your ability to price and basically do all of things we talk about, attributing to what a great quarter we had here in the third quarter, that technology and that science is difficult for a small owner, individual owner, to replicate. So we’re starting to see folks come to us because their only lever left is how effectively they can maximize revenue from each new customer and they’re looking for us to help add value there. On the development side, it’s just as a steady flow of stores in our core markets that they obviously have a choice and who can be their third-party manager and they’re choosing CubeSmart.

That’s very helpful. And my last question is going to be at about the two newly – two of the newly developed properties. One is the North Palm Beach project, the other would be the C/O deal in Riverwoods, Illinois. So they opened in Q1 and Q2, and just pulling up Page 25 of the supplemental, their occupancies are pretty strong. You’ve got a 46% occupancy already from North Palm Beach that just opened in Q1. And then the C/O deal in River Woods is 26% that opened in Q2. What is the discounting, what are the incentives, what’s that landscape look like in those particular markets just because the occupancies and lease-up has been pretty steep.

Yes. The North Palm Beach’s store, great location, and it’s – as you know, if you look at the total rentable square feet, it is a relatively small store. So we’ve got 46,000 rentable. And so that pace, the 46%, is somewhat just indicative of a relatively small store that’s in a great location in a good submarket and a very nicely constructed store. And so there, no particular change in how we always approach. We do believe that, that the idea of drastically reducing asking rents or offering excessive discounts in order to fill up quickly is not the right long-term strategy to maximize revenue at a newly developed store. So certainly, we will discount more. Certainly, your price there is going to be a little bit more competitive than the surrounding. But I think that store, part of it’s size, part of it is location. In Riverwoods, that 26%, which is, as you pointed out, pretty darn good for 74,000-square foot store, very high-quality store in a great suburb of Chicago with very little competition that I would say is of equal quality. So again, no crazy pricing strategy or discounting strategy there. I would think in a store like in Riverwoods, we probably also are benefiting from some of the larger-sized cubes renting out quickly, which would push our occupancy up in the early months fairly quickly. As those attractively located larger-sized cubes are full, the work gets a bit little harder from there on out.

Got it. Thank you.

Our next question comes from Jeremy Metz of BMO Capital Markets. Please go ahead.

Hi, guys. Jump on just a little late, so sorry if I missed this, but did you comment on your move-in rates relative to move-outs in 3Q? Just kind of wondering what your take rates are today? And as a follow-up to that, maybe more broadly, where is the in-place today relative to market?

Yes, Jeremy, you missed that and all of our 2018 guidance, sorry.

I knew it.

Yes. So if you look at the churn gap between the rental rate and the vacate rate in the quarter, it was down about 4.7%. And if you look at in-place relative to Street, it’s about even at this point at the end of the quarter. About half the customers are in there at a little bit lower and half the customers at a little bit higher.

And can you just remind us, that 4.7%, how does that compare to where you were in 2Q, if you have it?

It’s very seasonal, so I don’t know. I can remind you, I’m not sure, as we go through the year, though, it does tend to move around. It was about 6.4% in Q2.

Okay. And then, Tim, obviously, you’ve seen some pretty healthy tax expense increases this year. I’m just wondering at this point how much more of the – or how much of the portfolio has really reset? Or I guess, maybe the better question, as we look out, should we think about a similar level of elevated tax expense, call it, 5% next year? Is that fair?

Yes. I mean, short of guiding, I think, thematically, I don’t think anybody in the sector feels like we’re approaching a point where we feel like everything’s fully valued and we don’t see any continued pressure on that line item. Ironically, our outlook is a little bit improved for 2017. We actually got a little bit of good news, which is embedded in our better guidance. But I think you’re still looking at not just a 2018 issue, but probably still a next two, three year issue where my best guess for the sector is that you’re still going to be looking at 4% to 6% type increases in real estate taxes for the next couple of years, best guess.

See, I knew you guys didn’t give 2018 guidance yet. Thanks. Appreciate it.

You got it. Thanks, Jeremy.

Our next question is a follow-up from Ki Bin Kim of SunTrust. Please go ahead.

Thanks. Just a couple of quick ones here. Your realized rent grew about 4%. Is that helped by lower promotions? Or it’s something else moving that higher?

It is – lower promotion is certainly a contributor, so it’s all things combined that impact revenue. So it’s a blended impact.

Okay. And the promotions now for your properties ended like probably tougher on-portfolio average type of question. But when you lowered promotions this quarter, did that make your properties on average closer to the market? Or now are you less promotional versus your competing properties?

Yes, that was a tough one to answer because we tend to look at an effective rent. So it will depend on the degree of the competitors. I think if you just look at the competitive set of stores around the CubeSmart, it’s a pretty big range. I would say if we just took it across the country, there are markets where we are 4% to 5% higher than that effective rent being asked by the competitive set and there are markets where we’re at par. And there are a few other markets where we’re a little bit below what the market is charging.

Okay. And just, lastly, do developers – how comfortable are they developing or starting more projects in markets that have already seen a big supply ramp-up? So for example, like in the Bronx, there’s obviously a lot of properties coming onboard. Are developers typically, when they look at a market like that, are they completely staying away? Or are they still comfortable somewhat adding to that pipeline at this point?

I’m not really trying to be funny, but it largely depends upon the financial structure under which that developer is moving forward. If they have very little skin in the game and it’s a fee sort of driven approach, I would sense they probably care a little bit less about the new supply. If it is their equity or they have substantial risk, then, yes, absolutely, they would look at what’s going on in that market a lot closer.

Yes. The reason I asked that is like maybe – like maybe a bigger market for them for like if there’s an answer on average because that’ll probably give us a sense if supply gets worse in a market or it gets a better, that’s why I asked that question.

Yes. And I think Austin is probably a good example of a market where you’ve seen a pretty good influx of new supply for a market of that size. I mean, as we track Austin and we look at over the last couple of years new openings from what we track, we had 4 in 2014, 6 in 2015, 4 in 2016 and 14 in 2017 and right now we see that number drop to 4 again in 2018, I would think developers in Austin are certainly looking again. Austin is a sprawling, so we use the MSA. So not necessarily all these are clustered, but you have a few instances where there’s some there are stores that are all opening plus or minus in the same time frame and they’re all going to be going after generally the same customer base. You’ve got to assume and what we get from the Texas SSA meetings, et cetera, that the folks are keenly aware of what’s going on in a market like that and it will influence those who are – certainly who have their own capital at risk.

All right. Thanks again.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Chris Marr for any closing remarks.

Well, first, thanks, everybody, for dialing in and listening. Obviously, we’re pleased with our performance in the quarter. Continue to focus on maximizing the opportunities presented to us in each of our markets. Continue to be focused on refining our systems and looking for that competitive advantage in order to produce the best results. So thank you. We look forward to updating you all on the fourth quarter and obviously our thoughts on 2018 when we are back together again. Have a great weekend.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.