CubeSmart (CUBE) 2021 Q1 法說會逐字稿

Good day, and welcome to the CubeSmart First Quarter 2021 Earnings Conference Call.

(Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Josh Schutzer, Vice President of Finance. Please go ahead.

Thank you, Ian. Good morning, everyone. Welcome to CubeSmart's First Quarter 2021 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 the 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 first quarter financial supplement posted on the company's website at www.cubesmart.com. I will now turn the call over to Chris.

Thanks, Josh, and good morning, everyone. Thanks for joining the call. I'm pleased to report that fundamental trends in the self-storage industry continued the positive momentum that began in the second half of last year. Going back to the mid-second quarter of 2020 and continuing through today, our strategy here at Cube was, and continues to be, a fairly aggressive approach to effective rates for new customers. Continuing that rate strategy in 2021 reflects our belief that the strong demand and net rental trends will continue through the traditional spring and early summer busy season. To place that in perspective, during the first quarter, our average offered net effective rates for new customers in the same-store pool were up over the first quarter of last year in the high 20% range, and ended the quarter up over 40% compared to the end of the first quarter of last year.

Given the disruption and uncertainty we have all experienced over the last 4 quarters, our 6.7% first quarter same-store revenue growth and our above sector average same-store revenue growth over the last 4 quarters, we believe, is a reflection of our high-quality systems and dedicated marketing, business intelligence and operation teams. Our external growth teams are also extremely busy and focused on executing on our strategy of disciplined growth in high-quality assets. Our third-party management team onboarded 31 new stores to our platform during the quarter, split roughly 70-30 between newly developed and existing open and operating stores. The pipeline of future opportunities continues to remain very robust.

Our expectation is that in 2021, supply deliveries continue to decline from their 2019 peak in our core markets. Interestingly, when looking at our population of third-party management opportunities for proposed new developments, we are continuing to see a gradual shift away from the top 25 MSAs and towards MSAs 26 through 100. We remain disciplined in our underwriting on acquisitions. After an extremely busy fourth quarter for on balance sheet acquisitions, our activity during the first quarter occurred with our long-standing partner through both an existing and a newly formed joint venture. We anticipate continuing to utilize our joint ventures primarily to acquire self-storage facilities that are more recently developed and that have not yet reached economic stabilization. We are very positive about our first quarter performance and strong April trends, and we believe we are well-positioned heading into the busy rental season.

Thanks for listening, and I will now turn the call over to our Chief Financial Officer, Tim Martin. Tim?

Thanks, Chris, and thank you to everyone on the call for your continued interest and support. As Chris touched on from an operational standpoint, we posted a very strong quarter in our reported results. Same-store performance included headline results of 6.7% revenue growth, and 2% expense growth, yielding NOI growth of 8.9% for the quarter. Average occupancy for the first quarter was 93.8%, which was up 280 basis points year-over-year, and quarter ending occupancy was 94.4%. Couple that with the higher net effective rents to new customers that Chris walked through, and it results in a very strong 6.7% growth in same-store revenues. Same-store expense growth for the quarter, again, came in line with our expectations at 2% year-over-year.

We continue to experience strong performance across our non same-store portfolio and our third-party management business. And combining all of that internal growth, we reported FFO per share as adjusted of $0.47 for the quarter, and that represents 14.6% growth compared to last year. We remain active and disciplined in our pursuit of external growth opportunities. And after an extremely active fourth quarter, we were a little quiet on that front in the first quarter on a wholly-owned basis.

We opened up the second phase of our development in Arlington, Virginia, during the quarter, and we have a couple more developments opening in the second quarter. And on the co-investment front, we were active in 3 separate ventures that acquired stores in Minnesota, Florida, Connecticut and Maryland. And we have a group of 5 stores in Illinois under contract that will close in the second quarter. So the team continues to be busy underwriting a lot of opportunities, and we will remain disciplined in our approach. On the third-party management front, we were busy adding 31 stores during the quarter.

Transitioning then to the balance sheet, we continue to focus on funding our growth in a conservative manner, consistent with our BBB Baa2 credit ratings. We continue to raise equity capital through our at-the-market equity program during the quarter following a busy fourth quarter on the investment front. And so in the first quarter, we raised net proceeds of $99.7 million under the ATM program. We repaid a few of our secured loans early during the quarter and, at this point, have no debt maturities in 2021 or 2022. Our weighted average debt maturity is now 6.7 years and our conservative leverage levels have us well-positioned to pursue external growth opportunities. Details of our 2021 revised earnings guidance and related assumptions were included in our release last night, and based on strong operating fundamentals that we've discussed and our positioning entering the spring leasing season, we've increased our guidance range for full year FFO per share by nearly 2% or $0.03 per share at the midpoint.

Much of that guidance increase is based on an improved outlook on our same-store revenue growth for the year, which we've increased to a range of 4.75% to 5.75% growth over 2020 levels. So we're off to a really solid start in 2021. Our results in the first quarter and our improved earnings outlook are reflective of the strong current operating environment. And we believe also that this provides strong, clear evidence of how well our team did in managing through the first several months following the onset of the pandemic. We believe our systems and our platform on the pricing, marketing and operations fronts really outperformed in a rapidly changing environment, leading to very strong relative performance.

So with that, thanks again for joining us on the call this morning. And at this time, Ian, let's open up the call for some questions.

And our first question comes from Todd Thomas of KeyBanc.

This is Ravi Vaidya on the line for Todd Thomas. There's been a pickup in the movement back to New York, both the boroughs and the overall MSA in recent months. Are you seeing any impact as a result? And as the reopen continues, do you anticipate any volatility with regards to these things for your assets in this market?

Yes, this is Chris. I'll take that question. No, we are not seeing any volatility in the boroughs or at our store in Manhattan, as the city and activity starts to pick back up. And frankly, throughout the pandemic, the pattern of move-ins and move-outs and length of stay in the urban markets has been quite similar to those in the surrounding suburbs. So it's something that we continue to watch, but I would say, for the last 13, 14 months, there has not been any deviation of any significance in the urban markets versus the more suburban markets.

Got it. Just one more here. Advertising expense was only up 3.1%. How do you expect this to trend throughout the year?

Yes. That's a great question, and that's obviously a line item and a process that we look at on a daily and weekly basis and things can swing around based on what we're seeing in the market. We continue to expect that for the full year '21, we will see our marketing and advertising expense at a level higher than inflationary. We were able to get some good synergies and efficiencies in Q1. We shifted some anticipated spend into the current quarter. We are doing a little bit more certainly than last year out-of-home in some of the markets that we paused last year. So I think, in general, continue to expect that to be a little bit higher than inflationary levels as we go through the year.

Our next question comes from Samir Khanal of Evercore.

I guess, Tim, can you provide a little bit more color on the revised guidance as to how you're thinking about occupancy rate growth to get you maybe to the low end or the high end of that revised guidance here?

Well, to state the obvious, we think our outlook has improved. As we sit here and think about our first quarter performance and how well-positioned we are heading into the busy leasing season. As you know, we don't provide insight or guidance to the individual components of it. But I think what Chris was walking through in his prepared remarks is pretty telling, in that, throughout the first quarter, we were able to see not only occupancy levels that are still yet for the first quarter at record high levels. But we think we've done a really good job of having some capacity as we start the rental season to have some good units available to rent.

And we're doing so at prices that averaged -- our asking net effective rents, as Chris touched on, were in the mid-20s on average throughout the first quarter. And we're pushing up at right around 40% as we ended the quarter. So we're coming into the rental season extremely well-positioned, even better than we thought we would have been back when we provided the initial guidance. So in both areas that really can drive revenue growth, we feel really good about it.

I'm sorry. Just to add on that as we sit here today, the same-store pool is 95% occupied. The gap to last year has expanded, which, again, has given us some comfort that the traditional busy season has arrived and will continue. And I expect we will continue to make some gains in our occupancy at these very attractive run rate levels.

But is there a way to get more color on kind of the cadence of occupancy over the next sort of few quarters as we think about the first half and the second half here?

Well, I mean, I think you're going to -- you're going to see -- what you would typically see obviously is higher levels of physical occupancy in the summer months, and I think we'll see that. But -- and quite candidly, there's not a whole lot of room for (inaudible) where we were at the end of the first quarter. I think then we would expect that seasonally, when you get past the primary rental season, you'll start to see occupancy levels start to decline as they typically would. I think it's everyone's guess as to what that actually looks like when we get into the fall and early winter as to how abnormal that looks relative to prior cycles. I think we have elevated occupancy levels certainly on our platform and what we can see from the rest of the sector.

So I think occupancy is -- I think it's an interesting question, and I think it's an area that we could be pleasantly surprised. And that holds in there at really, really high levels throughout the balance of the year because we're seeing really, really strong demand. I think if occupancy levels start to return to seasonally more normal, again, I think our platform has demonstrated the ability to be nimble. And to be advantageous as we think about the combination of occupancy and rate in whichever direction the occupancy takes us in the back half of the year.

Okay. And my final question here, I guess, Chris, is, it sounds like you're pretty active busy on the acquisition front. You talked about external growth. I guess I was a little surprised that your kind of midpoint was $150 million for acquisitions. Just trying to see how much there's upside risk to that range you provided.

Yes. It's a hard one to identify unless you happen to have things in your pocket going into the year because it's, for us, with the really busy fourth quarter we had, we got everything closed by year-end. And therefore, we're starting, as we typically do, all over again. Pipeline is incredibly robust on the acquisition side, plenty of opportunities. We're just going to, as we always are, be very disciplined in our underwriting and look to be opportunistic in our acquisitions. So very difficult to frame that in a way that's very mathematical. But again, that's our best estimate of where we are likely to end up on balance sheet, and we'll just continue to update that as we go through the year.

Our next question comes from Juan Sanabria of BMO Capital Markets.

This is (inaudible) on for Juan Sanabria. So a question on third party management. It looks like you added 31 stores, but lost 53 stores this quarter. Is there any color you could provide on that? And if there is any kind of chunkier loss expected for the rest of the year?

Yes. Thanks for the question. I appreciate it. Yes, we had a very positive and active quarter in adding stores, as I mentioned in the opening remarks. On a net basis, we did have stores leave the platform, the majority of which were stores that were acquired by and thus left our platform, the biggest of which was the 30-store -- 37-store JCAP portfolio. And those are difficult to predict when they leave your platform. I think the way we think about it is that our third-party owners rely on us and count on us to use our operating platform to grow their cash flows and to increase value for their assets. They entrust us with that responsibility. And so when we have stores leave the platform, it's with mixed emotions.

We hate to see CubeSmart flags come down. But at the same time, we're incredibly proud of the value creation that we were able to help provide to our third-party owner customers. So it's good news, bad news. Good news is we're doing a great job. The bad news is that we continue to have a robust pipeline, and we'll replace those stores and get some new stores across the country with CubeSmart signs on them.

Very helpful. So it looks like you achieved great increase in your customer effective rents with high-20 up year-over-year and ended the quarter with 40%. So what about ECRIs? Any kind of material restrictions lapping the place with regulations being lifted across Cube portfolio? Is there any kind of easing assumed in your guidance?

So we were not -- just given the construct of our portfolio has significantly impacted by some of the municipalities' regulations that were put in place and to some extent, remain in place. So for us, those restrictions really have not had a real meaningful impact on our growth or our expectations going forward. So as we sit here today, there are still a few in the western part of the United States, restrictions in place, for the most part, many of them have eased. And we don't expect that -- it really hasn't had, and we don't expect that to have much of an impact on our future. We have been addressing existing customers and rate increases to them at a consistent pattern from the past several years.

And our next question comes from Smedes Rose of Citi.

Just looking at your market level results, I mean, quite a few markets, I think, more than what we would normally see, did see a decline in your operating costs year-over-year. And I was just wondering, is there anything you're seeing in particular across markets either with just maybe more efficient labor structuring or anything happening on the tax side that's helping keep those costs in check?

Yes, Smedes, it's Chris. The lumpiness in some of those markets is just what you described. It's taxes primarily, when you think about just some changes in real estate tax expectations as we looked at this quarter relative to the fourth quarter or the first quarter of last year. There is some timing, and this will continue through the second quarter due to the impact of COVID last year on repair and maintenance items, where last year, it just wasn't feasible to get things done. So we do expect to see that be a little bit choppy. And on the personnel side, it's just been a continued focus on staffing, on hours, on how we do business there, throughout the country. And we began to see some benefits of that plus the increased use of SmartRental late in the first quarter of last year and then those trends continue through this quarter.

Okay. I mean so the SmartRental, I guess, probably helps reduce your labor cost a little bit? Or is it -- is that meaningful?

It does.

Okay. And I just wanted to ask you, on the external growth opportunities, it sounds like you're looking at more lease-up facilities versus mature properties. I mean, has that changed at all, I guess, with the industry doing so well? I mean, are there fewer opportunities out there? Or are people willing to wait longer and see if they can kind of make it to the other side? Or kind of maybe any changes you're seeing there?

I don't think -- we may have mischaracterized something there. I think we're seeing opportunities both on stable assets and on assets that are in some stage of lease up. I think we're -- what we're seeing is a very robust environment for an awful lot of opportunities. And we expect that once -- I think we've talked about it before, but transactions and owners coming to market to sell their stores tends to have the same seasonality as our customers do, which is they -- we have more owners come to market to sell their stores in the summer months. People tend to like to bring their store to market when they're at peak occupancy levels and when rental rates tend to be at their highest, which is somewhat comical because I mean, of course, we all underwrite the fact that, that's when they come to market.

But in any event, the -- we're starting to see a really good pipeline of things coming across our investment team's desk to take a look at and to underwrite. I think it's going to be a very, very busy year from a transactional standpoint for the sector. I think it gets very difficult for us to predict to Chris' earlier response is to try to predict how often we're going to be the highest bidder or how often some of those deals are going to come in our direction. This year is as cloudy as it has been in quite some time, given the fact that, obviously, cap rates continue to compress. You have some pretty aggressive bids out there in the market when things do -- when things are trading. And so we'll remain disciplined. I think we'll have plenty of opportunities come our way. It's just a really difficult year to predict how many.

Our next question comes from Ki Bin Kim of Truist.

Just going back to that previous question. When you talk about the robust acquisition environment, I can see a scenario where there's a lot of deals happening. But are there a lot of deals happening that are within your strike zone? And how is that changing your strategy in terms of like what type of assets or markets or whether it's stabilized or kind of value-add things that you're looking at?

So I'm not sure how to answer that without being completely redundant. I would say in the fourth quarter, we had a lot of things that were in our strike zone that we felt like we've made pretty good contact on; and in the first quarter, not so much. I think it's -- we look at -- we like to think that we see almost every deal in the market. There are the occasional deals that trade that we see that perhaps others don't get a look at and certain that, that happens in the inverse. But obviously, in the first quarter and here in the very short-term, in the last couple of months, we've underwritten quite a few opportunities.

We've gotten to -- some we haven't even gotten to the second round in bidding because pricing levels relative to our underwriting and our return thresholds didn't make a ton of sense. I'm optimistic that we will find opportunities as the year progresses. It's just -- again, it's just very, very difficult to predict. I mean we can love an asset and based on the underwriting, we establish a price that we think makes sense to us and to our shareholders for us to create value on a long-term risk-adjusted basis. And if somebody comes in 20% above that, then we look at the next deal.

Okay. Now I might be stating the obvious, but I mean, it makes sense for occupancy and rates to move in a similar direction over the course of any time period. I think a lot of the self-storage operators are assuming fourth quarter occupancy is a negative comp, which makes sense. But is there a scenario that you think is building where perhaps the elevated rents are stickier and may not move in lockstep with a return to normalization that might be apparent in the occupancy this past fourth quarter, and next year?

And I think the occupancy question is just a really difficult one to answer because it's just hard to tell what's going to -- what the back half is going to look like. It's all dependent upon -- we've obviously seen as an industry, we've seen an incredible surge in demand over these past 3, now 3-plus quarters. And what's different about it is that we had customers coming to us in waves at times that seasonally, they haven't historically. And so the real challenge then is in a normal year, pre-pandemic, we're remarkably accurate at being able to predict vacates for the following year. And oftentimes, it just becomes a mathematical exercise, in that, customer behaviors tend to repeat themselves and customers that move in and in March tend to stay a certain length of time and year after year after year, those things tend to repeat themselves.

The biggest challenge for 2021 is that 2020 was so abnormal as to when people moved in, our tried and trued measures and our historical data-driven approach to predict those vacancies, we just don't have as high a degree of confidence in it because we haven't -- it's our first pandemic as we want to say. And so trying to think about where occupancies are going to be in the back half of the year is a challenge. I think there is certainly a bull case that many of those customers that came to us over these past 3 or 4 quarters, perhaps they have a very long length of stay. It's just too early to tell for sure. And if that's true and you couple that with a rental season that has a typical length of stay customer, then the back half of the year could be very highly occupied, and we'll have to manage through that.

If customers that moved in last year, as we start to get more insight into their vacate patterns and into their length of stay, if those move-outs start to come, we don't expect them to come in a big way, but if they start to pick up, then again, to my earlier point, I think our -- I think we've proven over these past several quarters that our pricing methodology, our marketing approach will serve us very well in changing times just like it did last year. I think on the rate side, I think when you look at rates and where they are, we're not widely disconnected. You're going to see some eye-popping numbers in the second quarter across the industry as to rates in the second quarter compared to rates in the second quarter of last year. I think we did a pretty good job of holding on to a good bit of rate in the second quarter of last year.

I think we did -- in the hindsight, I think, we did a better job than some or many in holding rate. So our increase -- we're going to have a much more difficult comp. But whether you have an easy comp or a more difficult comp, the rate growth in the second quarter of '21 versus the second quarter of '20, they're just going to be eye-popping numbers. And then, you'll start to revert back a little bit. But at the pricing levels we're seeing right now, if you go back over the course of 3, 4, 5 years, we're not widely disconnected or we're not wildly above where rates would have been, peak rates, over that same time period. So I think there's another bull case that the rates that we're seeing right now could hold in there and you don't have some type of reversion from a rate perspective.

Yes. And that's an interesting point you brought up because rates are probably -- they're up big from a year-over-year comp standpoint, but from a previous peak standpoint, whether that's 2016 or '17, it's probably not up to a degree that customers are being priced out, and it sounds like that's what you're saying.

That was what I was attempting to say, so thank you for clarifying.

Our next question comes from Jeff Spector, Bank of America.

My first question, I just wanted to ask on new renters. If you survey them, just curious, in the last month or 2, any change or reasons can you explain what they're looking to rent for? Just trying to get a feel for, again, renters, more recent renters, the main reasons they're looking for storage.

Not a specific reason, but again, the gamut of reasons that probably is intuitive to you. We have quite a number who are home improvement or some sort of home activity that is creating a need for storage. Obviously, the twin impact of an incredibly robust market for resale of single-family homes, where you're, I'm sure, reading about the bidding wars and everything else. And then the challenges on the construction of new homes from a cost of lumber, as I'm sure you're seeing every day in the papers, labor cost and availability is creating that perfect situation for our industry where you're selling your home much quicker than perhaps you ever would have thought. And then your new home is not going to be completed on time or on schedule, and later than you thought. And so therefore, you have that need for storage in the interim period. And then we're continuing now to see a bit of a more normal in some of our markets, college set of activity, and then just all the life events that typically happen over the busy April to August time frame.

Okay. And then my second question is on, Chris, your comments on supply. Some of the -- I think you referred to some third-party data, a gradual shift to MSAs 26 to 100. To confirm, are you talking about '22? And what are your thoughts on '22 even in your markets? What are you seeing out there?

Yes. So to clarify my comments, I was referring to where we're having interactions with potential new third-party customers who are considering developing a self-storage facility for us to manage out into the future. We are seeing a shift from those potential customers focusing that development or bringing an opportunity for us to talk about in the top 25 MSAs to being more increasingly in MSAs 26 to 100. So sort of the interesting point, I guess, I was trying to make was that we are starting to see that shift from some of the markets, say, like a Chicago that saw self-storage development in 2016 really, really pick up.

And I think our expectations, for example, in that MSA for 2021 deliveries, I think, are 2 new stores being delivered. So you're seeing a shift from those top 25 to 26 through 100. Although, again, this is just based on a sample size of third-party -- potential third-party customers (inaudible) U.S. overall thoughts on supply. Again, we've been pretty consistent that our data suggests that 2019 was a peak in our top markets and that it has continued to decline and we think it will decline again here in 2021. In our top 12 markets, plus or minus, our expectations are about 200 new stores coming in, which is down from where we were the last couple of years.

That's helpful. And then my last question is just, I guess, on that peak supplier. With all the demand we've seen, are we past peak pressure from that supply? Are newly developed assets leasing up quicker than the normal 2 to 3-year time frame? I feel like the industry discusses in terms of leasing up the new development.

So 2 different things there. I think from a lease-up of newly constructed stores, certainly, they were all the beneficiary of the robust activity that we've seen here for the last few quarters. And so as you see the record high occupancies in folks same-store pools, those customers who can't find what they're looking for in a mature store are finding it in a newly constructed store. And so the physical lease-up is moving in a more positive direction than it was pre-pandemic and the rate is coming along with that. So that's a positive. It's obviously a help in lessening the impact those new stores have on existing stores in those markets. I think, again, it goes to the commentary that Tim shared about the challenges of what the next 12 to 18 months look like. If we continue in a very robust pattern as we are, then yes, those lease-ups, the maturity will contract, and that will be obviously very beneficial. Maybe a little bit too early to plant that flag.

Just one last question on acquisitions and competition. Who are you losing to? Is it private equity? Or is it public peers? Like, who are you losing to?

It's the gamut. I mean, I think, you have large transactions where those folks who bang the drum about replacement costs seem not to care about replacement cost if it's a transaction over a certain size. On the one-off transactions, you tend to see the full gamut. It's the reach, it's the larger private operators, it's the folks who -- family office, as you would expect, it's the performance of the industry, combined with still a relatively attractive cash-on-cash yield compared to some other product types has drawn significant interest to our sector.

And then I think the other thing that's interesting is not only who you're losing to, if you want to use that term, but why? Right? And it could come from 2 different vantage points. It could come from the fact that somebody might just have a lower return threshold or want to structure it differently, utilizing leverage or otherwise? Or perhaps you also have folks that just have much different underwriting than you have. And obviously, in our view, in those cases, that go in a different direction, comes down from our perspective, either somebody had a view that they're looking at a lower return threshold that makes sense from their perspective than from ours. Or they have underwriting assumptions that are not in line with ours that are just much more aggressive than ours. And so to us, it's trying to figure out oftentimes why or what was the component of that more so than who are the nature of who that person was that was ultimately the winning bidder.

So I think that's an interesting thing that we try to look at and try to figure out and it's not an exact science, but that's part of doing this from deal to deal to deal to make sure that we're looking at deals even it don't go our way and use all the data that we have to then go back and evaluate the performance of those assets that we didn't transact on to make sure that we're not missing something. And I'm pleased to say that when we go back and do that exercise, I don't think we are, there's certainly -- if you go back over the past 5 years, there are certainly deals that we wish in retrospect, we had been more aggressive on as we see how that market performed or that asset had performed. But the overwhelming majority of the case is we go back and look at that data, and it proves out the fact that our disciplined approach paid off, and we made the right call from our perspective.

Our next question comes from Mike Mueller of JPMorgan.

Just a quick one, sticking with rates for a second. Can you give us any color in terms of as you're pushing out rate increases to existing tenants, what the either pushback or acceptance you're seeing is now compared to, I don't know, pre-pandemic norms?

Yes. The -- I would describe the entirety of the rate increases to existing customers. If you take away the component, which, are there certain areas that there were limitations around what you could do as an industry, I would say our approach, more or less, has been pretty consistent. We certainly have an array of increases that we pass-through based upon a pretty wide variety of different criteria from a customer, ranging a full gamut of variables that you could probably take a pretty good stab at what they are. The receptivity to those increases has been virtually unchanged. And the entirety of that approach is based on the fact that we're trying to pass on rate increases that don't have any type of material impact in vacate rates based on what we would expect a customer length of state to be.

So we're trying to find that sweet spot always, pass along rate increases that increase our profitability, increase our cash flows in a way that's not disruptive to ultimately being the thing that has somebody move out because you push too hard. Sometimes you want a customer to move out of if they're too far below market, and they don't want to come closer to market. If they leave, and you can go rent it at a higher price to a new customer, especially given high occupancy levels, then that's the right answer from a portfolio management standpoint. But the simple answer to your question is really not much change.

Got it. But it sounds like what may be a little different is, the formula and the magnitude of the increase. It sounds like you may have a lot more variability from market to market than you normally would otherwise, is that fair?

Well, I think where you have more variability is the fact that rates have changed so much in a relatively short period of time that you -- if you had a customer, for instance, that moved-in in April of last year at a rate that was a little bit -- that had been a little bit reduced given where we were and as the pandemic was playing out, that customer is going to be in a much different scenario than a customer that had moved in 3 months prior to higher rental rate and going to be much different than a customer that moved in 3 or 4 months later at a higher rental rate. So there's more variability in the fact that we have a lot of different customers that came in at different price points. Not a lot of variability. And our approach is consistent. You just have a lot of different customer types.

Next question comes from David Balaguer of Green Street.

Just wanted to go back to the comments that you had on third-party management that you've seen a lot more activity outside the top 25 market. Just knowing that cap rates have continuously compressed nationally, would you say that change has been more pronounced outside of the top 25 markets year-over-year? Or do you think it's been somewhat comparable?

Yes. I think it's been comparable. And that's, again, another thing that's different versus how we always used to think about yields from the markets that would be considered an A market to a B market to a C market. There has really been sort of cap rate compression across the board. And again, part of that goes back to what is your other alternative if you're an investor in and across multiple industries, multiple real estate opportunities. The strength of the cash flow that was proven through the recession and now through the pandemic of self-storage has drawn a significant amount of capital to the space. And we've said it before that it's obvious the introduction of third-party management platforms that are -- that have scale and that are able to deliver great results has also made it a little bit easier for folks to assemble a small portfolio of self-storage across varying markets.

That's helpful. And then just one other question. Just going back to supply. I know development costs have increased quite a bit. But at the same time, it seems like there's been some capital allocation into the sector. To what extent do you think that supply might increase just as -- obviously, the operational outlook is very strong over the next 10 to 18 months. Do you think that there's a potential that we could see supply in some of the out-years pick up quite a bit?

Yes. That's a great question. I think you hit on the yin and yang of the answer. It's -- on the one hand, fundamentals have been very solid and, therefore, folks looking at our product versus other opportunities certainly see that and react. On the opposite side, you have raw material costs that are escalating. You have labor, both cost and shortage. You continue to have challenges in markets relative to zoning and entitlement. So I think you have both of those that will, to some degree, offset one another in some markets. But ultimately, if your [land] basis is low, you've had the land for a while, you've been thinking about storage, market is healthy, and you can make it pencil, and I'm sure there will be deals that do, you will continue to see a level of development.

I do think the theme of it shifting around from those markets that saw supply early and often, and those were mostly the larger MSAs to moving to some of the smaller MSAs will continue. And as we've always said, some level of development is healthy. It indicates that the economy is healthy, the business is good for storage, and we've been able to absorb it, I think, as an industry pretty smoothly. I think we'll continue to be able to do so on a macro basis across all the markets.

And our next question comes from Jonathan Hughes of Raymond James Financial.

You mentioned the aggressiveness with rates over the past year that's driven strong revenue growth. And given the easy comp that's coming up in this second quarter, why not get more aggressive with revenue growth guidance? I think everyone listening to this call can see that revenue growth will almost certainly improve sequentially in the year. You said multiple times, you're going to see eye-popping rate growth in the next few months. Yet the upwardly revised full year revenue growth guidance actually implies the decel in the rest of the year. So is the revised guidance more reflective of concerns and uncertainty about the second half of the year, just an extreme level of conservatism? I'm just trying to reconcile your comments today with guidance from last night.

Thanks, Jonathan. I mean, I think the nuance there in that question is that my comments were specifically to the second quarter. You're going to see some eye-popping growth because I think from the companies who reported publicly and provided a commentary on it, I think, in the second quarter last year, you saw asking rates drop anywhere from 10% to upwards of pushing 30% down in the second quarter last year. And then following that, at varying degrees of pace, you saw each of the platforms start to get that pricing back and then the push beyond that. And then you get to where we are right now. And so I think my commentary was based on the second quarter, asking rates are going to be eye-popping. Keep in mind that as we churn between 5% and 6% of our portfolio every month, you're going to see some nice revenue growth that will be with you for quarters to come based on customers that move out that moved-in in the first quarter or second quarter of last year that you replace with customers at a higher rents this year.

Once you get to the third quarter and the fourth quarter, those easy comps go away because we were all pushing rate. We certainly were pushing rates, starting a little bit earlier than some. And so when we get to the third quarter and the fourth quarter, you get into much more difficult comps, both from a rate and an occupancy standpoint. So it's really a tale of 2 halves of the year. Actually, 3 completely different things. The first quarter that we just reported on is comparing against effectively a pre-pandemic first quarter of last year. The second quarter of this year is going to be the easiest comp that probably the industry has ever seen, at least from a rate perspective. Second quarter '20 versus second quarter '21. And then when you get in the back half of the year, much more difficult comp because operating fundamentals were so strong in the back half of last year.

So I think all of that, I appreciate the fact that it's a lot of moving pieces. And I appreciate the fact that we're looking at all the detail, and we're trying to build that up and present it in a way that's helpful, from an investor standpoint. We're very comfortable with the guidance that we have provided. I think in that range, being able to improve that guidance from where we were just a quarter ago, I think, is awfully positive. And again, a lot of moving pieces. I think we're optimistic as to how the rest of the year plays out.

Okay. That's helpful. And yes, look, I'm not trying to discredit all the hard work that's been done over the past year. I'm just trying to understand how you guys are thinking about the cadence from now until year-end. And so I mean, if we look at the 3Q '20 revenue comp, I mean, that was effectively flat revenue growth back then. I mean, if rates are still kind of in the 4%, probably 4.5% up range on an in-place effective, and we lose even a little bit of occupancy, I mean, that even is above what's implied in guidance. So that's kind of what spurred the question. But I appreciate your thoughts on it. Maybe we'll follow up off-line.

Happy and do that. Appreciate the question.

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

All right. Thanks, everybody, for participating. Really positive about the quarter, positive about how the second quarter has started off here in the month of April and look forward to speaking and seeing on the screen, hopefully, many of you at NAREIT virtually in June.

So thanks, everyone, and enjoy the rest of your day and your weekend. Take care.

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