Good day, and welcome to the CubeSmart fourth quarter 2019 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Josh Schutzer, Director of Financial Analysis. Please go ahead.
Thank you, Sean. Hello, everyone. Good morning from Malvern, Pennsylvania. Welcome to CubeSmart's fourth quarter 2019 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 can 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.
Thank you and good morning. We reported a solid quarter yesterday in a continuously challenging operating environment. Throughout the year, in spite of the internal growth headwinds caused by the ongoing impact of new supply, we generated growth in our funds from operations through expansion of our third-party management program, the utilization of joint ventures, the lease up of our non-stabilized portfolio, and successful capital raising in both the debt and equity markets.
2020 will be a year of transition as our industry absorbs the new supply delivered over the last several years. Our outlook for the future remains positive, as our current supply data for our top 12 markets points to 2019 being the peak year for new deliveries. Markets that experienced the impact of new supply early in the cycle are seeing a solid slowdown in expected future deliveries.
In New York City, we expect deliveries to taper off through 2020, and those expected deliveries are increasingly in submarkets where they will not directly compete with an existing CubeSmart store. Looking ahead, factoring in our ongoing innovations in technology, pricing, and marketing, as well as assuming our current supply outlook holds and no downturn in the U.S. economy, the deceleration in our same-store revenue growth should begin to stabilize in the latter half of this year, and we are cautiously optimistic about a gradual strengthening of fundamentals in 2021. I'll now turn the call over to Tim Martin to walk through our information in more detail. Tim?
Thanks, Chris, and thanks to everyone on the call for your continued interest and support. As Chris touched on, our fourth quarter results rounded out a busy and successful year across many fronts. Same-store performance included headline results of 1.6% revenue growth and 4.6% expense growth, yielding NOI growth of 0.4% for the quarter. For the full year, same-store revenues grew 1.9%, expenses grew 4%, leading to NOI growth of 1.1%. Average occupancy in the fourth quarter was 91.7%, up 10 basis points year-over-year, and quarter-ending occupancy was also up 10 basis points, closing out at 91.2%. Same-store expense growth for the fourth quarter was in line with our expectations. Property taxes were again this quarter a large component of the increase in overall expenses, up 5.1% over last year.
Our marketing spend increased 22.1% in the quarter, and our property and casualty insurance costs were up again following our annual renewal back in May. We reported FFO per share is adjusted to $0.42 for the quarter, which was at the high end of our guidance range for the year. Our reported FFO per share of $1.69 was a 3% increase over 2018. We remain active and disciplined in our pursuit of external growth opportunities. During the fourth quarter, we closed on the purchase of five properties for $57.9 million, and that brought our full-year acquisition activity to 29 stores for $246.6 million. During the quarter, we also completed the sale of one store in Texas for a total sales price of $4.1 million.
On the third-party management front, we finished off another productive year by adding 46 stores in the fourth quarter, bringing our 2019 total to 199 new stores added to our program. We ended the year with 649 managed stores, allowing us to enhance our market position and expand the CubeSmart brand. On the balance sheet, we continue to focus on funding our growth in a conservative manner that's consistent with our BBB/Baa2 credit ratings . We did not issue any shares under our active market equity program during the fourth quarter. For the year, we raised $196.3 million of proceeds, selling shares at an average price of $33.64.
In October, we accessed the public debt markets, issuing $350 million of 10-year unsecured senior notes with a 3% coupon. Our bond deal in the fourth quarter continued to demonstrate our commitment to utilizing the fixed income market as a primary source of capital to fund our growth, and was our second bond issuance of 2019, bringing our total to $700 million of new issue during the year. In addition to our 2019 ATM activity and bond issuance, as you'll recall, that we extended and expanded our unsecured revolver earlier in the year to $750 million. All of this activity further strengthened our balance sheet as we closed out the year. At year-end, we had only 3% of our debt maturing in 2020 and 2021 combined, a weighted average years to maturity of 6.4 years.
We had no floating rate debt, less than 2% secured debt to gross assets, and leverage and coverage metrics that have us in a very strong balance sheet position with significant liquidity. In December, we announced a 3.1% increase to our quarterly dividend, bringing our dividend to $1.32 per share on an annualized basis. Based on the midpoint of our 2020 guidance, the increased dividend suggests a FFO payout ratio of 78.1%. Details of our 2020 earnings guidance and related assumptions were included in our release last evening. Our 2020 same-store property pool increased by 11 stores. Same-store revenue guidance assumes little impact from occupancy and is again overwhelmingly driven by expected growth in net effective rates.
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 2018 and 2019, as well as the impact of 2020 deliveries that will compete with our stores. Embedded in our same-store expectations for 2020 is the impact of new supply that will compete with approximately 45% of our same-store portfolio. From a trend line perspective, you'll recall that in 2017, we had 25% of same stores impacted by supply. That grew to 40% in 2018, then grew again to 50% in 2019. At 45% for 2020, we're starting to see signs of a lessening impact from new supply as we move forward. That said, obviously, the impact of new supply to operating fundamentals is still being felt.
The impact to an individual store facing new competition and its competitive trade brand can range based on many factors, but overall, we expect a group of stores impacted by new supply to have revenue growth 200 to 300 basis points lower than the stores that are not impacted by new supply. Our newly developed stores and acquired stores and lease up continue to make progress from an occupancy standpoint, in line with our expectations. We believe our development pipeline and non-stabilized store acquisitions will create meaningful NAV growth at stabilization. Of course, in the short term, those investments create a drag to our FFO per share. Our FFO guidance for 2020 is impacted negatively by $0.07-$0.08 per share as a result of this dilution.
You'll note that the dilution in 2020 is down about $0.02 per share compared to 2019, as stores are leasing up and less has been added to our development pipeline. Our guidance includes the impact of acquisitions we've closed to date or have under contract, but does not include the impact of any speculative acquisition or disposition activity, as levels of activity and timing are difficult to predict. Thanks again for joining us on the call this morning. At this time, Sean, why don't we open up the call for some questions?
Thank you. We will now begin the question and answer session. To ask your question, you may press star, then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. Our first question today will come from Shirley Wu with Bank of America Merrill Lynch. Please go ahead.
Hey, good morning out there.
Good morning.
My first question is on revenues. In Q4, your core revenues were up 10 basis points quarter-over-quarter sequentially, but your core guidance implies 140 basis points of deceleration into next year. I'm just trying to get a little bit more color on what happened with that Q4 number, whether that indicates stabilization or that continued deceleration on top line. What you're seeing in one, two year to date in terms of demand to indicate one or the other.
Yeah, I'll start with the top-line growth rate. Thanks for the question. As we've been discussing, we spoke about a lot at meetings with Nareit and on prior calls. As we get deep into the development cycle, there's obviously a big focus on growth rates year-over-year. The reality is our expectation as we get here and think about the trough in impact on top-line growth being at least in sight, is that we're not going to see a clear inflection point likely in our portfolio and likely in others, to where you get to a point and you see re-acceleration and from there, it grows in a linear fashion.
We don't expect it to be a linear growth rates into 2020 to be in a linear fashion. I think it'll bounce around a little bit. I think early in 2020, we could see some positive impact, and then I think our expectation is you would see growth rates flatten out in the back half of 2020.
Shirley, I think your second question was along the lines of what we've been seeing so far this year in 2020 from an operating perspective. The answer is it continues to be very encouraging and positive performance from a physical occupancy perspective as we sit here today, our occupancy gap to last year is in the plus 30 basis point range. We've seen good demand for what is traditionally kind of the slower part of our industry's year. That continues, however, to be with its challenges from a pricing perspective, given all the new supply that we've talked about ad nauseam.
It's encouraging as we start to see the beginnings over the horizon for the busy rental season, that if we can head into that with some good occupancy performance here in the slower times, that is an encouraging sign as we get into the busy rental season, both on overall performance, but certainly also from a pricing perspective. We've got another month or so to go before we can have more confidence in that.
Got it. That makes sense. Pivoting to the expense side, so your marketing expenses did go up 22% in this quarter, which was a little bit surprising. I was just curious as to what you're seeing on the marketing side, as well as your expectations for 2020.
Sure. It's obviously a very competitive playing field across the industry. You've seen significant growth in marketing costs across the industry as we have a significant amount of vacancy across the industry to fill. We found opportunities in Q4 to productively spend and generate what we would consider to be an acceptable return on that expenditure in terms of the lifetime value of our customers.
As we head into 2020, embedded in our overall same-store expense expectations, and Tim can provide more detail, we would continue to expect to spend aggressively in marketing again, assuming that we can deliver that customer at a reasonable cost. That range could be plus or minus in kind of the growth you saw in Q4, and we could see that continue on through the next couple of quarters here in 2020. Tim, any additional color you want to provide there?
Yeah, I think that's right. I think the levels that we've seen in the fourth quarter overall is about plus, minus where we'd expect the marketing expense line item to be in 2020. Again, not all that dissimilar to my commentary on the top-line growth. It's going to bounce all over the place based on what we did in 2019 and opportunities that we find in 2020. As we enter the year, I would expect the second and third quarters, just from a comp perspective, to have the highest growth rates in marketing spend, and the first and fourth quarters to be Well, certainly fourth quarter will be a little bit lower as we ramped up spend here in the fourth quarter of 2019. The comp will be a little bit different than the balance of the year.
Got it. Thanks for the time, guys.
Thank you.
Our next question will come from Todd Thomas with KeyBanc Capital Markets. Please go ahead.
Hi, thanks. Good morning. First question, just following up on the same-store guidance. It sounds like you expect growth to improve earlier in the year with, I guess, growth in the first half being higher than the second half. Is the second half deceleration that you see in the model, is that more rate driven, or would you expect occupancy to be a little bit more pressured?
Yeah, it's not on the occupancy side. I think part of what makes everything bounce around is its rate, and it's the nature of how we achieve the effective rate given pricing strategies both in the comp period in 2019 and then pricing strategies which are yet to be determined as the year plays out in 2020. That oftentimes is what creates some of the volatility in growth rates bouncing around a little bit.
Okay. I appreciate the comments on New York City a little bit. Just in terms of the overall same-store forecast, can you just comment on how New York and also maybe Miami and Chicago sort of fit into that? Miami and Chicago both saw sequential improvements as well. I'm just curious if you expect to see continued stabilization there in those markets.
If you look at, Todd, if you look at everything relative to our overall portfolio same-store guidance for 2020 on the revenue line, we would expect the New York MSA, and really even just the individual boroughs collectively, to perform in line with the range of expectations we've provided for the overall pool. I think the pressure in the New York MSA, for our portfolio, is likely to be a little bit more pressure in the suburbs.
North Jersey is seeing supply. Westchester and Long Island are seeing supply. I think that's the sort of natural outgrowth of the fact that the opportunities in the boroughs have largely been taken advantage of. The change in the opportunities on the legislation has removed about half the available square footage for storage to be built in the boroughs. Folks are moving out into North Jersey and Long Island.
Again, in general, I think New York will be in line with the same-store expectations. Miami, the markets that saw supply early in the cycle, Miami, Chicago, Dallas, generally speaking, I think will perform better in 2020 than 2019, by and large, and I think, again, perhaps towards the higher end of our expectations for the same-store portfolio as a whole. Those markets that have yet to see supply, particularly in California, we would expect to outperform in terms of the same-store expectations taken as a whole. I think, again, we continue to see limited new supply in the markets in which we operate in California, barring the impact of the split roll on the ballot here in November, and in terms of its impact on real estate taxes.
For our portfolio, we certainly expect that to be a much lesser impact than it would for many of our peers who have a lot bigger problem there than we will. I think California will continue to outperform. The markets in Florida outside of Miami, you are seeing some impact of supply in a more material way from Tampa all the way down to Naples, and I would think those would be some markets that would underperform in 2020.
All right. That's helpful. Just one last one. In terms of the $0.07-$0.08 of dilution from lease-up properties that's embedded in the guidance, does that include any additional investments in 2020? Can you comment on the appetite for doing additional development here or adding projects to the value creation pipeline?
Yeah. The $0.07-$0.08 dilution that's included in the guidance does not contemplate any speculative activity. Second part of your question, what is our appetite? We are consistently looking for the best opportunities to grow our footprint and make attractive investments on a risk-adjusted basis. I think that, certainly what you've heard from some of our peers, we would echo in that the market for stabilized broker transaction is pretty aggressive.
Those yields are awfully tight. We're not seeing a tremendous amount of distress or despair. Certainly, there's going to be continuing interest and likely an accelerated interest of folks that have participated in this development cycle and have stores that are in some form of early-stage lease-up. If those opportunities present themselves at attractive risk-adjusted returns, we'll continue to be focused on underwriting them, and to the extent that they make sense for us, we'll be opportunistic.
Yeah. Todd, just to add onto that, when you think about where we've been willing to take development risk, principally New York, Boston, Washington D.C., there's nothing on the radar near term that would pencil out attractively that we're pursuing at this time.
Okay. Thank you.
Thanks.
Our next question will come from Jeremy Metz with BMO Capital Markets. Please go ahead.
Hey, guys. Good morning. Tim, sorry if I missed this, but did you say yet, or can you give us an update on effective rents and how they trended in the fourth quarter, and what sort of trends you're seeing so far here in 2020?
Yeah, Jeremy, thanks for the question. I'm going to hit my cough button and let Chris take that one.
Hey, sorry, Tim. Tim's struggling a bit here. We're hoping not with the coronavirus. The effective rents, both in Q4 and so far this year in 2020, are mirroring what we saw basically throughout the year. Positive in those markets I talked about that haven't seen supply, a little bit less negative and seeing some green shoots in Austin, Dallas, Houston even, Denver, Chicago. Seeing the pressure in Boston, in South Florida, particularly on the West Coast, in Brooklyn. A little bit better in the Bronx than what we've been seeing. You net it all together and effective rents are down. Give a range of 2.5%-5% over what we would have seen in Q4 2018 versus 2019, and basically in about that same range thus far this year.
That's helpful. On the expense side, taxes in particular, this has been a multi-year reassessment cycle. It's obviously caused some meaningful pressure on that line item. Just where are we at in that process? What's embedded in 2020? Is it another kind of 5% type of increase? How does that impact your outlook going forward here as we kind of move beyond?
Hey, Jeremy, it's Tim. Thinking about real estate tax expense, if you think about the trend line here over the last couple of years for our same-store pool, in 2017, taxes grew 4.3%, 2018 7.1%, 2019 5.4%. Obviously we've been on a trend line of above-inflationary increases, as you're well aware of. Our expectation for 2020 is we're still in that range. Somewhere in the 5%-7% range is our expectation for increase in real estate taxes for 2020 for the same stores.
Do you see it getting better as we look a little further out?
Yeah. We talk about that a lot in meetings. I think it's one of those interesting questions because the pressures on real estate taxes are coming from the fact that while NOI growth is decelerating from our peak levels back before the development cycle started, we're still seeing growth in NOI, which contributes to higher property values and higher assessed values. You're also seeing cap rates. If they're moving, they're compressing tighter, which also gives further evidence and ammunition for taxing authorities to increase assessed values. It's one of those things, to some extent, that it's a be careful what you wish for question, because the time at which we have the ammunition to go back and challenge and try to get tax assessed values reduced, we're not going to be talking about real estate taxes.
We're going to be talking about why cap rates are going up or why NOIs are going down. I don't see anything in the near term here. By near term, I would say one, two, maybe even three years out, that would lead me to believe that there's a lot of evidence that real estate taxes are going to get back even to inflationary type increases. I think you're still looking at probably 3%-5% type increases over the next couple of years. That doesn't mean that we're not going to aggressively challenge them, and look for opportunities to offset that through challenging the assessed values and hopefully, being successful on some appeals.
Obviously, all this excludes California because.
Correct
What's going on out there would obviously change the game.
That's right.
Yeah, helpful. Last question from me. Chris, as we think about supply and your comments on it tapering off, how much of this is a shift down in capital looking to invest, and developers really leaving the market versus major markets being more saturated at this point, so less optionality and capital generally just shifting out into secondary markets where relative to your footprint, it's clearly not as impactful, but perhaps where the opportunity remains.
Yeah, I think that's a great question, Jeremy. I think it's just a very nuanced combination of all of the above. When you think about my commentary about some of the North Jersey and Long Island development, it's a mix. It's folks who may have started by looking in more urban markets, more of the boroughs, finding out that things aren't penciling there, or the opportunity is too challenging, and so they sort of move to the bordering opportunities.
You also then have folks who look at the data on supply relative to population growth, et cetera, and look for opportunities in those North Jersey and Long Island markets who are, quote, "out of towners." You don't usually have folks who will shift from a North Jersey focus to deciding they're going to focus in Des Moines, Iowa. It usually doesn't operate that way.
Now, for those who are market agnostic, I would think they are starting to, and we're seeing it in the third-party program. They are starting to look at the more secondary markets, those markets that may have not experienced the impact of supply, and exploring some opportunities there. To be fair, we don't spend a lot of time digging into that data or trying to assess that because those stores are a third-party opportunity for us, but other than that, they won't impact our owned portfolio very much. Again, I think there should be some levels of supply being delivered in 2021 and 2022, assuming the economy remains healthy. I would suspect you would see that start to move into the more secondary markets, and away from the top 10 MSAs in the U.S.
Thanks for the time.
Our next question will come from Smedes Rose with Citi. Please go ahead.
Hi, thanks. I guess I wanted to ask you for the way you define the New York City portfolio, what percentage is actually in New York City versus in the suburbs, roughly?
Yeah.
Of your NOI.
From a percentage of NOI, again, we have some things that'll come online this year and aren't stabilized yet. ±14% of the NOI comes from New York City itself.
Okay, the rest of it would be more sort of surrounding areas.
The rest of it is the balance of the MSA, which is, yeah, principally Westchester, North Jersey, and Long Island.
Okay. That's why you would see New York being in line with the overall portfolio, I guess, because it's really weighted for outside of the city where you're seeing all this new supply.
We're seeing a greater impact of new supply in terms of just 2020 expected deliveries in North Jersey, Long Island, and Westchester than we are in the boroughs themselves.
Okay. Then I just wanted to ask you in terms of just pricing strategies in markets where you're maybe seeing or have seen peak supply now, is there any kind of change in the way you think about? Is it more maybe occupancy driven, so lowering asking rates to get folks in or maybe more discounts, or how has the sort of strategy changed versus maybe other markets?
Yeah. There are really two schools of thought that we see in the industry. You have model A, which is really draconian reductions in market rate for the customer coming in. Not talking about months free, although we are seeing some folks go with the 50% off the first three months type concept, or even multiple months free. It's generally more a pretty dramatic cut in the actual rate on the lease in order to gain that occupancy early on in the lease-up. The other model is our preferred model, which is a healthier balance between asking rate and any sort of incentive.
The reason is, it's just impossible mathematically to get that customer who comes in at 40% or 50% below the existing street rate for the competitor properties to ever imagine a path other than just a very difficult customer relation move, where you're giving somebody the bait and switch and saying, "Move in at $50," and 30 or 45 days later, you're raising their rent to $100. It's just impossible to ever get them back to market. We continue to prefer an approach that is a more gradual lease-up at higher effective rents. Again, all of our models would tell us for the long-term investor, that's gonna produce the best IRR on that particular development.
If your motivation is to sell the asset within 18 to 30 months, you may have a different view, which is, I want to get some customers into the Cubes, and then I'm hoping, the greater fool theory will play out and I can convince a buyer to pay me for the opportunity to try to get those in-place customers back to market over some period of time. That's basically the way your question sort of operates within markets.
Okay. Thank you.
Thanks.
Our next question will come from Ki Bin Kim with SunTrust. Please go ahead.
Thanks. Just going back to your comments about the acquisition markets being tight. You've seen some of your peers go into international markets like Canada or possibly Australia. You've seen your peers do bridge loans or preferred investments. What are you guys thinking internally about your external growth opportunity set?
Yeah. We think we have an awful lot of opportunity here domestically and in more traditional means. Looking at ideally for us on a risk-adjusted basis, if it's attractive, first on the list would be an open, operating, stabilized store at an attractive return, because the risk profile relative to any other opportunity is much lower. Those are challenging opportunities to find today.
Where we do think we'll start to see more opportunities is something that has a little bit of hair on it, which is, in some stage of lease-up. Coming out of the development cycle, getting on the tail end of it here, there's a tremendous amount of opportunity. It may not present us a lot of opportunity in 2020, but I think it will certainly present a lot of opportunity for consolidation here in the next two to three years.
Okay. Have you noticed any incremental changes to customer behavior, whether that be a response to rent increase letters or just shopping more for price before they move in for a new customer, and maybe that's reflected in things like the time they spend on your website, versus previous years?
Yeah. No significant change in customer behavior. When we think about health, we think about are they paying their rent on time? How do we see trends in defaults and auctions? All of those metrics have been very consistent over the last many quarters. The shift we see in all sectors, retail, et cetera, from desktop to mobile is real, and the ability for that customer on a mobile device to be able to simply and quickly price shop, is real.
Typically, our customers tend to look at three options, three providers within their trade ring. That hasn't changed over the last many quarters. The amount of time they're spending, at the margin, is shrinking, but I think that just goes to the gradual maturing of our industry and our product. Customers are just getting more and more used to shopping online in general, more used to shopping on a mobile device, and then more comfortable with our industry's product and how to use it.
Okay. Thank you.
Thanks.
Our next question will come from Jonathan Hughes with Raymond James. Please go ahead.
Hey, good morning. Chris, thanks for your comments on revenue growth outlook in year-end and next year. I think you said street rates are down 2.5% to 5% today. Where do you expect that rate gap to be by year-end in your revenue growth outlook? Is it flat or is the burn-off of promotions on the existing tenants largely getting you to that slowing deceleration in revenue growth by year-end?
Yeah, Jonathan, I'll start with a clarification, and then I'll turn it over to Tim. Not street rates. Street rates, again, what we're asking face rate for that customer to come in are all over the place. I would think across the portfolio, likely, a little bit higher right now than they were at this point last year. The question that I was asked was just effective rates. When you look at any sort of internet concession along with any sort of free rent, where's that net? That was the number that I had given, and I'll ask Tim to sort of address the nuances of.
Yeah. From a nuance perspective, Jonathan, we don't guide to the individual components of the revenue growth, primarily because they're going to bounce all over the place as well. The pricing system is going to, on a property-by-property, unit-by-unit basis, try to maximize revenue. At times, that'll be driving a little bit more from a volume perspective or occupancy perspective. Discount's going to move all over the place, depending on what's the most effective tool at the time. Overall, I think the trend line is likely to be similar to what I described in overall trends in revenue growth. I think as overall revenue growth flattens out year-over-year in the back half of the year, I think that's likely to be the trend in net effective rents as well.
Got it. Have you looked at increasing the magnitude or frequency of renewal rate increases, since existing tenants are seemingly stickier than ever, as a way to offset those weaker effective rates you just mentioned?
Yeah, that's something that we have been focused on for a very long time. I would echo your statement that things are as sticky as ever. If they were sticky four years ago, we believe that our systems were maximizing the ability to push at the appropriate time and at the appropriate volume, to maximize the impact that we can achieve from rate increases to existing customers in a way that doesn't impact move-out rates in a way that becomes negative. I think to a large degree, we continue to try to find efficiencies on the margin. From an overall big picture approach standpoint, I think we've been pretty aggressive for a pretty long time.
Yeah, Jonathan, I think those industry operators who would generally be considered best in class have, for some time now, recognized that the low-hanging fruit from years back on the existing customer base, thinking about how they may react, using technology and systems to test varying options, being sophisticated about how we use the data that we have to pass along increases or not, and at what rate and when to the existing customers. Looking for ways to use technology to remove fat out of the operating expense lines and create a more lean process. The reality is, a lot of that has been done over the last several years, and that sort of low-hanging fruit, for those of us who were certainly ahead of the curve from a sophistication perspective, that low-hanging fruit is just not there.
Okay. Got it.
Just one more from me. Are you getting any pressure from any of these third-party management owners to address the management fees? I know there was a big transition recently, but I've heard anecdotally that maybe some have been lowered by some operators to 4%-5% of revenues, just due to the increased competition out there. Any change you're seeing in that market?
Well, I think certainly you see some folks who are trying to build scale in third-party management, being on the more aggressive side of what is market, which feels appropriate. If you were in any type of business, that's what you would do. We have over 200 third-party relationships and work very hard to provide value for those customers. I would say the overwhelming majority are happy with the economic arrangement they have, with the value that we can provide on the CubeSmart platform, relative to the cost that they pay for the value that we're helping them create, is a pretty good deal for them.
Okay. All right. That's it for me. Thanks for the time.
Thanks.
Our next question will come from Samir Khanal with Evercore. Please go ahead.
Yeah, Chris, good morning. Can you provide some more color on Houston? I guess, do you expect that market to stabilize this year? We've seen an improvement in revenue sequentially, but your folks are spending a lot there. Any color would be helpful.
Sure. Houston, like all of the Texas markets, has obviously been impacted by new developments, also been impacted by weather and a variety of other things. We would expect that new openings in Houston will decline 2020 over 2019. Not draconianly, so you're still seeing new supply being delivered. Again, it's a very significant top five MSA, so that's not unexpected. What you're seeing is that the stores are leasing up. Occupancies are growing, and we would expect, relative to our overall guidance, and again, we only have 14 stores in Houston, same-store pool, that we would see positive occupancy growth in Houston in 2020 relative to 2019. We do not expect to see net effective rents flip positive. They are gradually getting better, but there's still an awful lot of pressure.
When you think about where we would expect same-store revenues in Houston on our 14 stores, relative to what we saw in 2019 going into 2020, we actually think the combination of some occupancy gains and some lesser impact on net effective rent declines will produce a much more positive result for our portfolio in 2020 than we saw in 2019.
I think long term, the question that I would have for Houston, which is really not any different than the same question I've been asking about Miami is, are we going to see the ability for cities like that to transform themselves into 24-hour urban downtown cities? Traditionally, in Houston and Miami, the downtown areas were where you went to work. It was doctors and lawyers I'm sorry, it was lawyers and accountants, no doctors, who were there during the day. They left and went home to the suburbs in the evening. You're seeing an awful lot of condo development and an awful lot of vertical self-storage development.
The question is for someone in Houston who, are they going to want to live in a condo in downtown and work there? What demographic is that going to be? If it's an older demographic who want to be close to transportation and entertainment options, does that older demographic want to pay the $20+ rents that these stores need to achieve in order to meet their development yields? Are they going to be perfectly happy leaving their possessions in an outside drive up store in the suburbs at a lower rent? I think over the next couple of years, those two markets in particular are going to be interesting test cases on how the demographics of our customer may change.
Thanks for that. I guess shifting gears, Tim, when I look at your guidance for G&A, it was up on my math about 10% here, and it's certainly higher than the quarterly run rate in Q4. Just want to make sure I'm not missing anything there.
I think it's up somewhere 8%-9% and is reflective of us continuing to build out our teams and our systems as we've grown our platform by much more than 8% or 9%.
Good. Thanks for that.
Thanks.
Our next question will come from Ryan Lumb with Green Street Advisors. Please go ahead.
Great. Thanks. Ad spending in the quarter ticked up as you mentioned. Just curious if that was more of a volume of ads placed. I assume this is paid search, the number of ads online, or if this is a price inflation, cost per click inflation.
Yeah. It's a combination of the two, but more heavily weighted towards spend for auction keywords. How we would think about how much we're willing to pay, and What's the budget during the course of that day for those keywords drove the majority of the increase.
Okay. Would you assume the midpoint of expense guidance for 2020 assumes an acceleration in expense growth for the year. Is that primarily driven by marketing or what are the drivers there for expense growth next year?
Real estate taxes.
Real estate taxes.
Okay.
That's certainly the biggest one. We talked about earlier, our expectation is that's in the 5%-7% range. You're obviously seeing we have an expectation in that 20%-30%-type range for marketing expense growth throughout 2020 on average.
Your last pressure point is personnel, and certainly with the economy where it is very, very healthy, we're seeing some pressure on hiring as well.
Okay, great. Thanks, guys.
Thanks.
Our next question will come from Michael Mueller with JPMorgan. Please go ahead.
Yeah. Hi. I guess looking at your acquisition guidance at the $75-$150, you talked about different types of investments, whether it's stabilized, core, low cap rate stuff or maybe value add. What are you contemplating in that range? I'm assuming it's probably not the fully marketed low cap rate stabilized transactions, but is it properties where you're going to have a very low going-in yield or you're looking for something with an immediate yield? How should we be thinking about that?
Thanks for the question and welcome.
Thanks
To our earnings call. The guidance that we provide is more of an indicator as to, as we're entering the year, from a big picture standpoint, where do we think volume of opportunities are likely to present themselves. The impact of any speculative acquisition activity is not in our FFO guidance. The reason it's not is because the answer to your question is very, very difficult.
We're not targeting necessarily any particular type of acquisition. We're targeting attractive risk-adjusted returns, and if we don't find any, we won't buy anything. If we find $500 million worth of attractive opportunities, then that's what we'll do. It's a really difficult question to answer. It's going to depend upon what we can find on an attractive risk-adjusted basis.
Got it. Okay. Then on the development front, what are you underwriting for a timeframe to stabilize the projects that opened in 2019 and are opening in 2020?
Yeah. For the more recent, we would expect, again, given the strong demand profile, that the physical occupancies, we still sort of look at first level of physical occupancy sometime between month 36 and month 45, depending upon the time of year in which they open, given where rental rates are, and then bringing those customers we've brought in up to market, about another 12 months after that for true economic first level of stabilization.
Got it. Okay. That was it. Thank you.
Thanks so much.
This concludes our question and answer session. I would like to turn the conference back over to Mr. Chris Marr, President and CEO, for any closing remarks.
Okay. Thank you everyone for participating in the call. Obviously, our business has some cyclicality to it in terms of our customers. As I said, we're encouraged with how the year has began. We look forward to entering into the busy season with our team and our process and our systems raring to go to take advantage of all of the opportunities that we believe will present themselves. We certainly believe that it's a very bright future for self-storage industry and for CubeSmart. We certainly appreciate you participating in the call today. We look forward to seeing many of you over the next couple of weeks at the various industry events, and we will speak to you again when we report first quarter earnings. Thank you.
This concludes today's conference. Thank you for attending, and you may now disconnect.