National Storage Affiliates Trust (NYSE:NSA) Q1 2024 Earnings Call Transcript

National Storage Affiliates Trust (NYSE:NSA) Q1 2024 Earnings Call Transcript May 2, 2024

National Storage Affiliates Trust isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings. Welcome to National Storage Affiliates First Quarter 2024 Conference Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, George Hoglund, Vice President of Investor Relations for National Storage Affiliates. Thank you, Mr. Hoglund, you may now begin.

George Hoglund: We’d like to thank you for joining us today for the first quarter 2024 earnings conference call of National Storage Affiliates Trust. On the line with me here today are NSA’s President and CEO, Dave Cramer; and CFO, Brandon Togashi. Following prepared remarks, management will accept questions from registered financial analysts. You limit your questions to one question and one follow-up and then return to the queue if you have more questions. In addition to the press release distributed yesterday afternoon, we furnished our supplemental package with additional detail on our results, which may be found in the Investor Relations section on our website at nationalstorageaffiliates.com. On today’s call, management’s prepared remarks and answers to your questions, they contain forward-looking statements that are subject to risks and uncertainties and represent management’s estimates as of today, May 2, 2024.

The company assumes no obligation to revise or update any forward-looking statement because of changing market conditions or other circumstances after the date of this conference call. The company cautions that actual results may differ materially from those projected in any forward-looking statement. For additional details concerning our forward-looking statements, please refer to our public filings with the SEC. We also encourage listeners to review the definitions and reconciliations of non-GAAP financial measures, such as FFO, core FFO, and net operating income contained in the supplemental information package available in the Investor Relations section on our website and in our SEC filings. I will now turn the call over to Dave.

Dave Cramer: Thanks, George, and thanks everyone for joining our call today. During the quarter, we completed many of our strategic initiatives that we’ve been discussing in previous calls. These initiatives enable us to deleverage our balance sheet in access to growth capital, increase earnings per share, and ultimately, position our company for future growth. Continue our focus on enhancing our operating platforms to ensure a better customer experience, these initiatives are still ongoing, but we’re starting to see improvements in rental activity and conversions from our advanced web presence and upgraded call center operations. On the rental front, we experienced three months of positive net rentals through the end of April, contributing to a seasonal uptick in occupancy, which ended April at 86%, up 50 basis points from the end of February.

During the quarter, we experienced a meaningful year-over-year increase in leases being fully executed online, large part due to improvements made to the lease signing experience. Additionally, our call center answered over 30% more calls during the quarter compared to last year. Continue to enhance and simplify our customer journey by leveraging intelligence in our customer acquisition strategies, we expect to see continued improvements in the customer experience we offer and overall performance. We’re also being more aggressive on our pricing strategy. While this is helping to drive rental volume, it is putting pressure on our move-in rates, which averaged down about 14% year-over-year for the quarter. Consumer base remains healthy, with 65% of our tenants having stayed with us over a year, while 49% have been with us over two years.

Our ECRI program remains largely consistent with the past couple of quarters in terms of pregnancy and magnitude. Ultimately, the quarter played out as we expected, but it’s still early in the spring leasing season, with the peak months ahead of us. That said, looking across our different Sunbelt markets, continue to face many challenges due to several factors, including absorption of new supply, unmuted housing market and a very competitive pricing environment. Results are mixed in these markets with revenue in Phoenix, Sarasota and Las Vegas all coming in below portfolio average, while markets like Oklahoma City, Savannah and Corpus Christi were better than average for the quarter. Continue to work hard in these markets to deliver a superior customer experience, recognize some of our markets are going to be slower to recover.

It is important to point out that we have markets that are currently healthy and delivering solid results. We remain very confident in the growth prospects of our Sunbelt markets due to attractive population and migration trends. I’m very pleased with our strategic positioning heading into this next phase of growth. We’re starting to see opportunities on the acquisitions front. We’re finding a variety of deals in many of our strongest performing markets where we have good insights into rental demand and street rates, allowing us to be more precise in our underwriting. These are deals that make sense for us to pursue as they improve our overall portfolio quality, add depth to our existing markets and increase our operational efficiency.

We currently have over $25 million under contract and approximately $200 million of properties in various stages of negotiation. Expect to fund these acquisitions through a combination of 1031 proceeds, joint venture capital and debt. We won’t comment on pricing until the deals are closed. These transactions make economic sense for us and our JV partners. We represent the start of us putting the dry powder to work that was generated from our portfolio optimization strategies. I’ll now turn the call over to Brandon to discuss our financial results.

Brandon Togashi: Thank you, Dave. Yesterday afternoon, we reported core FFO per share of $0.60 for the first quarter of 2024, representing a decrease of approximately 9% over the prior year period, driven primarily by the decline in same-store NOI, an increase in G&A and a decline in contribution from our JVs. Overall, our results for the quarter were in line with our expectations, except for a few casualty events resulting in an aggregate $1 million loss or almost a penny per share. For the quarter, revenue growth declined 1.5% on a same-store basis, driven by growth in rent revenue per square foot of 2.4%, offset by a 380-basis-point year-over-year decline in average occupancy during the quarter. Occupancy ended the quarter at 85.9%, down 350 basis points year-over-year.

Expense growth was 4.5% in the first quarter, similar to the past couple quarters, the main drivers of growth were property tax, marketing and insurance, partially offset by payroll efficiencies that resulted in lower spend versus the prior year period. Marketing expenses remain elevated due to increased competition for customers and a tough comp, while insurance expense growth will moderate going forward for the low-single digits, given our policy renewal that occurred on April 1st. As Dave mentioned earlier, we had a busy start to 2024 on the asset sales and joint venture front. All of which was discussed on our last call. Although we did not complete any acquisitions during the quarter, we remain active underwriting and evaluating potential transactions.

The majority of our revolver available to us today and $1 billion of buying power within our 2023 joint venture, we are encouraged by the opportunities for external growth that lie ahead of us. Turning to the balance sheet, during the quarter we completed just over $200 million of common share buybacks and subsequent quarter end exhausted the remaining $72 million of our program. We believe this strategic initiative is beneficial to our shareholders and will ultimately provide more FFO per share to them over the long run. Our current revolver balance is roughly $200 million, giving us approximately $750 million of remaining availability. Lastly, our leverage was 6.2 times net debt to EBITDA at quarter end. Now moving on to 2024 outlook. As we said earlier, the quarter played out largely as expected and it’s still early in the spring leasing season.

We are reaffirming our previously provided guidance, which is detailed in the earnings release. One item I want to mention on the balance sheet. We have $250 million of interest rate swaps that fixed daily simple SOFR at 1.59%, which mature in Q3. $145 million of this relates to the term loan that matures in July. So effectively $250 million of fixed rate debt will adjust to market rate starting August 1. This impact was factored into the guidance we provided in February, but I wanted to point it out since the swap expirations aren’t exactly aligned with the underlying debt maturities. Thanks again for joining our call today. Let’s now turn it back to the Operator to take your questions. Operator?

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question today is from the line of Samir Khanal with Evercore ISI. Please proceed with your questions.

Samir Khanal: Hey, Dave. Can I ask you to give more call around April? I know, I believe you said move-in rates were down 14% in the first quarter. Maybe give us an idea of kind of what you’re seeing in April so far.

Dave Cramer: Yeah. Samir, thanks for joining our call today. Certainly, April, we — I saw another positive net move-in activity in the month of April, which we were pleased with. We were able to generate the activity at the top of the funnel. We certainly are in a very competitive, most of our market’s in a pretty competitive market around street rate or asking rent to get started. And so I would tell you April got slightly worse than where the quarter finished. It wasn’t a large number, but it got slightly worse as far as street rate to street rate and move-in rate to move-in rate. So we saw a decline in both.

Brandon Togashi: Samir, this is Brandon. On the year-over-year move-in rate worsening that Dave’s referring to, that’s in part because last year we moved rates up some in April and so that’s also affecting that comp.

Samir Khanal: Okay. Got it. And I guess on the transaction side and it sounds like you have some opportunities on the acquisition front, but last quarter you were active on the sales front of the non-core assets. Is there more — like, is there more in that bucket of non-core at this point or is that pretty much done you think?

Brandon Togashi: Yeah. I think we’ll continue to look at our portfolio and scrub through the portfolio. We did the large portion of the asset sales last year in that tranche we worked through and we were pleased with that activity. I know we’re still scrubbing through, particular markets and particular assets and I think that’ll be a part of our program as we go forward in our future, as we look at optimizing our efficiencies and optimizing our portfolio. So I think you could see sales in the future. I don’t think you’re going to see the large chunks that we’ve done recently. I think we’re shifting our focus to looking for opportunities and when opportunities persist or present themselves, we’ll go out and look to start acquiring properties.

Samir Khanal: Okay. Thank you.

Dave Cramer: Thank you.

Operator: Our next question is from the line of Jeff Spector with Bank of America. Please proceed with your questions.

Dan Byun: Hello. This is Dan Byun on for Jeff. Thanks for having me. When it comes to allocating capital, how are you thinking about leverage versus buybacks?

Brandon Togashi: Yeah. Dan, I’ll take that. This is Brandon. So, look, we completed the $275 million share repurchase program that we mentioned in the earlier remarks and also the details in our release, and also as mentioned, pretty light on the acquisition volume. Everything we’ve done over the past few quarters, very pleased with accomplishing what we set out to do. Leverage in line with our targeted range of 5.5 times to 6.5 times. So what it does right now is it really positions us with the majority of our revolver available to us to take advantage of some of those opportunities that Dave referred to earlier. No different than what we talked about in our February call. I think if there’s a slight bias, it’ll be to deploy capital through the joint venture platform and that allows us to obviously do that in a capital lightweight, manage leverage and put to work some of that money that we worked hard to get ready with our JV partners.

Dan Byun: Thank you. And then just to follow up on leverage, could you provide your rationale behind including the hypothetical liquidation at book value for your 2024 JV to adjust EBITDA?

Brandon Togashi: Yeah. Good question and good observation. That was a new thing this quarter. So that joint venture, that’s the one that we put the 56 assets into. I would tell you the arrangement there is quite similar to the existing two joint ventures we have and that we’re 25% money partner managing the assets. However, the one nuance is there is an arrangement where based on certain performance metrics, the split of cash may be something different than 75-25. In some cases, we may get outside share. In other cases, our partner may. That drives us into the term you used, a GAAP-specific methodology for allocating earnings and we’re basically removing the effect of that and just showing a more straightforward 75-25 split.

Dan Byun: Awesome. Thanks for your time.

Brandon Togashi: Sure. Thanks.

Dave Cramer: Thanks.

Operator: Our next question is from the line of Michael Goldsmith with UBS. Please proceed with your questions.

Michael Goldsmith: Good afternoon. Thanks a lot for taking my questions. We’ve heard from some of your peers that a number of markets are starting to bottom out and reaccelerate. Are you seeing that across your portfolio? Maybe what percentage of your markets are accelerating or any specific markets to call out? Thanks.

Dave Cramer: Yeah. Michael, thanks for the question. Thanks for being here. I think as we think about it, we believe that the first half of our year was going to be the toughest part of our year, as we think particularly from a year-over-year comp. If we look sequentially, we’re happy that we had the move-in volume and the net rental activity that we had over the last three months and it was tougher sledding, I would tell you, in the Southeast, Florida, some of the Sunbelt markets, Phoenix, we mentioned, we mentioned Sarasota, Las Vegas. Those markets have been slower to respond, and those markets are also facing supply, like markets like Atlanta as well. And so I think as you look at it and look — as we look at some of those markets, the markets that have the most supply are slower to recover, but we’ve had good success in the Midwest.

We’ve had good success through the Texas markets, as we call that, I think we call that Corpus Christi in our opening remarks. And so, those, I think, did not also have some of the pandemic highs and they’ve been a little bit more stable, I think, as we went through this last cycle, and those are performing well for us. But again, I think, more of that, some of that Sunbelt exposures with the housing and muted transition and some of the other factors that are going on are going to be a little bit slower for us to recover.

Michael Goldsmith: Thanks for that, Dave. And then my follow-up is, you did a number of transactions at the start of the year with the sale and then the sale to the JV, it provided an influx of capital, but with the transaction market seemingly paused for the time being, how are you thinking about redeploying these proceeds and when do you think you can put them to work? Thanks.

Dave Cramer: Yeah. Good question. I touched on a little bit in the opening remarks. We do have — we have $25 million under contract right now in existing markets where we’re adding properties to our portfolio that will certainly help us in our efficiencies and the way we operate and scale and density and really things that we’re looking to drive in those markets. We have about $200 million that we’re in negotiations with right now. And so I would tell you, we’re starting to find opportunities that we like, and we thought for sure, as we looked at this year, that the back half of the year, we continue to see more opportunities. I think the fact that we’ve found some opportunities earlier in the year is a positive sign for us. And again, these are in markets that we operate and have great scale in and have great efficiency in and we are a good logical buyer for these properties.

Michael Goldsmith: Thank you.

Operator: Our next question is from the line of Juan Sanabria with BMO Capital Markets. Please proceed with your questions.

Juan Sanabria: Hi. I just wanted to continue with the same line of questioning with regards to acquisitions. I guess, where are you — are your targeted yields or cap rates and do you think that would be indicative kind of the current market for your types of assets and this is a subset of that. Should we assume or not that you re-up buyback now that it’s been fully depleted?

Dave Cramer: I’ll jump in and maybe Brandon finishes on this. I think as we look at assets that we’re looking to purchase, we’re targeting mid-6 is probably a range that we’re looking at today. Obviously, each property one, when you start talking cap rate, it — where is the property and how old is it? How seasoned is it? What’s the opportunity? Is there a value add? Is there a component of management from who you’re buying it for, where you think you may have a better opportunity versus you would on a different type of property or a different owner? And so I think it’s hard to really pin down cap rates, but we certainly internally have been modeling around that mid-6 range. As you remember, the assets we sold were towards the 6 cap itself and so we are certainly thinking redeploying this capital when we sold it to 6 and redeploying it to 6.5 makes a lot of sense to us and we get some growth opportunity on these assets that we’re buying.

As far as the share, we were able to obviously fulfill the current authorization on our share repurchase program. I think that share repurchase is part of our investment activity. I think that we look at several ways to deploy capital from this company and buying our shares back makes sense and so we don’t have anything authorized at this time, but again, I think, we would use that as a tool in our investment opportunities if we thought it was appropriate.

Brandon Togashi: And Juan, this is Brandon, I’ll just jump in. So the other thing I would comment on the share repurchase is just to my earlier remarks about leverage. I mean, we’ll obviously do everything that we’re talking about here, capital deployment, acquisitions, repurchases and maintain the range of comfort five and a 5.5 times to 6.5 times on that EBITDA that we’ve had for a long time now and are in currently. And then the only other thing I would add to Dave’s remarks is just on the year one yield and acquisitions. Also to my earlier point about some bias towards using those JVs, that gives us some management fees and allows us to stretch on deals that might be on the lower end of the yield target.

Juan Sanabria: Great. Thanks. And then just on the slope of seasonality, both in occupancy and rate, could you just comment on how that’s trending? I mean, it seems like rate maybe is disappointing. You called out a tough comp from the increase you saw last April. So just curious on your commentary there and how that stacks up relative to your initial thoughts?

Dave Cramer: Yeah. I think what we’re trying to balance and that — we always talk about. We’re solving the revenue and so occupancy is a piece of that, asking rate is a piece of that, discount is a piece of that. What type of customer we’re attracting, what type of unit we’re renting? It’s hard to have a global comment to that because there’s so many things that we’re looking at as we work hard and navigate what we’re trying to do. But what I would tell you is the reason we’re being a little more sharp on rate. It’s a competitive environment. But what we’re finding and the team has done a good job finding, is conversion rate. And that’s what we’re really looking at as far as what’s coming through our opportunities and how we’re converting those opportunities into rentals.

And so from the seasonal profit in February to where we finished in April, we were very pleased with the rental activity and what we’re able to achieve and some of that came at a little bit sharper price point than maybe we would have wanted. I can tell you we’re backing that up with the ECRI program, which is stronger than ever and our ability to really work through our existing tenant base. And so we’re looking at the offset of what we have to give maybe on an upfront rate or an upfront discount and how we make it up quicker in the ECRI cycle.

Juan Sanabria: Thanks, Dave.

Dave Cramer: Yeah. Thank you.

Operator: Our next question is from the line of Eric Wolfe with Citi. Pleased proceed with your question.

Eric Wolfe: Yeah. I just wanted to follow up on your last answer there. I mean, last quarter, you talked about the occupancy-based models and you were just talking about a second ago. I was just wondering how that testing has gone thus far and is it providing any type of outperformance versus comparable areas of your portfolio?

Dave Cramer: Yeah. Thanks for joining. Good question. We are seeing success in areas and it’s not — again, that’s the advantage of testing, and again, as we talk about our business unit size, it goes down to the unit size. And so, yes, we’ve seen some success. We have expanded the program in areas that we thought we would have success in. I can tell you we’ve had some areas where it was not successful and we pulled right back and said that tested did not work for us. But I would tell you as a whole, we — as around the commentary and being a little sharper in pricing, we have found activity we like and so we’re expanding the program and that’s put a little bit of pressure on the street rate for us.

Eric Wolfe: Got it. And your occupancy came a bit this quarter, sounds like a trough in February. I was just wondering in the typical year sort of what you would expect in terms of occupancy increases in the second quarter into the third quarter, and then sort of what’s baked into your guidance for this year?

Brandon Togashi: Eric, yeah. It’s Brandon. I mean, it wouldn’t be uncommon for us to gain 250 basis points to some years 350 basis points from the valley to the peak. What was baked into guidance for this year at our midpoint was really more like flattish occupancy as we went. I mean, maybe a little bit of seasonal uptick in the spring and summer, but by and large, sequentially flat for most of the year. And what that means on a year-over-year basis is that, as you saw in our first quarter numbers, you’re starting off 350 basis points, 380 basis points negative over prior year, but the comp gets easier in the back half. So that gap narrows as you go throughout the year.

Dave Cramer: I think I would add to that, to Brandon’s point, we’re also not very assertive on rent growth either. And so, as we’re testing these models, anything we’re trying to trade off on rent, we’re certainly trying to pick back up an occupancy. And so what moves that initial guidance to the occupancy level you’re talking about around, if we move the occupancy number up and we have to give a little bit on street rate, that’s the analysis we’re trying to find.

Brandon Togashi: Right. And the thesis on the occupancy, Eric, was really just expecting, like, we experienced last year, more muted demand related to housing, and so far, that’s played out. I mean, nothing wildly better or worse than how we thought about things back in February.

Eric Wolfe: That’s helpful. Thank you.

Dave Cramer: Yeah. Thank you.

Operator: Our next question is from the line of Todd Thomas with KeyBanc Capital Markets. Please proceed with your questions.

Todd Thomas: Hi. Thanks. First, just a quick follow-up. So 86% at the end of April, talking about the comps getting a little easier. Did — sorry if I missed it, but what’s that look like on a year-over-year basis? Has the gap continued to narrow?

Dave Cramer: It stayed fairly flat in April, Todd. As — the hard part about it, when you look at it a month — that monthly snapshot, we were talking earlier this week, there was five Saturdays in April last year. There’s four Saturdays this year, five Mondays, and moving this stuff around and so you start talking about it. It’s really, we have to look at through the second quarter before we really know the amount of occupancy gain and the amount of momentum we’re picking up. We did see rental activity. We’re happy with April. But again, there is some noise around the moving pieces of rental days in there.