National Storage Affiliates Trust (NYSE:NSA) Q3 2023 Earnings Call Transcript

National Storage Affiliates Trust (NYSE:NSA) Q3 2023 Earnings Call Transcript November 2, 2023

Operator: Greetings. Welcome to the National Storage Affiliation Third Quarter 2023 Conference Call. At this time, all participants are in a 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 begin.

George Hoglund: We’d like to thank you for joining us today for the third quarter 2023 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. Please 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 may contain forward-looking statements that are subject to risks and uncertainties and represent management’s estimates as of today, November 2, 2023.

The company assumes no obligation to revise or update any forward-looking statements, 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. The third quarter was largely in line with our expectations as we continue to execute on the everyday blocking and tackling of our business. The teams did a great job navigating the dynamics of the seasonality and the competitive environment. In the back half of the year, occupancy continues to follow typical seasonal patterns and we are nearing year-over-year occupancy delta. Our consumer remains healthy and stable, allowing us to execute on our revenue management strategies. There were several positive items to highlight this quarter, including the completion of our $250 million net private placement. Our team did a great job in the timing and execution of that transaction.

Treasury rates are higher today than when we priced the offerings, so we’re pleased to have that capital raise behind us. We also continue to execute on acquisitions from our captive pipeline while our PROs continue to replenish our pipeline by making acquisitions outside of the REIT. This illustrates one of the many strengths of our PRO structure. We remain pleased with our geographic exposure and our secondary market performance. Our MSAs outside the Top 25 continue to outperform the portfolio average in revenue growth. However, we are facing near term headwinds, including high interest rates, which has muted the housing market plus slowing consumer transitions. We’re in a very competitive customer acquisition environment, which is pressuring street rates.

We have challenging comps in parts of Florida due to hurricane-driven demand last year. We’re also dealing with elevated new supply in a few select markets like Atlanta, Phoenix and Las Vegas. That said all these challenges eventually will ease, which gives me confidence in our outlook for NSA. In the meantime, we continue to focus on the things we can control. Especially our efforts in regards to people, process and platforms. Our customer acquisition teams did great job maximizing rental conversions by adjusting marketing spend in front-end pricing. Our revenue management team continues to utilize improved AI technology to maximize our ECRI program. I’m confident that the investments in technology that, we’re making today will continue to enhance our results going forward.

We’re also encouraged by the progress to-date around our strategic dialog involving overall portfolio optimization and we’re generating equity capital through programmatic joint ventures, non-core asset sales and portfolio recapitalizations. We expect to provide an update on these initiatives over the next few quarters. I think it’s important not to lose sight of the long-term attractiveness of this sector and the positive attributes that will benefit us going forward. Few things to keep in mind, the new supply outlook is favorable. In our markets, deliveries are expected to drop by over 20% by 2025. The consumer remains healthy and stable. Our consumer length of stay remains well above pre-pandemic levels, M&A activity and bad debt expense remain in line with long-term averages.

Technology initiatives will continue to improve our ability to attract new customers, to enhance our revenue management strategies, allowing us to react quickly to changing environments. We believe NSA is well positioned within this sector, to have a strong performance in the future. As I reflect on the sector’s strong performance over the last five years, I want to point out that, during that timeframe, our average same-store NOI growth was over 9%. And core FFO per share increased 86%, both are very strong results. 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 $0.67 for the third quarter of 2023. This represents a decrease of 6.9% over the prior year period. The year-over-year decline despite 3.9% growth in adjusted EBITDA was due primarily to elevated interest expense as same-store NOI growth was essentially flat declining just 10 basis points. We delivered positive revenue growth of 1.1% on a same-store basis, driven by growth in contract rate of approximately 5% partially offset by a 400 basis point year-over-year decline in average occupancy during the quarter. Occupancy ended the quarter at 88.5% down 150 basis points from Q2 and down 360 basis points year-over-year. Similarly, October occupancy finished at 87.4%, which is also 360 basis points below last year.

Expense growth in the third quarter was 4.2%. Payroll declined 4.7% from the prior year period while property taxes were down 2.2%. These cost savings were offset by marketing expenses that remain elevated due to increased competition for customers and a tough comp. As well as insurance expense, which will remain elevated due to the policy renewal we have on April 1. We will continue to focus on minimizing our controllable expenses, where we can. On the acquisitions front, during the quarter and through October, we acquired four facilities totaling $55 million mostly out of our captive pipeline. In the near term, as Dave alluded to, we are focused on optimizing our portfolio and will remain patient in regards to acquisitions. Turning to the balance sheet.

During the third quarter, we repurchased 6.4 million common shares for $213 million. We’re encouraged by the volume of execution we were able to achieve under the repurchase plan our Board established last year. We are confident in the long-term outlook for NSA and believe, the current trading levels represent a very attractive investment opportunity. Subsequent to quarter end, we issued $250 million of senior unsecured notes across four tranches in a private placement with a weighted average coupon of 6.58% and a weighted average maturity of 5.8 years. We are pleased to have completed this transaction prior to the recent increase in treasury yields, which were approximately 40 to 50 basis points higher than when we priced our deal. Today, approximately 18% of total debt is variable rate, mostly related to our revolver.

Going forward, we will take further steps to free up some capacity on our line of credit, which will naturally reduce our floating rate exposure. At quarter end, our leverage was 6.3 times net debt to EBITDA, up slightly from 6.1 times at the end of the second quarter and within our target range of 5.5 times to 6.5 times. Now moving on to guidance. Results for Q3 were generally consistent with our expectations and performance in October continues to track in line as well. As such, we maintained our full year guidance ranges for same-store performance in core FFO per share. The midpoints of our guidance ranges as outlined in the earnings release are as follows: full year same-store revenue growth of 2.13%. Same-store operating expense growth of 5.13%.

Same-store NOI growth of 1% and core FFO per share of $2.66. Our guidance is based on a continuation of normal seasonality, which would include a modest amount of downward movement in occupancy and street rates for the balance of the year. At the midpoint of guidance, our same-store revenue growth in the fourth quarter would be negative year-over-year. While this is the result of near-term headwinds and coming off the record performance over the past few years, I’ll echo what Dave emphasized in his remarks. Self-storage is a great property type that has proven its resilience over time with needs base demand and the ability of operators to be nimble with revenue management strategies. 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 is from Michael Goldsmith with UBS. Please proceed.

Michael Goldsmith: Good afternoon. Thanks a lot for taking my question. It seems as though the sequential deceleration in operating metrics was more modest than they’ve been over the last couple of quarters. So is that a function of the environment improving slightly, is that some of the larger steps you’ve had, some of the larger step downs in the past – the comparisons are getting easier? And then do you think the trend going forward should kind of continue to be more flattish as you’ve moved past – some of the worst of it? Thanks.

Dave Cramer: Yes thanks, Michael. It’s Dave, thanks for the question. Thanks for being on the call. I think you’re right in how you are looking at it. Our toughest comps are behind us as far as you know year-over-year street rate and year-over-year occupancy. As we go through, as we really came through the third quarter, September was really kind of the peak of the pinnacle of those high points. And so as we head into the fourth quarter, you’ll see us have, a little bit easier comps and we’re starting also to level out a little bit on street rate in a lot of our markets and a little less volatility around street rates in some of our market. So, we’re having in little easier comp in the fourth quarter, those spreads will tighten year-over-year and that’s due to the fact that last year we held on a little longer on lowering our street rates – really in the third quarter when we had the movement around street rates.

And you know, the teams have done a good job really looking at how do we you know revenue management practices and how we’re really working with our existing tenant base and really looking at how we’re putting the customers that are with us today. We’ve had really good success around some of the technology platforms that we’ve improved and some execution around that existing customer base that allowing us to really work on what we have. Certainly today, there is still you know some pressure around some markets where we have supply. There’s markets where street rates have been more volatile, because of that supply and the demand ratios. And so, we’ve had to react to that. But on a whole, our portfolio, we believe with the diversification and where it’s located at, we’ve got some pretty good success moderating some of that – some of the effects of rate competition and supply and those things.

Michael Goldsmith: Thanks. And then my follow-up question is related to the share repurchases. Can you talk a little about the funding source for these and – is this a true you know invest in the shares buying back just given where they’re priced. Are these offset some of the OP units you issued and then would you consider to – would you consider continuing to use this lever going forward? Thanks.

Dave Cramer: Yes, so I’ll start and Brandon can jump in here. And again, thanks for the question. Our belief in our shares and our belief in our company and our belief in adding shareholder value, we think our stock is a great purchase, where it’s currently trading at and where it’s valued at today. We think purchasing our stock is a great opportunity for us and we were happy to fulfill what the Board has approved for us over a year ago. You know pretty much fulfill that commitment to repurchase our stock back, from our perspective and we look at where we’re at with our strategic initiatives and what we’re trying to accomplish in the future. We talked about on our last call is, we’re looking at initiatives around our portfolio and optimizing our portfolio and if you think about part of that portfolio optimization, we’re evaluating sale of non-core, non-strategic assets, we’re evaluating some portfolio opportunities around JVs where you might recapitalize some stores into a JV.

And so, the team has done a really good job. And we’ve been very thoughtful about studying our portfolio top to bottom and really thinking about where we want to operate, how we want to operate and where maybe some locations don’t fit into that strategy going forward. And the team has done a good job identifying assets that would fit in one of these categories, whether it’d be some kind of recapitalization, or sale and we’re vigorously working on those initiatives. I don’t have much more to report as far as definitive pieces of that, but I can tell you, I’ve been pleased with the progress we’ve made. The team has done a great job identifying and working the plan. And so I’m pleased from that aspect of it.

Brandon Togashi: Yes and Michael, this is Brandon. I mean the only other thing I would add is on the repurchases, it’s not necessarily the offset, as you said in your question. The OP equity we’ve issued this year, I mean, really what we’ve issued this year has been weighted towards our preferred equity, preferred OP units and the subordinated equity with our PROs. Now having said that, we grew a lot and very quickly in ’21, early parts of ’22. And so some of the equity, common equity we issued during that time was at higher levels than what we can repurchase that at now. So that’s certainly part of the math and the obvious benefit that goes into it. But that’s just the only other thing I would say, in response to your question. And I think what’s important in terms of what Dave spoke to, is that there is a multi-quarter execution to our strategy here. So what you saw in the third quarter, we’re very pleased with, but more to come in the next couple of quarters.

Michael Goldsmith: Thank you very much. Good luck in the fourth quarter.

Brandon Togashi: Thanks, Michael.

Operator: Our next question is from Juan Sanabria with BMO Capital Markets. Please proceed.

Juan Sanabria: Good morning, thanks for the time. Just hoping, you could talk a little bit about the street rate trends throughout the third quarter and you can provide an update for how October trended on a year-over-year basis. And as part of that where you feel most comfortable within the same store range. It’s still pretty wide to cater. We only have a quarter left so to give any kind of – include that in the answer that would be fantastic?

Brandon Togashi: Yes. Juan, this is Brandon. So street rates year-over-year as we finish the third quarter were similar to the update that we gave for August and we talked about those being 15% down year-over-year. And so that held pretty steady on a year-over-year basis in September. That delta is compressed a little bit and that goes to what Dave said earlier that last year we started to move rates down really in late Q3 and early Q4. And so we’re hitting that comp that gets slightly easier. But there’s still, there’s still negative double-digits. And then in terms of the guidance, you’re right, the ranges we kind of kept it where we revised too in August. The thought process there was just, whenever we’ve revised guidance in the past in August, we don’t spend a whole lot of time micro-tweaking it in November.

And frankly, this year has been more difficult to predict and you saw that based on you know what we introduced in February. And what we had to revise in August. So, I think going forward, including when we introduced guidance for ’24 in February, it’s possible that our ranges then are a little wider than what we’ve historically introduced to start the year. Where we’re most comfortable is certainly around the midpoint of the range. I mean the – on revenue, for example, at the high end of our full year guide, it would imply a fourth quarter that’s accelerating from the 1.1% rev growth that we had in third quarter. And I would characterize that as unlikely. So I would guide you to really the midpoint of the range on all fronts, rev, you know, OpEx and NOI on the same-store pool.