Q3 2019 Earnings Call
Greetings and welcome to the National storage affiliates third quarter 2019 conference call. At this time, all participants are in listen only mode.
A brief question answer session will follow the formal presentation. If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
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. Hoagland you may begin.
Good afternoon, or good morning, depending on which side of the country you're on.
It's a beautiful day here in Colorado Snow. We've received this week is a good reminder to retrieve the winter gear from your storage units and replace it without a season items.
We'd like to thank you for joining us today for the third quarter 2019 earnings conference call of National storage affiliates Trust. In addition to the press release distributed yesterday, we filed an 8-K with assay see contained in our supplemental package with additional detail on our results, which may be sound and the investor.
Relations section on our website at national storage affiliates Dot com.
On today's call management's prepared remarks, and the answers to your questions may contain forward looking statements that are subject to risks and uncertainties.
The company cautions that actual results may differ materially from those projected in any forward looking statement.
Additional detail please refer to our public filings with the FCC.
We also encourage listeners to review the definitions and reconciliations of non-GAAP financial measures such as.
Oh.
Oh and net operating income contained in the supplemental information package.
Today's conference call. This hosted by National storage affiliates, Chairman and Chief Executive Officer, Arlon Nordic and.
President and Chief Financial Officer, Tamra Fischer, Chief operating Officer, Steve Treadwell, Chief Accounting Officer brand into Yashi <unk>.
Following prepared remarks management will accept questions from registered financial analyst.
I'll now turn the call overtime.
Thanks, George and thank you all for joining our call today.
Please to report that we continued to lead our sector in virtually all key metrics.
Including year over year same store revenue in Hawaii, M. core FFO per share growth.
So the stated by our differentiated pro structure and geographically diversified portfolio.
As a result, we beat our current quarter expectations and they've raised our guidance for the remainder of the year.
On the other hand, as we mentioned on our previous earnings calls.
Yeah, well tougher comps and greater impact from new supply in our markets in the back half a year and that's playing out just as we thought.
Approximately 40% of our portfolio is being impacted by new supply within a five mile radius.
From 39% last quarter.
And again this supply is predominantly impacting stores in the top 50 M. assays.
However, we are seeing signs that the development pipelines in markets like Portland, Dallas, and Austin appear to have Pete.
Which leads us to believe that new deliveries and 2020 will decline from 2019 levels.
Fundamentally we're not seeing any softness in demand as the consumer remains healthy.
In addition, as we discussed on our last call.
That equity interest in self storage properties continues to increase as experienced by the enormous amount of equity capital competing to invest in self storage.
Having historically low cap rates.
As a result, we've lost out on a handful of deals which have done at prices that leave us scratching our heads a bit.
Given the stuff acquisition environment I'd like to highlight a few points.
First let's say remains committed the disciplined underwriting we will not grow just for growth say.
We invested $36 million in six properties this quarter, bringing year to date acquisitions to $416 million.
At the same time, we've passed on a number of deals where the pricing didn't make sense and wouldn't have been accretive and I say shareholders.
Second keep in mind, the timing of acquisitions as lumpy, we enjoyed robust acquisition volume in the first half was 2019, we knew that our acquisition activity would be frontend loaded.
So our pace in the back half a year is inline with our expectations.
On the West we continued to be active in underwriting deals and remain pleased with how proactive our pros have been and bringing potential deals to the table.
Third we're confident we'll generate solid acquisition volumes going forward given our for acquisition drivers, which are first. The addition of new pros and we added two pros earlier this year.
Second our captive pipeline, which totals over 100 stores valued at over $1 billion.
In addition, we drive much of our growth by buying third party acquisitions from individual sellers.
And finally, new joint ventures, as well as the future opportunity by out our current JV partners, which is currently valued at over one and a half billion dollars.
Once again I'm very pleased with our strong quarter and we remain confident that acquisitions will continue to be a substantial driver of accretive AFFO per share growth in the future.
I'll now turn the call over to Tam.
Thanks, Harlan Oh first spend a few minutes on fundamental.
On average fundamentals in our portfolio remain healthy we acknowledge the cumulative impact from new supply is weighing on street rates and has driven intense competition on the internet marketing front.
Well, we're becoming more efficient with our overall marketing spend we've seen the need to step up our efforts in certain markets and our spend this quarter was up 12% compared to Q3 last year.
Meanwhile, we continue to push mid to high single digit rent increases to in place customers, which is currently a key driver of our revenue growth.
Occupancy is up year over year and all those street rates were negative I won the 2% in the third quarter that represents a slight improvement from the negative 3% to 4% we saw earlier this year.
So far in the fourth quarter Street rates continue to move into right direction.
Then volumes were down slightly on the quarter, partially offset I move outs that were also down.
Discounting is about flat year over year and as we've mentioned average length of stay is steadily increasing and is now over 15 month.
We expect the strength of our pro structure combined with our evolving revenue management and digital marketing platform will continue to drive operational upside.
Now, let me comment on a few specific market.
Our leading I'm essays in terms of same store revenue growth include Riverside, San Bernardino Atlanta in Las Vegas, where demand growth has exceeded supply growth.
And in mind that storage is a local game. So despite seeing new supply on an M. A C level our assets maybe concentrated in areas that are more or less impacted by the supply.
Lagging markets in our portfolio included Portland, Dallas in Tulsa, which continue to feel the headwinds from elevated new supply.
So seeing increasing pressure from new supply in West Florida.
Worth, noting all of our top 10, M. essays generated positive same store revenue and then a wide growth in the third quarter.
Well the operating environment is no doubt challenging due to elevated new supply. We continue to believe will deliver sector leading growth in same store NOI in core AFFO per share.
I'll now turn the call over to Brandon to address third quarter results recent balance sheet activity and guidance.
Thank you Tammy.
Yesterday afternoon, we reported solid results for the third quarter. The core AFFO per share 40 cents, which represents an increase of 11.1% over the prior year period.
This growth was fueled by a combination of healthy same store NOI performance strong year to date acquisition volume increased fees from our JV platform.
For the third quarter same store NOI increased by 4.2% over prior year, driven by 3.7% growth in same store revenues and 2.7% growth and property operating expenses.
Our rate increases to existing tenants drove a 3.3% increase in average annualized rent per square foot.
In same store average occupancy increased 30 basis points, the 90.2% during the quarter.
Regarding same store opex growth for the quarter. The two largest expense categories were well controlled with property taxes up 3.5% year over year, which was lower than expected and personnel expenses up 3.1% year over year.
Repairs and maintenance costs increased 9.2%, mostly due to timing and marketing costs increased 12% over prior year.
These increases were partially offset by a decrease in utilities and insurance costs.
We expect overall expenses to tick up in the fourth quarter. However, property taxes are coming in lower than we had previously projected which is a key driver of the reduced opex guidance.
Now turning to the balance sheet.
As we noted on last quarter's call. We successfully completed her inaugural private placement transaction during the third quarter, which funded on August thirtyth.
We also completed the recast of our credit facility, increasing the borrowing capacity in lowering the cost.
The details of these transactions are in the press release.
Our balance sheet is very well positioned with a weighted average cost of that at quarter end of 3.5%.
With all of our outstanding debt currently fixed rate or swapped to fixed our weighted average maturity is 6.2 years and our net debt to EBITDA ratio was 5.7 times at the end of third quarter toward the lower end of our target range, five and a half the six and a half times.
With only a nominal amount of that maturing between now through 2022, and the full availability of our revolver, we have ample capacity and flexibility to execute our acquisition strategy.
Now moving on to guidance.
We're pleased by our third quarter performance and expect same store operating expense growth to remain muted for the remainder of the year.
Property taxes have been lower than expected and our pros have done a good job managing advertising and personnel expenses.
We expect revenue growth to continue to moderate in the fourth quarter, primarily due to tougher comps and the cumulative impact of new supply.
Taking all this into consideration we've updated our full year 2019 guidance as follows.
We project for your same store revenue growth in the range of three and a half the 4% which is unchanged. However, we're confident in achieving the top half of that range. We lowered the midpoint of same store operating expense growth by 50 basis points the 2.5%.
And we now project the same store NOI growth midpoint afford a half percent an increase of 50 basis points.
We also narrowed our full year 2019 wholly owned acquisition guidance with the midpoint remaining $450 million.
Finally, we're also increasing our guidance for full year 2019 core AFFO per share to a range of $1.52 to $1.54 up from our previous range of $1.51 to $1.54.
These updated assumptions are outlined in our earnings release.
Thanks again for joining our call today, we'll now turn the call back to the operator to take your questions operator.
Thank you.
At this time will it be conducting a question and answer session.
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Our first question comes from Smedes Rose with Citi. Please state your question.
Hi, Thank you.
I wanted to just follow up on your remarks, where you talked about sector leading.
Oh I growth same store NOI growth.
So I mean is it your view that and if they can kind of maintain the sort of similar spreads. If you will to same store NOI in 2022, the other public storage completes that you've seen across the course of this year.
Hi, Smedes. This is arlon I would say that we couldn't necessarily maintained the same spreads from the standpoint, you know a lot of our peers are getting close to zero and we are seeing slight deceleration.
I'm very confident we'll continue to have the highest same store NOI growth in the sector.
And that's really because of a couple of reasons. One is the fact that our markets. We have a lot more of our stores in the smaller m. assays, where we see significantly less a new supply competition and the second is that frankly, we've been at the game a lot shorter so we're still rolling out a lot of a new.
Platform tools and refining those platform tools.
A lot of our peers have been doing for a lot longer than we haven't so we have that ability to keep honing the the upside in the properties.
Okay. Thank you and then you just you mentioned steep competition.
Two for acquisitions, I think last quarter, you talked about six in the quarter to 6.5% cap rates for 'em acquisition thought you were able to complete or you still able to buy in that range and maybe just some commentary around what you're seeing overall in terms of pricing and kind of the quality of the products pets.
Sure that's coming to market a fuel.
Yeah, I would say we cannot buy at that same range. The it has come down.
25 to 50 basis points in terms of the cap rates for the same assets the quality of assets that we see is is pretty comparable with what we have seen a and there are some large portfolios out there that have come up as well, although a lot of those.
How the non stabilized properties and that is not a focus at N.S. say, we we try to focus on buying stabilized properties because our experience is that in the high supply markets the risk level of the non stabilized assets is is.
Substantially greater and then my experience has not been worse.
The <unk> the price the risk is just too great. So so we've stayed away from from any of the CFO deals and and done very small number in the non stabilized assets.
Okay I appreciate it thanks.
Thank you.
Our next question comes from Todd Thomas with Keybanc capital markets. Please state your question.
Hi, Thanks, good good afternoon.
Arland your comments about development activity, specifically in the Portland market I think you commented that you're you're encouraged you see some activity there, peaking.
Which I guess as future activities permitting I suppose but given how many deliveries are there have been in recent quarters and sort of whats in the pipeline here to be delivered near term how would you expect rents and occupancy to trend.
In that market over the next several quarters.
Well definitely Portland is going to continue to be a I'll call. It a flat market. Its it's challenging to just maintain occupancy and and revenues.
In the very close to you know zero to 1% type of range. We've actually if you go back for the last four to five quarters, we've really been in that kind of level and you know we went up to 1.9% I think last quarter and down a little this quarter and before that we were around 1%.
But it's really been the zero to 1% for quite awhile and it's just this constant bombardment of new supply I think our pro there has done a really good job of competing as effectively as possible, but I think there's still excess supply there and coming even though that the ma'am there's great. It's.
Very good man market you just can't build eight years worth of supply and think it's going to fill up overnight. So this has got to be a long process, but it won't though hugely NIAGEN it'll it'll just stay pretty close to zero inside the only thing I would add to that this is tammy.
It is that we continue to be successful and and processing.
Rate increases for our employees customers and so that's helping us kind of hold the line on a on revenues.
Okay and but.
We look at occupancy rates in that market and you know, we're looking at sort of third quarter numbers here and it's kind of trending.
Sub 85%. So we have a couple of quarters now of of occupancy loss.
During the off peak season is is it possible that we see.
Keep in see fall.
Below 80% sort of it though at the lows of the off peak season here in Portland.
That would probably be pushing out a little bit at least for our portfolio, but we will see seasonal declines as as always in the in the fourth quarter in first quarter, it's always lower than in the second and third quarter, but I don't see it going below 80% and.
Were.
We're effectively competing to keep in that you know 80 to 80.
5% range from the lowest to the highest speak I think 88 or something like that so.
Todd, it's Steve seasonal trends remain in place in Portland It.
It is not a deteriorating market per se.
It's a market, where we're going to struggle to grow but you know occupancy is frankly, holding very similar to where it was a year ago and we see the normal seasonal Q4 declining a street rates are also holding very close to where they were a year ago. So.
No I don't want to be two positive on world, but also don't want to be too negative I think the I think we're going to struggle there, but we expect to keep it above zero in terms of revenue growth.
Okay, and then a in terms of you know the acquisition environment. You know your comments around the competitive landscape for investment you discuss how you know revenue growth is sort of trending lower across the industry here and.
Sort of flattening out do you expect some of the the cap at all that's investing in the space today or looking to invest in the space.
You expect you know some of that capital to sort of step away.
You know if conditions.
Either remain challenging or grow a bit more challenging from here.
Well I would certainly say that we are seeing capital that spending towards new development is declining that is definitely true.
I haven't seen that stepping away of capital that's trying to focus on acquiring stabilized or existing assets, yet and that's why the pricing is been tight on that I think from I, our our standpoint, it's obvious that you're not going to hit the same IR ours.
If you're going to have same store revenue growth only averaging 3% of year for the industry as opposed to a few years ago. When it was running 7% or 8% of year, obviously your eye or ours are going to be lower but we are in a much lower it interest rate environment them. So.
No.
It's still very challenging.
Okay alright, thank you.
Thank you.
Our next question comes from Ronald Camden with Morgan Stanley . Please state your question.
Hey, Thanks, taking the questions. The first one was just thought out just on value and enhancing cap backs won can you just remind us a little bit what's the opportunity is there. So I, obviously I see that the spending year to date, but just trying to get a sense is that something is that 10% of the portfolio is that 20%.
The portfolio, what's the opportunity really there to drive that and what kind of returns you guys get on that.
Hey, Ron Melissa brand and I'll give you a little detail.
On a once in there currently and then Tami or Arland my remark on total opportunity.
Currently you know if we have any expansions that's going to be in that number we rely on our pros to identify those opportunities.
To bad space were to convert.
Non climate the climate controlled we also last year around this time, a announced that initiatives to do an LTV lighting project portfolio wide. So we have that rolling through the portfolio now. So those dollars are in that year to date spend you see and there's there's obviously a certain ROI threshold that we have on at a pretty.
A pretty high number on that to make the dollars makes sense. So.
So that's what's in there now I can't say that would necessarily quantified portfolio wide on a percentage basis, but the opportunities are but it's it's a continuous evaluation between us and constant communication with our pros.
And I would say as it relates to the whole portfolio.
Typically the highest returns you can have will be on doing.
Expansions of an existing site, where you've already got the land or you have land next door, you've already got the the management team and then all of that running it but of course, you've got a.
Caveat that was is this market already overbuilt.
And so I would say, we would probably limit most of those the markets in the smaller EMS sales you know from number 50 on up where we don't see nearly the number of new supply coming into the market. But then those are also our low rate markets and so you have to be you know.
Cognizant of the economics that that come into play, but usually the expansions on those make make good sense. So I wouldn't say that its.
It's more than 10% of our portfolios in terms of a potential opportunity, but it's nothing like 40 or 50% of our portfolio that has that kind of opportunity.
Great. That's helpful. At you know not to beat the acquisition questions to death, but just taking a step back obviously I'm not asking for guidance here, but when I think about the for 50 million of wholly owned.
You talked about that obviously cap rates are under pressure, there's a lot more competition.
Is that how hard is that number to make to make in a year right. So meaning like you still have started that opportunity to stay at that run rate going out 345 years. If the environment is getting so competitive or should we should we either expect that number to come down or will you guys try to sort of you know just just pay.
After the deal that you need just trying to get a sensor that.
Well our target remains that we want to continue to grow our asset base by about 10% per year, which means around $500 million of acquisitions per year and we do believe we can do that because remember that's comprised of a lot of those different categories. The.
And first of all this obviously third party acquisitions from totally independent sellers, but we've got a huge captive pipeline from our pros already that's a billion dollars that can come in over the next five six years or so we've also got the ability to add new pros, which those can bring him.
Big slugs of of properties all at one time in a you know hundred.
Hundred million to a billion dollars the that an individual procon bring in and then finally, the joint venture both new opportunities for joint ventures, as well as buying out our JV partners. So we look at this on the long term game and we see that we want to continue to grow and acquire you know.
500, plus million dollars per year on average over the next.
Five to 10 years now it's not going to be every single year that we can hit that but I do believe over the long term, we can do that because remember there's still 35000 independent mom and pop owners in the U.S. that on one to three properties. So we don't want to buy all of those properties, but we certainly would like.
The by a lot of them better in markets that are good institutional quality assets in markets, where we have a good pro presence.
Helpful. Just my last question if I look we you we've seen some of your sort of a major market peers.
A lot the sort of online marketing spend spending.
Quite significantly year over year, I guess, I guess I'm, just curious and in some of the markets that some of the major market that you overlap clearly by the portfolio does not overlap with that but just in those in those top market than the portfolio or you are you feeling more competitive pressure do you sort of feel that in the operator.
Since our or not so much.
We definitely feel a competitive pressure when it comes to paid search online marketing spend and it is definitely more pronounced in in a primary market versus a secondary or tertiary market.
All the way we've been able to mitigate it so far is simply just be more effective.
With our paid search strategies that are bidding strategies and more effective with our conversion. So we're also looking to really amp up the contribution over SCR unpaid.
Lead sources and that has helped tremendously as well so.
Yes, it's competitive yes, we will see increased spending going forward and does look like our competitors are appears or ramping down anytime soon either so it's frankly, just one of the levers you have to pull if you want to be competitive and an oversupplied market and so we we are.
Playing the game to the best for ability to keep revenues growing.
Helpful. That's all I got thanks, so much.
Thanks, Ron.
Thanks to remind everyone I'd like to ask a question press star one on your telephone keypad.
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Our next question comes from Todd Stender with Wells Fargo. Please state your question.
Hi, Thanks, a in your margins are up nicely.
But just going to get a sense of how much you're spending I guess on the marketing side, specifically in the competitive markets like Portland in Dallas, and then maybe counter to that inland Empire in Las Vegas seem to be doing well, how do you kind of balance that not overspending.
The competition, but also taking your foot off the gas and maybe you should keep it on.
Think about marketing spend at this point.
Yeah, I would say, it's it's honestly day to day in some cases, our to our in terms of how we decide whats the spend where.
We do utilize a machine learning and artificial intelligence and we let the machine helpless optimize our spend to fund the best opportunities and that can change very rapidly. So.
We're cognizant of differentials and we're focused on investing where we're going to get the best return in terms of lifetime value of the customer that we're going to acquire.
So to go into a market level discussion of what we're doing where would be inaccurate because it will change as soon as I get done.
Got it and.
And then how about just switching that this discounts.
Your occupancy is reached 90% I see you're entering kind of that the slow season now, but you also want to keep it as high as it can go into the spring leasing season.
Just for better pricing power, our any trends you can share so far into October and maybe just talk about discounting in general.
Yeah, So just kind of in general and it feels like it's been for almost two years now that we've been saying, it's basically flat year over year. It continues to be flat I think it's a tool that everyone is using we certainly use it where we think it makes sense to gain a new locked into a new signed a new lease and so we've been used.
These tools regularly where they make sense for a couple of years now and our competitors are doing the same I think in general the sector as probably largely plateaued when it comes to discounting.
Mostly because everybody is using the same type of discounts out there first month free being the most popular so I don't expect see many changes on discounting going forward I think we'll continue to see more flatness ahead and Q4's is no different so far.
Yeah, Thanks, and just finally Arlon your comments about private equity being pretty stiff competition I.
I would imagine that wouldn't impact your ability to to make in source investments within Jvs, you probably have some contracts within there, but the guidance did drop for acquisitions within JV says that just a timing issue any any color around your joint venture investments.
Yes, you're right that really is more of a timing issue. We have very good support from our JV partners and commitments from from all of them as well as ourselves that we want to continue to make investments in our existing jvs and expand those and so the timing relates to that those days.
These are very defined territories, where they make those investments and so if good investment opportunities don't come up within those territories. Then you know it just doesn't happen at that time and so we've had some deals that.
We're just overpriced and we've said we weren't going to pay that in other deals that were just outside those territories, but I'm confident we'll continue to have the JV volume of act positions in the year ahead. So.
Okay. Thank you.
Thank you Todd.
Ladies and gentlemen, there no further questions at this time I'll turn the floor back to Tomorrow Fischer for closing remarks. Thank you.
Thanks again, everyone for joining NSC third quarter 2019 earnings call. We appreciate your continued interest in and support as national storage affiliates and we look forward to seeing many of you at the upcoming Negrete conference in a couple of weeks.
Thanks.
Thank you. This concludes todays call pardon me disconnect have a good.