Q2 2022 National Storage Affiliates Trust Earnings Call
Greetings and welcome to the National storage affiliates second quarter 2022 conference call.
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It is now my pleasure to introduce your host George Hoglund, Vice President of Investor Relations for National storage affiliates.
Mr. Hogan you may begin.
We'd like to thank you for joining us today for the second quarter 2022 earnings conference call of National storage affiliates Trust on the line with me here today are Nsa's CEO , Tamara Fischer, President and C. L O, Dave Cramer and CFO brand into Gotcha.
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 national storage affiliates dotcom.
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 managements estimates as of today August four 2022.
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.
Company cautions that actual results may differ materially from those projected in any forward looking statements.
For additional detail 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 F. F. O Corp. S O and net operating income contained in the supplemental information report package available in the Investor Relations section on our website and in our SEC filings I will now turn the call over to Ted.
Amy.
Thanks, George and thanks, everyone for joining our call today, we had another great quarter with growth in core F. F O per share of 29, 1% and same store NOI growth of 17, 3%.
Our results are reflective of the ongoing strength of the self storage industry, our differentiated pro structure and our exposure to secondary sunbelt and suburban markets.
Exceptional growth allowed our board to increase our dividend again in the second quarter to 55 cents per share an increase of 45% over the second quarter last year.
Overall self storage fundamentals remain very healthy as the industry is coming off historic levels of year over year growth.
The moderation in growth is largely playing out as expected this year.
The self storage sector is well positioned for today's inflationary environment given that we meet our needs based demand with average monthly rents that represent a small portion of our customers' disposable income.
Because our units are leased on a month to month basis.
You have the flexibility to quickly adjust rents according to market trends and this permits us to increase rents to offset inflationary pressures on the expense side I would add that self storage has weathered past downturns well supported by unique counter cyclical demand factors, including demand driven by household contraction.
And necessity based relocation.
Oh in the Great financial crisis self storage same store revenues saw a return to peak rate pre recession levels within two years well ahead of other property types.
Mainly given the benefits of our differentiated pro structure in our geographic exposure, we remain very confident and then S as future prospects.
Having said that the resilience of the sector and our outstanding results don't always manifest themselves in a rising share price is demonstrated by the year to date sell off.
So our board has decided to put in place a share repurchase plan to provide greater flexibility in our capital allocation strategies.
Based on our favorable outlook for NSA today's depressed stock price provides us with a compelling investment opportunity.
Turning to the acquisition environment during the second quarter, we acquired eight wholly owned properties investing $115 million at an average cap rate of five 6% and.
And as we mentioned on our last call one of our joint ventures acquired a partially stabilized seven property portfolio strategically located in the Houston MSA for approximately $208 million well.
While investor demand for self storage properties remains strong we've seen the buyer pool narrow somewhat and property sellers are becoming more realistic with respect to price expectations, given the current increasing in volatile capital environment.
We're seeing more deals re trade than we've seen in the recent past with a few deals being pulled for the time being and some buyers backing out of transactions, but not able to secure attractive financing.
Overall, we're encouraged by the number of deals coming to market and by what seems to be more realistic pricing expectations.
Subsequent to quarter end, we've acquired six properties valued at $72 million and the pipeline remains active.
The second quarter played out largely as contemplated when we raised garden guidance last quarter we.
We've maintained our full year guidance, which implies 25 per cent core F. F O per share growth at the midpoint random more elaborate further on guidance in his comments.
Now I'll turn the call over to Dave to discuss current trends in operations and talk about a couple of new strategic technology initiatives, we have underway.
Yes.
Thanks, Jeremy our healthy operating results were driven by continued strength in self storage fundamentals mine with our continually improving operating platform, which increased our same store gross margin this quarter by one 7% to 74, 1%.
Second quarter same store NOI increased 17, 3% over last year, driven by a 14, 6% revenue increase combined with a seven 6% increase in property operating expenses.
We entered the spring leasing season with healthy momentum in occupancy and rate growth. We were pleased with our ability to continue to leverage our revenue management practices are.
Our rate growth during the second quarter was strong with contact rates up almost 16% versus the same period last year.
<unk> also experienced double digit growth, averaging 80% higher than the second quarter of this year compared to a year earlier.
Focus on rent increases to in place customers hold steady and average low to mid teens.
We're pleased that the average length of stay remains stable at 60 months.
Discounting and concessions remain well below historical averages during the quarter.
Robust growth in rates was slightly offset by occupancy there was a bit lower than the previous year by the end of the quarter of course this big store philosophy, we do not manage to occupancy, but rather to optimize long term revenue growth.
Which is continuing at this record setting pace.
Same store occupancy averaged 95, 1% for the quarter down 10 basis points compared to last year. We ended the second quarter with the same store occupancy of 95, 2% down 140 basis points over the prior year and up 40 basis points sequentially from the end of the first quarter.
As we discussed on our last call last years strong comps become more challenging in the second half. So we expect our year over year contract rate growth to moderate while we expect occupancy to follow the historical seasonal trends.
The occupancy levels will likely settle into the low ninety's, which is still above historical averages.
How are the wholesale storage sector has enjoyed robust pandemic driven demand I want to take a few minutes to highlight some of our initiatives that we think will continue to support revenue growth going forward.
Our customer acquisitions team is focused on driving increased customer traffic.
And improving our CMS by building a better online leasing program to enhance the customer experience, while our call center initiatives are focused on increasing overall conversion rates.
We remain committed to our AI capabilities, which allows us to be more dynamic and maximizing revenues. We're also excited about enhancement of our machine learning capabilities as we continue to improve our front end pricing and IPR sea platforms.
A quick comment on new supply, which remains relatively muted.
Additive landscape hasn't really changed much overall, we see these somewhat muted levels of new supply coming in as a net positive.
I'll turn the call over to Brandon to provide more detail on our financial results and balance sheet activity.
Thank you Dave.
Yesterday afternoon, we reported core <unk> per share of <unk> 71 for the second quarter 2022.
Which represents an increase of 29% over the prior year period.
This continued robust year over year growth was driven by a combination of strong same store growth and our significant acquisition volume over the past four quarters.
Our second quarter results, representing a record six consecutive quarter that we achieved double digit same store NOI growth.
Additionally, approximately 30% of our wholly owned portfolio was in our non same store pool.
We encourage by the outperformance relative to underwriting for these properties, which were mostly acquired in 2020, one and will be eligible for same store inclusion beginning in 2023.
Regarding operating expenses, our second quarter growth of seven 6% reflected inflationary pressures that we're seeing across the economy.
As well as significant increases in self storage property values, neither of which are surprising.
Our second quarter growth in same store Opex is due primarily to an 11, 2% increase in property taxes, driven by our Texas, Georgia, and Indiana markets and a 17, 5% increase in utilities.
Repairs and maintenance grew 10, 2%, reflecting the increase in cost for construction labor and materials.
We were up we were able to partially offset these increases with personnel costs were in line with prior year.
Mostly attributable to greater efficiencies with staffing at our properties.
We also benefited from better pricing on our property insurance this year and marketing expenses grew a modest three 3%.
Turning to the balance sheet during the quarter, we issued $14 million of O P equity in conjunction with acquisitions.
We closed on a $285 million seven year unsecured term loan with a variable rate based on a spread this over.
The effective interest rate was 3.34% at June 30th.
Also during the quarter Kroll Bond rating agency upgraded the credit rating of our operating partnership to Triple B plus from Triple B flat.
At quarter end, our leverage was five six times net debt to EBITDA.
Toward the low end of our targeted range of five five to six five times.
We are very comfortable with our balance sheet with no maturities through the end of the year, just 22% of our principle that subject to variable rate exposure.
And $360 million of availability on our revolver at quarter end.
We're committed to maintaining a conservative leverage profile and healthy access to multiple sources of capital.
Now moving onto guidance.
Results for the second quarter were largely in line with expectations consistent with our commentary last quarter, we expect lower growth levels in the second half of the year as last year's comps become more challenging.
As such we maintained our full year 2022 guidance, which we outlined in detail in our earnings release, a few a few of the highlights include core off a full per share $2 80 to $2 85.
Which at the midpoint represents 25% growth over prior year.
Same store revenue growth of 11% to 13% and NOI growth of 14% to 16%.
Same store NOI growth is moderating from the recent record levels, but still remains well above historical averages and the pace of that moderation suggests that we are headed for a soft landing.
Again for joining our call today, let's now turn it back to the operator to take your questions operator.
Thank you.
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Our first question comes from the line of Samir Khanal with Evercore ISI. Please proceed with your question.
Hi, Good morning, everybody, Hey, Brandon maybe walk us through your your.
Functions around occupancy.
You talked a little bit about rate growth here, but you.
How are you thinking about sort of the back half of the year. How you end the year with occupancy as we start to think about 2023.
Yeah Sameer thanks for the question.
Like Dave mentioned, we expect return to seasonality so.
From right now to end of year, maybe 200 to 300 basis point deceleration sequentially on occupancy.
We see that it would have us at the end of the year.
Down from prior year about also two to 250 basis points.
Okay, and then I guess on an E C. Our eyes are you pushing rates.
To the Max do you think at this point or do you feel like that that's a that's an area of upside that we could see sort of in in the second half of this year.
Good questions Jerry it's Dave.
Certainly being very assertive still in frequency in the percentage of a rate increase in the second quarter, we actually pushed more tenants than we've had historically push and that really led to what we think was a little bit more occupancy decline and we were probably expecting you know it was early in the second quarter and the month of May is where we probably pushed the hardest and.
So we were happy with the Bush happy with the results, but it certainly created more move outs just due to the amount of tenants that we pushed rate increases too.
So as we look at the back half of the year, we're not changing our strategy. We're certainly looking at.
But where we can get sort of how we're gonna be assertive and keep on pace for <unk> and then we're also looking at street rate and discount to say is there are other levers we can look at as far as the occupancy piece of it we were pretty stingy in the second quarter around discounting and we were certainly you know from a street perspective, we grew with street rates through the second quarter as well so we're trying to balance.
All of those levers find out where we want to land, but you know in place tenant changes are still going to stay pretty assertive.
And I guess, the only thing I would add is and this is tami hi, Samir.
As Dave commented on in his in his remarks, we have historically not managed to occupancy, but rather manage to optimize revenue growth and that remains kind of a key focus for us as well.
So so far I think we're good with where we ended up at the end of the second quarter.
Got it and then I guess as a follow up I mean are you seeing any sort of shift in customer behavior.
Here are just you know I'm, giving you a little bit more caution are there markets that are slowing a bit more than you expected maybe in Portland.
Help me think through you know you went from you know raising guidance by about 500 basis points, the first quarter, which was.
You know probably the highest of all your peers, but then you know kind of held steady and too cute. So I'm just trying to walk me through kind of the no.
Ah you're thinking for it for in terms of.
Hum sort of being cautious here if that's the case.
No I think I'll start and then Brandon can Jim This is Dave.
You know from a from a consumer pattern the very top of the funnel is still very robust we're seeing lots of activity lots of opportunity. What we've seen change just a little bit in the recent couple of months, probably you really around May and June and July is the amount of touches you had to do to get the conversion. So maybe the customer if they were you know maybe it was a one one and a half times they looked at.
And they converted now maybe that's gone to two or two and a half and so we're happy with the amount of volume we're driving we're happy with a lot of touches we're getting it's costing us a little bit more and spin and the touch points around that consumer which tells us maybe they're shopping a little bit more maybe they're looking for a little bit may be more of a discount then and as I said, we were pretty stingy in the second quarter with discounts and with <unk>.
Reising, so some of that might be you know we.
Created ourselves and the fact that we weren't giving a discount but that's the one pattern you know you mentioned Portland.
Portland is really our most competitive market, we've been talking about Portland for a number of years Theres a lot of competition up there.
And a lot of competitive pressures the pandemic certainly masked a lot of those competitive pressures you know in previous months.
The really couple of things happened with US we spent the first three or four months in Portland really working on the transition of the northwest team because the pro retired and we worked through platform changes and worked through our adjustments with those changes we focused on occupancy and you can see we grew occupancy from the first of the year till now and now we're going back into Portland are really focusing on revenue and so it.
And a little bit of a transition for us and it's not just Portland that northwest market and we're working our way through it we're very comfortable with where we're headed with with particularly.
And I think the other thing is as Steve said that that was probably our most challenged market from a new supply standpoint, and we did have the benefit I guess I'd say are absorbing a lot of that new supply through the pandemic, but its still there its still something that we're keeping an eye on it and have to be aware of as we as.
We run those properties up there.
Thank you.
Excuse me I appreciate it.
Our next question comes from the line of Kevin King for Securities. Please proceed with your question.
Oh, hi, good afternoon.
Can you talk about the street rates that you saw in <unk> and the cadence of how that progressed and maybe a July update.
Yeah. Good question is Dave I used to think for joining Nick even we saw progression through the quarter and street rate. So we saw sequential growth every month.
Got it through the entire year and you know obviously with the 18% comp year over year in street rate growth. We're happy with in July we again saw sequential growth in July as well. So we're happy with where street rates are going that would also include contract. You know we saw sequential growth in our contract rates all the way through the quarter and into July so well trends happening.
We're still sort of positive rent roll up which is something we like at this point in time as well.
Quarters straight right quarter straightened him.
So just want to clarify that you I think you were talking about sequential do you have that year over year.
Yeah keep men's Brandon so so the street rates in Q2, as Dave mentioned earlier were 18% up over prior year in July that was low teens sit down a little bit from the Q2 number or street rates last year really peaked.
Right around this time of the year and then didn't grow that much sequentially.
The balance of the year, so the comp the worst part of the comp is really you know it was through now so I would expect you know if things stayed static we would have that similar.
Low double digit spread but obviously that's dependent on where street rates go from here until the end of the year.
So you are strictly for up low teens in July obviously up very strongly into Q, you're saying you have a rent roll up.
Talking about demand the top of the funnel being good maybe people shopping a little bit more.
Yeah.
That would translate into <unk>.
A little bit stronger outlook for the second half and you know I say that you know a little tongue in cheek, but obviously, you're still seeing very good growth I'm, just comparing you guys relative to some of your peers that might be showing a little bit better second half outlook.
So I'm just curious what is was what am I missing here.
I think I'll start and Brandon can jump in you know certainly we commscope.
<unk> played a piece of it but I think as we looked at the occupancy drop in the second quarter.
And as we push that that rate increase that we push our number of rates we pushed through in the month of May I think we came off a little bit more on occupancy than we were expecting I think all the rest of those fundamentals stack up well I think as we go into the third quarter, keeping we're looking at how do we continue to drive that conversion rate and drive that occupancy that occupancy rate to help us offset some.
You know some of the loss that we had typically in the second quarter you don't have that much of a decline in occupancy that we experienced this year.
Last question when you look at your rates on average and you compare it to the competitive set and you're just kind of local competitive areas where.
Our Europe , Marc are you competitive with your competitors or hum below or above.
You know we look at it at a very obviously very store level very specific but I you know we're typically in the upper third if not the right leader most of our markets around the particular store there are certain situations, where there are certain operators that are considerably above market and we havent entered to that level, yet, but we certainly are in that upper <unk>.
A lot of great.
Okay. Thank you.
Thank you.
Our next question comes from the line of Jeff Spector with Bank of America. Please proceed with your question.
Hi, Good afternoon. This is Tom on.
On for Jeff I, just wanted to ask about what you're seeing on acquisition.
Dr. Thiele flower of the past quarter and you mentioned you were encouraged by the number of deals coming into the market.
RTL traded yet you maintained the guidance range. So I just wanted to see if you're still maintaining all of the assumptions behind guidance.
Sure.
No change in your conversation with salary.
I'd say, yes that the deal flow is strong. It is solid we continue to look at every transaction I will say that that seller. It takes a while for seller pricing expectations to catch up with I guess, I'd say reality and in this environment with our I am frankly, everyone.
A higher cost of capital.
It's it's you know there's an expectation that cap rates will continue to widen and we didn't see them widened in this in the second quarter.
I would say that the buyer pool narrowed somewhat are.
We have seen some deals that we thought were done that I that that basically fell apart.
And we've seen.
Somebody else gets completely pulp, but right now we're encouraged by what we're seeing will continue to underwrite everything that that meets our primary investment criteria.
And Oh, well and well go from there I think we maintained our guidance one thing I would probably point out to you is that the $200 million JV transaction that we closed in April .
Involved about $50 million of capital deployed on our part and so when I think about total capital deployed that range of 400, and 600 million still seems still seems reasonable I think well obviously be in the range and and from my standpoint, hopefully above the midpoint or towards the top end.
And I think that the range is probably still good we do like what we're seeing and in terms of the quality of the assets and I and a revised and more realistic higher expectations.
Okay, great. Thank you and I just wanted to follow up on the earlier question on you know any kind of weakness in your secondary market.
You know is there really any signposts at all by.
Any particular regions or by cost.
Income level.
That was different this quarter versus last.
How did.
These trends for example.
Good question. This is Dave you know, we haven't seen any real discernible differences within our markets I'm you know the way, we were applying rate programs and rate changes and in collections and bad debt all seem to be pretty similar across all of our markets and across all of our stores and store types of market types.
Certainly you know bad debt will continue to rise, it's well below historic levels and I think that's important to note. It's still very tame, but you know as you get back into more normal seasonal trends and more trends that you know more.
Historical averages for our sector you know the bad debt piece will come up with the payment activities. The same the buckets of you know the level of delinquency buckets are the same so we're not seeing any change in that activity either so.
This is Brandon the only thing I would add this is not specific to the secondary markets. As you mentioned in your question, but just in terms of what we're seeing certain markets relative to others.
Going back to the question about Portland.
The deceleration from Q1 to Q2 on the growth for top line revenue. If you look at the markets, where you saw the biggest T cell Portland was one Phoenix was another Sarasota was another those are all markets, where we've talked for several quarters now about being more challenged with supply and so we had an occupancy to gain a year ago 18.
[noise] ago in those markets that was a benefit but those are also the markets that we're starting to see a little bit of the initial softness and also because we have some of that occupancy. The gain you had things in the numbers a year ago like the admin fees that are associated with the upfront leasing process, but now we're not going to have this year. So that that also plays into some of the.
The sequential growth changes.
Okay. Thanks for the color.
Yeah. Thank you. Thank you.
Our next question comes from the line of Neil Malkin with capital One Securities. Please proceed with your question.
Good afternoon, everyone and thank you for the time.
First one Tammy you know just kind of hitting on the acquisition topic.
We've heard that are two things you know one secondary tertiary markets again have redefined tertiary have have been have so have seen the most cap rate expansion at.
At the same time.
We've also heard that bigger deals bigger chunks multiple assets are having a significantly harder time lining up financing at attractive terms versus one off assets. So can you just talk about those two things and and and you know how that you know.
Is potentially a favorable setup for you just given your access to capital and.
And ability to compete where potentially you know previous.
Hereto for.
Levered buyers would be aggressive.
Sure Yeah. Thank you for the question Yeah, I'll start with that I'll start with the second part of your question.
I will say that that we have seen a levered buyers falling away somewhat and to the extent that we've seen deals either being re traded or are just coming coming apart I that that has been directly related to those.
Those those buyers who are counting on cheap debt, which is really obviously not available anymore.
As it relates to secondary market cap rates, it's always been true that those cap rates are have been wider if you've always seen a spread between the.
The cap rates, where we're pretty focused in and the secondary markets and primary markets I would say that to be honest with you I don't think that those cap rates in those markets are widening quite as much quite as fast because there because there has been a significant amount of interest and acceptance of.
Are those secondary markets in suburban certainly sunbelt markets have become more attractive over the past couple of years and so we're still seeing good solid attractive opportunities and I think that we are often considered a preferred buyer because of our access to capital and our demonstrate.
And a commitment to those secondary suburban and sunbelt markets.
Okay, and then can you just sorry, and then on the the part about difficulty getting capital for larger deals are you seeing deals.
Deals out there that are a little bit bigger I mean, it looks like you had at least one portfolio in here, but any any you know comment on.
The ability to maybe not.
Not bid, but b there just you know come in and acquire you know being all cash buyer are you know most of the cash buyer.
Despite a more difficult lending backdrop.
Yeah, sorry, if I brushed over that but but yes, I would say that that is definitely true. There. There are a handful of I'll call. It you know 100 million $200 million plus valued portfolios and we have most definitely seeing buyers, who would otherwise be extremely competitive and driving.
Prices. Some places we would never call has fallen away and in fact, we have a few examples.
I'll get into the detail, but we have a few examples of getting out of a portfolio of assets right and our bread and butter area.
Where are we thought there's no chance where it lands.
And in this thing.
And sure enough, we end up and best and final. So so I think from that standpoint, where we know that that's part of what gives us the optimism that we have oh about about our ability to hit our targets and probably better than this year in acquisitions.
Okay, Thanks, and the other one not.
Not to beat a dead horse, but trying to just understand the it looks like in terms of occupancy this quarter. As you know seasonally are historically, a accelerating quarter right and I know that the comps are tougher, but you know.
It is.
Are you seeing it's almost like normalization was pulled forward a little bit in terms of you know that that seasonality coming back in and the occupancy kind of draw.
Dropping down from.
From the elevated COVID-19 levels to something more sustainable long term I mean is it you know.
Hi.
Can you just kind of again square that with all the positive commentary you've made.
Roll ups impressive.
Yep still doing well with with street rates E. C. Our eyes, you know really strong I mean, you know it is the is the reason for the guidance not you know it is that did that kind of make the guidance you know kind of beef.
Unchanged or are you worried about that getting continuing to happen with with occupancy because it sounds like demand is not a problem, particularly in your secondary market. So is it just exercising caution in the otherwise uncertain time as we also hidden inflection and seasonality.
If you could maybe talk about the the the main driver there that'd be great.
So Neil this is Jeremy thanks for the question, but I'll start Dave will indeed will answer the substance of the question, but the one thing that I would probably point out is that is that when we updated our guidance at the end of the first quarter with our Q1 earnings release, we tried to be exceptionally realistic.
And I and and in part it at its you know a a from from my standpoint, it would be better for us if we can get back to a place where we are not updating guidance every single quarter. So we were trying to be very realistic and I and put it all out there right now on the line. So I think that we did that I think we feel good about it.
And and and so just on the guidance that that's kind of how I'd level set that Dave can certainly comment on that on the occupancy and another.
Yeah, Mark to your question Yeah. Thanks, Thanks, Neal I think.
As we said earlier, we pushed extremely hard you know.
More than two times the normal green bushes, we do normally push in the month of May for an example, and I think that actually accelerated the decline in occupancy more than we anticipated I don't think that's the seasonality shift I don't think of it you know if anything it just accelerated what would normally to your point be stronger occupancy quarter.
I think doing what we're doing which we're not backing away from we were pleased with the results. We're pleased with what are generated for US. It. Please you know where we're going with it but its certainly put a little more pressure on occupancy, which is just one of the things we focus on.
So there's a lot of things about weather, but it did put some pressure on it and so I think that's the change you saw was around you know I P. R C.
Okay.
Okay. Thank you guys.
Thank you I appreciate it.
Our next question comes from the line of Todd Thomas with Keybanc Capital markets. Please proceed with your question.
Hi, Thanks.
Good morning out there first question Tammy I just wanted to follow up on on your comments in your prepared remarks about the share buybacks in and touch on that.
In the context of acquisition opportunities, where it sounds like you know there you're still seeing some deal flow and and there is some opportunities there as well you know how would you sort of rank order those opportunities today and should we expect to see.
The company active in the market.
Repurchasing shares.
You know Todd I think it comes down to making an evaluation of all of our capital deployment opportunities.
And I it it it clearly depends.
And whether acquisitions are a better opportunity to deploy capital at a better return, creating long term value and deals that are accretive for our shareholders.
But yes, our best investment if you will is a repurchase of our shares.
I think that our board would be supportive of our going forward with that so that may not be as super satisfying answer, but I think that that it's consistent with with what we've discussed as being strategically.
Strategically our job is to invest accretively in and for the benefit of our long term value for our shareholders.
Okay and then.
And then Dave back to.
And it was sort of some of the occupancy that you maybe lost in May and June .
You know that.
That was a little bit more than expected and it sounds like it was related to.
Some of the the the.
You see our eyes or the rent increases that were implemented a little bit earlier in the year.
I understand it's about maximizing revenue not so much a focus on occupancy or rates, specifically, but just based on your comment you know I'm. Just curious if you do plan to pull back a little bit on.
Sort of the magnitude of the rate increases that you're passing through or or asking rents.
Some extent in order to maybe stimulate a little bit more demand.
I think it's a good question you know we are evaluating all of that I use the word we were stingy on discounting and really skinny on our rate and certainly as we look at the conversion ratios. We want I think we're going to focus around marketing spend will focus around discounting with focus around pricing upfront pricing.
A little more dynamic in getting the conversion ratios I don't think we're pushing away from the table on the IPR see though I think we're comfortable with our cadence we're going to couple with the frequency in the mountains. So we'll we'll focus more on the rentals as well, where we're going to focus on.
Okay, and if I can just ask one last one on Portland.
Related to you mentioned that there were some new supply.
That has impacted that market is are your comments around Portland is that due to new supply. That's been delivered more recently or is that really a little bit more around.
The supply that that was delivered pre pandemic, where there's maybe just a little bit of like a hangover in a way.
Yeah, you know where that space was absorbed somewhere quickly during the last two years, but you know maybe now it's sort of catching up a little bit is as you know operating conditions and rental activities normalizing.
I think the back half Youre right I mean, it was pre pandemic at one point in time I think we were talking about there is seven to eight years worth of oversupply in Portland and <unk>.
Certainly.
Absorb that and muted that effect of that oversupply and now now the conditions are cooling off just a little bit it's starting to show back up nothing real new as far as overbuilding, it's just pre existing stuff.
Okay, Alright, that's helpful. Thank you.
Thank you.
Our next question comes from the line of Keegan Karl with Bahrenburg. Please proceed with your question.
Hey, guys. Thanks for the time I'll be brief here just two quick ones first I apologize if I missed this but what percentage of your portfolio is currently below street rate.
About 60% of our existing tenant basis.
To your question, it's around 60%.
Hello.
Got it.
And you know I know you kind of person that's too but are you guys seeing any changes at all in customer behavior relative to your expectation.
Obviously inflation, that's a huge talking point right now I mean, how far it for you on that topic, when you're pushing rate increases just given you know the feeling financial pressure is everywhere and there could be come a point when one storage isn't top of mind as far as the necessities.
But we're certainly paying attention to what's going on with inflation and you know what's going on with our consumer shopping patterns like I stated earlier it really changes the only really change was seen as a little bit in the way. They're shopping you know, we're still happy with the amount of flow and the amount of activity, but you know I'm out of touch points has increased a little bit.
Storage ticket generally isn't a large large number and so it doesn't necessarily in the household income rise to the top of heating bills and rent and some of these other things that are going on and so historically storage hasn't been as influence on some of these inflationary times as other products have been but certainly you know something will pay attention to as we go.
Into the future and look at but at this point in time.
It hasnt really changed or shifted our mindset about how we're operating our business.
Thank you for your time guys.
Okay. Thank you.
Our next question comes from the line of Ronald Camden with Morgan Stanley . Please proceed with your question.
Hey, just a couple quick ones. The first is just looking at the guidance the implied growth rate in the second half of the year, a sort of low 8% historically, we've talked about sort of that exit growth rate at the end of the year of being a good starting point for 2023, just curious if that still makes sense, if that still applies or if theres anything different.
There's the comp whether it's the mix that we should think about is where we're thinking about the starting point for 2023.
Hey, Ronald it's Brandon. Thanks for the question I think generally that's a good approach I mean, how we're going to exit 'twenty, two and a growth rate you know thinking about that as you're starting to <unk> for 23.
Youre right about the implied growth in the back half I think you know mid eight at the midpoint closer to mid pendency.
High end of our guide.
And so certainly that that would indicate.
Situation, where we're going into 'twenty three still above the long term historical averages in terms of same store growth. The one thing that is different for us and I don't have color right now to provide you, but but can do that in November next quarter.
I mentioned in my opening remarks, we are going to have a pretty big influx on our same store pool. So the same store pool for US does go up.
Serial lanes, so that will play out in terms of where those properties are located in the growth trajectory of those properties.
Got it and then my second question is just you know going back to sort of the rate increases in may.
And pushing it really hard and then seeing sort of the occupancy.
Respond I think you you sort of mentioned that you're still pushing as hard for the rest of the year.
Just trying to get a sense of how much conservatism is baked into the guidance right because.
Yeah, if you're still pushing sort of at the same level.
Are you sort of are you expecting occupancy to normalize similarly to two seasonal patterns, but to the extent that it. It doesn't you know how much more hopkins various or the guidance at this point.
Well, Ron and I would say I mean, Dave's remarks about Q2 in May specifically you were spot on I mean, there was more of a sort of a push than in the past, but I. You know we're continuing here in Q3 and Q4 the process rate increases for in place customers Thats similar levels. Both in terms of total customer.
Or is that are receiving the increase as well as the percentage increase itself similar levels as to what we did Q1.
The majority of 'twenty, one and so that's that's all wrapped into the guidance and we're.
We're not going.
Going anything above or below I guess and so the the occupancy effect I mean, we feel like everything we're seeing occupancy levels, Dave hit on delinquencies and bad debt everything appears to be returning to more pre pandemic normal levels and so that's that's in line with what I said about occupancy you know call it.
Two to 300 or two to $2 50.
The decline from peak to trough.
I don't know if that quite answers. It gives you much else, but yeah and Tammy mentioned our guide you know were pretty realistic in May and I think we're realistic right now so I wouldn't characterize it.
Tremendous amount of conservatism necessarily.
Helpful. Thank you Yep.
Yep. Thanks Rommel.
Thank you as a reminder, if you'd like to ask a question. Please press star one on your telephone keypad.
Our next question comes from the line of Spencer Alloway with Green Street. Please proceed with your question.
Thank you.
<unk> had one bigger picture question as it relates to ancillary revenue streams and some of your peers are getting really creative you know the.
The most recent example of the car.
Barack all this quarter just curious your thoughts on diversifying the revenue stream in the mid to longer term and I realize you obviously have a very unique position in the industry, but is there any concern around Paris, gaining market share in segments of the business that my you know be small now that might matter a little bit more down the road.
Great question, and you put out just a little bit about one of our peers I think something that extra day I want to make <unk> barcode is embargoed, okay. How would I want to make sure I didn't I didn't catch that but we certainly always looking at other ways to.
Effectively look at other income streams, where it doesn't affect our core business doesn't distract us doesn't do things that really move us away from what we're trying to accomplish here one of the things. We've always talked about is the third party management platform B wells. Once you could talk about how we evaluate that on a very often basis. We ask ourselves you know is there a point in time, where you could.
Look at something like that vehicle. If you wanted to do to drive some ancillary revenue streams. So it's we look we evaluate we've had tremendous success, thus far doing what we do and we've had great success with our differentiated strategy and how we approach that and how we build platforms for half pros have success and growth and I and then it's worked very very well for us.
We'll always be part of our strategy going forward, but you know I would tell you.
We're constantly looking do you have anything to say that we're working on that no I don't but we're constantly looking at and evaluating and seeing if we can find some additional places and the ultimate judge that's been centers Corp, a phone for share growth. So with our same store performance and the external acquisition volume that we've delivered for multiple years now the midpoint of this year's guide 25%.
Core <unk> per share growth.
That's north North Star and that's the ultimate judge our performance.
Thank you.
Thanks Vincent.
Our next question is a follow up from Keybanc Kim with Truth Securities. Please proceed with your question.
Thanks for taking me back.
A quick question around your comments around Portland, Phoenix, and Sarasota, being a little bit soft due to new supply.
Do those pressures get better or worse next year.
Yeah.
Yeah. Good question, Kevin So yeah, it was intentional but those markets because Portland is on a same store growth perspective below portfolio average Phoenix is kind of right in line with portfolio average in Sarasota.
Later than the portfolio average, but my comments were about the way that their growth rates changed from Q1 to Q2.
I think that it probably is a little bit more challenging in those markets I mean, I think the growth prospects, especially in Phoenix and West Coast of Florida are still there's still a lot of positive factors in play just given in migration data, but in population growth, but are there still is.
No new deliveries or so Dave's point about Portland deliveries that had taken place the market is still absorbing Portland for example, we've talked.
For several quarters now about even though things.
Next up there.
Relative to the years prior our occupancy in that market was still two to 300 basis points below portfolio average so.
It ties into what we're saying about you're seeing some of the effects of that that dynamic with supply and demand.
Okay, great and.
When you think about.
Customer reactions to E cri programs or just pricing changes.
Have you noticed any discernible trends and between how different groups of customers have reacted to work that.
It's obviously important to make a lot of different physical oversupply, but I'm talking more about a demographic quality or attribute.
Whether it might be high ADR tenants might be more or less sensitive for some lower APR kind of any kind of trends that you see.
Nothing yet I mean, you know we survey we studied some of the patterns, you're talking about demographic patterns and things like and we just haven't seen anything.
You know really separated itself in one direction or another and so Fortunately I would say no nothing yet.
Okay. That's it for me thank you.
Thank you.
Our next question is a follow up from Neil Malkin with capital One Securities. Please proceed with your question.
Hey, Thanks for taking another one for me just just one I don't think anyone mentioned it.
Jim you talked about cap rates you acquired this quarter like a five six obviously, that's a you know a bit a bit better than you've done the last couple of quarters, but again, you know cap rates are rising but can you just talk about the product you know that you're evaluating right now that's out there that you're looking at.
And have you seen those cap rates move up into that range as well it could could we get you know that the high fives are six level and.
Are you seeing actually higher yields for portfolios versus single assets. That's it for me.
Sure. So I'll start I think they've they've might want to chime in here a little bit but.
I will say that that we have always seen that that gap between cap rates and some of the secondary and tertiary markets and so to the extent we're acquiring in those markets. We are we continue to to be able to acquire at those higher cap rates.
The cat.
Assets that are on the market in some of the primary markets are at better cap rates than what we saw let's let's just say the.
The last quarter of last year and first quarter of this year.
So if and and and again cap rates or that's kind of a.
Hard number to even try to try to discern and talk about from one company and one one asset class to another but having said that if we were paying a call. It a four and a half cap for our portfolio late last year that same portfolio might trade for.
Thing just north of five that's just a in this current environment so call it a lot.
Now 30 60 days.
That's how fast things have changed.
And I would say that there is still absolutely a portfolio premium theres no question about that people are still trying to aggregate size and in self storage and but it's in that and that's been true historically, so that it's not really anything new last year, we saw the portfolio premiums widen even further.
Other than than we'd seen in the in the previous call. It 10 15 years.
Hum, but today there is still a portfolio premium it might not be quite as wide as it has been in the recent past.
I think I would add is I think maybe one of the things I am.
Kind of thinking about what you're getting to is I don't think theres a flight to single properties I don't think the buyer pool is now targeting single properties because its a better by I think the buyer pool in general has changed.
And pricing has changed with it I mean, there are people who have money that can buy properties and want to buy properties and they're still there you know bidding for these properties, but there hasn't been this flight to I want to buy one offs in South Carolina or something like that we're not seeing that you know a change at all in the people that are out there trying to buy properties.
Thank you.
Thank you. Thank you.
Thank you ladies and gentlemen, we have reached the end of the question and answer session. I will now turn the call over to Tamara Fischer for closing remarks.
Thank you.
I wouldn't want to end this call today are without recognizing and thanking our team for their ongoing commitment and focus on delivering outstanding results, we're very grateful for our team.
And we're certainly pleased with our Q2 results we remain very optimistic about our prospects for 2022 and I'll just say, thanks again for supporting NSA and for joining our call today.
Thank you. This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
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