Q3 2022 National Storage Affiliates Trust Earnings Call
Greetings and welcome to the National storage affiliates third quarter 2022 conference call at.
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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.
We'd like to thank you for joining us today for the third 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 COO, Dave Cramer and CFO Brandon to Gotcha.
Following prepared remarks management will accept questions from registered financial analysts.
Limit your question 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 Dot com.
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 three 2022.
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 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 <unk> core <unk> and net operating income contained in the supplemental information package available on the Investor Relations section on our website and in our SEC filings I will now turn the call over to Jamie.
Thank you George and thanks, everyone for joining our call today.
I'll start the call by addressing the recent Hurricanes, Fiona and E N and expressing our compassion for all who are affected by the storms.
We're pleased to report that all of our team members were safe and accounted for subsequent to the Hurricanes and although a number of our stores primarily in Florida were impacted to a certain degree all of our stores are currently open and operational.
I'd also like to thank our team for their extraordinary response to the storms both in terms of watching out for each other and taking care of our customers and so quickly working to assess damages, it's a cleanup process underway and resume normal operations.
Now moving on to results.
Delivered another great quarter with growth in core <unk> per share of 26, 3% and same store NOI growth of 12, 1%.
As expected our results continue to moderate from record levels as we face tougher year over year comps and a return to more normal seasonality.
Moderation is also fueled by inflationary pressures on the consumer as we close out 2022, and then or what may well be and even more challenging macroeconomic environment in 2023 keep in mind that the self storage asset class has historically proven to be quite recession resilient through various.
Economic cycles.
The sector benefits from unique counter cyclical demand factors, including demand driven by household contraction and necessity based relocations.
Further the pandemic introduce new customers to self storage, we have realized the convenience and affordability of the product.
Particularly in a time of increasing cost per square foot for housing.
Lee with the benefits of our differentiated pro structure and our broad geographic exposure, we remain very confident in nsa's future prospects.
Now turning to investment activity in the third quarter, we acquired 23 wholly owned properties investing $322 million at an average cap rate of five 4%.
20 of these stores are in Texas, Florida, Georgia, and South Carolina are great fit for our existing portfolio is fast growing sunbelt markets.
While the transaction market has slowed from last year's record pace, we're still seeing opportunities come to market and we continue to evaluate deals where it makes sense, but we're definitely being very selective in the face of today's increased cost of capital.
There is still a relatively significant bid ask gap between buyer and seller expectations. So we expect that Q4 will be relatively quiet on the transaction front.
Going forward, we will remain opportunistic with respect to our capital and investment strategy always with an eye to creating value for our shareholders over the long term.
Overall, I'd characterize the third quarter as strong performance with moderating fundamentals and in line with our expectations.
All storage sector in NSA, specifically remain well positioned to navigate a dynamic operating environment as we head into the new year.
I'll now turn the call over to Dave to discuss current trends in operations.
Thanks, Tammy the third quarter benefited from continued strength in self storage fundamentals.
However, we are clearly returning to normal seasonal patterns, which are being highlighted by a challenging year over year comp.
Third quarter same store NOI increased 12, 1% over last year, driven by a 10, 7% increase in revenue combined with a six 9% increase in property operating expenses a.
Our contract rates were up 15% in the third quarter from the prior year, while street rates were up 10% year over year.
Consistent with return to normal seasonality, we continue to see moderation in our street rates, which we expect to continue through the end of the year.
Our rent roll up was flat for the quarter and have now following.
Following normal seasonal trends.
Just kind of any concessions remain below historical averages during the quarter and we've increased our marketing spend is customer acquisition activity returns to normal.
Same store occupancy averaged 94, 1% for the quarter and 240 basis points compared to last year.
We ended the third quarter with the same store occupancy of 92, 6% down 350 basis points compared to the prior year.
Occupancy reflects the return to normal seasonality and the net change year over year is directly related to an abnormal comp last year.
Although we experienced some moderation across the portfolio I think it's worthwhile to point out that we're on track to stabilize above pre pandemic levels to give you a sense of where we were versus three years ago deteriorate in Q3, 2022 or about 37% higher than Q3 2019 and in place contract rents are about 24 person.
Higher.
Currency is also about 320 basis points higher.
Our average length of stay for tenants that have moved out has increased from 15 five months of $16. Two months the percent of customers that have stayed with us for longer than two years has increased from 45% to 50%.
All of these data points support our views, but fundamentals remain healthy.
Looking at geographic performance. The Sunbelt continues to outperform with states, such as North Carolina, Georgia, Texas, and Florida, while generating above portfolio average revenue growth.
All of our smaller markets, such as Oklahoma City, New Orleans savanna, and Wilmington are outperforming the portfolio average as well.
This reinforces our strategic market focus and continued emphasis on geographic diversity.
I'll now turn the call over to Brandon to provide more detail on our financial and balance sheet activity.
Thank you Dave.
Yesterday afternoon, we reported core <unk> per share of 72 for the third quarter 2022.
Which represents an increase of 26% over the prior year period.
This continued robust year over year growth was driven by a combination of double digit same store growth and our healthy acquisition volume over the past four quarters.
Our third quarter results represented a record seventh consecutive quarter that we achieved double digit same store NOI growth.
Additionally, approximately 30% of our wholly owned portfolio is at our non same store pool, and we're very encouraged by the outperformance relative to underwriting for those properties.
Which were mostly acquired in 2021 and will be eligible for same store inclusion beginning of 2023.
Regarding operating expenses.
Our third quarter growth of six 9%, reflecting inflationary pressures that we're seeing across the economy.
As well as property taxes, driven by significant increases in self storage property values.
The third quarter increase in same store opex.
It's due primarily to a six 1% increase in property taxes.
By Texas, Georgia, and Florida.
A 12, 4% increase in utilities, and a 28, 6% increase in marketing spend.
Repairs and maintenance grew four 1%.
Personnel costs grew just two 6%.
While the increase in marketing spend was significant in Q3 of last year, we experienced a decline of over 10%. So the two year average increase was about 9%.
Turning to the balance sheet.
During the quarter, we closed on a $200 million 10 year unsecured debt private placement with a fixed rate of 5.06%.
At quarter end.
Our leverage was six times net debt to EBITDA right in the middle of our targeted range of five five to six five times.
We are very comfortable with our balance sheet with no maturities through 2022 and $375 million scheduled to mature in 2023 $300 million of which consists of two term loans that we will address over the next few months.
Approximately 24% of our debt is subject to variable rate exposure.
Of which is the revolver.
And we had over $210 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.
As Tammy and Dave touched on we have seen a return of normal seasonality trends in fundamentals throughout third quarter and continuing into the fourth quarter.
Which is driving the moderation in same store NOI as we move gradually back toward long term historical averages.
However, our expense growth is trending a bit higher than we previously expected as I mentioned before regarding property taxes and inflationary pressures.
As a result for the full year of 2022, we estimate same store revenue growth of 11, five to 12, 5%.
Writer range than previous guidance, while keeping the midpoint of 12%.
Expense growth of five five to six 5% up from the previous range of five to six in the quarter.
And NOI growth of 14% to 15% with a midpoint of 14 and a half.
Or 50 basis points below the prior midpoint.
Additionally, the rapid rise in interest rates is pressuring interest expense, which combined with an income tax charge during the third quarter will weigh on core <unk> per share by approximately <unk> <unk> for full year 2022.
The combination of these factors results in us adjusting the midpoint of our core off over share guidance down by a penny and a half to $2 81.
The updated range is $2 80 to $2 82.
The midpoint represents an impressive 24% growth above our strong 2021 results in a two year combined increase of 64% over our <unk> per share in 2020.
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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Our first questions come from the line of La and Santa Maria with BMO Capital markets. Please proceed with your questions.
Hi, good morning.
A question on ECR is it sounded like you gave a how much rates have increased both in place and our street rates over the last couple of years or since pre COVID-19.
It seems like maybe there's some room for continued E. C O I increases that kind of above pre COVID-19 levels. Just curious on your view on.
If in fact, that's accurate.
How we should think about Easter horizon in 'twenty, three versus what you've been able to achieve it into 'twenty through 'twenty two.
Yes, David Thanks, Ron This is Dave good question.
Not going to really point to 2020 through yet, but I can tell you you know as we looked at the third quarter.
Cadence in our activity and the amount of rate increases remained very stable.
Which was encouraging the tenant reaction to those increases remained stable as well so as we look at customer behavior, finishing out the year and really look how we model our in place rent changes as we move forward.
We're still pretty confident in the program and the way we're running we're still confident in our cadence.
And we'll just have to monitor what happens as we look.
As occupancy numbers in street rates move around a little bit.
I'll have to look at you know what customer behavior is due if they changed at all over the upcoming pieces are the economic periods excuse me.
One part of the puzzle I mean, we're looking at occupancy we're looking at street, we're looking at concessions.
We're looking at you know the in place rent changes to find the revenue goal.
It is satisfying to US you know we had a lot of discussion about this and I've been at this for a few years now and you know.
We are pleased I was with skilled care back when we were private in 2008 and I can tell you even in the toughest times of that great financial crisis due to that period, we were still able to do in place rent changes you know maybe the amounts may not have been as much maybe the tennis midnight, but as much but we.
We didn't you know the financial pressures where may be fashion, you know the economy may be facing right now it didnt really good tourists back then from really you know continuing on some form of IPR C. P.
Program.
And then just as a second question.
Curious if you guys look at storage express either the assets or the software and as a result of our.
And as a result of the transaction there or do you think youre going to hear are seeing more competition for assets in your secondary or tertiary markets and tour.
Of a sub question do you think that there is the opportunity.
<unk> to use technology to improve efficiencies and maybe go more remote and store management.
Yeah. Another good question you know, what we've known Jefferson and for a long time, we've been around this product for a long time and watch him you know develop a very good model that worked extremely well and and so were familiar from a lot of different points of view on what he was able to accomplish we are.
Our running stores remotely now we're running stores either as an annex or even just purely remotely and we have technology in place of AIDS us to do that we have room to improve and we are working on improvements through that technology piece. We certainly think as we look at our future that's away from a payroll savings perspective, as you look at store hours and maybe overall head count.
It also allows you the ability to buy smaller properties within our markets that fit very nicely and run them as maybe a hub and spoke type concept, where you have some floating person around where you can take care of two three stores with less head count and we've done that over the years and demonstrated that is effective for us in certain markets.
And you know to the last part of your question could this introduce more competition for people buying properties that are marketing to it but you know there are other operators had been running this for quite a while now and we've been around those operators for a number of years and so I don't know if it significantly changes the landscape at this point.
And then just maybe if I could sneak in a quick third one could you give us any sense of the third quarter trends or sorry, the October trends in occupancy and street rates to compare versus the third quarter levels.
Well, we did experienced street rate growth year over year in October . It is obviously coming off of continuing to reduce so should you think about where the end of the third quarter, where September was October but we did it.
Year over year, an increase which is a positive sign for us and occupancy to continue to come down off its levels I mean occupancy levels came down in the month of October to let me know.
The number I can give you at 91, 4% so it dropped from the quarter and average down to 91, and we finished the year.
The third quarter to 92, six so we didn't have it.
<unk>.
The reduction in occupancy levels in October .
Thank you very much.
Thank you.
Thank you our next questions come from the line of Neil Malkin with capital One Securities. Please proceed with your questions.
Hey, thanks, everyone.
Sydney on that last question.
You know that that occupancy.
A versus the.
September occupancy versus the average for third quarter that slowed I think the most in versus peers and then again you saw a pretty significant.
The slowdown in October .
Looks like it's gonna be well.
Sure to the sort of from peak deterioration.
That you outlined previously that you expect for Q4. So maybe can you can you help us understand what is leading to that are you know it seems like a more significant fall in occupancy versus kind of what we expected the sort of new post COVID-19 model to look like is it is it small versus large markets is it Q2 much pushing.
On.
I P R C and not enough concert.
Sessions.
Any comments on on.
Occupancy and other.
How do you see that continuing to play out in your comfort level with the current levels.
Yes, good question and there's a lot of pieces to this I mean.
We certainly have had markets that come off on occupancy Theres still posted very large revenue gains I mean, if you looked at Atlanta or Riverside or.
Sarasota, Florida, where they've had 5% occupancy loss, but its still posting 15% 17% revenue gains. So we look at it as it's one of the pieces of the puzzle. If you look at our portfolio. Historically, we've always ran a little lighter than our peers, we're comfortable with that it fits in our markets. It fits in our revenue models and it fits in our business plan and so as we are.
Looking is this a really challenging occupancy comp versus last year.
We're trying to navigate the waters of where we want to land where it fits in with our revenue modeling.
And really where that you know that occupancy discount street rate in place rate all fit together and it's a it's a big puzzle so.
Your point I do do acknowledge I think the occupancy Pas was a little quicker and a little steeper than we thought and we're making adjustments to our marketing strategies, we're making adjustments to discounting.
And really street rate.
Where we're gonna be positioned in markets with industry rates and so I think we were aware of it were you know in certain markets. We're adjusting to it in certain markets. We're just fine. So theres a lot of pieces of that puzzle that we look at but just.
Just maybe just a little quicker than the occupancy drop that we had probably had forecast in the second quarter.
Yeah, Okay, and I guess just.
And going a little further on the comment you. Just made you know is it fair to expect higher marketing more you know discounting or I guess yeah.
More pressure on net pricing.
Pricing.
Our net rates.
Just maybe until you feel comfortable that occupancy continues or you know kind of stopped eroding at a faster rate than you would've thought.
Yes, I think that's fair I wouldn't we're doing all of those things didn't you know you've got to you got to look at it it's market by market that affects the overall portfolio keep in mind. We also have a little bit of drag in Portland and in Portland is a different market, we'll talk about here shortly but to your point, we were looking at all of those levers marketing spend was up for the quarter. So you saw the third quarter, we did have a pretty.
Significant German marketing now to your average was not as high but you know 28% year over year. So clearly last year, we had easy sailing in marketing expense and this year, we had to sort of lean on that a lot more will lean on the marketing piece as we go into the fourth quarter, we'll start to look more around street rate and where we're positioned in market.
For the third quarter discounts were very very low two 2% of revenue. So we still have some opportunity around discounts if we want to use that lever.
We need to find what the right math problem as to revenue we acknowledge it occupancy is a big piece of that but also these other factors come into play.
And overall, you know thinking about we're very happy with our contract rate growth, which was 15% for the quarter as well. So it was a nice balancing offset to the occupancy piece.
Yeah, Brian I'm, just just a little color too on that so like my opening remarks on the marketing spend I mentioned last year Q3, we were negative growth on the marketing, 10%. Similarly in the fourth quarter, we were negative 12% year over year. So as we have increased our spend this year and that's going to continue into Q4.
And then it's also going to compare against a really challenging comp. So that's that's absolutely going to be elevated on a year over year basis.
Okay. Yeah, that's helpful. The other one.
For me.
Is traditionally not a.
Seller.
But if you just look at the performance of your stock.
Have you thought about or are closer to potentially looking at.
Leverage neutral buybacks or how do you think about you know capital allocation and also balancing sort of macro uncertainty in general.
Good question Neal.
You know looking at the looking at our use of capital and sources of capital. It's it's really on us in any case to make sure that we're evaluating our portfolio and selectively disposing of assets. As you said, we're not really and we haven't been a big.
Salary, we're not I don't think will be a big seller, but we see that as an alternative in terms of sourcing capital.
So something I think the answer to your question is yes, I don't think you'll see us sell off you know 100 property portfolio or anything like that but but I think selectively we will we will look to too.
To prune our portfolio of pet and recent capital that way in this and in this environment, where the cap rates are frankly.
Still better than.
Then you know what we can what we could do otherwise and certainly taking that capital and redeploying it in the in the repurchase of our own shares makes all sense in the world.
Okay. Thank you.
Thank you. Our next question is coming from the line of Lizzie Joy Kim with Bank of America. Please proceed with your questions.
Great. Thank you I just wanted to follow up on that prior point me about adopting in certain markets.
And down in others and can you kind of comment on which market havent really taking that level on a street rate increases and as well as other things.
Where maybe you're still seeing some drag.
I know you.
You had mentioned seeing a little bit of a drag in Portland style. If you could just give an update on your markets.
Yeah. He absolutely were still very strong in the Sun belt in the southeast and so you know you look around Atlanta, and the Carolinas and through Georgia and through Texas, We're still haven't.
Good success down in those pieces, both on the Street and you know contract rate.
Keep in mind, we're coming off extreme highs I mean, some of those markets, where 98% full last year and now they're running at 93, and 92 and so that that occupancy headwind. While on paper may look very very daunting, you know for us, whereas those portfolios and those those are more stores in those markets. We're settling right in where we want them to be and we're very comfortable we're certainly facing some pressure in Portland, Portland has a number.
Things going on there we've talked about in previous calls and through the past there was prepaid.
Pre pandemic there was a bunch of new supply were brought on in that that supply is still there and the pandemic may have masked.
The impacts of that supply and now that the pandemic has kind of come back and things are returning back to normal Portland is really starting to see some of those pressures of that new supply unless there are some economic and social things going on in Portland. It just makes it MSA right now are challenging for US we'll continue to look at how we operate there for you know we're not going to go in and try to.
<unk> started some kind of rate war do something like that will be smart I mean, you've got to realize that the boiler markets can operate where it operates out of it we're going to try to maximize what that level is.
Phoenix repeat a little bit pressure Phoenix also had a bunch of new supply come on through the pandemic and its really you know and some of that now that some of the housing market is slowing down maybe some a little bit of in migration is slowing down a little bit Phoenix is starting to show a little bit of pressure and so how we manage Phoenix. It from a street rate perspective discount perspective occupancy level is going to be challenging for us as we go.
You know into 2023.
And then really you know the rest of the markets, there's not a lot to really call out we have some stable markets in the heartland.
Oklahoma City, and Tulsa that are just they're doing very well from a historical perspective, they're doing above average, but they're certainly not doing or what the portfolio level is but we're very comfortable in how they're operating and how they perform and we kind of call them the steady Eddie but they'd be that has performed well over and over and over again.
Just didn't have the highs and the lows of the pen.
NAMIC piece of it.
Okay. Thank you.
And for my second question.
Curious to hear more about it and the volume that news and how that trended versus your expectation.
And maybe how that compares here than there.
Pre COVID-19.
And you know that.
That rate kind of slowed down or did you see any signs yet.
Allowing your expectation and if you could comment on move outs as well.
Yeah. Good question. So certainly the last year move ins were less in and move out through more and that's comparing to last year and that's to be expected as we look back to 2019, which is really probably the most stable year. We can look to before the pandemic both move in and move out activity were very similar to the patterns. We would expect so we think it's returning.
To historical averages based on you know occupancy portfolio, how many tenants you have in the portfolio and what's your expectations around the move metrics in that that tenant base.
And so you know, that's where I would point you there.
What I would also add to that is the consumer shopping patterns are changing.
It's taking more touch points and is taking more and more of a lift to get people to convert today. So you know one of the things. We're very much focused on is marketing spend and really what we're doing the conversion rates and so the team is very dialed into how do we you know boost that conversion rate to make sure. We're using that dollar effectively that we'll bring into play the other levers are.
Where are we positioned with street rate what are we doing with discounting how well are we closing them and so I think that as I looked at the quarter. It.
Really looking ahead as you know that's back to really normal times of 2019, as well and we need to continue to make sure that we're driving efficiencies through our conversion rates.
Right and if I could follow up on them, how do you see it move on why do you think move in move out activity like until October .
October we are you know you saw the occupancy come off of where it was in September we were happy with where you know getting back looking at historical 2019 very comfortable.
It's a tough comp I mean really in the fourth quarter, we actually grew occupancy in the fourth quarter last year at a slight pace and so that's one of the things we were looking at as you know, it's a tough comp year over year, but it was very much in line of what we thought 2019 look like.
Alright, thank you.
Thank you.
Yes.
Thank you our next questions come from the line of Smedes Rose with Citi. Please proceed with your questions.
Hi, Thanks.
Kind of sticking with the occupancy.
Clients, which did seem a little more pronounced maybe relative to your expectations and.
Certainly to our expectations and I was just kind of wondering where do you think you might exit the year now on the occupancy front.
I think internally our expectation is we like the flattened it out.
We're not looking to lose a lot more occupancy and.
And so you know obviously, there's conditions going on out there with consumers in economic tightening and stuff that we have to navigate.
I thought we did a good job holding our street and contract rate growth in the third quarter I think you'll see a little more pressure on street in the fourth quarter and a little more pressure on discounting, which will allow us to flatten that that occupancy piece and so that's the math problem. We're working on the teams are working in every market in every store.
Really find where that balances, but I think David kalt called this out in your remarks and in some of the questions here earlier today, but we really don't manage to occupancy and Smedes I think I know you know that we've talked about it a lot, but but our objective here.
Is to optimize revenue growth and that's been our strategy for a long time and we'll continue to do that I think our view is that occupancy settles out a couple of hundred basis points higher than pre pandemic levels for us, that's probably still a gap between us and our peers and I and yet.
We set out to deliver outstanding growth in same store revenue so.
No I agree.
Not you're not running it to for occupancy, but I mean, I guess there is a I mean, it's got to be some point, where you and other operators would credit to protect occupancy rate I mean, you can't raise rates from empty boxes.
I mean, it's just like the commentary that we've heard from others that there's something like Europe , we want it I mean in terms of the more secondary and tertiary markets. I mean do you think you are just inherently more exposed to a maybe a more.
Demographically sensitive customer around rates and see what's going on as the economy. The economy or do you do you think that's not that doesn't hold water.
I don't think that's an issue at all I do think one thing that is happening though is we didn't have some of the tailwind of Miami and New York and L. A and some of these other markets because of our exposure there and we were out we didn't have the right restrictions that maybe some of our peers had for a couple of years and so I think that weighs on us a little bit as you think about year over year results. I also think last year, we did an excellent.
Job excellent job driving this portfolio.
In my words, I use overheating our portfolio, we drove it to an occupancy level through the back half of the year and our revenue result level. There was abnormal for our markets and we're settling back into what we think is normal for our markets. The families point, we think it's gonna be above pre pandemic levels, which was an objective for us and so.
All things considered I don't think its a tertiary or secondary market question. We're just settling back into what we feel are very comfortable normals.
Yeah.
Okay, and then can I just follow up I wanted to come back to the share repurchase I mean, I think you did 50 million.
You know when you bought back at considerably higher prices. So presumably I mean would you be interested in maybe getting more aggressive on that front as we head through the year and given the decline in the stock price here or how are you maybe just kind of go back to how you are thinking about that program.
Well I think as we think about capital deployment. It. It's it's all about where we can achieve the best returns, but I will also say that we are probably along with others are being very very selective and we will we will deploy capital opportunistically.
But in this current environment, where our cost of capital is high and excesses is.
Not as free as it was a year or so ago, maybe even six months ago.
I think I don't have I don't have a yes or no black and white answer for you smedes, but but it is an alternative that we will consider as we are thinking about strategic capital deployment, but when it's all said and done it. It's all about the long term for us in and building and delivering long.
Term shareholder value and then you can imagine if we thought it was a great investment at 52 Bucks. We certainly think it's an even better investment where we are today.
But I just I don't think there is a black and white answer to your question.
And to me this is Brian I would add.
The other thing I would add in is just that we through today, we've issued almost 600000 common op units the contributors of properties.
They've taken that equity at a price that's about $54 and change and you saw the activity. We did on repurchases was at $52 and change. So there was no part of our guidance thought on some of this was hey, we were able to neutralize some of the dilution impact of equity that we issued earlier in the year and so that was also a point of reference for us and thinking through the execution.
Right right Yeah, no. Thanks for that okay. Thank you appreciate it.
Thank you.
Thank you our next questions come from the line of Michael Goldsmith with UBS. Please proceed with your questions.
Okay.
Good afternoon. Good morning, Thanks, a lot for taking my questions.
I'm going to try to tie together a couple of different topics that have already been discussed, but Tammy you started the call talking about the inflationary pressures on the consumer and then later in the call. We touched on it maybe there's been a little bit more difficulty converting customers, who have entered the channel and into.
<unk>.
And converting them to tenants. So I guess just you know.
How do you think about the inflationary pressure on the consumer how is it impacting how is it impacting kind of your trends like our customers responding more negatively the rate increases are they being more price sensitive when moving in.
Or are they are they just vacating at a more frequent rate just because of.
Because theyre spending more money on our food and other things.
Good questions I'll try to cover recover as you went through to your last question. We don't see any change in move up patterns that have to do with economic conditions, its still around and need based and so as you think about you know when the time is up the time is up for them. If you read a distorted unit cause your remodeling your house in your houses done you're you're moving out we Havent you know.
This is through surveying and through things that we do we have not seen a significant change in the cost per patron.
Why they are moving or whether moving out.
From an economic perspective, there's a lot of things that have changed the housing market has cooled off significantly.
Would we love to have a hotter housing market, yes in a downturn housing market, we will still do well the sector does well you know we've proven that we're recession resilient, but.
But we don't think there's anything around what's happening in economic conditions right now that is changing what's going on with our length of stay or our tenant base.
As far as the conversion piece you know this is where we have to monitor all of our levers and figure out what's the best trigger point to get.
People to convert at the rate, we want them to convert at and that's really more of a use round, but I think right now in this period of time of what's happening with discounting whats happening with street rates Theres a lot of the sector that is cutting street rates pretty dramatically right. Now we have not done that we've always talked about it's a balance between the revenue goal and the revenue goal as rate occupancy.
Concession and all those things in the mix and we've chosen the path that we've held a little firmer on street rate a little firmer on less discounting and we're still generating the numbers that we aim to hit I think that will change a little bit from the conversion pattern and we may have to be a little more assertive on street rate and a little more assertive on discounting.
That's helpful Dave and.
My second question is on just kind of the cadence of the same store revenue growth you reported a 10, 7% in the quarter. So that was down sequentially by about 400 basis points.
Your guidance at the midpoint implies about a 6% same store revenue growth in the fourth quarter, which suggests kind of.
A step up in the slowdown so.
I'm, just trying to better understand kind of the.
The cadence of the moderation and how we should think about it.
Going forward and just I guess, you talked about altering some of the approaches like how much how much can that.
How much can you effect.
Slow the moderation based on kind of this current rate of about 400 basis points sequentially.
400 basis point sequential deceleration.
Hey, Michael it's Brandon so yeah.
Yeah, Let me try to hit a couple of things you hit on there well.
What's really important to remember is that the fourth quarter of last year was very abnormal for a comp purpose. Okay. So pre pandemic it would not be uncommon for same store revenue from Q3 to Q4, just absolute dollars.
So declined half a percent to one 5%.
The midpoint of our guide for the full year 'twenty two.
It implies a fourth one if it's closer to like a 7% growth rate. It has us declining from Q3.
Right around that level.
Last year the increase from Q3 Q4 was about 2.5%.
That speaks to how challenging that combos.
Not really trying to manage to the to the comp or the cadence. It's more about just executing on strategy, which Dave spoke to and the comp is what it is so I think you know another thing that people have done.
Across the sector and for US is just to look at that two year stack and that moderation is a lot more ratable.
Ratable, it's not as dramatic as that makes sense.
No it does and if I can squeeze one more in on the topic of property taxes have been feeling the pressure from.
From Texas. This year do you have any visibility into how property taxes, maybe may play out in the coming years.
Coming years withheld Michael I mean, we'll guide in February I'll tell you we start every year with like a 5% to 7% growth rate assumption.
Into 2022, we had an average three year increase of two.
2% on total Opex and an average annual increase in property tax of 2.4.
So we've we've dodged it the last few years and so we came into this year with a higher assumption.
And we're experiencing it so you see our numbers for the full year nine months and I think Q4 will be somewhat of a comp for property taxes, a little more challenging so maybe it comes in for fourth quarter year over year closer to 8%, but it puts the full year number at something closer to seven for the high end of where we would have entered this year with the expectation we will.
State with February about what were assuming for the full year 'twenty three but our best guess right now is it would be kind of in that 5% to 7% range.
Got it. Thank you very much good luck in the fourth quarter.
Thanks, Michael.
Thank you our next questions come from the line of West Golladay with Baird. Please proceed with your questions.
Hi, everyone can you give us your view on supply this year versus next year. When you look at it from a weighted average for the impact of your operations.
Sure I can start Dave and Dave and Brandon can jump in but I think our view of supply. This year is that it will it has been and it will remain somewhat muted I I think that for four projects that are under construction and they'll go forward there'll be delivered but what we're seeing.
And hearing from our pros and problem from our friends at you already is that projects that are that are not yet approved and certainly projects that have not yet secured financing a very good chance that they will fall out.
At least for the time being so our view on and supply is that I that it will remain muted probably through 2023 and and when we'll start looking at that potential impact probably a I don't know early to mid 'twenty 'twenty four but we'll keep you updated on that when we track that pretty closely.
Not only was he already but with our pros who are operating in the markets, where you know where where we're seeing that.
Potential threat.
Got it and then you have a comment on this in all cycle business and it has proven that to be over the last.
10, 20 years, but if you can maybe comment on some of the cyclical demand that may be abating, and then are you seeing near the counter cyclical demand pick up at the moment.
Yeah, I think as.
As we talked about maybe that none of the housing market has cooled off you know will there be other factors that the pick up of that in the end and we are I mean.
I think the hard part for US is is we're coming off something that was historic and you look at Youre coming off of a pandemic, which we navigated very nicely through we obviously had a lot a lot of success.
As the pandemic matured and went through a cycle of the self storage sector and ourselves.
Unbelievable highs and now we're heading into this unchartered waters of tough economic conditions in and certainly maybe looking down the barrel of a recession and so I think all things will continue to play out if the housing market cools off then the renter market, maybe stays longer people can't afford as much of our houses. They could you know what happens with business owners and how much.
No. We're we're pretty nice option versus warehouse space for business owners and how they look at US I just think all the things that we've seen through our history will prove out again that this the sector and our business in our portfolio will do well and be recession resilient through what's coming forward for US Yeah, I think that's right, Dave I mean, what we've.
Talked about over the years is that change drives demand and when one source of demand dries up another one seems to flourish and replace it so.
So that is our view.
View of I don't know probably through the next 18 to 24 months.
Got it housing.
Oh, sorry, sorry about that yes.
Okay.
No.
Okay, well, if I can get one last one in you know variable debt increased this quarter and you did have a $200 million alone at a pretty attractive price.
What is the appetite for more variable rate debt is it something you want to get down over time through free cash flow, maybe some dispositions rates did move up almost parabolic when he says that maybe caught some people off guard self included and so just maybe how are you going to navigate the variable rate challenge.
Yeah. This is Brandon I mean, we're we're at a level that we're comfortable with right now I don't think you should expect us to go dramatically higher and I also don't think that exposure is going to cut to zero either.
My opening remarks, you heard me mentioned half of that 24% of our total debt.
There's a variable rate and half of that is a revolver. So when you exclude that because over time, we're going to replenish that revolver balance with permanent capital long term capital.
Right you know that.
And so when you think about it with them about and when you exclude it you've got 12% of the rest of our debt a couple of bank term loans, but.
We've kept variables when you're right I mean rates moved moved sharply so that will be a short term headwind, but when you know things calm down there will be opportunity for us too.
Opportunistically raise capital like like you mentioned, we did.
During the quarter with a 5% coupons out that we placed.
Thanks, a lot.
Thank you. Our next question is coming from the line of Ronald Camden with Morgan Stanley . Please proceed with your questions.
Hey, just a couple of quick ones, just going back to the occupancy.
But actually mixing it in a little bit of the ECR I. When you think about it can you just give us a sense of.
The E C R I intensity.
Now over the past past couple past couple of quarters as you're sort of watching this occupancy.
Drop because I I think your point is that there's a trade off and I think what we're trying to figure out is what I was sort of the peak E E C. R I intensity.
And you know how much does it come off potentially as you've sort of seen occupancy go down if that makes sense.
Yeah, It makes sense and thanks.
Typically peak historic.
Historic seasonal trends the peak ECR activities really in the summer months.
You know we have you know.
There was couple of months in the summer I think we mentioned last quarter May was our most active months, where we had the largest percentage increase and the largest percentage of tenants hit but if you looked at the third quarter, we kept a very normal cadence the percent of our rate changes as a percentage of rent change to the customer as far as a dollar amount was very much in line of what we've been seeing over the last 12 months to 14 months.
And the percentage of our tenants that we hit in the third quarter was very similar it.
It is a balancing act the team is studying right now what's the percentage of lots that we can attribute to rate increase versus what customer sentiment is to what customer appetite is you know where we've already gone back and instilled. Some caps. We were looking at you know percentage or how many number of rate increases we've given tenants. So we're going back to some of the older practices.
Allow us to really dial in a risk or do we give a tenant.
At any rate increase or not but the third quarter remained very steady we were fairly steady in October .
What's to come you know where have to monitor what the consumer's telling us.
At this point in time, there are nothing that they told US yet you know it is causing us to shift dramatically, but again you know this is the stuff we monitor and it's a it's a big puzzle.
And there's a lot to it so.
I hope that answers your question.
Yeah that was super helpful.
Just moving onto the next one is just on the the expense same store NOI expense guidance for the same store expense guidance excuse me I think you mentioned it was higher both because of you know some some property taxes, it's an inflationary pressures any chance, we could just dig into that in a little bit more color Mike.
Mike is it.
Half of it is taxes happens like how does it break out.
Just any more color on what came in higher than you expected.
Yeah, Ronald I mean taxes is a big piece just given it's a you know one of the two largest opex line items. In addition to personnel. So it's coming in closer to 7% for the full year growth, but we've managed the personnel costs really well right or a little under 3% growth for the quarter.
Call it flat for the nine months year over year, and so those making up almost 60% of our opex.
They blend out to kind of like a 4%.
Growth combined.
For those two line items, so than really what you have is those other contributors that I mentioned in my opening remarks, we were seeing with utilities costs go up.
In the second quarter. So there were some elements of that already baked into our expectations. When we talked to you in early August , but I would say it came in and those those costs and the increases in rates came in a little bit higher than we expected three months ago. So that was a contributor to operating the Opex guide a little bit.
And then our marketing cost again, we fully expect it to increase that spend I mentioned that with the open I also think in one of the questions earlier spoke to the fact that that's gonna be elevated again in the fourth quarter, but we pulled on that lever a little bit more than that we might have thought in early August . So those were those were a couple of.
The key items credit card processing fees and other one that came out on the margin a little bit higher.
Great and then my last one was just when I look at the same store revenue guidance. It sort of implies you know sort of Ah Ah Ah Ah Ah Ah.
That mid sixes.
Growth rate coming in for Q, if I, if I'm doing that math correctly.
But you know just trying to I think what we're trying to square.
The same store revenue for <unk> versus the peer set.
How do you guys sort of think about where your portfolio is different from everybody else right is that is it maybe because you know others have ally exposure you guys don't do.
Do you think about sort of rent to income ratios at all like just how do you Square survey, what youre seeing in your markets versus the peers.
Yeah, Ronald I mean, it's hard to speak to the peers because everybody's portfolio is different dynamics I know that we were the second highest in revenue growth in Q4 of last year right. So that that's going to play into the the two year stack when you do that math on the comp.
The other thing I would just point to is what I remarked to Michael earlier about.
Comparable and kind of the abnormality of what we had last year as well as 2020, where sequentially same store revenue grew Q3 to Q4 and that was in part because we were either gaining occupancy.
Or not trading off that much on occupancy and that's that's very unusual. So if you look at any pre pandemic here with occupancy declining Q3 to Q4 as it seasonally does it would not be uncommon to have absolute dollar revenue growth decline Q3 to Q4, we didn't have that last year, but we are absolutely expecting.
This year or at least that's what's implied by the midpoint of the guide.
So I think you know another way of saying some of this is you know as I hear you and others remark on what the the growth implies.
They're all coming up with like a six three of six five it's actually a six nine at our mid point and it's the difference between doing kind of a simple quarterly average math and looking at the raw dollars because of this really challenging challenging comp. So you know if when you look at the strict.
Specific dollar math.
Low point of our revenue guide implies Q4 growth of 5% the midpoint of $6 nine and the <unk>.
High end is when we look at it it's eight eight and so that just speaks to the challenging comp that we have or the unusual content. We have in the fourth quarter of last year.
Great Super helpful. Thank you.
Thanks Ronald yes. Thank you.
Thank you as a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question is coming from the line of Todd Thomas with Keybanc. Please proceed with your questions.
Alright. Thanks.
Dave.
Our brand and maybe you know you both pointed out a number of times that occupancy grew last year from <unk> to <unk> and talked about that tough comp.
And some of the abnormal seasonality last year.
With regards to that 91, 4% occupancy data point at the end of October I'm curious, what the year over year spread looks like and occupancy and then also is that the change in discounting and promotions and I guess the change in street rates that you are now implementing is having the intended result.
Or are you starting to see demand stimulated a little bit more than the expected response.
Yeah, Todd I'll take the first part and I'll, let Dave speak to the discounting and promotions and success rate on that so it's about.
400, 450 basis point year over year negative on that end of occupancy number that Dave spoke to and I think just to bridge. Some of the commentary that you heard from Tami and Dave.
Our low point going into Covid for late 2019 on same store occupancy was right around 87% to 88%.
And for a long while now we've been saying look we're going to revert back to a more normal level.
But as Dave said at the open we think it's going to stabilize about somewhere about maybe 200 basis points well that that could put you at 9%.
You know I don't want to mischaracterize, what we sat here I think even though what they've said is true maybe it got a little quicker.
Not that much quicker I mean, our revenue guide at the midpoint stayed the same but we're not necessarily that surprised by what's happening in occupancy. We're certainly reacting on a daily basis, but I don't want to mischaracterize.
Some of the comments earlier, if it was a.
You know a big surprise to us Dave do you want to hit the discounts.
Yeah, you know I.
I'm trying to work our way through discounts, we talked about you know third quarter was a historic low of two 2% you know at this time of year, you might be running closer to four 5% to 5%. So I think as we look at is how we navigate this conversion rate that we're after I think that this kind of piece is going to step into this please and then where we balance you know ourselves in the market as far as street rates.
I think all those things contribute we you know we purposely held through the third quarter with contract grade growth was solid street rate decline was minimal and that was on purpose. So this is how our markets react again I think this occupancy headwind compared to last year is a tough drag to get over but that's not what we're worried about we're worried.
[noise] about where we're going with our portfolio and where our portfolio of lands end and we're looking at this not just this quarter over the next quarter, but long term and so long long experience in our markets long history with our customers finding the right balance of all of these things to find the revenue number that that fits for the markets we operate in.
And the occupancy headwind part of it's going to be there I mean, just you know it should be on everyone's screen, it's going to be.
You know negative comp challenge for for certainly the fourth quarter of this year as well as Q1 of next year.
Just until we lap that was kind of abnormal comp.
Yeah, we really don't lap it until Q2 of them next year.
Okay got it that's helpful. And then in terms of kind of looking ahead, it's clear.
Clearly there's.
A little bit of uncertainty around the macro and.
Conditions are.
You know sort of evolving with regards to the consumer with small business.
And so forth I'm just curious as you you know you kind of think about budgeting for for next year.
<unk> in the portfolio are they communicating with you any differently today.
Are they coming to you looking for a little bit more guidance or vice versa.
Maybe tammy.
Can you can you discuss how you work with your pros to set budgets and forecast.
You know sort of re forecast you know I guess for the year ahead and really throughout the year a little bit.
Sure sure well into that into the budgeting process for 2023 Todd.
And and so the process starts it it starts toward the middle.
Middle of the end of the third quarter.
We have regular conversations with our pros and this is on it.
A handful of different fronts.
We have a VP of financial planning and analysis, who kind of runs the process and he stays very close to our pros in there and their chief financial person whoever that ends up being and I would say that what we're hearing from our pros. So far this year is.
Pretty consistent with what we're seeing across our corporate portfolio I think the communications are our.
Everybody is cautiously optimistic.
You know our pros have been in the business for 20 plus years in operating in their respective markets.
Understand this as well or better than and frankly, frankly anybody else as far as I'm concerned.
I think that the moderation that we're seeing is not unique to corporate managed stores. There. It's it's really across the country some markets being.
I affected maybe a little more than others.
You know what we've talked about over the years Todd is that is that.
Because of our broad geographic diversification.
For us what we see is that is that when one or two or three markets. Go go down there are another three or four or five that are that are counter cyclical and are calling up and and I think that will continue to be true for us.
I'm the communications and just generally speaking communications with our pros happens a lot of different levels, but in terms of the principles.
We have a Monday after noon.
That's the point meeting that we've had I don't know every every Monday barring travel and other things going on.
We might be releasing earnings or something.
We have our Monday call without with the pros.
And then once a quarter at least we do a deep dive with each proud. So that's not a big group call, but rather a deep dive on the pros performance, what they're seeing in the market, what they're seeing with new supply.
And what their expectations are both short term and a little bit longer term. So I think.
Yeah, David just mentioned to me I end and then we also have a biweekly operations meeting. So the operations well leads are staying in touch on what they're seeing in their markets and best operating practices.
So and then we have an annual meeting where we bring everybody together and you probably didn't even widen out that much.
So I think no.
Yeah.
I'm sorry.
Okay.
I don't know.
I was really just wrapping up I was just saying I think that the communication is frequent and thorough end and continues to be I think very productive and collaborative so.
Okay.
I'm also wondering how much input do do you have on the budgets that they're setting for the year.
Or alternatively do you.
Take their budgets and you know as you kind of wrap them up and roll them up to sort of the corporate or the re forecast for the year how.
How much how much work do you do.
On their budgets.
Yeah. Good question. So the answer to that is you know we have a software that we set up all the parameters and we set up all the historical is on and we actually it has the ability to you know make changes through line items, we let them take a first stab at it we come back in you know so it's a bottom up approach we listened solicit feedback and then we get heavily involved in it we'd look at.
But markets that we have overlap you know expectations, we certainly have a goal in our mind to where we would like to land next year and that plays into that budgeting process as well. So it's collaborative yes, but there are some pushing and talking and you know negotiations that go along in that process and so lots of experience lots of great minds working on it but.
Definitely you know we are involved with the budget process and you know from my experience the way we run it it is not very different from other companies that I've been involved with in terms of where it starts and how it builds up and then I and then eventually we know who the sandbaggers hour and we know you know the guys who are being being out there.
Putting there.
The strongest put forward in and so we push the question, we Paul and you're calling me a sandbagger.
[laughter].
Seeing bigger in charge.
[laughter].
Alright, that's helpful and just just just one one last one real quick on the transaction environment I realize that youre expecting activity to be slow here near term and that makes sense. There is some volatility around asset pricing in the capital markets, but I just wanted to ask about the captive pipeline.
Which I think stood at around a billion and a half maybe slightly higher what's the status of that pipeline today and how should we think about.
Investments from the captive pipeline and just what the pros will look to do given the current lending environment. When you sort of put it all together because I believe a lot of those acquisitions from the captive pipeline, where we're sort of expected to take place.
Alongside debt maturities and other capital markets related activity, our recap. So I'm just curious what we should be thinking about there just given where interest rates are and the lending environment and so forth.
I don't think we will see too much of a change in cadence because of the capital markets.
The assets that have a financing on them.
It's already there and I and there may be a little bit of an acceleration with with a handful of our pros who are developing assets as those assets approach stabilization and theyre looking for.
Whether they contributed a permanent financing until until they reached full stabilization.
I don't know the answer to that yet we.
Our cost of capital has gone up too so that resets pricing and expectations on that side, but I think it will remain a.
A solid opportunity for us to.
Ted.
Maintain and acquisition acquisition pace of off market acquisitions at good prices are with our pros and assets that are high quality and in markets, where we're currently operating so.
It may accelerate a bit I don't have line of sight on that yet, but I think it's a it's a good bet that that we'll see some assets ahead.
Ahead of where we might have otherwise.
In 2023.
Okay, Alright, great. Thank you.
Hmm.
Thank you. Our next question does come from the line of Steve <unk> with Evercore ISI. Please proceed with your questions.
Hey, Tim This is Florida, we see from Evercore I just had a quick follow up question, so geographically and demographically youre customers are relatively more sensitive to equal nationally pressures and pertaining to this feature.
I guess, what's the how is the fact that it's trending so far and whats your expectation after bad debt levels through year end.
And two once twenty-three thanks.
Yeah, Yeah. Thanks for the question. Good question, you know Mednet as certainly return to pre pandemic levels.
In return you know really.
Third it started in the second quarter really returning to third quarter. So the teams are having to work really hard on collections as far as back to what normal normal sequences would be we're seeing more units at auction processes and those things are back to what we would see the levels of 2019.
Is it concerning us no not at this point, though these are levels that we're used to operating under and that's not everywhere. We have markets are little could be a little higher than that of the market is a little bit lower that but as a whole it's returned to average.
But again no concern at this point.
Okay and are you seeing any sort of level set that that makes it such be cautious linked to <unk> and maybe try to manage it the occupancy.
So.
I think we've tried to talk to it certainly occupancy is a piece of this and where we are looking at how and where we want to land throughout all of our markets. We.
We certainly did in the third quarter looked at marketing spend and the only reason you'd look at marketing spend as you wanted to drive more move in activity. We're going to look at you know where revisit street rates and discounting. So yes that is a part of the piece of the puzzle there will be some markets that we will certainly react a little bit harder if we want to drive some more occupancy and we think that's the right revenue math problem.
And so that's what we would work on we also have markets that are performing very well, if we're going back into and say can we drive a couple more points of occupancy markets that are performing very well. So it's not always a negative thing that we were trying to balance all of these pieces, where we spend our money how we use rates, how we use discounting but.
Certainly on our mind about where we balance and where we finished.
Okay. Thanks, I appreciate the color.
Thanks for the questions.
Thank you there are no further questions at this time I would now like to hand, the call back over to Tamara Fischer for any closing comments.
And thanks to everyone for your time today and for your interest in and support of NSA, even with moderating fundamentals and tough comps, we had a great third quarter and we're very optimistic about the rest of the year and into 2023 as I mentioned earlier self storage has demonstrated its resilience in challenging economic times and it was one of the best.
The best performing property type over the past 25 years.
We look forward to seeing many of you in San Francisco in a couple of weeks, thanks and have a great day.
Thank you. This does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation enjoy the rest of your day.