Q3 2023 National Storage Affiliates Trust Earnings Call
Greetings and welcome to National storage affiliation third quarter 2023 conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference. Please press star two.
And your telephone keypad as a reminder, this conference is being recorded it is now my pleasure to introduce your host George Hoglund.
He is president of Investor Relations for National storage affiliates. Thank you. Mr. Hogan you may begin.
We'd like to thank you for joining us today for the third quarter 2023 earnings conference call of National storage affiliates Trust on the line with me here today are NSA as president and CEO, Dave Cramer and C. S. L brands into Gotcha. Following prepared remarks management holds up 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 you know.
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 and national storage affiliates dotcom.
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 November 2nd 2023.
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 details concerning our forward looking statements. Please refer to our public filings with the SEC.
We also encourage listeners to review the definitions and reconciliations of non-GAAP financial measures such as <unk> or if that's all <unk> and net operating income contained in the supplemental information package available in the Investor Relations section on our website and in our SEC filings I will now turn the call over to Dave.
Thanks, George and thanks, everyone for joining our call today, the third quarter was largely in line with our expectations as we continue to execute on the everyday blocking and tackling of our business.
Our teams did a great job navigating the dynamics of the seasonality in the competitive environment.
The back half of the year occupancy continues to follow typical seasonal patterns and we are nearing year over year occupancy Delta.
Similarly remains healthy and stable, allowing us to execute on our revenue management strategies.
There were several positive items to highlight this quarter, including the completion of our $250 million private placement.
Our team did a great job and the timing and execution of that transaction Treasury.
Treasury rates are higher today than when we priced the offerings that we were pleased to have that capital raise behind us.
We also continue to execute on acquisitions for our captive pipeline why our pros continue to replenish that pipeline by making acquisitions outside of the REIT.
This illustrates one of the many strengths of our pro structure.
I am pleased with our geographic exposure in our secondary market performance our.
Our msas outside the top 25 continue to outperform the portfolio average in revenue growth.
However, we are facing near term headwinds, including higher interest rates, which has muted the housing market that's slowing consumer transitions.
We're in a very competitive customer acquisition environment, which is pressuring street rates.
Challenging comps and parts of Florida due to hurricane driven demand last year.
We're also dealing with elevated new supply in a few select markets like Atlanta, Phoenix and Las Vegas.
That said all of these challenges eventually will ease it gives me confidence over outlook for MSA.
In the meantime, we continue to focus on the things we can control actually I referenced in regards to people processing platforms or customer acquisitions teams did a great job maximizing rental conversions by Jessie marketing spend and front end pricing.
Our revenue management team is utilized improved AI technology to maximize our ECR I program, a comprehensive investments in technology that we're making today will continue to to answer our results going forward.
We're also encouraged by the progress to date around our strategic dialogue involving overall portfolio optimization.
You'd be generating equity capital through programmatic joint ventures, non core asset sales and portfolio of recapitalization, we expect to provide an update on these initiatives over the next few quarters.
I think it's important not to lose sight of the long term attractiveness of the sector and the positive attribute that will benefit us going forward a few things to keep in mind, the new supply outlook is favorable in our markets deliveries are expected to drop by over 20% 2025.
Tumor remains healthy and stable.
Jimmy length of stay remains well above pre pandemic levels and activity and bad debt expense remained in line with long term averages.
Technology initiatives will continue to improve our ability to attract new customers and enhance our revenue management strategies, allowing us to react quickly to changing environments.
I believe MSA is well positioned within the sector to have a strong performance in the future.
Does that reflect on the sector strong performance over the last five years I want to point out that during that timeframe. Our average same store NOI growth was over 9%.
Core <unk> per share increased 86% well, it's a very strong result.
I'll turn the call over to Brendan to discuss our financial results.
Thank you Dave yesterday afternoon, we reported core <unk> per share of <unk> 67 for the third quarter 2023, which represents a decrease of six 9% over the prior year period.
The year over year decline, despite three 9% growth in adjusted EBITDA was due primarily to elevated interest expense same store NOI growth was essentially flat declining just 10 basis points.
We delivered positive revenue growth of one 1% on a same store basis.
Driven by growth in contract rate of approximately 5%, partially offset by a 400 basis point year over year decline in average occupancy during the quarter Archie.
Occupancy ended the quarter at 88, 5% down 150 basis points from Q2, and down 360 basis points year over year.
Early October occupancy finished at 87, 4%, which is also 360 basis points below last year.
Expense growth in the third quarter was four 2%.
<unk> declined four 7% from the prior year period, while property taxes were down two 2%.
These cost savings were offset by marketing expenses remain elevated due to increased competition for customers and a tough comp.
Well as insurance expense, which will remain elevated due to the policy renewals we have on people first.
We will continue to focus on minimizing our controllable expenses, where we can.
On the acquisitions front during the quarter and through October we acquired four facilities totaling $55 million, mostly out of our captive pipeline.
In the near term as Dave alluded to we are focused on optimizing our portfolio and we'll remain patient in regards to acquisitions.
Turning to the balance sheet during the third quarter, we repurchased $6 4 million common shares for $213 million.
We're encouraged by the volume of execution, we were able to achieve under the repurchase plan our board established last year.
We are confident in the long term outlook for MSA and believe the current trading levels represent a very attractive investment opportunity.
Subsequent quarter end, we issued $250 million of senior unsecured notes across four tranches in a private placement with a weighted average coupon of 6.58% and a weighted average maturity of five eight years.
We're pleased to have completed this transaction prior to the recent increase in treasury yields which are approximately 40 to 50 basis points higher than when we priced our deal.
Today, approximately 18% of total debt is variable rate mostly related to our revolver.
Going forward, we will take further steps to free up some capacity on our line of credit, which will naturally reduce our floating rate exposure.
At quarter end, our leverage was six three times net debt to EBITDA up slightly from $6. One times at the end of the second quarter and within our target range of five five to six five times.
Now moving onto guidance.
<unk> for Q3 were generally consistent with our expectations and performance in October continues to track in line as well.
As such we maintained our full year guidance ranges for same store performance in core <unk> per share.
The mid points of our guidance ranges as outlined in the earnings release are as follows full.
Full year same store revenue growth of 2.13%.
Same store operating expense growth of five 3%.
Same store NOI growth of 1%.
<unk> per share of $2.66.
Our guidance is based on a continuation of normal seasonality, which would include a modest amount of downward movement in occupancy in street rates for the balance of the year.
At the midpoint of guidance, our same store revenue growth in the fourth quarter would be negative year over year.
While this is the result of near term headwinds and coming off a record performance over the past few years.
I feel what they've emphasized in his remarks self storage is a great property type that has proven its resilience overtime needs based demand and the ability of operators to be nimble with revenue management strategies.
Thanks again for joining our call today, let's now turn it back to the operator to take your questions operator.
Yeah, if he would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue and for participants using speaker equipment may be necessary to pick up your handset before pressing the star T is.
Our first question is from Michael Goldsmith with UBS. Please proceed.
Good afternoon. Thanks, a lot for taking my question it seems as though the sequential deceleration in operating metrics was more modest than they've been over the last couple of quarters. So is that a function of the environment improving slightly is that.
Some of the larger step you've had some of the larger step downs in the past the comparisons are getting easier and then do you think the trend going forward should kind of continue to be more flattish as you've moved past some of the worst of it. Thanks.
Yeah. Thanks, Michael its Dave Thanks for the question Thanks for being on the call I think you're right in how Youre looking at it you know our toughest comps are behind us as far as you know year over year street rates and year over year occupancy.
As we go through as we really came through the third quarter September was really kind of the peak of the pinnacle of those.
Hi points and so as we head into the fourth quarter, you'll see us.
Have.
A little bit easier comps and we're starting to also the level out a little bit on street rates in a lot of our markets and a little less volatile it all volatility around street rates in some of our markets. So we're having a little easier comp in the fourth quarter those spreads will tighten year over year and that's due to the fact that last year, we held out a little longer on you know lowering our street rates, but it was really the third quarter when we.
The movement around street rates.
And you know and the teams have done a good job really looking at how do we you know revenue management practices and how we're really working with our existing tenant base.
And really looking at how were you know putting the customers that are with US today, we've had really good success around some of the technology platforms that we've been proved and some execution around that existing customer base, allowing us to really work on what we have.
Certainly today, there's still you know some pressure around some markets, where we have supply.
Markets were.
Street rates been more volatile because of that supply and demand ratios and so we've had to react to that but on a whole our portfolio.
We believe the diversification of where it's located and we've had some pretty good success moderating some of that.
Some of the effects of a great competition in supply in those things.
Thanks for that and my follow up question is related to the share repurchases can you talk a little about the funding source for US and is this a is this a true invested in the shares buying back just given where their price or are these to offset some of some of the O. P units you issued and then.
Would you consider to can get would you consider continuing to use this lever going forward. Thanks.
Yeah, So I'll start and Brian can jump in here and then again. Thanks for the question you know our belief in our shares and our belief in our company and our belief and adding shareholder value. We think our stock is a great purchase.
You know what the or it is currently trading at and and where it's valued at today, we think purchasing our stock is a great opportunity for us and we were happy to fulfill what the board has approved for several year ago, you know pretty much fulfill that our commitment to repurchase our stock back.
From our perspective, and we look at where we're at with our strategic initiatives and what we're trying to accomplish in.
In the future we talked about on our last call is we're looking at initiatives around our portfolio and optimizing our portfolio and if you think about part of that portfolio optimization, we're evaluating sale of noncore nonstrategic assets, we're evaluating some portfolio opportunities around jb's, where you might read recapitalized.
Stores into a JV and so the team has done a really good job and we've been very thoughtful about studying our portfolio top to bottom and really thinking about where we want to operate how we want to operate and where maybe some locations don't fit into that strategy going forward and the team has done a good job identifying assets that would fit in one of these categories, whether it be some kind of recap.
Utilization or sale and we are vigorously working on those initiatives I don't have much more to report as far as definitive pieces of that but I can tell you I've been pleased with the progress. We've made the team has done a great job identifying and working the plan and so I'm pleased from that aspect of it yeah.
Yeah, and Michael This is Brandon I mean, the only other thing I would add is on the repurchases, it's not necessarily the offset as you as you said in your question.
Equity we've issued this year I mean really what we've issued this year has been weighted towards our preferred equity preferred op units and the subordinated equity with our pros now having said that we grew a lot and very quickly in 'twenty. One early parts of 'twenty, two and so some of the equity common equity we issued during that time was.
At higher levels than what we can repurchases. It out now so that's certainly part of the math and the obvious.
Benefit that goes into it but.
That's just the only other thing I would say in response to your question I think what's important in terms of what Dave spoke to is that there is a multi quarter execution of our strategy here. So what you saw in the third quarter, we're very pleased with but more to come in the next couple of quarters.
Thank you very much good luck in the fourth quarter.
Thanks, Michael.
Our next question is from Juan Sanabria with BMO capital markets. Please proceed.
Good morning, Thanks for the time, just hoping you could talk a little bit about the street rate trends throughout the third quarter and provide an update for how October trended on a year over year basis, and as part of that where you feel most comfortable within the same store range. It's it's still pretty wide, we only ever quarter.
Elapsed since you're getting passed.
I include that in the answer that would be fantastic.
Yeah. Juan this is Brandon So street rates year over year as we finished the third quarter was similar to.
The update that we gave for August when we talked about those being 15% down year over year, and so that held pretty steady on a year over year basis in September that Delta has compressed a little bit and that goes to what Dave said earlier that last year, we started.
To move rates down really in late Q3, and early Q4, and so we're hitting that conflict gets slightly easier, but they're still they're still negative double digits.
And then in terms of the guidance.
Youre right the range as we kind of kept it where we revised two in August the thought process. There was just whenever we've revised guidance in the past in August we don't spend a whole lot of time micro tweaking it in November.
And frankly this year has been more difficult to predict and and and you saw that based on what we introduced in February and what we had to revise in August so I <unk>.
Going forward, including when we introduce guidance for 'twenty four and February it's possible that our range ranges than are a little wider than what we've historically introduce to start the year where were most comfortable is certainly around the midpoint of the range I mean, the on revenue for example at the high end of our full year guide it would imply a <unk>.
Quarter, that's accelerating from the one 1% Rev growth that we had in third quarter and I, you know I would characterize that as unlikely so.
So I would guide you to.
Really the midpoint of the range on all fronts. Rev. You know opex in NOI on the same store pool.
Great. Thank you and then.
You guys here.
Reinvesting in the platform and the system skipping some of the rapid growth you've had over the last couple of years. So just curious as we start to think about 24, how we should think about G&A growth.
Again as you reinvest in the business.
Yeah. That's a good question you know, we're not prepared to speak to two specifically to 'twenty four but we certainly are making investments some of those investments we've been making throughout 'twenty. Three so that's kind of already baked in those investments are on the personnel side, we've hired staff there's been opportunities.
You know frankly, if given the.
Activity in our spacing and there was opportunities to to add folks who had storage experience to our team. There has been technology investments for sure some of that runs through G&A someone thats capitalized and then it gets.
Depreciate it through our corporate corporate investments.
Investments in that that that does flow through the <unk>.
But it's only only school impactful given you we're spreading those costs out over a multi year basis. So I wouldn't characterize those investments one is like tremendous needle movers in terms of in terms of like G&A costs, I think they're needle movers in terms of the ROI that they can provide but in terms of the G&A line item, it's just not a super nowhere.
The Delta.
Thank you.
Yes, the Q1.
Our next question is from Smedes Rose with Citi. Please proceed.
Hi, Thank you I just wanted to ask you a little bit if there's any sort of change in the way that you're thinking about occupancy versus rates I mean, I I get that everyone's trying to maximize revenue per unit, but occupancy is now in the high 80 is kind of back to where you were pre pandemic.
We.
And others seem to be maybe being more aggressive to maintain occupancy over.
Over 90%.
For you know for various reasons I'm just wondering.
Is there any tools like with what's going on in the housing market up a bunch, it's market or anything that would make you change kind of the way you think about what's the right occupancy level too.
Heath.
Yes, smedes. Thanks, that's a great question and thanks for being on today.
Certainly you know the.
<unk> housing market and the lack of transition has certainly changed one of the demand drivers.
In our business and we have a lot of them, but certainly that's one of them.
Over the years has provided good source of tenants for us.
You know what the team is doing is really trying to balance how much we want to chase occupancy at the expense of rate and discount and how does that affect the life you know lifetime value of a customer and really how does that fit into our revenue model and I think the team you know between marketing spend between discounting between how aggressive to be on asking rent street rates.
Three rate.
And how to really balance occupancy and and you know I'm very pleased so if you look at our annualized rent per square foot growth has been strong.
And I think we're finding our foothold around in a little calmer around the street rate movement.
And trying to balance that street rate occupancy discount to drive the revenue number we want and so what I would say as you know in the markets, where it's been very volatile like you know where you are.
New supply like Phoenix, and Vegas, and Atlanta, we probably had to react a little harder, but we have a lot of markets, where we've actually found a good occupancy foot hole.
And been able to really hold some street rate activity to leveling off and so to.
To your point, it's a balance I think we're probably returning a little bit more to our heritage where.
We're not necessarily going to chase occupancy at all costs, we're going to we're going to balance and trying to find our revenue path with balance occupancy rates and discount.
Okay, and then just to follow up on that I mean, any change in the way that you're thinking about it.
See our eyes going forward, either more moderate or less frequent or no.
Due to the same degree.
We've been that's that's to me been one of the silver linings to our business for for a lot of years and it remains as our customer base is healthy or stable.
Outside of the revenue management business, we've been able to maintain our cadence and our level of increase in quantity of increase in and we're just not seeing any change in customer behavior because of that program and so a lot and maybe were not attracting as many from the top of the funnel because of the little bit slowing in housing market and the muted housing market.
The existing consumer base is very healthy and we've had great success there.
Okay. Thank.
Thank you.
Thank you.
Our next question is from Jeff Spector with Bank of America. Please proceed.
Great. Thank you back on the occupancy again, you have had the most loss.
No versus your peers.
The third quarter of 'twenty two.
That gap hasn't.
Close as much as appears so again, just trying to think about what your comments on the strategy you know occupancy versus rate.
And then or is it certain markets that are maybe weighing on the portfolio versus others.
Good question and a good thought and thanks for being here.
We had a lot farther to fall if you really study what happened during Covid, where we started in 19 and 20 and our occupancy levels, which we're coming close to now as we're back down to it.
We had the most occupancy gain of any of the peer group any of them and we had we've had the most fall off obviously and if you think about where we're positioned today. It's still a result of that tough comp I mean, we're finding our you know we look at supply demand. We look at market equilibrium, we look at where our portfolio and run in Iraq.
Currency level generates the maximum amount of revenue that we're trying to strive for I think thats the spreads youre seeing it just as we cycled back down into what I would call normal patterns.
We certainly are working to find the right balance between those two.
On last call I do think as we look going forward, we want to make sure as we optimize our portfolio do we have the right unit mix in all of our locations for the right occupancy levels, we run a run at and so strategically over time, we are looking at.
Sizes of units how long they're on market. How full are they is there opportunities for us to change our unit makes it a little bit and Reattribution, our properties versus just discounting unit down 40% to try to fill it up we think there is a better approach to that and so you.
You know I think.
As we cycle through this last quarter as you know some of that occupancy comp in that spread will start tightened to what the peer group it looks like year over year.
Okay. Thank you.
And then how does how are you balancing the leverage you know your leverage it is higher than the peers versus the share buybacks you know I definitely appreciate the share buybacks, but at the same time.
It feels like an environment, where our company should be reducing debt.
How are you balancing those two.
Yeah, Jeff Good question, it's obviously top of mind for us and that goes back to my my earlier comment about this as a multi quarter execution. So I think at the end of the day. Our our intent is when we're done with these core set of immediate initiatives that <unk> spoken to.
Our leverage is going to be.
Equal to what it was before we endeavored the executing on all these strategies or even lower right and so everything that we're doing now.
With an eye towards ultimately, creating more liquidity so that when market conditions are more conducive. We can grow externally at the same pace that we enjoyed for several years.
And.
Also address the annual debt maturities that we have coming up.
And you know putting ourselves in a position that less capital position to fund our growth and to address kind of those annual capital needs.
Thank you.
Yeah.
Our next question is from Samir Khanal with Evercore ISI. Please proceed.
Hey, Dave on on maybe getting back to the ECR I question that.
How much has that sort of moderated through the year.
It's a good question Sameer.
For us.
I'd say in the last couple of months.
Probably come up are really really high we were pushing really really hard through the summer.
Frequency a little bit elevated in the summer, but certainly on the amount of rate increase.
It's moderated slightly in the last couple of months frequency Hasnt changed cadence hasn't changed but we've come off a little bit on.
The top in percentages of rate increases.
And some of that's a function of we got a lot of tenants process through the summer.
No that was great. We got out in front of that piece of it and some of it. We're obviously as you look at market conditions and units that are opening up and those things, but I will tell you we are still well above pre pandemic levels and the technology. As you know we have a better line of sight, we're able to react quicker I understand trends quicker.
I'm really pleased with the position we're at to really continue to execute in the market conditions. We're in.
Okay got it and then I guess, the switching of the transaction market.
It looks like you acquired a few assets I mean, how are you thinking about.
So the revenue growth NOI growth, maybe the underwriting of those properties.
Yeah and another good question certainly you know we were able to tap the captive pipeline. So those are assets. Obviously are pros have had a good line of sight on them for a number of years, whether they were filling them up or built them and work through the process of seasoning them up certainly next year.
It's going to be another challenging year as far as you know as you look at revenue growth, but we also know we're adding stores in markets, where we have operational efficiencies, we think as we're bringing them in there's still upside to those.
We believe we brought most of those assets in a round of right around six cap today and as you look forward moving forward you know.
We will grow out of that and have some success around it and I think really the six caps a year forward looking if you think about it that way.
And then we will continue to grow through it but you know from a revenue perspective, we certainly moderated our expectations on underwriting and how we're thinking about growth on assets. We're looking at I think that also contributes to the overall market conditions of how people are buying properties today, it's hard to underwrite a tremendous amount of revenue growth and lessen asset has you know.
Some Philip left into it or some something that has not gone on from a seasonality seasoning point of view.
Hope that helps.
Okay got it thank you.
Thank you.
Our next question is from Todd Thomas with Keybanc capital markets. Please proceed.
Hi, Thank you.
Brendan Dave you know with regard to the buybacks.
Thank you characterized it as a multi quarter execution.
So does that mean that you anticipate continuing.
To buy back stock here in the near term or do you pause a bit here I just wasn't clear on what the message was and.
It sounds like some of the dispositions or the recap plans that you're alluding.
Alluding to you know.
Or are you expecting to reduce leverage but is it possible that leverage rises above the six five times leverage level in the near term just between additional buybacks and.
The near term negative NOI and EBITDA growth that you're forecasting.
Yes, all good questions I'll try to try to work through them and Youll tell me if I missed this.
He is out there so.
My comment about the multi quarter execution was definitely all encompassing meeting.
Raise we did post quarter end in October the share repurchases that we did in the quarter.
All of the portfolio optimization strategies that Dave spoke to that will be a source of capital for US all of those things is what I was referring to when I said multi quarter execution and so when you wrap all those things together back to Jeff's question, I think that's where you'll see us bring leverage back towards the mid point of our range of comfort five five to six five.
Times.
The share repurchases, we have a lot of conviction in and I think the execution in Q3's speaks for itself in terms of the dollar volume, we only have about $28 million left on the current program. So to your question will we could we do more we would obviously have to refresh the program there and that will be something that we disclose when we do it.
It remains a possibility that something that we'll talk about as a management team and with our board.
I think that.
You are right with seasonality in our business sure.
Hold everything steady and you just roll forward.
Quarter typical seasonality from the third quarter, it would imply our leverage ticks up.
But look by the time, we're talking again in February I would hope that whether it's in the fourth quarter as of December 31, or post year end I would think that we would have a good update for you and others about execution on these other strategies that would bring that number in.
Okay, and I guess sticking with that a little bit.
Can you provide a little bit more color, maybe maybe bookend you know.
How much of the portfolio that you might be looking to sell or recapitalize. It sounds like you know joint ventures on the table.
Perhaps some some outright dispositions and and just to.
Continue there is a strategy focused on you know what in terms of the portfolio optimization.
It was a strategy focused on the geographic footprint of the portfolio.
Just sort of growth or something else altogether, I mean, how should we think about.
What that recap or the dispositions you know it might be looking to accomplish.
Yeah sure Todd. Thanks for the question you know I am not going to give a whole lot of color about size. Obviously, we're still working through a number of factors there what I will tell you you're right about as well we've had tremendous growth one since IPO and really if you look at the years 'twenty one 'twenty two we're able to use it to buy.
A few sizable portfolios and when you buy a portfolio of certainly you have assets then those portfolios that maybe do not fit strategically long term or do you want to go and so what I would tell you. We did is we really looked at the portfolio top to bottom.
Ask ourselves if you looked at a 90 10 rule for an example, and ask yourself, 10% of the assets that you know where where they position do we have synergies do we have operations that are used to have multiple properties are we able to grow are we happy with rent growth. All the factors, we look at as far as long term.
Owning assets in those markets and the team did a good job just analyzing across the country that we were not geographically focused in one area you were asking yourselves as you look at markets, where there's singles where theyre doubles in these markets have we not grown or had the ability to grow do we not like the demographics of the market.
When you look at.
From that aspect of it we were having great discussions and the team has done a good job working that plan and we think there are real opportunities to go out and and really execute on sale and disposition of assets.
From a portfolio recapitalization of the JV is a little bit different approach. There I mean, you look for stores where <unk>.
Maybe you want to Delever some of the risk you have in particular markets you look at maybe opportunities, where you can infuse capital and improved performance of the properties things like that that long term properties. We want act properties, we want to own long term, but it certainly gives us an advantage or opportunity to go out and kind of you know re look at those properties <unk>.
Those properties and the JV is it provides a good opportunity for them.
Okay, and and and Dave one more question if I could you mentioned in your prepared remarks that the pros continue to make acquisitions outside of the REIT can you just speak to that a little bit maybe put some numbers around that activity and I'm just curious.
How they're sourcing deals how theyre going about that and maybe talk a little bit about the pricing.
And also where they're sourcing capital from today.
Yes sure sure Great question, you know and that is an advantage of our pros have known this for years, they're very good at it they've raised money for years, they have friends and family networks. They have seen a small small investment firms that have certainly invested in them over the years and you know with the NSA program. That's one of the advantages that they can roll those in <unk> and.
And J P O P units at the time when they want to roll the properties into the REIT of course.
I would say numbers, if you think about what theyre looking to buy some of them are developing some of them are value add when they buy a small property and building expansions. Some folks are buying maybe C. O deals that they think are a great opportunity that it's the right time to be buying those those pieces of it and these are all activities that we like to see outside the risk. The pros are really taking more of that risk and they'll season the asset up.
And then bring it to us to see if it's an acquisition target for us in the future and again from a source of capital they're they've all done this over the years. They have a lot of good line of sight on where to get the pieces from.
Pricing wise I'm, not going to get into because there's a lot of moving pieces. There if you're building or your value, adding or if youre buying a C. O deal the pricing metrics are quite wide through all those pieces of it.
If you look at it I would say from a numbers perspective.
10 to 15 stores have been bought by the pros. This year and are you now and Theres still sourcing more and then there's some other activity I know, they're working on them and for US we like it and the fact that it just continues to restock our captive pipeline.
Okay alright, thank you.
Thank you.
Our next question is from Spencer Ottaway with Green Street. Please proceed.
Spencer please check and see if your phone is muted.
Yeah.
Okay. We will move on our next question will be from key and Karl with Wolfe Research. Please proceed.
Hey, guys. Thanks for the time, maybe a two part question here I'm. Just curious what are you seeing top of the funnel demand and how that's benefiting from marketing spend and then how you're thinking about the mix between your marketing spend and your street rate.
Yeah. Good question. So thanks for joining to top of the funnel.
Certainly we've been able to generate good activity there and in a lot of that activity is it because of the additional marketing spend and so.
The teams have done a good job really analyzing where we're getting our best value from our paid search perspective, and really looking at how we can drive the right opportunity I would tell you. What we're focused on is conversion rate and so as you think of the top of the funnel you can produce a lot of people at the top of the funnel by marketing spend but it's how you get them to convert through the funnel that's important to us and so that's where discounting.
And street rate and in that conversion piece, all come together and so you.
You know us in the markets, where we have good footing on occupancy we have pretty stable street rates conversion rates have been.
Little more easy to predict and a little more easy to maintain markets, where you have some pretty Wilder dynamic street rate movement, a little more challenging you know I mean, if you if you're generating.
Additional 5% at the top of the funnel, but your conversion rate has dropped by 4% and then you've had a pretty volatile street rate market. Obviously, we have to decide ourselves we want to continue to spend and drive the top of the funnel and Laura conversion rate or do we want to adjust our pricing it and keep that conversion rate.
The levels, we want to keep it at.
I would tell you in our business, it's a store by store market by market adventure right and you know one thing I will talk about and we've been talking about as our technology continues to improve our bid models, our new and improved and our AI technology behind those bid models, our new and improved and so the team is much more efficient at what Theyre doing.
Today versus where it would have been a year or two or three years ago, Our call center investment as well Kian is another one to call out I mean, that's an area, where we've really made.
Some big advancements on our board and our proprietary platform and that I should have added that when when one asked an earlier question about our G&A because that's another area, where our investment in these technology manifests itself. The call center expense for US is in the marketing line item in our property Opex. So that's that's another area where that.
That shows up and impacts.
The numbers outside of just the pure G&A.
Got it and then just one on guidance I'm just curious what's baked in from an occupancy perspective, I think Brandon said last quarter, you guys were expecting 200, and 250 basis point drop from peak to trough just wondering if that's still in play and where you ultimately see yourself ending the year at.
Yeah, I think it was $2 50 to 300 was the range. We gave from the end of June through the end of the year.
Yeah.
A working theory, I think for us and others in the sector was that maybe the back half of the year, we wouldn't see some of the the same seasonal occupancy declines because in the spring summer we didn't quite see the same magnitude of uptick.
So that that potential scenario.
The optimistic scenario was baked into more of the high end of our guidance Kagan Whats played out as it was in fact, so much closer to kind of your typical seasonality. So we lost 150 basis points from the end of the end.
As of June through the end of September another 90 basis points to the.
October and so that's that's pretty much in line with kind of your pre pandemic years, 2018, 2019, and so whats baked into our call. It base case projections, which is really the midpoint of our guide is.
Continued diesel or loss of occupancy of maybe.
It could be 100 basis points from the end of October through December that wouldn't be out of the norm.
Got it Super helpful. Thanks for the time guys.
Thank you.
Our next question is from Spencer all the way with Green Street. Please proceed.
Thank you sorry about that.
Do you think you commented on the difficulty in underwriting each operations in the current environment.
That in mind can you just provide some color on the depth of the potential buyer pool, and your confidence and ultimately being able to execute on disposition potential JV.
We have a high level of confidence you know one thing I would tell you is throughout our history and prior relationships and all the things that we've done in the past and we have a lot of relationships in this industry and as we look at.
Possible sale of assets. There are groups of buyers that we know that are well capitalized that can get the deals done that we've reached out to and we're having discussions with and so from that aspect of it you know they we know that these folks are in the market already they have assets in the market they would be strengthening in their positions in the market, where we believe in a market with one or two assets.
And so from that aspect, it's a win for them and it's a win for us and so I would just tell you you know as we talked about our last call. We are seeing transactions trade and we're seeing transactions change and a lot of the markets that will probably be leaving and the size of the transactions are fitting what are sellers expectations are and.
So at this point in time I would tell you, where we've got a good confidence level going into it.
Alright, Thank you guys.
Thank you.
As a reminder, it is star one on your telephone keypad, if he would like to ask a question. Our next question is from Ron Camden with Morgan Stanley. Please proceed.
Hey, just two quick ones on same store revenue I think you mentioned in your opening comments.
Hi, I think negative 1.1 and for Q.
Historically, we've talked about <unk> being a good sort of barometer for for the next year and just curious how we should think about that number. This go around and what what's what may be different this time around and what should we be keeping in mind as we're trying to think about where next year can shake out.
Yeah Ronald this is Brandon.
Yes, I mean, the exit point for the calendar year. So a good way to start projecting the next calendar year.
But it is tough right and you know the ingredients to the recipe, it's where street rates of move we've got the negative occupancy Delta, we're working with as Dave mentioned earlier, the extreme positive in our sector is the ability to be nimble with revenue management through the cri to existing customers.
So we all know that right. It's a matter of how do those dynamics play out.
Our demand levels higher in 2020 for it than what we've seen here in 2023.
Yeah, we'll get into that more obviously in February I think for us what we're focused on is.
Historically when the sector you know on the rare occasions that it hasnt countered negative revenue growth, it's been relatively short lift right. So where exactly does it go in Q1 of 'twenty four or Q2 was 24 when exactly is the bottom I mean, those are fair questions Theyre just not the questions that we're spending a whole lot of a lot of time trying to answer in our day to day right now.
We're taking a much longer view with a lot of the things that we're executing on right now.
And with the belief that the resilience of the sector is going to prove out.
Its going to demonstrate itself yet again and.
The negative territory will be we think relatively short lived.
Got it makes sense and then just a few expense line items the trailing five quarters in the supplemental Super helpful. So just aren't on one on property taxes, you know running two 1%.
Year to date anyways, maybe can you talk about what is there sort of a one timer or that that that's helping that or is that sort of a good run rate and then I'll.
On marketing expenses, you know I see that Scott.
It's gone up year over year.
Just thoughts on how much more you can lean into that.
Yeah on property tax Ronald.
The Q3 number did have some some favorable adjustments so downward downward adjustments to the expense in Q3 that related to kind of truing up the full year numbers as we got value assessments with tax bills in hand, I would say I would how.
How do you look at the year to date, the nine months 2023 number and annualize that it's probably a better approximation and that would that would give you a number that year over year is probably going to be in the 4% to 5% growth territory for property taxes, you can see in that trailing five the fourth quarter of 'twenty two.
A tough comp because we had some some favorable adjustments there's potential for maybe some of that this year, we'll see with Texas in particular with.
State surplus.
What the final levy rates are in some of those jurisdictions.
Marketing you're right that's definitely off some of that is just the comp we weren't spending the dollars last year.
Our spend levels are back to maybe a little bit higher than call. It. The norms that we had in 2018 2019 as I mentioned before we've made some call center investments. So that's contributing to that but the majority of that line item is your your paid search spend and we're using those dollars to judiciously.
Where we think there is no positive returns right.
Great. That's it for me thank you.
Thank you.
Our next question is from Eric Loop child with Wells Fargo. Please proceed.
I appreciate it I appreciate the question guys.
So I think in your prepared remarks, you talked a little bit about supply deliveries being down I think 20% by 2025. So maybe could you talk about what youre seeing in your markets in terms of new construction starts.
Interest rates, probably having some impact on that and whether youre seeing any difference in construction activity between call. It your more primary versus secondary markets.
Yes, Eric Thanks for joining a good question.
We certainly have seen the new starts slow considerably.
For a variety of reasons headwinds and interest rate.
Uncertainty and outlook on what the future as far as revenue growth and fill rates look like.
Availability of capital there are still headwinds around getting contractors and everybody lined up and get an approval is going and so as a whole nationwide. We've we've seen new construction starts certainly slow and we've seen proposed projects, maybe stall or take longer or maybe not even come at all.
I think the markets that we still feel the most pressure is one some of the ones, we called out Phoenix Las Vegas around parts of Atlanta.
These starts were had been started and are finishing up now or.
Or there are still a few new starts in those markets and so I would generalize it and probably more of our major markets is where we've seen the most competitive pressure in our secondary markets not as much.
Gotcha. That's helpful. Thank you and just as a follow up on the asset disposition topic I.
I guess, how do you think about the various use of those potential proceeds between repaying debt additional M&A or repurchasing an additional stock and as you look at the attractiveness of those do you should we think about <unk> <unk> per share accretion or how it impacts your longer term same store growth just maybe some color on how you are.
Assess the attractiveness of those various dispositions. Thank you.
I think all the things you mentioned are potentials for how we would use the proceeds I mean, certainly we've got.
Mounts drawn on our revolver so almost immediately.
Use of funds to reduce that and which is.
Carrying a pretty healthy interest rate cost today.
Spoke to you know share repurchases earlier, we'd have to refresh our stand up a new program, but that remains a possibility and then we do want to position ourselves to grow externally again, and that's not going to happen in mass until there's a rebalance in terms of cost of capital and cap rates when that happens, we certainly want to be ready to go and so all of those things are what we're trying to.
To position ourselves for I think the.
Assets that we've identified.
Dave spoke to earlier they are generally are of.
The type that are probably going to see.
Improve our occupancy profile slightly improve our NOI margin profile.
Once they are no longer part of the portfolio not not a tremendous amount, but it will still improve the quality of the existing portfolio and that's certainly a clear intent of these strategies.
Thank you.
Thank you.
Our next question is from keeping Quinn Kim with true Securities. Please proceed.
Thanks, Good morning.
Good morning, So I was curious it eventually we're going to hit.
Yeah occupancy being flat and three rates being flat at some point.
Is there a scenario as we get to that point that same store revenue could still be negative.
Just because even though E C. R. I program is doing what it's doing.
You'll have that.
Cost to release those customers that left at higher rents.
So it's a good question keeping in thanks, and thanks for joining.
Yeah.
Maybe there could be a scenario like that certainly what we're seeing also is the compression of the rent roll down and so I also think we've hit the peak of our rent roll downs, and so as occupancy spread and actually it comes tighter as our street rates level out at.
And you know what we're turning over time is longer term tenants I'd add that if that longer rent roll down implication, we're starting to see that roll down tightened because we're turning over people, who live with a six months or people, who have been with US nine months who've been out a little bit less of a street rate entry level and so that first ECR is making up for that that compression around that rent roll down.
So I would not expect it to be long if it did that would just be my personal take on that but there could be a situation.
And what is the rent roll down and through Q.
So the rent roll down in <unk> as you know at about 18% on average almost 19. It peaked in September 23, Keven. So.
As you know as you started the third quarter much closer to around 14 finished up about 23 and then in October it's fallen off so.
Like we said with street rate gap in occupancy gap, we think September was probably the peak.
And our last question from me.
Store payroll costs have been pretty flattish sequentially, just curious as you look forward.
What kind of.
Growth in expenses should we expect from that line.
Probably a little tougher line of sight, there we've done a lot around in store initiatives and use of technology in store operating hours and head count and so the teams have done a wonderful job really working towards the new staffing model and it's still evolving we've had some good success in and with what we've really been doing is not re.
<unk>, we've been through attrition and we've been doing it.
As opportunistic opportunistically as we can.
We've had two so actually three really good years of payroll.
Troll and payroll expense.
You know looking forward, we think there's a little bit more around head count that we can work on it and I think that the true test for us EMEA store operating hours when do we have to be there when the consumer not needed to be there how can we use technology to supplement that.
So again I think maybe on our next call. When we're talking about 2024, we might have a little more color around that for you and even the portfolio optimization strategies keven.
Or is this topic as well right because today's earlier point, where we're identifying assets or markets, where we only have 123 assets and don't see that opportunity or desire to really grow and if we can exit those and redeploy and intensify further in other markets that helps when you think about some of that operational overhead that that makes it too.
Store level costs.
Thank you.
Thanks, Kevin.
Our final question is from Juan Sanabria with BMO capital markets. Please proceed.
Hi, just wanted to ask a follow up on.
Cap rates essentially.
You said you'd transacted on the most recent acquisitions in the fourth quarter around 6%. So just curious if you think that's a good indication of spot yields or if that's maybe a stale number acquisitions were kind of agreed to once.
Back and not indicative of where rates are today. So just curious on the commentary with regards to.
Transaction pricing today versus that 6% cap rate earlier quarter deals.
Yeah. Good question, Juan those Theres, a little bit a legacy to those to your point as we do those deals took time to materialize and really work through the process.
It's hard with cap rate because it's also these were one off assets in one off markets.
No.
You know that could dictate.
If it's a five cap market or a seven cap market right. I mean, this dependent on the type of asset type of quality type of market.
I think.
Cap rates today, there are certainly starting to nudge up a little bit.
But there's still a big spread between sellers expectations and buyer.
And you know in our industry you typically don't see a lot of stress in the product type and so.
We are seeing.
The video properties sell we're seeing smart.
<unk> portfolio cell.
And you know what I mean, and we're also seeing deals not trade because of the expectation of prices not being met.
But I would tell you.
You know if you know.
Yeah.
Looking back to where we've come from 'twenty, one to 'twenty two now to 23 cap rates are definitely nudging up.
And I don't know if its 25 50 basis points from where they were maybe a year ago, but it's also by market by property type you know a lot of lot of variances in there right that drive that cap rate.
Thank you very much.
Thank you.
We have reached the end of our question and answer session I would like to turn the conference back over to George Hoglund for closing comments.
Thank you all for joining the call today and we appreciate your continued interest in MSA, we remain confident in the long term outlook for our business and we look forward to seeing many of you at the NAREIT conference in two weeks.
Thank you. This will conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
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