National Storage Affiliates Trust

And the quarter played out pretty much exactly as we expected. We acquired 12 stores valued at approximately $93 million. Gap rates on our first quarter acquisitions averaged 5.3%. Meanwhile, our focus on realizing that embedded growth in our 2021 acquisition assets contributed to our first quarter results and to our healthy upward revision to guidance. Subsequent to quarter end, we closed with one of our JV partners, on the acquisition of a high quality seven property portfolio strategically located in the Houston MSA and valued at $208 million. This is a strategy we've discussed as enabling us to acquire high quality assets and grow even in a low cap rate environment. As a reminder, we earn acquisition and management fees as well as an incentive promote on our JV acquisitions, which boosts the return on MSA's invested capital. This makes acquisitions within JVs an attractive option when faced with a low cap rate environment and is yet another benefit of our diversified capital platform. Overall, I'll say it again, it's a great time to be in self-storage as the results surpass even our own expectations and fundamentals remain strong. Our exceptional first quarter results and continued momentum into the second quarter furthered our conviction to meaningfully increase full-year guidance which Brandon will address in his comments. I'll now turn the call over to Dave to provide color on what we're seeing on the ground and with new supply. Dave?

Thanks, Tammy. The positive momentum that we experienced in the fourth quarter continued into the first quarter and has only gotten stronger as we progress into the spring leasing season. We continue to be pleasantly surprised at the strength and durability of consumer demand and our ability to continue to work our revenue management practices. We ended the first quarter with same-store occupancy up 140 basis points over the prior year. Our occupancy is following normal seasonal trends and declined by 20 basis points from year-end to 94.8% at the end of the first quarter. Occupancy at the end of April was 95.1%, consistent with the expected seasonal increase as we enter the spring leasing season. We were able to hold discounting and concessions well below historical averages at 2.2% of revenue. We continue to have great success with our revenue management strategies. Our street rates averaged 22% higher in the first quarter this year compared to a year earlier. Our rent roll-up in the first quarter remained positive at about 1%. The fact that it remained positive in the non-peak season when it would normally see a rent roll-down is impressive. As we enter our peak season, the rent roll-up has now widened to slightly above 5% at the end of April. Our contract rates continue to grow and we're up about 14% for the first quarter. As the year-over-year gap in occupancy narrows, we continue to offset it with steadily growing contract rates. Turning to new supply, we continue to see improvement. Rising interest rates and increased inflationary pressures are driving up construction costs and further restraining new supply. The percentage of our stores having a new competitor in a three- and five-mile radius declined a couple hundred basis points, to 27% and 45%, respectively. I'll now turn the call over to Brandon to discuss financial results and balance sheet activity.

Thank you, Dave. Yesterday afternoon, we reported core FFO per share of 68 cents for the first quarter of 2022, which represents an increase of 39% over the prior year period. Impressive year-over-year growth was driven by a combination of record acquisition volume over the past four quarters and double-digit same-store growth, both facilitated by our differentiated pro structure, and supported by our focus on Sunbelt and secondary markets. Same-store NOI increased by 22.2% in the first quarter of a prior year, driven by a 16.6% revenue increase, combined with a 3.1% increase in property operating expenses. Same-store occupancy averaged 94.7% during the quarter, an increase of 250 basis points compared to last year. Regarding OpEx, same-store growth came in better than expected due primarily to a 50 basis point decrease in payroll, a 2.1% decrease in marketing costs, and just 3% growth in property taxes compared to first quarter 2021. A decline in payroll was partially attributed to a longer time to backfill open positions and also reduced store hours on the margin. Now, moving on to guidance. Results for the first quarter were better than expected, including our non-same store pool performing ahead of expectations and the JV acquisition that we announced further contributes to core FFO per share growth. All in all, there were a handful of drivers that lead to the meaningful increase to our guidance. We expect higher growth levels in the first half of the year as comps become more challenging in the second half. Taking all of this into consideration, we update full year 2022 guidance with key highlights as follows. Core FFO per share of $2.80 to $2.85, which at the midpoint REPRESENTS A 4% INCREASE FROM OUR PREVIOUS GUIDANCE AND 25% GROWTH OVER PRIOR YEAR. SAME STORE REVENUE GROWTH OF 11 TO 13%, A 325 BASIS POINT INCREASE FROM PREVIOUS GUIDANCE AT THE MIDPOINT, AND NOI GROWTH OF 14 TO 16%, A 500 BASIS POINT INCREASE FROM PREVIOUS GUIDANCE. ADDITIONAL ASSUMPTIONS ARE OUTLINED IN THE EARNINGS RELEASE. TURNING TO THE BALANCE SHEET, WHERE WE REMAIN STRONGLY POSITIONED, DURING THE QUARTER, we issued $17 million of OP equity in conjunction with acquisitions and closed the remaining $125 million tranche of our previously announced private placement. Subsequent to quarter end, Coral Bond Rating Agency upgraded the credit rating of our operating partnership to BBB Plus from BBB Flat, reflective of our conservative balance sheet, multiple options for capital, and strength of the self-storage sector. At quarter end, our leverage was 5.7 times net debt to EBITDA, toward the low end of our targeted range of 5.5 to 6.5 times. We are very comfortable with our balance sheet, with no maturities through 2022, just 18% of our principal debt subject to variable rate exposure, and $185 million of availability on the revolver currently. We're committed to maintaining a conservative leverage profile and healthy access to multiple sources of capital. Thanks again for joining our call today. Let's now turn it back to the operator to take your questions. Operator?

Thank you. Ladies and gentlemen, at this time we will be conducting a question and answer session. If you'd like to ask your question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. In the interest of time, if you could please limit yourself to one question and one follow-up, and then re-queue for additional questions. Our first question comes from the line of Samir Connell with Evercore. Please proceed with your question.

Hi, good morning, everybody. I guess my question, Brandon or Tammy, is around the NOI guidance. I mean, you raised NOI guidance by about 500 basis points just two months after, I guess, providing the initial guidance in February. I guess what's changed here? made you comfortable raised, you know, by that magnitude, knowing that we're still going through the leasing season, you know, through the summer here. And then there's still, of course, the uncertainty about the second half and macro pressures here. Thanks.

Hey, Samir, it's Brandon. Yeah, thanks for the question. So a couple things. The first quarter certainly was a little bit better than we thought. But in February, we had a, you know, we have a good read on that, but it did come in a little bit better. So then really, it is kind of what you hit on, which is pace of the deceleration for the remainder of the year, based on the last two months and what we're seeing currently, we just have a lot more conviction about how the balance of the year, you know, may play out, you know, obviously within those ranges that we've given. Dave hit on some of those fundamentals most recently. You're right. There's certainly the critical leasing season that we have in front of us. But when you think about, for example, the be in place rate changes that we're processing to existing customers, you know, we've kind of made those decisions for a good chunk of the second quarter. So that gives us a good read on how we can expect that to play through subject to the customer response. So that, I mean, that's the biggest factor is just that pace of deceleration on the same store growth.

And then as a follow-up, are you getting any sort of pushback, you know, just trying to get an idea of customer behavior here, right? I mean, again, it's the pressure points for the consumer with inflation and higher gas prices at this time?

Good question, Samir. It's Dave. You know, we haven't had any, you know, everything we're monitoring and the responses we're getting on our feedback surveys, you know, you always get a little bit of noise around rate increases, but nothing has changed our opinion on our revenue management strategies. And everything we're doing seems to be, you know, being accepted fine. So, you know, we're at high occupancy levels. We're in a current rent roll-up situation with our street rates versus contract rate. It's given us a lot of confidence to continue forward with our strategies, and we're not getting a lot of pushback or a lot of feedback.

Thank you.

Thank you.

Thanks, Mayor.

Our next question comes from the line of David Belager with Green Street. Please proceed with your question.

Good morning. Just wanted to touch on occupancy. Amongst your peers, you seem to be the only one that had increased average occupancy and ending occupancy compared to prior year. Just want to get a better idea of what you're anticipating for the remainder of the year based on how occupancy is trended. Should we be thinking of this as roughly flat till we get late in the year and see maybe more seasonal patterns?

Good question. This is Dave. We feel like we're back into really more of a seasonal trend right now. We came off the non-peak seasons in the winter months, and we saw just a little bit of decrease in occupancy, and we saw April tick right back up. We feel like we're going to go into the summer months and see that normal spike in occupancy, which should allow us to drive some three-year growth and continue to work on contract rents. And then as the back half of the year comes back, we see more of a normal seasonal pattern as we finish out the fourth quarter. We're You'll see us come off, you know, 200, 250 basis points off our high in the summer months by the time we finish the end of the year.

And David, this is Brandon. The 95.1% end of month occupancy that Dave gave earlier for April, that's a 40 basis point spread positive over prior year. So it was 140 basis points at the end of March. So we're already seeing that compress, and that just has to do with the fact that last year in the first quarter, our same store pool grew occupancy from 92% to start the year to a peak of 96 plus, close to 97 in the summer months. So everything is playing out as we expected, where we have positive spread to start the year, and then going forward, as Dave mentioned, it could be flat or even negative in the back half.

That's helpful. And just flipping to the inflation side, obviously been dominating headlines recently. Just given your market exposure, generally lower household income markets compared to some of the others and the regressive nature of inflation, are there any markets where you have some concern on inflation impact to sort of your ability to continue pushing rents or given the lower price nature in those markets, is there no real relative difference?

This is Dave again. Good question. We don't have any markets that are really concerning at this point in time. You know, one thing about self-storage is It's month-to-month leases. We can be dynamic on how we price our street and what we do with contract rates, but it's really a low cost if you think about overall renting of a self-storage compared to your rent charges and some of the other things that are in the household budget. We're a very affordable option for folks, whether they're expanding or decreasing their footprint of size of what they have in their apartments, housing, and And I think what's really offsetting some of these inflationary things is there's a lot of other factors going on out there in the economy right now. There's still a lot of transition. There's a lot of movement of houses, a lot of movement of people moving around in rentals, transition around the country. I think all those things continue to support our sector and certainly support the markets we're in and where we're positioned very well through the Sunbelt states and some of these markets that are seeing transition. So at this point in time, we don't have any fear around the inflationary pressures that we're seeing in the country. Thank you.

Thank you. Thanks, David.

Our next question comes from the line of Jeff Spector with Bank of America. Please proceed with your question.

Great. Good morning. I have one follow-up on the comment that buyers are pulling back in recent weeks. I guess is there any particular type of buyer you're seeing in particular that's pulling back, or is it just kind of across the board?

Good question, Jeff. Thanks. I would say that there's not a particular type of buyer. And I would also say that my comment was somewhat anecdotal. So it's a little bit based on our own experience and what we're hearing from brokers and some direct conversations with other potential buyers. So I don't think I have much more color on it than that, to be perfectly honest with you.

Okay. Thank you. And then Just another follow-up, I guess, on supply. Dave's comments were very interesting, a decline of a couple hundred basis points. Is this just delays or projects getting canceled? It's pretty amazing that you're seeing a decline in your markets.

Yeah, that's a good question. This is Dave again. Two things are going on. So we've certainly hit the peak of new supply. And we hit that, you know, last year, a couple years ago, honestly. And we've had a declining amount of new supply hitting our markets to begin with. And the pandemic certainly accelerated the fill-up of that supply. And those markets are now benefiting from, you know, this new amount of demand and our ability to really drive performance in those markets. And so as we see it, you have no – the new amount of supply that's coming has diminished. So the amount of new starts are less than they were, and that's from multiple factors. It's pressures around getting projects approved. It's pressures around affording product. We talked about construction costs going up and delays in getting approvals from cities. So we think it slowed the amount of new supply that's coming our way, and we're also psyching off the peaks. And so if you think about it in those two terms, our markets would see less new supply, and the length of time of that new supply that's now filled up is really not the pressures that we would have seen two years ago and even last year. We do think supply will come. We think it'll be tempered versus maybe previous last run-ups for a lot of the factors we talked about. It's harder now to buy land. It's harder now to get projects approved. It's more expensive to get them completed. And so I think those pressures will continue to, you know, put headwinds in front of new supply.

Thank you.

Thank you.

Our next question comes from the line of Samides Rose with Citi. Please proceed with your question.

Hi, good morning. This is Seth on for Smith. With respect to your same-store NOI guidance increase, are you seeing that play out in the geographies, like, you know, versus your prior expectations? Are you seeing, you know, better performance in Sunbelt markets or coastal urban markets or vice versa?

Yeah, this is Brandon. I mean, we're seeing the growth well distributed across the entire portfolio. Now, that also includes the new stores that were added to the pool, the legacy pools for last year and the year before that we report in the documents. We're seeing it just kind of pervasively. Certainly, to the comment that I made in the opening about our focus on secondary and Sunbelt markets, as we've seen the last few years, on a relative basis, those are certainly outperforming. Atlanta, for example, has been particularly strong. Our Florida markets, the west coast of Florida, despite having some concern about supply inventory coming eventually, continues to perform really strongly. So the storyline with our portfolio that you've heard from us over the past several quarters continues to hold true and play out.

Okay. And then just to follow up on the earlier supply comments, with rates increasing, have you seen any changes from banks in terms of what they're willing to lend to developers who might be penciling out different return expectations, giving rising interest rates?

This is a good question. There's certainly more and more pressure on underwriting to see if the project will pencil. Everything is more expensive, so we've seen rate increases as far as consumer rates and our ability to have good success, but the rising interest rate is certainly putting pressure on All types of deals. New deals, to Tammy's point earlier, I think it's also putting pressure on levered buyers because it's certainly changing the dynamic of what the returns look like. And so, you know, I don't have a specific example for you, but we do know that, you know, rising interest rates will put pressure along with all the other things we mentioned earlier on new supply.

And the only thing I would add to that, Dave, is I think there's still a willingness of lenders to lend on these projects so long as they pencil. So I don't necessarily think that's slowing things down too much other than, as Dave mentioned, the increasing rate environment.

Okay, great. Thank you.

Our next question comes from the line of Keebin Kim with Truist. Please proceed with your question.

Thank you. Good morning. Just wanted to go back to your commentary about April pricing. Just curious if You're having to spend more marketing or promotions to achieve that street rate, or are things holding pretty steady?

Good morning, Kevin. It's Dave. Good question. You know, fortunately, we've had good success on not having to really deploy more marketing dollars. Our marketing dollars are really in line with what normal trends would be. And so, you know, if you think about last year, we had really good success with less. And so now I think they've returned to what a normal marketing dollar spend would look like. And discounts are still below our historical averages at 2.2% versus typically 3% to 4% of discounting. So we're having great success on both fronts, being able to drive rate, drive occupancy, and keep marketing and discounting down.

So let me actually rephrase that question. From a marketing standpoint, going back to normal, but does that still imply year-over-year declines, or does normal mean year-over-year increases?

The first quarter, we saw a decline. We would expect as we go through the year, we'll see more normal, and you'll see normal increase in marketing spend according to our budget parameters. We don't see it going way out of control, but we will start to return to where you will see increases compared to last year over marketing.

Okay. And just a question on ECRI. Can you summarize what the program looks like today and how we should expect that to progress throughout the year? especially in light of the comments you made about rent roll-ups, which is pretty unique.

Yeah, you know, we're sticking to what we really outlined in the first quarter. I mean, we're keeping the same frequency. You know, we're keeping our rate changes on our existing tenant base in that low to mid teens. And, you know, everything just seems to be working very well. So we don't see any real change in our outlook. Typically in the summer months, you know, we'll get fuller. And we may look at maybe how we look at a few things in the summer months, but right now we're just keeping things as we have them modeled, and it's working well. Okay, thank you. Thank you.

As a reminder, it is star one to ask a question. Our next question comes from the line of Todd Thomas with KeyBank Capital Markets. Please proceed with your question.

Hi, thanks. Good morning. Tammy, you commented that the company plans to pause a little bit and slow down on acquisitions in 2022 as you digest the $2.2 billion of investments completed in 2021. How are those acquisitions trending relative to underwriting?

Good question. I think that was really how those assets are performing. It really contributed to our conviction around our revised guidance, to be honest with you. The assets are performing well. I'm going to say maybe 5% to 10% above our expectations in terms of our underwriting. And so we're very pleased with how the integration of those assets is going.

Okay, and then can you talk a little bit about, well, has the REIT changed its return hurdles or criteria for new deals that pros are bringing to the table? And I guess, how does the change in NSA's cost of capital and currency in the form of OP and SP equity here impact acquisition efforts?

Well, so I don't think our hurdles have – the type of metric that we look at, which is typically levered and unlevered IRR, have not changed. We've certainly revisited the hurdle, which is now a little bit higher in light of the fact that our cost of capital has gone up. I would say that the OP and SP equity does not affect that. Our cost of equity is taken into – and always has been taken into consideration as we – think through whether a transaction is accretive to NSA or not. But I will say that the changing cost of capital is incremental to our view of what we want to acquire and how much we want to invest. But I think the story, the strategy is unchanged. I think all we're trying to say is that we will remain disciplined and that we will not grow for the sake of growth.

Okay, can you just describe a little bit more about your return hurdle, what that change looks like, and I'm assuming that's, I don't know if that's sort of the initial yield that you're targeting, or I guess if it's more IRR focused, but can you talk about that a little bit?

We look at both, and really, Todd, our hurdles change on a regular basis And I don't necessarily think that we've disclosed our hurdles historically, and I don't really want to go there today. We look at cap rates, we look at levered IRR, and we look at unlevered IRR.

Okay. All right. Great. Thank you.

You're welcome.

Our next question comes from the line of Ronald Camden with Morgan Stanley. Please proceed with your question.

Hey, just one quick one on L.A., and I know it's only 4% or 5%, but There was some price gouging sort of exploration in that market. Just can you remind us, how has that impacted you guys and your numbers this year, if at all? And this is L.A. specifically. Thanks.

Thanks, Ron. Good questions, Dave. We didn't have anything really in the city of L.A., and that's really the last one that burned off. We had some county of L.A., and we only had two stores. And so it's just really non-significant to us. And so, you know, that's really all I have to offer is now that everything is burned off and gone, we've gone back to normal business practices, but the impact is just very, very minimal in where the restrictions were.

And the good news is we also didn't get hit that hard by it when the restrictions were in place.

Okay, great. Look, I think that makes sense. And, you know, I think sort of moving on, thinking about the entire portfolio and Are there any markets that are left that are still restricted or is everything pretty much you can price it as you wish and so forth?

For us, fortunately, we have really nothing in our portfolio. There are still a couple areas in California where they have wildfire, some restrictions from wildfires years and years ago that are still in place, but it doesn't affect our portfolio. So we're fortunate to have everything open.

Great. And then my last one is, I think this is an ask like a couple of different ways, but I'll give it a shot too. You know, I think obviously a very solid guidance increase. April, you know, seeing the numbers, you must be feeling pretty confident. When you're thinking about how this year is playing out versus previous years, is it basically, is it, you know, the fact that you haven't really seen anything abnormal versus previous years, That sort of gives you confidence that the unprecedented demand that you're seeing is here to stay. Is that sort of the takeaway why you feel confident enough to sort of raise the guidance here, you know, a month into the peak earnings season? Or am I thinking about that incorrectly?

Good question. And I think we've talked about a couple points. But one of them is, you know, we talk about supply. New supply coming online is lessening, right? So there's less of it coming. we think demand is very, very durable right now. We think all the fundamentals around demand is very durable right now. And if you look at where we're starting this particular spring leasing season with, we've had consistent growth in contract rate. We've had month-over-month growth in street rate. We have a roll-up situation going on. We're at a high occupancy level. It just gave us a lot of confidence in what we think we'll be able to accomplish, particularly through the summer months, the really peak months, and then how the back half of the year really burns off, right, and it really settles into normal seasonality. And we're very comfortable at this point in time with all the things that are going on out there at this point in time that gave us really good confidence to raise our guidance.

And, Ronald, like, for example, another point is the year-over-year move-in volume is naturally down because of what I said earlier about how we were filling up so much last year, but the top of the funnel customer traffic and demand that we can see is right there. I mean, it's really strong. So that's in addition to what Dave just remarked on.

Great. Thanks so much.

Thank you. Thanks.

Our next question comes from the line of Wes Galladay with Robert W. Baird. Please proceed with your question.

Hey, good morning, everyone. With the cap rates potentially bottoming, is there any more conversations picking up with the potential pros to join the platform?

This is what I'm sorry. Apologies for being a little bit off here. But I would say that we continue to have conversations with high-quality private operators. There are really another half a dozen who may be qualified to join NSA. And as we've said in the past, it's a long process. It's a big decision for the operator. It's a big decision for us. I think that the current rate environment probably, it might actually give us an advantage at some point, but at this stage of the game, we're not seeing it. However, the conversations do continue, so I think that's a positive.

Okay, and then mortgage rates have had quite a big run. Would you expect much impact demand if new home sales were to slow materially?

This is Dave. Good question. I think you could see, you know, it still would cause transition. And what I mean by that is maybe people are renting longer, and so they have to stay in their apartments or they have to stay in their current conditions and they're not buying a new home. You know, but, you know, our business has been really around transition and around some of that need-based stuff. I don't know that a slowing housing economy would have a significant impact on us. I just think there are other factors that play along with it at this current conditions that, you know, rising interest rate, rising cost of apartment costs, we're a pretty affordable option for a lot of folks, and I think that will help us as we go forward.

Okay, thanks, everyone.

Thank you.

Thanks, Wes.

We have a follow-up from the line of Ronald Camden. Please proceed with your question.

Hey, sorry about that. Just was looking at my notes. Did you guys give the April sort of rents and occupancy numbers by chance? Apologies if you did.

That's fine, Ronald. We did give the end of April month of 95.1, which I then followed up and said that's a 40 basis point year-over-year positive spread. And on the rates, I mean, Dave remarked earlier that for the first quarter, our street rates were up over, you know, 20% year-over-year, and that was pretty consistent for April.

Excellent. Thanks so much.

Yep. Thank you.

There are no further questions in the queue. I'd like to hand the call back over to Tamara Fisher for closing remarks.

Thanks. I'll wrap up today by, again, recognizing and thanking our team for their commitment and focus on delivering outstanding results. We're certainly pleased with our Q1 results, and we're very optimistic about our prospects for 2022. I'd like to thank you again for joining our call and for your interest and support of NSA.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.