National Storage Affiliates Trust

Greetings. 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 zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, George Hoagland, Vice President of Investor Relations for National Storage Affiliates. Thank you, Mr. Hoagland. 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's President and CEO, Dave Kramer, and CFO, Brandon Tagashi. Following prepared remarks, management will accept questions from registered financial analysts. Please limit your questions to one question and one follow-up, and then return to the queue if you have more questions. In addition to the press release distributed yesterday afternoon, we've furnished our supplemental package with additional detail on our results, which may be found in the investor relations section on our website at NationalStorageAffiliates.com. On today's call, Nantron'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 2, 2023. The company assumes no obligation to revise or update any forward-looking statement because of changing market conditions or other circumstances after the date of this conference call. The company cautions that actual results may differ materially from those projected in any forward-looking statement. 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-debt financial measures such as FFO, core FFO, 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 and the competitive environment. In the back half of the year, occupancy continues to follow typical seasonal patterns, and we are nearing year-over-year occupancy delta. Our consumer 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 net private placement. Our teams did a great job in the timing and execution of that transaction, Treasury rates are higher today than when we priced the offerings, so we're pleased to have that capital raise behind us. We also continue to execute on acquisitions for our captive pipeline, while 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. We remain pleased with our geographic exposure and our secondary market performance. Our MSAs outside the top 25 continue to outperform the portfolio average in revenue growth. However, we are facing near-term headwinds, including high interest rates, which has muted the housing market, thus slowing consumer transitions. We're in a very competitive customer acquisition environment, which is pressuring street rates. We have challenging comps in 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, which gives me confidence in the overall outlook for NSA. In the meantime, we continue to focus on the things we can control, especially our efforts in regards to people, process, and platforms. Our customer acquisition teams did a great job maximizing rental conversions by adjusting marketing spend and front-end pricing. Our revenue management team continues to utilize improved AI technology to maximize our ECRI program. I'm confident that the investments in technology that we're making today will continue to enhance our results going forward. We're also encouraged by the progress to date around our strategic dialogue involving overall portfolio optimization into generating equity capital through programmatic joint ventures, non-core asset sales, and portfolio recapitalizations. 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 this sector and the positive attributes 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% by 2025. The consumer remains healthy and stable. Our consumer link to stay remains well above pre-pandemic levels. Payment activity and bed net expense remain 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. We believe NSA is well-positioned within the sector to have a strong performance in the future. As I reflect on the sector's 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%, and our core FFO per share increased 86%. Both are very strong results. I'll now turn the call over to Brandon to discuss our financial results.

Thank you, Dave. Yesterday afternoon, we reported a core FFO per share of 67 cents for the third quarter of 2023, which represents a decrease of 6.9% over the prior year period. The year-over-year decline, despite 3.9% growth in adjusted EBITDA, was due primarily to elevated interest expense, as same-store NOI growth was essentially flat, declining just 10 basis points. We delivered positive revenue growth of 1.1% 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. Occupancy ended the quarter at 88.5%, down 150 basis points from Q2, and down 360 basis points year over year. Similarly, October occupancy finished at 87.4%, which is also 360 basis points below last year. Expense growth in the third quarter was 4.2%. Payroll declined 4.7% from the prior year period, while property taxes were down 2.2%. These cost savings were offset by marketing expenses that remain elevated due to increased competition for customers, and a tough comp, as well as insurance expense, which will remain elevated due to the policy renewal we have on April 1st. 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 will 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 NSA 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. and a private placement with a weighted average coupon of 6.58% and a weighted average maturity of 5.8 years. We are 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 6.3 times net debt to EBITDA, up slightly from 6.1 times at the end of the second quarter, and within our target range of 5.5 to 6.5 times. Now, moving on to guidance. Results 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 and core FFO per share. Midpoints of our guidance ranges, as outlined in the earnings release, are as follows. Full-year same-store revenue growth of 2.13%, same-store operating expense growth of 5.13%, same-store NOI growth of 1%, and core FFO 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 and 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 the record performance over the past few years, I'll echo what Dave emphasized in his remarks. Self-storage is a great property type that has proven its resilience over time with 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?

Thank you. If you would like to ask a question, please 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. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. 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 quarters. So is that a function of the environment improving slightly? Is that some of the larger steps? You've had some of the larger step-downs in the past, so the comparisons are getting easier. And then do you think the trend going forward should kind of continue to be more flattish as you move past some of the worst of it. Thanks.

Thanks, Michael. Thanks for the question. Thanks for being on the call. You know, I think you're right in how you're looking at it. You know, our toughest comps are behind us as far as, you know, year over year street rate and year over year occupancy. As we go through, you know, as we really came through the third quarter of September was really kind of the peak or the pinnacle of those high points. And so as we head into the fourth quarter, you'll see us have a little bit easier comps, and we're starting also to level out a little bit on street rates in a lot of our markets and a little less 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 lowering our street rates. It was really the third quarter when we had the movement around street rates. And the teams have done a good job really looking at how do we revenue management practices and how we're really working with our existing tenant base and really looking at how we're treating the customers that are with us today. And we've had really good success around some of the technology platforms that we've improved and some execution around that existing customer base that are allowing us to really work on what we have. Certainly today there's still some pressure around some markets where we have supply. There's markets where Street rates have been more volatile because of that supply and the demand ratios, and so we've had to react to that. But on a whole, our portfolio, we believe, you know, with the diversification of where it's located, we've had some pretty good success moderating some of the, you know, some of the effects of rate competition and supply and 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 these? And is this a true, you know, invest in the shares, buying back, just given where their price are, are these to offset some of the OP units you've issued? And then would you consider continuing to use this lever going forward? Thanks.

Yeah, so I'll start and then I can jump in here. And again, thanks for the question. You know, our belief in our shares and our belief in our company and our belief in adding shareholder value, we think our stock is a great purchase. You know, where it's currently trading at 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 had approved for us over a year ago, you know, pretty much fulfill that commitment to repurchase our stock back. You know, from our perspective, and we look at where we're at with our strategic initiatives and what we're trying to accomplish in the future, we talked about in our last call is, you know, 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, you know, sale of non-core or non-strategic assets. We're evaluating, you know, some portfolio opportunities around JVs where you might, you know, recapitalize some stores into a JV. And so, you know, 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 recapitalization 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, and Michael, this is Brandon. I mean, the only other thing I would add is on the repurchases, it's not necessarily to offset, as you said in your question, the OP 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, you know, we grew a lot and very quickly in 21, you know, early parts of 22. And so some of the equity, common equity we issued during that time was at higher levels than what we can repurchase it at now. So that's certainly part of the math and the obvious benefit, you know, 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's a multi-quarter execution to our strategy here, so what you saw in the third quarter, we're very pleased with, but more to come in the next couple 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 still pretty wide given we only have a quarter left. So if you could kind of include that in the answer, that would be fantastic.

Yeah, Juan, this is Brandon. So street rates year-over-year as we finish the third quarter were 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 comp that gets slightly easier, but there's still negative double digits. And then in terms of the guidance, you're right. The ranges, we kind of kept it where we revised to in August. The thought process there is 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 you saw that based on what we introduced in February and what we had to revise in August. So I think going forward, including when we introduced guidance for 24 in February, it's possible that our ranges then are a little wider than what we historically introduced to start the year. where we're most comfortable is certainly around the midpoint of the range. I mean, on revenue, for example, at the high end of our full year guide, it would imply a fourth quarter that's accelerating from the 1.1% REV growth that we had in third quarter. And I've characterized that as unlikely. So I would guide you to really the midpoint of the range on all fronts, REV, OpEx, and NOI on the same store pool.

Great. Thank you. You guys are kind of reinvesting in the platform and the systems given 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 would you think about G&A growth, again, as you reinvest into the business?

Yeah, that's a good question. You know, we're not prepared to speak too specifically to 24, but we certainly are making investments. Some of those investments, you know, we've been making throughout 23, so that's kind of already baked in. Those investments are on the personnel side. We've hired staff. There's been opportunities. Frankly, given the M&A activity in our space, there's opportunities to add folks who have storage experience to our team. There's been technology investments for sure. Some of that runs through G&A. Some of that's capitalized, and then it gets depreciated through our corporate investments, and that does flow through to FFO. But it's only so impactful given we're spreading those costs out over a multi-year basis. I wouldn't characterize those investments, Juan, as like tremendous needle movers 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 noteworthy delta. Thank you.

Yep, thank you. Thanks, Juan.

Our next question is from Shmeed 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 get that everyone's trying to maximize revenue per unit, but occupancies now are in the high 80s, kind of back to where you were pre-pandemic. And others seem to be maybe being more aggressive to maintain occupancies over 90%. for, you know, for various reasons. I'm just wondering, is there any change, like, with what's going on in the housing market or the renter's market or anything that would make you change kind of the way you think about what's the right occupancy level to achieve?

That's me. Thanks. That's a great question. Thanks for being on today. Certainly, you know, the muted housing market and the lack of transition has certainly changed one of the demand drivers, you know, in our business, and we have a lot of them, but certainly that's one of them that you know, over the years has provided, you know, a 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 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, you know, street rate, entry rate, and how to really balance occupancy. And, you know, I'm very pleased if you look at our annualized rent per square foot growth has been strong. And I think we're finding our foothold around, you know, a little calmer around the street rate movement and trying to balance that, you know, street rate occupancy discount to drive to the revenue number we want. And so what I would say is, you know, in the markets where it's been very volatile, like, you know, where you have new supply like Phoenix and Vegas and Atlanta, We've probably had to react a little harder, but we have a lot of markets where we've actually found a good occupancy foothold and been able to really hold some street rate activity to leveling off. And so 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 balance and try to find our revenue path with balanced occupancy rates and discounts.

Okay, and then just to follow up on that, I mean, any change in the way that you're thinking about ECRIs going forward, either more moderate or less frequent or, you know, to the same degree?

You know, that's, to me, been one of the silver linings to our business for a lot of years, and it remains. Our customer base is healthy. They're stable. That side of the revenue management business, we've been able to maintain our cadence and our level of increase and quantity of increase and And we're just not seeing any change in customer behavior because of that program. And so while maybe we're not attracting as many from the top of the funnel because of the little bit slowing housing market or the muted housing market, the existing consumer base is very healthy, and we've had great success there. Okay.

Thank you.

Thank you. Our next question.

I've had the most loss, you know, versus your peers since the third quarter of 22. And again, that gap hasn't, you know, closed as much as the peers. So again, I'm just trying to think about what, you know, your comments on the strategy, you know, occupancy versus rate. And that, or, you know, is it certain markets that are maybe weighing on the portfolio versus others?

You know, good question and good thought, and thanks for being here. You know, we had a lot farther to fall. If you really study what happened during COVID, where we started in 19 and 20 in 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'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, you know, our portfolio can run at an occupancy level that generates the maximum amount of revenue that we're trying to strive for. You know, I think that's the spread you're seeing. It's just as we cycle back down into what I would call normal patterns, you know, we certainly are working to find the right balance between those two. I talked on last call, I do think, you know, 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 want to 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 mix a little bit and reattribute our properties versus discounting the unit down 40% to try to fill it up. We think there's a better approach to that. And so I think as we cycle through this last quarter, some of that occupancy comp and that spread will start to tighten to what the peer group looks like year over year.

Okay, thank you. And then how are you balancing the leverage, your leverage? It is higher than the peers versus the share buybacks. I definitely appreciate your share of buybacks, but at the same time, it feels like an environment where a company should be reducing debt. So how are you balancing those two?

Yeah, Jeff, good question. It's obviously top of mind for us, and that goes back to my earlier comment about this is a multi-quarter execution. So I think at the end of the day, our intent is when we're done with these core set of immediate initiatives that Dave's spoken to, our leverage is going to be equal to what it was before we endeavored to execute on all these strategies or even lower. And so everything that we're doing now is 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, put ourselves in a position, the best capital position, to fund our growth and to address kind of those annual capital needs.

Thank you.

Thank you.

Our next question is from Samir Canal with Evercore ISI. Please proceed.

Hey, Dave. On maybe getting back to the ECRI question, how much has that sort of moderated through the year?

You know, that's a good question, Samir. You know, for us, I would say in the last couple of months, we've probably come off our really, really high, you know, 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. And so it's moderated slightly in the last couple of months. Frequency hasn't changed. Cadence hasn't changed. But we've come off a little bit on, you know, the top-end percentages of rate increases. And some of that's a function of we got a lot of tenants processed through the summer, you know, and so, you know, that was great. We got out in front of that piece of it. And some of it were obviously, you know, as you look at market conditions and units that are opening up and those things. But I will tell you, we're still well above pre-pandemic levels. And, you know, the technology is, you know, we have better line of sight. We're able to react quicker, understand trends quicker. You know, I'm really pleased with the position we're at, too. 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, you know, it looks like you acquired a few assets. I mean, how are you thinking about sort of revenue growth, NOI growth, maybe the underwriting of those properties? Thanks.

Yeah, and another good question. Certainly, you know, we're able to tap the captive pipeline, so those are assets obviously our pros have had a good line of sight on for a number of years. they were filling them up or, you know, built them and worked through the process of seizing them up. Certainly next year, you know, and, you know, it's going to be a challenging year as far as, you know, as you look at revenue growth, you know, but we also, you know, we're adding stores and markets where we have operational efficiencies. We think as we're bringing them in, they're still upside to those. You know, we believe we brought most of those assets in around, right around our sixth cap today. And as you look forward, moving forward, you know, we'll grow out of that and, and, 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'll continue to grow through it. But yeah, from a revenue perspective, we've 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, unless an asset has some fill-up left into it or something that's not gone on from a seasoning point of view. Hope that helps.

Okay. Got it. Thank you. Thank you.

Our next question is from Todd Thomas with KeyBank Capital Markets. Please proceed.

Hi. Thank you. Brandon, Dave, you know, with regard to the buybacks, you know, I think 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 to are you're expecting to reduce leverage, but is it possible that leverage rises above the six and a half times leverage level in the near term, just between additional buybacks and the near term negative NOI and EBITDA growth that you're forecasting?

Yeah, Todd, all good questions. I'll try to work through them, and you'll tell me if I miss any of the ones you threw out there. So my comment about the multi-quarter execution was definitely all-encompassing, meaning, you know, the debt 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 a spring leverage back toward the midpoint of our range of comfort five and a half to six and a half times. The share repurchase, you know, we have a lot of conviction and I think the execution in Q3 speaks for itself in terms of the dollar volume. We only have about $28 million left on the current program. So to your question, you know, 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. But it remains a possibility and it's 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, if you hold everything steady and you just roll forward fourth quarter typical seasonality from 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, you know, I guess sticking with that a little bit, you know, can you, you know, provide a little bit more color, maybe bookend, you know, how much of the portfolio that you might be looking to sell or recapitalize? Sounds like, you know, joint ventures on the table, you know, perhaps some outright dispositions. And just to... you know, continue there. You know, is this strategy focused on, you know, in terms of the portfolio optimization, you know, is the strategy focused on, you know, the geographic footprint of the portfolio, you know, the competitive landscape and where you operate or, you know, just sort of growth or something else altogether? I mean, how should we think about, you know, what that recap or the dispositions, you know, might be looking to accomplish?

Yeah, sure, Todd. Thanks for the question. You know, I'm 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 is, you know, we've had tremendous growth, one since IPO. And really, if you look at the years of 21 and 22, we were able to buy a few sizable portfolios. And when you buy portfolios, certainly you have assets. Then those portfolios that maybe do not fit strategically long-term where you want to go. And so what I would tell you we did is we really looked at the portfolio top to bottom. And we ask ourselves, you know, if you looked at a 90-10 rule for an example and ask yourself 10% of the assets that, you know, where are they positioned? Do we have synergies? Do we have operation synergies? Do we have multiple properties? Are we able to grow? Are we happy with rent growth? You know, all the factors that we'd look at as far as long-term honing 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. We're asking ourselves, as you look at markets where there are singles, where there are doubles in these markets, have we not grown or had the ability to grow? Do we not like the demographics of the market? Or if we do like the demographics, you know, is it something long-term that we can continue to improve our position on? And we've identified a list of product out there that might be good candidates for dispositions. As you look at, you know, from that aspect of it, we're 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 really execute on, you know, sale and disposition of assets. You know, from a portfolio, you know, recapitalization and JV is a little bit different approach there. I mean, you look for stores where maybe you want to, you know, lever some of the risk you have in particular markets. You look at maybe opportunities where you can infuse capital and improve performance of the properties, things like that, that long-term properties we want back, properties we want to own long-term, but it certainly gives us an advantage or an or an opportunity to go out and kind of, you know, re-look at those properties, re-infuse those properties, and the JVs provide a good opportunity for that.

Okay. And, Dave, one more question, if I could. You know, 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. you know, how they're sourcing deals, how they're going about that, and, you know, maybe talk a little bit about the pricing and also where they're, you know, sourcing capital from today?

Yeah, sure, sure. Great question. You know, and that is an advantage. Our pros have done this for years. They're very good at it. They've raised money for years. They have friends and family networks. They have, you know, small investment firms that have certainly invested them over the years. And, you know, with the NSA program, that's one of the advantages is they can roll those in and take OP units at the time when they want to roll the properties into the REIT, of course. You know, I would say numbers, you know, if you think about what they're looking to buy, some of them are developing. Some of them are value add where they buy a small property and building expansions. Some folks are buying maybe CO deals that they think are a great opportunity that it's the right time to be buying those pieces of it. And these are all activities 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've all done this over the years. They have a lot of good line of sight on where to get the pieces from. You know, pricing-wise, I'm not going to get into it because there's a lot of moving pieces there. If you're building or you're value-adding or if you're buying a CEO deal, the pricing metrics are, you know, quite wide through all those pieces of it. You know, if you look at it, I would say, you know, from a numbers perspective, you know, Ten to 15 stores have been bought by the pros this year, and, you know, and they're still sourcing more. You know, there's some other activity I know they're working on. And for us, we like it in the fact that it just continues to restock our captive pipeline.

Okay. All right. Thank you.

Thank you. Our next question is from Spencer Alloway with Green Street. Please proceed. Spencer, please check and see if your phone is muted. Okay, we will move on. Our next question will be from Caden Carl with Wolf Research. Please proceed.

Hey, guys. Thanks for the time. Maybe a two-part question here. Just curious what you're seeing top of the funnel demand and, you know, 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 questions. And hey, thanks for joining too. You know, top of the funnel, certainly we've been able to generate good activity there. And a lot of that activity is because the additional marketing spent. And so the teams have done a good job really analyzing where we're getting our best value from a 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 you know street rate and and that conversion piece all come together and so um you know us in the markets where we have good footing on occupancy we have pretty stable street rates conversion rates have been a little more easy to predict and a little more easy to maintain markets where you have some pretty wild or dynamic street rate movement a little more challenging you know i mean if you if you're generating You know, an additional 5% at the top of the funnel, but your conversion rate is dropping by 4%, and you've had a pretty volatile street rate market. Obviously, we have to decide to ourselves who we want to continue to spend and drive the top of the funnel and lower our conversion rate, or do we want to adjust our pricing and keep that conversion rate at the target 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 is our technology continues to improve. our bid models are new and improved. And our AI technology behind those bid models are new and improved. And so the team is much more efficient at what they're doing today versus where we would have been a year, two, three years ago.

Our call center investment as well, Keegan, is another one to call out. I mean, that's an area where we've really made some big advancements on our what is now a proprietary platform. And I should have added that when Juan asked an earlier question about our G&A, because that's another area where our investment in these technologies manifests itself. The call center expense for us is in the marketing line item in our property ethics. So that's another area where 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, 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 250 to 300 was the range we gave from the end of June through the end of the year. You know, the working theory I think for us and others in the sector was that you know 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 and so that that's potential scenario you know that that um optimistic scenario was baked into more of the high end of our guidance, Keegan. You know, what's played out is, in fact, much closer to kind of your typical seasonality. So we lost 150 basis points from the end of June through the end of September, another 90 basis points to the, you know, in October. And so that's pretty much in line with kind of your pre-pandemic years, 2018, 2019. And so, you know, what's baked into our call it base case projections, which is really the midpoint of our guide, is a continued decel or loss of occupancy of maybe, you know, 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 Allaway with Green Street. Please proceed. Thank you. Sorry about that.

You guys commented on the difficulty in underwriting future operations in the current environment, and with that in mind, can you just provide some color on the depth of the potential buyer pool and your confidence in ultimately being able to execute on dispositions in potential JVs?

Yeah, very good question, and I'm glad you could get in this time. Sorry if we had someone on our end. We have a high level of confidence. One thing I would tell you is throughout our history and our relationships and all the things that we've done in the past, we have a lot of relationships in this industry. 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. From that aspect of it, you know, we know that these folks are in the market already. They have assets in the market. They would be strengthening their positions in the market where we'd be leaving 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 trade in a lot of the markets that we'll probably be leaving. And the size of the transactions are fitting what our sellers' expectations are and we're So at this point in time, I would tell you we've got a good confidence level going into it.

Great. Thank you, guys.

Thank you.

As a reminder, it is star one on your telephone keypad if you 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 that implied I think negative 1.1 in 4Q. I think historically we've talked about 4Q being a good sort of barometer for the next year and just curious how we should think about that number this go around and 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, it's Brandon. Yeah, I mean, the exit point for the calendar year is a good way to kind of start projecting the next calendar year. But it is tough, right? And you know the ingredients to the recipe. It's, you know, where street rates have moved. 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 ECRI to existing customers. So we all know that, right? It's a matter of how do those dynamics play out and are demand levels higher in 2024 than what we've seen here in 2023? We'll get into that more, obviously, in February. I think for us, what we're focused on is historically when the sector, on the rare occasions that it has encountered negative revenue growth, it's been relatively short-lived. And so where exactly does it go in Q1 of 24 or Q2 of 24 or when exactly at the bottom? I mean, those are fair questions. They're just not questions that we're spending 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. It's 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 and the supplemental is super helpful. So just on one on property taxes, you know, running 2.1%, you know, year to date anyways, maybe if you talk about what, is there sort of one timer or that's helping that or is that sort of a good run rate? And then on marketing expenses, you know, I see that's gone up year over year. Just thoughts on how much more you can lean into that. Thanks.

Yeah, on property tax, Ronald, the Q3 number did have some favorable adjustments, so downward adjustments to the expense in Q3 that related to kind of truing up the full year numbers as we got value assessments or tax bills in hand. I would say I would have you look at the year-to-date, the nine-month 2023 number and annualize that. is probably a better approximation and 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 22 has a tough comp because we had some favorable adjustments. There's potential for maybe some of that this year we'll see with Texas in particular with state surplus and what the final levy rates are in some of those jurisdictions. Marketing, you're right, that's definitely up. Some of that is just the comp where 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 paid search spend. And we're using those dollars judiciously where we think there's positive returns.

Great. That's it for me. Thank you. Thank you.

Our next question is from Eric Lubchow with Wells Fargo. Please proceed.

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 you're seeing in your markets in terms of new construction starts, interest rates probably having some impact on that, and whether you're seeing any difference in construction activity between, call it, you know, your more primary versus secondary markets?

Yeah, Eric, thanks for joining. Good question. You know, we certainly have seen the new starts slow considerably for a variety of reasons, you know, headwinds and interest rate, uncertainty and outlook on, you know, what the future as far as revenue growth and fill rates look like, availability of capital, There are still headwinds around, you know, getting contractors and everybody lined up and getting approvals going. And so as a whole nationwide, we've seen, you know, new construction starts certainly slow. And we've seen proposed projects maybe stall or take longer or maybe not even come at all. You know, I think the markets that we still feel the most pressure is some of the ones we called out, Phoenix, Las Vegas, around parts of Atlanta, where these starts had been started and are finishing up now. or there are still a few new starts in those markets. And so I would generalize it in probably more of our major markets is where we've seen the most competitive pressure, and our secondary markets not as much.

Gotcha. That's helpful. Thank you. And just to follow up on the asset disposition topic, I guess how do you think about the various use of those potential proceeds between repaying debt additional M&A or repurchasing additional stock. And as you look at the attractiveness of those, should we think about FFO per share accretion or how it impacts your longer term same store growth? Just maybe some color on how you assess the attractiveness of those various dispositions. Thank you.

I think, Eric, all the things you mentioned are potentials for how we would use the proceeds. I mean, certainly we've got amounts drawn on a revolver, so most immediately we would use the funds to reduce that, which is carrying a pretty healthy interest rate cost today. I spoke to chair repurchases earlier. We'd have to refresh or 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. But when that happens, we certainly want to be ready to go. And so all those things are what we're trying to position ourselves for. I think the assets that we've identified that Dave spoke to earlier, they are generally of the type that are probably going to – slightly improve our occupancy profile, slightly improve our NOI margin profile once they're no longer part of the portfolio. Not a tremendous amount, but it'll improve the quality of the existing portfolio, and that's certainly, you know, a clear intent of these strategies.

Thank you. Thank you.

Our next question is from Ki Bing Quinn. Kim with Truist Securities. Please proceed.

Thanks. Good morning. Good morning. So I was curious, eventually we're going to hit occupancy being flat and street 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 the ECRI program is doing what it's doing, you still have the cost to release those customers that left at higher rents?

It's a good question, Keith, and thanks for joining. Maybe there could be a scenario like that. Certainly what we're seeing also is a compression in the rent roll down. And so I also think we've hit the peak of our rent roll downs. And so as occupancy, the spread in occupancy becomes tighter as our street rates level out. And what we're turning over time is longer term tenants that have that longer rent roll down implication. We're starting to see that roll down tighten because we're turning over people who have been with us six months or people who have been with us nine months who have been on a little bit less of a street rate entry level. And so that first DCRI is making up for 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 in 3Q?

so the rent roll down in 3q was you know at about 18 on average almost 19. um it peaked in september at 23 even so um you know as you know it started the third quarter much closer to around 14 and finished up about 23 and then in october it's fallen off so like we said with street rate gap and occupancy gap we think you know september was probably the peak and uh last question for me your store payroll costs have been pretty

flattish consequentially. Just curious as you look forward, you know, what kind of growth and expenses should we expect from that line?

Probably a little tougher line of sight there. You know, we've done a lot around store initiatives and use of technology and store operating hours and headcount. And so the teams have done a wonderful job really working toward the new staffing model. And, you know, it's still evolving. We've had some good success. And what we've really been doing is not We've been doing it through attrition, and we've been doing it as opportunistically as we can. We've had two, actually three really good years of payroll control and payroll expense. Looking forward, we think there's a little bit more around headcount that we can work on, and I think that the true test for us is going to be store operating hours. When do we have to be there? Wouldn't this consumer not need us 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, Kevin, I mean, that serves this topic as well, right? Because today's earlier point where we're identifying assets or markets where we only have, you know, one, two, three assets and don't see that opportunity or desire to really grow. And if we can exit those and redeploy and, you know, densify further in other markets, you know, that helps when you think about some of that operational overhead that makes its way into the store-level costs. Thank you. Thanks, Cuban.

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 third 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 months back and not indicative of what rates are today. So just curious on the commentary with regards to transaction pricing today versus that 6% cap rate that you noted earlier for third quarter deals.

Yeah, good question, Juan. You know, those, you know, there's a little bit of legacy to those, to your point, as we, you know, those deals took time to materialize and really work through the process. You know, it's hard with cap rate because it's also these are one-off assets in one-off markets. And that could dictate if it's a five cap market or a seven cap market, right? I mean, just depending on the type of asset, type of quality, type of market. I think cap rates today, they're certainly starting to nudge up a little bit, but there's still a big spread between seller's expectation and buyer. And in our industry, you typically don't see a lot of stress in the product type. You know, we are seeing, you know, individual properties sell. We're seeing, you know, smaller portfolios sell. And, you know, I mean, and we're also seeing deals not trade because the expectation of price is not being met. But I would tell you, you know, looking back to where we've come from 21 to 22, now to 23, cap rates are definitely nudging up. And, you know, I don't know if it's 25, 50 basis points from where they were maybe a year ago, but it's also by market, by property type, a lot of variances in there that drive that gap 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 Hoagland for closing comments.

Thank you all for joining the call today, and we appreciate your continued interest in NSA. We remain confident in the long-term outlook for our business, and we look forward to seeing many of you at the NAIRIC conference in two weeks. Thanks.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.