National Storage Affiliates Trust

Greetings. Welcome to the National Storage Affiliates First Quarter 2024 Conference Call. At this time, all participants are in 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 now begin.

We'd like to thank you for joining us today for the first quarter 2024 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 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, management's prepared remarks and answers to your questions may contain forward-looking statements that are subject to risks and uncertainties and represent management's estimates as of today, May 2, 2024. Company assumes no obligation to revise or update any forward-looking statement because of changing market conditions or other circumstances after the date of this conference call. Company cautions that actual results may differ materially from those projected in any forward-looking 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-GAAP 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. During the quarter, we completed many of our strategic initiatives that we've been discussing in previous calls. These initiatives enable us to leverage our balance sheet in access to growth capital, increase earnings per share, and ultimately position our company for future growth. We continue our focus on enhancing our operating platforms to ensure a better customer experience. These initiatives are still ongoing, but we are starting to see improvements in rental activity and conversions from our advanced web presence and upgraded call center operations. On the rental front, we experienced three months of positive net rentals through the end of April, contributing to a seasonal uptick in occupancy, which ended April at 86%, have 50 basis points from the end of February. During the quarter, we experienced a meaningful year-over-year increase in leases being fully executed online, in large part due to improvements made to the lease signing experience. Additionally, our call center answered over 30% more calls during the quarter compared to last year. To continue to enhance and simplify our customer journey, and by leveraging intelligence in our customer acquisition strategies, we expect to see continued improvements in the customer experience we offer and overall performance. We're also being more aggressive on our pricing strategy. While this is helping to drive rental volume, it is putting pressure on our move-in rates, which average down about 14% year-over-year for the quarter. Consumer base remains healthy, with 65% of our tenants having stayed with us over a year, while 49% have been with us over two years. Our ECRA program remains largely consistent with the past couple of quarters in terms of frequency and magnitude. Ultimately, the quarter played out as we expected, but it's still early in the spring leasing season with the peak months ahead of us. That said, looking across our different Sunbelt markets, we continue to face many challenges due to several factors, including absorption of new supply, a muted housing market, and a very competitive pricing environment. Results are mixed in these markets with revenue in Phoenix, Sarasota, and Las Vegas all coming in below portfolio average, while markets like Oklahoma City, Savannah, and Corpus Christi were better than average for the quarter. We continue to work hard in these markets to deliver a superior customer experience and recognize some of our markets are going to be slower to recover. It is important to point out that we have markets that are currently healthy and delivering solid results. We remain very confident in the growth prospects of our Sobel markets due to attractive population and migration trends. I'm very pleased with our strategic positioning heading into this next phase of growth. We're starting to see opportunities on the acquisitions front. We're finding a variety of deals in many of our strongest performing markets where we have good insights into rental demand and street rates, allowing us to be more precise in our underwriting. These are deals that make sense for us to pursue as they improve our overall portfolio quality, add depth to our existing markets, and increase our operational efficiency. We currently have over 25 million under contract, and approximately $200 million of properties in various stages of negotiation. We expect to fund these acquisitions through a combination of 1031 proceeds, joint venture capital, and debt. We won't comment on pricing until the deals are closed. These transactions make economic sense for us and our JV partners. We represent the start of us putting the dry powder to work that was generated from our portfolio optimization strategies. I'll now turn the call over to Brandon to discuss our financial results.

Thank you, Dave. Yesterday afternoon, we reported core FFO per share of $0.60 for the first quarter of 2024, representing a decrease of approximately 9% over the prior year period, driven primarily by the decline in same-store NOI, an increase in G&A, and a decline in contribution from our JVs. Overall, our results for the quarter were in line with our expectations, except for a few casualty events resulting in an aggregate $1 million loss, or almost a penny per share. For the quarter, revenue growth declined 1.5% on a same-store basis, driven by growth in rent revenue per square foot of 2.4%, offset by a 380 basis point year-over-year decline in average occupancy during the quarter. Occupancy ended the quarter at 85.9%, down 350 basis points year-over-year. Expense growth was 4.5% in the first quarter. Similar to the past couple quarters, the main drivers of growth were property tax, marketing, and insurance, partially offset by payroll efficiencies that resulted in lower spend versus the prior year period. Marketing expenses remain elevated due to increased competition for customers and a tough comp, while insurance expense growth will moderate going forward to the low single digits, given our policy renewal that occurred on April 1st. As Dave mentioned earlier, we had a busy start to 2024 on the asset sales and joint venture front, all of which was discussed on our last call. Although we did not complete any acquisitions during the quarter, we remain active underwriting and evaluating potential transactions. The majority of our revolver available to us today and $1 billion of buying power within our 2023 joint venture, we are encouraged by the opportunities for external growth that lie ahead of us. Turning to the balance sheet, during the quarter we completed just over $200 million of common share buybacks. And subsequent to quarter end, exhausted the remaining $72 million of our program. We believe this strategic initiative is beneficial to our shareholders and will ultimately provide more FFO per share to them over the long run. Our current revolver balance is roughly $200 million, giving us approximately $750 million of remaining availability. Lastly, our leverage was 6.2 times net at the EBITDA at quarter end. Now, moving on to 2024 outlook. As we said earlier, the quarter played out largely as expected, and it's still early in the spring leasing season. We are reaffirming our previously provided guidance, which is detailed in the earnings release. One item I want to mention on the balance sheet. We have $250 million of interest rate swaps that fix daily simple SOFR at 1.59%, which mature in Q3. 145 million of this relates to the term loan that matures in July. So effectively, $250 million of fixed rate debt will adjust to market rate starting August 1. This impact was factored into the guidance we provided in February, but I wanted to point it out since the swap expirations aren't exactly aligned with the underlying debt maturities. Thanks again for joining our call today. Let's now turn it back to the operator to take your questions. Operator?

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question today, please press star one from your telephone keypad and a confirmation tone to indicate your line is in the question queue. You may press star two if you'd like to withdraw your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question today is from the line of Sameer Khanal with Evercore ISI. Please receive your question.

Hey, Dave. Can I ask you to give more call around April? I know, I believe you said moving rates were down 14% in the first quarter. Maybe give us an idea of kind of what you're seeing in April so far.

Yeah, Samir, thanks for joining our call today. Certainly, you know, April, I saw another positive net move in activity in the month of April, which we were pleased with. We were able to generate the activity at the top of the funnel. We certainly are, you know, in a very competitive, most of our markets are in a pretty competitive market around, you know, street rate or asking rent to get started. And so, I would tell you April got, you know, slightly worse than where the quarter finished. It wasn't, you know, a large number, but it got slightly worse as far as, you know, street rate to street rate and move-in activity and move-in rate to move-in rate. So we saw a decline in both.

Samir, this is Brandon. On the year-over-year move-in rate worsening that Dave's referring to, that's in part because last year, you know, we moved rates up some in April, and so that's also affecting that comp.

Okay, got it. I guess on the transaction side, it sounds like you have some opportunities on the acquisition front, but last quarter you were active on the sales front of the non-core assets. Is there more in that bucket of non-core at this point, or is that pretty much done, you think?

I think we'll continue to look at our portfolio and scrub through the portfolio. We did the large portion of the asset sales last year in that tranche we worked through, and And we were pleased with that activity. I know we're still scrubbing through particular markets and particular assets. And I think that'll be a part of our program as we go forward in our future as we look at optimizing our efficiencies and optimizing our portfolio. So I think you could see sales in the future. I don't think you're going to see the large chunks that we've done recently. I think we're shifting our focus to looking for opportunities. And when opportunities persist or present themselves, we'll go out and look to start acquiring properties.

Okay. Thank you.

Thank you.

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

Hello. This is Dan Biano for Jeff. Thanks for having me. When it comes to allocating capital, how are you thinking about leverage versus buybacks?

Yeah, Dan, I'll take that. This is Brandon. So, look, we completed the $275 million share repurchase program that we mentioned in the earlier remarks and also details in our release. And also, as mentioned, you know, pretty light on the acquisition volume. Everything we've done over the past few quarters, you know, we're very pleased with accomplishing what we set out to do. Leverage, you know, in line with our targeted range of five and a half to six and a half times. So what it does right now is it really positions us with, you know, The majority of our revolve are available to us to take advantage of some of those opportunities that Dave referred to earlier. No different than what we talked about in our February call. I think if there's a slight bias, it'll be to deploy capital through the joint venture platform, and that allows us to obviously do that in a capital light way, manage leverage, and put to work some of that money that we worked hard to get ready with our JV partners.

Thank you. And then just to follow up on leverage, could you provide your rationale behind including the hypothetical liquidation at book value for your 2024 JV to adjust EBITDA?

Yeah, good question and good observation. That was a new thing this quarter. So that joint venture, that's the one that we put the 56 assets into. I would tell you the arrangement there is quite similar to the existing two joint ventures we have and that we're 25% money partner managing the assets. However, the one nuance is there is an arrangement where based on certain performance metrics, you know, the split of cash may be something different than 75-25. In some cases, we may get outside share. In other cases, our partner may. That drives us into this, the term you use, like a gap-specific methodology for allocating earnings. And we're basically... removing the effect of that, and just showing a more straightforward 75-25 split. Awesome.

Thank you for your time.

Sure thing. Thanks. Our next question is from the line of Michael Goldsmith with UBS. Please proceed with your questions.

Good afternoon. Thanks a lot for taking my questions. We've heard from some of your peers that a number of markets are starting to bottom out and re-accelerate. Are you seeing that across your portfolio? Maybe what percentage of your markets are accelerating or any specific markets to call out? Thanks.

Yeah, Michael, thanks for the question. Thanks for being here. You know, I think as we think about it, we believe that the first half of our year was going to be the toughest part of our year, as we think particularly from a year-over-year comp. If we look sequentially, we're happy that we had the move-in volume and the net rental activity that we had over the last three months. And it was tougher sledding, I would tell you, in the southeast, Florida. Some of the Sunbelt markets, Phoenix, we mentioned. We mentioned Sarasota, Las Vegas. Those markets have been slower to respond. And those markets are also facing supply, like markets like Atlanta as well. And so I think as you look at it and as we look at some of those markets, the markets that have the most supply are slower to recover, but we've had good success through the Midwest. We've had good success through the Texas markets. As we called out, I think we called out Corpus Christi in our opening remarks. And so, you know, those, I think, did not also have some of the, you know, the pandemic highs, and they've been a little bit more stable, I think, as we went through this last cycle. And those are performing well for us. But again, I think, you know, more of that, some of that sunbelt exposures with the housing and muted transition and some of the other factors that are going on are going to be a little bit slower for us to recover.

Thanks for that, Dave. And my follow-up is, you know, you did a number of transactions at the start of the year with the sale and then the sale to the JV. It provided an influx of capital. But with the transaction market seemingly paused for the time being, how are you thinking about redeploying these proceeds and when do you think you can put them to work? Thanks.

Yeah, good question. You know, I touched on it a little bit in the opening remarks. We do have, you know, we have $25 million under contract right now in existing markets. where we're adding properties to our portfolio that will certainly help us in our efficiencies and the way we operate and scale and density and really things that we're looking to drive in those markets. We have about $200 million that we're in negotiations with right now. And so I would tell you we're starting to find opportunities that we like. And we thought for sure as we looked at this year that the back half of the year we'd continue to see more opportunities. I think the fact that we've found some opportunities earlier in the year is a positive sign for us. And again, these are in markets that we operate and have great scale in and have great efficiency in, and we are a good logical buyer for these properties. Thank you.

Our next question is from the line of Juan Sinabria with BMO Capital Markets. Please proceed with your questions.

Hi. I just wanted to continue with the same line of questioning with regards to acquisitions. are your targeted yields or cap rates? And do you think that would be indicative of kind of the current market for your types of assets? And this is a subset of that. Should we assume or not that you re-up buyback now that it's been fully depleted?

I'll jump in and maybe Brandon finishes on this. I think as we look at assets that we're looking to purchase, you know, we're targeting mid-six is probably a range that we're looking at. today. Obviously, each property one, when you start talking cap rate, it's, you know, where is the property and how old is it? How seasoned is it? What's the opportunity? Is there a value add? Is there, you know, a component of management from who you're buying it for, where you think you may have a better opportunity versus you would, you know, on a different type of property or a different owner. And so I think it's hard to really pin down cap rates, but we certainly internally have been modeling around that mid six range. As you remember, the assets we sold were towards the six cap itself. And so we are certainly thinking redeploying this capital when we sold it to six and redeploying it to six and a half makes a lot of sense to us. And we get some growth opportunity on these assets that we're buying. As far as the share, we were able to obviously fulfill the current authorization on our share repurchase program. I think that share repurchase is part of our investment activity. I think that we look at several ways to deploy capital from this company and buying our shares back

makes sense and so we don't have anything authorized at this time but again i think we would use that as a tool in our investment opportunities if we thought it was appropriate and one this is brandon i'll just jump in so the other thing i would comment on the share repurchase is just to my earlier remarks about leverage i mean we'll we'll obviously do everything that we're talking about here capital deployment acquisitions repurchases and maintain the range of comfort five and a half to six and a half times on that EBITDA that we've had for a long time now and are in currently. And then the only other thing I would add to Dave's remarks is just on the year one yield and acquisitions, also to my earlier point about some bias towards using those JVs, that gives us some management fees and allows us to stretch on deals that might be on the lower end of the yield target.

Great, thanks. And then just on the slope of seasonality, both in occupancy and rate, could you just comment on how that's trending? I mean, it seems like rate maybe is disappointing. You called out a tough comp from the increase you saw last April. So just curious on your commentary there and how that stacks up relative to your initial thoughts.

Yeah, I think what we're trying to balance, and we always talk about we're solving to revenue, and so occupancy is a piece of that. You know, asking rate is a piece of that. Discount is a piece of that. What type of customer we're attracting, what type of unit we're renting, you know, it's hard to have a, you know, a global comment to that because there's so many things that we're looking at as we work and navigate, you know, what we're trying to do. But what I would tell you is the reason we're being a little more sharp on rate. It's a competitive environment, but what we're finding is And the team has done a good job finding is conversion rate. And that's what we're really looking at as far as what's coming through our opportunities and how we're converting those opportunities into rentals. And so, you know, from the seasonal profit in February to where we finished in April, we were very pleased with the rental activity and what we're able to achieve. And some of that came at a little bit sharper, you know, price point than maybe we would have wanted. I can tell you we're backing that up with the ECRI program, which is stronger than ever. and our ability to really work through our existing tenant base. And so we're looking at the offset of what we have to give maybe on an upfront rate or an upfront discount and how we make it up quicker in the ECRI cycle.

Thanks, Dave.

Thank you.

Our next question is from the line of Eric Wolf with Citi. Pleased to see you with your question.

Yeah, I just wanted to follow up on your last answer there. I mean, last quarter you talked about the documents-based models and you were just talking about it a second ago. I was just wondering how that testing has gone thus far and is it providing any type of outperformance versus comparable areas of your portfolio?

Yeah, thanks for joining. Good question. We are seeing success in areas and it's not Again, that's the advantage of testing. And, again, as we talk about our business unit size, it goes down to the unit size. And so, yes, we've seen some success. We have, you know, expanded the program in areas that we thought we would have success in. I can tell you we've had some areas where it was not successful, and we pulled right back and said that test did not work for us. But I would tell you as a whole, as around the commentary and being a little sharper in pricing, we have found activity we like, and so we are expanding the program, and that's put a little bit of pressure on street rate for us.

And your occupancy came a bit this quarter, sounds like a trough to February. I was just wondering in the typical year, sort of what you would expect in terms of occupancy increases in the second quarter into the third quarter, and then sort of what's baked into your guidance for this year?

Eric, yeah, it's Brandon. I mean, it wouldn't be uncommon for us to gain 250 to, you know, some years 350 basis points. from, you know, the valley to the peak. What was baked into guidance for this year at our midpoint was really more like flattish occupancy as we went. I mean, maybe a little bit of seasonal uptick in the spring and summer, but by and large, sequentially flat for most of the year. And what that means on a year-over-year basis is that, you know, as you saw in our first quarter numbers, you're starting off, you know, 350, 380 basis points negative over prior year. but the comp gets easier in the back half. So that gap narrows as you go throughout the year.

I think I would add to that, to Brandon's point, we're also not very assertive on rent growth either. And so as we're testing these models, anything we're trying to trade off on rent, we're certainly trying to pick back up on occupancy. And so what moves that initial guidance to the occupancy level you're talking about around, if we move the occupancy number up and we have to give a little bit on street rate, that's the balance we're trying to find.

Right. And the thesis on the occupancy, Eric was really just expecting, like we experienced last year, more muted demand related to housing. And so far, you know, that's played out. I mean, nothing wildly better or worse than how we thought about things back in February.

That's helpful.

Thank you. Yeah, thank you.

Our next questions are from the line of Todd Thomas with KeyBank Capital Markets. Please proceed with your questions.

Hi, thanks. First, just a quick follow-up. So 86% at the end of April, you know, talking about, you know, the comps getting a little easier. Sorry if I missed it, but what's that look like on a year-over-year basis? Has the gap continued to narrow?

It stayed fairly flat in April, Todd. You know, the hard part about it, when you look at it a month you know, that monthly snapshot, you know, we were talking earlier this week, you know, there was five Saturdays in April last year. There's four Saturdays this year, five Mondays and moving this stuff around. And so you start talking about it. It's really, we have to look at through the second quarter before we'll really know the amount of occupancy gain and amount of momentum we're picking up. We did, you know, we did see rental activity. We're happy with April, but again, there's, you know, there's some, some noise around the moving pieces of rental days in there.

And we ended 86 flat, you know, interim month. We were, you know, we were higher than that. And then not uncommon to lose, you know, 10 to 30 basis points near the end of the month. So we were pleased with, I was pleased with some of the gross rental volume. It also meant there was a little bit of higher move out volume versus last year. So, you know, it's early to start making too many conclusions, but I think there's, April, there was just more mobility generally than what we saw last April, and maybe that portends for the next few months with a little bit more activity, but we'll have to wait and see.

Okay. Yeah, got it. And then, Brandon, I appreciate the comments on the swap expiration, but can you just remind us, or give us an update on the plan related to both the 2024 and the 25 term loans, the tranche B in July and tranche C next year. It's $470 million in total, what the plan to refinance at it looks like.

Yeah, sure. So we've got near term, we've got the tranche B, that's $145 million. So we can, you know, we've got capacity on our line. We can obviously seek to place some refinance debt out there as well. We do have a six-month extension option on Trunch B, so that would stack it on top of the January 25 Trunch C that you're referring to. All that debt is with our banks. So, you know, in this environment, you've got to stay close and in constant dialogue with your bank groups. So we're certainly doing that, and we'll continue to do that throughout the year. And then, you know, the base case is to put some replacement debt out there, be it with our bank group, or we've been very successful accessing the debt private placement market, so that remains an option for us. our secured debt as a percent of our total debt stack, you know, has, there's opportunity to return that to levels that it's historically been, that's called the 10 to 12% range. We're 6% currently. So, you know, a lot of opportunity there and I expect we'll probably address the majority of that in the second half of 23, 24, excuse me. Okay.

And then just back to the acquisition, discussion here. So in terms of acquisitions, it sounds like the majority of what you intend to acquire is expected to be through the joint venture that you announced last quarter. Will there be any acquisitions on balance sheet that we should anticipate? And then what happens to the assets that were in the captive growth pipeline that the pros had you know, sort of in the pipeline that NSA had been executing on since, you know, since the IPO in 2013.

Well, yeah, good three-parter there. I'll try to make sure I cover them all. I think, you know, probably the majority of our acquisitions will be weighted towards the JV because that is a good cost of capital for us, and it's a good way for us to purchase properties in today's environment. I would not rule out that you'll see stuff on balance sheet. We do have some 1031 activity we want to take care of as as some of the properties we sold last year, we're going to want to redeploy in a 1031 mechanism this year. So you'll see those come through. And, you know, we'll try to balance, you know, the opportunity, the type of property, what we think is the right place for that property to sit, and we'll put it in the right bucket. As far as, The pro-CAPTI pipeline, it's still out there. We're still evaluating, obviously, with today's cost of capital and finding the bid-ask between seller and buyer. We've had a tougher time bringing stuff in from the CAPTI pipeline. It doesn't mean we're still not working it. It doesn't mean there's still not opportunities. It's just been a little slower for us to work off that CAPTI pipeline in today's environment. And then there was the third part that I'm sorry, Todd, if I missed.

No, that was it, really, about the captive pipeline. But I guess, you know, what's the latest there, you know, in terms of the size? And if I recall, these assets, a lot of them, you know, had debt. You know, there was leverage or, you know, maturities that, you know, I think were sort of the catalyst for, you know, NSA being able to acquire them at maturity. You know, what's the latest there? What are the pros there? you know, I guess sort of executing, you know, around that in the meantime while NSA has been, you know, sort of, you know, less active bringing those, the captive pipeline properties onto the balance sheet.

Understood. You know, I think if you looked at, if we look at the top of the stack, there's probably 110 to 115 properties in the captive pipeline, depending on how you want to value it, you know, north of a billion, billion two. You know, I think the If you think about most of the folks that are in that CAPTI pipeline, they're looking for some kind of tax-deferred transaction. And so the preferred method they'd want to have is some type of OP unit, right? And so I would tell you the CAPTI pipeline is not shrinking. They're not outselling it to third parties. There hasn't been a lot of transactions around that. Amount of debt coming due, we haven't felt a lot of that pressure in that group. They've been fine. And so I think the opportunities still exist. I think we've had a lot of discussions around it. But at this point in time, it's just been hard for us to find a place where it works for both parties.

Okay. All right. Thank you. Sure.

Our next question is from the line of Ron Camden with Morgan Stanley. Please receive your questions.

Hey, just two quick ones. In terms of the performance of the portfolio, is there a way to provide a little bit more color on maybe some of the more sort of COVID winners versus the rest of the portfolio? or is there any sort of other way to slice and dice performance in thematic buckets that would be helpful?

Yeah, Ron, I mean, I'll give it a shot. I mean, I think certainly what you have is some of the markets that were red hot during the pandemic, Atlanta, Riverside for us, you know, Those have definitely cooled off, and to some degree, we're still dealing with the comparison against that cooling off that was happening, you know, in the back half of 22 and all throughout 23. And so that certainly plays into the year-over-year performance that you see for any given quarter. There's other markets that, you know, maybe didn't perform. They still perform really strong, but not as strong as those. And so those have been more like steady eddies. all throughout, and those are going to be your OKCs and Pulsars and some of the other markets that Dave cited in the opening remarks. Any other comments, Dave?

I'd also probably say, you know, if you think about the lack of movement around single-family housing, we do have some of this portfolio that sits around markets that benefited from people who bought houses in the lower interest rate markets, so maybe they pulled ahead their home purchase, they went ahead and moved into Florida, they moved into some of these markets and until I think we see a meaningful change around that single-family housing environment, some of these stores, you know, may be slower to recover versus the rest of our portfolio until you see a little bit more activity around that transition. You know, I would tell you I think, you know, we're happy with where we're positioned. We like our Sunbelt exposure. You know, the Sunbelt exposure as we call it, but I also think the positioning of our portfolio and the diversity of our portfolio to Brandon's point, we've got some markets that are tugging away just fine and we're able to do exactly what we want to do. And these other markets had a red, red hot, unbelievable run for about 18 to 24 months there. And now they're back to, you know, it's going to take a little bit for things to come back to what we would call, I don't know, new normal and new reality.

Great. That's helpful. And then my second question was just on sort of the guidance basically versus where you are sort of in one queue. I guess it would assume a little bit of a deceleration on the same store and wise, same store revenue line. Is that mostly just because you're trying to wait and see what sort of the peak leasing season brings or is there sort of something else there? And if you could just quickly comment on just how you're thinking about demand from sort of home turnover given the higher rates.

Yeah, Ron, on the first part, you're correct. I mean, certainly the midpoint of the full year guide that we gave for both same store revenue and same store NOI is, is lower than the Q1 year-over-year growth numbers, so that there's implied deceleration. You know, that's no different than when we were introducing the guidance in February. We expected to trough in terms of that growth in the middle of the year, and then maybe that accelerates, you know, still maybe negative growth year-over-year, but improving in the fourth quarter. And that's just really the dynamic of how we budgeted this year and the quarter-by-quarter comp that you have all throughout last year. on your second part regarding housing. I mean, look, how we feel today is probably different than how we felt six weeks ago, but I'm sure four weeks from now we'll feel different, right? Mortgage rates felt like they got a little bit of a relief early in the year, late last year, and then things have picked back up. But like I said in my response to Todd's question, some of the general mobility stuff we saw in the data in April was encouraging. So that would be despite, you know, the new highs for 2024 that you're seeing in mortgage rates, obviously you've got apartment renters and other things. So the benefit we have also is just a longer length of stay. If people aren't, you know, moving in as much, there's also a lot of people who aren't moving out as much. And that gives us power with ECRI. And it's what, as you know, it's what has allowed us and others in the space to maintain and protect the employee's portfolio rates.

Great. That's it for me.

Thanks, Ron. Our next questions are from the line of Keegan Carl with Wolf Research. Pleased to see you with your questions.

Yeah, thanks for the time, guys. Maybe just first on supply, how should we think about new deliveries in your markets in 24 and 25?

I think our general tone is we do think new deliveries are slowing nationally. And if you look down into a lot of our markets, we think new deliveries are slowing off the pace they were two years ago. And so that's a positive sign. I think the way we look at it is we really track around amount of fill-up properties, fill-up properties that would be in our three-mile radius. And I can tell you that number, percentage of stores that are facing pressure of some store and some form of fill-up, isn't moving around much. I mean, so the amount of new entries coming in and the amount of new entries falling off is keeping that percentage pretty similar. And that is down, you know, from where it was in 2022. And so we've seen a decline in the amount of our stores feeling pressure from stores and fill up. And so all of that, if I had to wrap it up, I think we're feeling better about new supply pressure in the coming years. But, you know, certainly that's market-specific, right? You've heard us talk today on the call about Phoenix and Atlanta, and there's been some product delivered that's going to, you know, put pressure around those markets. We believe in them. We believe they'll grow out of it. But there are going to be markets that feel more pressure than others.

And in changing gears, if I think back roughly a year ago, one of the things that came up in our NAIT REIT meeting was the potential for you guys to start your own third-party management platform. I guess just where are you guys at on that today?

That's a really good question. You've heard us talking over the last eight, ten months really about really looking at our platform, improving our platform, looking at people processing platforms, our team, our talent. We have done some major lifts in the last eight to ten months around our data systems, our operating platforms, our website, our call center. All of these things to position us to really evaluate how we continue to grow this company and look for things that would be added to the company. Certainly today our pros do third-party management, and so that's something we've had access around. We obviously have JV, so we do a lot of what we would call, even though we have an ownership, we manage for others, and we have all the systems, the reporting, all that stuff built out. I would tell you it's in our discussion points. It's something we look at and ask ourselves, is there a right time to dip your toe in the third-party platform. I would tell you we talk about it. I don't have an exact date for you, but I'd say it's something that might be on our horizon.

And in addition to the platforms initiatives, Keegan, that Dave said, I would tie in all the portfolio optimization strategies that we've been speaking with, right? So, I mean, the 71 stores that we sold in Q4 and Q1, if you remember our comments from the last call, I mean, that was spread out across 33 different MSAs, and so we're certainly trimming in areas where we don't have market dominance or, you know, strong market presence, and we're densifying in areas where we do, and I think that's going to, you know, in addition to the systems and platforms efforts, it's going to provide, you know, the path going forward for us to seriously consider, you know, the 3PM to your point.

Great. Thanks for the time, guys.

Thank you. The next question is from the line of Wes Galladay with Baird. Please proceed with your questions.

Hey, guys. A quick one on the pros. Do you get the sense when talking to them they're more excited about the current environment, the opportunities they see, or do you think, you know, you may see some want to retire, you know, call it within the next year or so?

Good question, and thanks for being with us today. You know, I certainly think from the pros' perspective they would like to be – you know, they'd like to see the environment be a little more – conducive to external growth. I think, you know, as you think about heritage and how long we've all been in the business and part of this business was acquiring and, you know, and improving performance on properties and finding the value in those acquisitions. And so certainly this has been a time where patience has been at the top of the list. And I think the pros have been very, very good at being patient. I would also tell you they've also been very good about acquiring properties outside the REITs. You know, they've been out. They have found some opportunities. They've found money outside the REIT, and then that just puts stuff into our CAPTI pipeline that we can evaluate and look to move on at a later date. So, you know, they've been great. We appreciate them very much, and they've been patient, but they've also been active. So I think, you know, short answer to your question, sure, they'd love to see it be a little easier to acquire properties within the NSA.

Okay, and then you had the comment earlier in the call about the cash flow and the JV may not exactly be 25%. Can you put some sensitivity on that? Are we looking at 24 or 26? And, you know, what would cause that deviation?

Yeah, sure. Wes, it's really around, like, providing a minimum, you know, base return to our partner, which, you know, the going in yield, the value at which we contributed the assets, it was all kind of pre-designed to JV. not guaranteed, but strongly assured that we're going to be at those levels. And then if we hit certain metrics and operating performance, we have the ability to earn some incremental fees. That's not currently that scenario of us being in the money on those is not a meaningful driver of our 24 guidance. It's a possibility, but it's just not a big needle mover. And then I'll save comments for the out years. They're achievable goals, but I'll save comments without handicapping the likelihood beyond 2024. And then like our existing two JVs, we have upon a liquidity event, promote structure where, you know, once a certain return has been provided to our partner, then we get kind of a disproportionate share of that upside.

Okay, then how should we think about, you know, call it the floating rate exposure? I think you mentioned some swaps are coming offline. You did some buybacks. You may have some dispositions. You may be buying some more assets. So a lot of moving parts over the calls in the balance of the year. What do you think the floating rate exposure is in the year?

Well, I guess, let me say it this way. We're, as I mentioned in the opening remarks, about $200 million drawn on our revolver, which is our only current variable rate exposure. we have the $250 million of swaps that expire middle of the year, that could go to floating or between now and then we could enter into new swaps and fix that. So that'll be, or take out place replacement debt. So those are options to us. If you factor in the $250 million of swaps that burn off, let's just assume that that goes to floating, it puts our total debt... that's subject to variable less as a percent of our total, around 13%, 14%. We've been comfortable in the past up to 20%, sometimes 25%. So I think if I had to tell you, I'd say between 10% and 20% of our total debt stack of a little over $3 billion could be floating rate by the end of the year. Okay, thanks for that.

Sure. Thank you. As a reminder to ask a question today, you can press star 1 from your telephone keypad. Our next question is from the line of Tayo Ocasalia with Deutsche Bank. Please receive your question.

Hi, yes. Good afternoon. Quick question. The captive pipeline from the Peru, is there any way that can potentially be acquired by the JVs or you can't do that legally or because of tax implications, something like that would not work?

Well, certainly, I think you touched on the point is the CAPTI pipeline people would probably, they could sell to anybody. They could sell it to, you know, a JV. They could sell it to our JV. They could sell it, you know, if we turn the property down and decide we don't want it, they could sell it wherever they want. I think they're really looking for the tax treatment and the OP unit is one of the primary drivers behind that CAPTI pipeline and that group of sellers. And so that makes it hard. We can't spin it into the JV in that aspect. is the answer to that, I guess, short answer.

And, Kyle, the only other thing I would say is Todd, you know, in his question referenced the debt maturities as a driver, which is true, but, you know, there's also assets in that captive pipeline that our pros manage, but they don't outright control. You know, they may just completely manage them only, or maybe they have a minority ownership interest and also manage them. So, you know, to the extent that those other owners, if their fact pattern changes and if they wanted to be a cash seller, you know, the JV could be an option. We haven't seen that yet, and I think it's less likely, as Dave said, but just wanted to provide some additional color on some of the different arrangements. That's helpful.

And then could you also kind of give a general sense on overall tenant credit, maybe what you're kind of seeing in regards to, you know, increasing auctions, increasing delinquencies, or decreasing auctions and decreasing delinquencies?

Yeah, I mean, no real changes in the first quarter from the previous several quarters in terms of delinquencies. You know, we track bad debt as a percent of revenue, and that's historically been, you know, in around the two and a half percent range. So we're very much in line with those levels for Q1. Something we're certainly watching closely, but haven't seen any significant changes in payment patterns or payment timing from the customers. So all indicators are very very healthy customer base intact. Great.

A solid work on the capital allocation front this quarter.

Thank you. Thank you.

Our next question is coming from the line of Brendan Lynch with Barclays. Please proceed with your questions.

Great. Thanks for taking the question. I want to go back to the focus on internal operations and the people, process, and platforms that are um being upgraded and evaluated i'd imagine this is a perpetual focus to a certain extent but to the extent you you can uh define are we reaching the end of that process for uh certain components of it and maybe just more broadly where you are in the transition overall yeah really good question and i would categorize it as yes we are ending we're ending the reaching the end of the current you know development cycle of what we've worked on and so

But it will be done here shortly. We've upgraded the operating platform. We've upgraded our data center and our capabilities around data and AI and technology. We've upgraded the call center platform. And we've updated the web experience. And so we've touched all four of those, which were very big lists for this company. The teams have worked extremely hard and extremely diligent in their efforts. can be more proud of all that we've accomplished. And so, you know, to me, we've got the platform, the foundation really, really solidly built, and this launches us into the next, you know, next chapter of this company's life as we look forward on utilizing that, what we've developed, the technology we've developed, and really having the tools for the talent to really excel.

Great. That's helpful. And then it looks like here you had about a 32% increase in marketing spending. Can you talk about the components that went into that? I'd imagine paying for clicks as part of it, maybe some call center considerations as well.

Yeah, you touched on them. I mean, our call center is included in our marketing expense. I think, you know, we think about it today. You're in a very competitive environment. You know, the marketing spend has come back to a level that we're very comfortable with as a percentage of revenue. And, you know, as we continue to implement technology and we continue to look at how we staff our stores and the payroll around our stores, obviously, you know, the call center and the customer touch points change. You know, digitally, we're moving more people to more of a digital experience. Our customers are transacting much more with us digitally than they have in the past. And the call center volume I was talking about is also a function of that where we are meeting the customer on how they want to transact. And so the comp is tougher because last year we were not spending at the level from a digital spend, paid search. Some SEO work around that piece of it was not as vigorous as it is this year. We'll start to annualize that paid search and some of those marketing costs, you know, the hard costs that go around Google and those things. Really, as we head into the second quarter, third quarter, we really start to annualize that year-over-year spend, and that comp will not look as pronounced as it is today.

Okay, very good. Thank you.

Thank you.

Our next question is from the line of Eric Lewishout with Wells Fargo. Please proceed with your question.

Great. Thanks for taking the questions. So, you know, it sounds like with some of your new revenue management systems you put in place, you're being a little more dynamic in terms of, you know, new rates and offering lower rates to customers to generate some additional occupancy, which is reflected in some of your web scripts as well. So any early learnings on how that strategy is progressing compared to other types of promotions that you might give, like one month free rent?

Yeah, really good question. I would tell you to start at the top of that is what we're discovering, and I don't think it's new to all of us, is the customer price sensitivity is mattering more now in the rental process than it did a year ago and even six months ago. And so the consumer from their entry level are looking for a little bit sharper promotion, discount, price reduction, however you want to look at that. We have been primarily focused on lowering entry rate and then trying to make that up through a little bit more of the ECRI program. But we are finding success now looking a little bit more back to what we used to do as an industry around promotion where it's maybe 30% off or a third off for the first three months or half off for two months. And a little easier to implement that with the consumer, a little more visibility around that piece of it as far as, you know, here's your discount, you know, your rent is this, and you get 50% off for the next two months, and then it's going to that. And, you know, as far as a consumer standpoint, that's a pretty easy point of sale, pretty easy to understand, and takes a little bit of pressure off those large increases, you know, after a 60- or 90-day period of being with us. And so we are... testing and we're finding a path around probably a little bit more promotions use and maybe not as steep, you know, of rate decreases as where we're heading with this. And so, I would tell you having the technology, having the testing, having the testing environment, you know, I've been around a long time. I'm really excited about what we can see and the data points we have and how we can test and react and how nimble we can be. We are, you know, much farther down the path of where we ever used to be and, you know, it's a good thing to be excited about. It's also a good way to learn. and hopefully, again, find the best efficiencies we can find when we're trying to attract new customers. I do want to shift back to also our existing customer base has been very, very, you know, sticky. We had long length of stays. And so on the flip side of that technology, attracting, we talk a lot about attracting customers, but our existing customer base is really healthy, really stable, and it's been very accepting of the, you know, ECRI program that we have in place.

Great. That's very helpful. And I guess just one follow-up. Just to confirm, the midpoint of your same-store revenue guidance assumes we don't have a typical seasonal uplift and move in rents from the troughs of winter to spring and summer. I just wanted to confirm that. Do you think that seems like the right assumption just based on what you've seen in early spring through late March, early in April?

Yeah, that's correct, Eric. I mean, maybe, you know, model a variety of scenarios. So in some of those that would incorporate a little bit of uptick in rate due to seasonality, but nothing like the typical norms that we've had in historical years. And I would agree with what you said. Yeah, nothing that we've seen so far makes us feel like we should or need to change those assumptions.

Okay, great. Thanks for the questions. Yep, thank you.

Thank you. At this time, we've reached the end of our question and answer session, and I'll turn the call back to George Hoagland for closing comments.

Thank you all for joining the call today. We appreciate your continued interest in NSA and look forward to seeing many of you at the REIT Week conference next month. Thank you.

This will conclude today's conference. You may disconnect your lines at this time.

Thank you for your participation, and have a wonderful day.