National Storage Affiliates Trust Q2 FY2020 Earnings Call

Greetings, and welcome to the National Storage Affiliates Second Quarter 2020 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, George Hoglund, Vice President, Investor Relations for National Storage Affiliates. Thank you, Mr. Hoglund, you may begin.

Good morning or good afternoon depending on what side of the country you're on. As some of you on this call may be looking to follow the recent trend of moving out of the big city and into the suburbs, I'd like to remind you that self-storage is available to facilitate life's transitions. We'd like to thank you for joining us today for the second quarter 2020 earnings conference call of National Storage Affiliates Trust. In addition to the press release distributed yesterday, we filed an 8-K with the SEC containing our supplemental package with additional details 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, including uncertainty related to the scope, severity and duration of the COVID-19 pandemic, the actions taken to contain or mitigate the direct and indirect impact. The company cautions that actual results may differ materially from those projected in any forward-looking statement. For additional detail concerning our forward-looking statements, please refer to our public filings with the SEC. We also encourage listeners to review the definitions and reconciliations of non-GAAP financial measures, such as 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. On the line with me here today are NSA's CEO, Tamara Fischer; COO, Dave Cramer; and CFO, Brandon Togashi. Following prepared remarks, management will accept questions from registered financial analysts. I will now turn the call over to Tammy.

Thanks, George, and thank you, everyone, for joining our call today. I'd like to first acknowledge and thank our PROs and our many team members who continue to work diligently in a challenging environment to deliver what we believe is a very solid quarter given the circumstances. While I never imagined being satisfied with the negative same-store NOI result, the extraordinary effort by our PROs and team members minimized the magnitude of that decline in the second quarter. Further, and consistent with what we've discussed historically, our PROs absorb a disproportionate share of downside risk through our structure, mitigating the negative impact on cash flow and core FFO per share during challenging times. As a result, and in spite of the 1.2% decline in same-store NOI, core FFO per share increased 7.9% in the second quarter compared to the second quarter last year. This positive result is due primarily to three factors, which are largely driven by our PRO structure. First, our ongoing robust acquisition volume is consistently accretive to FFO per share; second, the internalization of our SecurCare PRO was accretive by approximately $0.01 per share in the second quarter; and third, our PROs absorbed a disproportionate share of the decline in same-store NOI through reduced distributions on the SP units. Our unique structure was designed to align the interest of all of our stakeholders in good times and in bad, giving special priority to our common shareholders, and we saw this clearly demonstrated in the second quarter. While we're pleased with the overall performance in these challenging times, the coronavirus pandemic and its impact on the economy remain a key risk to our business. And I would emphasize that the health and safety of our employees and customers is our top priority. We've been proactively addressing the rapidly changing environment driven by the pandemic. All of our stores remain open and operating in a modified manner for safety, and all have contactless rental options. We've resumed rent increases and auctions across our portfolio except where prohibited by state executive orders. Cash collections remain at or near our normal strong levels and so far have really been a non-issue. Rental activity seems to have crossed in April and has steadily improved since then as many states began phased reopening. Both same-store move-ins and move-outs were down about 28% year-over-year in April, but steadily improved to the point that June move-in volume was roughly flat year-over-year. And move-outs remained down about 7%, compared to June 2019, resulting in an increase in net move-ins year-over-year, in June. The steady improvement in net rental activity continued into July. And we ended the month with occupancy up 80 basis points, compared to July last year. Further, easing of restrictions on rent increases, late fees and auction moratoriums by states and local governments, has been steadily gaining steam and fee revenue is beginning to recover. In most markets, we're putting auctioned units back into the rental system again. One important point I would highlight is related to concern that the inability to auction delinquent tenant units might have created an occupancy overhang. We've been proactively working with delinquent tenants since May, negotiating opportunities for these tenants to pay a portion of their overdue rent, to vacate their units and avoid the auction for closure process. This has materially reduced the number of pending auctions and is a win-win for us and for our exiting customers. We currently estimate that unprocessed auctions overstate occupancy by only about 50 basis points. So given that our July month-end occupancy was up by 80 basis points year-over-year, we're now seeing a true net occupancy gain on a year-over-year basis. Things have clearly moved in the right direction. And we're hopeful we've seen the worst of this downturn. But the resurgence of COVID infections across a number of states and uncertainty about how and when phased re-openings will occur continue to create uncertainty and limited visibility. As such, we are not reinstating 2020 guidance at this time, but we will continue to monitor and evaluate as the year progresses. Although the environment remains challenging, we think NSA is well positioned given the downside protection inherent in our unique PRO structure, essentially no lease-up exposure and our greater concentration in secondary and tertiary markets, which have been less affected by COVID-19. There have been a number of analyst reports and media articles published over the past couple of months, highlighting the early stages of out-migration from urban areas and primary markets, to more suburban locations and secondary markets. This is an important trend to keep in mind, when you think about how our portfolio is positioned and how this shift clearly benefits NSA. We believe this trend will only gain more investor focus as time goes on. Brandon will spend more time talking about our balance sheet and liquidity, but we were extremely pleased with the execution of our $250 million debt private placement transaction, which closed just this week. The 2.99% coupon on the 10-year notes was the lowest of any 10-year public or private notes issued by a self-storage REIT. On the external growth front, we continue to evaluate opportunities and acquired four wholly-owned properties during the second quarter for a total investment of $36 million. And subsequent to quarter-end, we acquired one additional store valued at $6 million. Three of these assets were from our captive pipeline, which remains a strong source of acquisition opportunities for the future. The external acquisition environment slowed significantly in the second quarter, as many portfolios were pulled from the market. And bid-ask spreads remained wide. Now that operating fundamentals are stabilizing and there's a sense that the worst is behind us, we're starting to see portfolios come back to market and overall market transaction activity is picking up. NSA is extremely well positioned to take advantage of potential opportunities with a reloaded revolver following our private placement, OP units that serve as attractive acquisition currency and the expectation that we will continue to execute on captive pipeline acquisitions. I'll now turn the call over to Brandon to discuss operating results and balance sheet activity.

Thank you, Tammy. Yesterday afternoon, we reported core FFO per share of $0.41, which represents an increase of 7.9% over the prior year period. As Tammy mentioned, this growth was fueled by a combination of strong acquisition volume over the past year and accretion from the internalization of SecurCare. For the second quarter, same-store NOI decreased by 1.2% over prior year, driven by a 1.1% decline in same-store revenues and 1.1% decline in property operating expenses. Same-store occupancy averaged 88.1% during the second quarter, a decline of 140 basis points compared to the same period in 2019. This effect was partially offset by an average rental revenue per occupied square foot that slightly increased year-over-year, despite the fact that we paused rental rate increases to existing customers in most of our markets during the quarter. Same-store OpEx growth benefited from diligent cost control measures across the board. Specifically, personnel costs declined 2.5% as we optimized staffing hours due to less activity in store offices, repairs and maintenance decreased 13% and utilities declined 1%, partially attributable to benefits from our LED lighting initiative. These favorable expense controls were partially offset by property taxes that grew 5.5% from the prior year period. Next, let me give some color on the positive trends in July. Same-store occupancy at the end of July was 91.1%, which is up 80 basis points compared to the end of July 2019 and up 130 basis points sequentially from the end of June. Same-store move-in volume in July was 8% higher than July 2019 and move-outs were down 20% compared to the prior year. Cash collections in July remained healthy and were about 99% of normal levels, similar to what we experienced in the second quarter. Our street rates were down about 5% year-over-year in both Q2 and July. We focus on optimizing revenue and believe our revenue management systems have done a good job of balancing the give and takes between occupancy and rental rate during this challenging time. Now, let me comment on some of our markets. In general, we were pleased that of our reported MSAs, half of them achieved positive same-store revenue and NOI growth and of our six largest exposure markets, four achieved positive same-store revenue and NOI growth. Two of our largest markets, Riverside, San Bernardino and Phoenix performed better than portfolio average during the quarter. While both markets experienced overall slowdowns in new rental activity consistent with the broader portfolio, occupancy held steady. And the Q2 results benefited from rent increases to existing customers that were processed in March, before we paused the program due to the pandemic. In Portland, the second quarter was quite negatively impacted by a combination of the COVID-related stay-at-home orders, regulatory restrictions on both auctions and late fees and the existing oversupply issues. Average occupancy was down 280 basis points during Q2, but ended the quarter down just 140 basis points. This improvement continued in July as the month-end occupancy was up 110 basis points year-over-year. While this trend is encouraging, Portland remains the most restrictive market in which we operate, with state mandates prohibiting late fee charges and auctions for the entirety of the third quarter. These are just a few examples of what we're seeing across markets. The landscape remains challenging. And as Tammy noted, our limited visibility about the continuing economic impact of the pandemic prevents us from confidently providing full-year guidance at this time. That said, I do want to offer some commentary about same-store revenue growth in the third quarter. We have a tough comp when we look back at the strong performance of the third quarter of 2019. This year, the lack of rent increases for existing customers during the second quarter has weighed on in-place rental rates heading into the third quarter, and we have been slightly more aggressive with lower pricing and discounting to new customers to boost occupancy. The combination of these factors could lead to Q3 year-over-year revenue growth being equal to or slightly below the negative 1.1% we reported for Q2. Now, turning to the balance sheet. Subsequent to quarter-end, we paid off $35 million of mortgage debt, the only debt that was maturing during 2020. We also closed on a $250 million private placement of senior notes comprised of two tranches: $150 million for 10 years at a 2.99% coupon and $100 million for 12 years at a 3.09% coupon. To take advantage of our low floating rate on the revolver, we have elected to delay funding of the notes for up to three months, no later than October 22. We're very pleased with the execution of this private placement that extends our weighted average maturity, lowers our average fixed rate borrowing cost and replenishes the capacity on our revolver. Also during the second quarter, we issued 387,000 shares of common stock through our ATM program at an average price of approximately $31 per share for gross proceeds of $12 million. We also issued 206,000 OP and SP units at an average price of $28 per unit in connection with our acquisition activity. Our balance sheet is well positioned with the full $500 million available on our revolver after reflecting the private placement, essentially no debt maturities through 2022 and healthy access to multiple sources of capital. Our weighted average cost of debt at quarter-end was 3.3% with all borrowings, except our revolver, fixed rate or swapped to fixed. Our weighted average maturity was 5.2 years, and our net debt-to-EBITDA ratio was 6.3 times at the end of the second quarter, down slightly from 6.5 times at the end of the first quarter. We have no immediate need for capital and we'll be opportunistic about accessing the capital markets going forward. The strength and flexibility of our balance sheet also position us well to take advantage of investment opportunities as they arise. And we believe our well-connected network of PROs and our ability to offer tax-deferred transactions with our OP unit currency will continue to fuel our external growth strategy. Thanks again for joining our call today. Let's now turn it back to the operator to take your questions.

Our first question today is coming from Neil Malkin from Capital One. Your line is now live.

Good morning everyone. It was a fantastic quarter. George, your contributions played a significant role in that, so great job on the introduction as well. My first question is about the transaction market. We’ve noticed that pricing has rebounded quickly. Did cap rates change during the toughest times? Can you discuss the deals you executed in the second quarter and the third quarter regarding pricing and what you're currently observing as more transactions come back to the market? Additionally, as a follow-up, considering your stock price performance today, are there portfolios that fit your criteria, especially given the possibility of issuing equity in an accretive manner?

Thank you for the question, Neil. We appreciate it and acknowledge George's contribution. Regarding the acquisitions market, we expected to see a greater compression in cap rates than we actually did. The transaction market slowed down in the second quarter starting mid-March, and we did not observe significant compression in cap rates. The deals we closed in Q2 were already under contract, and some came from our captive pipeline, which we tend to acquire at slightly better cap rates. Our average cap rate for transactions completed in the second quarter, including one from the beginning of the third quarter, was approximately 6.5%, around the mid-6% range. We are noticing an increase in activity with plenty of capital ready to be deployed for self-storage investments, and we believe we are well-positioned to seize opportunities as they arise. We will continue to be disciplined in our underwriting but are satisfied with the current landscape. We are pleased with our stock price today, although it may fluctuate, and we have our revolver fully available. Additionally, we've effectively utilized our OP currency to encourage sellers to consider selling to us.

Sure. I got you on that one. Last one for me is, can you give a sense as to how much demand, if you can even discern that is related to doubling up or moving due to the work from home or job loss or moving back in with your mom and dad? Typically, that's a pretty quick occurrence, I guess. So are you seeing any of that, or do you believe that, that is coming to potentially help support occupancies through the remainder of the year?

Neil, this is Dave. It's a good question. I can tell you, we have had stories of that, we've witnessed it. I can't put an exact number to it as far as how much activity, but we are certainly seeing people empty a bedroom to create an office. Empty bedrooms create places for their children. Some of the small businesses are getting rid of tables to make room to have limited capacity seating. We've experienced that all throughout the country. There's nothing really significant that we can put our finger to on how long it's going to last, and how much it's really impacted occupancy.

Okay. Appreciate it. Thank you, guys.

Thank you.

Next question today is coming from Todd Thomas from KeyBanc Capital Markets. Your line is now live.

Hi. Thanks. Just first question. So following up on external growth. I think previously, you've talked about growing the asset base 20% per year. Do you think that you could see a return to that pace of investment activity in the near term?

Yeah. I think – I honestly think that we talk more about 10% a year, to be honest with you, Todd. But I do believe that we can return to that. I think that will be our goal. Our original guidance for 2020 was for an investment of $400 million to $600 million this year. I don't know if we'll get there. We're getting to the later part of the year, and it seems like we'd have to have things picked up by now. But we're going to continue to actively seek transactions that make sense for us and close them as quickly as we can reasonably do it. So yeah, we're very motivated on that front.

Okay. And sorry about that 20%, 10%, whose is counting I guess, but – and then I know you were looking to round out the map with another PRO or two in certain geographies. Any update on those efforts? Is the current environment supportive of additional PRO adds here?

So I would tell you that, in the recent months, I would say that it has not done really with – a, with our stock price where it was; and b, with the uncertainty in self-storage; and c, as it relates to just the general economic environment. And so, but I would say things are changing. And I am so optimistic that over time, I can't say when, but over time, I do believe we will be successful in adding one to three more PROs. We've talked about it before. We're always in conversations with a handful of different private operators. And – but it takes time. It takes time to sort through it. But I'd say, over the past eight to 12 weeks it's been substantially on pause.

Okay. And just one more on investments. So historically, you've refrained from development and buying much product that wasn't stabilized. Would you sort of weigh in to the lease-up market at all for new investments, or do you expect to still be buying predominantly stabilized stores?

So you're right. It's – the acquisition of non-stabilized properties is definitely not part of our core strategy. But we've always said that, if and when the time is right and if it makes sense, we would be open to acquiring non-stabilized assets to a certain level. It will never be a huge part of our portfolio or our investment strategy, I don't think. But we also expect to see some change in pricing and expectations. And while we're seeing some deals come to market, there's still a pretty wide gap in the desk. And so at this point in time, we're still watching and waiting. And if there was a sizable opportunity, I think we would be open to looking at that with a JV partner if and when it makes sense.

Okay. And just last one for Brandon. Can you share what the bad debt expense or the reserve was in the quarter that ran through the income statement? And how do you expect I appreciate the comments around the third quarter comp, but how do you expect the reserve to trend in the third quarter as you work through – continue to work through auctions and that backlog?

Sure, Todd. Yes, thanks. So our historical bad debt expense as a percent of revenue and again, this is all netted within revenue, so you don't see it clearly on the financials, has been in the 2% to 2.5% range. And Q2 was no different. I think we were kind of right in the middle of that range. July did pick up, I'd say, towards the high end of that because we did reinstate the auction process across several markets. I think we may see a little bit of a continuation of that in August as we get to the full cycle of auctions, meaning the high end of that range, but I don't expect it to be dramatically higher. We – by the time we're getting to customers who are going through the auction process, we're pretty much fully reserved for that effect already. And so that's baked into the 2% to 2.5%.

Okay. Got it. And you'd expect to be through the auction process by the end of the third quarter?

Hey, Todd, it's Dave. Yes, we hope to be. Obviously, we still have some restrictions around the country and the municipalities and governments that are prohibiting us from completing all of those. Some of those do stretch through the end of September. At this point, Oregon being pretty restrictive, it could go even longer than that. But as the restrictions lift, we're working our way through them.

All right. Thank you.

Thanks, Todd.

Thanks, Todd.

Thank you. Our next question today is coming from Ronald Kamdem from Morgan Stanley. Your line is now live.

Thanks. Just a couple of quick ones from me. One, the July move-in volumes sounded pretty strong. Just wondering, if you could provide maybe a little bit more color on that and are you seeing any trends? Is there any parts of the portfolio, any markets, potential demand drivers? Just any more color on that would be helpful.

A good question. This is Dave. I believe that in July, many of our markets performed quite well regarding move-in and rental volume. All our teams are focused, and we are competitively priced with our discounts in place. Our marketing efforts were effective, and across the country, there was increased activity. For instance, Portland saw positive move-out activity in July, which is a change from what we've experienced lately. Overall, the country became more active and open, and our strategies were solid, with everyone executing them effectively.

Great. That's helpful. And then, the second question was just, maybe trying to get an understanding of sort of the guidance parameters. I obviously appreciate that there's a lot of uncertainty there. But when you think about the second half of the year, I think you've already sort of put some brackets around what 3Q could look like. Just curious, what are some of the unknowns, right? What are some of the things that sort of causing enough uncertainty that you wouldn't be willing to put more of a roadmap for us out there on the guidance front, hopefully, that made sense?

It did, Ron. Thank you. I think, what we believe is that the worst is behind us. And as you mentioned and Brandon mentioned in his comments, we do believe that the third quarter could look very much like the second quarter in terms of the decline in revenue. But I will also say that we're feeling a lot better about things today. And if you assume that there are no additional shutdowns or shelter-in-place orders around the country, we do believe that the last half of 2020 FFO should come in ahead of the last half of 2019.

Helpful. Congrats on a great quarter.

Thank you.

Thank you.

Thank you. Our next question today is coming from Smedes Rose from Citi. Your line is now live.

Hi. Thank you. You mentioned a few properties that you acquired from the captive acquisition pipeline, which I believe has around 140 properties. Can you share the timing of these properties entering your system? Additionally, could you remind me how the process works for acquiring from the captive pipeline?

The timing of assets coming from the captive pipeline is quite irregular. The assets are managed by our PROs, who often have some level of ownership. Many of these assets might have debt or are not fully stabilized, and in some instances, their actual sale is not managed by the PRO. We collaborate with our PROs to encourage them to make their best efforts to contribute the asset to NSA when it becomes available. Predicting this process can be challenging. We discuss it with our PROs every quarter and look ahead 12 to 24 months to anticipate what might come, but it can be somewhat unpredictable.

Okay. Typically, they would use some of the OP currency, as you described, as part of your acquisition?

The PROs take SP units. And in many cases, if they have an outside owner, the outside owner will take OP equity. Yes.

Okay. This is somewhat open-ended, but part of the discussion is the possibility of eliminating the step-up basis, which would affect various asset classes. I'm curious if the removal of the ability to shield gains for one's heirs would significantly alter how PROs approach being in this model. I'm not sure if it's something you've closely monitored, but do you have any general thoughts on it?

Well, to be honest with you, it's not something we've had conversations about recently in terms of potential changes to tax law. I will say that, conversations that we're having with sellers have all been very favorable, in at least in terms of what's in place right now. And honestly, if a change does come, we may see, sellers being more willing to move on things a little bit more quickly. So that could be a real positive for us.

Okay. All right. Thank you.

You bet.

Thank you.

Thanks. Our next question today is coming from Jon Petersen from Jefferies. Your line is now live.

Thank you. I have a few detailed questions about the markets. Looking at your same-store page, it appears that operating expenses in Indiana increased by 38% year-over-year. Could you explain what is causing that? Additionally, it seems that Oregon and Washington had the lowest revenue. I am aware there have been supply issues in Portland. Could you provide an update on your perspective regarding the market dynamics in Portland?

Sure, Jon, it's Brandon. Regarding the first point, Indi is related to property tax, and it's primarily a comparison issue. We had a significant benefit last year in the second quarter, which is why we expected a notable increase when comparing year-over-year for this year's Q2. Looking ahead, we also anticipate that Q4 will show a higher year-over-year increase due to similar comparison issues in other markets. Now, broadly speaking, the markets that have underperformed compared to the portfolio average on their own, as well as when comparing Q1 performance to the subsequent decline, include Portland, Dallas, L.A., and Vegas. These four markets face challenges due to supply issues. The pandemic has exacerbated these challenges along with the existing supply. Among those, Vegas has the least favorable situation. Nevada, similar to Oregon, implemented strict regulations concerning various fees and standard operations during the second quarter, which significantly impacted our business in Vegas.

Okay. And then, I'm curious with maybe some more color on July. And the first week of August in terms of any themes that you guys are seeing on which markets are, starting to do better or worse? And I guess, as we think about how COVID is kind of spread around. I mean, obviously, Texas and Florida have been a lot harder hit. I know you guys are in New York, but it actually seems like initially people thought it would be a negative in New York. And it's kind of turned into a positive to have like, a hard hit region. So I was curious, if you've seen any sort of themes or trends, related to that in the more recent weeks?

We haven't noticed much change in recent weeks. We observed some improvement in July, and August is consistent with those trends, which we're happy about. Despite some outbreaks, active markets remain busy with a good amount of foot traffic. All the metrics we monitor for web traffic are up, so we aren't anticipating any significant changes coming out of the second quarter through July and into early August. Overall, we're feeling pretty optimistic.

Okay. All right. That's helpful. Thanks Dave.

Thank you.

Thanks. Our next question today is coming from Irina. Your line is now live.

Just a little, can you hear me?

Yeah. Good afternoon.

I wanted to get more information on property taxes. By now, you probably have received all the deals from the municipalities. You mentioned earlier that there are some challenging comparisons in certain states. Should we anticipate more aggressive rate growth in the second half of this year for property taxes? How are municipalities approaching this? Are they looking to increase them or are they being more accommodating?

Yeah. Sure. Let me take this, yeah, Irina, this is Brandon. So the property tax expense growth that we had in Q2 was 5.5% year-over-year for the same-store pool. And at the beginning of this year, when we gave our guidance pre-pandemic, we talked about an expectation that the full year growth would be 5.5% to 6.5%. And so that's in line. Our first quarter, we had some unexpected benefit come in, so that was a positive. And so for the back half of the year, we do know more than we did at the beginning of the year. But you still have some jurisdictions like Florida, for example, is a big one that we'll find out here this month on those value assessments and the notices of value. And in the fourth quarter, my comments earlier were really around the in a couple of Texas markets. We had some benefits come through in 2019, and so that's going to be the comp there. But right now, I would say, on average, we still expect – I still expect that 5.5% growth clip that we had for Q2. I expect something similar on average for the back half of the year.

Okay. Thank you.

Thank you.

Our next question today is coming from Stephen Mead from Anchor Capital Advisors. Your line is now live.

Yes, hi. I was just curious in terms of the impact of the student population, in terms of what normally happens in the late August, September time frame, and whether this year is going to be much different in terms of year-over-year comparisons.

This is Dave. That's a great question. We certainly saw in the spring a change in the amount of college activity we experienced. Some of it was newer or sooner, back in March, as colleges let go earlier. We did see a little bit in May as they actually allowed the students to come back and empty their dorms. I think the question that's running through our mind is, I don't believe we got as many college students as we've had historically. And so as we look at the back half of August, we're looking at – we may have some form of college exposure to it. And as we studied the move-in activity, we thought it was less this year than what it was in previous years. And so still to be determined, and we'll see it as we get to the back half of August here, but at this point, we're hopeful that we may not have as many move-outs.

Yes. Okay. And then the construction segment in terms of general contractors and people who use storage for their construction work and what percentage of the total is that?

It's hard for us to track true business commercial tenants because they rent with individual names, and it's really hard to keep a good segment there. If we thought our commercial was 15%, that would probably be a rough average of commercial tenants. We haven't seen any movement there. We haven't seen any change of behavior from that group. It's remained steady thus far. And so we're pleased with that.

And then what are you seeing in terms of new starts and also sort of those projects that were underway and also in terms of the permits, in terms of new supply in the future?

So Steve, what we're seeing right now with new supply is that those properties, those projects that were approved obviously, the ones that were under construction are going to be completed and delivered. Deliveries may be delayed for a variety of obvious reasons. Those that are approved, permitted and ready to go are maybe not going forward to the degree you might have expected, not 100%, but something less than that. Lenders have pushed away from the table a little bit, not as willing to participate. And where we've really seen the drop is in planning and permitting. So not seeing nearly as much coming up out of nowhere. So I think that's a good sign for us, ultimately, although for the next year or so, we'll continue to see deliveries on a delayed basis.

Just one last question. As you look at the your non-same portfolio and the metrics in terms of occupancies, can you generalize in terms of the – that those new assets that you're adding in terms of upside associated with either improvement in occupancy or rates?

Yes. Steve, it's Brandon. So the non-same-store properties, I mean, we typically are able to improve those beyond what we believe the sellers were able to operate on that. So there's definitely some upside there. Some of that is realized in the period of times between when we acquire it and when we've held it long enough for it to get included in the same-store pool. So you don't always see that. But typically, the first year that a property is included in our same-store pool, we do still see some incremental lift. This year, we started reporting the different legacy pool results. And so in the supplemental schedule six and seven at the bottom, you can always refer to those. And you can kind of see that based on what the information we provide, the more recent adds to the same-store pool do perform better. In terms of what we're seeing today in that pool, occupancy is a little tough because it depends on the markets that they're in and the occupancy profile could be across the board. But by and large, everything I just spoke to, we're still seeing those continued trends that we have historically seen.

Okay. Thanks.

Thank you.

Thank you. Our next question today is coming from Neil Malkin from Capital One. Your line is now live.

Hello, again. Thank you. A couple of quick ones. Some of your peers had pretty significant increases in payroll and marketing for either demand purposes or frontline risk purposes for some associates. How were you guys able to keep those costs down or actually reduce them year-over-year? What do you think drove that pretty large disparity there?

A couple of factors. Our PROs did do a wonderful job with their teams in controlling the environment, keeping everyone safe, keeping everyone satisfied from team member to consumer to vendor, all of our partners. And I think it's a tribute to their leadership and how they were able to really manage the teams. We also knew during some of that down period, we had very slow foot traffic. And so we focused very hard on store hours and staffing levels. Technology kicked in there and allowed us to do some of those in different ways than we've done in the past. And so I think if you look at all the teamwork and the things that they focused on really helped in that payroll piece of it. And I think the environments they created didn't create a need for us to drive any type of premium pay or any type of hardship as it went along those lines. So hats off to them and hats off to all the teams that ran that.

Got you. Just in terms of the whole collection, which looks like there's barely any impact from COVID, but what are your normal assumptions for collectibility? So when you do reserve, let's just say, a given unit, do you assume like 10%, 20% collectibility? And then has that changed in the COVID environment?

Yes, Neil, it's Brandon. So to the question that Todd had earlier, I mentioned the 2% to 2.5% bad debt as a percent of revenue. And so what goes into that equation is you hit it. I mean it's right around that 10% to 20% in the early stages of when a customer first falls delinquent on one month. And then as they age out further, that quickly escalates up to 50%, 90%, 100% based on their aging profile. And so that's allowed us to have that historical 2% to 2.5% number. And throughout this process, we just haven't seen a dramatic change to the downside on collections. And so I believe we're still going to continue to see that was my response to Todd earlier. And I think some of that, we do attribute to the fact that our fees were down during the period, as I think you saw across the sector. Some of that is mandated, prohibited. We can't charge some of those fees, but we also were lenient, and we worked with our customers and did the right thing where it made sense. And I think that helped our collections with them as well.

Would agree. And it also helped us and as we look at the auction process going forward, we say we may have 0.5 point of occupancy built up in delayed auctions and the teams did a really good job focusing on these tenants. They were behind and working with them through the process and seeing if they could get them either current or get some type of agreement where they actually came in and paid a portion and moved on. And so we don't have to auction them in the future. So teams did a really good job throughout.

If you had 100 delinquent units, what percentage of those actually participates in your pay-to-break program?

I don't have a specific percentage to provide you. It depends on our ability to reach out to the tenants. Some of these tenants have disappeared, and we can't contact them, which means they're going straight to auction without any doubt. We maintain regular communication with the tenants who are still reachable. If we can persuade someone to pay part of their rent, whether it’s 30%, 40%, or 50%, that is preferable to moving to auction. We've given our team the flexibility to contact these individuals and explore options for collecting rent, and in some instances, rent and fees, to find a workable solution because that leads to a better outcome. Auctioning is the least favorable option; it results in losses for everyone involved, and we prefer to avoid that whenever possible.

Okay. Over the last three to four months, have you seen a notable change in the demographics of any kind, in any way, in your portfolio in terms of move-in relative to your sort of in-place demographics?

Nothing noticeable. Nothing that jumps out to us at all at this point.

Okay. And for the last question, I understand that you're not interested in lease-ups and tend to be cautious about it. However, is there a point where occupancy is sufficiently high or the lease has progressed far enough that you would consider taking on non-stabilized assets, given that your platform could significantly enhance the NOI compared to a merchant or private developer?

There may be a time, but we're not anywhere close to it. We have a lot of levers to pull to optimize revenue, and that's really what we're focused on month-to-month. And so for now, I don't see that as being something we want to do short term in a material way, unless it really makes sense to us from the standpoint of our investment in location of the property and long-term strategic benefits of holding an asset, maybe where we're building scale or something like that.

All right. Thank you, guys very much.

Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over to Tammy for any further or closing comments.

I'd like to thank everyone for your interest in NSA. And to reiterate, we're pleased with our second quarter results and the fact that self-storage again shows its resilience in the face of challenging times. We feel much better about things today than we did three months ago, and we're confident we'll come through this stronger and will continue to deliver sector-leading results. Be safe and stay healthy. Thanks.

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