Greetings, and welcome to the National Storage Affiliates Second Quarter 2023 Conference Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, George Hoglund, Vice President of Investor Relations for National Storage Affiliates. Thank you. Mr. Hoglund, you may begin.

We'd like to thank you for joining us today for the second quarter 2023 Earnings Conference Call of National Storage Affiliates Trust. On the line with me here today are NSA's President and CEO, Dave Cramer; and CFO, Brandon Togashi. 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, August 8, 2023. The company assumes no obligation to revise or update any forward-looking statements because of changing market conditions or other circumstances after the date of this conference call. The company cautions that actual results may differ materially from those projected in any forward-looking 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 to everyone for joining our call today. I would like to start by acknowledging and thanking all of our team members here at NSA and our PROs for their continued dedication and hard work. It is the significant contributions from our team members that drive our success and we appreciate everyone's efforts. Our continued focus on people, process, and platforms is allowing us to improve our performance as we navigate very challenging comps and an unusual environment for our sector. Our teams did a good job balancing the changing demand environment by effectively using all levers available to create rental opportunities and drive conversions. Our customer base remains very healthy, our portfolio is well positioned for long-term success, and our focus on key initiatives will enhance our ability to remain a leader in the self-storage sector. Looking at the second quarter, we had a number of operational data points that we were pleased with, including street rate growth of 3.4% over the first quarter, contract rate growth increased 1% sequentially and 7% year-over-year. Our existing customer base remains resilient with average length of stay remaining well above historical norms. 50% of our customer base has now been with us for greater than two years. On average, our current tenant base has now been with us for over 40 months. Our ability to implement ECRI remains strong at above pre-pandemic levels and insurance penetration continues to improve, increasing over 10% year-to-date. At debt was 2.1% of revenue and concessions were 2% of revenue, both below pre-pandemic levels. Overall, our operational performance is strong in many areas, and our customer base remained stable over the quarter. It is worth pointing out that street rates in July were still 18% above 2019 levels and contract rates in July were 30% above 2019 levels. We had a couple of areas that did not meet our expectations. The spring leasing season was weaker than we originally forecasted, resulting in occupancy levels that were below our initial projections. Movement activity was below the levels we had anticipated due to several external factors. First, we experienced a disappointing change in the amount of move-in demand due to the slowing housing market. Home sales are down across most of our markets. This change in volume of housing sales has temporarily decreased the demand for self-storage, which impacted our spring leasing season. Although we expect this housing trend to eventually subside, it has put short-term pressure on our business. We also had a very competitive environment for the acquisition of new customers. Our teams were navigating a dynamic street rate environment along with elevated marketing spend across the sector. The number of rental opportunities generated was below our expectations. Not only did the rising interest rate environment put pressure on storage demand, it also put pressure on our interest expense, leading to less-than-expected core FFO for the second quarter. We expect interest rates to remain a headwind for the remainder of the year. These factors have led us to revise our guidance, which Brandon will discuss later in the call. As we cycle past historically tough comps in the back half of the year, we are confident our portfolio remains well positioned for future success. I want to highlight a few areas where we are focused on delivering both internal and external growth going forward. First, we remain focused on enhancing our customer acquisition and revenue management processes and platforms. We continue to strengthen our team, and we're excited about the initiatives underway to optimize the online customer experience and front-end pricing. Second, our investment in an improved net warehouse and the use of AI technology will continue to improve our ECRI program which drives our revenue growth once the customer is in the door. Third, we are actively working on repositioning our balance sheet. We're exploring various capital sourcing strategies that will enable us to become more opportunistic when the time is right. We are confident our strategies will position the NSA to deliver healthy growth as we have demonstrated since our IPO. I will now turn the call over to Brandon.

Thank you, Dave. Yesterday afternoon, we reported core FFO per share of $0.68 for the second quarter of 2023, which represents a decrease of 4.2% over the prior year period. The year-over-year decline, despite 3.4% growth in same-store NOI and 7.4% growth in adjusted EBITDA, was due primarily to elevated interest expense given the rising rate environment. We delivered positive revenue growth of 2.8% on a same-store basis, driven by 7% contract rate growth. Occupancy ended the quarter at 90%, up 20 basis points from Q1 and down 450 basis points year-over-year. Similarly, July occupancy finished relatively unchanged at 89.9%, which is also 450 basis points below last July. Our team did a tremendous job controlling expenses such that our growth in the second quarter was just 1.4%. Payroll declined 3.4% from the prior year period, while property taxes were down 1.5%. These cost savings were offset by marketing expenses that grew 34% and insurance that grew 41% due to the policy renewal we had on April 1 in a tough market, which we discussed on our last call. We will continue to focus on minimizing our controllable expenses, allowing us to slightly lower our guidance range for same-store OpEx growth. On the acquisitions front, the second quarter was fairly quiet given the wide bid-ask spread and elevated cost of capital. During the quarter, we acquired two facilities totaling $14 million that will be run as annexes to existing locations and therefore, not increase our store count. The larger of these acquisitions was from our captive pipeline. Subsequent to quarter end, we acquired one property for $18 million, also out of our captive pipeline. Going forward, we will remain opportunistic and patient as we look to continue to grow externally. Turning to the balance sheet. During the second quarter, as previously announced, we issued $120 million of five-year unsecured notes in a private placement with a face coupon of 5.61% and an effective rate to us of 5.75%, inclusive of the impact of pre-issue hedges. Subsequent to quarter end, $175 million of swaps expired and we entered into new swaps with a notional value of $100 million, resulting in a net $75 million of incremental floating rate exposure. Today, approximately 20% of total debt is variable rate, mostly related to our revolver. Going forward, as Dave mentioned, we will take further steps to free up some capacity on our line of credit, which will naturally reduce our floating rate exposure. At quarter end, our leverage was 6.1 times net debt to EBITDA, down sequentially from 6.3 times at the end of the first quarter and comfortably within our range of 5.5 times to 6.5 times. Now moving on to guidance. As Dave mentioned, when we initiated full-year guidance for 2023, we assumed that occupancy would return to more typical seasonal patterns with the trough in February and then rising a few hundred basis points until peaking in the summer months. Instead, occupancy has been relatively flat all year. This caused our Q2 results to be below our internal projections and led us to revise expectations for the remainder of the year. Our updated guidance ranges as outlined in the earnings release are as follows: Full year same-store revenue growth of 1.5% to 2.75% with a new midpoint of 2.13%. Same-store operating expense growth of 4.5% to 5.5% and down modestly from the previous midpoint. And we now project same-store NOI growth of 0.25% to 1.75% with a new midpoint of 1%. This leads to a core FFO per share range of $2.63 to $2.69 with a midpoint of $2.66. While the midpoint represents a 5% decline from 2022 results, primarily due to interest expense, and also represents an increase of 73% over our FFO per share in 2019, the year prior to the pandemic-related impacts on our business. Assumptions that we've modeled into the midpoint of our revised guidance include a return to normal seasonality. This includes 250 to 300 basis points of occupancy loss by year-end and street rate moderation of 8% to 10% from the end of the second quarter. Any deviation from these assumptions up or down would move us away from the midpoint. Thanks again for joining our call today. Let's now turn it back to the operator to take your questions.

Good afternoon. Thanks for taking my question. In the prepared remarks, you mentioned you were looking to reposition your balance sheet. Can you provide a little bit more detail into what you expect to do and how that's going to free up capital?

Thanks for joining the call. Happy to dig into that a little bit. I think of it this way, since our IPO, NSA has been a leader in external growth on a relative basis. Much of that has been driven through our multifaceted acquisition strategy, and we've increased the size of our company substantially. With that growth, we've built a really nicely diversified portfolio across 43 states in Puerto Rico, with exposure in primary and secondary markets. That external growth has led to obviously attractive FFO and NOI growth, which has benefited all of our shareholders. Currently, the external growth opportunities are limited in the time we're in today, given it's time to really evaluate our internal asset management. And as we look going forward, we intend to look very closely at our portfolio to determine if there are properties, portfolios, or even markets that are non-core to our strategic focus. This will give us an opportunity to unlock value by selling properties and recycle capital into core growth strategies or even help us deleverage our balance sheet. Also, with attractive asset opportunities inside the portfolio, we're studying very hard the expansion opportunities, redevelopment opportunities, and looking at our unit configurations to see if we can find opportunities to creatively grow FFO and really push occupancy to higher levels with unit reconfigurations. We continue to explore avenues of capital. You look at joint venture opportunities with private capital partners, we have an abundance of people looking to get into this industry. These ventures would give us access to capital to fund future growth, possibly deleverage as opportunities present themselves. The portfolio capitalization is a great access to capital without going into equity capital markets. We could contribute wholly owned properties to a new joint venture vehicle with a private institutional investor. We can then redeploy that new capital into opportunities and leverage our balance sheet if that's the right chance. Adding these areas to our focus on people, process, and platform initiatives that we have, we believe will position us well for future opportunities and success.

Got it. That's really helpful. And my second question is on ECRIs. As we understand it, street rates play a role in the ECRI strategy as you look to move customers back to or above street rate. So, at what point does the pressure on street rates start to weigh on the ECRI strategy to the point where you may need to reduce the magnitude of rent increases from it?

Really good question again, Michael. What I would say is, I'm happy to report, and I think what we're pleased with is our cadence and the level of rate increases that we're giving today still remain above pre-pandemic levels, and we haven't had to alter that cadence at all. We're not getting any type of pressure from consumers, our move-out activity isn't changing as far as test groups and the non-test groups. And so, we're pleased with that cadence. We're not afraid to be above street rate. I mean street rates are very volatile. And I think this year, they've been more volatile than I've seen in a long time. And we're hoping the back half of the year, people will find their footing and the street rate volatility will settle down a little bit. I think that will give us strength as we go into the back half of the year as far as that rate volatility, but right now, we have a better platform than we've ever had. We've invested a lot of dollars around new team members and additional team members and new platforms. And that ECRI program is really strong for us and is paying dividends on our existing customer base.

Thank you very much. Good luck in the back half.

Great. Thank you. On the last call, you discussed some markets that were a bit weaker. I think you talked about Vegas, Phoenix, Portland, Colorado Springs. I guess, what are you seeing today in those markets or are there other new weak markets or maybe even opposite strong markets to discuss?

Very good question, Jeff, and thanks for joining. I'll kind of break it down as you discussed. We actually have found a little bit of traction in Portland where we've been talking about Portland for quite a while, having a lot of supply, a number of years of supply starting before the pandemic. And obviously, the pandemic helped mask some of that supply pressure. As we come out of the pandemic, we've got a little traction around occupancy. We've done a little traction around rates and Portland actually had some positive revenue growth for the second quarter, which we're pleased with. Still lots of ways to grow, still needs to grow to address that supply piece, but we think we've found maybe just a little bit of footing of stabilization and now we'll have to work through the existing supply. Vegas and Phoenix are really – they were red hot markets during the pandemic. There was a lot of supply coming online in '19, '20, and '21 in both those markets. They're also feeling pressure from the housing slowdown. Both are really good markets. We're very happy with those markets, our portfolios are well diversified in these markets, but they're going to face some near-term pressure because of supply and really the change in the housing market and the movement that's going on in our country. We pointed out some hot markets. We're really pleased with South Texas down around McAllen and Brownsville, and those places are above portfolio average. Oklahoma City is well above portfolio average. And I would also point to Atlanta, a market we've been talking about having some supply pressure, but Atlanta had probably one of our largest occupancy decreases on an average of 710 basis points but still put out a 4.8% revenue growth. Our teams did a wonderful job balancing occupancy rate, marketing spend against a very tough occupancy comp in that market.

Okay. Very helpful. So, my follow-up then, I guess, is on the occupancy loss and just confirming exactly what's happening there because you talked about the strength in the existing customers. We heard that from your peers. I guess maybe focusing on Atlanta or pick anywhere like, then what exactly is happening with the occupancy loss because it is a bit more severe than what your peers have seen year-to-date?

Yes, that's a great question, and it's something we frequently discuss. If we consider the pandemic period, our occupancy growth was likely about twice that of our peer group. From the starting point of our portfolio pre-pandemic to where we ended, we experienced an 850 basis point increase in occupancy, which is unusual for us and our markets. As we move forward post-pandemic, we are talking about where we will stabilize and what our sustainable occupancy level will be. We believe we’ve identified an occupancy level that aligns with what our markets can comfortably support. You could view this as an extended summer period that began in late 2020 and continued through 2022, and now we are seeing a decline from those peak levels. The occupancy losses may appear more significant for us since our portfolios were less occupied coming into this phase. In today's market, we are balancing our revenue objectives with occupancy and pricing. Most of our markets are functioning well within the occupancy levels we consider comfortable.

And Jeff, this is Brandon. The other thing I would just add is for the second quarter, our Sunbelt markets outperformed the non-Sunbelt. So, the Sunbelt markets had that revenue growth of 2.8%. They were above that portfolio average. The non-Sunbelt markets were below. And then similarly, our secondary markets, call it, NSAs outside the top 25, were above portfolio average, outperforming the top 25 markets in our portfolio, which were below that 2.8% revenue growth. We've taken questions about how those secondary markets are performing and to your point about relative performance to peers. I just wanted to call that out because it was the case for Q2, very consistent with Q1, and we included some five-year trailing information on same-store performance across those splits in the June Nareit back to our website. So, I just want to point that out.

That's very interesting. I know it's two questions, but if I could just then ask on occupancy, you're saying you feel like you have stability today where you stand, let's say, through the rest of the year? It sounds like you found that stability, just to confirm.

We are still forecasting. So, if you look at our guidance in the back half of the year, we're still forecasting a normal seasonality of loss of occupancy in the back half of the year. We did not peak as high as we thought during the summer. That's around what we discussed moving around the country and all the things around the rate environment and stuff that were going on in the spring leasing season. But we think conservatively, we have in our midpoint of our guidance really forecasted 200 to 300 basis points of occupancy fall off in the back half of the year, which would be consistent with historical trends pre-pandemic.

But lower than last year, Jeff. So last year, we lost 450 basis points, and at that midpoint of the guide projections, we do believe that the negative delta on occupancy year-over-year will tighten, but it will still end negative at the midpoint of what we've guided.

Hi, thanks for taking my question. You mentioned in your prepared remarks that street rates were up 3.4% sequentially. Can you tell us what street rates were in the second quarter year-over-year and the cadence in July?

Yes. Good question. The street rates are down about 9% year-over-year as we've discussed, still cycling some really large occupancy comps and straight rate comps, so street rates are about 9%. In July, they fell a little bit more, and that's still around the comp. If you remember last year, we held street rates very steady through the third quarter. As we look at our comp against street rates this year, I think we're going to show a little bit more negative comp for the next couple of months, and then we started going back into adjusting street rates down in the back half of the year, really the last quarter of the year.

Okay. Got it. And then can you comment on promotions and marketing dollars in the second quarter, maybe also in July and what your strategy is there for the remainder of 2023?

Good question. So certainly, the marketing dollars themselves have been elevated. We're seeing that across the sector. We're seeing it in a lot of our markets. It's very market-specific, and the teams have done a good job using marketing dollars to generate lead activity. We've got more sophisticated programs than we've ever had. We've got more team members in that seat than we've ever had. So, we're pleased with the way we deployed marketing dollars, really through the first half of the year, and finding our footing on the balance of spend versus lead generation. The discounting remains muted below pre-pandemic levels, around 2% of revenue right now, and pre-pandemic, it was 3.5% to 5%. Right now, our information is showing that the rate is a better trigger than discount. I think that's probably why you're seeing more muted discounts versus historical, and that's just a result of having better tools and better information.

Okay, that’s helpful. Thank you.

It's A.J. on for Todd. Just a couple of questions. So, following up on what's already been asked in a sense. So just going back into the marketing and web dollars, were the web hits and phone inquiries. Did you see a decrease there or was the conversion rate lower with the sense that customers are shopping around more and being perhaps a little more rate-sensitive?

Good question. Thanks for joining. The session activity at the very top of the funnel was less than we expected. We were very careful not to over-deploy marketing dollars. It’s a big year-over-year increase. Last year, we weren't spending a lot on marketing dollars. So that large increase looks a little outsized. The team did a good job focused on conversion rate, as you touched on, and keeping our conversion rate where we felt comfortable with the amount of spend. The top of the funnel sessions, particularly early in the second quarter, April was probably our sluggish month around moving activity to expectation, and we improved through May and June, and July has improved as well, but on the top of the funnel is what I would tell you.

Okay. That's helpful. And then a question just going back to Portland. So, should we think about Portland as a bit of a leading indicator or perhaps a roadmap of sorts for how the other markets of the portfolio overall may perform over the next few quarters? Is that a good way to think about it?

I think Portland is a tough one because Portland still has an overabundance of supply buildup. We're happy that it's kind of found some traction. So that's good. But I would point you more to markets like Oklahoma City, Tulsa, even some of that South Texas. If you look at Oklahoma City, there has been relatively low new supply over the past three or four years. In the pandemic, it was not as red hot as some of the other markets because they didn't have the influx of housing. If you look at its performance today, that's what a stable market looks like that's really cycled all the activity of what's gone on in the last couple of years and then our ability to really implement our revenue management platform.

Okay. That's helpful. And then real quick, if I could squeeze in one more. Just where was occupancy at the end of July? And what was it year-over-year?

I think, as Brandon stated, it was 89.9 and it was down still 450 basis points year-over-year.

You've answered a lot of these, but I guess I just wanted to understand the guidance a little more because it sounds like, I think if I'm doing this right, your second-half same-store NOI will contract at the high end and then even more at the low end. And we've seen a downward bias, I think, for the group overall for a lot of the reasons that people have already talked about. But I'm wondering why yours seems more kind of pronounced if you're pushing through the same level of rate increases and occupancies are going back to what you saw pre-pandemic levels. I'm trying to figure out what piece we might be missing that's driving your expectation to see same-store NOI contraction in the second half.

Yes, Smedes, it's Brandon. It’s probably a little tough for us to comment relative to the peers. I think you really got to parse what was everyone dealing with a year ago and when did that growth look like. Frankly, they've kind of hit it in his remarks earlier in response to a question. For us, we've really been looking at things on a three-year and four-year basis because you had so much volatility, especially across certain markets starting in 2020, all the way through now. I think that's tough to answer relative to the peers. Our absolute growth rate in the first half of the year is below peers, right? If we're moderating and decelerating on growth as everyone is implying, we're starting from a lower point. That’s where the back half might imply lower than the others. Just to give a little more color on what we are expecting for the back half, it’s certainly somewhat dependent on whether or not we do experience that 250-basis point to 300 basis point occupancy decrease that I mentioned in the opening remarks. If we do, when do we experience that? We lost a good chunk of occupancy. I said it earlier, 450 basis points last year. A lot of that came in August and September. We didn't see this year that typical spring-summer occupancy uptick. A lot of factors contributed to our discussion around the rate environment and everything else that was going on in the spring leasing season. So conservatively, we have the midpoint of our guidance really forecasting that 200 to 300 basis points of occupancy decline in the back half of this year, which would align with historical trends pre-pandemic.

Great. Two quick ones. Hopefully, you can hear me. So, the first one is just going back to sort of the guidance. I think historically, we sort of talked about the end-of-the-year run rate as sort of a good look for 2024, as others have sort of mentioned on the call. The question is really based on the NOI guidance in the second half of the year; it suggests 2024 should be negative. Can you just remind us what the puts and takes are with the cost? Like how do you get comfortable with offsets of that next year that I think you're trying to highlight?

Yes, Ron, I’m not sure if I’ll say anything that’s too widely different from what we said earlier, in terms of not speaking too much about 2024. But obviously, I agree that the exit rate in '23 kind of sets you up for how we’ll be thinking about 2024. Frankly, a lot will be determined as we see how the back half of this year plays out. I mean, that’s the big unknown and so I don’t know if I have too much more to comment from what we said earlier, unfortunately.

Yes. Really good question. Certainly, we have test groups and these test groups are experiencing maybe no rate increases or perhaps mid-level or little higher-level rates, and we’re studying the effects of those on that customer base. The more data we gather and the more times we do this, the smarter the machine gets, and we’re looking at the risk score. We monitor the risk of whether we do this at this level and whether the tenant potentially will move out. Thus far, I can tell you, I have been in this job for 20 years, and we didn’t have these tools; our knee-jerk reaction would be to pull back and not do rate increases, but the fact that we have the technology is proving that we can still operate in this needs-based business. The customer is here because it needs to be here, and we need to work the ECRI program effectively during that cycle. Our tools are helping us determine and make better decisions, and we think we’re getting better results out of it. Nothing really has disrupted that length of stay in any of the segments we’re tracking, whether it be over a year or over two years, overall in the portfolio. Thanks. As we move past the near-term challenges from market impacts on demand, we remain confident that our focus on people, process, and platform initiatives, combined with our exposure to attractive Sunbelt markets, position us well for continued success. I want to thank you all for joining the call today and for your continued interest in NSA.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.