Greetings. Welcome to the National Storage Affiliates First Quarter 2024 Conference Call. 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 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, David Cramer; and CFO, Brandon Togashi. Following prepared remarks, management will accept questions from registered financial analysts. Please limit your questions to 1 question and 1 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. 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, 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 enabled us to deleverage our balance sheet and access to growth capital, increased 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're 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 3 months of positive net rentals through the end of April, driven by a seasonal uptick in occupancy, which ended April at 86%, up 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. This is largely 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. We continue to enhance and simplify our customer journey by leveraging intelligence in our customer acquisition strategies, and 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, which is helping to drive rental volume, but it is putting pressure on our move-in rates, which averaged down about 14% year-over-year for the quarter. The consumer base remains healthy with 65% of our tenants having stayed with us over a year, while 49% have been with us over 2 years. Our ECRI 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. Markets like Oklahoma City, Savannah and Corpus Christi performed 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 Sunbelt 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, 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. Currently, we 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 joint venture partners, representing the start of 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 joint ventures. 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 $0.01 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 of quarters, the main drivers of growth were property tax, marketing and insurance, partially offset by payroll efficiencies that resulted in lower spending versus the prior year period. Marketing expenses remain elevated due to increased competition for customers and a tough comparison, while insurance expense growth will moderate going forward to the low single digits, given our policy renewal that occurred on April 1. 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 is available to us today, and we have $1 billion of buying power with 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 6.2x net debt to 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 is that we have $250 million of interest rate swaps that fixed 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.

Our first question today is from Samir Khanal with Evercore ISI.

Can I ask you to give more color around April? I know you said move-in rates were down 14% in the first quarter. Maybe give us an idea of what you're seeing in April so far?

Yes, Samir. Thanks for joining our call today. Certainly, in April, we saw another positive net move-in activity, which we were pleased with. We were able to generate the activity at the top of the funnel. We are certainly in a very competitive market, especially around street rates and asking rent to get started. I would say April got slightly worse than where the quarter finished. It wasn't a large number, but it got slightly worse. As far as street rate to street rate and move-in activity — move-in rate to move-in rate. So we saw a decline in both.

Samir, this is Brandon. Regarding the year-over-year move-in rate worsening that Dave was referring to, that's in part because last year, we moved rates up in April, affecting that comparison.

Okay. Got it. And 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 noncore assets. Is there more in that bucket of noncore at this point? Or is that pretty much done do you think?

I think we'll continue to look at our portfolio and scrub through the portfolio. We completed a large portion of the asset sales last year in that tranche we worked through, and we were pleased with that activity. I know we're still scrubbing through particular markets and particular assets. I think that will be a part of our program as we go forward in the 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, we'll present themselves.

Our next question is from the line of Jeff Spector with Bank of America.

This is Jeff. How are you approaching the decision between leveraging and buybacks when it comes to allocating capital?

Yes, 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 detailed in our release. And as mentioned, we're pretty light on the acquisition volume. Everything we've accomplished over the past few quarters, we're very pleased with what we've set out to do. Leverage is in line with our targeted range of 5.5x to 6.5x. So what it does right now is position us well with the majority of our revolver available to take advantage of some of those opportunities that Dave referred to earlier. There is a slight bias towards deploying capital through the joint venture platform, which allows us to operate in a capital-light way, manage leverage and put to work some of that money with our joint venture partners.

And then just a follow-up on leverage. Could you provide your rationale behind including the hypothetical liquidation at book value for your 2024 joint venture to adjust EBITDA?

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

Our next question is from the line of Michael Goldsmith with UBS.

We've heard from some of your peers that a number of markets are starting to bottom out and reaccelerate. Are you seeing that across your portfolio? Maybe what percentage of your markets are accelerating or any specific markets to call out?

Michael, thanks for the question. 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, particularly from a year-over-year comparison. 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 3 months. It was tougher sledding, especially in the Southeast, Florida, and some of the Sunbelt markets. Phoenix, Sarasota, and Las Vegas have been slower to respond and are facing supply challenges like markets such as Atlanta as well. I think as we look at it, some of those markets have the most supply pressure and are slower to recover, but we've had good success in the Midwest. Markets in Texas, as we called out, like Corpus Christi, performed well. Those did not experience the pandemic highs and have been a little more stable. As we go through this last cycle, those are performing well for us. However, I think some of that Sunbelt exposure, with the housing market muted, will be slower for us to recover.

And my follow-up is, you did a number of transactions at the start of the year with the sale and then the sales to the joint venture that 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?

Yes. Good question. I touched on this a little bit in the opening remarks. We currently have $25 million under contract in existing markets, adding properties to our portfolio, which will help us in our operational efficiencies, scaling and density in the markets we operate. We have about $200 million in negotiations right now. I would tell you, we are starting to find opportunities that we like. We thought we would find more opportunities as we proceed through the year. The fact that we have found some earlier in the year is a positive sign for us. Again, these are in markets where we have great scale and operational efficiencies, making us a logical buyer for these properties.

Our next question is from the line of Juan Sanabria with BMO Capital Markets.

Just wanted to continue with the same line of questioning regarding acquisitions. Where are your targeted yields or cap rates? And do you think that will be indicative of the current market for your types of assets? Should we assume or not that you will restart the buyback now that it's been fully depleted?

Juan, I'll jump in and maybe Brandon can finish up. I think as we look at the assets we're looking to purchase, we're targeting mid-6% as a range we’re looking at today. Each property has its own considerations when talking about cap rates, such as the property’s location, age, and management opportunities. Hard to pin down exact cap rates, but we internally model around that mid-6% range. As you remember, the assets we sold were around the 6% cap, and redeploying at around 6.5% makes a lot of sense, providing growth opportunities on these assets. Regarding share repurchases, we fulfilled our current authorization on our share repurchase program. We look at various ways to deploy capital, and buying our shares back makes sense. We don’t have anything authorized at this time, but we would consider it as a tool in our investment opportunities if we find it appropriate.

And Juan, this is Brandon. To add to that on share repurchases, we will do everything we're discussing regarding capital deployment, acquisitions, repurchases while maintaining our comfort range of 5.5x to 6.5x net debt to EBITDA. I want to add that regarding year one yield and acquisitions, there may be a bias towards using joint ventures, which allows us some flexibility.

Great. And then just on the slope of seasonality, both in occupancy and rate, could you comment on how that's trending? It seems like rates may be disappointing; you mentioned a tough comparison from earlier April. So just curious on your thoughts there.

Yes. What we're aiming for is solving the revenue. So occupancy is a part of it, as are asking rate, discounts, and unit types. It's hard to have a global comment due to the many variables we evaluate. We find ourselves being sharper on rates in a competitive environment while looking for conversion rates. From February's seasonal trough to April's end, we’re happy with the rental activity and what we've accomplished, even if it came at a higher price point than we might have preferred. However, we're backing it up with a strong ECRI program with excellent results in our existing tenant base.

Our next question is from the line of Eric Wolfe with Citi.

I just wanted to follow up on your last answer. Last quarter, you discussed occupancy-based models. How is that testing going, and is it outperforming comparable areas of your portfolio?

Yes. Thanks for joining. Good question. We're seeing success in areas. The advantage of testing is substantial. Yes, we've seen success, and we have expanded the program in areas we expected to. We've had some areas that did not work for us, and we've promptly adjusted. Overall, we’ve been finding good activity while expanding the program; this put a bit of pressure on our street rate. However, I can confidently say that our existing customer base is proving very loyal, and coupled with a solid ECRI program, our stability remains intact.

Got it. And occupancy seemed to grow a bit this quarter, with February as the trough. What do you typically expect for occupancy increases in the second quarter to the third quarter? What's in your guidance for this year?

Eric, yes, it's Brandon. It wouldn't be unusual for us to gain 250 to sometimes 350 basis points from the valley to the peak. What we modeled for this year at our midpoint was more like flattish occupancy, potentially with a little seasonal uptick in the spring and summer. By and large, we expect it to remain sequentially flat for most of the year. Year-over-year, with the 350 to 380 basis points negative compared to the prior year, the comp gets easier in the back half, narrowing that gap as we proceed throughout the year.

To add to Brandon's point, we were not very assertive on rent growth either. While we test these models, we aim to increase occupancy while potentially discounting on rent. This balance is key to reach the occupancy levels you're talking about, and if we see an uptick in occupancy, we may have to lower street rates, keeping everything in check.

Exactly, Eric. Our expectation regarding occupancy was shaped by 2023's muted demand due to housing trends, and thus far, our current conditions have reflected that. Nothing drastically different from how we assessed things back in February.

Our next question is from the line of Todd Thomas with KeyBanc Capital Markets.

Just a quick follow-up. So you mentioned 86% occupancy at the end of April. How does that look year-over-year? Has the gap continued to narrow?

The occupancy stayed fairly flat in April, Todd. When looking at a monthly snapshot, there were 5 Saturdays in April last year, whereas this year had 4 Saturdays. So we need to analyze through the second quarter before confirming the exact occupancy gain and momentum we're building. We were pleased with the rental activity in April, but again, there were some nuances regarding moving rental days.

And we ended at 86% flat, Todd. With higher gross rental volume, we did see some increased move-out volume versus last year, making it early to draw too many conclusions. However, we sensed more mobility this April than in the past, which could indicate better activity in the upcoming months.

Okay, got it. And Brandon, regarding the tranche B and C term loans, can you update us on the refinance plan?

Yes, certainly. Near-term, we have tranche B of $145 million. We have capacity on our line and can also pursue some refinancing debt. We do have a 6-month extension option on tranche B, stacking it on top of the January '25 tranche C that you're referring to. Communication with our banks is essential in this environment, and we will continue to engage throughout the year. The base case remains to put some replacement debt out there, whether with our bank group or through the private placement market, where we've historically been successful. Our secured debt as a percentage of our total debt stack has opportunities for improvement, and I expect we will address the majority of this in the second half of 2024.

Okay, and regarding acquisitions, will most of what you intend to acquire be through the joint venture that was announced last quarter? Will you see acquisitions on the balance sheet?

Yes, good three-part question. Most of our acquisitions will lean towards the joint venture because it's good capital for us. However, we won't rule out seeing acquisitions on the balance sheet. We plan to handle some 1031 activity to redeploy some properties sold last year. We’ll try to balance opportunity type and property placement to determine the right outcome. As for the captive growth pipeline, we're actively evaluating it with opportunities existing. While it's been slower for us to engage, we still see opportunities in the pipeline. If we look at the captive pipeline, there are around 110 to 115 properties valued at about $1 billion to $1.2 billion. The folks in this captive pipeline are mainly looking for some tax-deferred transaction, mainly via OP units. Thus, it complicates spinning these properties into the joint venture. However, we believe our PROs are managing the acquisitions they found outside the REIT, contributing to our captive pipeline for future evaluation.

Our next question is from the line of Ron Kamdem with Morgan Stanley.

Just 2 quick ones. In terms of the performance of the portfolio, can you provide insight into some of the COVID winners versus the rest of the portfolio? Any thematic performance segments?

Yes, Ron. I think markets that were hot during the pandemic, like Atlanta and Riverside, have cooled off. We're still determining the comparisons versus that cooling-off period from the back half of '22 and the entirety of '23. Other strong markets didn’t see such significant declines and remained stable throughout. The diversity in our portfolio enhances our overall position, providing an advantage as we manage through these fluctuations.

In addition to the lack of movement around single-family housing, we do have a certain portion of our portfolio around markets benefiting from individuals who bought homes in lower interest rate environments. Until we see a significant change in that housing environment, some of these markets may be slower to recover than others. We're happy with our positioning and pleased with our Sunbelt exposure, but recovery will require more patience in these other markets.

Great. That's helpful. My second question pertains to guidance versus Q1 performance. It seems to imply some deceleration in same-store NOI and revenue. Is that primarily due to waiting for peak leasing season, or is there more to it?

Yes, Ron, on the first part, you're correct. The full-year guidance midpoint we've given for both same-store revenue and NOI is lower than Q1 year-over-year growth, indicating implied deceleration. This has remained consistent with our guidance introduced back in February, expecting lower growth first half of the year and an acceleration towards the fourth quarter. This reflects the dynamics of our budgeting approach for this year. Regarding demand from housing transition with higher rates, our perspective today is more nuanced than it was six weeks ago. Clearly, mortgage rates briefly fell, but have risen again recently. Some encouraging data in April suggests increased mobility, despite 2024 mortgage rates being at new highs.

Our next question is from the line of Keegan Carl with Wolfe Research.

How should we think about new deliveries in your markets in '24 and '25?

Our general observation is that new deliveries are slowing nationally. Many of our markets are witnessing reduced deliveries compared to the pace of two years ago, which is a positive sign. We generally track around the amount of fill-up properties within a 3-mile radius, and the percentage of stores under pressure is not moving much. The declining new entries and slower delivery rates keep that percentage similar. Overall, we feel better about the new supply pressure in the coming years, but it remains market-specific. You heard us reference Phoenix and Atlanta, which have seen some product deliveries presenting pressure but we believe they will eventually rebound.

And then switching gears, a year ago, there was talk about starting your third-party management platform. Where do you stand on that today?

That's a great question. Over the last 8 to 10 months, we've been focusing on enhancing our platform, including our people, processes, and technologies. We've done major upgrades around our data systems, operating platforms, and customer service areas. Today, our PROs do third-party management, which gives us access to evaluate our growth. We're in discussions on when the right time would be to launch our own third-party platform. I don’t have an exact date, but it's certainly something we are considering.

In addition to the platform initiatives that Dave mentioned, we are implementing our portfolio optimization strategies. The 71 stores sold in Q4 and Q1 were spread out over 33 different MSAs, confirming that we're reducing in areas without a strong presence while densifying in others, which provides room for serious consideration for third-party management.

The next question is from the line of Wes Golladay with Baird.

Do you sense that when talking to your PROs, they are excited about the current environment with opportunities, or might we see some retirements in the next year?

From the PROs perspective, they would love for the environment to be more conducive to external growth. This industry requires patience, especially for those with long-standing experience in acquisitions and improving property performance. The PROs have shown commendable patience while also being active in acquisitions outside the REIT, which contributes effectively to our captive pipeline.

You mentioned cash flow and possibly JV aspects being variable over the coming years. Can you give any clarity on that?

Sure, Wes. It's primarily about providing a minimum base return to our partner from the value at which we contributed the assets. While there's potential to earn incrementally, it isn’t a significant driver for our 2024 guidance, but it's achievable. Once a specific return has been provided to our partner, we can receive a disproportionate share of the upside based on our existing joint venture structures.

Could you provide insight into your floating rate exposure? With buybacks and asset dispositions, there are a lot of moving parts.

Currently, we have about $200 million drawn on our revolver, which is our only current variable rate exposure. We also have the $250 million of swaps expiring mid-year. If those go to floating, it would result in approximately 13% to 14% of our total debt, which is over $3 billion, being floating. We've encountered no issues previously at levels from 20% to 25%, so I would estimate our exposure could reach that range by year-end.

Our next question is from Omotayo Okusanya with Deutsche Bank.

Regarding the captive pipeline from the PROs, can this be acquired by the JV, or are there legal or tax implications preventing that?

Yes, while the captive pipeline can be sold anywhere, including to our JV, those working there are primarily interested in tax treatment associated with OP units. This drives the slow engagement with the JV in this aspect.

To add clarification, there are also assets in the captive pipeline that our PROs manage but do not outright control. If those owners’ tax patterns change and they become cash sellers, the JV could be an option, but we haven’t seen that yet.

Could you provide insight into tenant credit and any changes in delinquencies?

Absolutely. We haven’t observed any significant changes in delinquencies during Q1 compared to previous quarters. We track bad debt as a percentage of revenue, historically around the 2.5% range, which remains consistent for Q1. We’re monitoring the patterns closely, but the customer base remains stable and healthy.

Great. Impressive work on capital allocation this quarter.

Our next question is from the line of Brendan Lynch with Barclays.

Returning to the focus on internal operations and evaluated upgrades. Is this a perpetual focus, or are we nearing the end for certain components?

That’s a great question. We are reaching the end of the current development cycle of the work we've done. We've successfully upgraded our operating platform, data center, and capabilities around data and AI, along with improvements in the call center and web experience. This solid foundation positions us well for the future, enhancing our ability to utilize technology effectively.

You had notable increases in marketing spending. What are the components driving that?

Yes, as you pointed out, the call center contributes to marketing expense. Looking at current conditions, our spend has re-aligned to a level that is more typical. Marketing has become competitive again, and we are continuing to build on technology and digital experiences. As we track customer interactions, we’re also moving more transactions to digital channels. The hard costs for marketing will start to annualize in the coming quarters, reducing the impact when we consider year-over-year spending comparisons.

Our next question is from the line of Eric Luebchow with Wells Fargo.

With the new revenue management systems, you seem to be more dynamic regarding new rates. Any early insights on this strategy compared to other promotions?

Yes. The early discovery highlights that customer price sensitivity is growing, affecting the rental process significantly more than just a year or six months ago. As a primary focus, we're working on lowering entry rates while making up for value through our ECRI program. We're exploring a range of promotions that simplify customer understanding, including discounts for specified periods at the beginning of rentals. Our existing customer base has responded positively, demonstrating strong stickiness.

To confirm, does the midpoint of your same-store revenue guidance assume there won't be a typical seasonal uplift?

That's correct, Eric. While we considered several scenarios, our guidance reflects minimal seasonality trends, and thus far, the insights we've gathered do not warrant alterations to that assumption.

At this time, we've reached the end of our question-and-answer session. I'll turn the call back to George Hoglund 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.