National Storage Affiliates Trust Q2 FY2024 Earnings Call

Greetings, and welcome to the National Storage Affiliates Second 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 begin.

We'd like to thank you for joining us today for the Second Quarter 2024 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 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 and represent management's estimates as of today, August 6, 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. Our results for the quarter reflect continued pressure from a very competitive operating environment. Similar to other operators, we're seeing reduced customer demand for storage due to a muted housing market and the absorption of new supply, which is being felt mainly in our Sunbelt markets. Rental activity slowed in the back half of June and into July, with the same-store occupancy ending in June at 87% and July at 86.6%. Street rates grew sequentially each month during the second quarter, but declined 1.7% in July and are down 14% from last year. Historically, occupancy rates peak in July, so the spring leasing season did not play out as typical. We continue to be pleased with our existing customer behaviors; payment activity, length of stay, and ECRIs all remain within our expectations. We believe that the current operating environment will remain throughout the back half of the year. Given these headwinds, we have adjusted our full-year expectations accordingly, which Brandon will detail further. We are starting to see more acquisition opportunities in our core markets. We started to deploy capital from JV 2023, closing on the purchase of a high property portfolio in the Rio Grande Valley for $72 million. These are high-quality properties in lease-up with an average occupancy in the mid-70s. The portfolio was purchased with 100% equity, and we plan to place long-term financing on the assets following stabilization. We also have a 13-property portfolio totaling $75 million under contract and another attractive core market to be purchased by the same JV. These two deals improve our overall portfolio quality, deepen our existing markets, and increase our operational efficiencies. We've made significant progress on our strategic initiatives over the past few quarters, culminating with the internalization of our PRO structure, which positions us well when the operating environment improves. The transition of the PRO-managed stores to the NSA's platform is on schedule, and we are encouraged by the opportunities to further enhance the performance of these properties. I'll provide some highlights of our progress to date. Currently, out of the 333 PRO-managed stores, 70% are on the NSA web and operating platforms, with the remaining to be completed by the end of the year. Of the 172 stores to be rebranded, 40% have been completed. Once the transition is complete, we expect that approximately 94% of our portfolio will be managed by our corporate team, while the remaining 6% of our properties will be managed by forward PROs due to geographic and future relationship considerations. As previously discussed, we expect accretion related to the PRO internalization in three key areas: $0.03 to $0.04 of accretion primarily from G&A savings beginning in 2025, eliminating the cash flow split from the PRO structure effectively adds $0.50 on every dollar of NOI growth, and we expect $0.02 to $0.04 of accretion from changes in revenue management and operations efficiencies. As an example, currently, there is a 300 basis point difference in occupancy between PRO-managed stores and the corporate-managed stores, which we expect to close going forward. Additionally, there are differences in ECRI and marketing strategies, which we are in the process of standardizing. Although we face near-term headwinds, we remain optimistic about the longer-term outlook given all the steps we've taken to improve our platform, optimize our portfolio, and generate access to growth capital via joint ventures. 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 $0.62 for the second quarter of 2024, representing a decrease of approximately 9% over the prior year period, driven primarily by the decline in same-store NOI. Additionally, we had a few casualty events resulting in approximately $1 million of losses or almost $0.01 per share, which impacted second quarter results. For the quarter, revenue growth declined 2.8% on a same-store basis, driven by growth in rent revenue per square foot of 60 basis points, offset by a 320 basis point year-over-year decline in average occupancy. Expense growth was 4.8% in the second quarter, with the main drivers being R&M, marketing, and insurance, partially offset by a decline in property taxes due to successful appeals. Marketing expenses remain higher due to increased competition for customers, while insurance expense growth will moderate going forward to the single digits. Now speaking to the balance sheet: Our current revolver balance is roughly $400 million, giving us $550 million of availability. Our plan coming into 2024 was to be patient until the back half of the year before terming out debt to address maturities and the revolver balance. With interest rates starting to move in our favor over the next few quarters, we will opportunistically seek to push out maturities and create a little more capacity on the line of credit. We are comfortable with our leverage, which was 6.5 times net debt to EBITDA at quarter end, and we expect it to remain relatively flat for the remainder of the year with capital deployment biased to our joint ventures, as Dave touched on earlier. During the quarter, we fulfilled our share repurchase program, buying 1.9 million shares for $72 million. Additionally, on July 1, all of the subordinated performance units associated with our PRO structure were converted into 18 million OP units, and we bought out the management contracts and tenant insurance economics related to the PRO-managed stores. This included the payment of $33 million in cash and 1.5 million OP units. The elimination of the SP unit simplifies our capital structure and financials for all stakeholders. This results in higher gross FFO dollars since there will no longer be any distributions on the SP units and a denominator share count of 135 million or an estimated 127 million weighted average shares for the full year of 2024. Now moving on to our 2024 outlook: Let me give some color on the key drivers of change in our guidance. When we introduced same-store growth guidance in February, we talked about the following assumptions: on the high end, a return to typical seasonality due to a normalization of the housing market; on the low end, continued downward pressure on rate and occupancy due to muted customer demand; and at the midpoint, a modest level of seasonality with occupancy and street rates remaining relatively flat throughout the year. As we progressed through June and July, it became clear to us that sufficient customer demand was not materializing and competitive pressures were persisting such that the upper half of our revenue and NOI ranges was not realistic. The difference in operating dynamics across our portfolio has also been observable, with the Sunbelt markets more challenged than others. For example, the assumption I mentioned earlier that informed the midpoint of our guidance—that our occupancy and street rates are relatively flat throughout the year—has largely played out in our non-Sunbelt markets. The sequential occupancy gain in these markets has been about 180 basis points from January to the end of July, and street rates are up about 2% in that time. But for our Sunbelt markets, occupancy is only up 50 basis points, and street rates are down 9%. This divergence in results has weighed heavier on our portfolio, given a higher concentration of Sunbelt markets. Looking back over multiple years, these Sunbelt markets have still outperformed the rest of the portfolio. And over the long term, we expect them to outperform. But near term, due to tougher multiyear comps, elevated competitive pressure, and softer demand due to housing, these markets will be more challenged. These revisions to same-store growth are the primary driver of our guidance change in core FFO per share, which we now project to be $2.36 to $2.44 for 2024. Thanks again for joining our call today. Let's now turn it back to the operator to take your questions.

Our first question comes from Juan Sanabria with BMO Capital Markets. Please go ahead with your question.

Good morning. Just hoping you could talk a little bit about the PRO internalization. You mentioned the opportunity with an occupancy gap there relative to the corporate-managed stores. And what do you think that would entail going forward, or what's assumed in the back half of guidance? Are you assuming you're going to have to drop rates incrementally to stimulate more demand, or how should we think about that evolving in the time frame to close that gap?

Thank you for joining, Juan. That's a great question. We plan to approach this from several angles. As we integrate the stores into our platforms and enhance customer acquisition through our website, we'll focus on how we allocate marketing dollars and utilize AI tools in Google Analytics to establish effective paid search metrics for those stores. Pricing and discounts will definitely play a role in our strategy to achieve our revenue targets while aligning closer with our corporate portfolio. We've seen positive results in the first half of this year with our corporate portfolio thanks to new tools and data analytics that optimize occupancy rates. We believe the PRO stores will see benefits from joining our platforms, and we anticipate that occupancy will stabilize in the second half of this year and into early next year, allowing us to narrow that occupancy gap according to specific market and store conditions, leading to anticipated occupancy improvements.

Okay. And then switching gears, you talked about becoming more acquisitive. You talked about a 13-asset portfolio with the PRO-managed fund. Just hoping you could talk a little bit about cap rates and kind of what you're underwriting for that deal, if you could share the dollar size as well and just where asset values are today?

Yes, sure. We were very successful in a couple of fronts in the second quarter. We did buy three assets on the balance sheet for about $25 million using 1031 proceeds. So, we were able to effectively redeploy capital on assets that we had sold and put it to work in markets where we wanted to target and deepen our portfolio. Of the $25 million, 2 of those acquisitions were stabilized assets in key markets that just added to our portfolio, purchased in the mid-6s as far as a cap rate. We were also able to acquire one property in a very targeted market for us with a little more lease-up component. So that was probably a little closer to the low 4s. But it's expected that in the next 12-18 months, it will return to stabilization in the high 6s. From ease of capital and use of 1031 proceeds, the team did a really good job finding assets to satisfy that. The JV that we mentioned in the Rio Grande Valley is still in lease-up, with high-quality assets and a large presence. This includes a lot of climate-controlled product that benefits our portfolio in the Rio Grande Valley, currently in the mid-70s. It's well positioned and well located for us in the market, filling in a market nicely. The yield on that was in the mid-5s, and we expect that to be in the high 7s as we stabilize that portfolio throughout. We also added another portfolio of 13 assets in a very key market for us. The due diligence was just completed, and we're looking forward to bringing that in. It is, again, more stabilized product, 13 properties in a very nice market that will improve our portfolio position and our operational efficiencies. That portfolio is higher than the mid-5s and closer to the 6 as we go into it. It does have some lease-up opportunities, as they just added some new expansion. So, I think the team has done a really good job in the second quarter, getting back to smart growth, deploying funds in markets where we want to densify our portfolio and build operational presence and efficiencies.

Our next question comes from the line of Samir Khanal with Evercore ISI. Please proceed with your question.

Thank you. Brandon, I guess what are you baking in for ECRIs in your guidance at this time? Have those assumptions changed as you see lowered revenue growth guidance?

Samir, ECRI assumptions: We plan for the balance of this year to continue to be as assertive as we have been recently. All the data that we have tells us that we're not really making that much of an impact on customer behavior. Customer response has been strong regarding the pushes on those rate increases. So, right now, we plan to continue to push those out. Obviously, your opportunity set is based on what you were able to achieve with occupancy in the spring and summer is impacted there. And so, that's all factored into the math. But no changes based on customer behavior or what the data is telling us.

And even, I guess, as a follow-up, what about in the markets when you look at—you talked about Sunbelt being a little bit more challenged. You're not seeing any changes there from an ECRI perspective either, correct?

No, nothing specific to ECRI in those markets or the demographics related to those markets that's telling us there's a big difference or delta in that behavior. If anything, Samir, one of the things that's factored in is— as we transition the ECRI decisions from the PROs, who weren't previously fully letting us run those programs, it is going to increase the opportunity set a little bit. Some of the PROs may not have pushed that first rate increase to new move-ins as early as we have with our corporate-managed stores, which allows us to be higher on that first increase from a percentage rate change just because of what I mentioned earlier about the data supporting the reception to that. So, that is going to add some pieces in the back half of the year, which probably benefits maybe the fourth quarter a little bit, but then really going forward into 2025, we should see some benefit there.

Our next question comes from the line of Spenser Allaway with Green Street Advisor. Please proceed with your question.

Maybe just one more on the transaction market. Can you just comment on whether you're seeing more inbound calls today than normal? And just trying to get a sense of how the deals are getting done and being sourced? And if there are any more willing sellers in today's market than six months ago?

Sure. Thanks for the question. I do think we're seeing more deal flow—more deal flow that makes sense to us. I think we've seen traffic over the last six months, 12 months, 18 months, but I think there was definitely a wider spread on sellers' expectations versus where we thought we were going to buy. I would also tell you we're seeing deals come back multiple times. So, if we saw it six months ago or 12 months ago, we're seeing it again today. And so, I think that, again, sellers' expectations are becoming a little more realistic on where they need to transact. We're happy with the amount of deal flow we're seeing. We're underwriting a lot of properties. Again, I was pleased in the second quarter with our team's ability to really get some deals across the finish line and really buy up opportunities we thought were good for us.

Okay. Great. And yes, your comments on the bid-ask spread are useful. Can you just quantify, if you could, the bid-ask spread today versus maybe on the deals that are coming back around versus where they may have been initially traded or sourced?

I would say, while on average, from a starting point from the mid-ask bid, we're probably 5% to 10% off today as we start the process with the seller, compared to probably 5% to 10% higher than that a year ago. So, we certainly have seen that gap probably cut in half, as I would tell you, as we're starting deal underwriting today.

Our next question comes from the line of Todd Thomas with KeyBanc Capital Markets. Please proceed with your question.

Thanks, good afternoon. First question, just I was wondering if you could provide an update on the G&A synergies, specifically, the $0.03 to $0.04 in total that you mentioned, and whether that has been achieved on an annualized basis now within the revised guidance? Or what the timeline to achieve that accretion might look like on an annualized basis going forward?

Yes, Todd, this is Brandon. Good question. The G&A savings we expected to realize was in the $7.5 million to $9 million range. That was the large contributor to the $0.03 to $0.04, which incorporated other things like the tenant insurance buyout but also the cost of the consideration for those buyouts and the conversion of the PRO SP equity to OP equity. So that was all incorporated into that math. We're picking up a little bit of that G&A savings. But really, as Dave touched on earlier in his comments, the full realization of that is really going to be in 2025 and beyond. All of the PRO management agreements as they were in place have terminated, but then we immediately turned around and entered into short-term transitionary management agreements with the PROs at a slightly reduced percent of revenue rate. There is some incremental realization of that benefit over the next two quarters, but really, it's when that transition is complete and our corporate team has taken over the operations, the accounting, all the back-office administration, and oversight of those properties. That's really when we'll realize that benefit and the accretion, which we project to be—the first full quarter of seeing a real run rate is going to be in the first quarter of 2025.

Okay. Great. That's helpful. And then the $0.02 to $0.04 of accretion from revenue management, is that predominantly the closing of the occupancy gap that you discussed and the ECRIs that I think you just spoke about in a prior question, or would the changes in ECRI strategies, bringing them onboard now to corporate—would that be additional upside?

No, I think that's in the $0.02 to $0.04 as we look at operational efficiencies and really just around the structure of the ECRI program. Occupancy will be part of that factor, but I think it comes a little later as we close that gap, Todd; really in 2025. To Brandon's point, as we transition the stores to our platforms, which is well underway, we will implement the ECRI strategy. So, we'll start to see some benefit mid-part of the back half of the year, with the full benefit coming into 2025. But that 2% to 4% is really around—the payroll savings as we bring people on and structure, because we have overlay in markets as we look at the ECR program as well.

Okay. Got it. So, the ECRI program will have a faster impact earlier on. The occupancy gap closing might take a little bit longer just based on market conditions. Okay. And then the stores that will remain with the PROs for management purposes, can you just provide a little more detail there? Whether there's an expectation to eventually transition management of those stores in the future? And then are they going to adopt a more centralized ECRI strategy and, I guess, revenue management strategy—or will they continue to operate separate from corporate?

Yes. Really good question. We have a couple of PROs that are with us long term, and they are very good performers. Their stores will be on the platform. All of the platform efficiencies, all the platform structure that we have and the implementation they will be onboarding. They will continue to operate the stores from a local perspective regarding people management. They'll do the accounting. They certainly have great insights into the markets. They want to continue to grow. I think there are opportunities with these PROs to look at future ventures with us where they continue to acquire properties. It will be different than the PRO structure to be, maybe some kind of joint venture where we can have these two PROs continue to build out in the markets they are in. Geography plays in this as well. Well-performing PROs are positioned in geography where we have some overlap. For our standpoint, operational efficiencies would be a little more challenging there because we would enter markets where we didn't have overlap. We think it's a good benefit. They provide a lot of value to us, and we're looking forward to the future with them.

Our next question comes from the line of Ki Bin Kim with Truist Securities. Please proceed with your question.

Thank you. Good morning. Just going back to the revenue synergy commentary on the PRO internalization. You mentioned a 300 basis point gap in occupancy that you might be able to close. I was curious, is that just comparing one portfolio versus the NSA portfolio? Or is that somehow market-weighted, meaning certain markets obviously have just a different occupancy profile?

It's a really good question, Ki Bin. I would tell you, the pure spread is portfolio to portfolio, but in these markets that we're studying, there is a lot of overlap. We have a high level of confidence within a lot of these markets that we'll be able to adjust that occupancy level smartly. I mean, we're still trying to solve for revenue, but we, through better marketing practices and better revenue management practices, will be able to close that gap similar to what the corporate portfolio has done since we've instituted the new tools and achieved success around the new tools.

And as you transitioned, I guess, in July, the internalized structure. Did that at all cause any kind of usual blip in operating performance?

Certainly, as I acknowledged in my comments on the release, the transition works here—it’s a lift. We’ve got it well planned, with a nice structure around it. The intent of extending the management agreement is to have a smooth transition. But, I would be honest with you: we all know every time you transition platforms and you transition marketing platforms and you work through team member transition, it can certainly be a distraction. We are working very hard and focused on minimizing that distraction. But, it can be a lift that the second half of the year, we were thinking about the first half of the year. I think we're well positioned. I think we're going to work through it fine. I'm very proud of our team and what they're doing and how they're executing, but again, being honest, we know it's extra work.

Yes. I mean, the press release language suggested something like that, which is why I asked. Maybe you could just provide some of the same-store NOI performance between NSA's portfolio versus the PROs year-to-date. And just curious if there's been a noticeable difference in same-store NOI growth rates?

I'm probably not going to get into this keeping, obviously, markets and store specifics, and there's a lot of pieces to it around different strategies that went into it. So, I probably won't talk a lot about the NOI differences between the portfolios.

Our next question comes from the line of Michael Goldsmith with UBS. Please proceed with your question.

Good afternoon. Thanks for taking my question. My first question is on just customer demand and what has to change to get things to get better. We've talked, over the last several quarters, a lot about the housing market, but are you seeing anything else that could be influencing new customer demand, any sort of increased customer sensitivity to the macro or economic slowing?

It's a good question. We haven't seen a lot of impact from economic slowing. Like I said, the existing customer base has been healthy. So, we're pleased with payment activity and all those pieces. The new customer attracting new customers, there are several things going on. There's obviously a little less demand. Transition around the country due to housing due to other jobs environment, strength of the economy has kept people in place. I believe we still have new supply that we're cycling in a lot of our markets, particularly in the Sunbelt. That will take time to burn through. If you look at the markets like Phoenix, Atlanta, the West Coast of Florida, and some of these markets we've discussed before, time is what's going to fix that. There's still good population growth, household formation, and job growth in these markets. We like them long term; it just takes time to burn through this supply. I think, as storage goes, even as things tighten in the economy, storage has historically benefited from contraction as people are forced to move around the country for jobs or maybe they're forced to downsize or face transitions in their life. That hasn't really happened in the last 18 to 24 months. The only significant change has been the interest rate environment, and it's really muted housing transition. At this point in time, we're happy with our portfolio position and the diversity of our portfolio. The Sunbelt will bounce back. We had a strong run through COVID, and we shouldn't forget that. Sunbelt markets were some of the hottest in the country.

And then my follow-up question is for Brandon. The same-store expense guidance has moved a little bit higher. We saw a lot of the peers kind of take down the same-store expense guidance. So, can you walk through what you're seeing on the expense side? What you're seeing at the expense side and your ability to flex expenses or manage the slower demand environment?

Yes, Michael, you're right; we increased the low end of the guidance range a little bit just based on what we saw in the first half of the year. Some of that is like our marketing spend. We deliberately chose to spend a little more than we had budgeted based on the muted demand and trying to capture some customers in a competitive environment. Property taxes are obviously a big line item and one that we just still don't have a clear picture on yet, given where our markets are and where you get those final assessments. The first half of the year incorporated some benefits from successful appeals, as I mentioned in my earlier remarks, but the back half of the year still has our beginning of the year budgets for many markets, which sometimes we get to the end of the year, and I think we were a little conservative because we have been more successful oftentimes in the third and fourth quarters, contesting those. But that baked into the guide is what we had projected at the beginning of the year. As we go through Texas and other parts of the Southeast, we'll get final bills on those over the next couple of quarters and have more clarity.

Our next question comes from the line of Eric Wolfe with Citibank. Please proceed with your question.

You mentioned that you haven't seen changes in the existing customer piece yet, but I was curious in the past when you've seen signs of ECRI behavior changing, what do you think caused it? Was it a recession or economic reasons? I'm just trying to understand what would actually prompt a change in behavior?

I think you'd have to go back—the last time we saw a significant change was during the GFC, when people's pocketbooks got really tight. We've made adjustments, but we never really stopped the program. We might have changed the magnitude of the rate increase. We would set more guardrails around perhaps a total dollar amount of increase versus strictly percentage looking at it. It really had to do with consumer health around unemployment rates, income levels, and what was going on in that environment. I think today, we’re smarter; we have better data tools, and we have higher levels of confidence. I believe if we had these back in the GFC, we would probably have had a different attitude about rate changes at that time than we do today.

That's helpful. In the past, I think storage companies have said that about 50% of customers move out before six months. Correct me if I'm wrong on that, but I was wondering if there have been any changes to that? I know the average length of stay went up during COVID and has come down a bit, but didn't know if that's being driven by more short-term customers that are turning over more quickly or long-term customers staying a little less time. I know average length of stay seems to be staying consistent, but just curious about how the different cohorts are changing in terms of length of stay?

It's a really good question. We do study the buckets you're referring to, such as less than 90 days, less than six months, and others. We haven't seen much movement within those buckets. To your point, the average length of stay of people who have been with us over 24 months continues to hover around 19 months. Within the same store, the total length of stay for all our in-place tenants is still above 40 months. Approximately 65% of our tenants have been with us for more than a year, and about 50% have been with us for more than two years. Compared to historical numbers, those percentages remain healthy and stable.

Our next question comes from the line of Eric Luebchow with Wells Fargo. Please proceed with your question.

Great. I appreciate it. You touched on this a little bit, Dave, already on the Sunbelt, but in terms of new supply. But is a lot of that supply online now, and as you mentioned, it's just a matter of time before working through it? Or are you seeing continued development activity popping up in some of those markets that make you think the supply overhang could persist for longer? Just trying to get a sense of when we may start to see that supply overhang reverse, assuming that current demand trends hold going forward?

We believe that the major amount of supply has been delivered. We think a lot of this product was delivered in '21 and '22, and I would tell you, we're probably on the downhill slope of the maximum impact from new supply. Certainly, development is occurring. There are markets seeing new development, but it's more challenging than ever to develop and more expensive than ever to develop. If you're a developer, you're now looking at longer fill-up times in a more challenging competitive environment, which might change your attitude about developing in the future. But I'd say we're on the downhill slide of the majority of the impact from new supply hitting the market.

Great. Appreciate that. And you've touched on move-in rates, being a little more aggressive to improve occupancy. So, one of the early signs has been from customers on the ECRIs? I think you've talked about pushing faster rate increases and a larger magnitude with the first ECRI. Has that been successful so far? How does that compare to other promotional techniques like free rent?

Currently, I think our data indicates that price is still important for attracting new customers. Discounting has increased a little, but price remains the main driver for rentals. As such, we are focusing more sharply on pricing at the entry point for new customers. After that, we've had better success surrounding the ECRI program in timing and magnitude. All the testing and different strategies we're running indicate we're not pushing statistics around acceptance of ECRI; even though we're increasing magnitude. Our customer base remains healthy. They’re accepting our implemented programs, and we haven't seen much movement yet.

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

David, I appreciate your opening remarks. You commented that we should expect the current environment conditions to last into year-end. Is it fair to say, based on seasonality and the currency of the consumer, that the current environment really will last at least until the '25 peak leasing season, possibly through it? Or do you feel like that's really not a fair comment at this point?

It's a really good question. There are a lot of things at play that we just don't know yet. What will free up a little more housing activity and create a little more transition around the company? Will the Fed cut interest rates? There are many unknowns in the back half. I’m in the camp that I do expect some Fed activity as we go into the back half of the year. The question becomes, how much pent-up demand is there surrounding movement, people wanting to buy and sell houses and transition? If that happens in the back half, I'd say the spring leasing season for 2025 will be a big indicator. We will enter first quarter of 2025 similarly to how we entered this year and hopefully see a stronger leasing season in 2025, provided this demand factor returns, which is somewhat muted at the moment. I wish I had a better answer; I think we're hopeful, and believe supply pressures in certain markets will ease while others will likely maintain pressure. With our internalization efforts and our platforms in place, we’re well positioned to compete in today’s environment, and excel when it eventually changes.

Thank you. I appreciate all the comments on the existing customer and the strength in existing customers that you're pushing rates on. You did respond that historically, when there’s an issue, it’s when that customer is reviewing their expenses—and we're in that state currently. Is that a concern? Are you contemplating shifting that strategy on how much you're pushing? Is it just a seasonal thing? I think as you discussed that, yes, over the next few months, you'll do that? Or again, how should we think about that balance? Thank you.

Yes. Good question. We aren't seeing anything today that will likely change our course on where our ECRI program is. One thing we're examining is tenants that have had multiple rate increases, assessing replacement paths and tenant longevity, considering how aggressively we want to pursue a fifth or sixth rate increase. That's one area we're analyzing closely. However, we're not planning on making major shifts in the ECRI program. Overall, the data indicates that the consumer hasn't changed their habits or behaviors due to what we're implementing. I believe storage is not a large component of personal expense budgets. It's a very convenient, easy-use product that people need. Storage has always been a need-based business, which gives us confidence that people aren't likely to make a tough choice before leaving their storage unit.

Our next question comes from the line of Omotayo Okusanya with Deutsche Bank. Please proceed with your question.

Yes. Questions around street rates. I believe you mentioned for the quarter it was down 9% year-over-year. Just curious what's built into the revised guidance regarding how you think street rates may perform in the back half of '24?

I think, Tayo, thanks for joining. What Brandon was discussing was just the difference between our Sunbelt markets and non-Sunbelt markets. I think in his comments, he was talking about a 9% difference in the decline in street rates was in our Sunbelt markets versus our non-Sunbelt markets. I think we ended the quarter with street rates down around 14.5% to 15%, I think is where we finished in July. In the back half of the year, the year-over-year comparisons certainly get easier. The street rate differences in year-over-year variance will likely come closer. However, it's still going to remain competitive. We plan to be strategic in driving to a revenue number. We need to be smart around driving occupancy discounts, marketing spend, and overcoming competitive environment overall, which is particularly felt more in areas with new supply. It's a very dynamic situation right now, I’d say.

So, are we thinking about a negative single digit from a negative double digits? Does it improve to that level, given better year-over-year comps in the back half of the year? Or I'm not sure how much you can nail it down because everything is dynamic right now, but kind of curious to get a bit more specific guidance around it.

It's tough to know what competitive pressures will do. I'd say as we looked at the year in February, we thought it would be in the single digits closing that gap in the back half of the year. I think we're probably not as optimistic we’ll see low single digits, but we do believe we won’t be in double digits anymore. I think we’re aiming for high single digits for year-end.

Our next question comes from the line of Brendan Lynch with Barclays. Please proceed with your question.

Great. Thanks for taking my question. I wanted to ask on the performance of your pricing and occupancy and marketing algorithms, to what extent they are perfected for lack of a better term versus having some upside potential from further adjustments? And maybe just some commentary on how you evaluate whether you are truly maximizing profitability with the algorithm that you have in place?

Really, really good thought there. I don't think we're optimized. I think there are several reasons for that. Time, situation, and a number of data points continuously improve you all the time. If you think about it, I don't think we've operated in this type of environment before. We come from a COVID high and now into this highly competitive landscape, where we've seen some consolidation in the industry, new supply coming on, and dynamic pricing movements. Our tools are capable of learning; they’re learning every day. We are testing different strategies within markets, unit sizes, and properties. I'd suggest we have room to improve.

Great. And somewhat related follow-up. You hired a new Chief Marketing Officer a few months ago. What are your expectations for marketing initiatives, and are there any new tactics you're considering?

Sure. We promoted an internal candidate into that position. Melissa has been with us for five years and has been integral in building out our marketing strategies and customer acquisition strategies. In the last two years, we've focused on adding talent and technology around our call center platform, marketing website platform, and implementing algorithms for our Google paid search. We've invested a lot in improving our positioning—launching new customer experiences around our website, which she has spearheaded. We have tremendous energy going into this with our support. We're excited about what's ahead.

Our next question comes from the line of Juan Sanabria with BMO Capital Markets. Please proceed with your question.

Thanks for the follow-up time. Just curious, if you could comment about the difference in in-place rates between the corporate-managed stores and the previously PRO-managed stores and how you think about that quantum and the time frame to close that gap and the levers to do so?

It's hard because of geography. Each store has its own different ways and unique unit metrics. It varies throughout the markets. We acknowledge that there are differences in how we can work on the existing customer base. Attracting customers is one piece, but really that existing base's use of data, tools, and willingness to drive stronger performance is crucial. This is where we see an opportunity, and it will effectively lead to bigger in-place contract rents and the ability to drive revenue growth.

One last one for me. How do you guys think of setting hurdle rates or benchmarks for determining success in the PRO internalization, optimizing that delta to whatever levels you're targeting? How should we judge what determines success for you?

We've outlined a couple around platform transition, acceptance of the platforms’ operation structure, rate change technologies, and customer acquisition success rates through the funnel to rental. I think those are numbers we can continue to work on and will talk about. We'll also look at the occupancy gap as the first target. As we go through this transition, we think there’s an opportunity to effectively use that occupancy lever to drive additional revenues. Once we complete the next couple of quarters of transition, we’ll return with a few more metrics to better convey our success.

Our next question comes from the line of Keegan Carl with Wolfe Research. Please proceed with your question.

I apologize, I think you might have said some of this, but I'm just curious about July in particular, where occupancy and rates both performed versus Q2 and also June. And I'd love to know how this compared to your expectations. In other words, where were you assuming July performance at the midpoint of your prior guidance range?

So, Keegan, in July, we mentioned occupancy ended the month at 86.6%, a negative 300 basis point delta from the prior year. So, it widened a little from June year-over-year. Also, as Dave and I previously discussed, as we progressed through June and July, it was weaker than we would have liked to have seen, which informs everything we covered last night. So, occupancy down sequentially from June to July, street rates also began to move downward as they typically would seasonally. Both metrics typically trend lower sequentially during the back half of the year, which is built into our projections. The growth rate year-over-year for Q2 wasn't materially different from when we were discussing in May, but the trajectory as we exited June and entered July shaped the insights we've provided today.

Got it. That's helpful. I'm curious about the occupancy delta on a year-over-year basis for the rest of 2024. Does your guidance include any inflection in demand for the rest of the year? I know you mentioned that you expect it to trend similarly, but is there any sort of embedded inflection within either the mid or high end of the range?

Yes. We do expect occupancy to continue to trend lower as it normally would seasonally. The 300 basis point negative delta in July at the midpoint of our guidance would suggest that by year-end, we can expect a similar negative outlook, but perhaps more in the negative 100 basis point range, such that the average for the back half of the year is closer to negative 200. We've also described our contract rates; as seen in our numbers, they’ve been positive year-over-year, but that gap is narrowing and is likely to reverse. So, you have a negative 200 basis points on occupancy coupled with negative contract rates, which leads to insights on revenue as seen within our guidance. These assumptions do not incorporate a material inflection on demand. As Dave discussed earlier, if the Fed moves, that could create some uptick around demand. Such elements are equally impactful on both the high and low ends, but at the midpoint, no significant changes are assumed based on those events.

Our next question comes from the line of Ronald Kamden with Morgan Stanley. Please proceed with your question.

Just two quick ones for me. Just trying to understand the same-store revenue guidance, making sure I get it right. So, if you have it sort of down three for the year and you're down two year-to-date, that implies the back half of the year, exiting the year at sort of a down four number, which would be the exit rate for the year going into 2025. Is that sort of correct? Is that the right starting point for 2025 that we should be thinking about? Or am I missing something?

Your number is—call it a high 3, around 3.8 versus 4. Overall, I agree with your commentary. Now how we get there, that's aggregate across Q3 and Q4. What does that mean in terms of where you're actually exiting the 2024 year and beginning 2025—that’s the crux of your question, right? I'm not prepared to give you more color than we've shared, but that will be impactful to what we're discussing in February when we introduce 2025 projections.

Makes sense. My second question was just around expenses a little bit. I don't know if you've touched on it, but it sounds like you've seen some favorable appeals on taxes—just provide some high-level commentary on where we should expect those to trend? Is this 5% number the right run rate? Or are there opportunities to perform better than that?

Yes, long term, we've shown great success over five to six years with OpEx growth in the 3% to 4% range. More recently, however, there have been pressures—wage pressures, property tax pressures, and marketing spend, which we didn’t need to focus on in the past when demand was robust. Looking at the back half of the year, I anticipate second half growth year-over-year will be lower compared to the first half, as implied in earlier comments about property tax. That will be the needle mover; whether we see favorable results with assessments, especially in the Southeast markets, where we have yet to receive final bills.

Our last question comes from the line of Eric Wolfe with Citibank. Please proceed with your question.

You mentioned that you haven't seen changes in the existing customer piece yet, but I was curious that around 60% to 70% of your stores compete with an LSI store. When they raised pricing around late May, did that help to move rents for your competing stores? I would have assumed that it would be more helpful than some of the aggregate numbers you quoted suggest. Perhaps they just didn’t hold the pricing long enough, or you saw more competition in other places. I was curious about what that impact was across your competing stores?

Sure. That’s a good question. We were able to move, particularly in April and May, street rates up. I do think having somewhat less competitive pressure around certain markets and witnessing positive movement in rates helped. However, I would say, from mid-June into July, we saw a reversal of that improvement, which certainly put pressure on all of us from a competitive standpoint to react to the changing street rate environment that materialized at the back half of June and in July. As we reviewed Q2, that’s when we were a bit more optimistic about the second quarter; the circumstances changed during the second half of June and moving into July.

There are no further questions at this time. I'd like to turn the call back over to George for some closing remarks.

Thank you all for your continued interest in NSA. We hope you enjoy the rest of the summer, and we look forward to seeing many of you at the upcoming conferences in September.

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