Earnings Call Transcript - NSA Q3 2022

Operator, Operator

Greetings, and welcome to the National Storage Affiliates' Third Quarter 2022 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] 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.

George Hoglund, Vice President of Investor Relations

We'd like to thank you for joining us today for the third quarter 2022 earnings conference call of National Storage Affiliates Trust. On the line with me here today are NSA's CEO, Tamara Fischer; President and COO, Dave Cramer; and CFO, Brandon Togashi. Following prepared remarks, management will accept questions from registered financial analysts. [Operator Instructions] 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, November 3, 2022. 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 statements. For additional detail concerning our forward-looking statements, please refer to our public filings with the SEC. We also encourage listeners to review the definitions and reconciliations of non-GAAP financial measures such as FFO, core FFO and net operating income contained in the supplemental information package available in the Investor Relations section on our website and in our SEC filings. I will now turn the call over to Tammy.

Tamara Fischer, CEO

Thank you, George, and thanks, everyone, for joining our call today. I'll start the call by addressing the recent hurricanes, Fiona and Ian, and expressing our compassion for all who are affected by the storms. We're pleased to report that all of our team members were safe and accounted for subsequent to the hurricanes. Although a number of our stores, primarily in Florida, were impacted to a certain degree, all of our stores are currently open and operational. I'd also like to thank our team for their extraordinary response to the storms, both in terms of looking out for each other, taking care of our customers, quickly assessing damages, starting the cleanup process, and resuming normal operations. Now moving on to results. We delivered another great quarter with growth in core FFO per share of 26.3% and same-store NOI growth of 12.1%. As expected, our results continue to moderate from record levels, and we face tougher year-over-year comparisons and a return to more normal seasonality. The moderation is also fueled by inflationary pressures on the consumer as we close out 2022 and enter what may well be an even more challenging macroeconomic environment in 2023. Keep in mind that the self-storage asset class has historically proven to be quite recession-resilient through various economic cycles. The sector benefits from unique countercyclical demand factors, including demand driven by household contraction and necessity-based relocations. Additionally, the pandemic introduced new customers to self-storage, who have realized the convenience and affordability of the product, particularly in a time of increasing cost per square foot for housing. Finally, with the benefits of our differentiated PRO structure and our broad geographic exposure, we remain very confident in NSA's future prospects. Now turning to investment activity in the third quarter. We acquired 23 wholly owned properties, investing $322 million at an average cap rate of 5.4%. Twenty of these stores are in Texas, Florida, Georgia, and South Carolina, which is a great fit for our existing portfolio in fast-growing Sunbelt markets. While the transaction market has slowed from last year's record pace, we're still seeing opportunities come to market and we continue to evaluate deals where it makes sense. However, we're definitely being very selective in the face of today's increased cost of capital. There is still a relatively significant bid-ask gap between buyer and seller expectations, so we expect that Q4 will be relatively quiet on the transaction front. Going forward, we will remain opportunistic with respect to our capital and investment strategy, always with an eye to creating value for our shareholders over the long term. Overall, I'd characterize the third quarter as strong performance with moderating fundamentals and in line with our expectations. The self-storage sector and NSA specifically remain well-positioned to navigate the dynamic operating environment as we head into the new year. I'll now turn the call over to Dave to discuss current trends and operations.

David Cramer, President and COO

Thanks, Tammy. The third quarter benefited from continued strength in self-storage fundamentals. However, we are clearly returning to normal seasonal patterns, which are being highlighted by a challenging year-over-year comparison. Third quarter same-store NOI increased 12.1% over last year, driven by a 10.7% increase in revenue combined with a 6.9% increase in property operating expenses. Our contract rates were up 15% in the third quarter from the prior year, while street rates were up 10% year-over-year. Consistent with the return to normal seasonality, we continue to see moderation in our street rates, which we expect to continue through the end of the year. Our rent roll-up was flat for the quarter and now follows normal seasonal trends. Discounting and concessions remain below historical averages during the quarter, and we've increased our marketing spend as customer acquisition activity returns to normal. Same-store occupancy averaged 94.1% for the quarter, down 240 basis points compared to last year. We ended the third quarter with same-store occupancy of 92.6%, down 350 basis points compared to the prior year. Occupancy reflects the return to normal seasonality, and the net change year-over-year is directly related to an abnormal comparison last year. Although we're experiencing moderation across the portfolio, I think it's worthwhile to point out that we're on track to stabilize above pre-pandemic levels. To give you a sense of where we were versus three years ago, rates in Q3 2022 were about 37% higher than Q3 2019, and in-place contract rents are about 24% higher. Occupancy is also about 320 basis points higher. Our average length of stay for tenants that have moved out has increased from 15.5 months to 16.2 months. The percentage of customers that have stayed with us for longer than two years has increased from 45% to 50%. All of these data points support our views that fundamentals remain healthy. Looking at geographic performance, the Sunbelt continues to outperform with states such as North Carolina, Georgia, Texas, and Florida, all generating above-portfolio-average revenue growth. Several of our smaller markets such as Oklahoma City, New Orleans, Savannah, and Wilmington are outperforming the portfolio average as well. This reinforces our strategic market focus and continued emphasis on geographic diversity. I'll now turn the call over to Brandon to provide more detail on our financial and balance sheet activity.

Brandon Togashi, CFO

Thank you, Dave. Yesterday afternoon, we reported core FFO per share of $0.72 for the third quarter of 2022, which represents an increase of 26% over the prior year period. This continued robust year-over-year growth was driven by a combination of double-digit same-store growth and our healthy acquisition volume over the past four quarters. Our third quarter results represented a record seventh consecutive quarter where we achieved double-digit same-store NOI growth. Additionally, approximately 30% of our wholly-owned portfolio is in our non-same-store pool, and we're very encouraged by the outperformance relative to underwriting for these properties, which were mostly acquired in 2021 and will be eligible for same-store inclusion beginning in 2023. Regarding operating expenses, our third quarter growth of 6.9% reflected inflationary pressures that we're seeing across the economy as well as property taxes driven by significant increases in self-storage property values. The third quarter increase in same-store OpEx is due primarily to a 6.1% increase in property taxes driven by Texas, Georgia, and Florida, a 12.4% increase in utilities, and a 28.6% increase in marketing spend. Repairs and maintenance grew 4.1%, while personnel costs grew just 2.6%. While the increase in marketing spend was significant in Q3 of last year, we experienced a decline of over 10%, so the two-year average increase is about 9%. Turning to the balance sheet, during the quarter, we closed on a $200 million 10-year unsecured debt private placement with a fixed rate of 5.06%. At quarter-end, our leverage was 6x net debt to EBITDA, right in the middle of our targeted range of 5 and 6.5x. We are very comfortable with our balance sheet, with no maturities through 2022 and $375 million scheduled to mature in 2023, $300 million of which consists of two term loans that we will address over the next few months. Approximately 24% of our debt is subject to variable rate exposure, half of which is the revolver, and we had over $210 million of availability on the revolver at quarter-end. We're committed to maintaining a conservative leverage profile and healthy access to multiple sources of capital. Now moving on to guidance. As Tammy and Dave touched on, we have seen a return of normal seasonality and trends in funnels throughout the third quarter and continuing into the fourth quarter, which is driving the moderation in same-store NOI as we move gradually back toward long-term historical averages. However, our expense growth is trending a bit higher than we previously expected, as I mentioned before regarding property taxes and inflationary pressures. As a result, for the full year 2022, we estimate same-store revenue growth of 11.5% to 12.5%, a tighter range than in previous guidance while keeping the midpoint at 12%. Expense growth of 5.5% to 6.5% is up from the previous range of 5% to 6.25%, and NOI growth of 14% to 15%, with the midpoint of 14.5% or 50 basis points below the prior midpoint. Additionally, the rapid rise in interest rates and pressuring interest expense, which combined with an income tax charge during the third quarter, will weigh on core FFO per share by approximately $0.02 for the full year 2022. The combination of these factors results in us adjusting the midpoint of our core FFO per share guidance down by $0.05 to $2.81. The updated range is $2.80 to $2.82. The midpoint represents an impressive 24% growth above our strong 2021 results and a two-year combined increase of 64% over our FFO per share in 2020. Thanks again for joining our call today. Let's now turn it back to the operator to take your questions.

Operator, Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first questions come from the line of Juan Sanabria with BMO Capital Markets. Please proceed with your questions.

Juan Sanabria, Analyst

Hi, good morning. A question on ECRIs. It sounded like you gave how much rates have increased, both in-place and street rates over the last couple of years or since pre-COVID. And it seems like maybe there's some room for continued ECRI increases that kind of above pre-COVID levels. Just curious on your view on if, in fact, that's accurate and kind of how we should think about ECRIs in '23 versus what you've been able to achieve in '22?

David Cramer, President and COO

Yes. David, thanks, Juan, this is Dave. Good question. It's certainly not going to really point to 2023 yet. But I can tell you, as we looked at the third quarter, our cadence and our activity and the amount of rate increases remain very stable, which was encouraging. The tenant reaction to those increases remains stable as well. So as we look at customer behavior finishing out the year and really look at how we model our in-place rent changes as we move forward, we're still pretty confident in the program and the way we're running. We're still confident in our cadence. And we'll just have to monitor what happens as we look at occupancy numbers and street rates move around a little bit, we'll have to look at what customer behaviors do if they change at all over the upcoming pieces or the upcoming period, excuse me. But just one part of the puzzle. I mean, we're looking at occupancy, we're looking at street, we're looking at concessions, we're looking at the in-place rent changes to find the revenue goal that is satisfying to us. We've had a lot of discussion about this, and I've been at this for a few years now. And I can tell you, even in the toughest times that at great financial through that period, we were still able to do in-place rent changes. Maybe the amounts may not be as much, maybe the tenants may not have been as much, but we didn't -- the financial pressures were maybe facing, the economy we'll be facing right now didn't really deter us back then from really continuing on some form of IPRC program.

Juan Sanabria, Analyst

And then just as a second question. Curious if you guys look at Storage Express either the assets or the software and as a result, or -- and as a result of the transaction there, do you think you're going to see or are seeing more competition for assets in your secondary or tertiary markets and/or kind of a subquestion, do you think that there is the opportunity to continue to use technology to improve efficiencies and maybe go more remote in store management?

David Cramer, President and COO

Yes. Another good question. We've known Jefferson for a long time. We've been around this product for a long time and lets him develop a very good model that worked extremely well. And so we're familiar from a lot of different points of view on what he was able to accomplish. We are running storage remotely now. We're running storage either as an annex or even just purely remotely. And we have technology in place that aids us to do that. We have room to improve, and we are working on improvements through that technology piece. We certainly think, as we look at our future, that's a way to achieve savings in payroll as you look at store hours and maybe overall headcount. It also allows you the ability to buy smaller properties within our markets that fit very nicely and run them as maybe a hub-and-spoke concept, where you have some floating person around where you can take care of two, three stores with less headcount. We've demonstrated that this is effective for us in certain markets. As for whether this will introduce more competition for people buying properties in our markets, there are other operators that have been running this for quite a while now, and we've been around those operators for a number of years. So I don't know if it significantly changes the landscape at this point.

Juan Sanabria, Analyst

And then maybe if I could sneak in a quick third one. Could you give us any sense of the third quarter trends or -- sorry, the October trends in occupancy and street rates to compare versus the third quarter levels?

David Cramer, President and COO

We did experience straight rate growth year-over-year in October. It is obviously coming off continuing to reduce as you think about where the end of the third quarter, where September was to October, but we did -- it's still year-over-year an increase, which is a positive sign for us. And occupancy continued to come down off its levels. I mean occupancy levels came down in the month of October to let me -- the number I give you is 91.4%. So it dropped from the quarter end average down to 91%, and we finished into the third quarter at 92.6%. So we did have a continued reduction in occupancy levels in October.

Juan Sanabria, Analyst

Thank you very much.

David Cramer, President and COO

Thank you.

Operator, Operator

Thank you. Our next questions come from the line of Neil Malkin with Capital One Securities. Please proceed with your questions.

Neil Malkin, Analyst

Hi, thanks everyone. Just sticking on that last question. That occupancy, a, versus the September occupancy versus the average for third quarter. That slowed, I think, the most versus peers. And then again, you saw a pretty significant slowdown in October. It looks like it's going to be well short of the -- sort of from peak deterioration that you outlined previously that you expect for Q4. So maybe can you help us understand what is leading to that? It seems like more significant fall in occupancy versus kind of what we expected the sort of new post-COVID model to look like? Is it small versus large markets? Is it too much pushing on IPRC not enough concessions, like any comments on occupancy and how you see that continuing to play out in your comfort level at the current levels?

David Cramer, President and COO

Good question. There's a lot of pieces to this. I mean, we certainly have had markets that have come off on occupancy, and they're still posting very large revenue gains. I mean, if you looked at regions like Atlanta, Riverside, or Sarasota, Florida, where they've had 5% occupancy loss, but still posting 15%, 17% revenue gain. So we look at it as it's one of the pieces of the puzzle. If you look at our portfolio, historically, we've always run a little lighter than our peers. We're comfortable with that. It fits in our markets. It fits in our revenue models, and it fits in our business plan. As we're looking at this really challenging occupancy comp versus last year, we're trying to navigate the waters of where we want to land, where it fits in with our revenue modeling, and really where that occupancy discount, street rate, in-place rate, all fit together. So to your point, I do acknowledge, I think the occupancy valve was a little quicker and a little steeper than we thought. We're making adjustments to our marketing strategies. We're making adjustments to discounting and really street rate, where we're going to be positioned in markets within the street rates. There's a lot of pieces to that puzzle that we look at. It's just maybe been a little quicker on the occupancy drop that we had, probably had forecast in the second quarter.

Neil Malkin, Analyst

Yes. Okay. And I guess, just going a little further on the comment you just made, is it fair to expect higher marketing, more discounting or, I guess, more pressure on net pricing, net rates, at least maybe until you feel comfortable that occupancy continues or kind of stops eroding at a faster rate than you would have thought?

David Cramer, President and COO

Yes, I think that's fair. We're doing all of those things. You got to look at it market by market, and it affects the overall portfolio. Keep in mind, we also have a little bit of drag in Portland, and Portland is different. Mark will talk about here shortly. But to your point, we're looking at all those levers. Marketing spend was up for the quarter. So you saw in the third quarter we did have a pretty significant marketing peer average that was not as high, but 28% year-over-year. Last year, we had easy sailing and marketing expense. This year, we had to certainly on that a lot more. We're lean on the marketing piece as we go into the fourth quarter. We'll start to look more around street rate and where we're positioned in the market. The third quarter discounts were very, very low, at 2.2% of revenue. So we still have some opportunity around discounts if we want to use that lever to continue to find what the right math problem is to revenue. We acknowledge that occupancy is a big piece of that, but also these other factors come into play. Overall, you think about, we're very happy with our contract rate growth, which was 15% for the quarter as well. So it was a nice balancing offset to the occupancy piece.

Brandon Togashi, CFO

Neil, this is Brandon. Just a little color too on that. So like in my opening remarks on the marketing spend, I mentioned last year in Q3, we were negative growth in the marketing by 10%. Similarly, in the fourth quarter, we were negative 12% year-over-year. As we have increased our spend this year, and that's going to continue into Q4, it's also going to compare against some really challenging comps. So that's absolutely going to be elevated on a year-over-year basis.

Neil Malkin, Analyst

Okay. Yes. That's helpful. Other one for me is you're traditionally not a seller. But if you just look at the performance of your stock, have you thought about or considered potentially looking at leverage neutral buybacks? Or how do you think about capital allocation and also balancing sort of macro uncertainty in general?

Tamara Fischer, CEO

Good question, Neil. I think that looking at the -- looking at our use of capital and sources of capital, it's really up to us in any case to make sure that we're evaluating our portfolio and selectively disposing of assets. As you said, we're not really -- we haven't been a big seller. I don't think we'll be a big seller. But we see that as an alternative in terms of sourcing capital. So I think the answer to your question is, yes. I don't think you'll see us sell off a 100-property portfolio or anything like that. But I think selectively, we will look to prune the portfolio and raise some capital that way in this environment where the cap rates are, frankly, still better than what we could do otherwise. Certainly, taking that capital and redeploying it in the repurchase of our own shares makes all the sense in the world.

Neil Malkin, Analyst

Okay, thank you.

Operator, Operator

Thank you. Our next questions come from the line of [indiscernible] with Bank of America. Please proceed with your questions.

Unidentified Analyst, Analyst

Great. Thank you. I just wanted to follow up on the prior point made about adjusting in certain markets and adjusting down in others. Can you kind of comment on which markets haven't really taken this level of street rate increases as well as others and where maybe you're still seeing some drag? I know you had mentioned seeing a little bit of drag in Portland. So if you could just give an update on your markets.

David Cramer, President and COO

Yes, yes, absolutely. We're still very strong in the Sunbelt in the Southeast. If you look around Atlanta and the Carolinas and through Georgia and through Texas, we're still having very good success down in those pieces, both on street and contract rate. Keep in mind, we're coming off extreme highs. Some of those markets were 98% full last year, and now they're running 93% and 92%. So that occupancy headwind while paper may look daunting. For us, those portfolios and those stores in those markets are settling right in where we want them to be, and we're very comfortable. We're certainly paying some pressure in Portland. Portland has a number of things going on there. We've talked about in previous calls and through the past, there was pre-pandemic. There was a bunch of new supply brought on and that supply is still there, and the pandemic may have masked the impacts of that supply, and now that the pandemic has come back and things are returning normal. Portland is really starting to see some of those pressures. Plus there are some economic and social things going on in Portland that just makes that MSA right now challenging for us. We'll continue to look at how we operate there. We're not going to go in and try to start some kind of rate war or something like that. We'll be smart. You got to realize that the Portland market is going to operate where it operates at, and we're going to try to maximize what that level is. Phoenix, we're feeling a little bit of pressure. Phoenix also had a bunch of new supply come on through the pandemic, and some of that -- some of the housing market is slowing down maybe a little bit in migration is slowing down a little bit, Phoenix is starting to show a little bit of pressure. How we manage Phoenix from a street rate perspective, discount perspective, and occupancy level is going to be challenging for us as we go into 2023. In terms of the rest of the markets, there's not a lot to really call out. We have some stable markets in the Heartland like Oklahoma City and Tulsa that are doing very well. From a historical perspective, they're doing above average, but they're certainly not doing what the portfolio level is, but we're comfortable in how they're operating and performing. We kind of call them the steady eddies, just performing well over and over again and just didn't have the highs and the lows of the pandemic piece of it.

Unidentified Analyst, Analyst

Okay. And for my second question, I'm curious to hear more about the volume of move-ins and how that trended versus your expectations and maybe how that compares to the movement from pre-COVID. Has that rate kind of slowed down? Or did you see any signs of this being below your expectations? And if you could comment on move-outs as well.

David Cramer, President and COO

Yes. Good question. So certainly, the last year move-ins are less and move-outs are more, and that's comparing to last year. To be expected. As we look back to 2019, which is really probably the most stable year we can look to before the pandemic, both move-in and move-out activity are very similar to the patterns we would expect. We think it's returning to historical averages based on the portfolio occupancy, how many tenants you have in the portfolio, and what our expectations are around the move metrics of that tenant base. That's where I would point you there. What I would also add to that is the consumer shopping patterns are changing. It's taking more touch points and more lift to get people to convert today. So one of the things we're very much focused on is marketing spend and what we're doing with the conversion rates. The team has dialed into how to boost that conversion rate and make sure we're using that dollar effectively. That will bring into play the other levers. Where are we positioned with street rate? What are we doing with discounting? How well are we closing? As I look at the quarter, really looking ahead is that's back to really normal times of 2019 as well, and we need to continue to make sure that we're driving efficiencies through our conversion rates.

Unidentified Analyst, Analyst

Great. And if I could follow up on how do you see move-in -- what is the move-in, move-out activity like into October?

David Cramer, President and COO

In October, we saw occupancy come off of where it was in September. We were happy with where -- again, looking at historical to 2019, very comfortable. It's a tough comp. I mean, really, in the fourth quarter, we actually grew occupancy in the fourth quarter last year at a slight pace. That's one of the things we were looking at; it's a tough comp year-over-year. We think it's very much in line with what 2019 looks like.

Unidentified Analyst, Analyst

All right, thank you.

David Cramer, President and COO

Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Smedes Rose with Citi. Please proceed with your questions.

Smedes Rose, Analyst

Hi, thanks. Just kind of sticking with the occupancy declines, which did seem a little more pronounced maybe relative to your expectations and certainly to our expectations. I was just kind of wondering where do you think you might exit the year now on the occupancy front?

David Cramer, President and COO

I think internally, our expectation is we'd like to flatten it out. We're not looking to lose a lot more occupancy. Obviously, there are conditions going on out there with consumers and economic tightening that we have to navigate. I thought we did a good job holding our street and contract rate growth in the third quarter. I think you'll see a little more pressure on street in the fourth quarter and a little more pressure on discounting, which will allow us to flatten that occupancy piece. That's the math problem we're working on. The teams are working on every market and every store to find that balance. But...

Tamara Fischer, CEO

Smedes, I think -- I know you know that we've talked about this a lot, but our objective here is to optimize revenue growth. That’s been our strategy for a long time, and we'll continue to do that. I think our view is that occupancy settles out a couple of hundred basis points higher than pre-pandemic levels for us, but probably still a gap between us and our peers. And yet we set out to deliver outstanding growth in same-store revenue.

Smedes Rose, Analyst

I appreciate that you're not running it for occupancy, but I mean, I guess there is a -- I mean, there's got to be some point where you and other operators would pivot to protect occupancy rate. You can't raise rates from empty boxes, as they like to say. I wanted to ask you, do you feel like it's fair -- I mean it's just like commentary that we've heard from others that just something like your view on it. I mean, in some of the more secondary and tertiary markets, do you think you're just inherently more exposed to maybe a more demographically sensitive customer around rates and to what's going on with the economy? Or do you think that doesn't hold water?

David Cramer, President and COO

I don't think that's an issue at all. I do think one thing that is happening, though, is we didn't have some of the tailwinds of Miami, New York, and L.A., and some of these other markets because of our exposure there. We didn't have the rate restrictions that maybe some of our peers had for a couple of years. I think that weighs on us a little bit as you think about year-over-year results. I also think last year, we did an excellent job driving this portfolio. In my words, I use overheating our portfolio. We drove it to an occupancy level through the back half of the year and a revenue result level that was abnormal for our markets. We're settling back into what we think is normal for our markets. To Tammy's point, we think it's going to be above pre-pandemic levels, which was an objective for us. All things considered, I don't think it's a tertiary or secondary market question. We're just settling back into what we feel are very comfortable normal.

Smedes Rose, Analyst

Okay. And then can I just follow up? I wanted to come back to the share repurchase. I mean, I think you did $50 million, and you bought back at considerably higher prices. So presumably, I mean, would you be interested in maybe getting more aggressive on that front as we head through the year and given the decline in the stock price here? Or how do you think about that program?

Tamara Fischer, CEO

As we think about capital deployment, it's all about where we can achieve the best returns. But I will also say that we are probably, along with others, being very, very selective, and we will deploy capital opportunistically. In this current environment, where the cost of capital is high and access is not as free as it was a year or so ago, maybe even six months ago, I don’t have a yes or no black-and-white answer for you, Smedes, but it is an alternative that we will consider as we are thinking about strategic capital deployment. When it's all said and done, it's all about the long term for us and building and delivering long-term shareholder value. If we thought it was a great investment at $52, we certainly think it’s an even better investment where we are today. But I just don’t think there's a black-and-white answer to your question.

Brandon Togashi, CFO

And Smedes, this is Brandon. The other thing I'd add is that through today, we've issued almost 600,000 common OP units, the contributors of properties, and they've taken that equity at a price that's about $54 and change. You saw the activity we did on repurchases at $52 and change, part of our guiding thought on some of this was, 'Hey, we were able to neutralize some of the dilution impact of equity that we had issued earlier in the year.' That was also a point of reference for us in thinking through the execution.

Smedes Rose, Analyst

Great, great. Thanks for that. Okay, thank you. Appreciate it.

Brandon Togashi, CFO

Thank you.

Operator, Operator

Thank you. Our next questions come from the line of Michael Goldsmith with UBS. Please proceed with your questions.

Michael Goldsmith, Analyst

Good afternoon, good morning. Thanks all for taking my question. I'm going to try to tie together a couple of different topics that have already been discussed. But Tammy, you started the call off talking about the inflationary pressures on the consumer. And then later in the call, you touched on maybe there's been a little bit more difficulty converting customers who have entered the channel into tenants. I guess, just how do you think about the inflationary pressure on the consumer? How is it impacting -- how is it impacting kind of your trends? Like are customers responding more negatively to rate increases? Are they being more price sensitive when moving in? Or are they just vacating at a more frequent rate just because they're spending more money on food and other things?

David Cramer, President and COO

Good questions. I'll try to cover as you went through. To your last question, we don't see any change in move-out patterns that have to do with economic conditions. It's still around need-based. As you think about when the time is up, the time is up for them. If you rent a storage unit because you're remodeling your house and your house is done, you're moving out. We haven’t -- through surveying and through our internal analysis, we have not seen a significant change in customer pattern of why they're moving or why they're moving out. From an economic perspective, a lot of things have changed. The housing market has cooled off significantly. Would we love to have a hotter housing market? Yes, in a down housing market, we will still do well. The sector does well. We’ve proven that we're recession-resilient. But we don’t think there’s anything around what’s happening in the economic conditions right now that's changing what's going on with our length of stay or tenant base. As far as the conversion piece, this is where we have to monitor all of our levers and figure out what’s the best trigger point to get people to convert at the rate we want them to convert at. That’s really more of a focus right now on discounting and street rates. There is a lot of the sector that is cutting street rates pretty dramatically right now. We have not done that. We’ve always talked about it being a balance between the revenue goal and that revenue goal is rate, occupancy, concession, all those things in the mix, and we’ve chosen the path that we’ve held a little firm on street rate, less discounting, and are still generating the numbers that we aim to hit. I think that may change a little bit from the conversion pattern, and we may need to be a little more assertive on street rate and a little more assertive on discounting.

Michael Goldsmith, Analyst

That's helpful, Dave. And my second question is on the keys of the same-store revenue growth. You reported 10.7% in the quarter. So that was down actually by about 400 basis points. Your guidance at the midpoint implies about 6% same-store revenue growth in the fourth quarter. It would suggest kind of a step up in the slowdown. So I'm just trying to better understand kind of the cadence of the moderation and how we should think about it going forward? Just like, I guess, you talked about altering some of the approaches, like how much can -- how much can you affect to slow the moderation based on kind of this current rate of about 400 basis points sequential deceleration?

Brandon Togashi, CFO

Hey, Michael, it’s Brandon. Look, I think what's really important to remember is that the fourth quarter last year was very abnormal for a comp purpose, okay? Pre-pandemic, it would not be uncommon for same-store revenue from Q3 to Q4, just absolute dollars to decline 0.5% to 1.5%. The midpoint of our guide for the full year '22 implies the fourth quarter is closer to a 7% growth rate, with a decline from Q3 right around that level. Last year, the increase from Q3 to Q4 was about 2.5%. That speaks to how challenging that comp is. We’re not really trying to manage to the comp or cadence, it’s more about executing on strategy, which Dave spoke to, and the comp is what it is. Another thing that people have done across the sector and for us is just to look at that two-year stack, and that moderation is a lot more ratable. It’s not as dramatic. If that makes sense.

Michael Goldsmith, Analyst

No, that does. If I can squeeze one more in. On the topic of property taxes, you've been doing the pressure from Texas this year. Do you have any visibility into how property tax may play out in the coming years?

Brandon Togashi, CFO

Coming years is tough, Michael. We'll guide in February. I'll tell you, we start every year with like a 5% to 7% growth rate assumption. Coming into 2022, we had an average three-year increase of 2% on total OpEx and an average annual increase of property tax of 2.4%. So we've dodged it the last few years. We came into this year with that higher assumption and we're experiencing it. You see our numbers for the full year nine months, and I think Q4 will be something similar to comp for property taxes, a little more challenging. Closer to 8% but it puts the full-year number something closer to 7%. High end of where we would have entered this year with the expectation. We'll update in February about what we're assuming for the full year '23, but best guess right now is it would be kind of in that 5% to 7% range.

Michael Goldsmith, Analyst

Got it. Thank you very much. Good luck in the fourth quarter.

Brandon Togashi, CFO

Thanks, Michael.

Operator, Operator

Thank you. Our next question comes from the line of Wes Golladay with Baird. Please proceed with your questions.

Wesley Golladay, Analyst

Hey, everyone. Can you give us your view on supply this year versus next year when you look at it from a weighted average of the impact of your operations?

Tamara Fischer, CEO

Sure. I can start, Dave and Brandon can jump in. But I think our view of supply this year is that it has been and it will remain somewhat muted. For projects that are under construction, they'll go forward, they'll be delivered. What we're seeing and hearing from our Pros and from our friends at Yardi is that projects that are not yet approved and certainly, projects that have not yet secured financing, are at a very good chance of falling out, at least for the time being. Our view on supply is that it will remain muted probably through 2023 and when we’ll start looking at potential impact, probably early to mid-2024, but we’ll keep you updated on that. We track that pretty closely, not only with Yardi but with our Pros who are operating in the markets where we're seeing the potential threat.

Wesley Golladay, Analyst

Got it. And then you had the comment earlier, it's an all-cycle business, and it has proven to be over the last 10, 20 years. But if you can maybe comment on some of the cyclical demand that may be abating. Are you seeing the countercyclical demand pick up at the moment?

David Cramer, President and COO

Yes. As we talked about, maybe the housing market has cooled off, will there be other factors that pick up on that? We are. I think the hard part for us is we're coming off some historic highs. You look at -- you're coming off a pandemic, which we navigated very nicely. The self-storage sector and ourselves had unbelievable highs. Now we're heading into this uncharted waters of tough economic conditions and certainly looking down the barrel of a possible recession. All things will continue to play out. If the housing market cools off, then the renter market may stay longer. People can’t afford as much of a house as they could. What happens with business owners, and how much -- we’re a pretty nice option versus warehouse space for business owners. I think all the things we’ve seen through our history will prove out again that this sector and our business, our portfolio will do well and be recession-resilient through what's coming forward for us.

Tamara Fischer, CEO

Yes, I think that's right, Dave. I mean what we've talked about over the years is that change drives demand. And when one source of demand dries up, another one seems to flourish and replace it. That's our view, probably through the next 18 to 24 months.

Wesley Golladay, Analyst

Sorry about that. Okay, well, if I could get one last one in. Variable debt increased this quarter, and you did have a $200 million loan at a pretty attractive price. What is the appetite for more variable rate debt? Is it something you want to get down over time through free cash flow, maybe some dispositions rates did move up almost parabolically, so some people of self-included. Just maybe how are you going to navigate the variable rate challenge?

Brandon Togashi, CFO

Yes, Wes, this is Brandon. We're at a level we're comfortable with right now. I don't think you should expect us to go dramatically higher. I don’t think that exposure is going to be cut to zero either. In my opening remarks, you heard me mention that half of our 24% of total debt is variable half of that is the revolver. We exclude that because over time, we’re going to replenish that revolver balance with permanent capital, long-term capital, fixed-rate debt. When you exclude it, you've got 12% of the rest of our debt, a couple of bank term loans that we've kept variable. You’re right; rates moved sharply. That will be a short-term headwind. When things come down, there will be opportunities for us to opportunistically raise capital. As you mentioned, we did during the quarter with a 5% coupon debt that we placed.

Wesley Golladay, Analyst

Great. Thanks, everyone.

David Cramer, President and COO

Thank you.

Operator, Operator

Thank you. Our next questions come from the line of Ronald Kamdem with Morgan Stanley. Please proceed with your questions.

Ronald Kamdem, Analyst

Hey, just a couple of quick ones. Just going back to the occupancy, but actually mixing in a little bit of the ECRI. When you think about -- can you just give us a sense of the ECRI intensity over the past couple of quarters as you're sort of watching this occupancy drop? Because I think your point is that there's a trade-off, and I think what we're trying to figure out is where was sort of the peak ECRI intensity? How much does it come off potentially as you sort of see occupancy go down, if that makes sense?

David Cramer, President and COO

Yes, it makes sense. Typically, peak ECRI activities are really in the summer months. There was a couple of months in the summer. I think we mentioned last quarter, May was our most active month where we had the largest percent increase, and the largest percentage of tenants hit. If you look at the third quarter, we kept a very normal cadence. The percentage of rate changes, the percentage of rent change to the customers as far as a dollar amount was very much in line with what we've been seeing over the last 12 to 14 months. The percentage of our tenants that we hit in the third quarter was very similar. It is a balancing act. The team is studying right now what's the percentage of loss that we can attribute to rate increase versus what customer sentiment is to what customer appetite is. We've already gone back and instilled some caps. We were looking at percentage of rate and how many rate increases we've given our tenants. The third quarter remained very steady. We were fairly steady in October. What’s to come? We’ll have to monitor what the consumer is telling us. At this point in time, there's nothing that they told us yet that is causing us to shift dramatically, but again, this is stuff we monitor, and it’s a big puzzle. A lot to it, so I hope that answers your question.

Ronald Kamdem, Analyst

Yes. That was super helpful. Just moving on to the next one is just on the expense -- same-store NOI expense guidance -- for the same-store expense guidance, excuse me. I think you mentioned it was higher both because of some property taxes and some inflationary pressures. Any chance we could just dig into that and a little bit more color like half of it is taxes, half of it is the other? How does it break out? Just any more color on what came in higher than you expected?

Brandon Togashi, CFO

Yes, Ronald, I mean tax is a big piece, just given it's one of the two largest OpEx line items in addition to personnel. It's coming in closer to 7% for the full-year growth, but we've managed personnel costs really well, right, a little under 3% growth for the quarter, call it flat for the nine months year-over-year. Making up almost 60% of our OpEx, they blend out kind of like 4% growth combined for those two line items. Really, what you have is other contributors that I mentioned in my opening remarks. We were seeing the utilities costs go up in second quarter. There were some elements of that already baked into our expectations when we talked to you in early August. But I would say those costs and increases in rates came in a little bit higher than we expected three months ago. So that was a contributor to upping the OpEx guide a little bit. On marketing costs, again, we fully expected to increase that spend. I mentioned that is open. I also think one of the questions earlier spoke to the fact that that's going to be elevated again in the fourth quarter. We told on that lever a little bit more than we might have thought in early August. Those were a couple of the key items; credit card processing fees is another one that came in on the margin a little bit higher.

Ronald Kamdem, Analyst

Great. And then my last one was just when I look at the same-store revenue guidance, it sort of implies sort of a mid-6s growth rate coming in 4Q, if I'm doing that math correctly. Just trying to -- I think what we're just trying to square the same-store revenue for 4Q versus the peer set. How do you guys sort of think about where your portfolio is different from everybody else? Is it maybe because others have LA exposures you guys don’t? Do you think about sort of rent-to-income ratios at all? How do you square sort of what you're seeing in your markets versus the peers?

Brandon Togashi, CFO

Ronald, it’s hard to speak to the peers because everybody's portfolio has different dynamics. I know we were the second highest in revenue growth in Q4 of last year, right? So that's going to play into the two-year stack when you do that math on the comp. Another thing I would point to is what I remarked to Michael earlier about the comparable and the abnormality of what we had last year. We had unraveled through the tough economic environment and the unusual comp. We didn’t have that last year, but we are expecting it this year or at least that's what's implied by the midpoint of the guide. If you think about it, it’s going to be tough out there given the nature of the comps coming up. Our growth guide at the midpoint stays the same. We’ve been very clear we would not sacrifice revenue or quality for occupancy. That is our guiding principle moving forward

Ronald Kamdem, Analyst

Great. Super helpful. Thank you.

Brandon Togashi, CFO

Thanks, Ronald.

Operator, Operator

Thank you. Our next question is come from the line of Todd Thomas with KeyBanc. Please proceed with your questions.

Todd Thomas, Analyst

Dave or Brandon, maybe you both pointed out a number of times that occupancy grew last year from Q3 to Q4 and talked about that tough comp, and some of the abnormal seasonality last year. With regards to that, 91.4% occupancy data point at the end of October, I'm curious what the year-over-year spread looks like in occupancy? Is the change in discounting and promotions and I guess, the change in street rates that you're now implementing, is it having the intended result? Or are you starting to see demand stimulated a little more and the expected response?

Brandon Togashi, CFO

Yes, Todd, I'll take the first part, and I'll let Dave speak to the discounting and promotions and success rate on that. So it's about a 450 basis point year-over-year negative on that end of occupancy that Dave spoke to. Just to bridge some of the commentary that you heard from Tammy and Dave, we are low point going into COVID late 2019 on same-store occupancy was right around 87% to 88%. For a long while now, we’ve been saying, look, we’re going to revert back to a more normal level. As Dave said, we think it will stabilize above -- somewhere above maybe 200 basis points. We’re not that surprised by what's happening in occupancy. We’re certainly reacting on a daily basis, but I don’t want to mischaracterize some of the comments earlier as if it was a big surprise to us. Dave, you want to hit the discounts?

David Cramer, President and COO

Yes. Trying to work our way through discounts. We talked about third quarter was historic; it was low at 2.2%. At this time of the year, you might be running closer to 4.5% to 5%. As we look at how we navigate the conversion rate that we're after, this piece is going to step into this place, and we've been assessing where we balance ourselves in the market in terms of street rates. I think all those things contribute. We purposely held through the third quarter. Contract rate growth was solid. Street rate decline was minimal, and that was on purpose. For our markets, we're trying to see where that balance lands. Overall, I think the occupancy headwind compared to last year is a tough drag to get over, but that’s not what we’re worried about. We're focused on our portfolio and where it lands, not just looking quarter-to-quarter but on a long-term outlook.

Brandon Togashi, CFO

Thanks, Todd.

David Cramer, President and COO

Thank you.

Operator, Operator

Thank you. Our next questions come from the line of Ronald Kamdem with Morgan Stanley. Please proceed with your questions.

Ronald Kamdem, Analyst

David Cramer, President and COO

Yes, Ronald, I think it makes sense. The peak ECRI activity is generally in the summer months. We had a couple of months in the summer; May was the most active month this year. The third quarter maintained a very normal cadence in terms of rate changes, both in terms of the percentage of tenants impacted and the dollar amounts. The team is studying what's the percentage of loss that we can attribute to rate increases versus what customer sentiment is. We monitored those metrics, and our tenant rate adjustments were in line with what we've seen for the past few months. Overall, everything has remained steady.

Ronald Kamdem, Analyst

Yes, that was super helpful. Thank you.

David Cramer, President and COO

Thank you.

Operator, Operator

Thank you. There are no further questions at this time. I'd now like to hand the call back over to Tamara Fischer for any closing comments.

Tamara Fischer, CEO

Well, thanks, everyone, for your time today and for your interest in and support of NSA. Even with moderating fundamentals and tough comps, we had a great third quarter, and we're very optimistic about the rest of the year and into 2023. As I mentioned earlier, self-storage has demonstrated its resilience in challenging economic times and is one of the best, perhaps the best performing property type over the past 25 years. We look forward to seeing many of you in San Francisco in a couple of weeks. Thanks, and have a great day.

Operator, Operator

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.