Earnings Call Transcript - NSA Q1 2023

Operator, Operator

Greetings, and welcome to the National Storage Affiliates First Quarter 2023 Conference Call. At this time, all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It 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 first quarter 2023 earnings conference call of National Storage Affiliates Trust. On the line with me here today are NSA's Executive Chair, Tamara Fischer; 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 can be found in the Investor Relations section on our website at nationalstorageaffiliates.com. On today's call, management's prepared remarks and the answers to your questions may contain forward-looking statements that are subject to risks and uncertainties and represent management's estimates as of today, May 2, 2023. The company assumes no obligation to revise or update any forward-looking statements because of changing market conditions or other circumstances after the date of this conference call. The company cautions that actual results may differ materially from those projected in any forward-looking 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 Dave.

Dave Cramer, President and CEO

Thanks, George. And thanks, everyone, for joining our call today. Before we get started, I'd like to acknowledge the recent passing of a valued member of our Board of Trustees, George Chapman. George joined our Board at our IPO in April of 2015 and has contributions that are too many to name. We greatly appreciate his wisdom, guidance, and sense of humor, and we will miss him greatly. Many of you know, today is my first earnings call as CEO. Tammy is in the room with us today, so I'd like to say thank you for all you've done for the NSA over the years, and congratulations on your move to the Executive Chair role. But I'd also like to acknowledge and thank all of our team members here at NSA and our PROs for their continued dedication and hard work as significant contributors from our team members that drive our continued growth, and we appreciate everyone's efforts. Overall, looking at how the year started, there are positive signs that fundamentals are moving in the right direction. The street rates have increased 4% from the beginning of the year through the end of April. Contract rates are also up slightly over that same timeframe. Length of stay continues to increase with the average length of stay on move-outs now up to 17 months, the highest it has ever been for our portfolio. Also, our rent roll down has moderated every month this year starting at 19% in January and is now 13% in April. With these trends moving in the right direction, I'll remind you that we're coming off the best two years of rate and occupancy growth the self-storage sector has ever seen. The comps are challenging as we moderate back to normal levels. Now turning to results for the quarter. We began the year with solid operating performance, delivering same-store revenue growth of 5.7%, which is still above the long-term historical average for the sector. Occupancy ended the quarter at 89.8%, and April finished at 90%. With the headwinds of a slowing economy and muted housing market, demand levels will continue to feel pressure. As an example, in March, home sales were down 29% year-over-year in both Phoenix and Las Vegas, while occupancy in those markets was down 570 basis points and 790 basis points respectively. Our teams have done a good job navigating the changing economic environment and remain focused on executing strategies to capture new customers as we progress through the spring leasing season. It's still very early, so the next couple of months will be key to our full-year growth. Geographically, our Sunbelt and secondary markets continue to outperform with MSAs such as McAllen, Oklahoma City, Brownsville, and Wilmington all generating revenue growth north of 10%, which reinforces our strategic market focus and continued emphasis on geographic diversity. Turning to the supply environment. We believe that on a portfolio-wide level, supply will remain relatively muted near to midterm, given the many headwinds that developers are facing today. That said, there are a handful of markets where we're feeling pressure from new supply, resulting in below-average growth, including Portland, Phoenix, and Las Vegas. On the acquisitions front, we had a productive quarter, acquiring 16 properties totaling $160 million. 15 of these properties were previously discussed and were part of our portfolio purchased out of the Captive pipeline for approximately $145 million. We funded these transactions with $150 million of equity, which Brandon will discuss further in his remarks. These transactions demonstrate one of the benefits of our PRO structure, which is the Captive pipeline, which now stands at approximately 100 properties, totaling $1.4 billion. The acquisition environment remains competitive with a wide gap between buyer and seller expectations, while we remain patient and disciplined, focusing on the Captive pipeline and off-market transactions. I'll now turn the call over to Brandon to provide more detail on our financial results and balance sheet activity.

Brandon Togashi, CFO

Thank you, Dave. Yesterday afternoon, we reported core FFO per share of $0.66 for the first quarter of 2023, which represents a decrease of 2.9% over the prior year period. The sequential and year-over-year decline in core FFO per share despite 4.8% growth in same-store NOI was due primarily to elevated interest expense given the rising rate environment, minimal acquisition volume in the fourth quarter of 2022 versus the $1.1 million of acquisitions in the fourth quarter of 2021, and an overall deceleration in operating fundamentals as we come off historic highs. Operating expense growth in the first quarter was 8.3%, in line with the high single-digit growth we previewed on our last call, as we had a tough comp in property taxes with favorable adjustments in the prior year period. Property taxes grew 11% year-over-year but excluding the prior year adjustments, the growth was closer to 7%. We also saw an 11% increase in utilities and a 29% increase in marketing expense. Both of these line items had elevated spend beginning in the second quarter of last year, so we will start to lap the tough comps by midyear. These items were partially balanced by lower growth in other line items, a 1% increase in payroll and a 4% increase in repairs and maintenance. Turning to the balance sheet. Apart from the January recast of our credit facility, we previously announced we issued $113 million of a new series of preferred stock during the quarter in conjunction with an Orlando portfolio acquisition. The Series B preferred stock has a 6% coupon and was issued at an effective yield of approximately 6.1%. Separately, we also repurchased 1.6 million common shares for $69 million. Subsequent to quarter end, we issued $120 million of five-year unsecured notes in a private placement with a face coupon of 5.61% and an effective rate to us of 5.75%, inclusive of the impact of pre-issue hedges. Additionally, Kroll Bond Rating Agency affirmed NSA's BBB+ credit rating and maintained the outlook at stable. At quarter end, our leverage was 6.3 times net debt to EBITDA, up sequentially from year end primarily due to typical first-quarter seasonality. We project leverage will decline slightly in the next couple of quarters as EBITDA increases from organic growth and the acquisitions we completed in mid-March. Giving effect to our $120 million debt raise, approximately 16% of our debt is subject to variable rate exposure, mostly from the outstanding balance on the revolver. We're committed to maintaining a conservative leverage profile and healthy access to multiple sources of capital. Now moving on to 2023 guidance. As Dave mentioned, it's still early, so we will wait until we get further into the peak leasing season before revisiting the outlook for same-store revenue growth. On the OpEx front, we completed our annual property insurance renewal effective April 1 and experienced the same as other property owners, a very challenging renewal market with cost increases that were roughly double what we had in the budget. While insurance expense is a relatively small component of our property OpEx, this will still put some pressure on growth, which will come back where we can with controllable items. We thus maintained the guidance ranges that we introduced in February, which can be found in the earnings release. Thanks again for joining our call today. Let's now turn it back to the operator to take your questions.

Operator, Operator

Our first question comes from Michael Goldsmith with UBS.

Michael Goldsmith, Analyst

Your comments from the earnings release and the call today imply some caution. So can you maybe elaborate a little bit on how you view the quarter and then trends in April?

Dave Cramer, President and CEO

Michael, this is Dave. Thanks for joining our call today, and I appreciate you being on and thanks for the question. Yes. I think as you listen to what we talked about in our prepared remarks and as we look at the quarter, we certainly have a challenging comp to last year's occupancy. And we've been facing that comp now for two quarters coming off unprecedented times of just great times for the self-storage sector. And so we really spent a lot of time looking at what we wanted to accomplish in the first quarter and what the business trends we were trying to achieve in the first quarter. In our opinion, the first quarter really reacted pretty much as we expected. We saw seasonal changes where we saw the trough in occupancy and we saw the trough in street rates really coming about mid-quarter in February, which would be expected in a normal seasonal trend. Then we saw improvement in March and we saw improvement again in April in occupancy and street rate and contract rate. From that, our seat, that was a positive reaction in the quarter, a positive trend within the quarter that we're hoping to see. Our Sunbelt states continue to perform well throughout the quarter, really outperforming the portfolio in general. Our MSAs above 25% also outperformed our portfolio in general as we think about how they performed against the total portfolio. Top of the funnel made it active; we had to spend more marketing dollars to keep customers coming in that top of the funnel. As we looked at the quarter though, we thought the rental activity was a little less than we wanted. The top of the funnel was active enough but conversion rates were not as strong as we wanted them to be within that funnel, so we thought rental activity was a little on the light side. Overall, the quarter very much played out as we thought, and we were pretty happy with where we ended, particularly coming out of April.

Michael Goldsmith, Analyst

And as my follow-up, I'm just trying to put the start of this year into context. So maybe if we compare other years where rental activities were maybe a little bit late. Has there been times when it picks up in May and June and you're able to meet your expectations or meet the guidance through the year because things pick up, or is it kind of like when you face pressure earlier in the year, it's just harder to catch up based on maybe a little softness earlier in the year?

Dave Cramer, President and CEO

We do think it's early yet. We're just now entering the spring leasing season. We still have May and June, which are very active months and sometimes July, part of July are as well. So we think it's too early to tell, and that's why we haven't really looked any further about our guidance. We think there's plenty of opportunity in the next couple of months to drive performance, and we're watching it very closely. Like I said, we did see an improvement in April over March as far as moves; we were pleased with that. April, just pure rental activity in occupancy gain March to April was just a little lighter than we thought it might be based on maybe '18 or '19 trends.

Operator, Operator

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

Juan Sanabria, Analyst

Just wanted to follow up on that last commentary. One of your peers talked about March being softer but April rebounded and is kind of back to normal. So just curious, I guess, what you saw month-to-month in March and April and maybe May? And I guess you can't talk to May; it's just the 2nd of May. But just curious on the slope of what you're seeing and if that is not as steep on the upward trajectory as you normally would expect and more importantly, I think from an investor perspective, what's assumed in guidance? If you could just comment on that, that would be great.

Dave Cramer, President and CEO

Yes, I'll touch on the slope of the activity around the piece, and then Brandon can jump in on the other backside of that question. Certainly, again, we were happy with the improvement. We saw street rate improvement. We saw contract rate improvement through the first quarter and it also improved in April. We're happy with that. The top of the funnel, the marketing spend and the dollars we deploy generated opportunities. I think March to April, maybe we would expect a 60 basis point improvement in occupancy, and we didn't get to 60, and that's where we're looking at the rental activity being a little softer than that. It doesn't mean it's not going to come either. There are days of the week involved at the end of April where maybe a Saturday last year was the 30th and the 30th this year was on a Sunday. There's some movement around days. It's way early in May; I can't really comment on May. But I do think there's an opportunity from a rental aspect to make some of this up in the month of May. Brandon, if you want to jump in on…

Brandon Togashi, CFO

No, Juan, in response to your and Michael's questions, I want to emphasize that we are conducting numerous checks based on our observations from the pre-pandemic years. However, there are additional factors at play as we move away from the historically high occupancy rates that Dave mentioned. Our current pricing strategies are significantly stronger than they were in 2018 and 2019, which adds another layer to the situation. We can reference 2018 and 2019, but we are also navigating a new normal that we are still trying to understand.

Juan Sanabria, Analyst

And then just on the existing customer rate increases, how have you been able to push those? What's been the receptivity of the customers? Has there been any increased price sensitivity to where maybe you step back on the pace of the increases you'd expected to push through? Any commentary would be helpful.

Dave Cramer, President and CEO

Honestly, no. That's been very solid for us; it's been a good strength for us. Our cadence remains as active as it has been really through the pandemic, and the amount of customers and the amount of rate increase they're getting remains very constant and very right where we want it to be. There's been no change; there's been no commentary back from our consumer. Our length of stay hit 17 months, which is the longest length of stay on move-outs that we've seen in our history. So I think there's a lot of strength around that. Right now, we're really confident in where we're at with our in-place rent changes.

Operator, Operator

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

Jeff Spector, Analyst

Looking at the situation, I think the remarks made during the call today are more optimistic than the statements I found in the press release. I'm trying to understand the reasons behind the decline or the areas where performance was weaker in April. Is it correct to say that the concerns reflected in the press release might be more widespread? When you mention the weakness in April, are you specifically referring to the underperforming markets you discussed in the press release and during today’s call, such as Phoenix and Vegas, where there's an oversupply? Could you provide more details on that?

Dave Cramer, President and CEO

Those markets are certainly exerting pressure on that activity. We've seen shifts in some of these markets due to a correction from a previously heated housing market, along with new supply entering the scene. Phoenix and Vegas both have new supply coming in. We're still experiencing challenges in Portland, which is one of our largest markets. Some of the volume changes are clearly related to those areas. However, we also have other markets, particularly in the Sunbelt like Oklahoma City, where we are seeing strong activity. I wouldn't characterize this as a nationwide issue; rather, certain markets are more negatively impacted by changing economic conditions.

Jeff Spector, Analyst

And then my follow-up would be on the marketing strategy. As we're heading into May here into some of the busy months, like what is the marketing strategy at this point for '23 peak leasing?

Dave Cramer, President and CEO

Certainly, we want to make sure that we keep the activity at the top of the funnel. We've certainly increased our marketing spend pretty substantially to make sure that we're keeping that activity. I think the tricky part, as the team is experiencing and we have a lot of markets and all markets are not reacting the same is really pricing and discounting and really getting that customer to convert as you get them into the funnel. We would like a little stronger conversion rate into rental from those opportunities. We're generating enough opportunities. We're happy with the opportunities we're generating. We're trying to find the right formula to get better conversion rates. We think customers are shopping more; they're certainly taking more touchpoints to rent. It's filling back like it did in '17, '18, and '19. We're really trying to figure out what's the best formula in all of our markets, and it varies by market, to get the conversion rates we want on rentals.

Operator, Operator

Our next question is from Samir Khanal with Evercore ISI.

Samir Khanal, Analyst

Can you provide an update on expenses, the various line items, how are they tracking versus your expectations, any areas where you're seeing more pressure than others?

Dave Cramer, President and CEO

I missed the first part of that, Samir, can you please repeat the first part of that question.

Samir Khanal, Analyst

I was asking about just an update on expenses, the various line items, the components, how are they tracking versus your expectations, any areas where you're seeing more pressure than others?

Brandon Togashi, CFO

The first quarter, as I mentioned in the open, is very much in line with our expectations. We knew property taxes were going to be a tough comp; a high single-digit growth number over the prior year was not a surprise to us. We were essentially on our budget. As a reminder, the first quarter growth for same-store last year and OpEx was 3%, even though for the full year, it was closer to 5%. So it's just a tough comp there. The biggest surprise is the insurance that I mentioned at the open. We have a renewal that starts April 1, so we feel three-fourths of the impact of that 12-month renewal in 2023, and we had budgeted something closer to a 25% year-over-year increase. Like I said in the earlier remarks, it's going to be closer to a 50% year-over-year increase, April through December that you'll see in this year's numbers. That’s the biggest downside that’s come through since our last call. Property taxes for the full year, even inclusive of the tough Q1 comp, we still expect to be toward the high end of the total OpEx range that we gave, so call it 5.5% to 7%. Personnel and repairs and maintenance, we expect to be within the total OpEx range, maybe even a touch below in the case of repairs and maintenance. Marketing will be double-digit year-over-year, but the worst of that, I think, is Q1 and Q2 because of the comps.

Samir Khanal, Analyst

And then for my next question, just switching subjects a little bit here. We've seen the LSI deal get announced and we've been getting a lot of questions about your portfolio. Can you just provide context around how the PRO structure makes it difficult for a potential deal to get approved in the event that there was interest in your portfolio?

Brandon Togashi, CFO

Samir, I'm sorry, it's really choppy. Can you say it one more time, please?

Samir Khanal, Analyst

We've seen the LSI deal get announced and we’ve been getting a lot of questions about your portfolio. Maybe just remind us how difficult does the PRO structure make it for a potential deal to get approved in the event that there was interest for your portfolio; help us think through the process?

Dave Cramer, President and CEO

Sameer, our Board is very focused on strategies that will create superior long-term value for our shareholders, that's top priority and they certainly are very focused on it. The PRO structure itself, to remain intact, doesn't really put a lot of obstacles at all. If there are changes to the current structure and there might be modifications in the current structure, then the PROs would certainly have a voice in the transaction. But if all things remain the same and the PRO structure remains intact, there's a very clear path to it.

Operator, Operator

Our next question is from Keegan Carl with Wolfe Research.

Keegan Carl, Analyst

Dave, I know you mentioned in your opening remarks that street rates are up in the 4% range since the start of the year. But I'm just kind of curious a few questions on that. So first, how does that compare to March and then also to this time last year and then throughout Q1, if you could just help us kind of understand how street rates flowed just given the softness that everyone experienced in March?

Dave Cramer, President and CEO

Well, I can tell you, street rate wise, we've improved every month since January. We've seen a continual uptick January to February, February to March, March to April. April was the strongest of that increase; that's where you saw the largest percent increase month-over-month as expected. I mean, as you go into the spring leasing season, we're starting to see a little more activity. It's hard to compare to last year. Last year was such an outsized year. I mean, we had the best pricing power that we've had ever since I've been in this industry and we had obviously the strongest occupancy number. Our street rates are still down about 8% to last year. The pace of growth in April to March last year was better than it was this year, but again, just a really tough comp. I would say, as I look back at maybe in '18 and '19, maybe a core portfolio that April, again is similar to what we saw in that 2018 or 2019 cycle.

Keegan Carl, Analyst

And I guess for a follow-up here, how should we think about your capital allocation going forward? I mean if your multiple stays where it's currently at, should we expect more buybacks and fewer transactions from the acquisition side of things going forward?

Brandon Togashi, CFO

We're going to be, like we have been in the past few quarters since interest rates really started to increase and cost of capital became a lot higher, very patient. We're going to be very judicious about the opportunities in front of us. I think we've been quite balanced these last couple of quarters. We're doing some in the way of acquisitions. It's been—we talked about it in February, some creative deals in the sense that we've issued OP equity at a premium. We did the new series of preferred stock. Those are ways that we're helping to fund the acquisitions without issuing our common at a discounted value and not bearing too much on high-interest rate debt either. Yes, we certainly had some appetite for share repurchases, and I think it's been in moderation. So going forward, you can expect us to be selective in the same ways that we have been these past couple of quarters.

Operator, Operator

Next question is from Spenser Allaway with Green Street.

Spenser Allaway, Analyst

So I know you guys tend to acquire assets via your PRO relationships, and I know you commented on your Captive pipeline in your opening remarks. But is there anything you can share just on the broader transaction market in terms of what's coming across your screen as it relates to volume of deals being marketed right now, competition for assets, and cap rates?

Dave Cramer, President and CEO

Certainly, the Captive has been a great tool for us in the first half of the year and has been over our years. From third-party transactions, we're certainly seeing less volume of transactions across our desk. There are still opportunities out there. Those opportunities are probably more single to one asset versus portfolios at this point in time. We're not seeing a lot of portfolio opportunities across our desk. There’s still just a wide gap between seller's and buyer's expectations, maybe 10% to 15% price wise if you think about it in those aspects. It varies by market, it varies by asset type, of course. We will be very patient in making sure we're buying the right opportunity strategically for ourselves in the future. But I can tell you, it’s just been more challenging just because of the seller and buyer's expectations being different right now.

Spenser Allaway, Analyst

And then how prudent are you guys being on the rate side in markets where you've seen occupancy fall back to pre-COVID levels? Specifically, can you comment on how much promotional activity is being given right now relative to, let's say, the pre-COVID era?

Dave Cramer, President and CEO

Promotion and discounting still remains at historical lows. I mean, it's not back to pre-COVID levels yet. I think what the teams are working on and what we're finding is, thus far, rate has been a little bit better trigger than discounting. As we watch rates in different markets and watch our reaction to what the markets are doing, that's been our focus. It’s certainly tricky. I think I'd tell you it's been very dynamic. We've seen a lot of movement around street rates. We've seen operators chasing occupancy and maybe that has put a little more pressure on street rate. Our teams are looking at all the levers and asking ourselves what is the best formula to try to get the revenue and working on street may work well in one market and this may work well in the other. At this point in time, I would tell you, discounting is just not climbing back to the historical averages yet.

Operator, Operator

Our next question is from Ki Bin Kim with Truist Securities.

Ki Bin Kim, Analyst

Just a quick one on street rates. You mentioned 8% down year-over-year. Was that for the first quarter or April?

Dave Cramer, President and CEO

The first quarter, Ki Bin, was around 7.5%; in April it was 8%, so the average for the first quarter is 7.5%.

Ki Bin Kim, Analyst

And how do those rates compare to, let's say, like 2019 levels?

Brandon Togashi, CFO

When we look at a subset of stores that we've had for that entire period of time, so you strip out some of the noise of new additions, street rates are up right around 20% over that four-year period. So simply averaging 5%, a little less when you compound and average it.

Ki Bin Kim, Analyst

And I realize your PROs are also geographically divided. So it might be difficult to answer this next question. But under the PRO structure, obviously, the PROs can run their own pricing schemes or marketing platforms. Are you noticing at all differences between how PROs have performed as we are kind of in a somewhat soft patch?

Dave Cramer, President and CEO

I think you touched on it; it's geography. We've had the Southeast and some of those Florida markets just still performing at very, very strong levels. The PROs have done a great job; the opportunity has given them, and they have strong occupancies. They've been able to have good pricing. They're doing all they can to drive performance out of those markets. We have PROs that are in Las Vegas or Phoenix, for example, which are facing a different challenge. Oversupplied markets, cooling housing market, cooling fundamentals. You're seeing pretty significant swings in peak occupancy last year to where they're sitting today, and they're having to take a different approach. What I do know is our teams do a great job. We talk weekly about this stuff; the marketing team has call rounds up weekly. The operations group is constantly talking about it. There's a really good tight connection around strategies in our strategy of working or not working on what you're seeing on the ground. We get lots of good color, we get lots of good flavor. We have PROs with a lot of history that can really dial in on things they've seen in the past. I don't think it inhibits anybody from maximizing their business; they're doing a really good job.

Ki Bin Kim, Analyst

Are there any mechanisms built into the contracts where, I mean I'm going to assume the answer is no, but where if you deem that operators are a little bit weaker than you would have expected, some type of mechanism where you could put in more of the NSA controls in there?

Dave Cramer, President and CEO

There are certainly things in the agreement should something go south with the PRO and it's something that's not outside of their control, I mean we're very realistic about the business. If there's something that they are doing that maybe is getting in the way of their business, we certainly have mechanisms where we can insert and have somebody from the NSA to help guide their business and try to get it back on track; it's very well defined in the documents. We've been very fortunate over the years; never been close to having to do something like that, but there are mechanisms in our documents that would allow us to do that.

Brandon Togashi, CFO

A more practical thing, Ki Bin, that we do, that was just on a week-to-week basis. We share information. I mean, the PROs have access to the same management reporting tools that we do. Just as an example, we typically have meetings with our PROs every Monday or every other Monday. Oftentimes, that's to review acquisition deals. In an environment like this where the transaction pace is slower, we use it as an opportunity to talk operations, talk fundamentals, show the visual analytics on the screen and discuss the SP distributions that the PROs get as the biggest motivator on performance.

Operator, Operator

Our next question is from Smedes Rose with Citi.

Smedes Rose, Analyst

I was just wondering if you've seen any changes in the amount of late payments or non-payments year-over-year and maybe how that compares to kind of pre-pandemic levels?

Dave Cramer, President and CEO

We've actually seen an improvement in bad debt. As we mentioned, the team is getting the portfolio ready for the spring leasing season. We work very hard with delinquencies and working through the delinquency schedule of our tenants. But our bad debt has improved over the last couple of months. No real change in how many people are delinquent in any cycle of the delinquency schedule. So from days late and amount of payments made really, really consistent; we've been very pleased there, which is again, a strength of our consumer right now is still strong.

Smedes Rose, Analyst

And then when you lower initial asking rates, do you find that a customer that comes in with like a particularly low rate tends to stay longer relative to a customer who didn't, or is there anything you can speak to there, maybe potential strategies?

Dave Cramer, President and CEO

We haven't noticed a real large difference between the rental rate when they moved in. Certainly, we're more assertive. If you're getting a better entry rate, you're probably getting a much stronger first rate increase on our in-place rent changes right off the bat, but we just haven't seen a real difference. I look at it if you're running 10 units with 10 different customers; the percentages of the people that are staying through the buckets are pretty similar, whether you have to be at a lower street rate to get because the market is driving the street rate. We're not—it's not necessarily us changing the street rate. The market is driving the street rate. We're trying to find a rental foothold and our rental activity, but the customer bases are—the customer bases seem very similar, no matter where their asking rate is right now. And then keep in mind, we're not out there trying to destroy our market either. We're not slashing street rates 50% to grow occupancy; we're just not doing that.

Operator, Operator

Our next question is from Ronald Kamdem with Morgan Stanley.

Ronald Kamdem, Analyst

Just a couple of quick ones. I saw the preferred issuance in the quarter. Maybe could you talk about just how you're thinking about funding in this environment, where could you issue debt and how you make that call between using debt and the preferred, and can we see more preferred issuance?

Brandon Togashi, CFO

Yes, Ronald, that was a really good transaction that we were working on for a long time with our PRO in the Orlando area. We talked about it a little bit on the last call, but it was a lot of moving parts, a lot of different family dynamics and ownership pieces that the PRO had to work through on their side of the portfolio and just some complexities in general, including getting that new series of preferred equity stood up. Very pleased with the coupon or the effective yield that I cited of 6.1% in the opening remarks; very pleased with that pricing given the cost of all alternative sources of capital right now. We're open to doing more in the way of preferreds as an alternative to our common equity. When we first did our inaugural issuance of preferreds back in 2017, that represented roughly 5%, perhaps a little bit more than 5% of our total capital stack. Over time, that's drifted down just because of the way we balance the sources and uses. This will put us back up closer to 3.5%, 4% of the capital stack, and I think there's room to add to the extent that suits what a seller is looking for.

Ronald Kamdem, Analyst

You just touch on the top of the funnel demand heading into the peak leasing season. The question really is, if you think about—I see marketing spend is up, and you've talked about street rates down, sort of, I think, 8% in April. I would have thought that would start to strengthen by now. The question is, is that still to come? Have you seen strengthening? Just what sort of trends are you seeing this year as you're coming into the peak leasing season and maybe how that compares to other years?

Dave Cramer, President and CEO

From a top of the funnel perspective, the spend is certainly creating opportunities. We're pleased with that. The fact that we can go out and target markets and target specific areas and drive top of the funnel activity has been good. As we talked earlier, as we flow them through the funnel, the conversion rate—we'd like to see a little bit better to rentals, and that's what we're focused on. This is a function that could be a function of concession or rate. There are certain things as you work your way through that. Street rates have improved since the beginning of the year. So street rates are up 4% since January. The 8% down is to last year's comp. Last year's comp was very, very challenging for us through the second quarter and in the end of the third quarter as far as occupancy, and we just had tremendous pricing ability last year. We’re pleased that our street rate this year is up 4%. So we have seen it improve, to answer your question.

Ronald Kamdem, Analyst

And then the last one is just you guys obviously saw for revenue and not occupancy, but what is the guidance baking in for the occupancy trends back half of the year; so where are you ending the year?

Dave Cramer, President and CEO

It would look very similar to what you may have seen early in '18 and '19 in our trends. If we’re going to come into the season and trough in February, we might see a 300 basis point peak in July and then trail off 250 in the back half of the year towards the end of the year is really how we’d look at the occupancy slope this year.

Operator, Operator

Our next question is from Todd Thomas with KeyBanc.

Unidentified Analyst, Analyst

It's A.J. on for Todd Thomas. Dave, I just wanted to follow up on some of your comments around supply in your opening remarks. Are you seeing the deliveries delayed or is it more about starts decreasing? Is the outlook of supply—is that having more of an impact on 2023 or is that 2024 and on?

Dave Cramer, President and CEO

What we're really seeing is if it was in the cycle and being built, it's been completed, and so that hasn't—that piece is continuing. The new starts are really, really slowing. So what you're seeing is using some of the already data that we look at is that it hasn't been started; it's probably not going to be started—that’s the conclusion we're starting to see. Most of our markets are seeing a decline in new supply hitting the market and we're happy about that. Headwinds are going to remain. It's very expensive to develop; it takes a long time. There’s some uncertainty around what kind of rate growth you can drive today versus what they were underwriting when they were trying to get these projects approved two years ago. I can tell you, anecdotally, there’s a lot of land crossing our desk right now where they have a development deal that they're looking to sell. They’re not looking to build it; they’re looking to sell it.

Unidentified Analyst, Analyst

And then if I could just follow up. So for the non-stabilized stores, you mentioned in Portland, Phoenix, also Vegas, that you were seeing pressure from the new supply. Can you just provide a little context around how the operators of the non-stabilized stores in those markets are being—are they using promotions? Are they cutting rates? Can you just provide a little more color?

Dave Cramer, President and CEO

I would say predominantly rate is the driver right now. They're being super assertive on trying to get their fill-up. There's certainly—there's some discounting out there. I'm not saying they're out, but we've certainly seen—I think our team would tell us it's been more about rate and driving that rental growth through rate as far as occupancy growth rates.

Operator, Operator

Our next question is from Wes Golladay with Baird.

Wes Golladay, Analyst

I just got a follow-up to that supply question. I guess are we calling for peak delivery this year in 2023, or peak supply pressure when you take in the context of the time to lease up?

Dave Cramer, President and CEO

I think from I'd say there’ll be deliveries. I mean, the deliveries that—we've seen the deliveries on their way down.

Wes Golladay, Analyst

So maybe—was it like a typical maybe a year to lease up? So maybe a little bit more pressure at least in the front half of next year would be a good way to look at it?

Dave Cramer, President and CEO

I think that's probably the appropriate way to look at it. The lease-up curve may be interesting to study on these facilities. Certainly, things have changed versus in the old days, I'll use that word. I mean, it was—you're talking about 36 months to fill up a property. During COVID, it got down to 18 months. I think we're heading more back towards the old days and where fill-up is going to be a lot longer.

Wes Golladay, Analyst

And then my final question would be, how do you balance buying back the shares? It's a pretty steep discount; I understand that part. But then at the same time, you're taking on a little bit more leverage and variable rate debt at the same time when the macro, and even the micro, at this point is a little more uncertain?

Brandon Togashi, CFO

It's generated a healthy discussion, I would say, on our side. It's all done with a view of long-term value. We look at the growth prospects of our company and the diversified portfolio that we offer relative to alternative capital deployment options. Most recently, especially in light of what Dave spoke to earlier about the bid-ask spread between buyers and sellers on individual assets, that's been an easier investment to make that gives what we think is pretty quantifiable, easy to quantify, I should say, real value to shareholders long-term. To your point, we have to keep in balance with leverage concerns or evaluations. The increase in our leverage from Q4 to Q1, I spoke to it on the call, but we were at 6 flat times at 12/31, that went to 6.3. I attribute a tenth of a turn to the buyback, and we're going to easily grow into that with organic growth. That’s kind of the way we look at that; that's all sorted itself pretty quickly. The other two tenths of a turn increase was really the seasonality and the lack of external growth that we've had the last couple of quarters. With seasonality changing, that will come down as well.

Operator, Operator

Our next question is from Spenser Allaway with Green Street.

Spenser Allaway, Analyst

Just one more, and I apologize if I missed this. But would you guys be able to provide just a little bit more color on the 16 assets that you acquired in the quarter? I know, obviously, you gave the state breakout. But any additional color on what was appealing about these assets, any commentary on age, whether single-story versus multi, any of the units, climate controls, etc., that would be really helpful?

Dave Cramer, President and CEO

The majority of those, 15 of those were in the Orlando market. So the feel of that is here's a top 25 market where we can add a significant amount of assets to an operator out of their Captive pipeline. It was a tough transition for the PRO, because there was—each one of these were owned individually by a lot of people. There was a lot of time putting this portfolio together and then getting it over the finish line. We bought in the top 25 market for around a 6 cap, just right at a 6 cap, and we think that's a pretty good price for a top 25 market. Strategically, we like Orlando; we like the market; we like everything that's going on there. There are a lot of metrics we like about Orlando. Most of the assets are single-story; there is a mixture of climate and non-climate in there. The average age is probably in the 90s, around 85 to 90, probably would be the average age on those assets, well positioned in part of Orlando where you wouldn't be building storage facilities right today. There's a lot of good pluses in this portfolio and where they're positioned in the Orlando MSA.

Spenser Allaway, Analyst

And then was there much deferred CapEx underwritten with those assets?

Dave Cramer, President and CEO

The PRO has done a really good job in the previous ownership, so there wasn't a lot. They've done a really good job maintaining them and keeping them up to standard and just well taking care of assets well positioned.

Operator, Operator

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to David Cramer for closing comments.

Dave Cramer, President and CEO

We are pleased with our operating results for the quarter, with trends moving in the right direction. Having been in the industry for 25 years, I'll once again remind you that the self-storage sector and the NSA in particular, remain well positioned to manage through different economic environments. Thank you all for your continued interest in the NSA.

Operator, Operator

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.