National Storage Affiliates Trust

NYSE:NSA

Earnings Call Transcript 2019-Q2

[Operator]

Greetings, and welcome to the National Storage Affiliates Second Quarter 2019 Earnings 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, VP, IR]

Hello, everyone. We’d like to thank you for joining us today for the second quarter 2019 earnings conference call of National Storage Affiliates Trust. In addition to the press release distributed yesterday, we’ve filed an 8-K with the SEC containing 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. Company cautions that actual results may differ-materially from those projected in any forward-looking statement. 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 contained in the supplemental information package available in the Investor Relations section on our website and in our SEC filings.

Today’s conference call is hosted by National Storage Affiliates’ Chairman and Chief Executive Officer, Arlen Nordhagen; President and Chief Financial Officer, Tamara Fischer; Chief Operating Officer, Steve Treadwell; and Chief Accounting Officer, Brandon Togashi. Following prepared remarks, management will accept questions from registered financial analysts.

I will now turn the call over to Arlen.

[Arlen Nordhagen, Chairman and CEO]

Thanks, George, and thank you all for joining our call today.

Before we address our results for another excellent quarter, I’d like to remind everyone of the planned management transition that we announced at the end of May. Effective January 1, 2020, I’ll assume the role of Executive Chairman of the Board and Tammy will become President and CEO. Additionally, Brandon Togashi, our current Chief Accounting Officer will be promoted to CFO. Although my day-to-day role will be reduced, I’ll remain very active in guiding and executing on the overall vision and strategy of the Company, especially with respect to significant growth strategies including acquisitions and PRO recruitment. I’m happy that Board and I share the same confidence in Tammy and Brandon, and I look forward to continuing our successes together.

Now, on to our second quarter results.

We’re happy to report that we continued to lead the sector once again in year-over-year same-store revenue, NOI and core FFO per share growth, facilitated by our differentiated PRO structure and portfolio.

The self storage industry continues to benefit from the growing economy, which is helping to fuel demand growth and partially offset the impact from new supply. Although recent market data suggests that the pace of new deliveries nationwide is declining, it’s not declining quickly, which is continuing to provide headwinds for the sector as a whole, especially in the primary MSAs.

That said, we’d like to highlight a few key points about our portfolio, which gives us confidence in the outlook for NSA. First, we have greater exposure to the secondary markets than our peers, and those secondary markets have experienced significantly less supply growth in this current development cycle. We estimate 39% of our stores are currently affected by new supply in the 5-mile trade area. And we believe our secondary markets will continue to see less new supply than the primary markets, given that many of the secondary markets have lower average rents per square footprint. These lower rates don’t make new development nearly as attractive to developers.

Second, in primary markets such as Riverside, San Bernardino, Atlanta, and Dallas-Fort Worth where we have several facilities, we tend to have a higher percentage of single-storey drive-up facilities, relative to our peers. The new supply coming on line is generally multistory, climate controlled, higher priced per square foot units. These new facilities often are not direct competition to our facilities, given they are significantly different product type. As such, we often see less negative impact from this type of new supply. And finally, we continue to benefit from very significant geographic diversity in our portfolio.

Given these factors, we’re optimistic that we’ll continue to deliver solid results, despite the elevated new supply.

Contributing to the strong results, we remain active on the acquisition front, having acquired 24 properties for $185 million in the second quarter, bringing year-to-date acquisitions to almost $400 million. Our summer leasing season has been slightly above normal, with higher occupancy year-over-year, although that delta has narrowed subsequent to quarter end, as we expected. As such, we’re well-positioned for the back half of the year. The favorable year-to-date and expected second half performance is reflected in our updated guidance, which is positive across the board, despite tougher comps in the second half. We believe our sector-leading same-store NOI and core FFO per share growth should result in a more favorable valuation for NSA shares.

On average, fundamentals in our portfolio remain healthy. We continue to push mid-to-high single-digit rent increases to our in-place customers, which is currently a key driver of our revenue growth. We’re further encouraged by our occupancy gains in the second quarter, which were consistent with the first quarter. And we expect that the strength of our PRO structure combined with our constantly evolving revenue management and internet marketing systems will provide additional operational upside, going forward.

The combination of strong external growth and robust same-store NOI growth gives us confidence that we will continue to achieve year-over-year, double-digit percentage growth in core FFO per share to lead our sector in 2019.

With that, I’ll now turn the call over to Tammy.

[Tamara Fischer, President and CFO]

Thank you, Arlen.

We continued to deliver solid results as our second quarter core FFO per share of $0.38 represents growth of 11.8% over the prior year period. This growth was fueled by a combination of strong same-store NOI growth, strong acquisition volume and growing fees from JV platform.

For the second quarter, same-store NOI increased by 5.5%, driven by growth in same-store revenues of 4.7%, and property operating expense growth of 2.8%. We continued to push rate increases on existing tenants, which resulted in a 3.8% increase in average annualized rent per square foot.

Same-store average occupancy increased 40 basis points to 89.6% during the quarter. Same-store OpEx growth for the quarter was 2.8%, driven primarily by property taxes, which were up 3.8% year-over-year, and repairs and maintenance, which were up about 19% year-over-year, although that’s really a function of timing and weather.

Personnel and marketing expense increases were close to our average number. These increases were partially offset by decreases in insurance and utilities. But, we do expect overall expenses to pick up in the back half of the year, with property taxes remaining the key wild card.

Turning to geographic performance. Our leading MSAs in terms of same-store revenue growth include Atlanta, Indianapolis and Las Vegas, where recent demand growth has exceeded supply growth. Lagging markets in our portfolio included Portland, Dallas and Phoenix, where we continue to face the most impactful headwinds from elevated new supply. We are also seeing increased pressure from new supply in West Florida. Worth noting, all of our top 10 MSAs generated positive same-store revenue and NOI growth in the second quarter.

I’ll now turn the call over to Brandon Togashi to address recent balance sheet activity.

[Brandon Togashi, Chief Accounting Officer]

Thanks, Tammy.

With respect to the balance sheet, we’ve been proactive in accessing various sources of capital while extending maturities, keeping leverage low and creating significant dry powder for future acquisition opportunities.

During the second quarter, we issued approximately $140 million of equity through the issuance of both common and preferred stocks under our ATM program as well as a combination of OP, SP and preferred OP units issued in connection with acquisitions.

In addition, we closed on a $100 million 10-year unsecured term loan with an effective interest rate of 4.27%. Subsequent to quarter-end, we successfully completed our inaugural private placement transaction. In connection with that transaction, we agreed to issue $100 million of 3.98%, 10-year senior unsecured notes and $50 million of 4.08% 12-year senior unsecured notes. The notes are expected to fund on August 30th and have been rated BBB by Kroll Bond Rating Agency. We are very pleased with the execution of this transaction and we appreciate the support of our new capital providers.

We also recently closed on a recast of our credit facility, which increased our revolver capacity to $500 million and increased our term loan borrowings by $155 million in addition to extending the maturities. Notably, we also lowered our cost by reducing the current spread on the revolver by 10 basis points and lowering the weighted average swap cost on the term loans by 7 basis points.

After the recast of the facility and funding of the private placement notes, we expect our $500 million revolving line of credit to be fully available to us, providing significant capacity for future acquisitions.

Our weighted average cost of debt at quarter end was 3.6% with 84% of our debt fixed rate or swapped-to-fixed. After giving pro forma effect for the recast of the credit facility and funding our private placement, our weighted average maturity increases to 6.4 years from 4.1 years at the end of the second quarter, and our weighted average interest rate will be 3.5%.

Our net debt to EBITDA ratio was 5.9 times at the end of the second quarter, in the middle of our target range of 5.5 times to 6.5 times. We have no additional debt maturing for the remainder of 2019, and we remain committed to maintaining a conservative balance sheet.

I’ll now pass the call back to Tammy to address guidance for 2019.

[Tamara Fischer, President and CFO]

Thanks, Brandon.

Performance for the first half of this year has been better than expected. We are confident in the outlook for the back half of the year but we do expect revenue growth to slow, primarily due to tougher comps, especially on the stores added to the same-store pool this year, which performed very well in the second half of 2018. The cumulative impact of new supply will remain a headwind. We also expect expenses to tick up in the back half of the year, primarily due to timing and anticipated increases in property taxes.

Taking all of this into consideration, we’ve updated our full-year 2019 guidance as follows: We now project full-year same-store revenue growth in the range of 3.5% to 4% versus our original guidance of 2.5% to 3.5%. The new midpoint of 3.75% represents a 75 basis-point increase from the previous midpoint. We project same-store operating expense growth of 2.75% to 3.25% from 2.5% to 3.5% previously. The midpoint remains 3%, but we’ve narrowed the range. And we now project same-store NOI growth of 3.5% to 4.5%, up from our previous guidance of 2.5% to 3.5%. The new midpoint of 4% represents 100 basis-point increase from previous guidance.

We are also increasing our guidance for full-year 2019 core FFO per share to a range of $1.51 to $1.54, up from our previous range of $1.48 to $1.52. Additional guidance updates include full-year 2019 wholly-owned acquisitions of $400 million to $500 million, up from $300 million to $500 million. And we’re maintaining our JV acquisition guidance at $20 million to $100 million. Additional details on our updated assumptions are included in our earnings release.

Thanks again for joining our call today. We’ll now turn the call back to the operator to take your questions. Operator?

[Operator]

Thank you. [Operator instructions] Our first question comes from Smedes Rose with Citi. Please proceed with your question.

[Smedes Rose, Citi]

Hi there. Thanks. I just wanted to ask you a little bit just on the acquisitions front. If you are seeing anything changing on the pricing side, if more product is coming to market that’s of interest to you or kind of maybe just some color there?

[Arlen Nordhagen, Chairman and CEO]

I would say, overall, we saw a lot of activity in the first half. We certainly looked at everything that came out there. And there were some larger portfolios that ended up going at pricing that we wouldn’t bid that high. Obviously, we kept our discipline in our underwriting. And so, we definitely had several hundred million dollars of acquisitions that we looked at that we didn’t -- we decided not to buy. But, I’d say, in general, that represents the continuing fact that we see portfolio premiums, whenever there’s a portfolio of properties coming on the market. But on individual one-off transactions, which is mostly what we’ve done this year, the cap rates are staying pretty similar. We’re in the 6% to 6.5% cap rate range, again, on pretty much all the stuff we bought this last quarter.

[Smedes Rose, Citi]

Okay. And then, from the other public companies, there’s been a lot of discussion around higher marketing costs, particularly around bidding on search terms. Is that the something that you’re seeing, or is it less of an issue maybe in as you’ve talked about being in more secondary markets?

[Steve Treadwell, COO]

Hey, Smedes. This is Steve. Yes. We have not seen the same impact as our peers. We’re probably about 3% up year-over-year when it looks to advertising costs. And there’s a couple things driving that. Some of that is market based. Yes, we’re probably a more secondary and tertiary markets than they are. But, I still think, it speaks to our process and our team and improving efficiencies. We’re very-focused on cost per acquisition. And our processes and our machine learning continue to get better as our portfolio gets larger and our datasets get richer. So, we think we’ve just been more effective and we’ve been pleased with the results so far this year.

[Operator]

Our next question comes from Todd Thomas with KeyBanc Capital Markets. Please State your question.

[Todd Thomas, KeyBanc Capital Markets]

Hi. First question is just circling back to acquisitions. So, what was the average cap rate on 185 million completed in the quarter? And can you provide some detail in terms of where they are from an occupancy standpoint?

[Arlen Nordhagen, Chairman and CEO]

As I mentioned, Todd, the average cap rate is right around the 6.25%. They all range between 6% and 6.5%. Average occupancy on those was probably in the mid to high-80s. So, there’s a little bit of upside opportunity on the occupancy. But mainly where we see the opportunity is from our platforms, being able to drive rents higher, average rent per occupied square foot higher. We do some cost reductions in several areas as well. But, primarily, it’s on the marketing side that we’ve seen the tremendous value add that we get on our acquisition.

[Todd Thomas, KeyBanc Capital Markets]

Got it. And then, how many of these were sourced from the captive pipeline versus being third-party deals?

[Tamara Fischer, President and CFO]

About a half a dozen, Todd. I think, I think that -- think about Southern just coming in, they contributed three more in the second quarter, and then a handful of other ones, some other PROs across six-month period.

[Arlen Nordhagen, Chairman and CEO]

But, it’s mostly third-party, obviously, with only a half a dozen being the captive pipeline. And interestingly, our captive pipeline ends up -- even though we absorb properties out of there into the acquisitions, our PROs end up getting new ones, either through third-party management or through developments that they’re. So, the size of our acquisition, our captive pipeline, pretty much stays the same or even keeps growing slowly over time.

[Todd Thomas, KeyBanc Capital Markets]

So, can you can you comment on that? Can you -- where is the captive pipeline today? And if you look across the portfolio and all the PROs that you’re working with, how many properties are being third-party managed today?

[Arlen Nordhagen, Chairman and CEO]

We don’t track it exactly, but I know it’s around 100 properties that are third-party managed, where we include in that properties that the PROs might have a percentage ownership in that they’re not 100% controlling. And so, that would be sort of for them JV, their JV properties plus their total third-party properties. And those are the ones that take a lot longer for us to obviously get in out of the captive pipeline, because the PRO doesn’t control the decision on when those come into NSA. But, the total the total captive pipeline is well over 100 properties and over $1 billion because we’ve added these new PROs recently, which obviously adds to the captive pipeline.

[Todd Thomas, KeyBanc Capital Markets]

Okay, right. And then, what’s the current thinking then? So, the acquisitions in the quarter, high 80% range, maybe sitting a little bit below the portfolio average, but what’s the current thinking from an investment standpoint on lease-up stores? You’ve refrained from development and C-of-O deals, but what about lease-up properties? Is that something that you would consider or are starting to see more opportunity in?

[Arlen Nordhagen, Chairman and CEO]

We definitely see more opportunity. Honestly, I probably see three or four of those stores come across my internet every week because there’s is a lot of I guess developer panic out there, they are not selling up as fast as they thought they would. And we keep considering them. We definitely look at them in markets that we like for our joint venture acquisitions. And we have approved -- the Board has approved a small number, about up to 3% of our asset base as potential acquisitions of non-stabilized fill-up stores in our core portfolio, wholly-owned as well. But honestly, we have not seen the prices of those come down enough to do very much of it yet. We do think that they’ll keep coming down, and once they do, we’re going to be very interested in it.

[Operator]

[Operator Instructions] Our next question comes from Ronald Kamdem with Morgan Stanley. Please state your question.

[Ronald Kamdem, Morgan Stanley]

Hey. Thanks, guys and obviously congratulations on the management transition. The first question I have was just, maybe can you just comment on maybe move-in volumes and move-in rates during the quarter to the extent that you can provide any color on that and sort of trends in July as well would be helpful?

[Steve Treadwell, COO]

Yes. This is Steve. Move-in volumes for the quarter were good, they were strong as you would imagine for this part of the season; relative to last year, maybe a little bit lighter. But the good news is that even given that we held occupancy 40 bps higher during the quarter versus last year. So, we feel strong about the move-in volume that is out there. But certainly there is a lot of new supply, and that’s really what’s driving us on the street rate side. We continue to see street rates down year-over-year. For Q2, I’d say, on an average, they were down about 3% to 4%. So, that’s been a consistent trend over the last couple of quarters. We expect that to persist through the balance of the year. At this point, it’s just too much new supply out there.

[Ronald Kamdem, Morgan Stanley]

Got it. That’s very helpful. The other question I have was just, going back to sort of the acquisitions question on sort of cap rates that you’re looking at. Just so I’m clear, those are -- are those cash cap rates you’re quoting or are those GAAP adjusted…

[Arlen Nordhagen, Chairman and CEO]

Those are cash flow projections for the year, the first year [Technical Difficulty]

[Ronald Kamdem, Morgan Stanley]

I’m sorry. You were breaking out, maybe that was me, but…

[Arlen Nordhagen, Chairman and CEO]

[Technical Difficulty] I’ll repeat that. It’s cash, year one cash flow divided by year one -- or total capital investment. Did you hear that, Ron?

[Ronald Kamdem, Morgan Stanley]

Yes. I got it. That was clear, helpful. The last question was just on I saw you obviously issued equity and debt and so forth, a lot of kind of financing activity during the quarter. Just maybe remind us like how are you guys thinking about when to sort of pull the equity trigger versus issuing debt, what sort of goes into those decisions as you’re thinking about funding acquisitions? Thanks.

[Brandon Togashi, Chief Accounting Officer]

Hey. Ronald, this is Brandon. I’ll take that and Tammy can add on. So, we -- I’ll kind of frame in the context of the three objectives we had coming into 2019. One was to relaunch our ATM, which we did early in the year. And remember that under that program, we have the optionality to issue common and preferred. So that was kind of expectation for this year, which you saw us put in our release for what we did in Q2. We also wanted to recap the credit facility, which we did just earlier this week. And then the debt private placement was with the third item.

So, we had frankly, good opportunities this quarter with pricing and all three of those alternatives and we pulled the trigger. We also matched that with the high volume of acquisitions we had in Q1 and Q2.

I think, as you look forward to the back half of the year, obviously with our revised acquisitions guidance, we’re implying a lighter deal flow, and thus you’ll see us have a lot less activity. We’re also fully undrawn on the revolver after we get through our private placement funding. So, we don’t really have a lot in the way of capital needs immediately.

[Arlen Nordhagen, Chairman and CEO]

And I would add to that that one of the things that we really do from a strategic standpoint is try to have access equity at all times to be available so that we can pull the trigger on acquisition opportunities when they come up. We are really continuing to be focused as a growth company and we never want to find ourselves that we can’t do an acquisition because of the fact that we leveraged ourselves too highly and our stock prices isn’t good. So, we want to try to do that in advance as much as we can. And so, now, we’re positioned where we can do a lot of acquisitions without having to issue equity. And if the equity price is good again, we can issue more equity and just keep building that capacity going forward.

[Operator]

Thanks. Our next question comes from Todd Stender with Wells Fargo. Please state your question.

[Todd Stender, Wells Fargo]

Hi. Thanks. Just looking at the same-store pool, occupancy and rate were up. It’s pretty good execution in peak season. Can you just share maybe what your revenue management systems are telling you? And I guess broadly speaking, what the discounting levels were in the quarter? Thanks.

[Arlen Nordhagen, Chairman and CEO]

Yes. So, we’re always looking to optimize revenue rather than occupancy or rate per se, and we’re always trying to find the right mix. And you can see it across our different markets, you see different dynamic and in some places we’re given up occupancy and other places we grab it back. So, it’s on a case-by-case basis. I think, the expectation is that occupancy continues to be flattish or maybe mildly positive for the remainder of the year is the expectation. And we expect to continue to push rate. We’ve been very successful with the revenue management system in terms of pushing our rent increases to existing customers. That is persisted for many, many quarters now. We tend to hit sort of high single-digits on our average rate increase. And I think as we’ve messaged before, we fully expect to give three quarters of our customers a rate increase effectively through the course of the year.

When you look at discounting, it’s been relatively flat for a long, long time. This quarter, we actually saw it down versus the Q2 of last year. It’s down about 5% and in dollar terms that was a pleasant surprise, given the uptick in occupancy. I would expect it to be flattish for the balance of the year. But it’s been a nice tailwind here for a few months, and it will probably die off here towards the end of the year. So, in short, we continue discounting as a good lever to drive movements, to hold occupancy and to be competitive with our peers. So, I think discounting will continue to be strong through the balance of the year.

[Todd Stender, Wells Fargo]

That’s helpful. And then, when do customers get their first rental rate increase, and does that change per PRO or geographically?

[Steve Treadwell, COO]

So, unfortunately, I’ll say, it varies a lot. It varies by market, it varies by market dynamic, varies by customer. In some cases, we have customers that came in well below what we think a market rate is because we wanted to grab that occupancy, and we will hit those customers sooner than later. In other places where we’re a little worried about new supply and occupancy, we might be a little more reluctant to push out a rate increase before, say, the 9 months or 12 months period. So, on average, I would say, the first increase across our portfolio, the average would be about 7 to 9 months after a customer joins us. But that is not uniform across the portfolio or across PROs.

[Arlen Nordhagen, Chairman and CEO]

In almost all cases, [Technical Difficulty] year, a customer would receive a rate increase.

[Steve Treadwell, COO]

Yes. Really, that’s the intent. There’s very, very few cases where we would not give a rate increase within a year, but it’s typically between 7 and 9 months.

[Todd Stender, Wells Fargo]

Thank you. Just last question. I think, you gave the occupancy on the new properties acquired in the quarter. But, when we speak about the rates, your average, at least in the same-store pool, was up around 11.80 a square foot? Where did the new properties come in at? I guess, above or below that average?

[Arlen Nordhagen, Chairman and CEO]

I think, the new ones came in very close to that average, but I know our number were above and some below. It’s very market specific there. And I’m sorry, Todd, I don’t have that exact number. We could follow up after the call and give you that. But, I can tell you it’ll be relatively close.

[Operator]

Thank you. Our question comes from Jon Petersen with Jefferies. Please state your question.

[Jon Petersen, Jefferies]

So, I know you talked a little about equity versus debt in the market today. I was just kind of curious, maybe more pointedly looking at your leverage ratio, debt-to-EBITDA of 5.9 times. I was kind of curious what your kind of long-term targets are and then maybe how you think about that trending in the short-term given pricing in the capital markets?

[Tamara Fischer, President and CFO]

So, our long-term objective, Jon is in the range of 5.5 to 6.5 net-debt-to-EBITDA. And so, we’re perfectly comfortable with 5.9. I think what we’ve talked about in the past is that to the extent we’re aggressively acquiring assets, we may on a short term basis see that number end up at the top end of the range for a little while we reposition. Right now, of course, we feel like we’re in great shape and well-positioned to opportunistically take advantage of acquisitions as they become available to us.

[Jon Petersen, Jefferies]

It seems like you guys are doing I don’t know one disposition or so a quarter, just curious how we should think about dispositions going forward. I don’t know how large the portfolio of target dispositions is internally, maybe just some more thoughts on that?

[Tamara Fischer, President and CFO]

We don’t have a target disposition number Jon. But the way we think about it is that when an asset no longer fits our profile, or if there is a higher and better use for, for instance the land on which an asset sits which is the case in one of our dispositions this year, we -- it just made all the sense in the world to go ahead with the disposition. With our PRO structure, we have the advantage of having, call it 10 acquisition teams on the ground. We also have 10 asset managers on the ground and they are the closest to [Technical Difficulty]

[Arlen Nordhagen, Chairman and CEO]

Perhaps a good example on the one that we did in the second quarter, it was generated by the PRO in a situation where they found a buyer that would pay a really low cap rate because they’re going to [Technical Difficulty]. We love to do that kind of deal [Technical Difficulty].

[Jon Petersen, Jefferies]

Okay. I think, I got most of it. You guys are kind of breaking up again. But, I think I got that. But, just one clean-up question if I could on the revenue line, management fees were up quite a bit, I think about $3 million year-over-year. Just kind of curious, if there is anything onetime in there when do adjust for it?

[Brandon Togashi, Chief Accounting Officer]

Hey, Jon. This is Brandon. Not one time, but remember, we had a 2018 JV come in, in September of last year. So, if you’re looking year-over-year, really until you get to Q4 of this year, they’re not going to have an apples-to-apples comp. So, it’s really the influx of the fees related to that second joint venture, our 2018 JV.

[Arlen Nordhagen, Chairman and CEO]

And that’s also part of the reason why our G&A costs are up year-over-year.

[Operator]

Thank you. Ladies and gentlemen, there are no further questions at this time. I’ll turn it back to Tamara Fischer for closing remarks.

[Tamara Fischer, President and CFO]

Thanks everyone for joining NSA’s second quarter 2019 earnings call. To reiterate, we’re very pleased with our year-to-date performance and full-year outlook, which benefited from the differentiated PRO structure and our portfolio. We appreciate your continued interest in and support of National Storage Affiliates. And we look forward to seeing many of you at the upcoming conferences this fall.

[Arlen Nordhagen, Chairman and CEO]

Thank you.

[Operator]

This concludes today’s conference. All parties may disconnect. Have a great day.