National Storage Affiliates Trust

NYSE:NSA

Earnings Call Transcript 2022-Q2

[Operator]

Greetings, and welcome to the National Storage Affiliates Second Quarter 2022 Conference Call. At this time all participants are in a listen-only mode. [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 second 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. 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 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 August 4, 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 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 income contained in the supplemental information report 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, President, Chief Executive Officer & Trustee]

Thanks, George and thanks, everyone for joining our call today. We had another great quarter with growth in core FFO per share of 29.1% and same-store NOI growth of 17.3%. Our results are reflective of the ongoing strength of the self-storage industry, our differentiated PRO structure and our exposure to secondary Sunbelt and suburban markets. This exceptional growth allowed our Board to increase our dividend again in the second quarter to $0.55 per share, an increase of 45% over the second quarter last year. Overall, self-storage fundamentals remain very healthy, as the industry is coming off historic levels of year-over-year growth. The moderation in growth is largely playing out as expected this year. But the self-storage sector is well positioned for today's inflationary environment, given that we meet a needs-based demand with average monthly rents that represent a small portion of a customer's disposable income. Because our units are leased on a month-to-month basis, we have the flexibility to quickly adjust rents according to market trends and this permits us to increase rents to offset inflationary pressures on the expense side.

I would add that self-storage has weathered past downturns well, supported by unique countercyclical demand factors including demand driven by household contraction and necessity-based relocations. Following the great financial crisis, self-storage same-store revenues saw a return to pre-recession levels within two years, well ahead of other property types.

Finally, given the benefits of our differentiated PRO structure and our geographic exposure, we remain very confident in NSA's future prospects. Having said that, the resilience of the sector and our outstanding results don't always manifest themselves in a rising share price as demonstrated by the year-to-date sell-off. So our Board has decided to put in place a share repurchase plan to provide greater flexibility in our capital allocation strategies. Based on our favorable outlook for NSA, today's depressed stock price provides us with a compelling investment opportunity.

Turning to the acquisition environment. During the second quarter, we acquired eight wholly owned properties, investing $115 million at an average cap rate of 5.6%. And as we mentioned on our last call, one of our joint ventures acquired a partially stabilized seven property portfolio, strategically located in the Houston MSA for approximately $208 million. While investor demand for self-storage properties remain strong, we've seen the buyer pool narrow somewhat and property sellers are becoming more realistic with respect to price expectations, given the current increasing and volatile capital environment.

We're seeing more deals retrade than we've seen in the recent past with a few deals being pulled for the time being and some buyers backing out of transactions, when not able to secure attractive financing. Overall, we're encouraged by the number of deals coming to market and by what seems to be more realistic pricing expectations.

Subsequent to quarter end, we've acquired six properties valued at $72 million and the pipeline remains active. The second quarter played out largely as contemplated when we raised guidance last quarter. We've maintained our full year guidance, which implies 25% core FFO per share growth at the midpoint. Brandon will elaborate further on guidance in his comments.

I'll now turn the call over to Dave to discuss current trends and operations and talk about a couple of new strategic technology initiatives we have underway. Dave?

[Dave Cramer]

Thanks, Tammy. Our healthy operating results were driven by continued strength in self-storage fundamentals in line with our continuously improving operating platform, which increased our same-store gross margin this quarter by 1.7% to 74.1%. Second quarter same-store NOI increased 17.3% over last year, driven by a 14.6% revenue increase, combined with a 7.6% increase in property operating expenses.

We ended the spring leasing season with healthy momentum in occupancy and rate growth. We were pleased with our ability to continue to leverage our revenue management practices. Our rate growth during the second quarter was strong with contact rates up almost 16% versus the same period last year. Street rates also experienced double-digit growth, averaging 18% higher in the second quarter this year compared to a year earlier. Our focus on rent increases to in-place customers held steady in average low to mid-teens.

We are pleased that the average length of stay remained stable at 16 months. Discounting and concessions remained well below historical averages during the quarter. Robust growth in rates was slightly offset by occupancy that was a bit lower than the previous year by the end of the quarter. Of course, this speaks to our philosophy that we do not manage to occupancy, but rather to optimize long-term revenue growth which is continuing at this record-setting pace.

In-store occupancy averaged 95.1% for the quarter, down 10 basis points compared to last year. We ended the second quarter with a same-store occupancy of 95.2%, down 140 basis points over the prior year and up 40 basis points sequentially from the end of the first quarter.

As we discussed on our last call, last year's strong comps become more challenging in the second half. So we expect our year-over-year contract rate growth to moderate, while we expect occupancy to follow historical seasonal trends. We think the occupancy levels will likely settle into the low 90s, which is still above historical averages.

And while the whole storage sector has enjoyed robust pandemic-driven demand, I want to take a few minutes to highlight some of our initiatives that we think will continue to support revenue growth going forward. Our customer acquisition team is focused on driving increased customer traffic and improving our CMS by building a better online leasing program to enhance the customer experience, while our call center initiatives are focused on increasing overall conversion rates.

We remain committed to our AI capabilities, which allows us to be more dynamic in maximizing revenues. We're also excited about enhancement of our machine learning capabilities, as we continue to improve our front-end pricing in IPRC platforms. A quick comment on new supply which remains relatively muted as the competitive landscape hasn't really changed much. Overall, we see these somewhat muted levels of new supply coming in as a net positive.

I'll now turn the call over to Brandon to provide more detail on our financial results and balance sheet activity.

[Brandon Togashi]

Thank you, Dave. Yesterday afternoon, we reported core FFO per share of $0.71 for the second quarter of 2022, which represents an increase of 29% over the prior year period. This continued robust year-over-year growth was driven by a combination of strong same-store growth and our significant acquisition volume over the past four quarters. Our second quarter results represented a record sixth consecutive quarter that 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 second quarter growth of 7.6%, reflected inflationary pressures that we're seeing across the economy, as well as significant increases in self-storage property values, neither of which are surprising. The second quarter growth in same-store OpEx is due primarily to an 11.2% increase in property taxes, driven by our Texas, Georgia and Indiana markets and a 17.5% increase in utilities.

Repairs and maintenance grew 10.2%, reflecting the increase in costs for construction labor and materials. We were able to partially offset these increases with personnel costs that were in line with prior year, mostly attributable to greater efficiencies with staffing in our properties. We also benefited from better pricing on our property insurance this year and marketing expenses grew a modest 3.3%.

Turning to the balance sheet. During the quarter, we issued $14 million of OP equity in conjunction with acquisitions and closed on a $285 million seven-year unsecured term loan with a variable rate based on a spread to SOFR. The effective interest rate was 3.34% at June 30. Also during the quarter, Kroll Bond Rating Agency upgraded the credit rating of our operating partnership to BBB+ from BBB flat. At quarter end our leverage was 5.6 times net debt to EBITDA towards the low end of our targeted range of 5.5 to 6.5 times.

We are very comfortable with our balance sheet, with no maturities through the end of the year just 22% of our principal debt subject to variable rate exposure and $360 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. Results for the second quarter were largely in line with expectations. Consistent with our commentary last quarter, we expect lower growth levels in the second half of the year, as last year's comps become more challenging. As such, we maintained our full year 2022 guidance which we outlined in detail in our earnings release. A few of the highlights include core FFO per share of $2.80 to $2.85 which at the midpoint represents 25% growth over prior year.

Same-store revenue growth of 11% to 13%, and NOI growth of 14% to 16%. Same-store NOI growth is moderating from the recent record levels, but still remains well above historical averages and the pace of that moderation suggests that we are headed for a soft landing. Thanks again, for joining our call today.

Let's now turn it back to the operator, to take your questions. Operator?

[Operator]

Thank you. At this time we will begin the question-and-answer session [Operator Instructions] Our first question comes from the line of Samir Khanal with Evercore ISI. Please proceed with your question

[Samir Khanal, Evercore ISI]

Hi, good morning, everybody. Brandon, maybe walk us through your assumptions around occupancy. I know you talked a little bit about rate growth here, but how you're thinking about sort of the back half of the year? How you end the year with occupancy, as we start to think about 2023?

[Brandon Togashi]

Yes. Samir, thanks for the question. Like Dave mentioned, we expect return to seasonality. So from right now to the end of the year maybe 200 to 300 basis point deceleration sequentially on occupancy. If we see that, it would have us at the end of the year down from prior year about also two to -- 250 basis points.

[Samir Khanal, Evercore ISI]

Okay. And then I guess on ECRIs, are pushing rates to the max you think at this point, or do you feel like that's an area of upside, that we could see sort of in the second half of this year?

[Dave Cramer]

Good question, Samir, it's Dave. We're certainly being very assertive still in frequency and the percentage of rate increase. In the second quarter, we actually pushed more tenants than we had historically pushed, and that really led to what we think was a little bit more occupancy decline than we were probably expecting. It was early in the second quarter, in the month of May is where we probably pushed the hardest. And so we were happy with the push, happy with the results, but it certainly created more move-outs just due to the amount of tenants that we pushed rate increases to.

So as we look at the back half of the year, we're not changing our strategy. We're certainly looking at where we can be assertive, how we're going to be assertive and keep on the pace for ECRIs. And then we're also looking at street rate and discount to say, is there other levers we can look at as far as the occupancy piece of it. We were pretty stingy in the second quarter around, discounting and we were certainly from a street rate perspective we grew street rates through the second quarter as well. So we're trying to balance all those levers, find out where we want to land, but in-place tenant changes are still going to stay pretty asserted.

[Tamara Fischer, President, Chief Executive Officer & Trustee]

And I guess the only thing, I would add is -- this is Tammy. Hi, Samir. As Dave commented in his remarks, we have historically not managed to occupancy, but rather managed to optimize revenue growth. And that remains kind of a key focus for us as well. And so, I think we're good with where we ended up, at the end of the second quarter.

[Samir Khanal, Evercore ISI]

Got it. And I guess as a follow-up, I mean are you seeing any sort of shift in customer behavior here, just giving you a little bit more caution? Are there markets that are slowing a bit more than you expected, maybe in Portland? I guess help me think through -- you went from raising guidance by about 500 basis points in the first quarter, which was probably the highest of all your peers, but then you kind of held steady in 2Q. So just trying to -- walk me through kind of the -- your thinking for -- in terms of, sort of being cautious here if that's the case.

[Dave Cramer]

I think I'll start and then Brandon, can jump in. This is, Dave. From a consumer pattern, the very top of the funnel is still very robust. We're seeing lots of activity, lots of opportunity. What we've seen change just a little bit in the recent couple of months, probably really around May and June little bit in July, is the amount of touches you had to do to get the conversion. So maybe the customer, if they were -- maybe it was 1 1.5 times, they looked at you and they converted now maybe that's gone to two or 2.5. And so we're happy with the amount of volume we're driving. We're happy with the amount of touches, we're getting it's costing us a little bit more in spend. And the touch points around that consumer, which tells us maybe they're shopping a little bit more. Maybe they're looking for a little bit, maybe more of a discount

And as I said we were pretty stingy in the second quarter, with discounts and with pricing. So some of that might be we created ourselves, and the fact that we weren't giving a discount. But that's one pattern. You mentioned Portland. Portland, is really our most competitive market. We've been talking about Portland, for a number of years. There's a lot of competition up there, and a lot of competitive pressures. The pandemic certainly masked, a lot of those competitive pressures in previous months.

We spent really -- a couple of things happened with us. We spent the first three or four months in Portland, really working on the transition of the Northwest team, because the PRO retired and we worked through platform changes and worked through our adjustments with those changes. We focused on occupancy. And as you can see, we grew occupancy from the first of the year until now. And now we're coming back into Portland, and really focusing on revenue. And so it's been a little bit of a transition for us. And it's not just Portland, it's that Northwest market and we're working our way through it. We're very comfortable with, where we're headed with particularly.

[Tamara Fischer, President, Chief Executive Officer & Trustee]

And I think the other thing is as Dave said, that was probably our most challenged market from a new supply standpoint. And we did have the benefit I guess, I'd say, of absorbing a lot of that new supply through the pandemic, but it's still there. It's still something that we're keeping an eye on and have to be aware of, as we run those properties up there.

[Samir Khanal, Evercore ISI]

Thank you.

[Operator]

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

[Ki Bin Kim, Truist Securities]

Hi. Good afternoon. Can you talk about the street rates that you saw in 2Q and the cadence of how that progressed and maybe a July update?

[Dave Cramer]

Yeah. Good question, it's Dave. Thanks for joining Ki Bin. We saw a progression through the quarter in street rates. So we saw sequential growth every month. We've had it through the entire year. And obviously, with the 18% comp year-over-year in street rate growth we're happy with. In July, we again saw sequential growth into July as well. So we're happy with where street rates are going that would also include contract. We saw sequential growth in our contract rates all the way through the quarter and into July. So both fronts happy. We're still in a positive rent roll-up, which is something we like at this point in time as well.

[Tamara Fischer, President, Chief Executive Officer & Trustee]

For five quarters straight, right?

[Dave Cramer]

Five quarters straight, yeah.

[Ki Bin Kim, Truist Securities]

So just want to clarify that. You – I think you were talking about sequential. Do you have that year-over-year?

[Brandon Togashi]

Yeah. Ki Bin, this is Brandon. So the street rates in Q2, Dave mentioned earlier were 18% up over prior year in July that was low teens so down a little bit from the Q2 number. Our street rates last year really peaked right around this time of the year, and then didn't grow that much sequentially through the balance of the year. So the comp the worst part of the comp is really – was through now. So I would expect if things stayed static we would have that similar low double-digit spread. But obviously that's dependent on where street rates go from here to the end of the year.

[Ki Bin Kim, Truist Securities]

So you're street rates are up low teens in July, obviously, up very strongly in 2Q. You're saying you have a rent roll-up talking about demand top of the funnel being good. Maybe people are shopping a little bit more. I would think that, would translate into perhaps a little bit of a stronger outlook for the second half. And I say that, low tongue in cheek because obviously, you're still seeing very good growth. I'm just comparing you guys relative to some of your peers that might be showing a little bit better second half outlook. So, I'm just curious like what am I missing here?

[Dave Cramer]

I think, I'll start and then Brandon can jump in. Certainly, we – comps will play a piece of it. But I think as we looked at the occupancy drop in the second quarter and as we pushed that rate increase that we pushed a number of rates we pushed through the month of May I think we came off a little bit more on occupancy than we were expecting. I think all the rest of those fundamentals stack up well. I think as we go into the third quarter Ki Bin we're looking at how do we continue to drive that conversion rate and drive that occupancy rate to help us offset some of the loss that we had. Typically, in the second quarter, you don't have that much of a decline in occupancy that we experienced this year.

[Ki Bin Kim, Truist Securities]

And just last question, when you look at your rates on average and you compare it to the competitive set in your kind of local competitive areas are your rents competitive with your competitors or below or above?

[Dave Cramer]

Yeah. We look at it at a very obviously very store level very specific. But I – we're typically in the upper third, if not the rate leader in most of our markets around, the particular store. There are certain situations, where there are certain operators that are considerably above market. And we haven't ventured to that level yet, but we certainly are in that upper edge we want at rate.

[Ki Bin Kim, Truist Securities]

Okay. Thank you.

[Dave Cramer]

Thank you.

[Operator]

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

[Unidentified Analyst]

This is Lizzie Dugan [ph] on for Jeff. I just wanted to ask about, what you've seen on acquisitions or deal flow in the past quarter? You mentioned, you were encouraged by the number of deals coming into the market and seeing more deals traded yet you maintain the guidance range. So I just wanted to see if you're still maintaining all those assumptions behind guidance or if you've seen a change in your conversations with sellers?

[Tamara Fischer, President, Chief Executive Officer & Trustee]

I'd say, yes. The deal flow is strong. It's solid. We continue to look at every transaction. I will say that seller, it takes a while for seller pricing expectations to catch up with I guess I'd say reality. And in this environment with our – frankly, everyone's higher cost of capital. It's – there's an expectation that cap rates will continue to widen and we did see them widen in this second quarter. I would say that, the buyer pool narrowed somewhat. We have seen some deals that we thought were done that basically fell apart. And we've seen some deals get completely pulled.

But right now, we're encouraged by what we're seeing. We will continue to underwrite everything that meets our primary investment criteria and we'll go from there. I think we maintained our guidance. One thing, I would probably point out to you is that the $200 million JV transaction that we closed in April involved about $50 million of capital deployed on our part. And so when I think about total capital deployed that range of $400 million to $600 million still seems reasonable. I think we'll obviously be in the range. And from my standpoint, hopefully, above the midpoint or towards the top end, but I think the range is probably still good. We do like what we're seeing in terms of the quality of the assets and revised and more realistic buyer expectations.

[Unidentified Analyst]

Okay. Great. Thank you. And I just wanted to follow-up on the earlier question on any signs of weakness in your secondary market. Is there really any sign posts at all by -- any particular regions or by customer income level that was different this quarter versus last? How did late fees trend for example?

[Dave Cramer]

Good question. This is Dave. We haven't seen any real discernible differences within our markets. The way we're applying rate programs and rate changes and collections and bad debt all seem to be similar across all of our markets and across all of our stores and store types and market types. Certainly, bad debt will continue to rise. It's well below historic levels. And I think that's important to note. It's still very tame.

But as you get back into more normal seasonal trends and more trends -- more historical averages for our sector the bad debt piece will come up. But the payment activity is the same the buckets of -- the level of delinquent buckets are the same. So we're not seeing any change in that activity either. So..

[Brandon Togashi]

And Lizzy, this is Brandon. The only thing I would add this is not specific to the secondary markets as you mentioned in your question. But just in terms of what we're seeing in certain markets relative to others and going back to the question about Portland the pace of deceleration from Q1 to Q2 on the growth for top-line revenue, if you look at the markets where you saw the biggest decel Portland was one, Phoenix was another. Sarasota was another. Those are all markets where we've talked for several quarters now about being more challenged with supply.

And so we had occupancy to gain a year ago -- 18 months ago in those markets that was a benefit. But those are also the markets that we're starting to see a little bit of the initial softness. And also because we had some of that occupancy the gain you had things in the numbers a year ago like the admin fees that are associated with the upfront leasing process that we're not going to have this year. So that also plays into some of the sequential growth changes.

[Unidentified Analyst]

Okay. Thanks for the color.

[Brandon Togashi]

Thank you.

[Dave Cramer]

Thank you.

[Operator]

Our next question comes from the line of Neil Malkin with Capital One Securities. Please proceed with your question.

[Neil Malkin, Capital One Securities]

Good afternoon, everyone. Thank you for the time. First, one Tammy just kind of hitting on the acquisition topic. We've heard that two things one secondary tertiary markets again how we define tertiary have been -- have sold -- have seen the most cap rate expansion.

And at the same time we've also heard that bigger deals, bigger chunks, multiple assets are having a significantly harder time lining up financing and at attractive terms versus one-off assets. So can you just talk about those two things and how that is potentially a favorable setup for you just given your access to capital and ability to compete where potentially previous -- heretofore levered buyers would be aggressive?

[Tamara Fischer, President, Chief Executive Officer & Trustee]

Sure. Yes. Thank you for the question, Neil. I'll start with the second part of your question. I will say that we have seen levered buyers falling away somewhat. And to the extent that we've seen deals either being retreated or just coming apart that has been directly related to those buyers who are counting on cheap debt which is really obviously not available anymore.

As it relates to secondary market cap rates it's always been true that those cap rates are -- have been wider. We've always seen a spread between the cap rates where we're pretty focused in the secondary markets and primary markets.

I would say that to be honest with you I don't think that those cap rates and those markets are widening quite as much quite as fast because there has been a significant amount of interest and acceptance of those secondary markets and suburban -- certainly Sunbelt markets have become more attractive over the past couple of years.

And so we're still seeing good solid attractive opportunities. And I think that we are often considered a preferred buyer because of our excess to capital and our demonstrated, kind of, commitment to those secondary suburban and Sunbelt markets.

[Neil Malkin, Capital One Securities]

Okay. And then can you -- sorry and then on the part about difficulty getting capital for larger deals. Are you seeing deals out there that are a little bit bigger? I mean it looks like you had at least one portfolio in here, but any comment on the ability to maybe -- not outbid but be there to come in and acquire be an all-cash buyer mostly cash buyer again despite a more difficult lending backdrop?

[Tamara Fischer, President, Chief Executive Officer & Trustee]

Yes. Sorry, if I brushed over that.

[Neil Malkin, Capital One Securities]

No, problem.

[Tamara Fischer, President, Chief Executive Officer & Trustee]

But yes, I would say that that is definitely true. There are a handful of call it $100 million $200 million plus valued portfolios and we have most definitely seen buyers who would otherwise be extremely competitive and driving prices to places we would never go have fallen away.

And in fact we have a few examples. We can't get into the detail. But we have a few examples of bidding on a portfolio of assets right in our bread and butter area where we thought there's no chance. We're not landing this thing. And sure enough we end up invest in final. So, I think from that standpoint where we -- that's part of what gives us the optimism that we have about our ability to hit our targets and probably better this year in the acquisitions.

[Neil Malkin, Capital One Securities]

Okay. And the other one not to beat a dead horse but trying to just understand the it looks like in terms of occupancy this quarter is seasonally or historically an accelerating quarter right? And I know that the comps are tougher. But it is -- are you seeing -- it's almost like normalization was pulled forward a little bit in terms of that seasonality coming back and the occupancy kind of dropping down from the elevated COVID levels to something more sustainable long-term.

I mean is it can you just kind of again square that with all the positive commentary you've made? Roll-ups impressive still doing well with street rates, ECRI is really strong. I mean is the reason for the guidance not -- is that -- did that kind of make the guidance kind of be unchanged?

Are you worried about that continuing to happen with occupancy? Because it sounds like demand is not a problem particularly in your secondary market. So -- is it just exercising caution in the otherwise uncertain time as we also hit an inflection in seasonality? I guess if you could maybe talk about the main driver there that would be great.

[Tamara Fischer, President, Chief Executive Officer & Trustee]

So, Neil, this is Tammy. Thanks for the question. But I'll start. Dave will answer the substance of the question. But the one thing that I would probably point out is that when we updated our guidance at the end of the first quarter with our Q1 earnings release we tried to be exceptionally realistic.

And in part it's -- from my standpoint, it would be better for us if we can get back to a place where we are not updating guidance every single quarter. So, we are trying to be very realistic and put it all out there and on the line. So, I think that we did that. I think we feel good about it. And so just on the guidance that's kind of how I'd level set that. But Dave can certainly comment on the occupancy and other parts to your question.

[Dave Cramer]

Thanks Neil. I think as we said earlier we pushed extremely hard more than two times the normal rate we pushed than we would normally push in the month of May for an example. And I think that actually accelerated the decline in occupancy more than we anticipated.

I don't think that the seasonality shift I don't think -- if anything it just accelerated what would normally to your point be a stronger occupancy quarter. I think doing what we're doing which we're not backing away from. We're pleased with the results. We're pleased with what it generated for us. We're pleased where we're going with it.

But it certainly put a little more pressure on occupancy which is just one of the things we focus on. There's a lot of things we focus on but it did put some pressure on it. And so I think that's the change you saw was around IPRC.

[Neil Malkin, Capital One Securities]

Okay. Thank you guys.

[Dave Cramer]

Thank you. Appreciate it.

[Operator]

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

[Todd Thomas, KeyBanc Capital Markets]

Hi thanks. Good morning out there. First question, Tammy, I just wanted to follow up on your comments in your prepared remarks about the share buybacks and touch on that just staying in the context of acquisition opportunities where it sounds like you're still seeing some deal flow and there's some opportunities there as well. How would you sort of rank order those opportunities today? And should we expect to see the company active in the market repurchasing shares?

[Tamara Fischer, President, Chief Executive Officer & Trustee]

Todd I think it comes down to making an evaluation of all of our capital deployment opportunities. And it clearly depends on whether acquisitions are a better opportunity to deploy capital at a better return creating long-term value and deals that are accretive for our shareholders.

But if our best investment if you will is a repurchase of our shares, I think that our Board would be supportive of our going forward with that. So, that may not be a super satisfying answer, but I think that it's consistent with what we've discussed as being -- strategically our job is to invest accretively and for the benefit of long-term value for our shareholders.

[Todd Thomas, KeyBanc Capital Markets]

Okay. And then Dave back to sort of some of the occupancy that you may be lost in May and June that was a little bit more than expected. It sounds like it was related to some of the ECRIs or the rent increases that were implemented a little bit earlier in the year. I understand it's about maximizing revenue, not so much a focus on occupancy or rate specifically. But just based on your comments, I'm just curious if you do plan to pull back a little bit on sort of the magnitude of the rate increases that you're passing through or asking rents to some extent in order to maybe stimulate a little bit more demand.

[Dave Cramer]

Yeah. I think it's a good question. We're evaluating all of that. I used the word we were stingy on discounting and really, stingy on our rate. And certainly, as we look at the conversion ratios we want, I think we're going to focus around marketing spend. We'll focus around discounting. We'll focus around pricing upfront pricing a little more dynamic in getting the conversion ratios. I don't think we're pushing away from the table on the IPRC though. I think we're comfortable with our cadence. We're comfortable with the frequency and the amounts. So we'll focus more on the rentals is what we're going to focus on.

[Todd Thomas, KeyBanc Capital Markets]

Okay. And then if I could just ask one last one on Portland. Related to -- you mentioned that there were some new supply that had impacted that market. Are your comments around Portland is that due to new supply that's been delivered more recently, or is that really a little bit more around the supply that was delivered pre-pandemic where there's maybe just a little bit of like a hangover in a way where that space was absorbed somewhat quickly during the last two years, but maybe now it's sort of catching up a little bit as operating conditions and rental activities normalizing?

[Dave Cramer]

I think the back half, you're right. I mean it was pre-pandemic. At one point in time, I think we were talking about the seven, eight years' worth of oversupply in Portland and pandemic certainly absorbed that and muted that effect of that oversupply and now that conditions are cooling off just a little bit it's starting to show back up. Nothing real new as far as overbuilding, it's just pre-existing stuff.

[Todd Thomas, KeyBanc Capital Markets]

Okay. All right. That’s helpful. Thank you.

[Dave Cramer]

Thank you.

[Operator]

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

[Keegan Carl, Berenberg]

Hey, guys. Thanks for the time. I'll be brief here. Just two quick ones. First, apologies if I missed this, but what percentage of your portfolio is currently below street rate?

[Dave Cramer]

About 60% -- of our existing tenant base. So to your question it's around 60% below.

[Keegan Carl, Berenberg]

Got it. And I know you kind of touched on this too, but are you guys seeing any changes at all in customer behavior relative to your expectations? Obviously, inflation is huge talking point right now. I mean how thoughtful are you on that topic when you're pushing rate increases just given they're feeling financial pressures everywhere and there could become a point when storage isn't top of mind as far as necessities?

[Dave Cramer]

We're certainly paying attention to what's going on with inflation and what's going on with our consumer shopping patterns. Like I stated it earlier really change -- the only really change we've seen is a little bit in the way they're shopping. We're still happy with the amount of flow and amount of activity, but amount of touch points has increased a little bit. Our storage ticket generally isn't a large, large number. And so it doesn't necessarily in the household income rise to the top of eating bills and rents and some of these other things that are going on. And so historically, storage hasn't been as influenced on some of these inflationary times as other products have been. But certainly, something we'll pay attention to as we go into the future and look at. But at this point in time, it hasn't really changed or shifted our mindset about how we're operating our business.

[Keegan Carl, Berenberg]

All right. Thanks guys.

[Dave Cramer]

Thank you.

[Operator]

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

[Ronald Kamdem, Morgan Stanley]

Hey. Just a couple of quick ones. The first is just looking at the guidance the implied growth rate in the second half of the year is sort of low 8%. Historically, we've talked about sort of that exit growth rate at the end of the year being a good starting point for 2023. Just curious if that still makes sense if that still applies or if there's anything different, whether it's the comp, whether it's the mix that we should think about as we're thinking about the starting point for 2023?

[Brandon Togashi]

Hey, Ronald, it's Brandon. Thanks for the question. I think generally that's a good approach. I mean, how we're going to exit 2022 on a growth rate thinking about that as you're starting spot for 2023. You're right about the implied growth on the back half I think mid-8 up at midpoint closer to mid-10 is the high-end of our guide. And so certainly that would indicate a situation where we're going into 2023 still above like the long-term historical averages in terms of same-store growth. The one thing that is different for us and I don't have color right now to provide you, but can do that in November next quarter. I mentioned in my opening remarks, we are going to have a pretty big influx on our same-store pool. So the same-store pool for us does go up materially. And so that will play in, in terms of where those properties are located and the growth trajectory of those properties.

[Ronald Kamdem, Morgan Stanley]

Got it. And then my second question is just going back to sort of the rate increases in May and pushing it really hard and then seeing sort of the occupancy respond. I think you sort of mentioned that you're still pushing as hard for the rest of the year. So I guess just trying to get a sense of how much conservatism is baked into the guidance, right? Because if you're still pushing sort of at the same level, are you sort of -- you're expecting occupancy to normalize similarly to seasonal patterns. But to the extent that it doesn't how much more -- how conservative is sort of the guidance at this point?

[Brandon Togashi]

Well, Ronald, I would say, I mean Dave's remarks about Q2 and May specifically were spot on. I mean there was more sort of a push than the past. But we're continuing here in Q3 and Q4 to process rate increases for in-place customers that's similar levels both in terms of total customers that are receiving the increase as well as the percentage increase itself. Similar levels as to what we did in Q1, the majority of 2021, and so that's all wrapped into the guidance. We're not going anything above or below, I guess. And so the occupancy effect, I mean, we feel like everything we're seeing occupancy levels, Dave hit on delinquencies and bad debt, everything appears to be returning to more pre-pandemic normal levels.

And so that's in line with what I said about occupancy call it 200 to 300 or 200 to 250 decline from peak to trough. I don't know if that quite answers it or gives you much else. But yes -- and Tammy mentioned, our guide we're pretty realistic in May and I think we're realistic right now. So I wouldn't characterize a tremendous amount of conservatism necessarily.

[Ronald Kamdem, Morgan Stanley]

Helpful. Thank you.

[Brandon Togashi]

Yes. Thanks, Ron.

[Operator]

Thank you. [Operator Instructions] Our next question comes from the line of Spenser Allaway with Green Street. Please proceed with your question.

[Spenser Allaway, Green Street]

Thank you. I had one bigger picture question as it relates to ancillary revenue streams. Some of your peers are getting really creative. The most recent example of the Bargold this quarter. Just curious your thoughts on diversifying your revenue stream in the mid to longer-term. And I realize you obviously have a very unique position in the industry, but is there any concern around peers gaining market share in segments of the business that might be small now, but might matter a little bit more down the road?

[Dave Cramer]

Great question. And you put out just a little bit about one of our peers, I think, something that extradite, I wanted to make…

[Spenser Allaway, Green Street]

Regarding, Bargold.

[Dave Cramer]

So, Bargold, okay. I wanted to make sure, I didn’t catch up. But we're certainly always looking at other ways to effectively look at other income streams, where it doesn't affect our core business, it doesn't distract us. It doesn't do things that really move us away from what we're trying to accomplish here.

One of the things we've always talked about is third-party management platform would be one of those ones you can talk about. We evaluate that on a very often basis. We ask ourselves is there a point in time where you could look at something like that vehicle if you wanted to drive some ancillary revenue stream.

So it's not -- we look, we evaluate, we've had tremendous success thus far doing what we do. And we've had great success with our differentiated strategy and how we approach that, and how we build platforms where our PROs have success and growth. And that's worked very, very well for us. Will always be part of our strategy going forward. But I would tell you, we're constantly looking. Do I have anything to say that we're working on no I don't. But we're constantly looking and evaluating and then seeing if we can find some additional places.

[Brandon Togashi]

And the ultimate judge of that Spenser is core FFO per share growth. So with our same-store performance and the external acquisition volume that we've delivered for multiple years now the midpoint of this year's guide, 25% core FFO per share growth. That's the North Star and that's the ultimate judge of our performance.

[Spenser Allaway, Green Street]

Thank you.

[Brandon Togashi]

Thanks, Spenser.

[Operator]

Our next question is a follow-up from Ki Bin Kim with Truist Securities. Please proceed with your question.

[Ki Bin Kim, Truist Securities]

Thanks for taking me back. Just had a quick question around your comments around Portland, Phoenix and Sarasota being a little bit soft due to new supply. Do those pressures get better or worse next year?

[Brandon Togashi]

Yes. Good question Ki Bin. So it was intentional with those markets, because Portland is on a same-store growth perspective below portfolio average. Phoenix is kind of right in line with portfolio average and then Sarasota is greater than the portfolio average. But my comments were about the way that their growth rates change from Q1 to Q2.

I think that it probably is a little bit more challenging in those markets. I mean, I think the growth prospects, especially in Phoenix and West Coast of Florida are still -- there's still a lot of positive factors in play just given in-migration data and population growth, but there still is new deliveries, or to Dave's point about Portland deliveries that had taken place that the market is still absorbing.

Portland for example, we've talked for several quarters now about even though things picked up there relative to the years prior, our occupancy in that market was still 200 to 300 basis points below portfolio average. So that ties into what we're saying about you're seeing some of the effects of that dynamic with supply and demand.

[Ki Bin Kim, Truist Securities]

Okay. Great. And when you think about the customer reactions to ECRI programs or just pricing changes, have you noticed any discernible trends in between how different groups of customers have reacted towards it? So obviously Portland might be a little different just because it's oversupplied but I'm talking more about demographic qualities or attributes whether it might be high ABR tenants might be more or less sensitive versus low ABR tenants. Any kind of trends that you see?

[Dave Cramer]

Nothing yet. I mean we survey, we studied some of the patterns you're talking about, demographic patterns and things like, and we just haven't seen anything really separating itself in one direction or another. And so fortunately, I would say no, nothing yet.

[Ki Bin Kim, Truist Securities]

Okay. That’s it for me. Thank you.

[Dave Cramer]

Thank you.

[Operator]

Our next question is a follow-up from Neil Malkin with Capital One Securities. Please proceed with your question.

[Neil Malkin, Capital One Securities]

Hi. Thanks for taking another one for me. Just one, I don't think anyone mentioned it. Tammy, you talked about cap rates you acquired this quarter like a 5.6. Obviously, that's a bit better than you've done in the last couple of quarters but again, cap rates are rising. But can you talk about the product that you're evaluating right now that's out there that you're looking at? Have you seen those cap rates move up into that range as well? Should we get the high-5s or six level? And are you seeing actually higher yields for portfolios versus single assets? That's it for me.

[Tamara Fischer, President, Chief Executive Officer & Trustee]

Sure. So, I'll start. I think Dave might want to chime in here a little bit. But I will say that we have always seen that gap between cap rates in some of the secondary and tertiary markets. And so to the extent we're acquiring in those markets, we continue to be able to acquire those higher cap rates. The assets that are on the market in some of the primary markets are at better cap rates than what we saw, let's just say, the last quarter of last year and first quarter of this year. So, if -- and again cap rates are -- that's kind of an odd number to even try to discern and talk about from one company and one asset class to another.

But having said that, if we were paying a call it a 4.5 cap for a portfolio late last year that same portfolio might trade for something just north of 5 this -- in this current environment. So call it, the last 30, 60 days. That's how fast things have changed. And I would say that there is still absolutely a portfolio premium. There's no question about that. People are still trying to aggregate size in self-storage and -- but it's and that's been true historically. So that -- it's not really anything new. Last year, we saw the portfolio premiums widen even further than we'd seen in the previous call it, 10, 15 years. But today, there is still a portfolio premium. It might not be quite as wide as it has been in the recent past.

[Dave Cramer]

I think I would add is, I think maybe one of the things I'm kind of thinking about what you're getting to is. I don't think there's a flight to single properties. I don't think the buyer pool is now targeting single properties because it's a better buy. I think the buyer pool in general has changed and pricing has changed with it. I mean there are people who have money that can buy properties and want to buy properties, and they're still there bidding for these properties. But there hasn't been this flight to I want to buy one option in South Carolina or something like that. We're not seeing that change at all in the people that are out there trying to buy properties.

[Neil Malkin, Capital One Securities]

Thank you.

[Dave Cramer]

Yes. Thank you.

[Tamara Fischer, President, Chief Executive Officer & Trustee]

Thank you.

[Operator]

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now turn the call over to Tamara Fischer for closing remarks.

[Tamara Fischer, President, Chief Executive Officer & Trustee]

Thank you. I wouldn't want to end this call today without recognizing and thanking our team for their ongoing commitment and focus on delivering outstanding results. We're very grateful for our team. And we're certainly pleased with our Q2 results. We remain very optimistic about our prospects for 2022. And I'll just say thanks again for supporting NSA and for joining our call today.

[Operator]

Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.