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National Storage Affiliates Trust
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Greetings, and welcome to the National Storage Affiliates' Third Quarter 2022 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, George Hoglund, Vice President of Investor Relations for National Storage Affiliates. Thank you, Mr. Hoglund. You may begin.
We'd like to thank you for joining us today for the third quarter 2022 earnings conference call of National Storage Affiliates Trust. On the line with me here today are NSA's CEO, Tamara Fischer; President and COO, Dave Cramer; and CFO, Brandon Togashi. Following prepared remarks, management will accept questions from registered financial analysts. [Operator Instructions] In addition to the press release distributed yesterday afternoon, we furnished our supplemental package with additional detail on our results, which may be found in the Investor Relations section on our website at nationalstorageaffiliates.com.
On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements that are subject to risks and uncertainties and represent management's estimates as of today, November 3, 2022. The company assumes no obligation to revise or update any forward-looking statements because of changing market conditions or other circumstances after the date of this conference call.
The company cautions that actual results may differ materially from those projected in any forward-looking statements. For additional detail concerning our forward-looking statements, please refer to our public filings with the SEC. We also encourage listeners to review the definitions and reconciliations of non-GAAP financial measures such as FFO, core FFO and net operating income contained in the supplemental information package available in the Investor Relations section on our website and in our SEC filings.
I will now turn the call over to Tammy.
Thank you, George, and thanks, everyone, for joining our call today. I'll start the call by addressing the recent hurricanes, Fiona and Ian and expressing our compassion for all who are affected by the storms. We're pleased to report that all of our team members were safe and accounted for subsequent to the hurricanes. And although a number of our stores, primarily in Florida were impacted to a certain degree all of our stores are currently open and operational.
I'd also like to thank our team for their extraordinary response to the storms, both in terms of watching out for each other, taking care of our customers and so quickly working to assess damages, it the cleanup process underway and resume normal operations. Now moving on to results. We delivered another great quarter with growth in core FFO per share of 26.3% and same-store NOI growth of 12.1%.
As expected, our results continue to moderate from record levels and we face tougher year-over-year comps and a return to more normal seasonality. The moderation is also fueled by inflationary pressures on the consumer as we close out 2022 and enter what may well be an even more challenging macroeconomic environment in 2023, keep in mind that the self-storage asset class has historically proven to be quite recession resilient through various economic cycles.
The sector benefits from unique countercyclical demand factors, including demand driven by household contraction and necessity-based relocations. Further, the pandemic introduced new customers to sell storage who have realized the convenience and affordability of the product, particularly in a time of increasing cost per square foot for housing.
Finally, with the benefits of our differentiated PRO structure and our broad geographic exposure, we remain very confident in NSA's future prospects. Now turning to investment activity in the third quarter. We acquired 23 wholly owned properties, investing $322 million at an average cap rate of 5.4%. 20 of these stores are in Texas, Florida, Georgia and South Carolina, a great fit for our existing portfolio in fast-growing Sunbelt markets.
While the transaction market has slowed from last year's record pace, we're still seeing opportunities come to market, and we continue to evaluate deals where it makes sense. But we're definitely being very selective in the face of today's increased cost of capital. There is still a relatively significant bid-ask gap between buyer and seller expectations. So we expect that Q4 will be relatively quiet on the transaction front.
Going forward, we will remain opportunistic with respect to our capital and investment strategy, always with an eye to creating value for our shareholders over the long term. Overall, I'd characterize the third quarter as strong performance with moderating fundamentals and in line with our expectations. The self-storage sector and NSA specifically remain well positioned to navigate the dynamic operating environment as we head into the new year.
I'll now turn the call over to Dave to discuss current trends and operations. Dave?
Thanks, Tammy. The third quarter benefited from continued strength in self-storage fundamentals. However, we are clearly returning to normal seasonal patterns, which are being highlighted by a challenging year-over-year comp. Third quarter same-store NOI increased 12.1% over last year, driven by a 10.7% increase in revenue combined with a 6.9% increase in property operating expenses.
Our contract rates were up 15% in the third quarter from the prior year, while street rates were up 10% year-over-year. Consistent with return to normal seasonality, we continue to see moderation in our street rates, which we expect to continue through the end of the year. Our rent roll-up was flat for the quarter and now following normal seasonal trends. Discounting and concessions remain below historical averages during the quarter, and we've increased our marketing spend as customer acquisition activity returns to normal.
Same-store occupancy averaged 94.1% for the quarter down 240 basis points compared to last year. We ended the third quarter with a same-store occupancy of 92.6%, down 350 basis points compared to the prior year. Occupancy reflects the return to normal seasonality and the net change year-over-year is directly related to an abnormal comp last year. Although we're experiencing moderation across the portfolio, I think it's worthwhile to point out that we're on track to stabilize above pre-pandemic levels. To give you a sense of where we were versus 3 years ago, 2 rates in Q3 2022 were about 37% higher than Q3 2019 and in-place contract rents are about 24% higher.
Occupancy is also about 320 basis points higher. Our average length of stay for tenants that have moved out has increased from 15.5 months to 16.2 months. The percent of customers that have stayed with us for longer than 2 years, has increased from 45% to 50%. All of these data points support our views that fundamentals remain healthy.
Looking at geographic performance. The Sunbelt continues to outperform with states such as North Carolina, Georgia, Texas and Florida, all generating above portfolio average revenue growth. Several of our smaller markets such as Oklahoma City, New Orleans, Savannah and Wilmington, are outperforming the portfolio average as well. This reinforces our strategic market focus and continued emphasis on geographic diversity.
I'll now turn the call over to Brandon to provide more detail on our financial and balance sheet activity.
Thank you, Dave. Yesterday afternoon, we reported core FFO per share of $0.72 for the third quarter of 2022, which represents an increase of 26% over the prior year period. This continued robust year-over-year growth was driven by a combination of double-digit same-store growth and our healthy acquisition volume over the past 4 quarters..
Our third quarter results represented a record seventh 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 third quarter growth of 6.9% reflected inflationary pressures that we're seeing across the economy as well as property taxes driven by significant increases in self-storage property values. The third quarter increase in same-store OpEx is due primarily to a 6.1% increase in property taxes driven by Texas, Georgia and Florida, a 12.4% increase in utilities and a 28.6% increase in marketing spend. Repairs and maintenance grew 4.1%, while personnel costs grew just 2.6%.
While the increase in marketing spend was significant in Q3 of last year, we experienced a decline of over 10%, so the 2-year average increase is about 9%. Turning to the balance sheet. During the quarter, we closed on a $200 million 10-year unsecured debt private placement with a fixed rate of 5.06%. At quarter end, our leverage was 6x net debt to EBITDA, right in the middle of our targeted range of 5 and 6.5x.
We are very comfortable with our balance sheet with no maturities through 2022 and $375 million scheduled to mature in 2023, $300 million of which consists of 2 term loans what we will address over the few months. Approximately 24% of our debt is subject to variable rate exposure, half of which is the revolver. And we had over $210 million of availability on the revolver at quarter end.
We're committed to maintaining a conservative leverage profile and healthy access to multiple sources of capital. Now moving on to guidance. As Tammy and Dave touched on, we have seen a return of normal seasonality and trends in funnels throughout third quarter and continuing into the fourth quarter, which is driving the moderation in same-store NOI as we move gradually back toward long-term historical averages.
However, our expense growth is trending a bit higher than we previously expected, as I mentioned before regarding property taxes and inflationary pressures. As a result, for the full year 2022, we estimate same-store revenue growth of 11.5% to 12.5%, a tighter range than previous guidance while keeping the midpoint of 12%.
Expense growth of 5.5% to 6.5% up from the previous range of 5 and 6.25% and NOI growth of 14% to 15%, with the midpoint of 14.5% or 50 basis points below the prior midpoint. Additionally, the rapid rise in interest rates and pressuring interest expense, which combined with an income tax charge during the third quarter, we'll weigh on core FFO per share by approximately $0.02 for full year 2022.
The combination of these factors results in us adjusting the midpoint of our core FFO per share guidance down by $0.05 to $2.81. The updated range is $2.80 to $2.82. The midpoint represents an impressive 24% growth above our strong 2021 results and a two-year combined increase of 64% over our FFO per share in 2020.
Thanks again for joining our call today. Let's now turn it back to the operator to take your questions. Operator?
Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first questions come from the line of Juan Sanabria with BMO Capital Markets. Please proceed with your questions.
Hi, good morning. A question on ECRIs. It sounded like you gave how much rates have increased, both in place and street rates over the last couple of years or since pre-COVID. And it seems like maybe there's some room for continued ECRI increases that kind of above pre-COVID levels. Just curious on your view on if, in fact, that's accurate and kind of how we should think about ECRIs in '23 versus what you've been able to achieve it through '22?
Yes. David, thanks, Juan, this is Dave. Good question. It's certainly not going to really point to 2023 yet. But I can tell you, as we looked at the third quarter, our cadence and our activity and the amount of rate increases remain very stable, which was encouraging. The tenant reaction to those increases remain stable as well.
So as we look at customer behavior finishing out the year and really look how we model our in-place rent changes as we move forward, we're still pretty confident in the program and the way we're running. We're still confident in our cadence. And we'll just have to monitor what happens as we look as occupancy numbers and street rates move around a little bit, we'll have to look at what customer behaviors do if they change it all over the upcoming pieces or the upcoming period, excuse me.
But just one part of the puzzle. I mean, we're looking at occupancy, we're looking at street. We're looking at concessions. We're looking at the in-place rent changes to find the revenue goal that is satisfying to us. We've had a lot of discussion about this, and I've been at this for a few years now. And we had -- I was with SecurCare back when we were private in 2008.
And I can tell you, even in the toughest times that at great financial through that period, we were still able to do in-place rent changes. Maybe the amounts may not be as much, maybe the tenants may not have been as much, but we didn't -- the financial pressures were may be facing, the economy we'll be facing right now didn't really deter us back then from really continuing on some form of IPRC program.
And then just as a second question. Curious if you guys look at Storage Express either the assets or the software and as a result or -- and as a result of the transaction there, do you think you're going to see or are seeing more competition for assets in your secondary or tertiary markets and/or kind of a subquestion, do you think that there is the opportunity to continue to use technology to improve efficiencies and maybe go more remote in store management?
Yes. Another good question. We've known Jefferson for a long time. We've been around this product for a long time and lets him develop a very good model that worked extremely well. And so we're familiar from a lot of different points of view on what he was able to accomplish..
We are running storage remotely now. We're running storage either as an annex or even just purely remotely. And we have technology in place that aids us to do that. We have room to improve, and we are working on improvements through that technology piece.
We certainly think, as we look at our future, that's away from a payroll savings perspective as you look at store hours and maybe overall headcount. It also allows you the ability to buy smaller properties within our markets that fit very nicely and run them as maybe a hub-and-spoke-type concept, where you have some floating person around where you can take care of two, three stores with less headcount.
And we've done that over the years and demonstrated that, that is effective for us in certain markets. And to the last part of your question, could this introduce more competition for people buying properties in our markets that good. But there are other operators that have been running this for quite a while now, and we've been around those operators for a number of years. And so I don't know if it significantly changes the landscape at this point.
And then maybe if I could sneak in a quick third one. Could you give us any sense of the third quarter trends or -- sorry, the October trends in occupancy and street rates to compare versus the third quarter levels?
We did experience straight rate growth year-over-year in October. It is obviously coming off continuing to reduce as you think about where the end of the third quarter, where September was to October, but we did -- it's still year-over-year an increase, which is a positive sign for us. And occupancy continued to come down off its levels.
I mean occupancy levels came down in the month of October to let me -- the number I give you is 91.4%. So it dropped from the quarter end average down to 91%, and we finished into the third quarter at 92.6%. So we did have a continued reduction in occupancy levels in October.
Thank you very much.
Thank you.
Thank you. Our next questions come from the line of Neil Malkin with Capital One Securities. Please proceed with your questions.
Hi, thanks everyone. Just sticking on that last question. That occupancy, a, versus the September occupancy versus the average for third quarter. That slowed, I think, the most versus peers. And then again, you saw a pretty significant slowdown in October. It looks like it's going to be well short of the -- sort of from peak deterioration that you outlined previously that you expect for Q4.
So maybe can you help us understand what is leading to that? It seems like more significant fall in occupancy versus kind of what we expected the sort of new post-COVID model to look like? Is it small versus large markets? Is it too much pushing on IPRC not enough concessions, like any comments on occupancy and how you see that continuing to play out in your comfort level at the current levels?
Good question. And there's a lot of pieces to this. I mean, we certainly have had markets that have come off on occupancy, they're still posting very large revenue gains. I mean, if you looked at the Atlanta Riverside or Sarasota, Florida, where they've had 5% occupancy loss, but still posting 15%, 17% revenue gain.
So we look at it as it's one of the pieces of the puzzle. If you look at our portfolio, historically, we've always ran a little lighter than our peers. We're comfortable with that. It fits in our markets. It fits in our revenue models and it fits in our business plan. And so as we're looking at this really challenging occupancy comp versus last year, we're trying to navigate the waters of where we want to land, where it fits in with our revenue modeling and really were that occupancy discount, street rate, in-place rate all fit together, and it's a big puzzle.
So to your point, I do acknowledge, I think the occupancy valve was a little quicker and a little steeper than we thought, and we're making adjustments to our marketing strategies. We're making adjustments to discounting and really street rate, where we're going to be positioned in markets within the street rates.
And so I think aware of it, we're -- in certain markets, we're adjusting good in certain markets, we're just fine. So there's a lot of pieces of that puzzle that we look at. But just maybe just a little quicker on the occupancy drop that we had probably had forecast in the second quarter.
Yes. Okay. And I guess, just going a little further on the comment you just made, is it fair to expect higher marketing, more discounting or, I guess, more pressure on net pricing, net rates, at least maybe until you feel comfortable that occupancy continues or kind of stops eroding at a faster rate than you would have thought?
Yes, I think that's fair. We're doing all of those things. And you got to look at it is market by market to it, that affects the overall portfolio. Keep in mind, we also have a little bit of drag in Portland and Portland is a different. Mark will talk about here shortly. But to your point, we're looking at all those levers. Marketing spend was up for the quarter. So you saw the third quarter we did have a pretty significant marketing Peer average was not as high, but 28% year-over-year. So clearly, last year, we had easy sailing and marketing expense. And this year, we had to certainly on that a lot more.
We're lean on the marketing piece as we go into the fourth quarter. We'll start to look more around street rate and where we're positioned in market. The third quarter discounts were very, very low, 2.2% of revenue. So we still have some opportunity around discounts, if we want to use that lever to continue to find what the right math problem is to revenue.
We acknowledge that occupancy is a big piece of that, but also these other factors come into play. And overall, you think about, we're very happy with our contract rate growth, which was 15% for the quarter as well. So it was a nice balancing offset to the occupancy piece.
Neil, this is Brandon. Just a little color too on that. So like in my opening remarks on the marketing spend, I mentioned last year, Q3, we were negative growth on the marketing 10%. Similarly, in the fourth quarter, we were negative 12% year-over-year. So as we have increased our spend this year, and that's going to continue into Q4 and then it's also going to compare against some really challenging comps. So that's absolutely going to be elevated on a year-over-year basis.
Okay. Yes. That's helpful. Other one for me is you're traditionally not a seller. But if you just look at the performance of your stock, have you thought about are closer to potentially looking at leverage neutral buybacks? Or how do you think about capital allocation and also balancing sort of macro uncertainty in general?
Good question, Neil. I think that looking at the -- looking at our use of capital and sources of capital. It's really on us in any case, to make sure that we're evaluating our portfolio and selectively disposing of assets. As you said, we're not really -- we haven't been a big seller.
We're not -- I don't think we'll be a big seller, but we see that as an alternative in terms of sourcing capital. So I think the answer to your question is, yes. I don't think you'll see us sell off 100 property portfolio or anything like that. But I think selectively, we will look to prune the portfolio and raise some capital that way in this environment where the cap rates are, frankly, still better than what we can -- what we could do otherwise and certainly taking that capital and redeploying it in the repurchase of our own shares makes all the sense in the world.
Okay, thank you.
Thank you. Our next questions come from the line of [indiscernible] with Bank of America. Please proceed with your questions.
Great. Thank you. I just wanted to follow up on the prior point made about adjusting in certain markets and adjusting down in others. Can you kind of comment on which markets haven't really taking this level of street rate increases as well as others and where maybe you're still seeing some drag? I know you had mentioned seeing a little bit of drag in Portland. So if you could just give an update on your markets.
Yes, yes, absolutely. We're still very strong in the Sunbelt in the Southeast. And so you look around Atlanta and the Carolinas and through Georgia and through Texas, we're still having very good success down in those pieces, both on street and contract rate. Keep in mind, we're coming off extreme highs. I mean some of those markets were 98% full last year, and now they're running 93% and 92%. And so that that occupancy headwind while paper may look very, very daunting. For us, those portfolios and those -- more stores in those markets are settling right in where we want them to be, and we're very comfortable.
We're certainly paying some pressure in Portland. Portland has a number of things going on there. We've talked about in previous calls and through the past, there was pre-pandemic. There was a bunch of new supply brought on and that supply is still there and the pandemic may have masked the impacts of that supply and now that the pandemic has kind of come back and things are returning back to normal.
Portland is really starting to see some of those pressures of that new supply. Plus there are some economic and social things going on in Portland that just makes that MSA right now challenging for us. We'll continue to look at how we operate there. We're not going to go in and try to start some kind of rate war or something like that, will be smart. I mean you got to realize that the Portland market is going to operate where it operates at and we're going to try to maximize what that level is.
Phoenix, we're feeling a little bit of pressure. Phoenix also had a bunch of new supply come on through the pandemic and some of that -- some of the housing market is slowing down maybe some a little bit in migration is slowing down a little bit, Phoenix is starting to show a little bit of pressure. And so how we manage Phoenix from a street rate perspective, discount perspective. Occupancy level is going to be challenging for us as we go into 2023.
And then really rest of the markets, there's not a lot to really call out. We have some stable markets in the Heartland like Oklahoma City and Tulsa that are just -- they're doing very well. From a historical perspective, they're doing above average, but they're certainly not doing what the portfolio level is, but we're very comfortable in how they're operating and how they perform. And we kind of call them the steady eddies, but that just performed well over and over and over again and just didn't have the highs and the lows of the pandemic piece of it.
Okay. And for my second question, I'm curious to hear more about the volume of move-ins and how that trended versus your expectations and maybe how that compares to the movement from pre-COVID? Has that rate kind of slowed down? Or did you see any signs of this being below your expectations? And if you could comment on move-outs as well.
Yes. Good question. So certainly, the last year move-ins are less and move-outs are more, and that's comparing to last year. And that's to be expected. As we look back to 2019, which is really probably the most stable year we can look to before the pandemic, both move-in and move-out activity are very similar to the patterns we would expect.
So we think it's returning to historical averages based on occupancy portfolio, how many tenants you have in the portfolio? And what's our expectations around the move metrics of that tenant base? And so that's where I would point you there.
What I would also add to that is the consumer shopping patterns are changing. It's taking more touch points and it's taking more, more of a lift to get people to convert today. So one of the things we're very much focused on is marketing spend and really what we're doing with the conversion rates.
And so the team has very dialed into how do we boost that conversion rate and make sure we're using that dollar effectively. That will bring into play the other levers. Where are we positioned with street rate, what are we doing with discounting? How well are we closing? And so I think that as I looked at the quarter, really look at ahead is that's back to really normal times of 2019 as well, and we need to continue to make sure that we're driving efficiencies through our conversion rates.
Great. And if I could follow up on how do you see move-in -- what is the move-in, move-out activity like into October?
October, we saw the occupancy come off of where it was in September. We were happy with where -- again, looking at historical to 2019, very comfortable. It's a tough comp. I mean, really, in the fourth quarter, we actually grew occupancy in the fourth quarter last year at a slight pace. And so that's one of the things we were looking at is it's a tough comp year-over-year, but it was very much in line with what we thought 2019 look like.
All right, thank you.
Thank you.
Thank you. Our next question come from the line of Smedes Rose with Citi. Please proceed with your questions.
Hi, thanks. Just kind of sticking with the occupancy declines, which did seem a little more pronounced maybe relative to your expectations and certainly to our expectations. And I was just kind of wondering where do you think you might exit the year now on the occupancy front?
I think internally, our expectation is we'd like to flatten it out. We're not looking to lose a lot more occupancy. And so obviously, there's conditions going on out there with consumers and economic tightening and stuff that we have to navigate. I thought we did a good job holding our street and contract rate growth in the third quarter.
I think you'll see a little more pressure on street in the fourth quarter and a little more pressure on discounting, which will allow us to flatten that that occupancy piece. And so that's the math problem we're working on. The teams are working on every market and every store to really find where that balance is. But...
And I think, Dave, you've called this out in your remarks and some of the questions here earlier today. But we really don't manage to occupancy. And Smedes, I think -- I know you know that. We've talked about it a lot. But our objective here is to optimize revenue growth, and that's been our strategy for a long time, and we'll continue to do that.
I think our view is that occupancy settles out a couple of hundred basis points higher than pre-pandemic levels for us, but probably still a gap between us and our peers. And yet we set out to deliver outstanding growth in same-store revenue.
I appreciate that you're not running it for occupancy, but I mean, I guess there is a -- I mean, there's got to be some point where you and other operators would pivot to protect occupancy rate. I mean you can't raise rates from empty boxes as they like to say. And I just wanted to ask you, would you -- I mean, do you feel like it's fair -- I mean it's just like commentary that we've heard from others that just something like your view on it. I mean, in some of the more secondary and tertiary markets, I mean, do you think you're just inherently more exposed to maybe a more demographically sensitive customer around rates and to what's going on with the economy? Or do you think that's not -- that doesn't hold water?
I don't think that's an issue at all. I do think 1 thing that is happening, though, is we didn't have some of the tailwinds of Miami and New York and L.A. and some of these other markets because of our exposure there. And we were out, we didn't have the rate restrictions that maybe some of our peers had for a couple of years.
And so I think that weighs on us a little bit as you think about year-over-year results. I also think last year, we did an excellent job, excellent job driving this portfolio. In my words, I use overheating our portfolio. We drove it to an occupancy level through the back half of the year in a revenue result level that was abnormal for our markets.
And we're settling back into what we think is normal for our markets. To Tammy's point, we think it's going to be above pre-pandemic levels, which was an objective for us. And so I think all things considered, I don't think it's a tertiary or secondary market question. We're just settling back into what we feel are very comfortable normal.
Okay. And then can I just follow up, I wanted to come back to the share repurchase. I mean, I think you did $50 million and you bought back at considerably higher prices. So presumably, I mean, would you be interested in maybe getting more aggressive on that front as we head through the year and given the decline in the stock price here? Or how you -- maybe just kind of go back to how you're thinking about that program?
I think as we think about capital deployment, it's all about where we can achieve the best returns. But I will also say that we are probably, along with others being very, very selective, and we will deploy capital opportunistically. But in this current environment, where cost of capital is high and access is not as free as it was a year or so ago, maybe even six months ago.
I think I don't have a yes or no black and white answer for you, Smedes, but it is an alternative that we will consider as we are thinking about strategic capital deployment. But when it's all said and done, it's all about the long term for us and building and delivering long-term shareholder value. And you can imagine, if we thought it was a great investment at $52, we certainly think it's an even better investment where we are today. But I just -- I don't think there's a black and white answer to your question.
And Smedes, this is Brandon. The other thing I would add -- the other thing I would add in is just that we -- through today, we've issued almost 600,000 common OP units, the contributors of properties, and they've taken that equity at a price that's about $54 and change, and you saw the activity we did on the repurchases was at $52 and change. So there was -- part of our guiding thought on some of this was, "Hey, we were able to neutralize some of the dilution impact of equity that we had issued earlier in the year. And so that was also a point of reference for us in thinking through the execution.
Great, great. Thanks for that. Okay, thank you. Appreciate it.
Thank you.
Thank you. Our next questions come from the line of Michael Goldsmith with UBS. Please proceed with your questions.
Good afternoon, good morning. Thanks all for taking my question. I'm going to try to tie together a couple of different topics that have already been discussed. But Tammy, you started the call off talking about the inflationary pressures on the consumer. And then later in the call, you touched on maybe they've been a little bit more difficulty converting customers who have entered the channel and into and converting them to tenants.
So I guess just how do you think about the inflationary pressure on the consumer? How is it impacting -- how is it impacting kind of your trends? Like are customers responding more negatively the rate increases? Are they being more price sensitive when moving in? Or are they just vacating at a more frequent rate just because of -- because they're spending more money out of food and other things?
Good questions. I'll try to cover as you went through. To your last question, we don't see any change in move-out patterns that have to do with economic conditions. It's still around need-based. And so as you think about when the time is up, the time is up for them. If you rent at a store unit because you're remodeling your house and your house is done, you're moving out.
We haven't -- and this is through surveying and through things that we do, we have not seen a significant change in the customer pattern of why they're moving or why they're moving out. From an economic perspective, there's a lot of things that have changed. The housing market has cooled off significantly. Would we love to have a hotter housing market? Yes, in a down housing market, we will still do well. The sector does well.
We've proven that we're recession resilient. But we don't think there's anything around what's happening in the economic conditions right now that's changing what's going on, it's our length of stay or our tenant base. As far as the conversion piece, this is where we have to monitor all of our levers and figure out what's the best trigger point to get people to convert at the rate we want them to convert at.
And that's really more of a use around, I think, right now in this period of time of what's happening with discounting and what's happening with street rates. There is a lot of the sector that is cutting street rates pretty dramatically right now. We have not done that. We've always talked about it's a balance between the revenue goal and the revenue goal is rate, occupancy, concession, all those things in the mix, and we've chosen the path that we've held a little firm run street rate, held a little bit firm run less discounting, and we're still generating the numbers that we aim to hit.
I think that will change a little bit from the conversion pattern, and we may have to be a little more assertive on street rate and a little more assertive on discounting.
That's helpful, Dave. And my second question is on just kind of the keys of the same-store revenue growth. You reported 10.7% in the quarter. So that was down actually by about 400 basis points, your guidance at the midpoint implies about 6% same-store revenue growth in the fourth quarter. We would suggest kind of a step up in the slowdown.
So I'm just trying to better understand kind of the cadence of the moderation and how we should think about it going forward? And just like, I guess, you talked about altering some of the approaches, like how much can -- how much can you affect to slow the moderation based on kind of this current rate of about 400 basis points sequential deceleration?
Hey, Michael, it's Brandon. So yes, let me try to hit a couple of things you get on there. Look, I think what's really important to remember is that the fourth quarter last year was very abnormal for a comp purpose, okay? So pre-pandemic, it would not be uncommon for same-store revenue from Q3 to Q4, just absolute dollars to decline 0.5% to 1.5%.
The midpoint of our guide for the full-year '22. It implies the fourth quarter it's closer to like a 7% growth rate. It has us declining from Q3 right around that level. Last year, the increase from Q3, Q4 was about 2.5%. So that speaks to how challenging that comp is.
So we're not really trying to manage to the comp or the cadence. It's more about just executing on strategy, which Dave spoke to, and the comp is what it is. So I think another thing that people have done across the sector and for us is just to look at that two-year stack, and that moderation is a lot more ratable. It's not as dramatic. If that makes sense.
No, that does. If I can squeeze one more in. On the topic of property taxes, you've been doing the pressure from Texas this year. Do you have any visibility into how property tax may play out in the coming years?
Coming years is tough, Michael, I mean we'll guide in February. I'll tell you, we start every year with like a 5% to 7% growth rate assumption. Coming into 2022, we had an average three-year increase 2% on total OpEx and an average annual increase on property tax of 2.4%. So we've dodged it the last few years. And so we came into this year with that higher assumption and we're experiencing it.
So you see our numbers for the full-year, nine months, and I think Q4 will be something similar to comp for property taxes are a little more challenging. So maybe it comes in for fourth quarter year-over-year, closer to 8%, but it puts the full-year number something closer to 7%. So the high end of where we would have entered this year with the expectation. We'll update in February about what we're assuming for the full-year '23. But best guess right now is it would be kind of in that 5% to 7% range.
Got it. Thank you very much. Good luck in the fourth quarter.
Thanks Michael.
Thank you. Our next question is come from the line of Wes Golladay with Baird. Please proceed with your questions.
Hey, everyone. Can you give us your view on supply this year versus next year when you look at it from a weighted average of the impact of your operations?
Sure. I can start, Dave and Brandon can jump in. But I think our view of supply this year is that it will -- it has been and it will remain somewhat muted. I think that for projects that are under construction, they'll go forward, they'll be delivered. So what we're seeing and hearing from our Pros and from our friends at Yardi is that projects that are not yet approved and certainly, projects that have not yet secured financing, very good chance that they will fall out at least for the time being.
So our view on supply is that it will remain muted probably through 2023 and when we'll start looking at potential impact, probably, I don't know, early to mid-2024, but we'll keep you updated on that. We track that pretty closely, not only with Yardi, but with our Pros who are operating in the markets where we're seeing the potential threat.
Got it. And then you had the comment earlier, it's an all-cycle business, and it has proven that to be over the last 10, 20 years. But if you can maybe comment on some of the cyclical demand that may be abating. And then are you seeing the countercyclical demand pickup at the moment?
Yes. I think as we talked about, maybe the housing markets cooled off, will there be other factors that pick up on that. And we are. I mean I think the hard part for us is we're coming off as historic. And you look at -- you're coming off a pandemic, which we navigated very nicely through.
We obviously had a lot of success as the pandemic matured and went through the cycle if we just -- the self-storage sector and ourselves had unbelievable highs. And now we're heading into this uncharted waters of tough economic conditions and certainly maybe looking down the barrel of a recession.
And so I think all things will continue to play out. If the housing market cools off, then the renter market maybe stays longer. People can't afford as much of a house as they could. What happens with business owners and how much -- we're a pretty nice option versus warehouse space for business owners and how they look at us. I just think all the things that we've seen through our history. We'll prove out again that this sector and our business and our portfolio will do well and be recession resilient through what's coming forward for us.
Yes, I think that's right, Dave. I mean what we've talked about over the years is that change drives demand. And when one source of demand dries up, another one seems to flourish and replace it. So that is our view of, I don't know, probably through the next 18 to 24 months housing.
Sorry about that. Okay, well, if I could get one last one in. Variable debt increased this quarter, and you did have a $200 million loan at a pretty attractive price. What is the appetite for more variable rate debt? Is it something you want to get down over time through free cash flow, maybe some dispositions rates did move up almost parabolically, so some people of self-included. And so just maybe how are you going to navigate the variable rate challenge?
Yes, Wes, this is Brandon. I mean we're at a level that we're comfortable with right now. I don't think you should expect us to go dramatically higher. I also don't think that exposure is going to be cut to 0 either opening remarks. You heard me mention half of that our 24% of our total debt is variable half of that is a revolver.
So we exclude that because over time, we're going to replenish that revolver balance with permanent capital, long-term capital, fixed rate debt. And so when you -- we think about it with and without and when you exclude it, you've got 12% of the rest of our debt, a couple of bank term loans that we've kept variable. When you're right. I mean rates moved move sharply. So that will be a short-term headwind. But when things come down, there will be opportunity for us to opportunistically raise capital. Like you mentioned, we did during the quarter with a 5% coupon debt that we placed.
Great. Thanks everyone.
Thanks Wes.
Thank you.
Thank you. Our next question is coming from the line of Ronald Kamdem with Morgan Stanley. Please proceed with your questions.
Hey, just a couple of quick ones. Just going back to the occupancy, but actually mixing in a little bit of the ECRI. When you think about -- can you just give us a sense of the ECRI intensity over the past couple of quarters as you're sort of watching this occupancy drop, because I think your point is that there's a trade-off, and I think what we're trying to figure out is where was sort of the peak ECRI intensity? And how much does it come off potentially as you sort of see occupancy go down, if that makes sense?
Yes, it makes sense. And thanks. And typically, peak, its historical seasonal trends, the peak ECRI activities really in the summer months. We have -- there was a couple of months in the summer. I think we mentioned last quarter, May was our most active month where we had the largest percent increase and the largest percentage of tenants hit.
But if you look at the third quarter, we kept a very normal cadence. The percent of rate changes, the percentage of rent change to the customer as far as a dollar amount was very much in line with what we've been seeing over the last 12 to 14 months. and the percentage of our tenants that we hit in the third quarter was very similar.
It is a balancing act. The team is studying right now what's the percentage of loss that we can attribute to rate increase versus what customer sentiment is to what customer appetite is. We've already gone back and instilled some caps. We were looking at percentage of rate how many number of rate increases we've given tenants. So we're going back to some of the older practices that allow us to really dial in our risk or do we give a tenant a rate increase or not.
But the third quarter remained very steady. We were fairly steady in October. What's to come? We'll have to monitor what the consumer is telling us. At this point in time, there are nothing that they told us yet that is causing us to shift dramatically. But again, this is stuff we monitor, and it's a big puzzle. And there's a lot to it. So -- but I hope that answers your question.
Yes. That was super helpful. Just moving on to the next one is just on the expense -- same-store NOI expense guidance -- for the same-store expense guidance, excuse me. I think you mentioned it was higher both because of some property taxes and some inflationary pressures. Any chance we could just dig into that and a little bit more color like half of it is taxes, half of it is the other? Like how does it break out? Just any more color on what came in higher than you expected? Thanks.
Yes, Ronald, I mean, tax is a big piece, just given it's one of the two largest OpEx line items in addition to personnel. So it's coming in closer to 7% for the full-year growth, but we've managed the personnel costs really well, right, a little under 3% growth for the quarter, call it flat for the nine months year-over-year.
And so those making up almost 60% of our OpEx, they blend out kind of like 4% growth combined for those two line items. So then really, what you have is other contributors that I mentioned in my opening remarks. We were seeing the utilities costs go up in second quarter. So there were some elements of that already baked into our expectations when we talked to you in early August.
But I would say it came in and those costs and the increases in rates came in a little bit higher than we expected three months ago. So that was a contributor to upping the OpEx guide a little bit. And then on marketing costs, again, we fully expected to increase that spend I mentioned that is open. I also think one of the questions earlier spoke to the fact that, that's going to be elevated again in the fourth quarter, but we told on that lever a little bit more than we might have thought in early August.
So those were a couple of the key items, credit card processing fees is another one that came in on the margin a little bit higher.
Great. And then my last one was just when I look at the same-store revenue guidance, it sort of implies sort of a mid-6s growth rate coming in 4Q, if I'm doing that math correctly. But just trying to -- I think what we're just trying to square the same-store revenue for 4Q versus the peer set.
How do you guys sort of think about where your portfolio is different from everybody else, right? Is it maybe because others have LA exposures you guys don't -- do you think about sort of rent-to-income ratios at all? Like just how do you square sort of what you're seeing in your markets versus the peers?
Yes. Ronald, I mean it's hard to speak to the peers because everybody's portfolio has different dynamics. I know that we were the second highest in revenue growth in Q4 of last year, right? So that's going to play into the 2-year stack when you do that math on the comp. The other thing I would just point to is what I remarked to Michael earlier about the comparable and kind of the abnormality of what we had last year as well as 2020 where sequentially same-store revenue grew Q3 to Q4, and that was in part because we were either gaining occupancy or not trading off that much on occupancy.
And that's very unusual. So if you look at any pre-pandemic year, with occupancy declining Q3 to Q4, as it seasonally does, it would not be uncommon to have absolute dollar revenue growth decline Q3 to Q4. We didn't have that last year, but we're absolutely expecting it this year, or at least that's what's implied by the midpoint of the guide.
So I think another way of saying some of this is as I hear you and others remark on what the growth implies that you're all coming up with like a 6.3% 6.5%. It's actually a 6.9% at our midpoint. And it's the difference between doing kind of the simple quarterly average math and looking at the raw dollars because of this really challenging comp.
So if we look at the specific dollar math, the low point of our revenue guide implies Q4 growth of 5%. The midpoint is 6.9% and the high end is when we look at it, it's 8.8%. And so that just speaks to the challenging comp that we have or the unusual comp that we have in the fourth quarter of last year.
Great. Super helpful. Thank you.
Thanks Ronald.
[Operator Instructions] Our next question is come from the line of Todd Thomas with KeyBanc. Please proceed with your questions.
Dave or Brandon, maybe you both pointed out a number of times that occupancy grew last year from 3Q to 4Q and talked about that tough comp and some of the abnormal seasonality last year. With regards to that 91.4% occupancy data point at the end of October, I'm curious what the year-over-year spread looks like in occupancy?
And then also, is the change in discounting and promotions and I guess, the change in street rates that you're now implementing, is it having the intended result? Or are you starting to see demand stimulated a little bit more and the expected response?
Yes, Todd, I'll take the first part, and I'll let Dave speak to the discounting and promotions and success rate on that. So it's about a 450 basis point year-over-year negative on that end of occupancy number that Dave spoke to. And I think just to bridge some of the commentary that you heard from Tammy and Dave, we are low point going into COVID late 2019 on same-store occupancy was right around 87% to 88%.
And for a long while now we've been saying, look, we're going to revert back to a more normal level. But as Dave said at the open, we think it's going to stabilize above -- somewhere above maybe 200 basis points. So that completely at 90%. So I don't want to mischaracterize what we said here. I think even though what Dave said is true, maybe it's gone a little quicker, it's not that much quicker.
I mean our revenue guide at the midpoint stayed the same. But we're not necessarily that surprised by what's happening in occupancy. We're certainly reacting on a daily basis, but I don't want to mischaracterize some of the comments earlier as if it was a big surprise to us. Dave, you want to hit the discounts?
Yes. Trying to work our way through discounts. We talked about third quarter was historic it's low, 2.2%. At this time of the year, you might be running closer to 4.5% to 5%. And so I think as we look at -- as how we navigate the conversion rate that we're after, I think that this piece is going to step into this place and then where we balance ourselves in the market as far as street rates.
I think all those things contribute. We purposely held through the third quarter. Contract rate growth was solid. Street rate decline was minimal and that was on purpose. So this is how our markets react. Again, I think this occupancy headwind compared to last year is a tough drag to get over, but that's not what we're worried about. We're worried about where we're going with our portfolio and where our portfolio lands.
And we're looking at this not just this quarter to the next quarter, but long term. And so long experience in our markets, long history with our customers, finding the right balance of all these things to find the revenue number that fits the markets we operate in.
And the occupancy headwind, Todd, it's going to be there. I mean just this should be on everyone's screen, it's going to be a negative comp challenge for certainly in the fourth quarter of this year as well as Q1 of next year. Just until we lap that this kind of abnormal comp, we really don't lap it until Q2 of next year.
Okay. Got it. That's helpful. And then in terms of kind of looking ahead, it's -- clearly, there's a little bit of uncertainty around the macro and conditions are sort of evolving with regards to the consumer with small business and so forth. I'm just curious, as you kind of think about budgeting for next year, are the PROs in the portfolio, are they communicating with you any differently today? Or are you -- are they coming to you looking for a little bit more guidance or vice versa? And maybe, Tammy, can you discuss how you work with your PROs to set budgets and forecasts and sort of reforecast, I guess, for the year ahead and really throughout the year a little bit?
Sure, sure. We're well into the budgeting process for 2023, Todd. And so the process starts -- it starts toward the middle to the end of the third quarter. We have regular conversations with our PROs, and this is not a handful of different fronts. So we have a VP of Financial Planning and Analysis, who kind of runs the process, and he says very close to our PROs and their Chief financial person, whoever that ends up being.
And I would say that what we are hearing from our PROs so far this year is pretty consistent with what we're seeing across our corporate portfolio. I think communications are -- everybody is cautiously optimistic. Our PROs have been in the business for 20-plus years and operating in their respective markets. So they understand this as well or better than frankly anybody as far as I'm concerned.
I think that the moderation that we're seeing is not unique to corporate managed stores there. It's really across the country. Some markets being affected maybe a little more than others. And what we've talked about over the years, Todd, is that because of our broad geographic diversification, for us, what we see is that when one or two or three markets go down, there are another three or four or five that are countercyclical and are going up.
And I think that will continue to be true for us. The communication just generally speaking, communications with our PROs. It happens at a lot of different levels, but in terms of the principles, we have a Monday afternoon touch point meeting that we've had, I don't know, every Monday barring travel and other things going on like we might be releasing earnings or something.
We have a Monday call with the PROs. And then once a quarter, at least, we do a deep dive with each PRO. So that's not a big group call, but rather a deep dive on the PROs of performance, what they're seeing in the market, what they're seeing with new supply and what their expectations are, both short term and a little bit longer term. So I think -- Dave just mentioned to me. And then we also have a biweekly operations meeting, so the operations leads are staying in touch on what they're seeing in their markets and best operating practices. So -- and then we have an annual meeting where we bring everybody together and you probably didn't even want to know that much. But yes.
Sorry. Go ahead.
No, no. I was really just wrapping it up. I was just saying, I think that the communication is frequent and thorough and continues to be, I think, very productive and collaborative. So...
Okay. But I guess I'm also wondering how much input do you have on the budgets that they're setting for the year? Or alternatively, do you take their budgets and as you kind of wrap them up or roll them up to sort of the corporate or to the REIT's forecast for the year? How much work do you do on their budgets?
Good question. And so the answer to that is we have a software that we set up all the parameters, and we set up all the historicals on and we -- actually, it has the ability to make changes through line items. We let them take a first stab at it. We come back in. So it's a bottom-up approach. We listed solicit feedback and then we get heavily involved in it.
We look at markets that we have overlap expectations, we certainly have a goal in our mind where we would like the land next year, and that plays into that budgeting process as well. So it's collaborative. Yes, there are some pushing in, talking in negotiations that go along in that process. And so lots of experience, lots of great minds working on it, but definitely, we are involved in the budget process.
And from my experience, the way we run it is not very different from other companies that I've been involved with in terms of where it starts and how it builds up and then eventually, we know who the sandbaggers are, and we know the guys who are being out there suing their maybe strongest foot forward. And so we push -- the question will be fall in.
You call me a sandbagger.
Sandbagger in charge.
All right. That's helpful. And just one last one real quick on the transaction environment. I realize that you're expecting activity to be slow here near term, and that makes sense. There's some volatility around asset pricing and in the capital markets. But I just wanted to ask about the captive pipeline, which I think stood at around $1.5 billion, maybe slightly higher. What's the status of that pipeline today?
And how should we think about investments from the captive pipeline and just what the PROs will look to do given the current lending environment when you sort of put it all together because I believe a lot of those acquisitions from the captive pipeline were sort of expected to take place alongside debt maturities and other capital markets-related activity or recap. So just curious what we should be thinking about there just given where interest rates are and the lending environment and so forth?
I don't think we'll see too much of a change in things because of the capital markets. The assets that have financing on them that's already there. And there may be a little bit of an acceleration with a handful of our PROs who are developing assets. And as those assets approach stabilization and they're looking for whether they contributed or permanent financing until they reach full stabilization.
I don't know the answer to that yet. We -- but our cost of capital has gone up, too. So that resets pricing and expectations on that side. But I think it will remain a solid opportunity for us to maintain an acquisition pace of off-market acquisitions at good prices with our PROs and assets that are high quality in markets where we're currently operating.
So it may accelerate a bit. I don't have line of sight on that yet, but I think it's a good bet that we'll see some assets ahead of where we might have otherwise in 2023.
Okay. All right. Great. Thank you.
Thank you. Our next question is come from the line of Steve Sakwa with Evercore ISI. Please proceed with your questions.
Hi, team. This is Laura [indiscernible] from Evercore. I just have a quick follow-up question. So geographically and demographically, your customers are relatively more sensitive to informed national rate pressures and pertaining to this feature, I guess what's the -- how is the bad debt is trending so far? And what your expectations of the bad debt level through year-end and towards '23?
Yes. Yes. Thanks for the question. Good question. Bad debt has certainly returned to pre-pandemic levels. and return really in the third -- it started in the second quarter and really returning to the third quarter. So the teams are having to work really hard on collections as far as back to what normal sequences would be.
We're seeing more units at auction. The processes of those things are back to what we would see levels of 2019. Is it concerning us? No, not at this point. These are levels that we're used to operating under. And that's not everywhere. We have markets that are a little -- could be a little higher than that. The market is a little bit lower than that. But as a whole, it's returned to average. But again, no concern at this point.
Okay. And is there any certain level that makes you such a bit cautious on rate growth and maybe try to start to manage the occupancy?
So I think we tried to talk through it. Certainly, occupancy is a piece of this. And we are looking at how and where we want to land throughout all of our markets. We certainly, in the third quarter, looked at marketing spend and the only reason you look at marketing spend is you wanted to drive more move-in activity. We're going to look at where we use fee rates and discounting. So yes, that is a part of the piece of the puzzle. There will be some markets that we will certainly react a little bit harder if we want to drive some more occupancy, and we think that's the right revenue math problem.
And so that's what we would work on. We also have markets that are performing very well that we're going back into and say, can we drive a couple more points of occupancy markets that are performing very well. So it's not always a negative thing that we're trying to balance all these pieces where we spend our money, how we use rates, how we certainly on our mind about where we balance and where we finish.
Okay. Thanks. I appreciate the color.
Yes, thanks for the questions.
Thank you. There are no further questions at this time. I'd now like to hand the call back over to Tamara Fischer for any closing comments.
Well, thanks, everyone, for your time today and for your interest in and support of NSA. Even with moderating fundamentals and tough comps, we had a great third quarter, and we're very optimistic about the rest of the year and into 2023.
As I mentioned earlier, self-storage has demonstrated its resilience in challenging economic times and is one of the best, perhaps the best performing property type over the past 25 years. We look forward to seeing many of you in San Francisco in a couple of weeks. Thanks, and have a great day.
Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.