National Storage Affiliates Trust

NYSE:NSA

Earnings Call Analysis

Navigating Rental Compression and Cap Rate Shifts

The recent earnings call reveals that the company has faced a tightening in its rent roll down, which peaked in September 2023 at nearly 19%. The management perceives this as the peak, and with occupancy becoming tighter and street rates leveling out, the expectation is that this compression will not be prolonged. In terms of capitalization rates (cap rates), they have increased slightly, indicative of a cautious market with a gap between seller expectations and buyer willingness. While acquisitions in Q3 were around 6%, this reflects a legacy position, and current cap rates are nudging upwards, signaling a more conservative approach to valuation in real estate transactions.

Steady Performance Amidst Market Headwinds

National Storage Affiliates Trust's third quarter was in line with expectations, demonstrating resilience in a challenging environment that included high interest rates and competitive pressures in customer acquisition impacting street rates. Their proactive revenue management strategies held firm thanks to a stable consumer base, and the team's adept execution of a $250 million net private placement—a strategic move well-timed in advance of rising Treasury rates—is noteworthy. The continued growth of acquisitions reflects the robustness of the company's PRO structure and its adaptiveness to market changes. Despite an overall positive revenue growth of 1.1%, they reported a year-over-year core Funds From Operations (FFO) decline by 6.9%, with occupancy seeing a 360 basis-point decline, signaling a need for careful market watch and operational efficiency improvements.

Operational Highlights and Strategic Acquisitions

Operational efficiency was reflected in the third quarter as payroll costs saw a 4.7% decrease compared to the previous year, coupled with a 2.2% reduction in property taxes. These savings however were offset by a spike in marketing expenses, arising from intensified competition and significant insurance costs from the April policy renewal. Strategically, NSA acquired four storage facilities for $55 million, a move aligned with their growth strategy, and has emphasized portfolio optimization over rapid acquisitions. Additionally, a substantial stock repurchase of 6.4 million shares for $213 million signals their confidence in NSA's valuation and long-term prospects.

Balance Sheet Management and Future Outlook

The issuance of $250 million in senior unsecured notes ensures growth capital at favorable interest rates, reflecting strong fiscal management in the face of rising rates. With a net debt-to-EBITDA ratio of 6.3 times and a strategic intention to reduce floating rate exposure, NSA is positioned securely within its leverage targets. Looking ahead, NSA is maintaining its full-year guidance with projected same-store revenue growth of 2.13%, a 5.13% rise in operating expense, and a moderate 1% growth in same-store net operating income (NOI). They forecast a core FFO per share of $2.66, setting a stable foundation for future performance amidst a favorable new supply outlook and ongoing technology investments to enhance customer attraction and revenue management.

Earnings Call Transcript 2023-Q3

[Operator]

Greetings. Welcome to National Storage Affiliation Third Quarter 2023 conference call. [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, executive]

We'd like to thank you for joining us today for the Third Quarter 2023 Earnings Conference Call of National Storage Affiliates Trust.

On the line with me here today are NSA's President and CEO, Dave Cramer; and CFO, Brandon Togashi. Following prepared remarks, management will accept questions from registered financial analysts. Please limit your questions to 1 question and 1 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, November 2, 2023. The company assumes no obligation to revise or update any forward-looking statements because of changing market conditions or other circumstances after the date of this conference call. The company cautions that actual results may differ materially from those projected in any forward-looking statement. For additional details concerning our forward-looking statements, please refer to our public filings with the SEC. We also encourage listeners to review the definitions and reconciliations of non-GAAP financial measures such as FFO, core FFO and net operating income contained in the supplemental information package available in the Investor Relations section on our website and in our SEC filings.

I will now turn the call over to Dave.

[David Cramer, executive]

Thanks, George, and thanks, everyone, for joining our call today. The third quarter was largely in line with our expectations as we continue to execute on the everyday blocking and tackling of our business.

Our teams did a great job navigating the dynamics of the seasonality and the competitive environment. In the back half of the year, occupancy continues to follow typical seasonal patterns, and we are narrowing year-over-year occupancy delta. Our consumer remains healthy and stable, allowing us to execute on our revenue management strategies. There were several positive items to highlight this quarter, including the completion of our $250 million net private placement. Our team did a great job in the timing and execution of that transaction. Treasury rates are higher today than we repriced the offering, so we're pleased to have that capital raise behind us.

We also continue to execute on acquisitions from our Captive pipeline, while our approach continue to replenish that pipeline by making acquisitions outside of the REIT. This illustrates one of the many strengths of our PRO structure. We remain pleased with our geographic exposure and our secondary market performance. Our MSAs outside the top 25 continue to outperform the portfolio average in revenue growth. However, we are facing near-term headwinds, including high interest rates, which has muted the housing market thus slowing consumer transitions. We're in a very competitive customer acquisition environment, which is pressuring street rates. We have challenging comps in parts of Florida due to hurricane-driven demand last year.

We're also dealing with elevated new supply in a few select markets like Atlanta, Phoenix and Las Vegas. That said, all of these challenges eventually will ease, which gives me confidence in our outlook for NSA. In the meantime, we continue to focus on the things we can control. [indiscernible] our efforts in regards to people, process and platforms. Our customer acquisition teams did great job maximizing rental conversions by adjusting marketing spend and front-end pricing. Our revenue management team continues to utilize improved AI technology to maximize our ECRI program. I'm confident that the investments in technology that we're making today will continue to enhance our results going forward.

We are also encouraged by the progress to date around our strategic dialogue involving overall portfolio optimization and we're generating equity capital through programmatic joint ventures, noncore asset sales and portfolio recapitalizations. We expect to provide an update on these initiatives over the next few quarters.

I think it's important not to lose sight of the long-term attractiveness of this sector and the positive attributes that will benefit us going forward. A few things to keep in mind. The new supply outlook is favorable, and our market's deliveries are expected to drop by over 20% by 2025. The consumer remains healthy and stable.

Consumer length of stay remains well above pre-pandemic levels. M&A activity and bad debt expense remained in line with long-term averages. Technology initiatives will continue to improve our ability to track newer customers to enhance our revenue management strategies, allowing us to react quickly to changing environments. We believe NSA is well positioned within the sector to have a strong performance in the future. As I reflect on the sector's strong performance over the last 5 years, I want to point out that during that time frame, our average same-store NOI growth was over 9%, and our core FFO per share increased 86%, both are very strong results.

I'll now turn the call over to Brandon to discuss our financial results.

[Brandon Togashi, executive]

Thank you, Dave. Yesterday afternoon, we reported core FFO per share of $0.67 for the third quarter of 2023, which represents a decrease of 6.9% over the prior year period. The year-over-year decline despite 3.9% growth in adjusted EBITDA was due primarily to elevated interest expense as same-store NOI growth was essentially flat, declining just 10 basis points.

We delivered positive revenue growth of 1.1% on a same-store basis, driven by growth in contract rate of approximately 5%, partially offset by a 400 basis point year-over-year decline in average occupancy during the quarter. Occupancy ended the quarter at 88.5%, down 150 basis points from Q2 and down 360 basis points year-over-year. Similarly, October occupancy finished at 87.4% which is also 360 basis points below last year. Expense growth in the third quarter was 4.2%. Payroll declined 4.7% from the prior year period, while property taxes were down 2.2%. These cost savings were offset by marketing expenses that remain elevated due to increased competition for customers and a tough comp as well as insurance expense, which will remain elevated due to the policy renewal we had on April 1.

We will continue to focus on minimizing our controllable expenses where we can. On the acquisitions front, during the quarter and through October, we acquired 4 facilities totaling $55 million, mostly out of our captive pipeline. In the near term, as Dave alluded to, we are focused on optimizing our portfolio and will remain patient in regards to acquisitions.

Turning to the balance sheet. During the third quarter, we repurchased 6.4 million common shares for $213 million. We're encouraged by the volume of execution we were able to achieve under the repurchase plan our Board established last year. We are confident in the long-term outlook for NSA and believe the current trading levels represent a very attractive investment opportunity.

Subsequent to quarter end, we issued $250 million of senior unsecured notes across 4 tranches in a private placement with a weighted average coupon of 6.58% and a weighted average maturity of 5.8 years. We are pleased to have completed this transaction prior to the recent increase in treasury yields, which are approximately 40 to 50 basis points higher than when we priced our deal.

Today, approximately 18% of total debt is variable rate, mostly related to our revolver. Going forward, we will take further steps to free up some capacity on our line of credit, which will naturally reduce our floating rate exposure. At quarter end, our leverage was 6.3x net debt to EBITDA, up slightly from 6.1x at the end of the second quarter and within our target range of 5.5 to 6.5x.

Now moving on to guidance. Results for Q3 were generally consistent with our expectations and performance in October continues to track in line as well. As such, we maintained our full year guidance ranges for same-store performance and core FFO per share. The midpoints of our guidance ranges as outlined in the earnings release are as follows: full year same-store revenue growth of 2.13%; same-store operating expense growth of 5.13%; same-store NOI growth of 1%; and core FFO per share of $2.66. Our guidance is based on a continuation of normal seasonality, which would include a modest amount of downward movement in occupancy and street rates for the balance of the year.

At the midpoint of guidance, our same-store revenue growth in the fourth quarter would be negative year-over-year. While this is the result of near-term headwinds and coming off the record performance over the past few years, I'll echo what Dave emphasized in his remarks, self-storage is a great property type that has proven its resilience over time with [ needs base ] demand and the ability of operators to be nimble with revenue management strategies.

Thanks again for joining our call today. Let's now turn it back to the operator to take your questions. Operator?

[Operator]

[Operator Instructions] Our first question is from Michael Goldsmith with UBS.

[Michael Goldsmith, analyst]

It seems as though the sequential deceleration in operating metrics was more modest than they've been over the last couple of quarters. So is that a function of the environment improving slightly? Is that some of the larger steps you've had some of the larger step-downs in the past comparisons are getting easier? And then do you think the trend going forward should kind of continue to be more flattish as you've moved past some of the worst of it?

[David Cramer, executive]

Thanks, Michael, it's Dave. Thanks for the question. Thanks for being on the call. I think you're right in how you're looking at it. Our toughest comps are behind us as far as year-over-year street rate and year-over-year occupancy as we go through -- as we really came through the third quarter, September was really kind of the peak of the pinnacle of those high points.

And so as we head into the fourth quarter, you'll see us have a little bit easier comps, and we're starting also to level out a little bit on street rates in a lot of our markets and a little less volatility around street rates in some of our markets. So we're having little easier comp in the fourth quarter, and those spreads will tighten year-over-year.

And that's due to the fact that last year, we held that a little longer on lowering our street rates, it's really the third quarter when we had the movement around street rates. And the teams have done a good job really looking at how do we -- revenue management practices and how we're really working with our existing tenant base and really looking at how we're treating the customers that are with us today.

And we've had really good success around some of the technology platforms that we've improved and some execution around that existing customer base that are allowing us to really work on what we have. Certainly, today, there's still some pressure around some markets where we have supply. There's markets where street rates has been more volatile because of that supply and the demand ratios. And so we've had to react to that.

But on a whole, our portfolio, we believe the diversification of where it's located, we've had some pretty good success moderating some of the effects of rate competition and supply and those things.

[Michael Goldsmith, analyst]

And my follow-up question is related to the share repurchases. Can you talk a little about the funding source for this? And is this a true invest in the shares, buying back just given where they're priced or are these to offset some of the OP units you've issued? And then would you consider -- would you consider continuing to use this lever going forward?

[David Cramer, executive]

Yes. So I'll start and Brandon can jump in here in it. And again, thanks for the question. Our belief in our shares and our belief in our company and our belief in adding shareholder value, we think our stock is a great purchase. Where it's currently trading at and where it's valued at today, we think purchasing our stock is a great opportunity for us, and we were happy to fulfill what the Board has approved for us over a year ago -- pretty much fulfill that commitment to repurchase our stock back.

From our perspective and we look at where we're at with our strategic initiatives and what we're trying to accomplish in the future. We talked about on our last call is we're looking at initiatives around our portfolio and optimizing our portfolio. And if you think about part of that portfolio optimization, we're evaluating sale of noncore, nonstrategic assets. We're evaluating some portfolio opportunities around JVs where you might recapitalize some stores into a JV.

And so the team has done a really good job, and we've been very thoughtful about studying our portfolio top to bottom and really thinking about where we want to operate, how we want to operate and where maybe some locations don't fit into that strategy going forward. And the team has done a good job identifying assets that would fit in 1 of these categories, whether it be some kind of recapitalization or sale. And we are vigorously working on those initiatives. I don't have much more to report as far as definitive pieces of that, but I can tell you, I've been pleased with the progress we've made. The team has done a great job identifying and working the plan. And so I'm pleased from that aspect of it.

[Brandon Togashi, executive]

Yes. And Michael, this is Brandon. I mean the only other thing I would add is on the repurchases, it's not necessarily to offset, as you said in your question. VLP equity we've issued this year, I mean, really, what we've issued this year has been weighted towards our preferred equity preferred OP units and the subordinated equity with our PROs.

Now having said that, we grew a lot very quickly in '21, early parts of '22. And so some of the equity -- common equity we issued during that time was at higher levels than what we can repurchase it that now. So that's certainly part of the math and the obvious benefit that goes into it. But that's just the only other thing I would say in response to your question. I think what's important in terms of what Dave spoke to is that there's a multi-quarter execution to our strategy here. So what you saw in the third quarter, we're very pleased with, but more to come in the next couple of quarters.

[Operator]

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

[Juan Sanabria, analyst]

Just hoping you could talk a little bit about the street rate trends throughout the third quarter, anything -- and provide an update for how October trended on a year-over-year basis. And as part of that, where you feel most comfortable within the same-store range, it's still pretty wide, given we only have a quarter left. So if you can kind of include that in the answer, that would be fantastic.

[Brandon Togashi, executive]

Yes. Juan, this is Brandon. So street rates year-over-year as we finish the third quarter, were similar to the update that we gave for August and we talked about those being 15% down year-over-year. And so that held pretty steady on a year-over-year basis in September. That delta has compressed a little bit, and that goes to what Dave said earlier that last year, we started to move rates down really in late Q3 and early Q4. And so we're hitting that comp that gets slightly easier. But they're still negative double digits.

And then in terms of the guidance, you're right. The ranges we kind of kept it where we revised to in August. The thought process there is just whenever we've revised guidance in the past in August, we don't spend a whole lot of time micro tweaking it in November. And frankly, this year has been more difficult to predict.

And you saw that based on what we introduced in February and what we had to revise in August. So I think going forward, including when we introduced guidance for '24 in February, it's possible that our range is then are a little lighter than what we've historically introduced to start the year. Where we're most comfortable is certainly around the midpoint of the range. I mean the -- on revenue, for example, at the high end of our full year guide. It would imply a fourth quarter that's accelerating from the 1.1% rev growth that we had in the third quarter. And I'd characterize that as unlikely. So I would guide you to really the midpoint of the range on all fronts, Rev, OpEx and NOI in the same-store pool.

[Juan Sanabria, analyst]

Great. And then you guys are kind of reinvesting in the platform and the systems given some of the rapid growth you've had over the last couple of years. So just curious, as we start to think about '24, how we should think about G&A growth again as you reinvest in the business?

[Brandon Togashi, executive]

Yes, that's a good question. We're not prepared to speak too specifically to '24, but we certainly are making investments. Some of those investments, yes, we've been making throughout '23. So that's kind of already baked in. Those investments are on the personnel side. We've hired staff. There's been opportunities. Frankly, given the M&A activity in our space, there's opportunities to add folks who had storage experience our team. There's been technology investments for sure. Some of that runs through G&A, some of that's capitalized, and then it gets depreciated through our corporate investments and that does flow through to FFO. But it's only still impactful given you're spreading those costs out over a multiyear basis.

So I wouldn't characterize those investments, one, as like tremendous needle movers in terms of like G&A costs. I think they're needle movers in terms of the ROI that they can provide. But in terms of the G&A line item, it's just not a super noteworthy delta.

[Operator]

Our next question is from Smedes Rose with Citi.

[Bennett Rose, analyst]

I just wanted to ask you a little bit if there's any sort of change in the way that you're thinking about occupancy versus rates? I mean I get that everyone is trying to maximize revenue per unit, but occupancies now are in the high 80s kind of back to where you were pre-pandemic. And is the -- and others seem to be maybe being more aggressive to maintain occupancies over 90% for various reasons. I'm just wondering, is there any change like with what's going on in the housing market or the renters market or anything that would make you change kind of the way you think about what's the right occupancy level to achieve?

[David Cramer, executive]

Smedes, that's a great question. Thanks for being on today. Certainly, the muted housing market and the lack of transition has certainly changed one of the demand drivers in our business. And we have a lot of them, but certainly, that's one of them that over the years has provided good source of tenants for us. What the team is doing is really trying to balance how much we want to chase occupancy at the expense of rate and discount and how does that affect the lifetime value of a customer. and really, how does that fit into our revenue model. And I think the team between marketing spend between discounting between how aggressive to be on asking rent street, entry rate and how to really balance occupancy.

And I'm very pleased if you look at our annualized rent per square foot growth has been strong. And I think we're finding our foothold around a little calmer around the street rate movement and trying to balance that street rate occupancy discount to drive the revenue number we want. And so what I would say is in the markets where it's been very volatile like we have new supply like Phoenix and Vegas and Atlanta. We probably had to react a little harder, but we have a lot of markets where we've actually found a good occupancy foothold and been able to really hold some street rate activity to leveling off.

And so -- to your point, it's a balance. I think we're probably returning a little bit more to our heritage, where we're not necessarily going to chase occupancy at all costs. We're going to balance and try to find our revenue path with balanced occupancy rates and discount.

[Bennett Rose, analyst]

Okay. And then just to follow up on that. I mean, any change in the way that you're thinking about ECRIs going forward, either more moderate or less frequent or the same -- to the same degree?

[David Cramer, executive]

We've been -- that's to me, been one of the silver linings to our business for a lot of years, and it remains as our customer base is healthy. They're stable. That side of the revenue management business, we've been able to maintain our cadence and our level of increase and quantity of increase, and we're just not seeing any change in customer behavior because of that program. And so while maybe we're not attracting as many from the top of the funnel because of a little bit slowing in housing market or the muted housing market, the existing consumer base is very healthy, and we've had great success there.

[Operator]

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

[Jeffrey Spector, analyst]

Back on the occupancy, again, you have had the most lost versus your peers since the third quarter of '22. And again, that gap has close as much as the peers. So again, just trying to think about your comments on the strategy, occupancy versus rate and that -- or is it certain markets that are maybe weighing on the portfolio versus others?

[David Cramer, executive]

Good question and good thought and thanks for being here. We had a lot farther to fall. If you really study what happened during COVID, where we started in '19 and '20 in our occupancy levels, which we're coming close to now as we're back down to it.

We had the most occupancy gain of any of the peer group, any of them. And we've had the most fall off, obviously. And if you think about where we're positioned today, it's still a result of that tough comp. I mean we're finding our -- we look at supply-demand. We look at market equilibrium. We look at where our portfolio can run at an occupancy level that generates the maximum amount of revenue that we're trying to strive for I think that's the spread you're seeing.

It's just as we cycle back down into what I would call normal patterns, we certainly are working to find the right balance between those 2 I talked on last call. I do think as we look going forward, we want to make sure as we optimize our portfolio, do we have the right unit mix in all of our locations for the right occupancy levels we want to run at?

And so strategically, over time, we are looking at sizes of units, how long they're on market how full are they? Is there opportunities for us to change our unit mix a little bit and reattribute our properties versus discount unit down 40% to try to fill it up. We think there's a better approach to that. And so I think as we cycle through this last quarter, some of that occupancy comp and that spread will start to tighten to what the peer group looks like year-over-year.

[Jeffrey Spector, analyst]

Okay. And then how are you balancing the leverage? Your leverage, it is higher than the peers versus the share buybacks. I definitely appreciate the share buybacks, but at the same time, it just -- it feels like an environment where a company should be reducing debt. So how are you balancing those 2?

[Brandon Togashi, executive]

Yes, Jeff, good question. It's obviously top of mind for us, and that goes back to my earlier comment about this is a multi-quarter execution. So I think at the end of the day, our intent is when we're done with these core set of immediate initiatives that they've spoken to, our leverage is going to be equal to what it was before we endeavored to execute on all these strategies or even lower, right?

And so everything that we're doing now is with an eye towards ultimately creating more liquidity so that when market conditions are more conducive, we can grow externally at the same pace that we enjoyed for several years. And it also address the annual debt maturities that we have coming up and putting ourselves in a position, the best capital position to fund our growth and to address kind of those annual capital needs.

[Operator]

Our next question is from Samir Khanal with Evercore ISI.

[Samir Khanal, analyst]

Dave, on maybe getting back to the ECRI question, but -- how much has that sort of moderated through the year?

[David Cramer, executive]

It's a good question, Samir. For us, I would say in the last couple of months, we probably come up a really, really high. We were pushing really, really hard through the summer. Frequency a little bit elevated in the summer, but certainly on the amount of rate increase. And so it's moderated slightly in the last couple of months. Frequency hasn't changed. Cadence hasn't changed, but we've come off a little bit on the top in percentages of rate increases.

And some of that's a function of we've got a lot of tenants processed through the summer. And so that was great. We got out in front of that piece of it. And some of it were Obviously, as you look at market conditions and units that are opening up and those things, but I will tell you, we're still well above pre-pandemic levels and the technology is -- we have better line of sight. We're able to react quicker, understand trends quicker. I'm really pleased with the position we're at to really continue to execute in the market conditions we're in.

[Samir Khanal, analyst]

Okay. Got it. And then, I guess, the switching of the transaction market, it looks like you acquired a few assets. I mean, how are you thinking about sort of revenue growth, NOI growth, maybe the underwriting of those properties?

[David Cramer, executive]

Yes, another good question. Certainly, we're able to tap the CAFD pipeline. So those are assets. Obviously, our PROs have had a good line of sight on for a number of years, whether they were filling them up or built them and worked through the process of seasoning them up. Certainly next year, it's going to be a challenging year as far as you look at revenue growth, but we also -- we're adding stores in markets where we have operational efficiencies.

We think as we're bringing them in, there's still upside to those. We believe we brought most of those assets in around right around 6 cap today. And as you look forward moving forward, we'll grow out of that and have some success around it. And I think really the 6 caps a year forward looking, if you think about it that way, and then we'll continue to grow through it. But yes, from a revenue perspective, we've certainly moderated our expectations on underwriting and how we're thinking about growth on assets we're looking at. I think that also contributes to the overall market conditions of how people are buying properties today. It's hard to underwrite tremendous amount of revenue growth, unless an asset has some fill-up left into it or something that's not gone on from a seasoning point of view. I hope that helps.

[Operator]

Our next question is from Todd Thomas with KeyBanc Capital Markets.

[Todd Thomas, analyst]

Brandon, Dave, with regard to the buybacks, I think you characterized it as a multi-quarter execution -- so does that mean that you anticipate continuing to buy back stock here in the near term? Or do you pause a bit here? I just wasn't clear on what the message was.

And -- it sounds like some of the dispositions or the recap plans that you're alluding to or you're expecting to reduce leverage, but is it possible that leverage rises above the 6.5x leverage level in the near term, just between additional buybacks, and the near-term negative NOI and EBITDA growth that you're forecasting?

[Brandon Togashi, executive]

Yes, Todd, all good questions. I'll try to work through them and you'll tell me if I say the ones you threw out there. So -- my comment about multi-quarter execution was definitely all encompassing, meaning the debt raise we did post quarter end in October, the share repurchases that we did in the quarter, all of the portfolio optimization strategies that Dave spoke to, that will be a source of capital for us, all of those things is what I was referring to when I said multi-quarter execution.

And so when you wrap all those things together, back to Jeff's question, I think that's where you'll see spring leverage back toward the midpoint of our range of comfort 5.5x to 6.5x. The share repurchases, we have a lot of conviction And I think the execution in Q3 speaks for itself in terms of the dollar volume We only have about $28 million left on the current program.

So to your question, will we -- could we do more? We would obviously have to refresh the program there, and that will be something that we disclose when we do it. But it remains a possibility, and it's something that we'll talk about as a management team and with our Board. I think that you are right with seasonality in our business, sure, if you hold everything steady. And you just roll forward fourth quarter typical seasonality from the third quarter, it would imply our leverage ticks up. But look, by the time we're talking again in February, I would hope that whether it's in the fourth quarter as of December 31 or post year-end, I would think that we would have a good update for you and others about execution on these other strategies that would bring that number in.

[Todd Thomas, analyst]

Okay. And I guess sticking with that a little bit. Can you provide a little bit more color, maybe book end, how much of the portfolio that you might be looking to sell or recapitalize. Sounds like joint ventures on the table, perhaps some outright dispositions. And just to continue there. Is the strategy focused on what -- in terms of the portfolio optimization, is the strategy focused on the geographic footprint of the portfolio, the competitive landscape and where you operate? Or just sort of growth or something else altogether? I mean, how should we think about what that recap or the dispositions might be looking to accomplish?

[David Cramer, executive]

Yes. Sure, Todd. Thanks for the question. I'm not going to give a whole lot of color about size. Obviously, we're still working through a number of factors there. What I will tell you, you're right about is we've had tremendous growth one since IPO. And really, if you look at the years of '21 and '22, we were able to continue on by a few sizable portfolios.

And when you buy a portfolio, certainly, you have assets. Those portfolios that maybe do not fit strategically long term where you want to go. And so what I would tell you, we did is we really look at the portfolio top to bottom. And we ask ourselves, if you look at a 90-10 rule for an example, and ask yourself, 10% of the assets that -- where are they positioned? Do we have synergies?

Do we have operation synergies? Do we have multiple properties? Are we able to grow? Are we happy with rent growth? All the factors we'd look at as far as long-term owning assets in those markets. And the team did a good job just analyzing across the country we're not geographically focused one area. We're asking ourselves as you look at markets where there are singles, whether it doubles in these markets. Have we not grown or had the ability to grow -- do we not like the demographics of the market and we do like the demographics, is it something long term that we can continue to improve our position on?

And we have identified a list of product out there, there might be good candidates for dispositions. As you look at -- from that aspect of it, we were having great discussions and the team has done a good job working that plan, and we think there are real opportunities to go out and really execute on sale and disposition of assets. From a portfolio recapitalization of JV is a little bit different approach there. I mean you look for stores where maybe you want to delever some of the risk you have in particular markets. You look at maybe opportunities where you can infuse capital and improve performance of the properties. Things like that, that long-term properties we want back properties we want to own long term, but it certainly gives us an advantage or an opportunity to go out and kind of relook at those properties, reinfuse those properties and the JVs that provide a good opportunity for them.

[Todd Thomas, analyst]

Okay. And Dave, 1 more question, if I could. You mentioned in your prepared remarks that the PROs continue to make acquisitions outside of the REIT. Can you just speak to that a little bit, maybe put some numbers around that activity? And I'm just curious how they're sourcing deals, how they're going about that? And maybe talk a little bit about the pricing and also where they're sourcing capital from today?

[David Cramer, executive]

Yes, sure. Great question. And that is an advantage. Our PROs have done this for years. They're very good at it. They've raised money for years. They have friends and family networks. They have small investment firms that have certainly invested in them over the years. And with the NSA program, that's one of the advantages that they can roll those in and be OP units at the time when they want to roll their properties into the REIT, of course, I would say numbers, if you think about what they're looking to buy, some of them are developing, some of them are value-add where they buy a small property and building expansions.

Some folks are buying maybe CO deals that they think are a great opportunity, that it's the right time to be buying those pieces of it. And these are all activities we like to see outside the risk. The PROs are really taking more of that risk and they'll season the asset up and then bring it to us to see if it's an acquisition target for us in the future. And again, from a [ sourcing ] capital, they've all done this over the years. They have a lot of good line of sight on where to get the pieces from. Pricing wise, I'm not going to get into because there's a lot of moving pieces there. If you're building or you're value-adding or if you're buying a CO deal that the pricing metrics are quite wide through all those pieces of it.

I would -- if you look at it, I would say, from a numbers perspective, 10 to 15 stores have been bought by the PROs this year, and they're still sourcing more. There's some other activity I know they're working on. And for us, we like it and the fact that it just continues to restock our CAFD pipeline.

[Operator]

Our next question is from Spenser Allaway with Green Street. We will move on. Our next question will be from Keegan Carl with Wolfe Research.

[Keegan Carl, analyst]

Maybe a 2-part question here. Just curious where you're seeing top of the funnel demand and how that's benefiting from marketing spend? And then how you're thinking about the mix between your marketing spend and your street rate?

[David Cramer, executive]

Good question. Thanks for joining, too. Top of the funnel, certainly, we've been able to generate good activity there, and a lot of that activity is because of the additional marketing spend. And so -- we -- the teams have done a good job really analyzing where we're getting our best value from a paid search perspective and really looking at how we can drive the right opportunity. I would tell you what we're focused on is conversion rate. And so as you think of the top of the funnel, you can produce a lot of people at the top of the funnel by marketing spend, but it's how you get them to convert through the funnel that's important to us. And so that's where discounting and street rate and that conversion piece all come together.

And so us in markets where we have good footing on occupancy, we have pretty stable street rates. Conversion rates have been a little more easy to predict and a little more easy to maintain, markets where you have some pretty wild or dynamic street rate movement, a little more challenging.

I mean, if you're generating an additional 5% at the top of the funnel, which your conversion rate has dropped by 4% and then you've had a pretty volatile street rate market. Obviously, we have to decide ourselves where we want to continue to spend and drive the top of the funnel and lower conversion rate. Or do we want to adjust our pricing and keep that conversion rate at the target levels we want to keep it at.

I would tell you, in our business, it's a store-by-store, market-by-market, adventure, right? And one thing I will talk about, and we've been talking about is our technology continues to improve. Our bid models are new and improved and our AI technology behind those bid models are new and improvement. So the team is much more efficient at what they're doing today versus where we would have been a year or 2, 3 years ago.

[Brandon Togashi, executive]

Our call center investment as well keen and is another one to call out. I mean that's an area where we've really made some big advancements on our -- what is now a proprietary platform. And that I should have added that when Juan asked an earlier question about our G&A because that's another area where our investment in these technologies manifests itself. The call center expense for us is in the marketing line item in our property OpEx. So that's another area where that shows up and impacts the numbers outside of just the pure G&A.

[Keegan Carl, analyst]

Got it. And then just one on guidance. Just curious what's baked in from an occupancy perspective. I think Brandon said last quarter, you guys were expecting 200, 250 basis point drop from peak to trough. Just wondering if that's still in play and then where you ultimately see yourself ending year at?

[Brandon Togashi, executive]

Yes. I think it was $250 million to $300 million was the range we gave from the end of June through the end of the year. Working theory, I think, for us and others in the sector was that maybe the back half of the year, we wouldn't see some of the same seasonal occupancy declines because in the spring/summer, we didn't quite see the same magnitude of uptick. And so that's a potential scenario. That optimistic scenario was baked into more of the high end of our guidance. Keegan, what's played out is, in fact, much closer to kind of your typical seasonality. So we lost 150 basis points from the end of June through the end of September, another 90 basis points to the -- in October.

And so that's pretty much in line with kind of your pre-pandemic years, 2018, 2019. And so what's baked into our, call it, base case projections, which is really the midpoint of our guide is a continued decel or loss of occupancy of maybe could be 100 basis points from the end of October through December. That wouldn't be out of the norm.

[Operator]

Our next question is from Spenser Allaway with Green Street.

[Spenser Allaway, analyst]

You guys commented on the difficulty in underwriting future operations in the current environment. And with that in mind, can you just provide some color on the depth of the potential buyer pool and your confidence in ultimately being able to execute on [ dispositions ] and potential JVs?

[David Cramer, executive]

Yes. Very good question, and I'm quite glad you get in this time. Sorry, we had some in our end. But we have a high level of confidence. One thing I would tell you is throughout our history and our relationships and all the things that we've done in the past, and we have a lot of relationships in this industry. And as we look at possible sale of assets, there are groups of buyers that we know that are well capitalized that can get the deals done, that we've reached out to, and we're having discussions with.

And so from that aspect of it, we know that these folks are in the market already. They have assets in the market. They would be strengthening their positions in the market where we believe in a market with 1 or 2 assets. And so from that aspect, it's a win for them and it's a win for us. And so I would just tell you, as we talked about our last call, we are seeing transactions trade, and we're seeing transactions trade in a lot of the markets that we'll probably be leaving. And the size of the transactions are fitting what our sellers' expectations are. And so at this point in time, I would tell you, we've got a good confidence level going into it.

[Operator]

[Operator Instructions] Our next question is from Ron Kamdem with Morgan Stanley.

[Ronald Kamdem, analyst]

Just 2 quick ones. On same-store revenue. I think you mentioned in your opening comments implied, I think, negative $1.1 million in 4Q. I think historically, we've talked about 4Q being a good sort of barometer for the next year. And just curious how we should think about that number, this go around? And what may be different this time around? Or what should we be keeping in mind as we're trying to think about where next year can shake out?

[Brandon Togashi, executive]

Yes, Ronald, it's Brandon. Yes, I mean, the exit point for the calendar year is a good way to kind of start projecting the next calendar year. It's -- but it is tough, right? And you know the ingredients to the recipe. It's where street rates have moved. We've got the negative occupancy delta that we're working with. As Dave mentioned earlier, the extreme positive in our sector is the ability to be nimble with revenue management through the ECRI to existing customers. So we all know that, right? It's a matter of how do those dynamics play out and our demand levels higher in 2024 than what we've seen here in 2023. We'll get into that more, obviously, in February.

I think for us, what we're focused on is, historically, when the sector on the rare occasions that it has encountered negative revenue growth, it's been relatively short-lived, right? And so where exactly does it go in Q1 of '24 or Q2 of '24? Or when exactly at the bottom? I mean, those are fair questions. They're just not questions that we're spending a whole lot of time trying to answer in our day-to-day right now. We're taking a much longer view with a lot of the things that we're executing on right now. And with the belief that the resilience of the sector is going to prove out, it's going to demonstrate itself yet again. And the negative territory will be, we think, relatively short-lived.

[Ronald Kamdem, analyst]

Got it. Makes sense. And then just a few expense line items. The trailing 5 quarters in the supplemental is super helpful. So just one on property taxes, running 2.1% year-to-date anyways. Maybe can you talk about what -- is there sort of a one-timer or that's helping that? Or is that sort of a good run rate? And then on marketing expenses. I see that it's gone up year-over-year. Just thoughts on how much more you can lean into that.

[Brandon Togashi, executive]

Yes. On property tax, Ronald, the Q3 number did have some favorable adjustments. So downward adjustments to the expense in Q3 that related to kind of truing up the full year numbers as we got value assessments or tax bills in hand. I would say -- I would have you look at the year-to-date, the 9-month 2023 number and annualize that is probably a better approximation. And that would give you a number that year-over-year is probably going to be in the 4% to 5% growth territory for property tax.

As you can see in that trailing 5, the fourth quarter of '22 has a tough comp because we had some favorable adjustments. There's potential for maybe some of that this year. We'll see with Texas, in particular, with state surplus and what the final levy rates are in some of those jurisdictions. Marketing, you're right, that's definitely up. Some of that is just a comp where we weren't spending the dollars last year. Our spend levels are back to maybe a little bit higher than, call it, the norms that we had in 2018, 2019. As I mentioned before, we've made some call center investments, so that's contributing to that. But the majority of that line item is your paid search spend. And we're using those dollars judiciously where we think there's positive returns.

[Operator]

Our next question is from Eric Luebchow with Wells Fargo.

[Eric Luebchow, analyst]

Appreciate the question, guys. So I think in your prepared remarks, you talked a little bit about supply deliveries being down, I think, 20% by 2025. So maybe -- could you talk about what you're seeing in your markets in terms of new construction starts? Interest rates probably having some impact on that? And whether you're seeing any difference in construction activity between, call it, your more primary versus secondary markets?

[David Cramer, executive]

Yes. Eric, thanks for joining. Good question. We certainly have seen the new starts slow considerably for a variety of reasons. Headwinds and interest rate uncertainty and outlook on what the future is as far as revenue growth and fill rates look like, availability of capital. There are still headwinds around getting contractors and everybody lined up and getting approvals going. And so as a whole nationwide, we've seen new construction starts certainly slow. And we've seen proposed projects maybe stall or take longer or maybe not even come at all. I think the markets that we still feel the most pressure is on some of the ones we called out. Phoenix, Las Vegas, around parts of Atlanta, where these starts or had been started and are finishing up now or there are still a few new starts in those markets. And so I would generalize it in probably more of our major markets is where we've seen the most competitive pressure. In our secondary markets, not as much.

[Eric Luebchow, analyst]

Got you. That's helpful. And just to follow up on the asset disposition topic. I guess how do you think about the various use of those potential proceeds between repaying debt, additional M&A or repurchasing additional stock? And as you look at the attractiveness of those, do you -- should we think about FFO per share accretion or how it impacts your longer-term same-store growth? Just maybe some color on how you assess the attractiveness of those various dispositions.

[Brandon Togashi, executive]

I think, Eric, all the things you mentioned are potentials for how we would use the proceeds. I mean, certainly, we've got amounts strong on our revolver. So most immediately, we would use the funds to reduce that, which is carrying a pretty healthy interest rate cost today. I spoke to share repurchases earlier. We'd have to refresh or stand up a new program, but that remains a possibility.

And then we do want to position ourselves to grow externally, again. And that's not going to happen in mass until a rebalance in terms of cost of capital and cap rates. But when that happens, we certainly want to be ready to go. And so all those things are what we're trying to position ourselves for. I think the assets that we've identified that Dave spoke to earlier, they are generally of the type that are probably going to slightly improve our occupancy profile, slightly improve our NOI margin profile once they're no longer part of the portfolio. Not a tremendous amount, but it will improve the quality of the existing portfolio, and that's certainly a clear intent of these strategies.

[Operator]

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

[Ki Bin Kim, analyst]

I was curious. Eventually, we're going to hit occupancy being flat and street rates being flat at some point. Is there a scenario, as we get to that point, that same-store revenue could still be negative just because even though the ECRI program is doing what it's doing, you still have that -- the cost to release those customers that left at higher rents?

[David Cramer, executive]

It's a good question, Ki Bin, and thanks for joining. Maybe there could be a scenario like that. Certainly, what we're seeing also is the compression of the rent roll down. And so I also think we've hit the peak of our rent roll downs.

And so as occupancy, the eye spread in occupancy comes tighter as our street rates level out. And what we're turning over time is longer-term tenants that have that longer roll-down implication. We're starting to see that roll down tighten because we're turning over people who have been with us 6 months or people who've been with us 9 months, who've been on a little bit less of a street rate entry level. And so that first ECRI is making up for that compression around that rent roll down. So I would not expect it to be long, if it did, that would just be my personal take on that, but there could be a situation.

[Ki Bin Kim, analyst]

And what is the rent roll down in 3Q?

[David Cramer, executive]

So the rent roll down in 3Q was about 18% on average, almost 19%. It peaked in September '23, Kevin. So you started the third quarter much closer to around 14% and finished up about 23% and then in October, it's falling off. So like we said, with street rate gap and occupancy gap, we think September was probably the peak.

[Ki Bin Kim, analyst]

And last question for me. Your store payroll costs have been pretty flattish sequentially. Just curious as you look forward, what kind of growth and expenses should we expect from that line?

[David Cramer, executive]

Probably a little tougher line of sight there. We've done a lot around store initiatives and use of technology and store operating hours and head count. And so the teams have done a wonderful job really working towards the new staffing model and it's still evolving.

We've had some good success. And what we've really been doing is not refilling. We've been doing it through attrition and we've been doing it as opportunistically as we can. There's -- we've had 2 -- actually 3 really good years of payroll control and payroll expense. Looking forward, we think there's a little bit more around headcount that we work on. And I think that the true test for us is going to be store operating hours. When do we have to be there? When does this consumer not need us to be there? How can we use technology to supplement that. So again, I think maybe on our next call when we're talking about 2024, we might have a little more color around that for you.

[Brandon Togashi, executive]

And even the portfolio optimization strategies, Ki Bin, I mean, that serves this topic as well, right, because to Dave's earlier point where we're identifying assets or markets where we only have 1, 2, 3 assets and don't see that opportunity or desire to really grow. And if we can exit those and redeploy and densify further in other markets, that helps when you think about some of that operational overhead that makes its way into the store level costs.

[Operator]

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

[Juan Sanabria, analyst]

Just wanted to ask a follow-up on cap rates essentially. You said you'd transacted on the most recent acquisitions in the third quarter around 6%. So just curious if you think that's a good indication of spot yields or if that's maybe a stale number. Acquisitions were kind of agreed to months back and not indicative of what rates are today. So just curious on the commentary with regards to transaction pricing today versus that 6% cap rate that you made earlier for third quarter deals?

[David Cramer, executive]

Yes. Good question, Juan. There's a little bit of legacy to those, to your point, as we -- those deals took time to materialize and really worked through the process. It's hard with cap rate because it's also -- these are one-off assets in one-off markets where that could dictate if it's a 5-cap market or a 7-cap, right? I mean just depending on the type of asset, type of quality type of market. I think cap rates today, they're certainly starting to nudge up a little bit, but there's still a big spread between sellers' expectations and buyer. And in our industry, you typically don't see a lot of stress in the product type.

And so we are seeing individual properties sell. We're seeing this more smaller portfolio sell. And I mean -- and we're also seeing deals not trade because the expectation of price is not being met. But I would tell you, if -- looking back to where we've come from '21 to '22, now to '23, cap rates are definitely nudging up. And I don't know if it's 25, 50 basis points from where they were maybe a year ago. But it's also by market high property type. A lot of variances in the right that drive that cap rate.

[Operator]

We have reached the end of our question-and-answer session. I would like to turn the conference back over to George Hoglund for closing comments.

[George Hoglund, executive]

Thank you all for joining the call today, and we appreciate your continued interest in NSA. We remain confident in the long-term outlook for our business, and we look forward to seeing many of you at the NAREIT Conference in 2 weeks. Thanks.

[Operator]

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