National Storage Affiliates Trust (NSA) 2017 Q2 法說會逐字稿

Greetings, and welcome to the National Storage Affiliates Second Quarter 2017 Conference Call. (Operator Instructions) And as a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Marti Dowling, Director of Investor Relations for National Storage Affiliates. Thank you, Ms. Dowling, you may begin.

Hello, everyone. We would like to thank you for joining us today for the Second Quarter 2017 Earnings Conference Call of National Storage Affiliates Trust. In addition to the press release distributed yesterday after market closed, we have filed an 8-K with the SEC containing our supplemental package with additional detail on our results, which may also 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. The company cautions that actual results may differ materially from those projected in any forward-looking statement. For additional detail concerning our forward-looking statements, please refer to our public filings with the SEC. We also encourage listeners to review the definitions and reconciliations of non-GAAP financial measures such as FFO, core FFO and net operating income contained in the supplemental information package available in the Investor Relations section on our company’s website and in its filings made with the SEC.

Today's conference call is hosted by National Storage Affiliates' Chief Executive Officer, Arlen Nordhagen; Chief Financial Officer, Tamara Fischer; and Senior Vice President of Operations, Steve Treadwell. Following prepared remarks, management will accept questions from registered financial analysts.

I will now turn the call over to Arlen.

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Thanks, Marti, and thank you, everyone, for joining our second quarter 2017 earnings conference call. Yesterday, we reported another quarter of strong results as we continue to execute on our differentiated strategy that combines the local expertise of our participating regional operators with our national operating platform and scale, driving top-tier year-over-year organic growth. During the second quarter, our same-store NOI grew by 8.4% and our core FFO was $0.31 per share, up nearly 11% compared to the second quarter last year.

On the acquisition front, we maintained our strategy of sourcing quality assets at attractive returns across our portfolio, even though we find ourselves in a market with significantly reduced transaction volume. We grew our wholly owned portfolio with the acquisition of 10 self-storage properties during the second quarter for a total investment of $70 million. In addition, our iStorage JV acquired 4 self-storage properties for almost $50 million during the quarter. Always looking to optimize our long-term portfolio, we sold 2 self-storage properties in Asheville, North Carolina for gross proceeds of just over $10 million and rolled those proceeds into a 1031 exchange investment that closed in July. We'll continue to opportunistically dispose of assets in markets where we consider our growth prospects to be limited and cap our ability to benefit from market economies of scale. Subsequent to quarter-end, we acquired another 4 properties valued at approximately $40 million and currently have another $80 million-plus under contract, which we expect will close later this year. We remain optimistic about the opportunities we're seeing and are expecting a stronger acquisition pace in the second half of this year.

To support our growth, we maintain a strong and flexible balance sheet while working to expand our sources of capital. We're very comfortable with our current leverage metrics and have plenty of capital available to fund our current pipeline of acquisitions. Tammy will discuss our balance sheet and liquidity in more detail later in the call.

Now, I'd like to take a moment to comment on the fundamentals we are seeing within the self-storage industry. As we have discussed on recent calls, supply is increasing in several markets, which is only natural after years of very high NOI growth, driven by increasing demand and limited new supply. We've seen the most notable impacts of new supply in the top 25 MSAs, particularly in Texas, Oregon, Colorado and Georgia. As a result, we continually refine our revenue management programs in markets with new supply to determine the best way to maximize revenue growth. Because self-storage is essentially a fixed inventory business with tenants that stay for several months, unlike, for example, the hotel or airline industry, we found that in markets with increased competition, we can produce substantially better total revenue gains by giving up small amounts of occupancy in order to keep driving rate rather than fighting to hold occupancy at historically high levels. We don't want to rent our last 10x10 unit to a super rate-sensitive customer when we could have rented to a new customer at a stronger rate a week or 2 week later. And at these very high occupancy rates, we always have unit sizes with almost no spaces available to rent. Within every portfolio, there will always be a few markets that are working through challenges, but we believe in the benefits of geographic diversification and that the balance of our overall portfolio is very healthy. To that end, we continue to drive internal growth as we put in place institutional best practices at our newly acquired stores, evolve and improve our revenue management system, scale our centralized marketing and call center and leverage our management team and platform as we grow our asset base.

From an external perspective, we see excellent opportunities for growth across all acquisition avenues. First, our captive pipeline, which consists of properties that our PROs currently manage, but which NSA does not yet own, stands at about 120 properties valued at approximately $1 billion. Second, our PROs provide us with a strategic advantage as they source third-party acquisitions through their personal networks and relationships. Third, we pursue new PROs to join NSA through ongoing discussions with several high-quality private operators. And finally, our joint venture partnership allows us to leverage the strength of our balance sheet and scale our property management platform.

I'll now turn the call over to Tammy.

Thanks, Arlen, and thank you, everyone, for joining us and for your interest in National Storage Affiliates. I'll start with the review of our second quarter results and wrap up with a discussion of our balance sheet and updated 2017 guidance.

For the second quarter of 2017, we reported net income of $15.6 million compared to $6 million in the second quarter of 2016. Core FFO per share increased by over 10% to $0.31 per share. This year-over-year growth for the quarter comes primarily as a result of the acquisition of 80 properties over the past year, delivering about $7.8 million in incremental NOI and another $2.3 million of organic growth from within our same-store portfolio. We also benefited from $2.1 million of management fees and other revenue and $1.2 million of core FFO from our unconsolidated joint venture investment. Our growth was offset somewhat by increased G&A and higher interest expense.

Turning to operations. Our second quarter same-store NOI grew by 8.4%, driven by a 5.8% increase in revenue and focused control over operating expenses. We expect our revenue management system will allow us to optimize revenue growth as we further refine it by striving to achieve the correct balance of occupancy and rate growth, which was over 6% this quarter. As Arlen mentioned, in situations with new supply, small declines in occupancy like the 60 basis point decrease we saw this quarter can be combined with higher rate increases to deliver better overall improvement in total revenue. Our same-store property operating expenses increased by just 0.4% this quarter. While we continue to see outsized growth in property tax expense, running 2 to 3x inflation, we also continue to benefit from economies of scale in areas like marketing and insurance, where our year-over-year expenses have declined while still delivering equal or better results. Within our portfolio, California and Arizona were our strongest performers, while Oklahoma, Colorado and Georgia experienced weaker negative same-store NOI growth. Oklahoma is the classic case of a lagging economy combined with excess new supply in the market. Colorado has a strong economy, but new supply has really hurt that market. Georgia is an outlier because we were impacted by unusual onetime events, such as a flood in one store, a fire in another store, and disruptions to customer traffic due to construction near a couple of our Atlanta Metro area stores. Significant new supply is also limiting our same-store gains in Portland, Dallas and Raleigh-Durham, but we have been able to keep pushing same-store revenues upward at a good pace by focusing on higher rate growth to offset declining occupancy.

Overall, we again delivered strong results because of the diversity of our portfolio and the strength of many of our submarkets. We realized year-over-year same-store revenue growth for Q2 '17 of 5% or more in almost 60% of our same-store MSA markets. We also benefit from the fact that our portfolio is primarily located within states with strong job growth economies. In fact, of the 20 MSAs that generate the most revenue for NSA, we categorize 10 of them as having a very strong economy, 6 of them as having a good stable economy and only 4 of them as having a slower economy. And their relative performance bears that out, with the strong economy markets averaging year-over-year same-store revenue gains of 7.1%, the stable economies averaging 6% and the slower economy markets only delivering 0.4% year-over-year revenue gains for NSA. Besides property-level operations, our increasing scale has helped reduce our G&A expense as a percentage of revenue. If we include all of our joint venture property revenue, our G&A expense is now running below 10% of revenues. We continue to maintain a strong flexible capital structure with leverage at the lower end of our optimal target range. Our net debt-to-EBITDA ratio was 6.1x at the end of the quarter and we have almost no debt maturing before 2020. With our demonstrated ability to access both debt and equity capital, including through the issuance of OP equity, we are well positioned to fund our planned growth. Due to the strong performance of our portfolio, our board increased our second quarter dividend in May by 8%. Our annualized dividend rate is now $1.04 per share, 18% higher than where it was just 1 year ago. We are pleased to provide our investors with what we believe is an attractive combination of growth and income as a result of the execution of our differentiated strategy.

Finally, I'd like to review a few key points from our updated guidance in our earnings release. Based on our current market dynamics and year-to-date results, we updated our guidance by narrowing our ranges for the full year 2017. We now expect to end the year with same-store revenue growth in the range of 5% to 6% with same-store expense growth of 1.5% to 2.5%, driving same-store NOI growth of between 7% and 8%. We expect total acquisitions within a range of $300 million to $450 million for the full year. This includes consolidated acquisitions in the range of $250 million to $350 million and unconsolidated acquisitions in the range of $50 million to $100 million. With this growth and the management fees and other FFO from our unconsolidated joint venture, we expect core FFO for 2017 will be between $1.23 and $1.27 per share.

In closing, midway through 2017, we are very pleased with our results and believe we are well positioned as we enter the second half of the year to drive outsized growth as we create value for our shareholders. Again, thank you for joining us today.

Now we'll turn the call back to the operator to take your questions. Operator?

(Operator Instructions) Our first question comes from the line of Todd Thomas with KeyBanc.

Just first question, rate growth was higher in the quarter and I'm just wondering what caused you to bring down the forecast for revenue growth with the -- for the back half of the year.

Todd, it's Steve. Thanks for the question. We've been very successful so far this year in pushing rates. In terms of street rates, they're kind of running in the low single digits as far as year-over-year growth, but our ability to increase rates on in-place customers has really allowed us to drive that average per square foot revenue number. (inaudible) we were about 6.3% effective this quarter. I think what we will see in the back half of the year is some tougher comps and so a little bit of deceleration, and that's, I think, just a natural trend that we've seen here for several quarters. But all in all, everything remains in place and the trends are strong.

The effective rate, the 6.3%, do you think that you can maintain that rate growth going forward?

Yes. It'll probably be similar to that. I won't speak to what it's exactly going to be for the back half of the year, but it's going to be in that range. The ability to raise rates on in-place customers is really kind of hitting in the high single digits as far as pushing those rates. And when you blend that with the starting rate increases and add a little discounting in for good measure, that's how you're getting to the 6% range.

Okay. And then as you sort of hold rate steadier and refrain from renting units to more rate-sensitive customers, as you noted, are you seeing any change at all in conversion rates from online or at the call center? Is there any -- is demand to the system, I guess, being impacted at all?

No, I don't think so. I think demand is pretty steady. I think conversion rates are pretty steady. There is nothing material to speak about there. We have definitely used discounting and promotions as an effective tool within our portfolio to attract eyeballs on the internet and to bring customers in the door and to get them to sign that lease. So that's allowed us to hold the line on street rates. And if we can hold the line on street rates and get some increases there, then we have a better base and a foundation for increasing rates on customers down the road after they've been with us for 6, 9, 12 months or whatever it is per store. And so we'd rather use the discounts and promotions rather than letting rate come down. And we've been effective in keeping the conversion high.

And, Todd, this is Arlen. I'll add to that, that it's really market-by-market dependent. You'll notice in our supplemental that occupancy overall was down about 60 basis points across the portfolio, but that varied from market to market. You can see some markets which have more new supply and new competition, they might be down 3%, 4%. Others are up. And the key is that our whole focus on the revenue management program is on total revenues, not on occupancy and not on rate by itself, but it's the blend of those 2. And, of course, we factor in discounting as part of that. And we believe that by factoring all of those in, being very careful in markets that have new supply, not to start a price war, that we actually end up with much better revenue growth.

Okay. And lastly, do you have an occupancy update at the end of July for the same-store?

The trends that we've seen so far remain in place. July is basically where we had expected it to be and we are very comfortable with our guidance for the rest of the year in terms of revenue growth. So I think, I would just say that occupancy trends remain in place.

Our next questions come from the line of George Hoglund with Jefferies.

I have a question on the balance sheet. You ended the quarter at about $180 million on the line, just looking to see what your plans are for that. And overall company size, are we getting to the point where it might make sense to eventually do an index-eligible bond offering?

George, thanks for the question. We were at $180 million. We're a little above that now with post-quarter acquisitions that we've completed. We are also in the process of terming out about $85 million of the debt. That'll be done in the near term with a 10-year (inaudible) secured financing. And then in terms of accessing the public bond market, I think we want to keep our options open. We're going to continue to manage our balance sheet with the flexibility that we need to be able to do that and we'll continue to evaluate it. When we get to the right time and place, we would definitely want to have that available to us as an option.

Okay. And then just on the acquisition front, just what are you guys seeing in terms of portfolio deals out there? And then also just the PRO pipeline, the assets there, is there anything that could potentially speed up or slow down the pace of acquisition from the PRO pipeline?

So George, this is Arlen. In general, we are seeing certainly more activity on the transaction size -- side now than we were earlier in the year. What was happening earlier in the year is that there was a pretty good disconnect between the seller's expectation where they thought that cap rates would keep coming down and the buyer's expectation thinking the cap rates would go up. And we had a number of transactions that just didn't close because of that and the sellers took them off the market. We're now seeing those come a little more in line and kind of it's become that the sellers think, well, cap rates are flat and the buyers think they are about flat or maybe a little bit up. But bottom line is to get a deal done, you've got to be in pretty comparable cap rates. So what that means is, it's no secret that we had a quite slow acquisition pace in the first half of the year. We only closed a little over $100 million in consolidated and another $50 million in our joint venture. We definitely are seeing that, that will pick up in the last half of the year. There are always some portfolios on the market, but to be honest, it's way less than last year. Last year we saw a number of sizable portfolios on the market. This year, it's really just a few here and there. And of course, we are always interested in them, if they are in markets that we participate in. But we don't have anything to announce in that regard. It's just those -- we would look at everything that's out there.

Okay. And then just on the pace of acquisitions from the PROs. Anything that would change that?

The pace on the PROs is fairly well set. And we've done a number of those already this year. We've got some more from now through the end of the year, and that's part of our guidance. So we're pretty comfortable. We increased the midpoint of our guidance a little bit. We did lower the top end of our guidance in the acquisition estimate for the year, primarily because the first half was quite a bit slower than we thought it would be, to be honest.

Our next questions come from the line of Vikram Malhotra with Morgan Stanley.

Could you give us a sense of where street rate growth is across sort of some of the key markets and what you're seeing on occupancy and rate growth so far through July?

Vikram, Steve. So our strongest street rate growth is frankly in Southern California. It's been a great market for us and we have been successful in pushing rate in that market for a long time. So that trend continues. I'd also say the street rate growth in Oregon has been fantastic and also continues to impress. As far as weakness in the street rate, I'd say Oklahoma is one of our tougher markets. We're having a little trouble pushing rate there. And West Texas is a challenge. But all in all, we're running on an average for the whole portfolio in sort of the low to mid-single digits as far as street rate growth.

And Vikram, this is Arlen. I'd just add, obviously, this really is a very micro, very locally sensitive business. So even within those different states, you'll have properties that will be quite different. And it's -- if -- for example, even though California is doing great overall, if there is a property in California that gets a new supply, new property built next door, it's going to have an impact. So -- but from an overall standpoint, as Steve said, we are seeing overall low to mid-single digit street rate gains and high to mid -- mid- to high single digit existing customer gains, and the combination of that is very effective.

I think maybe you had said you're seeing sort of 4% to 6% street rate growth and it sounds like now that's decelerated a bit, is that fair?

Yes, a little bit. May be about 1% or so, maybe 3% to 5% on average versus 4% to 6%. And that's part of both the tougher comps, but also more new supply coming in. And of course, it's important to remember that street rates are only not even half of the equation because existing customers and the raises that we make to those have remained very strong. We have not really cut that back at all, that's remained in the high single digits consistently, regardless of street rate.

Okay. And then just on supply, it's obviously an ongoing topic. I wanted to just get your thoughts, if you sort of look in your crystal ball, what are you seeing in for actual deliveries this year and into next year? And is it fair to say either the peak -- the impact of -- or greater impact would be felt next year?

It's hard to know exactly when the peak of new openings or deliveries will be. It's going to be somewhere between the end of this year and the middle of next year. I think pretty much everyone is agreeing on that from what we've heard and what we've seen in the surveys that we do. But of course, again, that's market-by-market dependent. But let's just say that the peak's somewhere late this year, early next year. That would mean that next year we'll probably have the biggest impact because you not only have the new stores from next year impacting it, but new stores this year aren't going to be full. And so they'll impact next year's supply/demand dynamic, and even last year's stores that were opened last year in a lot of markets are still in fill-up, although they tend to get at the point -- once the stores get around 60% occupied or so, they stop having nearly as much impact on the overall market just because you are at the point where you are covering your operating costs, you are covering typically your debt service, if this is a privately owned facility. And so we definitely see much less aggressive marketing and pushing for new customers once they hit about 60%. But those stores that are in the 0% to 60% range are going to have an impact on that. Now we only have about 20% of our stores across our entire portfolio that have either a new store that opened in the last year or a store that will open in the next year. So 80% of our stores will not be affected by a new supply in that time frame, but 20% of them will and that 20% will certainly have more challenges.

And just to follow-up very quickly on that 80% that's not impacted, are you seeing -- and you mentioned that new supply is a bigger deal across the 25 major markets. Are you seeing now some of that trickle down to your 75 -- 25 to 75 MSA as well?

We are seeing some of that. Although, remember, about 1/3 of our stores are in the top 20 MSAs as well. So we are in both the large MSAs and the smaller, but we do have a bigger percentage in the smaller MSAs. And we are starting to see some new supply come in to those smaller MSAs. The real challenge comes when a new supply comes into an area where you have no demand growth. And that's why Oklahoma has been so bad because you have got new supply coming in, in Oklahoma and yet the economy is so weak, their demand is not growing. Whereas, there is a lot of new supply in Dallas, for example, but in our areas, the supply and demand are growing fairly similar where our stores are. There are some parts of Dallas that are even better than that and some parts of Dallas that are worse. So it's submarket related. But, for example, in Denver, almost everywhere in Denver has too much new supply versus the growth in demand. Even though it's a strong economy, you just aren't growing demand at 10% a year or something like that.

(Operator Instructions) Our next questions come from the line of David Corak with FBR.

Most of my stuff has been answered. But just looking at your revenue guidance range and sticking with the street rates, you mentioned renewals are still very strong, presumably the reduction is mainly new lease-driven. How do you guys have street rates trending in the second half of the year in your guidance? I mean, how are you thinking about them? You mentioned that they're kind of down from the 4% to 6%, to 3% to 5% range. But how are you thinking about those for the rest of the year?

I'd say it's probably going to remain somewhat consistent. Muted growth relative to last year, but we are still able to hold the line and still able to on average sort of eke out those mid to -- low- to mid-single digit increases on the street rate. So we feel comfortable with that trend.

The other thing, David, is that we are -- have higher promos, discounts than last year, which has an impact, and that's because of the new supply. You have to meet those promotional opportunities to keep your volume of movements consistent.

Okay. And then you might not have this, but what is the spread between your average move-in rate and your average move-out rate today or over the quarter and maybe how has that changed over the past few quarters?

We don't disclose the exact number, but I will tell you that it is still a positive roll up, which probably contrasts with some of our peers, and that trend continues as well. We sort of get the benefit of that tailwind going forward. As the portfolio naturally churns, we get a small roll up. It's not a major factor, but it's better positive than negative.

And it was higher in the past so that -- the amount has gone down, but it's still positive.

Our next questions come from the line of Ki Bin Kim with SunTrust.

This is Ian on with Ki Bin. As you guys continue to push rates, at what point do you get concerned about occupancy? Is there a certain level you want to keep the portfolio at or is it just looking at total revenue?

Well, to be honest, it's really looking at total revenue because the bottom line is that one of the strengths historically of the self-storage sector has been that the industry has been able to deliver same-store NOI growth despite significant overbuilding. If you look at the time period from 1995 to 2010, our industry was massively overbuilt. There were over 1500 new stores a year built for a 15-year period. We added 1.3 billion square feet to the market during that time period and the demand only went up by about 900 million square feet. So when you look at the industry, the average occupancy from like -- from 1995 to 2010, of course, that was the bottom of the recession, but it went from like 89% down to 76%. And yet, during that same time period, same-store NOI growth was still 3.8% a year. And the key to doing that, the key is to make sure that you focus on total revenue and do not care about occupancy. If you care about occupancy and all you want to do is keep high occupancy, you just start price wars and then you end up making your NOI go down. And we -- I mean, I've been in the business so long, unfortunately, that I saw that happen and that's kind of how we learned that lesson is to make sure you do not do that because that's the one thing that can hurt the industry. Overall, if you maintain looking at supply/demand, try to stay strong in your market, but if the overall blend of supply and demand in the market goes from 95% to 85%, if you try to stay at 95%, what do you think your other competitors are going to do? They're just going to cut prices to try to get more people to move in. And so in that example, we would say, let's say, we'll go from 95%, maybe we'll go to 90%. We won't go all the way to 85% because we'll still beat the market but we'll tell them -- we'll let the other competitors have part of that demand.

Okay, I appreciate that comment. And then just one quick one. What were your promotions year-over-year?

Our promotions were slightly increased year-over-year. They are up probably about 20% above where they were a year ago, maybe not quite that much, but somewhere in that. So clearly, that's one of the things that we use as a way to drive traffic. Rather than cutting rates, we'll give a higher promotion for people to move in, and then once the promotion wears off, they're at regular street rates which, as Steve said, is higher than it was a year ago.

Okay. I would just say -- I would add to that, that the promotions are a unit-by-unit decision. We are only offering promotions on units that are not well occupied. So it's not across the board that our customers will see a promotion or an offer.

This concludes our question-and-answer session. I would like to turn the floor back to Arlen Nordhagen for closing comments.

Well, thanks again, everyone, for joining us for today's second quarter earnings conference call. And as we've discussed, we really are very pleased with our year-to-date results. We appreciate your continued interest in and support of National Storage Affiliates, and we look forward to visiting with everyone again next quarter. Thank you.

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