National Storage Affiliates Trust (NYSE:NSA) Q4 2023 Earnings Call Transcript
National Storage Affiliates Trust (NYSE:NSA) Q4 2023 Earnings Call Transcript February 29, 2024
National Storage Affiliates Trust isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings. Welcome to the National Storage Affiliation Fourth Quarter 2023 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, George Hoglund, Vice President of Investor Relations for National Storage Affiliates. Thank you. Mr. Hoglund, you may begin.
George Hoglund: We'd like to thank you for joining us today for the fourth 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 one question and one follow-up and then return to the queue if you have more questions. In addition to the press release distributed yesterday afternoon, we furnished our supplemental package with additional detail on our results, which may be found in the Investor Relations section on our website at nationalstorageaffiliates.com. On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements that are subject to risks and uncertainties and represent management's estimates as of today, February 29, 2024.
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.
Dave Cramer: Thanks, George, and thanks everyone for joining our call today. Fourth quarter capped off a busy year here at NSA. We made significant progress in our people, process and platform initiatives. I'm very pleased with all that we've accomplished in 2023 to strategically position us for the next phase of growth. On the people front, we made a handful of key moves to enhance our team, including hiring Will Cowan, who joined NSA in June as Chief Strategy Officer. Will's hiring is notable as he is leading our portfolio optimization plan, which includes asset sales and joint venture transactions in many areas, including our data science and customer acquisitions teams. Teams focus on enhancing our processes through utilization of artificial intelligence and machine learning in our revenue management models.
This has improved our customer rate decisions and elevated our intelligence in paid marketing and front end pricing models. We also invested in new and upgraded platforms in 2023, including a new property management system, data warehouse and customer web platform. These upgrades position us to have enhanced intelligence, a better customer experience, increase conversion rates and facilitate more sophisticated revenue management and marketing strategies. Needless to say, I'm very proud of what our team accomplished in 2023 and they worked diligently to position NSA to deliver enhanced growth over the long-term. Now turning to operations for the quarter. There were several puts and takes in the fourth quarter, but on the whole, the quarter played out modestly better than our expectations.
Teams focused on balancing rate and occupancy to maximize revenue, while we remain focused on expense control. The quarter remained challenging on an asking rate front. Competition for new customers remains high, especially in markets where we also have supply pressures. Our improvements in team and technology are certainly aiding us in navigating the challenging environment. Our existing customer base remains healthy, but it's like to stay above historical averages. Continued ability to implement ECRIs is allowing stability and achieved rate, while we rate for demand conditions to improve. Keep in mind that the seasonal profit in rates and occupancy tends to occur in the first couple of months of the year, we’re seeing evidence that February likely ends up being the bottom.
Lastly, looking at our different markets, the Sump Delta is currently facing demand challenges due to muted housing market and new supply. With MSAs like Phoenix, Sarasota and Las Vegas all performing below portfolio average. Longer term, we remain very confident in the growth prospects of our Sunbelt markets due to the broader population and migration trends. Now turning to our portfolio optimization strategies, we had a very busy fourth quarter and a start to the New Year, including the following. First, we sold a portfolio of 71 properties to a large private storage operator for a gross price of $540 million. The sales straddled year end with half of the portfolio closing in December and although one of the remaining properties closed in February.
Portfolio consisted of assets that were generally smaller than our portfolio average with lower margins and were geographically less concentrated. The assets and markets also generally had lower growth prospects than our portfolio. As such, the sale enhanced operational efficiencies, improves our long-term growth prospects and generates capital for our balance sheet initiatives. Second, we contributed 56 assets totaling almost $350 million to a newly formed joint venture in February with one of our existing JV partners. We chose these properties because they had revenue-enhancing opportunities that we felt were best unlocked off balance sheet in a joint venture structure. We've retained a 25% interest in this JV and the right of first offer on the assets.
These are assets and markets that we will want to own long-term, so we maintain the flexibility to bring these assets back on balance sheet in the future. Third, we also formed a new joint venture with an existing partner. JV has $400 million of total capital commitments with a maximum allowed leverage of up to 60%, which implies up to $1 billion of buying power. This JV provides additional growth capital to take advantage of acquisition opportunities that we think will start to materialize in 2024 and into 2025. And last, we raised $250 million of capital through a debt private placement. By completing these activities, we were able to repay our entire revolver balance and eliminate all of our exposure to floating rate debt. Also bought back $27 million of common shares in the fourth quarter and an additional $93 million year-to-date.
We've delivered on what we've been messaging over the past few quarters. Net impact of these transactions are reduced risk, better portfolio concentration and quality, improved operational efficiencies, reduced share count to enhance FFO growth going forward, and generation of investment capital and dry powder for future acquisitions. In short, we've strategically and significantly improved our balance sheet position on enhancing our growth prospects over the long-term. I'll turn the call over to Brandon to discuss our financial results.
Brandon Togashi: Thank you, Dave. Yesterday afternoon, we reported core FFO per share of $0.68 for the fourth quarter of 2023 and $2.69 for the full year, at the high end of the guidance range we revised in the middle of last year, driven by same-store NOI growth coming in higher than the guidance midpoint. These core FFO per share amounts represent a decrease of approximately 4% over the prior year period, driven primarily by an increase in interest expense, which overshadowed same-store performance and NOI from acquisitions, partially offset by a reduction in weighted average shares outstanding attributable to our share buyback program. For the quarter, revenue growth was flat on a same-store basis, driven by growth in rent revenue per square foot of 3.6%, offset by a 380-basis point year-over-year decline in average occupancy during the quarter.
Occupancy ended the quarter 86%, down 410 basis points year-over-year, while January occupancy finished 390 basis points below last year. Expense growth was 4.8% in the fourth quarter and 4.7% for the full year. Similar to the past couple of quarters, main drivers of growth were property tax, marketing and insurance, partially offset by payroll efficiencies that resulted in lower spend versus the prior year period. Marketing expenses remain elevated due to increased competition for customers and a tough comp. While insurance expense growth will continue to be at this high level until our policy renewal coming up April 1. As Dave mentioned earlier, it was a busy quarter and start to 2024 on the asset sales and joint venture front. We also continue to evaluate acquisition opportunities and purchased two assets during the quarter totaling $25 million.
One of these assets was from our captive pipeline and the other asset was sourced off market by one of our pros, utilizing their local relationships in the industry. This brought our full-year acquisition activity to 20 properties totaling $230 million all through our captive pipeline or off-market channels. Looking at the portfolio sale and JV contribution that Dave discussed, our net proceeds from these transactions were approximately $835 million, which we've used to repay our revolver in full, repay $130 million of term loan B that matures in July, and to buyback approximately $120 million of common shares since our last earnings call. These transactions have allowed us to significantly enhance our strategic capital position as of today by eliminating offloading rate debt exposure, freeing up all the capacity on our revolver, sourcing additional growth capital through the formation of a new joint venture, and reducing our share count due to our discounted valuation, which will create greater FFO per share growth over time.
Needless to say, we have positioned ourselves to take advantage of opportunities as they arise. Turning to the balance sheet, I won't summarize all the details of our debt private placement or share buyback activity, the specifics of which you can see in our disclosures. But I will highlight that at quarter end our leverage was 6.1 times net debt to EBITDA and pro forma with the asset sales and debt repayments our leverage at year end would have been 5.7 times. Now moving on to 2024 guidance which we introduced yesterday. The operating environment remains very competitive to start the year which is weighing on rental rates and occupancy. And uncertainty remains regarding interest rates, their impact on the housing market, and in turn the spring leasing season.
We've thus factored a wide range of scenarios into our full year guidance assumptions, which are detailed in the earnings release. The midpoints of key items of our guidance are as follows: Same-store revenue growth of negative 2%, same-store operating expense growth of 4%, same-store NOI growth of negative 4%, acquisition volume of $200 million and core FFO per share of $2.48. High-end of our guidance range assumes a return towards typical seasonality fueled in part by normalization of the housing market. The low-end incorporates continued downward pressure on rate and occupancy due to muted customer demand. And the midpoint assumes a modest level of seasonality with occupancy remaining relatively flat throughout the year. While our guidance reflects a wide range of outcomes, at some point the pent-up demand for home purchases will be unlocked, which combined with an improving supply outlook creates a healthy backdrop for self-storage fundamentals.
Thanks again for joining our call today. Let's now turn it back to the operator to take your questions. Operator?
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