welcome to the National Storage Affiliates Second Quarter 2019 Conference Call.
At this time, all participants are
in a listen only mode. A brief question and answer session will follow the formal presentation. 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.
Hello, everyone. We'd like to thank you for joining us today for the Q2 2019 earnings conference call of National Storage Affiliates Trust. In addition to the press release distributed yesterday, we filed an 8 ks with the SEC containing our supplemental package with additional detail on our results, 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. The company cautions that actual results may differ materially from those projected in any forward looking statements.
For additional detail concerning our forward looking statements, please refer to our public filings with the SEC. We also encourage listeners to review the definitions and reconciliations of non GAAP financial measures, such as FFO, core FFO and net operating income contained in the supplemental information package available in the Investor Relations section on our website and in our SEC filings. Today's conference call is hosted by National Storage Affiliates' Chairman and Chief Executive Officer, Arlen Nordhagen President and Chief Financial Officer, Tamara Fisher Chief Operating Officer, Steve Treadwell and Chief Accounting Officer, Brandon Tagashi. Following prepared remarks, management will accept questions from registered financial analysts. I will now turn the call over to Arlen.
Thanks, George, and thank you all for joining our call today. Before we address our results for another excellent quarter, I'd like to remind everyone of the planned management transition that we announced at the end of May. Effective January 1, 2020, I'll assume the role of Executive Chairman of the Board, and Tammy will become President and CEO. Additionally, Brandon Todacci, our current Chief Accounting Officer, will be promoted to CFO. Although my day to day role will be reduced, I'll remain very active in guiding and executing on the overall vision and strategy of the company, especially with respect to significant growth strategies, including acquisitions and pro recruitment.
I'm happy the Board and I share the same confidence in Tammy and Brandon, and I look forward to continuing our successes together. Now on to our 2nd quarter results. We're happy to report that we continue to lead the sector once again in year over year same store revenue, NOI and core FFO per share growth, facilitated by our differentiated pro structure and portfolio. The self storage industry continues to benefit from the growing economy, which is helping to fuel demand growth and partially offset the impact from new supply. Although recent market data suggests that the pace of new deliveries nationwide is declining, it's not declining quickly, which is continuing to provide headwinds for the sector as a whole, especially in the primary MSAs.
That said, we'd like to highlight a few key points about our portfolio, which gives us confidence in the outlook for NSA. First, we have greater exposure to the secondary markets than our peers, and those secondary markets have experienced significantly less supply growth in this current development cycle. We estimate 39% of our stores are currently affected by new supply in the Five Mile trade area, and we believe our secondary markets will continue to see less new supply than the primary markets, given that many of these secondary markets have lower average rents per square foot. These lower rates don't make new development nearly as attractive to developers. 2nd, in primary markets such as Riverside San Bernardino, Atlanta and Dallas Fort Worth, where we have several facilities, we tend to have a higher percentage of single story drive up facilities relative to our peers.
The new supply coming online is generally multistory climate controlled, higher price per square foot units. These new facilities often are not direct competition to our facilities, given they are significantly different product type. As such, we often see less negative impact from this type of new supply. And finally, we continue to benefit from very significant geographic diversity in our portfolio. Given these factors, we're optimistic that we'll continue to deliver solid results despite the elevated new supply.
Contributing to the strong results, we remain active on the acquisition front, having acquired 24 properties for $185,000,000 in the 2nd quarter, bringing year to date acquisitions to almost $400,000,000 Our summer leasing season has been slightly above normal with higher occupancy year over year, although that delta has narrowed subsequent to quarter end as we expected. As such, we're well positioned for the back half of the year. Favorable year to date and expected second half performance is reflected in our updated guidance, which is positive across the board despite tougher comps in the second half. We believe our sector leading same store NOI and core FFO per share growth should result in a more favorable valuation for NSA shares. On average, fundamentals in our portfolio remain healthy.
We continue to push mid- to high single digit rent increases to our in place customers, which is currently a key driver of our revenue growth. We're further encouraged by our occupancy gains in the 2nd quarter, which were consistent with the Q1. And we expect that the strength of our pro structure, combined with our constantly evolving revenue management and Internet marketing systems, will provide additional operational upside going forward. The combination of strong external growth and robust same store NOI growth gives us confidence that we will continue to achieve year over year double digit percentage growth in core FFO per share to lead our sector in 2019. With that, I'll now turn the call over to Tammy.
Thank you, Arlen. We continue to deliver solid results as our Q2 core FFO per share of $0.38 represents growth of 11.8% over the prior year period. This growth was fueled by a combination of strong same store NOI growth, strong acquisition volume and growing fees from our JV platform. For the Q2, same store NOI increased by 5.5%, driven by growth in same store revenues of 4.7% and property operating expense growth of 2.8%. We continued to push rate increases on existing tenants, which resulted in a 3.8% increase in average annualized rents per square foot.
Same store average occupancy increased 40 basis points to 89.6% during the quarter. Same store OpEx growth for the quarter was 2.8%, driven primarily by property taxes, which were up 3.8% year over year and repairs and maintenance, which were up about 19% year over year, although that's really a function of timing and weather. Personnel and marketing expense increases were close to our average number. These increases were partially offset by decreases in insurance and utilities. But we do expect overall expenses to pick up in the back half of the year with property taxes remaining the key wildcards.
Turning to geographic performance. Our leading MFA in terms of same store revenue growth include Atlanta, Indianapolis and Las Vegas, where recent demand growth has exceeded supply growth. Lagging markets in our portfolio included Portland, Dallas and Phoenix, where we continue to face the most impactful headwinds from elevated new supply. We are also seeing increased pressure from new supply in West Florida. Worth noting, all of our top 10 MSAs generated positive same store revenue and NOI growth in the 2nd quarter.
I'll now turn the call over to Brandon Togashi to address recent balance sheet activity.
Thanks, Tammy. With respect to the balance sheet, we've been proactive in accessing various sources of capital, while extending maturities, keeping leverage low and creating significant dry powder for future acquisition opportunities. During the Q2, we issued approximately $140,000,000 of equity through the issuance of both common and preferred stock under our ATM program as well as a combination of OP, SP and preferred OP units issued in connection with acquisitions. In addition, we closed on a $100,000,000 10 year unsecured term loan with an effective interest rate of 4.27%. Subsequent to quarter end, we successfully completed our inaugural private placement transaction.
In connection with that transaction, we agreed to issue $100,000,000 of 3.98 percent 10 year senior unsecured notes and $50,000,000 of 4.08 percent 12 year senior unsecured notes. The notes are expected to fund on August 30 and have been rated BBB by Kroll Bond Rating Agency. We are very pleased with the execution of this transaction and we appreciate the support of our new capital providers. We also recently closed on the recast of our credit facility, which increased our revolver capacity to $500,000,000 and increased our term loan borrowings by $155,000,000 in addition to extending the maturities. Notably, we also lowered our costs by reducing the current spread on the revolver by 10 basis points and lowering the weighted average swap cost on the term loans by 7 basis points.
After the recast of the facility and funding of the private placement notes, we expect our $500,000,000 revolving line of credit to be fully available to us, providing significant capacity for future acquisitions. Our weighted average cost of debt at quarter end was 3.6% with 84% of our debt fixed rate or swapped to fixed. After giving pro form a effect for the recast of the credit facility and funding our private placement, our weighted average maturity increases to 6.4 years from 4.1 years at the end of the second quarter, and our weighted average interest rate will be 3.5%. Our net debt to EBITDA ratio was 5.9x at the end of the second quarter, in the middle of our target range of 5.5x to 6.5x. We have no additional debt maturing for the remainder of 2019, and we remain committed to maintaining a conservative balance sheet.
I'll now pass the call back to Tammy to address guidance for 2019.
Thanks, Brandon. Performance for the first half of this year has been better than expected. We're confident in the outlook for the back half of the year, but we do expect revenue growth to slow primarily due to tougher comps, especially on the stores added to the same store pool this year, which performed very well in the second half of twenty eighteen. The cumulative impact of new supply will remain a headwind. We also expect expenses to tick up in the back half of the year, primarily due to timing and anticipated increases in property taxes.
Taking all of this into consideration, we've updated our full year 2019 guidance as follows. We now project full year same store revenue growth in the range of 3.5% to 4% versus our original guidance of 2.5% to 3.5%. The new midpoint of 3.75 percent represents a 75 basis point increase from the previous midpoint. We project same store operating expense growth of 2.75 percent to 3.25 percent from 2.5% to 3.5% previously. The midpoint remains 3%, but we've narrowed the range.
And we now project same store NOI growth of 3.5% to 4.5 percent, up from our previous guidance of 2.5% to 3.5%. The new bid point of 4% represents a 100 basis point increase from previous guidance. We're also increasing our guidance for full year 2019 core FFO per share a range of $1.51 to $1.54 up from our previous range of $1.48 to 1.52 dollars Additional guidance updates include full year 2019 wholly owned acquisitions of $400,000,000 to $500,000,000 up from $300,000,000 to $500,000,000 And we're maintaining our JV acquisition guidance at $20,000,000 to $100,000,000 Additional details on our updated assumptions are included in our earnings release. Thanks again for joining our call today. We'll now turn the call back to the operator to take your questions.
Operator?
Thank you. At this time, we'll be conducting a question and answer session. Our first question comes from Menis Rose with Citi. Please state your question.
Hi there. Thanks. I just wanted to ask you a little bit just on the acquisitions front. If you are seeing anything changing on the pricing side, if more product is coming to market that's of interest to you or kind of maybe just some color there?
Hi, Smedes. This is Arlen. I would say overall, we saw a lot of activity in the first half. We certainly looked at everything that came out there. And there were some larger portfolios that ended up going at pricing that we wouldn't bid that high.
Obviously, we kept our discipline in our underwriting. And so we definitely had several $100,000,000 of acquisitions that we looked at that we didn't we decided not to buy. But I'd say, in general, that represents the continuing fact that we see portfolio premiums whenever there's a portfolio of properties coming on the market. But on individual one off transactions, which is mostly what we've done this year, the cap rates are staying pretty similar. We're in the 6% to 6.5% cap rate range again on pretty much all the stuff we bought this last quarter.
Okay. And then from the other public companies, there's been a lot of discussion around higher marketing costs, particularly around bidding on search terms. Is that something that you're seeing or is it less of an issue maybe in the as you've talked about being in more secondary markets?
Hey, Spence, this is Steve. Yes, we have not seen the same impact as our peers. We're probably about 3% up year over year when it looks to advertising costs. And there's a couple of things driving that. Some of that is market based.
Yes, we're probably in more secondary and tertiary markets than they are. But I also think it speaks to our process and our team and improving efficiencies. We're very focused on cost per acquisition and our processes and our machine learning continue to get better as our portfolio gets larger and our data sets get richer. So we've frankly just been more effective and we've been pleased with the results so far this year.
Our next question comes from Todd Thomas with KeyBanc Capital Markets. Please state your question.
Hi. First question, just circling back to some detail in terms of where they are from an occupancy standpoint?
Yes. As I mentioned, Todd, the average cap rate is right around the 6.25%. They all range between 6% 6.5%. Average occupancy on those was probably in the mid to high 80s. So there's a little bit of upside opportunity on the occupancy, but mainly where we see the opportunity is from our platforms being able to drive rents higher, average rent per occupied square foot higher.
We do some cost reductions in several areas as well. But primarily, it's on the marketing side that we've seen the tremendous value add that we get on our acquisition.
Got it. And then how many of these were from the were sourced from the captive pipeline versus being 3rd party deals?
About a
half a dozen, Todd. I think that if you think about Southern just coming in, they contributed 3 more in the second quarter and then a handful of other ones from other PROs across the 6 month period.
That is mostly third party, obviously, with only half a dozen being the captive pipeline. And interestingly, our captive pipeline ends up, even though we absorb properties out of there into the acquisitions, our PROs end up getting new ones either through 3rd party management or through developments that they're doing. So the size of our acquisition or captive pipeline pretty much stays the same or even keeps growing slowly over time.
So can you comment on that? Can you where is the captive pipeline today? And if you look across the portfolio and all the pros that you're working with, how many properties are being 3rd party managed today?
We don't track it exactly, but I know it's around 100 properties that are 3rd party managed where we include in that properties that the pros might have a percentage ownership in that they're not 100% controlling. And so that would be sort of for them JV, their JV properties plus their total third party properties. And those are the ones that take a lot longer for us to obviously get in out of the captive pipeline because the pro doesn't control the decision on when those come into NSA. But the total captive pipeline is well over 100 properties and over $1,000,000,000 because we've added these new PROs recently, which obviously adds to the captive pipeline.
Okay, right. And then and what's the current thinking then? So the acquisitions in the quarter, high 80% range, maybe sitting a little bit below the portfolio average. But what's the current thinking from an investment standpoint on lease up stores? You refrain from development and C of O deals, but what about lease up properties?
Is that something that you would consider or starting to see more opportunity in?
We definitely see more opportunity. Honestly, I probably see 3 or 4 of those stores come across my Internet every week because there's a lot of, I guess, developer panic out there that are not filling up as fast as they thought they would. And we are considering we keep considering them. We of approved a small number, about up to 3% of our asset base as potential acquisitions of non stabilized fill up stores in our core portfolio wholly owned as well. But honestly, we have not seen the prices of those come down enough to do very much of it yet.
We do think that they'll keep coming down. And once they do, we're going to be very interested in it.
Okay, great. Thank you.
Thank you.
Our next question comes from Ronald Kamdem with Morgan Stanley. Please state your question.
Hey, thanks guys. And obviously congratulations on the management transition. The first question I had was just maybe can you just comment on maybe move in volumes and move in rates during the quarter to the extent that you can provide any color on that and sort of trends in July as well would be helpful.
Yes, this is Steve. Moving volumes for the quarter were good. They were strong, as you would imagine, for this part of the season. Relative to last year, maybe a little bit lighter, but the good news is that even given that, we held occupancy 40 bps higher during the quarter versus last year. So we felt strong about the move in volume, the spend volume is out there.
But certainly, there's a lot of new supply and that's really what's driving us on the street rate side. We'll continue to see street rates down year over year. For Q2, I'd say on average they were down about 3% to 4%. So that's been a consistent trend over the last couple of quarters. We expect that to persist through the balance of the year at this point.
It's just too much to be supply out there.
Got it. It. That's very helpful. The other question I have was just going back to sort of the acquisitions question on sort of the cap rates that you're looking at, just so I'm clear, are those cash cap rates you're quoting or are those GAAP adjustments?
Those are cash flow projections for the year, the 1st year ahead of our closing.
I'm sorry, you were breaking up. Maybe that was me, but
Yes. We hear you correctly. I'll repeat that. It's cash year 1 cash flow divided by year 1 or total capital investment. Did you hear that, Ron?
Yes, yes, I got it. That was clear, helpful. The last question was just on I saw obviously issued equity and debt and so forth, a lot of financing activity during the quarter. Just maybe remind us like how you guys thinking about when to sort of pull the equity trigger versus issuing debt? What sort of goes into those decisions as you're thinking about funding acquisitions?
Thanks.
Hey, Ronald, this is Brandon. I'll take that and Tammy can add on. So we I'll kind of frame it in the context of the 3 objectives we had coming into 2019. 1 was to relaunch our ATM, which we did early in the year. And remember that under that program, we have the optionality to issue common and preferred.
So that was kind of in our expectations for this year, which you saw us put in our release for what we did in Q2. We also wanted to recap the credit facility, which we did just earlier this week. And then the debt credit placement was the 3rd item. So we had frankly good opportunities this quarter with pricing on all three of those alternatives and we pulled the trigger. We also matched that with the high volume of acquisitions we had in Q1 and Q2.
I think as you look forward to the back half of the year, obviously, with our revised acquisitions guidance, we're implying a lighter deal flow and thus you'll see us have a lot less activity. We're also fully undrawn on the revolver after we get through our private placement funding. So we don't really have a lot in the way of capital needs immediately.
And I would add to that that one of the things that we really do from a strategic standpoint is try to have excess equity at all times to be available so that we can pull the trigger on acquisition opportunities when they come up. We are really continuing to be a focus as a growth company and we never want to find ourselves that we can't do an acquisition because of the fact that we've leveraged ourselves too highly and our stock price isn't good. So we want to try to do that in advance as much as we can. And so now we're positioned where we can do a lot of acquisitions without having to issue equity. And if the equity price is good again, we can issue more equity and just keep building that capacity going forward.
Helpful. Thanks so much for the call from me. Thanks.
Our next question comes from Todd Stender with Wells Fargo. Please state your question.
Hi, thanks. Just looking at
the same store pool, occupancy and rate were up. It's pretty good execution and peak season. Can you just share maybe what your revenue management systems are telling you? And just, I guess, broadly speaking, what the discounting levels were in the quarter?
Yes. So we're always looking to optimize revenue rather than occupancy or rate per se, and we're always trying to find the right mix. And you can see across our different markets, you see a different dynamic. In some places, we're giving up occupancy and other places, we're grabbing it back. So it's on a case by case basis.
I think the expectation is that occupancy continues to be flattish or maybe mildly positive for the remainder of the year is the expectation. And we expect to continue to push rate. We've been very successful with our revenue management system in terms of pushing out rent increases to existing customers. That has persisted for many, many quarters now. We tend to hit sort of the high single digits on our average rate increase.
And I think as we've messaged before, we fully expect to give 3 quarters of our customers a rate increase effectively for the through the course of the year. When you look at discounting, it's been relatively flat for a long, long time. This quarter, we actually saw it down versus Q2 of last year. It was down about 5% in dollar terms. That was a pleasant surprise given the uptick in occupancy.
I would expect it to be flattish for the balance of the year, but it's been a nice tailwind here for a few months and it will probably die off here towards the end of the year. So long and short of it, we continue to use discounting as a good lever to drive movements to hold occupancy and to be competitive with our peers. So I think discounting will continue to be strong through the balance of the year.
That's helpful. And then when do customers get their first rental rate increase? And does that change per pro or geographically? Yes.
So unfortunately, I'll tell you, it varies a lot. It varies by market. It varies by market dynamic. It varies by customer. In some cases, we have customers that came in well below what we think a market rate is because we wanted to grab that occupancy and we'll hit those customers sooner than later.
In other places where we're a little worried about new supply and occupancy, we might be a little more reluctant to push out a rate increase before, say, the 9 month or 12 month period. So on average, I would say the first increase across our portfolio, the average would be about 7 to 9 months after a customer joins us. But that is not uniform across portfolio or across pros. In almost all cases, in a year, the customer would receive a rate increase. Yes.
Certainly, that's the intent. There's very, very few cases where we would not get a rate increase within a year, but it's typically between 7 to 9 months.
Okay. Thank you. Just last question. I think you gave the occupancy on the new properties acquired in the quarter. But when you speak about the rate, your average, at least in the same store pool, is up around 11.80 a square foot.
What did the new properties come in at, I guess, above or below that average?
I think the new ones came in very close to that average, but I know a number were above and some below. So it's very market specific there. And I'm sorry, Todd, I don't have that exact number. We could follow-up after the call and give you that. But I can tell you it'll be relatively close.
Our next question comes from Jon Petersen with Jefferies. Please state your question.
Great. Thanks. So I know you talked a little
bit about equity versus debt in the market today. I was just kind of curious, maybe more pointedly, looking at your leverage ratio, debt to EBITDA of 5.9x. Just kind of curious what your kind of long term targets are? And then maybe how you would think about that trend in the short term given pricing in the capital markets?
So our long term objective, John, is to stay in the range of 5.5 to 6.5 net debt to EBITDA. And so we're perfectly comfortable at 5.9. I think
what we've talked about in
the past is that to the extent we're aggressively acquiring assets, we may on a short term basis see that number end up at the top end of the range for a little while while we reposition. Right now, of course, we feel like we're in great shape and well positioned to opportunistically take advantage of acquisitions as they become available to us.
Okay. And it seems like
you guys are doing, I don't know, 1 disposition or so a quarter. Just curious how we should think about dispositions going forward. I don't know how large the portfolio of target dispositions is internally. Maybe just some more thoughts on that.
We don't have a target disposition number, John. But the way we think about it is that when an asset no longer fits our profile or if there is a higher and better use or, for instance, the land on which an asset sits, which is the case in one of our dispositions this year, it just made all the sense in the world to go ahead with the disposition. With our PRO structure, we have the advantage of having, call it, 10 acquisitions teams on the ground. We also have 10 asset managers on the ground and they are the closest to their own portfolio and
That's a good example on the one that we did in the Q2. It was generated by the pro and a situation where they found a buyer that would pay a really low cap rate because they're going to We love to do that kind of deal.
Okay. I think I got most of that.
You guys are kind of
breaking up again. But
I think I got that. But just one cleanup question, if
I could. On the revenue line management fees were up quite a bit, I think about $3,000,000 year over year. Just kind of curious if there's anything one time in there
we need to adjust for?
Hey, Tim, this is Brandon.
Not one time, but remember
we had the 2018 JV come in, in September of
last year. So if you're looking year over year really until you get to Q4 of this year, you're not going to have an apples to apples comp. So it's really the influx of
the fees related to that
second joint venture, our 2018 JV.
And that's also part of the reason why our G and A costs are up year over year.
Got it. Okay. Thank you.
Thank you.
Thank you. Ladies and gentlemen, there are no further questions at
this time. I'll turn
it back to Tamara Fisher for closing remarks. Thank you.
Thanks, everyone, for joining NSA's Q2 2019 earnings call. To reiterate, we're very pleased with our year to date performance and full year outlook, which benefit from the differentiated flow structure and our portfolio. We appreciate your continued interest in and support of National Storage Affiliates, and we look forward to seeing many of you at the upcoming conferences this fall.