National Storage Affiliates Trust [NSA] Conference call transcript for 2022 q4
2023-02-28 21:45:20
Fiscal: 2022 q4
Operator: Greetings, and welcome to the National Storage Affiliates' Fourth Quarter 2022 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, George Hoglund, Vice President of Investor Relations for National Storage Affiliates. Thank you, Mr. Hoglund. You may begin.
George Hoglund: We'd like to thank you for joining us today for the fourth quarter 2022 earnings conference call of National Storage Affiliates Trust. On the line with me here today are NSA's CEO, Tamara Fischer; President and COO, Dave Cramer; and CFO, Brandon Togashi. Following prepared remarks, management will accept questions from registered financial analysts. [Operator Instructions] In addition to the press release distributed yesterday afternoon, we furnished our supplemental package with additional detail on our results, which may be found in the Investor Relations section on our website at nationalstorageaffiliates.com. On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements that are subject to risks and uncertainties and represent management's estimates as of today, February 28, 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 statements. For additional detail concerning our forward-looking statements, please refer to our public filings with the SEC. We also encourage listeners to review the definitions and reconciliations of non-GAAP financial measures such as FFO, core FFO and net operating income contained in the supplemental information package available in the Investor Relations section on our website and in our SEC filings. I will now turn the call over to Tammy.
Tamara Fischer: Thanks George, and thanks, everyone, for joining our call today. We're very pleased with our fourth quarter results that capped off another impressive year, delivering growth in core FFO per share for the year of over 24%, the second highest year of growth for us since our IPO in 2015. Our same store growth for the year of almost 15% culminated a record three year period where same store NOI is now more than 40% and FFO per share is now more than 80% higher than the pre-pandemic levels of 2019. During the year, we acquired 53 stores valued at nearly $800 million comprised of 45 wholly owned properties valued at $570 million and 8 properties valued at $215 million that we acquired with our joint venture partners. I think it's worthwhile to note that this transaction volume was our third largest year since our IPO based on wholly owned acquisitions activity. To top it off, we also delivered 35% growth in dividends paid in 2022 compared to the prior year. Not only are we proud of being able to deliver record levels of financial growth for our shareholders, we're also proud the 2022 was our biggest year in supporting our communities since our IPO. Through our partnership with Feeding America, we were able to provide a million and a half meals to assist in ending food insecurity in America. Our properties continue to support their local schools and children's charities. And our corporate team thoroughly enjoyed our holiday toy drive for Children's Hospital here in Denver. We were pleased to again step up our support of the Self Storage Association's college scholarship program. We also continue to enhance our diversity at NSA were more than 40% of our senior management are women or minorities. Turning to the current acquisitions environment. We're seeing fewer deals come to market and the remains a pretty significant gap between buyer and seller price expectations. We continue to evaluate deals where it makes strategic sense and remain both disciplined and very selective in the face of today's increased cost of capital. Of course, just like we refuse to buy at prices that are not accretive for our shareholders. Sellers often refuse to sell given the healthy cash flow they generate. So it's not uncommon for sellers to just pull deals off the market if they don't like the pricing. Overall, the volume of transactions in the market is definitely slowing. In our case, though, we do have the unique benefit of our captive pipeline of assets, which are stores managed by our PROs, but that we don't yet own. Because we're on the same team as buyer and seller in these cases, we can cooperate to use structuring that is accretive for our shareholders, while also beneficial to the sellers. To that end, we recently entered into an agreement to acquire 15 properties in Florida owned generationally by one of our PROs and family members. The transaction is valued at about $145 million and we expect the first year yield will be in the low 6s. In this case, we've negotiated to fund the transaction with the issuance of a new series of preferred equity, beneficial to the PROs family, but still accretive to NSA. We expect the transaction will close sometime in March. This deal demonstrates one of the many benefits of our PRO structure and our ability to continue to grow while being very creative with capitalization. We began 2023 with another accretive event in the retirement of Move It Self Storage one of our IPO PROs. Move It managed over 70 properties for NSA concentrated in Texas and the Southeast. As most of you know, we've discussed an anticipated PRO retirements over time, and we expected at the time of our IPO, as many as half of our six PROs at the time would choose to retire within 10 years. Move It is the third of our PRO retirements following Northwest last year and secure care in 2020. We will continue to operate the stores under the Move It flag the internalization of Move It increases the number of stores managed within our corporate portfolio to almost 800 stores, or over 70% of our total 1100 stores at the end of the year. We estimate this retirement will be one to two pennies per share accretive to core FFO. I'd like to thank the Move It team for their partnership over the years. They've been a key contributor to NSA success. Finally, as today's call will wrap up my final year as NSA's CEO I'd like to congratulate Dave on stepping up as CEO effective at the end of this quarter. I'd also like to congratulate Tiffany Kenyon on recently being elevated to Chief Legal Officer and Derek Bergeon, our current Senior Vice President of Operations, and his upcoming move to Chief Operating Officer. I look forward to Dave leading NSA through its next phase of growth and continuing to deliver outstanding results for all of our stakeholders. I'll now turn the call over today, Dave?
Dave Bergeon: Thanks, Tammy. I'd like to congratulate you on your upcoming transition to executive chair. We appreciate all that you've done for the NSA and all us you will continue to do in your new role. I would also like to thank our PROs and their teams along with the NSA team for achieving great results in 2022. Without their efforts, we would not be able to accomplish all that we have this year. As we reflect on the fourth quarter and how 2022 played out, we really experienced normal seasonal trends. Occupancy peaked in Q2 at 95.3% and finished in December at 90.5%. Contract rates grew every month in 2022 finishing 12.7% higher than 2021. Our rent roll down averaged 12% in the quarter, which was in line with our expectations. Rental activity followed historical patterns peaking in the summer months and declining in the back half of the year. As a reminder, our current tenant base has an average length of stay of over 40 months. Our team did a wonderful job in the quarter driving revenue which was up 7.4% controlling expenses of only 1.6% leading to an increase in NOI of 9.4%. That's improving our NOI margin by 140 basis points. As we look to 2023 we are encouraged as our portfolio is following typical seasonal trends. Occupancy and street rates have bottomed here in February. We’re expecting both to pick up as we head into the spring leasing season. We believe we're on track to stabilize above pre-pandemic levels. January month end same store occupancy was over 250 basis points higher than January 2019 implying that we are settling in well above pre-pandemic levels. Our Sunbelt markets continue to outperform with states such as North Carolina, Florida, Georgia and Texas, all generating above portfolio average revenue growth. Several of our secondary markets such as Brownsville, McAllen, Oklahoma City, [indiscernible] and Wilmington are also outperforming the portfolio average. This reinforces our strategic market focus on Sunbelt, secondary and suburban markets and continued emphasis on geographic diversity. Our focus on people, process and platforms in 2023 will enable us to deliver strong results and continued success. I'll now turn the call over to Brandon to provide more detail on our financial results and balance sheet activity.
Brandon Togashi: Thank you, Dave. Yesterday afternoon, we reported core FFO per share of $0.71 for the fourth quarter of 2022 which represents an increase of 11% over the prior year period. For the full year core FFO per share was $2.81, 24.3% increase over 2021 driven by strong same store performance, including 12.1% revenue growth, and healthy acquisition volume in the back half of 2021 and throughout 2022. Dave spoke to the drivers impacting revenue. Let me give some color on fourth quarter operating expenses. Our fourth quarter growth of 1.6% benefited from lower than expected property taxes due to some successful challenges and efficiencies in personnel partially offset by inflationary pressures on utilities any increased marketing expense. Turning to the balance sheet. During the quarter, we entered into swaps to fix interest rates on $410 million of floating rate term loans. A weighted average effective interest rate on these loans at September 30, was 4.6% and pro forma with swaps was 5.2% as of December 31. In early January, we announced the recast of our credit facility, including expansion of our revolver capacity to $950 million, a $230 million increase to our existing term loans, and the retirement of $300 million of 2023 maturities. This execution during an evolving bank lending environment demonstrates the appeal of self storage as a property type and the strong relationships we have with our bank group. The end result was an extension in our weighted average maturity to 5.7 years from 5.1, increased flexibility, and about a five basis point increase in weighted average effective interest rate. At quarter end, our leverage was six times net debt to EBITDA right in the middle of our targeted range of 5.5 to 6.5. Pro forma for the financing activity I've mentioned at year end, approximately 17% of our debt is subject to variable rate exposure, down from 24% at September 30 with nearly all of that exposure from the outstanding balance on the revolver. We're committed to maintaining a conservative leverage profile and healthy access to multiple sources of capital. Now moving on to 2023 guidance which we introduced in yesterday's release. Same store growth is reverting to long term averages. We estimate same store revenue growth at 4.5% at the midpoint of the range we've provided, which is in line with our average annual growth over the three years pre-pandemic. We estimate same store expense growth of 5.25% and NOI growth of 4.25% each of the midpoints we provided. Our same store pool increases to 834 stabilized stores and 52 million square feet, an increase of over 200 stores due to our record acquisition volume in 2021. Approximately 68% of our same store portfolio is in the Sunbelt. And we expect revenue growth from these stores to outpace our non-Sunbelt stores by about 100 basis points. We are very pleased with our core operating fundamentals. However, higher interest rates will be an earnings headwind in 2023. Based on our debt in place currently, and using an assumption SOFR average is 4.6% we expect interest expense of over $150 billion for the year. All of this results in our 2023 core FFO per share guidance of $2.78 to $2.86 with a midpoint of $2.82. Lastly, before taking questions regarding Move It, I'll offer a reminder on the mechanics of a PRO retirement. The SP units associated with the Move It PRO, which were converted to O Punits on January 1, at a conversion ratio of 2.75. And therefore, distributions to SP units will be reduced accordingly, while the outstanding common shares and units outstanding increased by 2.5 million. NSA will no longer pay a management fee. So there will be a reduction in supervisory and administrative expenses within G&A which will be partially offset by an increase in other G&A as the properties will now be managed by NSA's corporate property management platform. All of these items are factored into our additional guidance assumptions that are detailed in the earnings release. Thanks again for joining our call today. Let's now turn it back to the operator to take your questions. Operator?
Operator: Thank you. Ladies and gentlemen at this time we will be conducting a question and answer session. [Operator Instructions] Our first question comes from the line of Juan Sanabria with BMO Capital Markets. Please proceed with your question.
Operator: Our next question comes from the line of Smedes Rose with Citi. Please proceed with your question.
Operator: Our next question comes from the line of [indiscernible] with Bank of America. Please proceed with your question.
Operator: Great. Thank you. Our next question comes from the line of [indiscernible] with Wolf Research. Please proceed with your question.
Operator: Our next question comes from the line of Todd Thomas with KeyBanc. Please proceed with your question.
Operator: Our next question comes from the line of Michael Goldsmith with UBS. Please proceed with your question.
Operator: Our next question comes from the line of Ronald Kamdem with Morgan Stanley. Please proceed with your question.
Operator: [Operator Instructions] Our next question comes in line of Wesley Golladay with Robert W. Baird. Please proceed with your question.
Operator: Our next question comes in the line of [indiscernible] With Green Street Advisors, please proceed with your question.
Operator: There are no further questions in the queue. I'd like to hand the call back to Ms. Fischer for closing remarks.
Tamara Fischer: Okay, thank you. So this wraps it up for the fourth quarter and for the year 2022. We're definitely feeling very optimistic about 2023. We certainly appreciate your participation in our calls today and in for your ongoing support of NSA. We look forward to seeing many of you in the coming weeks. Thanks again for your time today.
Operator: Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.
