NSA - NYSE

Greetings, and welcome to the National Storage Affiliates Second Quarter 2024 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.

We'd like to thank you for joining us today for the Second Quarter 2024 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 details 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, August 6, 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.

Thanks, George, and thanks, everyone, for joining our call today. Our results for the quarter reflect continued pressure from a very competitive operating environment. Similar to other operators, we're seeing reduced customer demand for storage due to muted housing market and the absorption of new supply which is being felt most probably in our Sunbelt markets. Rental activity slowed in the back half of June and into July, with the same-store occupancy ending in June at 87% and July at 86.6%. Street rates grew sequentially each month during the second quarter, but declined 1.7% in July and are down 14% from last year. Historically, occupancy rate peak in July, so the spring leasing season did not play out as a typical season. We continue to be pleased with our existing customer behaviors, payment activity, length of stay and ECRIs all remain within our expectations. We believe that the current operating environment will remain throughout the back half of the year. Given these headwinds, we have adjusted our full-year expectations accordingly, which Brandon will detail further. We are starting to see more acquisition opportunities in our core markets. We started to deploy capital from JV 2023, closing on the purchase of a high property portfolio in the Rio Grande Valley for $72 million. These are high-quality properties in lease-up with an average occupancy in the mid-70s. The portfolio was purchased with 100% equity, and we plan to place long-term financing on the assets following stabilization. We also have a 13-property portfolio totaling $75 million under contract and another attractive core market to be purchased by the same JV. These two deals improve our overall portfolio quality at depth to our existing markets and increase our operational efficiencies. We've made significant progress on our strategic initiatives over the past few quarters, culminating with the internalization of our PRO structure, which positions us well when the operating environment improves. Transition of the PRO-managed stores to the NSA's platform is on schedule, and we are encouraged by the opportunities to further enhance the performance of these properties. I'll provide some highlights of our progress to date. Currently, out of the 333 PRO managed stores, 70% are on the NSA web and operating platforms that the remaining to be completed by the end of the year. Of the 172 stores to be rebranded, 40% have been completed. The transition is complete, we expect that approximately 94% of our portfolio will be managed by our corporate team while the remaining 6% of our properties will be managed by forward PROs due to geographic and future relationship considerations. As previously discussed, we expect accretion related to the PRO internalization in three key areas: $0.03 to $0.04 of accretion primarily from G&A savings beginning in 2025, eliminating the cash flow split from the PRO structure effectively adds $0.50 on every dollar of NOI growth, and we expect $0.02 to $0.04 of accretion from changes in revenue management and operations efficiencies. As an example, currently, there is a 300 basis point difference in occupancy between PRO managed stores and the corporate managed stores, which we expect to close going forward. Additionally, there are differences in ECRI and marketing strategies, which we are in the process of communizing. Although we face near-term headwinds, we remain optimistic on the longer-term outlook given all the steps we've taken to improve our platform, optimize our portfolio and generate access to growth capital via joint ventures. I'll now turn the call over to Brandon to discuss our financial results.

Thank you, Dave. Yesterday afternoon, we reported core FFO per share of $0.62 for the second quarter 2024, representing a decrease of approximately 9% over the prior year period, driven primarily by the decline in same-store NOI. We Additionally, we had a few casualty events resulting in approximately $1 million of losses or almost $0.01 per share, which impacted second quarter results. For the quarter, revenue growth declined 2.8% on a same-store basis, driven by growth in rent revenue per square foot of 60 basis points, offset by a 320 basis point year-over-year decline in average occupancy. Expense growth was 4.8% in the second quarter with the main drivers of growth being R&M, marketing and insurance, partially offset by a decline in property taxes due to successful appeals. Marketing expenses remain higher due to increased competition for customers while insurance expense growth will moderate going forward to the single digits. Now speaking to the balance sheet. Our current revolver balance is roughly $400 million, giving us $550 million of availability. Our plan coming into 2024 was to be patient until the back half of the year before terming out debt to address maturities and the revolver balance. With interest rates starting to move in our favor over the next few quarters, we will opportunistically seek to push out maturities and create a little more capacity on the line of credit. We are comfortable with our leverage, which was 6.5 times net debt to EBITDA at quarter end and we expect it to remain relatively flat for the remainder of the year with capital deployment biased to our joint ventures, as Dave touched on earlier. During the quarter, we fulfilled our share repurchase program, buying 1.9 million shares for $72 million. Additionally, on July 1, all of the subordinated performance units associated with our PRO structure were converted into 18 million OP units, and we bought out the management contracts and tenant insurance economics related to the PRO managed stores. This included the payment of $33 million of cash and 1.5 million OP units. The elimination of the SP unit simplifies our capital structure and financials for all stakeholders. This results in higher gross FFO dollars since there will no longer be any distributions on the SP units and a denominator share count of 135 million or an estimated 127 million weighted average shares for full year 2024. Now moving on to 2024 outlook. Let me give some color on the key drivers of change in our guidance. When we introduced same-store growth guidance in February, we talked about the following assumptions; on the high end, a return to typical seasonality due to a normalization of the housing market; on the low end, continued downward pressure on rate and occupancy due to muted customer demand; and at the midpoint, a modest level of seasonality with occupancy and street rates remaining relatively flat throughout the year. As we progressed through June and July, it became clear to us that sufficient customer demand was not materializing and competitive pressures were persisting such that the upper half of our revenue and NOI ranges was not realistic. The difference in operating dynamics across our portfolio has also been observable, with the Sunbelt markets more challenged than others. For example, the assumption I mentioned earlier that informed the midpoint of our guidance, our occupancy and street rates are relatively flat throughout the year, has largely played out with our non-Sunbelt markets. The sequential occupancy gain in these markets has been about 180 basis points from January to the end of July, and street rates are up about 2% in that time. But for our Sunbelt markets, occupancy is only up 50 basis points and street rates are down 9%. This diversion in results has weighed heavier on our portfolio, given a higher concentration of Sunbelt markets. Looking back over multiple years, these Sunbelt markets have still outperformed the rest of the portfolio. And over the long term, we expect them to outperform. But near term, due to tougher multiyear comps, elevated competitive pressure and softer demand due to housing, these markets will be more challenged. These revisions to same-store growth are the primary driver of our guidance change in core FFO per share which we now project to be $2.36 to $2.44 for 2024. Thanks again for joining our call today. Let's now turn it back to the operator to take your questions. Operator?

[Operator Instructions]. Our first question comes from the line of Juan Sanabria with BMO Capital Markets. Please proceed with your question.

Good morning. Just hoping you could talk a little bit about the PRO internalization. You mentioned the opportunity with an occupancy gap there relative to the corporate-managed stores. And what do you think that would entail kind of going forward or what's assumed in the back half of guidance? Are you assuming you're going to have to drop rates incrementally to stimulate more demand? Or how should we think about that evolving in the time frame to close that gap?

Juan, thanks for joining. It's a good question. I think we're going to look at that in several ways. I think we'll look at -- as we bring the stores onto our platforms, bringing them onto the customer acquisitions platform around the website, how we deploy marketing dollars, use the AI tools around our Google analytics to get the right paid search metrics built into those stores. Looking at price and discount certainly will be a part of that equation as we try to drive really to a revenue number we're seeking, but really close the gap closer to that corporate portfolio. We've had good success in the first half of this year around the corporate portfolio with the new tools that we have and the new data analytics that we have, effectively driving occupancy, holding rate very close to where we want to be and just had success. So we think the PRO stores will benefit from coming on to our platforms and will level really through the back half of the year and the first part of next year, we'll be able to close that occupancy gap to a level that we're anticipating, market-specific, store specific, of course, but we should see success around occupancy gains there.

Okay. And then switching gears, you talked about becoming more acquisitive. You talked about a 13 asset portfolio with the [indiscernible] managed fund. Just hoping you could talk a little bit about cap rates and kind of what you're underwriting for that deal, if [indiscernible] the dollar size as well and just where asset values are today?

Yes, sure. We were very, I thought, successful in a couple of fronts in the second quarter. We did buy three assets on balance sheet for about $25 million using 1031 proceeds. So, we were able to effectively redeploy capital on assets that we had sold and put it to work in markets where we wanted to target and densify our portfolio. Of the $25 million, 2 of those ads were stabilized assets in very key markets that just added to our portfolio. Those are purchased in the mid-6s as far as a cap rate look. We were able to also acquire one property in a very targeted market for us. It had a little more lease-up component. So that was probably a little closer to the low 4s. But a little expected here in the next 12 months, 18 months to 24 months to be in the high 6s when it returns to stabilization. So, from ease of capital and use of 1031 proceeds, the team did a really good job finding assets to satisfy that. The JV that we mentioned in the Rio Grande Valley, it's still in lease-up, very high-quality assets. We have a large presence there. This has a lot of climate control product that benefits our portfolio that we have in the Rio Grande Valley, it's in the mid-70s right now, very well positioned, very well located for us in the market. So, it really fills in a market nicely. The yield on that was in the mid-5s. We expect that to be in the high 7s as we stabilize that portfolio throughout. And then we also added another portfolio of 13 assets in a very key market for us. The due diligence is just completed on, and we're looking forward to bringing that in. It's, again, more stabilized product, 13 properties in a very nice market for us. It will improve our portfolio position and our operational efficiencies. That portfolio is up because it's a little more stabilized, is higher than the mid-5s. It's closer to the 6 as we go into it. It does have some lease-up opportunities with it because they just added some new expansion to it. So that occupancy is in the low 80s right now. So, I think the team has done a really good job second quarter, getting back to smart growth, deploying funds in markets where we want to densify our portfolio and build operational presence and efficiencies.

Our next question comes from the line of Samir Khanal with Evercore ISI. Please proceed with your question.

Thank you. Brandon, I guess what are you baking in for ECRIs in your guidance at this time? Have those assumptions changed as you see lowered revenue growth guidance?

Samir, ECRI assumptions, we plan for the balance of this year to continue to be as assertive as we have been recently. All of the data that we have tells us that we're not really making that much of an impact on customer behavior. Customer response has been really strong and good regarding the pushes on those rate increases. And so right now, we plan to continue to push those out. Obviously, your opportunity set based on were you able to achieve with occupancy in the spring and summer is impacted there. And so that's all factored into the math. But no changes based on customer behavior or what the data is telling us.

And even, I guess, as a follow-up, what about in the markets when you look at -- you talked about Sunbelt being a little bit more challenged. You're not seeing any changes there from an ECRI perspective either, correct?

No, nothing specific to ECRI in those markets or the demographics related to those markets that's telling us there's a big difference or delta in that behavior. If anything, Samir, one of the things that's factored in is, as we transition the ECRI decisions from the PROs who weren't previously kind of fully letting us run those programs. It is going to increase the opportunity set a little bit. Some of the PROs may not have pushed that first rate increase to new move-ins as early as we have with our corporate managed stores, the magnitude of that increase. We've been more confident in being higher on that first increase from a percentage rate change just because of what I mentioned earlier about the data supporting the reception to that. So that is going to be some additive pieces in the back half of the year, which probably benefits maybe the fourth quarter a little bit, but then really going forward into 2025, we should see some benefit there.

Our next question comes from the line of Spenser Allaway with Green Street Advisor. Please proceed with your question.

Maybe just one more on the transaction market. Can you just comment on whether you're seeing more inbound calls today than normal? And just trying to get a sense of how the deals are getting done are being sourced? And if there are any more willing sellers in today's market than versus maybe like 6 months ago?

Sure. Thanks for the question. I do think we're seeing more deal flow and more -- I would say more deal flow that makes sense to us. I think we've seen traffic over the last six months, 12 months, 18 months, but I think there was definitely a wider spread on sellers' expectations versus where we thought we were going to buy at I would also tell you we're seeing deals come back multiple times. And so, if we saw it six months or 12 months ago, we're seeing it again today. And so, I think that, again, back to sellers' expectations are becoming a little more realistic on where they need to transact at. And so, we're happy with the amount of deal flow we're seeing. We're underwriting a lot of properties Again, I was pleased in the second quarter of our team's ability to really get some deals across the finish line and really buy it opportunities we thought were good for us.

Okay. Great. And yes, your comments on the bid-ask spread are useful. Can you just quantify if you could, the bid-ask spread today versus maybe on the deals that are coming back around versus where they maybe were first being traded or first being sourced?

I would say, while on average, from a starting point from the mid-ask bid, we're probably 5% to 10% off today as we start the process with the seller and buyer it was probably 5% to 10% higher than that a year ago. So we certainly have seen that gap probably cut in half, I would tell you, as we're starting deal underwriting today.

Our next question comes from the line of Todd Thomas with KeyBanc Capital Markets. Please proceed with your question.

Thanks, good afternoon. First question, just I was wondering if you could provide an update on the G&A synergies, specifically, the $0.03 to $0.04 in total that you mentioned and whether that has been achieved on an annualized basis now within the revised guidance? Or what the time line to achieve that accretion might look like on an annualized basis going forward?

Yes, Todd, this is Brandon. Good question. So, the G&A savings, remember, the dollars that we expected to realize was in the $7.5 million to $9 million range. That was the large contributor to the $0.03 to $0.04, which incorporated other things like the tenant insurance buyout, but also the cost of the consideration to do those buyouts as well as the conversion of the PRO SP equity to OP equity. So that was all incorporated into that math, of course. The G&A savings, we're picking up a little bit of that, but really as Dave touched on earlier in his comments, that's the full realization of that is really going to be in 2025 and beyond. All of the PRO management agreements as they were in place terminated, but then we immediately turned around and entered into short-term transitionary management agreements with the PROs at a slightly reduced percent of revenue rate. And so, there is some incremental realization of that benefit these next two quarters. But really, it's when that transition is complete and our corporate team has taken over the operations, the accounting, all the back-office administration and oversight of those properties, that's really when we'll realize that benefit and the accretion then comes at that time, which we project to be -- the first full quarter of seeing like a real run rate is going to be first quarter 2025.

Okay. Great. That's helpful. And then the $0.02 to $0.04 of accretion from revenue management, is that predominantly the closing of the occupancy gap that you discussed and the ECRIs that I think you just spoke about to a prior question or with the changes in ECRI strategies, bringing them on board now to corporate? Would that be additional upside?

No, I think that's in the $0.02 to $0.04 as we look at operational efficiencies and really just around the structure of the ECRI program, occupancy will be part of that factor, but occupancy, I think it comes a little bit later as we close that gap, Todd, really 2025. To Brandon's point, we transition the storage to our platforms, which is well underway. We will implement the ECRI strategy. So, we'll start to see some benefit mid-part of the back half of the year. Obviously, the full benefit coming into 2025. But that 2% to 4% is really around -- made some payroll savings as we bring people on as far as ours and structure and because we have overlay in markets as we look at the ECR program as well.

Okay. Got it. So, the ECRI program will have a faster impact earlier on. The occupancy gap closing might take a little bit longer just based on market conditions. Okay. And then the stores that will remain with the PROs for management purposes, can you just provide a little bit more detail there? Whether there's an expectation to eventually transition management of those stores in the future? And then are they going to adopt a more centralized ECRI strategy and, I guess, revenue management strategy -- or will they continue to operate sort of separate from corporate?

Yes. Really good question. And so, we have a couple of PROs that are with us longer term, and they are very good performers. Their stores will be on the platform. So, all of the platform efficiencies, all the platform structure that we have and the implementation, they will be on. They will continue to operate the stores from a local piece of it from people management. They'll do the accounting. They certainly have great insights on markets. They want to continue to grow. So, I think there's opportunities with these couple of PROs to look at future ventures with us where they continue to acquire properties. It will be different than -- the PRO structure to be maybe some kind of venture that we spin up where we can have these 2 PROs continue to build out in markets they're in. Geography played in this as well. Well-performing PROs -- well positioned in geography where we didn't have a lot of overlap. And so, for our standpoint, operational efficiencies would be a little more challenging there because we enter markets where we didn't have any overlap. And so, we think it's a good benefit. We think they provide a lot of value to us, and we're looking forward to the future with them.

Our next question comes from the line of Ki Bin Kim with Truist Securities. Please proceed with your question.

Thank you. Good morning. Just going back to the revenue synergy commentary on the PRO internalization. You mentioned 300 basis points gap in occupancy that you might be able to close. I was curious, is that just comparing one portfolio versus the NSA portfolio? Or is that somehow market-weighted? Meaning, certain markets obviously have just a different occupancy profile.

It's a really good question, Ki Bin. I would tell you, the pure spread is portfolio to portfolio, but in these markets that we're studying, there is a lot of overlap. So, we have a high level of confidence within a lot of these markets that we'll be able to adjust that occupancy level smartly. I mean, we're still trying to solve the revenue, but we -- through better marketing practices and better revenue management practices, we'll be able to close that gap similar to what the corporate portfolio has done since we've instituted the new tools and had success around the new tools.

And as you transitioned, I guess, in July, internalized structure. Did that at all cause any kind of usual blip in operating performance?

Certainly, as I acknowledged in my comments on the release, the team here, it's a lift. I mean, we've got well planned, we've got a nice structure around it. The intent of extending the management agreement is to get a nice, smooth transition. But I would be honest with you, we all know every time you transition platforms and you transition marketing platforms and you work through team member transition, it's certainly -- it can be a distraction. We are working very, very hard and we're very, very focused on minimalizing the distraction. But it certainly works here that the back half of the year, we were thinking about the first half of the year. And so, I think we're well positioned. I think we're going to work through it fine. I'm very proud of the team and what they're doing and how they're executing, but again, being honest, we know it's extra work.

Yes. I mean the press release language suggested something like that, which is why I asked. Maybe you could just provide some of the same-store NOI performance between NSA's portfolio versus the PROs year-to-date. And just curious if there's been a pretty noticeable change in -- or difference in same-store NOI growth rates?

I'm probably not going to get into this keeping obviously, markets and store specifics, and there's a lot of pieces to it around different strategies that went into it. So, I probably won't talk a lot about the NOI differences between the portfolios.

Our next question comes from the line of Michael Goldsmith with UBS. Please proceed with your question.

Good afternoon. Thanks for taking my question. My first question is on just on the customer demand and what has to change to get things to get better? We have talked, over the last several quarters, a lot about the housing market, but are you seeing anything else that could be influencing kind of that new customer [indiscernible], any sort of increased customer sensitivity to the macro or economic slowing?

It's a good question. We haven't seen a lot of impact from economic slowing. Like I said, the existing customer base has been healthy. And so, we're pleased with payment activity and all those pieces of it. So that's good. I think the new customer attracting new customers, there are several things going on. There's obviously a little less demand. Transition around the country due to housing due to other jobs environment, strength of the economy, I think, has kept people in place. I believe we still have new supply that we're cycling in a lot of our markets, particularly in the Sunbelt. And so that will take time to burn through. So, if you look at the markets like Phoenix and Atlanta and West Coast of Florida and some of these markets we've called out before, time is what's going to fix that. There's still good population growth. There's still good household formation. There's still good job growth in these markets. And the long term, we like them. It just takes time to burn through this supply, which I would go back to tell you, we think some of the supply was masked because of the COVID, the success we had around COVID in the storage industry and they'll work their way through it. I think -- as storage goes, I mean, even as things tighten in the economy, storage has historically benefited from contraction as people are forced to move around the country for jobs or maybe they're forced to downsize or maybe those other transitions in their life. And so that's something that hasn't really happened in the last 18 months to 24 months, really the only change has been the interest rate environment, and it's really muted the housing transition. So I think at this point in time, we're happy with the way our portfolio is positioned. We're happy with the diversity of our portfolio. The Sunbelt will come back. We had a really strong run through COVID, and we shouldn't forget that. That was one of the hottest markets in the country through some of those markets and we just have to sail through it.

And then my follow-up question is for Brandon, the same-store expense guidance have moved a little bit higher. We saw a lot of the peer’s kind of take down the same-store expense guidance. So, can you walk through like what you're seeing on the expense side? What you're seeing at the expense side and your ability to flex expenses or maybe the slower demand environment? Thanks.

Yes, Michael, on the expenses, yes, you're right, we lowered the -- sorry, increased the low end of the guidance range a little bit just based on what we saw in the first half of the year. Some of that is like our marketing spend. We deliberately chose to spend a little more than we had budgeted just based on all the things that we described earlier, right, just the muted demand and trying to capture some of the customer -- customers that we could in the some competitive environment. Property taxes is obviously a big line item and one that we just still don't have a ton of clarity on yet, just given where our markets are and where you get those final assessments. So, the first half of the year incorporates some benefits to the successful appeals, as I mentioned in my earlier remarks, but the back half of the year still has our beginning of the year budgets for a lot of markets, which sometimes we get to the end of the year, and I think we were a little conservative because we are a little more successful oftentimes in the third and fourth quarter, contesting those. But that baked into the guide is what we had projected at the beginning of the year. So, as we go through Texas and other parts of the Southeast, we'll get final bills on those, these next couple of quarters and have more clarity there.

Our next question comes from the line of Eric Wolfe with Citibank. Please proceed with your question.

You mentioned that you haven't seen changes in the existing customer piece yet, but I was curious in the past, when you have seen signs that ECRI behavior was changing, what do you think caused it? Was it a recession or economic reasons? Just trying to understand what would actually cause a change in behavior?

I think you'd have to go back -- I mean go back to GFC in places like or the pocket book got really tight. We've made -- we never really stopped the program, but maybe we change the magnitude of the rate increase. We would set more guardrails around maybe a total dollar amount of increase versus looking at percentages. And they really had to do, I think, with health of the consumer around unemployment rates and income levels and really what was going on in the environment around that piece of it, is probably the last time I can think that we really were challenged around altering the ECRI program. I think today, we're smarter though. We have better data tools. We have higher levels of confidence. Personally, I would tell you it's less than a gut feeling. It's more about data now, and the tools we've deployed thus far, give us more confidence. If we had these back in the GFC, we'd have probably had a different attitude about rate changes at that time as we do today.

That's helpful. And in the past, I think storage companies have said that about 50% of customers move out before 6 months and correct me if I'm wrong on that. But I was just wondering if there have been any changes to that? I know average length of stay went up during COVID and it's come down a bit, but didn't know if that's being driven by more short-term customers that are turning over more quickly or long-term customers staying a little less time. I know average length of stay seems to be staying consistent, but just curious within that different cohorts are sort of changing in terms of how long they're staying?

It's a really good question. And we do study the buckets as you're referring to, less than 90 days, less than six months, places like that. We just haven't seen a lot of movement within those buckets. And I can tell you, to your point, on move out, the average length of stay of people been with us over 24 months, is still around 19 months. Our -- within the same store, the total length of stay for all of our in-place tenants is still north of 40 months. The approximate -- 65% of our tenants have been with us more than a year and about 50% have been with us more than 2 years. So, if you look back to history, those are still above some of the historical numbers and staying very solid.

Our next question comes from the line of Eric Luebchow with Wells Fargo. Please proceed with your question.

Great. I appreciate it. You touched on this a little bit, Dave, already on the Sunbelt, but in terms of new supply. But is a lot of that supply online now, and as you mentioned, it's just a matter of time about working through it? Or are you seeing continued development activity popping up in some of those markets that makes you think the supply overhang could persist for longer? Just trying to get a sense for when you think we may start to see that supply overhang reverse in an opposite direction, assuming that current demand trends hold going forward?

It's -- we believe that the major amount of supply is going down as far as new deliveries. We think a lot of this product was delivered and has been delivered through '21, '22, and so I would tell you, we're probably on the downhill slope of the maximum impact of new supply. Certainly, there is development. Certainly, there are markets that are seeing new development. It's more challenging than ever to develop. It's more expensive than ever to develop. And now if you're a developer, you're looking at longer fill-up times in a more challenging competitive environment that might change your attitude about developing in the future. But I'd say we're on the downhill slide of the majority of the impact from new supply hitting the market.

Great. Appreciate that. And you've touched on move-in rates and been a little more aggressive to get -- to improve occupancy. So, one of the early signs been, from customers, on the ECRIs? I think you've talked about pushing faster rate increases and a larger magnitude with the first ECRI. Has that been successful so far? And how does that compare to any other promotional techniques you've used in the past, things like free rent?

Currently, I think our data would tell us is that price is still important on attracting new customers. And so, discounting has come up a little bit, but price is still the main driver to get the rental. And so, we are focusing -- a little more sharp on pricing at the entry point of the customer for new customers. After that, we've had better success around the ECRI program in timing, quicker timing and magnitude. And we just haven't -- all the testing we're doing and all the different levels we're doing within that testing, we're not seeing anything that's pushing the stats around the acceptance of ECRI, even though we're increasing magnitude and we might be short in the time frame on when they're getting them. So far, again, we talked about the customer remains healthy. They're accepting the programs that we're implementing, and we just haven't seen a lot of movement.

Our next question comes from the line of Jeff Spector with Bank of America. Please proceed with your question.

David, I appreciate your opening remarks, you commented that we should expect the current environment conditions to last into year-end. Is it fair to say and think just based on seasonality and the currency of the consumer that the current environment really will last at least until '25 peak leasing season possibly through it? Or do you feel like that's really not a fair comment at this point?

It's a really good question. I think there's a lot of things at play that we just don't know yet. I mean what will free up a little more housing activity and create a little more transition around the company -- around the country, excuse me -- will the Fed cut interest rates. There's just a lot of unknowns in the back half. We -- I'm in the camp, but I do think we're going to see some Fed activity as the back half of the year comes along. And the question then becomes is the -- how much pent-up demand is there around movement, people wanting to buy and sell houses and transition. If that does come to light in the back half of the year, then I would say the spring leasing season to 2025 would be the tell off. We'll enter the first quarter of 2025 similar to the way we probably entered this year and then hopefully we'll have a stronger leasing season in 2025 should this demand factor is a little bit muted right now return. I wish I had a better answer than that. I think we're hopeful. I think supply pressures in some markets will ease while other markets will maintain. But certainly, with our internalization and us getting our platforms on commonized and some of the things we can do internally, I think that sets us up well to compete in today's environment. And then when it changes, excel.

Thank you. And then, again, I appreciate all the comments on the existing customer and the strength in existing customer that you're pushing rate. You did respond that historically when there's an issue. It's when that customer is I think you alluded to reviewing right their expenses, and we're in that current state. So, is that a concern? Do you -- are you contemplating shifting that strategy on how much you're pushing? Is it just a seasonal thing? I think as you discussed that, yes, over the next few months, you'll do that? Or again, how should we think about that balance? Thank you.

Yes. Good question. I don't -- we're not seeing anything today that is going to probably change our course on where we're at with our ECRI program. With one thing that I would add is the fact that, we're looking at tenants that have had a number of rate increases and asking ourselves replacement path of that tenant -- longevity of that tenant, how much do we want to actively pursue, maybe a fifth or sixth rate increase if you look at it that way. And so that's the one area I think we're studying harder than ever. But the rest of our programs, that is telling us and our testing is telling us as we look at different levels and different magnitude and timing that the consumer is not having any change in habits or behaviors because of what we're doing. I will tell you, I still believe this storage is not a large, large component dollar item of the personal expense line. It's a very convenient, easy use product that people need. And storage has always been a need-based business. And so, I believe that also helps us in our strength of confidence around the consumer really having to make a tough choice before they decide to leave their storage unit.

Our next question comes from the line of Omotayo Okusanya with Deutsche Bank. Please proceed with your question.

Yes. Questions around street rate. I believe you mentioned for the quarter it was down 9% year-over-year. Just curious what's built into the revised guidance regarding how you think Street rates may perform in the back half of '24?

I think -- Tayo, thanks for joining. And I think what Brandon was talking about was just the difference between our Sunbelt markets and our non-Sunbelt markets. And so I think in his comments, he was talking about 9% difference in the decline in Street rates was in our Sunbelt markets versus our non-Sunbelt markets. I think we ended the quarter on street rate, I think we were down around 14.5%, 15%, is what Street rates were down for the quarter. I think I know our comp gets a little easier in the back half of the year. And so as you look at July, if it was 4.5% or so, it got a little better in July as far as I think we said it was 14. It's where we finished in July. And in the back half of the year, the year-over-year comps get easier, the street rates, the difference in year-over-year variance in the rate will come get a little bit closer. I will tell you, it's going to remain competitive, though. I think we're going to be smart around driving to a revenue number. I think we'll be smart around driving to an occupancy discount marketing spend in a street rate environment that gets the overall goal we want, which is a revenue number we're shooting for. And so competitive environment still exists. They're more competitive where we have new supply. And certainly, some markets are feeling that more than others, and it's pretty dynamic right now, I guess, is what I would say.

So, are we thinking about a negative single digits from a negative double digits? Does it improve to that level given better year-over-year comps in the back half of the year? Or I'm not sure how much you can kind of nail it down because everything is dynamic right now, but kind of curious just if you could give us a little bit more specific guidance around it.

Tough to know what the competitive pressures do. I would say, as we looked at the year in February, we thought it would be in the single digits really closing that gap in the back half of the year. I think we're probably not as optimistic that we'll get low single digits, but I think we believe will not be in the teams anymore. I think we're going to get maybe high single digits by the end of the year.

Our next question comes from the line of Brendan Lynch with Barclays. Please proceed with your question.

Great. Thanks for taking my question. I wanted to ask on the performance of your pricing and occupancy and marketing algorithms, to what extent they are perfected for lack of a better term versus having some upside potential from further adjustments? And maybe just some commentary on how you evaluate whether you are truly maximizing profitability with the algorithm that you have in place?

Really, really good thought there. I don't think we're optimized. And I think there are several reasons for that. I think time, situation, a number of data points improve you all the time. If you think about it, I don't think we've operated in this type of environment. I've been at this a long time -- for a long time, if ever. I mean, we come from a COVID high and this materially higher environment. And now we're going into a really highly competitive environment. where we've seen some consolidation in the industry. We've seen new supply come on. We've seen machines really be dynamic in the way they price, particularly entry rate and very, very dynamic movements in rates that I haven't seen before. And so, our tools are capable of learning. They're learning every day. We are testing all of the time, different strategies within markets, within unit sizes, within properties. But I would tell you, I think time and will make us better. I think situations will make us better, what we learn and how we improve and how we tweak will make us better. So personally, from my position, I think we have room to improve.

Great. And somewhat related follow-up. You hired a new Chief Marketing Officer a few months ago. Maybe what your expectations are, the marketing initiative and anything that you might be branching out into taking on new marketing tactics and how they're going so far?

Sure. We actually promoted an internal candidate into that position. So, Melissa has been with this 5 year, I think, [indiscernible] of what she's been now. And so she's been a very integral part of our building out of our marketing strategies and our customer acquisition strategies. The last two years, we've spent a tremendous amount of energy and time adding talent and technology around the call center platform, around the marketing website platform, the introduction of algorithms around our Google paid search platforms, which we have built. And so we've done a lot of things to improve our positioning in our footing, setting us up for the future. If you look, we've launched new customer experiences around our website, which she's been in the spearhead of. And so we've got, I think, a lot of exciting things that we're just putting the finishing touches. Data warehouse -- the new data warehouse environment is up and running and functional, that introduces machine learning and AI technology. Again, the call center, the amount of team members we have, the amount of technology we have, the amount of touch points for that call center service center is very important to us. And so yes, I mean, she's doing a wonderful job. She's certainly had a lot of vision around this. And with our support, she's been able to develop a really strong program for us.

Our next question comes from the line of Juan Sanabria with BMO Capital Markets. Please proceed with your question.

Thanks for the follow-up time. Just curious, if you could comment about the difference of in-place rates between the corporate managed stores and the previously PRO managed stores and how you think about that quantum and the time frame to close that gap and the levers to do so?

It's one -- thanks for the question. Thanks for the follow-up. It's hard because of geography. I think each store has -- each market has its own different way you look at it, they have a different unit mix. They have a different maybe a ratio of climate control versus non-climate, and so it varies throughout the markets. And so, I think it's hard for us to give a number around in-place contract rate or achieve rate -- my PRO. What we would tell you is we know there are differences in the way we can really work on the existing customer base. So how we attract customers is one piece of it, but really that existing customer base and use of data, use of tools, use of appetite to use the tools, acceptance of the data to drive a stronger performance out of that in-place tenant. And so that's where we see an opportunity, that will obviously lead to bigger in-place contract rents and ability to drive revenue.

And just one final one for me. I mean how do you guys think of setting hurdle rates or what the benchmarks are for determining success in the PRO internalization and optimizing that delta to whatever levels you're targeting like -- how should we, I guess, be able to judge or not what determines success for you?

Well, I think we've laid out a couple of them around platform transition, acceptance of the way the platforms will work around, rate change technologies and customer acquisitions and use of paid spend and marketing spend and our success ratio is around conversion rate on the top end of the funnel through the funnel to rental. I think those are numbers that we can continue to work on and refine and then we'll talk about. And then obviously, the occupancy gap is the first one we pointed to. As we work through this transition, we think there's an opportunity to effectively carefully use that occupancy lever to drive additional revenue. And so, I think let us get through the next couple of quarters of transition, get the platform done, get the team transition done, and then we'll come back with a few more stats. I think that will help you understand how we're looking at success.

Our next question comes from the line of Keegan Carl with Wolfe Research. Please proceed with your question.

I apologize, I think you might have said some of this, but I'm just curious on July in particular, where occupancy and rate both performed versus both 2Q and then also June. And then just on July, in particular, I'd love to know how this compared versus your expectations? In other words, just where were you assuming July performance at the midpoint of your prior guidance range?

So, Keegan, July, we did remark that occupancy was 86.6% at the end of the month, that's a negative 300 basis point delta at the prior year. So, it widened a little bit from the in June year-over-year. Also, the comments that Dave and I gave earlier about, just as we progressed through June and July, and things just being a little weaker than we would have liked to have seen, obviously, informed everything we put in the report last night. So occupancy down sequentially June to July, street rates also start to move downward as they typically would seasonally, right, both of those metrics, they would typically start to go lower sequentially as you go through the back half of the year. So that's certainly built into our projections. It's just a matter of how much of those competitive pressures and the lack of demand. How much does that weigh on that dynamic as we progress through. Q2, I would tell you, just like the growth rate year-over-year, it wasn't too materially off from when we were talking with you in May, but I would say the trajectory of how things were going as we exited June and July is what informs a lot of what we have talked about today and put in the report last night.

Got it. That's helpful. And then just shifting gears on the occupancy portion of the guide. I guess I'm just curious, I know you touched on street rate. But how should we think about the occupancy delta on a year-over-year basis for the rest of 2024? And does your guidance include any inflection in demand for the rest of the year? I know you mentioned that you expect it to kind of trend similarly [indiscernible] now. But is there any sort of embedded inflection within either the mid- or high end of the range?

Yes. So, Keegan, we do expect occupancy to continue to go lower as it normally would seasonally. But that 300 basis point negative delta at the end of July, at the midpoint of our guide, would assume that by the end of the year, that's probably still negative, but maybe more in like the negative 100 basis point range, such that the average for the back half of the year is a negative 200. And then the other dynamic that we have going on is just our contract rate, as you saw in our numbers, has been positive year-over-year but that gap has been narrowing and narrowing. And that is likely to inflect and be negative. So it's a negative 200 basis point on occupancy, coupled with a negative year-over-year on contract rate, which gets you to that implied growth on revenue that you saw in our guidance. The assumptions do not include a material inflection regarding demand. As Dave mentioned earlier, if the Fed moved swiftly here in September and maybe there's some pickup we get from what that could do. Also, if there's countercyclical demand because of job loss increase and things like that and some of the transition that Dave described earlier that our business generally benefits from. That -- those are the types of things that could help us in the high and low end. But at the midpoint, we're not assuming anything material from those events.

Our next question comes from the line of Ronald Kamden with Morgan Stanley. Please proceed with your question.

Just two quick ones for me. Just trying to understand sort of the same-store revenue guidance, making sure I get it right. So, if you have it sort of down three for the year and you're sort of down two year-to-date, -- so that sort of implies the back half of the year, exiting the year at sort of a down four number, which would be the exit rate for the year going into 2025. Is that sort of correct? And is that the right sort of starting point for 2025 that we should be thinking about? Or am I missing something?

Your number -- I have got a high 3, call it, 3.8 number, Ronald, versus 4. But overall, I agree with your commentary. Now how we get there, that's the back half of the year, aggregate. How do we get there across Q3 and Q4? And what does that mean in terms of where you're actually exiting the 2024 year and beginning 2025, that's the crux of your question, right? And I'm not prepared to give you any more color than what we've given here, but that will be obviously impactful to what we're talking about in February when we talk about 2025 projections.

Makes a ton of sense. And then my second one was just going to expenses a little bit. I don't know if you've touched on it, but -- just -- you got some -- it sounds like favorable appeals on taxes, sort of labor and stuff. Just could you provide some high-level commentary on just where should we expect those to trend? Is this 5% number sort of the right run rate? Or is there opportunities to do maybe better than that over time?

Yes. Long term, I mean, we've had great success 5-year, 6-year averages of 3% to 4% OpEx growth. More recently, obviously, there's been pressures, wage pressures property tax pressures, marketing spend, certainly, which we didn't have to spend a whole lot on or certainly can dial back tremendously when demand was falling from the trees. But going forward, for the back half of the year, I mean, I expect the second half growth year-over-year to be a little bit less, obviously, as is implied, than what the first half was. And earlier comments about property tax that will be the needle mover is whether or not we're -- have some favorable results when it comes to the assessed values and levy rates and especially like the Southeast markets where we've yet to get those final bills.

Our last question comes from the line of Eric Wolfe with Citibank. Please proceed with your question.

Thanks for taking the follow up, I know the call is going long here. But I think you said that around 60% to 70% of your stores compete with an LSI store. So, I was curious when they raised pricing around late May, did that end up being helpful to sort of moving rents for your competing stores? I guess, I would have assumed that it would be more helpful than some of the aggregate numbers you quoted would suggest. But perhaps they just didn't hold the pricing long enough or you saw more competition in other places. I was just curious sort of what that impact of that was across your competing stores?

Sure. Really good question. We were able to move, particularly April and May, really into June, street rates up. And so yes, I think having a little less competitive pressure around some of the markets and seeing some positive movement in street rates certainly helped. To the Brandon's point -- Brandon was just driving, by mid-June and into July, we saw a reversal of that improvement in street rate and certainly that put pressure on, I think, all of us from a competitive set to react to the changing street rate environment that really happened back half of June and July. So that's -- as you look at the second quarter, I think that's probably as -- when we were talking to you out there in May, we're a little more optimistic about the second quarter, it certainly changed back half of June and July.

There are no further questions at this time. I'd like to turn the call back over to George for some closing remarks.

Thank you all for your continued interest in NSA. We hope you enjoy the rest of the summer, and we look forward to seeing many of you at the upcoming conferences in September.