10-Q: National Storage Affiliates Reports Mixed Q2 Results

National Storage Affiliates Trust reports a decline in rental revenue and occupancy, alongside increased interest expenses, despite strategic internalization benefits.

Summary

• Total revenue decreased by $1.6 million, or 0.8%, to $188.8 million for the three months ended June 30, 2025, compared to $190.4 million in the prior year period.
• Rental revenue declined by $4.5 million, or 2.6%, to $169.8 million for the three months ended June 30, 2025, primarily due to a decrease in total portfolio average occupancy from 86.1% to 83.6%.
• Net income attributable to common shareholders increased by $2.4 million, or 20.1%, to $14.4 million for the three months ended June 30, 2025, compared to $12.0 million in the prior year period.
• For the six months ended June 30, 2025, net income attributable to common shareholders decreased significantly by $43.6 million, or 66.2%, to $22.2 million, compared to $65.9 million in the prior year, largely due to a lower gain on property sales.
• FFO per share and unit decreased to $0.54 for the three months ended June 30, 2025, from $0.61 in the prior year, and to $1.06 for the six months ended June 30, 2025, from $1.20 in the prior year.
• Core FFO per share and unit decreased to $0.55 for the three months ended June 30, 2025, from $0.62 in the prior year, and to $1.09 for the six months ended June 30, 2025, from $1.22 in the prior year.
• Interest expense increased by $4.0 million, or 10.9%, for the three months ended June 30, 2025, and by $6.4 million, or 8.5%, for the six months ended June 30, 2025, primarily due to maturing interest rate swaps and higher variable rates.
• General and administrative expenses decreased by $3.4 million, or 20.9%, for the three months ended June 30, 2025, and by $5.9 million, or 18.6%, for the six months ended June 30, 2025, following the internalization of the PRO structure.
• The company sold ten self storage properties for net proceeds of approximately $67.1 million during the six months ended June 30, 2025, recording a net gain of $11.0 million.
• As of June 30, 2025, the company owned 807 consolidated self storage properties and managed an additional 260 properties through unconsolidated real estate ventures.

Sentiment

Score: 4

Explanation: The sentiment is moderately negative due to declines in key operating metrics such as rental revenue, occupancy, FFO, and Core FFO per share/unit. Increased interest expense and a credit rating downgrade further weigh on performance. While the internalization of the PRO structure is a positive strategic move, its benefits are currently overshadowed by operational headwinds and a significant drop in six-month net income due to lower asset sale gains.

Positives

• Net income attributable to common shareholders increased by 20.1% for the three months ended June 30, 2025, reaching $14.4 million.
• Management fees and other revenue increased by 28.4% to $12.2 million for the three months ended June 30, 2025, and by 31.0% to $24.4 million for the six months ended June 30, 2025, driven by new joint ventures and tenant insurance activities.
• General and administrative expenses decreased significantly by 20.9% for the three months and 18.6% for the six months ended June 30, 2025, primarily due to the internalization of the PRO structure.
• The company recorded a gain of $9.6 million on the sale of self storage properties for the three months ended June 30, 2025, and $11.0 million for the six months ended June 30, 2025.
• Dividends declared per common share increased slightly to $0.57 for the three months ended June 30, 2025, from $0.56 in the prior year.
• The company maintains significant borrowing capacity under its credit facility, with $544.1 million remaining Revolver commitments as of June 30, 2025.
• Amendments to term loan facilities (2028, April 2029, June 2029) resulted in decreased interest rates during the second quarter of 2025.

Negatives

• Total revenue decreased by 0.8% for the three months and 2.4% for the six months ended June 30, 2025.
• Rental revenue decreased by 2.6% for the three months and 4.4% for the six months ended June 30, 2025, primarily due to a decline in total portfolio average occupancy.
• Total portfolio average occupancy decreased from 86.1% to 83.6% for the three months ended June 30, 2025, and from 85.8% to 83.6% for the six months ended June 30, 2025.
• Same store portfolio rental revenues decreased by 3.1% for the three months and 3.2% for the six months ended June 30, 2025.
• FFO per share and unit decreased by $0.07 for the three months and $0.14 for the six months ended June 30, 2025.
• Core FFO per share and unit decreased by $0.07 for the three months and $0.13 for the six months ended June 30, 2025.
• Interest expense increased by 10.9% for the three months and 8.5% for the six months ended June 30, 2025, due to maturing interest rate swaps and higher variable rates.
• Equity in losses of unconsolidated real estate ventures increased by $3.6 million for the six months ended June 30, 2025, primarily due to the non-cash impact of applying the HLBV method to the 2024 Joint Venture.
• Acquisition and integration costs increased by $1.6 million for the three months and $3.5 million for the six months ended June 30, 2025, related to the PRO structure internalization.
• Net income attributable to common shareholders for the six months ended June 30, 2025, was significantly lower than the prior year due to a much smaller gain on property sales ($11.0 million vs. $63.8 million).
• KBRA downgraded the operating partnership's issuer and senior notes credit ratings to BBB from BBB+ and revised the outlook to stable from negative on March 17, 2025. Preferred shares were also downgraded.

Risks

• Market trends in the self-storage industry, interest rates, inflation, and tariff policies can adversely affect business.
• The ability to achieve underwritten capitalization rates for acquisitions and execute on the acquisition pipeline is uncertain.
• Integration of properties managed by former PROs into financial and operational reporting infrastructure and internal control framework may face challenges.
• Operating performance and projected operating results, including the ability to achieve market rents and occupancy levels, reduce operating expenditures, and increase ancillary product sales, are subject to uncertainty.
• The ability to obtain and maintain financing arrangements on favorable terms is not assured.
• General volatility of the securities markets can impact the company.
• Impacts from major public health events could adversely affect occupancy levels, rental rates, expenses, and tenant payment ability.
• Changes in interest rates and the effectiveness of hedging strategies against interest rate volatility pose risks.
• The risks of investing through joint ventures, including whether anticipated benefits are realized or take longer than expected, exist.
• Recent tariff actions by the U.S. and other countries may have a material adverse effect on business, financial condition, results of operations, ability to access capital, and common stock market price.

Future Outlook

The company expects to fund short-term liquidity requirements from operating cash flow, cash on hand, and borrowings under its credit facility. Long-term liquidity needs are expected to be met with operating cash flow, cash on hand, secured and unsecured indebtedness, and the issuance of equity and debt securities. The company believes it will have access to multiple sources of capital as a publicly-traded REIT, though this is not assured. The recently enacted One Big Beautiful Bill Act (OBBB) will relax the REIT asset test requirement for taxable REIT subsidiaries to 25% from 20% and permanently extend the 20% qualified business income deduction for REIT dividends, effective January 1, 2026.

Management Comments

• Management believes that the final disposition of legal proceedings will not have a material adverse effect on the company's financial position, results of operations, or liquidity.
• The internalization of the PRO structure was always a part of our long-term vision, leveraging national scale by integrating multiple experienced regional self storage operators.
• The company's property management platform now manages and controls the majority of its 807 consolidated properties and all 260 unconsolidated real estate venture properties.
• There is significant opportunity for continued external growth by partnering with institutional investors seeking to deploy capital in the self storage industry.
• The 75% third-party interest in the company's unconsolidated real estate ventures, approximately $2.0 billion based on historical book value, presents a potential acquisition opportunity that could drive future growth.
• The company's disclosure controls and procedures, as of the end of the period covered by this report, are effective.

Industry Context

The self-storage industry is subject to minor seasonal fluctuations, with a greater portion of revenues and profits generally realized from May through September. The company's strategy focuses on owning properties in high-quality sub-markets within the top 100 metropolitan statistical areas, which are characterized by strong and stable cash flows and multiple barriers to entry against new supply. The company's shift to a fully internally-staffed property management platform, following the internalization of the PRO structure, aims to enhance operational control and efficiency. The broader economic environment, including interest rates and tariff policies, continues to pose market risks for the real estate sector.

Comparison to Industry Standards

• NA

Corporate Governance

Legal Proceedings

• The company is subject to litigation, claims, and assessments that may arise in the ordinary course of its business activities, including contractual matters, employment-related issues, and regulatory proceedings. However, the company believes that the final disposition of such matters will not have a material adverse effect on its financial position, results of operations, or liquidity.

Related Party Transactions

• Following the internalization of the PRO structure, the company incurred $1.4 million for supervisory and administrative fees to former PROs under new asset management agreements for the three months ended June 30, 2025 (down from $5.1 million in Q2 2024).
• The company incurred $1.8 million for payroll and related costs reimbursable to former PROs for the three months ended June 30, 2025 (down from $6.8 million in Q2 2024).

Stakeholder Impact

• Shareholders: Decreased FFO and Core FFO per share/unit, along with a credit rating downgrade, may negatively impact investor confidence and share price. However, a slight increase in dividends declared per common share offers some positive return.
• Employees: The internalization of the PRO structure means more operations are now internally staffed, potentially leading to changes in employment structure and responsibilities for former PRO employees.
• Customers: Decreased occupancy suggests potential challenges in attracting or retaining tenants, which could lead to competitive pricing or incentives.
• Creditors: The KBRA credit rating downgrade to BBB from BBB+ for senior notes and BBBfrom BBB for preferred shares indicates a slightly increased risk profile, which could affect future borrowing costs or access to capital.

Next Steps

• Continue to integrate properties managed by former PROs into the company's platforms.
• Monitor and manage exposure to interest rate fluctuations through derivative instruments.
• Potentially pursue acquisitions of the 75% third-party interests in unconsolidated real estate ventures.
• Evaluate the impact of the One Big Beautiful Bill Act (OBBB) on REIT taxation and adjust strategies as needed from January 1, 2026.
• The 2023 Joint Venture acquired one property in Tennessee for approximately $21.8 million on July 22, 2025.
• The company sold two self storage properties for net proceeds of approximately $6.0 million on July 22, 2025.

Key Dates

Recommendation

The company is navigating a challenging period marked by declining rental revenue and occupancy, rising interest expenses, and a recent credit rating downgrade. While the internalization of the PRO structure is a significant strategic move expected to yield long-term benefits by reducing G&A expenses and enhancing operational control, its immediate positive impact is offset by current operational headwinds and a substantial year-over-year decline in six-month net income. The dividend remains stable, but the overall financial performance indicates a need for caution. A 'hold' recommendation is appropriate as the company works through these transitions and market pressures, with potential for improvement once the benefits of the internalization fully materialize and market conditions stabilize.

Keywords

Self Storage, REIT, Real Estate, Property Management, SEC Filing, 10-Q, Financial Results, Occupancy, Rental Income, Joint Venture, Debt, FFO, Core FFO, Corporate Governance, Risk Factors