Greetings, and welcome to National Storage Affiliates Second Quarter 2017 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, Marti Dowling, Director of Investor Relations for National Storage Affiliates. Thank you, Ms. Dowling, you may begin..

Hello, everyone, we would like to thank you for joining us today for the second quarter 2017 earnings conference call of National Storage Affiliates Trust.

In addition to the press release distributed yesterday after market closed, we have filed an 8-K with the SEC containing our supplemental package with additional details on our results, which may also 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 the Company’s website and in its filings made with the SEC.

Today’s conference call is hosted by National Storage Affiliates’ Chief Executive Officer, Arlen Nordhagen; Chief Financial Officer, Tamara Fischer; and Senior Vice President of Operations, Steve Treadwell. Following prepared remarks, management will accept questions from registered financial analysts. I will now turn the call over to Arlen..

Thanks, Marti, and thank you everyone for joining our second quarter 2017 earnings conference call.

Yesterday, we reported another quarter of strong results as we continue to execute on our differentiated strategy that combines the local expertise of our participating regional operators with our national operating platform and scale driving top tier year-over-year organic growth.

During the second quarter, our same store NOI grew by 8.4% and our core FFO was $0.31 per share, up nearly 11% compared to the second quarter last year.

On the acquisition front, we maintain our strategy of sourcing quality assets at attractive returns across our portfolio even though we find ourselves in a market with significantly reduced transaction volume.

We grew our wholly-owned portfolio with the acquisition of 10 self storage properties during the second quarter for a total investment of $70 million. In addition, our iStorage JV acquired four self storage properties for almost $50 million during the quarter.

Always looking to optimize our long term portfolio, we sold two self storage properties in Ashville, North Carolina for gross proceeds of just over $10 million and rolled those proceeds into a 1031 exchange investment that closed in July.

We'll continue to opportunistically dispose of assets in markets where we consider our growth prospects to be limited and cap our ability to benefit from market economies of scale.

Subsequent to quarter end, we acquired another four properties valued at approximately $40 million and currently have another $80 million plus under contract, which we expect will close later this year. We remain optimistic about the opportunities we're seeing and are expecting a stronger acquisition pace in the second half of this year.

To support our growth, we maintain a strong and flexible balance sheet while working to expand our sources of capital. We’re very comfortable with our current leverage metrics and have plenty of capital available to fund our current pipeline of acquisitions. Tammy will discuss our balance sheet and liquidity in more detail later in the call.

Now I'd like to take a moment to comment on the fundamentals we're seeing within the self storage industry. As we've discussed on recent calls, supply is increasing in several markets which is only natural after years of very high NOI growth driven by increasing demand and limited new supply.

We've seen the most notable impacts of new supply in the top 25 MSAs, particularly in Texas, Oregon, Colorado, and Georgia. As a result, we continually refined our revenue management programs in markets with new supply to determine the best way to maximize revenue growth.

Because self storage is essentially a fixed inventory business with tenants that stay for several months, unlike for example the hotel or airline industry, we found that in markets with increased competition we can produce substantially better total revenue gains by giving up small amounts of occupancy in order to keep driving rate rather than fighting to hold occupancy at historically high levels.

We don't want to rent our last 10 by 10 unit to a super rate sensitive customer when we could have rented to new customer at a stronger rate a week or two later. And at these very high occupancy rates, we always have unit sizes with almost no spaces available to rent.

Within every portfolio, there will always be a few markets that are working through challenges but we believe in the benefits of geographic diversifications and that the balance of our overall portfolio is very healthy.

To that end, we continue to drive internal growth as we put in-place institutional best practices at our newly acquired stores, evolve and improve our revenue management system, scale our centralized marketing and call center and leverage our management team and platform as we grow our asset base.

From an external perspective, we see excellent opportunities for growth across all acquisition avenues. First, our captive pipeline which consists of properties that are PROs currently manage but which NSA does not yet own, stands at about a 120 properties value of approximately $1 billion.

Second, our PROs provide us with a strategic advantage as they source third party acquisitions through their personal networks and relationships. Third, we pursue new PROs to join NSA through ongoing discussions with several high quality private operators.

And finally, our joint venture partnership allows us to leverage the strength of our balance sheet and scale our property management platform. I will now turn the call over to Tammy..

Thanks, Arlen, and thank you everyone for joining us and for your interest in National Storage Affiliate. I’ll start with a review of our second quarter results and wrap up with a discussion of our balance sheet and updated 2017 guidance.

For the second quarter 2017, we reported net income of $15.6 million compared to $6 million in the second quarter 2016. Core FFO per increased by over 10% to $0.31 per share.

This year-over-year growth for the quarter comes primarily as a result of the acquisition of 80 properties over the past year, delivering about $7.8 million of incremental NOI and another $2.3 million of organic growth from within our same store portfolio.

We also benefited from $2.1 million of management fees and other revenue and $1.2 million of core FFO from our unconsolidated joint venture investment. Our growth was offset somewhat by increase G&A and higher interest expense.

Turning to operations our second quarter same store NOI grew by 8.4% driven by a 5.8% increase in revenue and focused control over operating expenses.

We expect our revenue management system will allow us to optimize revenue growth as we further refinance by striving to achieve the correct balance of occupancy and referrals, which was over 6% this quarter.

As Arlen mentioned, in situations with new supply small declines in occupancy like the 60 basis points decrease we saw this quarter can be compared with higher rate increase, deliver better overall improvement in total revenue.

Our same store property operating expense increased by just four time of a percent this quarter, while we continue to see outsized growth in property tax expense running two to three times inflation.

We also continue to benefit from economies of scales in areas like marketing and insurance where our year-over-year expenses have declined while still delivering equal or better results. Within our portfolio, California and Arizona were our strongest performers while Oklahoma, Colorado and Georgia experienced weaker negative same store NOI growth.

Oklahoma is the classic case of lagging economy combined with excess new supply in the market. Colorado has a strong economy but new supply has really hurt that market.

Georgia is an outlier because we're impacted by unusual one-time event such a flood in one store, a fire in another store and disruptions to customer traffic due to construction near couple of our Atlanta metro area stores.

Significant new supply is also limiting our same store gains in Portland, Dallas and Raleigh, Durham, but we've been able to keep pushing same store revenues upward at a good pace by focusing on higher rate growth to offset declining occupancy.

Overall, we again deliver strong results because of the diversity of our portfolio and the strength of many of our sub markets. We realized year-over-year same store revenue growth for Q2 ’17 of 5% or more in almost 60% of our same store MSA market.

We also benefit from the fact that our portfolio is primarily located within states with job growth economy. In fact of the 20 MSAs that generate the most revenue for MSA, we categorize 10 of them as having a very strong economy. Six of them, is having a good stable economy and only four of them is having a slower economy.

And the relative performance bears that out with the strong economy market averaging year-over-year same store revenue gains of 7.1%. The stable economy is averaging 6% and the slower economy markets only delivering four tens of a percent year-over-year revenue gains for MSA.

Besides property level operations, our increasing scale has helped to reduce our G&A expense as a percentage of revenue. If we include all of our joint venture property revenue, our G&A expense is now running below 10% of revenues. We continue to maintain a strong flexible capital structure with leverage at the lower end of our optimal target range.

Our net debt-to-EBITDA ratio was 6.1 times at the end of the quarter and we have almost no debt maturing before 2020. With our demonstrated ability to access both debt and equity capital, including through the issuance of OP equity we are well positioned to fund our planned growth.

Due to the strong performance of our portfolio, our board increased our second quarter dividend in May by 8%. Our annualized dividend rate is now a $1.04 per share 18% higher than where it was just one year ago.

We are pleased to provide our investors with what we believe, is an attractive combination of growth and income as a result of the execution of our differentiated strategy. Finally I’d like to review a few key points from our updated guidance in our earnings release.

Based on our current market dynamics and year-to-date results, we updated our guidance by narrowing our ranges for the full year 2017. We now expect to end the year with same store revenue growth in the range of 5% to 6% with same store expense growth of 1.5% to 2.5%, driving same store NOI growth of between 7% and 8%.

We expect total acquisitions within a range of $300 million to $450 million for the full year. This includes consolidated acquisitions in the range of $250 million to $350 million and unconsolidated acquisitions in the range of $50 million to a $100 million.

With this growth and the management fees and other FFO from our unconsolidated joint venture, we expect core FFO for 2017 will be between $1.23 and $1.27 per share.

In closing midway through 2017, we are very pleased with our results and believe we are well positioned as we enter the second half of the year to drive outsized growth as we create value for our shareholders. Again, thank you for joining us today. Now, we’ll turn the call back to the operator to take your questions.

Operator?.

Thank you. [Operator Instructions] Our first question comes from the line of Todd Thomas with KeyBanc. Please go ahead with your questions..

This first question, rate growth was higher in the quarter and I'm just wondering.

What caused you to bring down the forecast for revenue growth, for the back half of the year?.

Hey, Todd, it's Steve. Thanks for the question. We've been very successful so far this year in pushing rates. In terms of street rates, they're kind of running in the low single digits as far as year-over-year growth, but our ability to increase rates on in-place customer has really allowed us to drive that average per square foot revenue number.

In theory, we're about 6.3% effective this quarter. I think what we'll see in the back half of the year is some tougher comps and so a little bit of a deceleration and that's I think just a natural trend that we've seen here for several quarters, but all-in-all everything remains in-place and returns are strong..

The effective rate to 6.3%, do you think that you can maintain that rate growth going forward?.

Yes, it'll probably be similar to that. I won't speak to what it's exactly going to be for the back half of the year, but it's going to be in that range. The ability to raise rates on in-place customers has really kind of hitting in the high single digits as far as pushing those rates.

When you blend that with the starting rates increases and add a little discounting in for good measure, that's how you're getting to the 6% range..

Okay. And then as you, sort of hold rates steadier and refrain from renting units to more rate sensitive customers, as you noted.

Are you seeing any change at all in conversion rates from online or at the call center? Is there any -- is demand to the system I guess being impacted at all?.

No, I don't think so. I think demand is pretty steady. I think conversion rates are pretty steady. There's nothing material to speak about there. We definitely used discounting and promotions as an effective tool within our portfolio to attract eyeballs on the internet and to bring customers in the door and get them to sign out lease.

So, that's allowed us to hold the line on street rates. And if we can hold the line on street rates and get some increases there then we have a better base and a foundation for increasing rates on customers, down the road after that they've been with us for 6, 9, 12 months or whatever it is per store.

And so, we'd rather use the discounts promotions rather than letting rate come down, and we’ve been effective in keeping the conversions high..

And Tom, this is Arlen. I'll add to that that it’s really market by market dependent, you'll notice in our supplemental that you know occupancy overall was down about 60 basis points across the portfolio but that varied from market to market. You can see some markets which have more new supply and new competition, they might be down you know 3% to 4%.

Others are up, and you know the key is that our whole focus on the revenue management program is on total revenues, not on occupancy and not on rate by itself, but it's the blend of those two.

And of course we factor in discounting as part of that, and we believe that by factoring all of those in, being very careful in markets that have new supply, not to start a price war that we actually end up with much better revenue growth..

Okay.

And lastly, do you have an occupancy update at the end of July, for the same store?.

The trends that we’ve seen so far remain in-place. July is basically where we would expect it to be and we're very comfortable with our guidance for the rest of the year in terms of revenue growth. So I think I would say the occupancy trend remain in-place..

Our next question comes from the line of George Hoglund with Jefferies. Please go ahead with your question..

I have a question on the balance sheet.

You ended the quarter about 180 million on the line just looking to see what your plans are for that and overall company size, are we getting to the point where it might makes sense to eventually to index eligible bond offering?.

Hey George, thanks for that question. We were at 180 million. We were little above that now with the post-quarter acquisitions that we completed. We're also in the process of turning out about $85 million that will be done in the near-term with a 10-year late come future financing.

And then in terms of accessing the public bond market, I think we want to keep our options open we're going to continue to manage our balance sheet with the flexibility that we need to be able to do that we will continue to evaluate it or get to the right time and place which we defiantly want to have that available to us an option..

And then just on the acquisition front, what do you guys see in terms of portfolio deals that out there and then also just the PRO pipeline the assets.

Is there anything that could potentially speed up or slow the pace of acquisition from the PRO pipeline?.

So George this is Arlen, in general we’re seeing certainly more activity on the transaction side now then we were earlier in the year.

What was happening earlier in the year is that there was pretty good disconnect between the sellers expectations where they thought the cap rates would keep coming down and the buyers expectation thinking the cap rates would go up, and we had a number of transactions that just didn’t close of the add in the seller took them off the market.

We're now seeing those come a little more in inline and kind of it's become that the sellers think well cap rates are flat and the buyers think there are about flat or maybe a little bit up, but bottom is we get the deal done, you got to be in pretty comparable cap rates.

So what that means is, there is no secret that we had a quite slow acquisition pace in the first half of the year. We only close the little over 100 million consolidated and another 50 million in our joint venture. We definitely are seeing that that will pick up in the last half of the year.

There are always some portfolios on the market, but to be honest its way less than last year. Last year, we saw number of sizable portfolios on the market. This year it's really just a few here and there and off course we're always interested in them, if there are in markets that we participate in.

But we don’t have anything to announce in that regard, it just those we would look at everything that’s out there..

Okay and then just a on the pace of acquisitions from the PROs anything that would change that?.

The pace in the PROs is fairly well set and we've done a number of those already this year. We got some more from now through the end of the year and that’s part of our guidance. So we’re pretty comfortable, we increased the midpoint of our guidance a little bit.

We did lower the top end of our guidance in the acquisition estimate for the year primarily because the first half is quite a bit lower than we thought it would be to be honest..

Our next question comes from the line of Vikram Malhotra with Morgan Stanley. Please go ahead with your question..

Could you give a sense of where street rate growth is across some of the key markets? And what you’re seeing on occupancy and rate growth so far through July?.

Hey, Vikram, this is Steve. So, our strongest street rate growth is frankly in Southern California. It's been a great market for us and we’ve been successful in pushing rate in that market for a long time. So that trend continues and I’d also say the street rate growth in Oregon has been fantastic and also continues to impress.

As far as weakness history rate that say Oklahoma is one of our tougher markets, we’re having -- have a little trouble pushing rate there. And West Texas to the challenge, but all-in-all we’re running on an average from the portfolio in sort of the low-to-mid single digits as far as street rate growth..

And Vikram, this is Arlen. I’d just add you know obviously this really is a very micro, very locally sensitive business.

So even within those different states you will have properties that will be quite different and its -- if for example even though California is doing great overall and if there is one property in California that gets a new supply, new property built next door.

It's going to have an impact, so but from an overall standpoint as Steve said we’re seeing overall low to mid single-digit street rate gains and mid to high single digit, existing customer gains and you know the combination of that is very effective..

I think [indiscernible] [0:24:39.3] you're seeing sort of you know 4% to 6% street rate growth and it sounds like now that decelerates a bit, is that fair?.

Yes, little bit maybe about a percent or so, maybe three to five on average versus four to six.

And that’s part of both the tougher comps, but also you know more new supply coming in and of course it's important to remember that street rates are only not even half of the equation because existing customers and the raises that we make to those have remained very strong.

We have not really cut that back at all, that’s remained in the high single digits consistently, regardless..

Okay. And then just on supply, it's obviously ongoing topic. I wanted to just get your thoughts, if you sort of look in your crystal ball. What are you seeing in fracture deliveries this year and into next year? And is it fair to say the impact of greater impact would be felt next year..

It’s hard to know exactly when the peak of new openings or deliveries will be -- it's going to be somewhere between the end of this year and middle of next year. I think pretty much everyone is agreeing on that from what we’ve heard and what we’ve seen in the surveys that we do. But of course again that’s market-by-market dependent.

But let’s just say that the peak somewhere late this year, early next year. That would mean that next year will probably have the biggest impact because you not only have the new stores from next year impacting it but new stores this year aren’t going to be full.

And so they will impact next year’s supply demand dynamic and even last year's stores that were opened last year in a lot of markets are still in fill up although they tend to get you know at the point -- once the stores get around 60% occupied or so, they stop having nearly as much impact on the overall market just because we're at the point where you're covering your operating cost, you're covering typically your debt service that is a privately-owned facility and so we definitely see much less aggressive marketing and pushing for new customers once they hit about 60%.

But those stores that are in the zero to 60% range are going to have an impact on that. Now we only have about 20% of our stores across our entire portfolio that have either a new store that opened in the last year or a store that will open in the next year.

So you know 80% of our stores will not be affected by a new supply in that timeframe but 20% of them will and that 20% will certainly have more challenges..

And just to follow up very quickly on that 80% that's not impacted, are you seeing, and you mentioned that new supply is a bigger deal across the 25 major markets.

Are you seeing now some of that trickledown to your the 75 -- 25 to 75 MSA as well?.

We are seeing some of that although remember about a third of our stores are in the top 20 MSAs as well. So we are in -- we're in both the large MSAs and the smaller, but we do have a bigger percentage in the smaller MSAs, and we're starting to see some new supply come into those smaller MSAs.

The real challenge comes when a new supply comes into an area where you have no demand growth, and that's why Oklahoma's been so bad, because you've got new supply coming in, in Oklahoma and yet the economy's so weak there, demand's not growing.

Whereas, you know, there's a lot of new supply in Dallas for example, but in our areas the supply and demand are growing fairly similar where our stores are. There're some parts of Dallas that are even better than that and some parts of Dallas that are worse.

So it's a submarket related but you know for example in Denver almost everywhere in Denver has too much new supply versus the growth in demand, even though it's a strong economy you just aren't growing demand at you know 10% a year or something like that..

Thank you. [Operator Instructions] Our next question comes from the line of David Grove with FBR. Please go ahead with your question..

Hey, good afternoon. Most of my stuff has been answered, but just looking at your revenue guidance range and sticking with the street rates. You mentioned renewals are still very strong presumably the reduction is mainly newly driven.

How you guys have street rates trending in the second half of the year in your guidance? I mean, how you are thinking about them? You mentioned that they're kind of down from the four to six, the three to five range, but how are you thinking about those for the rest of the year?.

I'd say it's probably going to remain somewhat consistent. Unit growth relative to last year, but we're still able to hold the line and still able to on average sort of eke out those mid or low to mid single digit increases on street rates. So we feel comfortable with that trend..

The other thing David is that we are, have higher promos, discounts than last year which has an impact and that's because of the new supply, -- you have to meet those promotional opportunities to keep your volume of movements consistent..

Okay.

And then you might not have this but, what is the spread between your average move in rate and your move out rate today over the quarter? And maybe how has that changed over the past few quarters?.

We don’t disclose the exact number, but I will tell you that it is still positive rollup which probably can contrast with some of our peers and that trend continues as well.

We sort to get the benefits of that tailwind going forward as the portfolio actually returns, we get a small role of it, not a major factor but it's better positive than negative..

And it was positive in the past, so the amount has to...

Yes, still positive..

Our next question comes from the line of Kwan Kim with SunTrust. Please go ahead..

Hi, guys. This is Yun Zhong with Kwan.

As you guys continue to push rates, at what point do you get concerned about occupancy? Is there a certain level that you want to keep that portfolio add or is it just looking at total revenue?.

Well to be honest its really looking at total revenue because the bottom line is that one of the strength historically of the self store sector has been that the industry has been able to deliver same store NOI growth despite significant over building.

If you look at the time period from 1995 to 2010 our industry was massively over build, there were over 1500 new stores a year build for a 15 year period. We added 1.3 billion square feet to the market during that time period and the demand only went up by about 900 million square feet.

So when you look at the industry the average occupancy from like 1995 to 2010 of course that was the bottom of the recession but it went from like 89% down to 76% and yet during that same time period same store NOI growth was 3.8% a year.

And the key to doing that, the key is to make sure that you focus on total revenue and do not care about occupancy. If you care about occupancy and all you want to do is key occupancy, you just start price rewards and then you end up making your NOI go down.

And we -- I mean I've been in the business so long unfortunately that I saw that happened and that’s kind how we learned that lesson is to make sure we do not do that because that’s the one thing that convert the industry.

Overall, if you maintain looking at supply demand, stay strong in your market, but if the overall blend of supply and demand in the market goes from 95% to 85%. If you try to stay at 95%, what you think you're other competitors are going to do, they're just going to cut prices to try to get more people to move in.

And so in that example, we would say let's say we will go from 95, maybe we will go to 90, we will won't go all the way to 85 because we will still beat the market, but we will them let the other competitors have part of that demand..

Okay I appreciate that color and just one quick one.

Where were your promotions year-over-year?.

Our promotions were slightly increased year-over-year, they’re up probably about 20% above where they were at year ago maybe not like that much, but somewhere in that. So clearly that’s one of the things that we use as a way to drive traffic rather than cutting rates will give a higher promotion for people to move in.

And then once the promotion wares off, they’re at regular street rates, which as Steve said is higher than it was a year ago..

Okay, I’ll just say. I’ll add to that the promotions are a unit-by-unit decision. We’re only offering promotions on units that are not well occupied. So it's not across the Board that our customers will see a promotion and offer..

I think this concludes our question-and-answer session. I’d like to turn the floor back to Arlen Nordhagen for closing comments..

Well, thanks again everyone for joining us for today’s second quarter earnings conference call and as we’ve discussed, we really are very pleased with our year-to-date results. We appreciate your continued interest in and support of National Storage Affiliates and we look forward to visiting with everyone again next quarter. Thank you..

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation..