Greetings, and welcome to the National Storage Affiliates Second Quarter 2018 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 now begin..

Hello, everyone. We would like to thank you for joining us today for the second quarter 2018 earnings conference call of National Storage Affiliates Trust.

In addition to the press release distributed yesterday, we have filed an 8-K with the SEC containing our supplemental package with additional detail on our results, which may be found in the Investor Relations section on our Web site at nationalstorageaffiliates.com.

Please note that in overview of the new joint venture transaction we announced on July 10, 2018 may be found on the corporate presentation page of our Web site. On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements that are subject to risks and uncertainties.

The Company cautions that actual results may differ materially from those projected in any forward-looking statements. For additional detail concerning our forward-looking statements, please refer to our public filings with the SEC.

We also encourage listeners to review the definitions and reconciliations of non-GAAP financial measures, such as FFO, core FFO and net operating income contained in the supplemental information package available in the Investor Relations section on our Web site and in our SEC filings.

Today's conference call is hosted by National Storage Affiliates' Chief Executive Officer, Arlen Nordhagen; President and Chief Financial Officer, Tamara Fischer; and Chief Operating Officer, 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 thanks, everyone for joining our call today. With industry leading growth and core FFO per share of almost 10%, our second quarter results were obviously very good. But the subsequent announcement of the planned acquisition of the portfolio of assets from Brookfield was clearly much larger in scale.

So let me begin by providing an overview of that transaction. We were very excited to announce our second major joint venture with Heitman, a high quality institutional partner to acquire a 112 store portfolio from Simply Self Storage, a subsidiary of Brookfield for just over $1.3 billion.

The 8.7 million square foot portfolio spanned 17 states plus Puerto Rico, overlapping 12 of NSA's existing states and adding five new states to our geographical diversification. This transaction is transformational for NSA's internal property management operations.

And upon closing will represent one of the largest M&A transactions in the history of the self storage sector. Let me touch on a few key points of the transaction. First, as of June 30th, this diverse portfolio was 92% occupied and delivered average rent of $13.26 per occupied square foot.

The asset locations both complement our existing portfolio and broaden our geographic footprint with significant concentrations in Michigan, Ohio, Minnesota, Tennessee and across five states in the Northeast.

The transaction include six stores in Puerto Rico and one in Ohio, which will be immediately spun off by the JV as wholly owned stores to NSA upon closing. We continue to evaluate our long-term plans and strategy for Puerto Rico. If we decide to exit that market, we’ll consider disposition of those assets after closing.

In addition, besides our pro rata share of earnings from the JV, we have an opportunity to earn a promoted interest above targeted return thresholds and we’ll also earn fee income for the management platform services we provide to the JV.

We expect these fees will allow us to leverage our G&A expenses to deliver an FFO benefit of approximately $4 million per year to NSA net of related expenses. Finally, the majority of the 105 properties in the JV portfolio will be rebranded as iStorage, and we expect to benefit from added scale in that existing platform as well.

We anticipate the transaction will close late in the third quarter of 2018, and Tammy will discuss the financing of this acquisition later in this call.

In addition to this transaction, our other avenues for external growth remain active as we continue to capitalize on our position as a strategic consolidator within the highly fragmented self-storage business. Specifically, our captive pipeline still has about 120 properties that we've not yet acquired, valued at approximately $1 billion.

Also, our pipeline of third-party PRO driven acquisitions remain strong. And finally, we remain in ongoing discussions with several high-quality potential new PROs. Turning to our second quarter performance, we’re pleased to report another quarter of good financial results.

For the most part, our performance was in line with our expectations, including year-over-year growth in core FFO per share of 9.7% and same store NOI growth of 4.2%. In addition, we continued at good acquisition pace by closing on 12 more properties in our wholly-owned portfolio for approximately $63 million at an average cap rate of 6.2%.

Regarding overall conditions for Self Storage, we remain optimistic about fundamentals supporting continued growth and demand. Across our geographically diverse markets, economic growth is solid and job growth and household formation are fueling incremental demand for Self Storage.

Against that backdrop and as we've discussed over the past several quarters, there are certain markets where new supply exceeds demand growth and we’re being impacted in terms of market street rates.

While the diversity of our portfolio provides a level of protection against the short-term impact for supply imbalances in any one market, this quarter we were significantly impacted by new supply in Portland, Oregon, one of our largest markets, which had an outsized impact on our results.

Overall, we estimate about 20% of our portfolio is currently exposed to new supply, approximately the same as last quarter. Consistent with past practice we’re avoiding price wars and allowing for some degradation in occupancy in markets with excess new supply. We believe this is the best approach to optimize NOI growth over the long term.

Looking ahead, we expect new supply growth overall will peak in our markets by the end of the year. Data provided to us by Yardi shows a significant decline in the number of new construction loans in the top 100 MSAs for Self Storage, which is good leading indicator for declining number of new construction starts in the sector.

However, even with a decline in additional new construction starts, the new supply that has been built in the industry over the past two years must be absorbed by the markets. So we expect industry results for the next several quarters to be similar to what we've seen in the past few quarters. With that, I'll now turn the call over to Tammy..

Thanks, Arlen. And thanks everyone for joining today. Yesterday, we reported a year-over-year same store NOI growth of 4.2% for the quarter and 4.3% year-to-date. Our results for the quarter were consistent with our expectations of slower growth due to a very tough comp from the second quarter of 2017 when our same store NOI was up more than 8%.

Same store revenue increased by 3.6% this quarter, driven by a 3.1% increase in average rents and 20 basis point increase in average occupancy. Again, these results are consistent with our expectations both for the quarter and year-to-date.

We expect same store growth will pick up somewhat in the last half of the year 2017, given slightly easier comps in 2017. For that reason, we expect to end the year nearer to the low end of our guidance range of 4% to 5% same store revenue growth.

Our same store properties operating expense increased just 2.4% for the quarter and 3.2% year-to-date over last year despite continued pressure on property taxes, personnel costs and increased marketing spend in markets where we are up against new supply.

We remain comfortable with our previously provided guidance for increased operating expenses this year, and we expect to end the year towards the lower end of our range of 3% to 4%.

We believe the combined result of these expectations for same store revenue and expense growth will deliver annual same store NOI growth consistent with our guidance of 4% to 5.5% for the year.

With respect to market by market performance, our stores in states with good economies and without excessive new supply, such as California and Florida, continued to outperform.

Our stores in Indiana and Louisiana delivered strong same-store NOI growth, benefiting primarily from low expense growth, driven by favorable property tax adjustments, a reoccurrence in our world. The one geographic area which deserves attention this quarter is our second largest state, Oregon.

Our 55 stores in Oregon represent nearly 15% of our same-store pool this year, and three quarters of those stores are important, a market that is very challenged by new supply frankly, impacting us beyond our expectations.

This quarter our Oregon same store NOI growth was slightly negative overall, which was below our expectations, because sluggish revenue growth was further penalized by higher than expected spending on personnel cost and marketing. We’re also competing with excess new supply in markets such as Dallas, Boston, Raleigh, Oklahoma and Phoenix.

We expected those markets to deliver below-average performance and that’s proven true.

In these markets with excessive new supply, our internal focus remains on avoiding price wars by sacrificing some occupancy to maintain rate discipline and utilizing the deep market knowledge of our PROs to determine the best path for a long-term growth strategy in each respective markets. With respect to our balance sheet.

Our access to well priced capital allows us to take advantage of external growth opportunities, and this remains the key pillar of our growth strategy. We’ve had great execution on several recent moves to enhance our balance sheet.

During May and June, we amended two of our term loans to reduce the applicable margin spreads, resulting in approximately 30 basis points interest rate reduction for these two loans. We also exercised the accordion feature on one of the term loans, increasing net borrowing by $75 million.

On the equity side after quarter end, we issued 5.9 million shares and a common equity offering at $30 per share, raising net proceeds of $176 million. Short term we used just over $100 million of the proceeds from this offering to pay down the balance on our revolver.

We’ll use the remaining proceeds plus borrowings on our revolver to fund our share of the equity in our 2018 JV and the seven assets we’ll bring on balance sheet as part of the Brookfield Simply portfolio acquisition. At quarter end, our net debt to EBITDA ratio was 5.8 times and today our $400 million revolver is completely available to us.

After closing the JV and related acquisitions transactions, we expect to have about $280 million available to us on our revolver.

As we’ve discussed, our plan is to finance the JV with 50% debt and the JV has executed a term sheet with two life insurance company co-lenders to provide approximately $643 million in 10 year interest-only secured debt financing that we rate locked at 4.34%.

We expect to close this financing concurrently with the JV and acquisition transactions in September. Given the continued execution of our strategy and strong growth in FFO per share year-to-date, our Board elected to increase our second quarter dividend by 3.6% to $0.29 a share.

It’s worth noting this is our sixth dividend increase since our IPO three years ago. We’re very pleased to continue to deliver a compelling combination of strong growth and income for our shareholders.

Finally, wrapping up with guidance; we acknowledge certain assumptions included in our previously provided full year 2018 guidance will be affected by a recent equity offering; the formation of our 2018 JV and the related acquisitions but importantly, incorporating all of these changes; we’re pleased to reaffirm our previously provided guidance of $1.33 to $1.37 for core FFO per share for the full year 2018.

Thanks again for joining us today and we’ll now turn the call back to the operator to take your questions.

Operator?.

At this time, we will be conducting a question-and-answer session [Operator Instructions]. Our first question comes from the line of Todd Thomas from KeyBanc Capital Markets. Please proceed with your question..

First question so on the Simply deal, I was just wondering can you just talk about the decision to acquire those 112 assets from Brookfield? And I guess the question is just about the larger Self Storage portfolio that Brookfield owns there with Simply.

So what happened to the remaining assets, are they staying with Brookfield, were they available for sale, maybe you could shed some light there?.

We were pleased to have the opportunity to buy those assets.

Fundamentally Brookfield and simply are remaining in the business with about half of their assets, but the half that we’re buying, roughly half are all tied to certain debt maturities and so these were properties that they were looking at as possibilities to either recapitalize or potentially sell.

Obviously, in our case we weren’t interested in a recapitalization, but told them we'd be very interested if they wanted to sell those. And with the timing of the debt maturities, we are able to negotiate a deal we believe is a very good for them and very favorable for us and our investors as well..

And then can you provide some detail around the timing and expectation for your partner for Heitman to commit to fall 75% in the venture? I guess when we are certainly around your funding requirement as it pertains to the joint venture..

So that is now confirmed and finalized Heitman will be 75% with their total investor partners, and we will be as a 25% equity partner of those numbers are hard now that’s all been signed off on by all the parties involved, and we’re looking for closing in the first half of September.

So obviously a lot of work going on this in between now and then but were very happy and looking forward to it..

And then just shifting over to the Portland market, Arlen you talked in prior calls about your exposure being in a slightly different sort of footprint relative to where that the supply is hitting you commented this quarter.

Now new supply a significant impact on the portfolio we see occupancy lower like 300 basis points whatever decelerated a little further what happened in Portland relative to your expectations..

Well, this is a really good example of what I call the overlapping circles impact on a whole market when you really significant excess new supply coming in.

Generally, we look at the competition that affects us as being anything that would be built within a three to five mile radius, and the truth is, most of the stores in Portland are not within a three to five mile radius of our existing stores.

But when you get so many new stores coming into a market those three to five mile circle keep overlapping each other.

So something even on the other side of town can end up impacting us, completely the other side of town because of those overlapping circles of new supply that's really what happened in the Portland in particular that has impacted us more than we expected.

We certainly knew there was new supply coming in there, but you know we had forecast that would be able to keep our NOI basically flat to maybe 1% and as you can see you know that we didn’t achieve that for Q2..

Where are we in the cycle for development in Portland and when we do expect to see perform stabilize..

We still see some more new stores coming on in Portland, we think it's going to be in a difficult market probably similar results to what we've been seeing for the next several quarters.

I would say in Portland in particular with the amount of new supply coming in at significantly more than the demand growth even though demand growth is very strong there is nowhere near the supply growth..

Our next question comes from the line of Smedes Rose from Citi. Please proceed with your question..

Can you discuss the cap rate on the Simply portfolio, what you acquired with that and on sort of a trailing basis and what do you think it is on the forward basis?.

We typically look at it on a forward basis, but in this case, it is fairly close on a trailing basis, because when we look at our forward we also adjust property taxes, et cetera. So on our first year we were looking at 5.6% cap rate on that acquisition, which is obviously a very a good price for the seller.

But for that larger portfolio we also feel it's a very good price for us. We’ve been buying properties and our partner Heitman has been buying portfolios of properties in the industry for a long time and we’re very comfortable with our underwriting and believe that it will be a very good investment for us and our co-investors..

I wanted to understand just on your guidance so the unchanged guidance does fully incorporate this transaction or does not and you’re acknowledging that once, that you update your guidance accordingly….

It does..

So you’ve the 4 million that you….

Yes, Smedes, it doesn't have much impact this year because the dilutive impact of the equity is offset -- that offsets the accretive nature of the acquisition for just a few months that we have at this year so the net of those is almost a wash it’s maybe a penny positive or so at the most..

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

Just going back to the maybe the same store guidance looks like you guys maintain it sort of implies a five handle in the second half of the year just trying to marry that with some of the comments on the supply, maybe you can provide give me a little bit of color of what sort of gives you confidence in that and what could lead you to outperform or underperform in that second half of the year?.

I think the way we’re looking at it is that really everything that’s happened in the first six months of this year is pretty consistent with our expectations. We expected the second half of the year to come a little bit better than the first half for no other reason we’ve little bit easier comps heading into the last half of the year.

And I would say we’d probably guide on revenues to the low end of the range and also low end of the range, and probably somewhere in the middle of the range or maybe even lower end of the range for same store NOI growth. But still in the range I guess is my point..

And then can you just touch on concessions, how they’re trending this quarter how they’re trending versus maybe last year or any kind of details there?.

Honestly, we’ve been very flat when it comes to discounting concessions when you normalize it for revenue. And you look at it year-over-year for several quarters now we’re -- we’ve been essentially flat so we see that as a good time.

We still use discounting as a tactic to try to maintain rate discipline and to try to hold occupancy where we might be facing some new supply threats. And it’s been effective and consistent with our peers I think flats it's really not a tailwind or headwind going forward..

And then my last question that you mentioned Georgia in the opening comments, I’m just looking at occupancy down here 6.5% in change is that all suppliers or anything else going there worth highlighting..

Yes there is couple of things you mentioned, the 6% plus decrease that you’re looking at is really on a full portfolio. So there is an effect from a large transaction with several Georgia properties that pulls that number down.

We bought the portfolio at a lower occupancy level and certainly see the upside in the portfolio, and that’s what driving that number as opposed to performance per se.

Within the same-store pool, we’ve got a couple of stores at Atlanta that have struggled one coming back from fire one that has poor access to some road construction and we got small expansion that’s in play as well. So on same store sides, we’re actually doing really well in Atlanta and Georgia with exception of those handful stores..

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

I was wondering if you could comment on performance in July.

In terms of where was ending occupancy and what was the discounting looking like year-over-year?.

So July was very consistent with the seasonal trends that we saw through Q2 , and definitely consistent with our expectations.

The discount remains flat year-over-year rates continue to be flat with an upward bias and we continue to execute on the same strategy, which is rely less on occupancy and work on those simply three changes to drive revenue growth and July was no difference than Q2 in that prospective..

In terms of the year Simply portfolio transaction, when you go back and look at the cap rate of 5 to 6 once you layering all the fees.

What returns that bring you up to?.

George, for us because of the fact that we have the fee income related to it and we get to leverage some of our G&A platform, it ends up equivalent to us as if we’re buying it in the mid six. So obviously that's a significant benefit for us. And that's what results of being so accretive for our shareholders..

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

Can you talk a little bit about your same store revenue guidance, Tammy or Arlen and where you actually see the uplift, because that’s pointed out the second half implied acceleration is to 5% average same store revenue..

We are not expecting 5% uplift in second revenue but we’re definitely expecting to come up from the 3.9 that we've averaged in the first half of the year based. And that’s based on the trends that were seen.

Certainly, some of that's been because of the fact that we are seeing some actually several markets that are having slightly less impact from new supply as opposed to markets like Portland which are worse but on average were seeing someone getting better.

We also have a slight uptick in occupancy and so that’s why when you think the 3.9 we average in the first six months and look at what we're seeing in the last six months versus those comps from last year.

We feel like we're definitely going to end up within our 4 to 5 range, but we’re going to be towards the lower end of that range as Tammy commented in her opening comments..

And going back to supply where the new markets where supply has yet to open, but you see the pipeline building that might make an impact the sector later in the year?.

The good news is that in general not every market but across the U.S. new supply growth is slowing down.

In fact, as I commented about the leading indicator, which is the best leading indicator we've seen out there to try to predict out 12 to 18 months is the drop off in new construction loan originations for self storage and Yardi metrics has done a great job of compiling that data across the country.

And if you look at what's happened from Q2 of ’17 to today those new construction loan initiations are less than half of what they were a little over a year ago. So obviously that's going to be rolled through in the market and we are seeing less new starts.

The problem is we have got two years worth of existing starts and the stuff that’s finishing up now that's got to be absorbed, so I’d have to say probably the only market we see this not getting better is probably Portland but we still have challenges in a lot of markets as Tammy mentioned several of them and it'll take us a couple of years to absorb those..

And I know your same store pool only represents a fraction of your total portfolio today.

Do you guys have back data for the things that you bought where you’ve a more holistic look at the same store revenue for total portfolio year-over-year?.

Well, we could go back. We don’t keep that typically on -- looking at it regularly but obviously we have data that we could go back and look at it. One thing I do know because we have gone back and looked at it in general and what we’ve found is that the performance, whether it's a new property in the same store or an old property in same store.

If it's in the same market, the performance is very similar. But where we see significant differences is if the markets change. So it’s the new pool that’s added to the same store pool increases and, let’s say, all of those stores would've been in Oregon. Our same store would have done much worse the new pool than the old pool.

Whereas if they were all in California, it’d be the opposite, the new pool would be way better. So it’s really more geographical and not so much based on when we put it in the pool..

And just one follow-up here. As the pool changes as we head into next year, should that -- so similar question, you’re going to probably have the increased presence from Georgia and Florida.

Do those things help or hurt the same store metrics next year?.

Well, I know in the past some years they’ve hurt, some years they’ve held. We don’t….

It might be almost driven in equilibrium based on the markets that we entered into in 2017. I am guessing that we’re not going to see a huge uplift, no..

On a property basis, obviously when we take a kind of properties. The first six months or so slower growth we’re taking over management and applying our tools, and putting on platforms. But then from month six and month 18, is probably when we see the biggest jump from our institutional management of that property.

And then after that it starts to mimic what’s happening in the rest of its market or the rest of portfolio. So you think about how things come in our same-store pool. You really don't see it in the pool until it hits, that month 15 to month 20 based on the timing of the acquisition. So I don’t think it’s going to be a big driver in general.

And I would say it’s giving a better and broader look at our portfolio when we update same store pool..

[Operator Instructions] Our next question comes from the line of Jeremy Metz with BMO Capital Markets. Please proceed with your question..

Just going back to the revenues, you’re now pointing the low end of your 4% to 5% guidance. You’ve mentioned Portland obviously a number of times here, so just trying to understand. Is that the main driver that we do outlook from the midpoint. So what those lower expectations there is more than bigger impact from broadly from supply.

Is it some softer demand into the system anything more color you can give us?.

Well, I would say Jeremy that it’s defiantly not demand we're definitely seeing the demand growth that we expected. And the only market that’s really materially different than we thought is Portland.

Now we’ve got a few things are maybe a little bit different here and there but frankly that’s Portland, because it is 15% of our portfolio, it’s enough to move us down from 4.5 midpoint down to some like 4.1 or that lower end of the range..

I think our same store NOI without Portland was 5%..

If we took Portland out just for example, our same-store NOI this past quarter would have been up 5%..

And then I did want to go to back to the Simply deal, one of the attractive aspect you noted in your opening remarks gaining access to number of new markets, the Midwest, in particular.

So can just give a little more on the opportunity and the attractiveness you see in those markets just given that there are some lower barriers to entry from a supply standpoint?.

I would see that there's couple of factors there. One is these are -- as you mentioned more Midwestern and northeastern markets as opposed to our historical focus on the west and south. And they are -- by definition, those are slower growing economies, slower population growth markets.

But the other side of the coin there is that they all have good healthy economies and we’re seeing significantly less new supply in most of those markets. So when you balance the two off we believe they'll be delivered good strong results for us going forward.

We really like the geographical diversification that that gives us, because as our comments about Portland highlight, it was one of our strongest performing markets two years ago and now it’s our weakest performing market. Three or four years ago, Oklahoma was one of our stronger markets, now it's one of our weaker markets.

The key to really having stable long-term success in self storage is having great geographic diversification to take away those ups and downs of individual markets because from time to time any market could be great or could be poor and we like increasing our diversification through this joint venture.

We think that's a big benefit to our shareholders..

And as part of that, I mean you did pick up some Puerto Rico assets. Can you just talk about the competitive positioning of the fixed assets you got in Puerto Rico from the rents and occupancy perspective relative to that market? And then obviously you didn’t mention that you may consider selling those assets.

So have you already started that process at all, talking to potential interested parties and acquiring that, or realistically what timing should we expect to maybe see you move away from that market?.

So I’ll start off with rents and occupancy and the stores there, the stores Puerto Rico, have been really stable for the last four to five months. If you think about the hurricane effect and we’re through our underwriting process, trying to figure out how much increased performance and how much is driven by the hurricane.

We really see a consistent occupancy level for several months now. So we think that it's largely sustainable. The rates are in a very nice position they have obviously boosted over the last eight to nine months but we also see those as been sustainable.

So we acknowledge there’re probably some challenges in Puerto Rico in the long-term, but for now we think the performance is solid and sustainable. And I’ll add to that Jeremy that Puerto Rico is a market we are just still trying to understand, the properties are very nice, they have good rates good occupancy and it's a good market right now.

But we do know that the population there has been on the decline. There are some challenges as it relates to that. And the counter to that is the fact that the square-foot supply per capita in Puerto Rico is so low.

So you got a really long supply market that has declining population and good rates and good occupancy, which is why it makes it complicated for us to analyze and figure out is this a good market we should stay in long-term. And that’s what we’re really going to evaluate over the next 12 months or so..

Our next question comes from the line of Todd Stender from Wells Fargo. Please proceed with your question..

Just to stay on that last theme, Arlen.

What is the square foot per capita for Puerto Rico and maybe how that compares to Portland, for example?.

Yes it’s probably around that 2 square-foot per capita so it starts to mimic some of your super urban area. It may even be less until I think -- I think it might be one, because there’s only like 20 properties or something like that.

And in the whole market there’re large properties but there’s 3 million people in Puerto Rico even after a bunch of them have moved out so if you figure a 100,000 square-foot for a property that's 2 million square foot with 3 million people. So it's pretty obvious it's a very low ratio..

And do you have a Portland number by chance?.

Yes Portland is right around 4.5 to 5 square-foot per capita..

Just shifting gears back to the Simply deal, you talked about your fees. But can you tell us what the management fee percentage is and then what the tenant insurance breakout is , if you’re sharing that at all..

Yes, we published some numbers around in our slide deck that are release yesterday so first you look at that. But in general the property management fees are market standard and 6% of revenue.

We are sharing the tenant insurance revenues with the joint venture, such that as manager we get half of revenues and absorb all the costs and then the joint venture gets the other half of the revenues.

There will be acquisition fees associated with the initial portfolio as well as the future acquisition and we also support the platform fee for the licensing of our brands and use of our marketing platforms. So all in all, we think it’s worth about $4 million upside impact core FFO on an annualized basis..

And then also Arlen you mentioned a promoted interest that you can earn, what’s the targeted return threshold any details on that..

We have incentive promotes about two different thresholds we get an incentive promote above 9% internal rate of return of over 12% internal rate of return and those really are would be paid upon some an exit for our partners.

So that certainly not a short-term benefit, but we believe based on our pro forma underwriting, that will be a long-term benefit to us. And certainly, if we achieve and exceed those thresholds it will be of no long-term benefit for our partners as well..

Our next question comes from the line of Smedes Rose from Citi. Please proceed with your question..

It’s Michael Bilerman here with Smedes. Arlen you just mentioned acquisition fees.

So I wasn't sure if there is anything in the third or fourth quarter from one-time perspective that we should be aware of that’s flowing into FFO?.

Yes, we do get paid acquisition fees both on the existing initial transaction and on the future acquisitions into the JV. But what we do is we amortize those fees over 48 month period. So the impact that we get in the Q4, but a little one month I guess in Q3, is very small. It's not.

It's about a not even a 10th of our fee even though the fee is paid up front, we actually accrue that as we earn that..

So there will be relatively clean -- there shouldn’t be anything -- there is obviously the dilution from the earlier equity rates relative to close. But there shouldn’t be anything that positively, or for that matter negatively, if there's debt cost to affecting the numbers.

So there shouldn’t be any surprises with 3Q and 4Q result is effectively what I’m saying..

It will be very smooth out by the way we amortize that..

And how much time and I don’t you if you’ve used consultants, but we’ve obviously seen brand changes within the storage business on a larger scale. Clearly what CubeSmart and then clearly with U-Store-It going and then also….

And there our live storage as well….

And in the case of Uncle Bob’s going to live. And I would say both of those cases I think both companies underestimated two things. One was the cost of doing brand change, but the second really is the time it takes for our consumers to get on to the new brand.

And clearly I would say Life probably had a little more difficulties than Cube [indiscernible] did, and while you already have the iStorage brand out there. I'm wondering how much time you spent in thinking about that aspect and how that may depress the initial yield that you're getting..

So we certainly have underwritten the hard costs associated with all of finest changes at the stores and rebranding in the stores. Really we’ve been focused on the Internet marketing side and making sure that we get a clean move from the Simply platform to the iStorage platform, with all the associated redirects.

And we don't expect to lose much traffic. These are well stabilized properties. They’ve got plenty of good momentum going in the Q3, Q4. And we actually think it’s going to be pretty seamless when it comes to the marketing side. We think will be very effective in continuing to drive performance of these properties on the marketing side.

And then on the operational side, we are working close to the seller to make it as smooth transition as possible and that means that we’re trying to hire as many the current people who are operating this portfolio as possible.

And we think that’s going to make things run much more smoothly here as we move through September and take control of these properties..

Certainly, the key risk issue that we have with this and I'm very happy that the Brookfield and Simply people have been really cooperative, I think we have a really good relationship to make this transition as seamless as possible.

And we have put a lot of time and effort into planning the rollover on the branding and all of that, as everyone knows things will come up that you don't anticipate, but we've done everything possible and we will continue to do that between now and closing..

I guess I am just trying to put into perspective a five, six forward yield, clearly you're starting out at the gate with some potential from seasonal the fourth quarters typically not the strongest of the quarters; in addition to the loaded cost of doing the brand; in addition to the potential that there may be some weaker traffic.

And so I am just trying to understand the ramp to that five, six, so that Street estimates don’t get ahead of themselves in terms of the accretion?.

Yes so that’s a great point, I certainly would take the five, six, and ratably spread it over the first 12 months that’s now how we've underwritten it, that’s not how we’re budgeting for those properties.

We expect all the normal seasonal trends to be in play and we expect obviously Q2 and Q3 of next year to be much stronger than the first two quarters that will have these properties in Q4, Q1. So I agree with your point entirely.

And when you think about the risk of making a brand change on a property or a portfolio of properties, if I am going to do it, I am going to try to do it in the low season. And so our timing is pretty well aligned with that. And so we must try to do this in Q4 rather than say coming out of Q1 and into Q2..

So if we think about the accretion, you’ve $4 million that you talked about from the net fees that you’re generating the $0.05 there. And then just based on the 5.6 and how you funded debt, and the equity that you closed that probably annualizes out to $0.04 as well, so call it $0.09 of annualized accretion.

But sounds like at least on the acquisition front that $0.04 is probably more minimal in 4Q, 1Q and maybe even to 2Q where you start getting that annualized accretion later. So out of $0.09 of annualized accretion, you're probably running $0.06 or $0.07 at the start and then ramping up to that $0.09 thereafter.

Is that fair?.

It’s probably a pretty good guess….

And then just thinking about where the Street was, the Street was at 1.47 for ’19 before you announce the deal.

Is that -- if you add $0.06 or $0.07 that number, is that a good benchmark for the Street to be at post earnings?.

Well, we certainly are in a position to give guidance for 2019 yet at this point, we will give those obviously later this year. But clearly the impacts that we've seen all of those things are consistent with our past practices. So that's all I can comment on that..

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

Just follow up on that last question. I remember when Life bought -- when Sovereign bought Life, one thing they face was they had tenants in place that weren’t paying rent and maybe the occupancy was just a little bit inflated because of that.

So have you guys done that part of due diligence or walk the properties to get comfortable on that factor?.

We’ve actually conducted on-site audit of every property. So far here for the close we know exactly what challenges we’re looking at as we integrate these properties. And we found frankly very good results.

There are pockets where you wish things were a little bit better, but we also said time some markets and sub-markets where they’ve done a fantastic job. And everything is clean as far as they are in auction. So on balance, I would say it probably looks a lot like the rest of our portfolio.

I would not expect to see anything material to come out of that transition with respect to tenants that are paying or options that are delayed. I think it’s going to be a very smooth transition..

I think the only thing I would add to that, Steve, is that we’ve got a little bit more time to get through this transaction. And I’m not saying it’s been luxurious, but we’ve had the benefit of a few months to work through all that, and so that give us a little more confidence too..

Yes, and I think it also helps -- in the case of Simply really Brookfield wasn't intending to sell the properties and they’ve continued to run them this way.

And when they were looking at a recapitalization, it wasn't like, oh, we’re going to run these numbers up and just to get rid of them that hasn’t been their intention and they’ve continued to run them very professionally throughout this whole process as we keep monitoring it.

So I do think it will be -- certainly there's always issue that it's not easy, it's a lot of work. But I feel very good with the way the sellers have gone through this process and I think it'll be a smooth transition..

And did you guys comment on Street rates that you saw during the quarter and July?.

So really, we’re seeing Street rates mostly flat with upward bias, which gives us a very small tailwind. I don’t want to over commit, but that’s what we saw in Q2 and through July as well. So we think that’s a positive, particularly when you put it in light of the fact that we picked up some occupancy during Q2 as well.

Both of those things are a little bit better than what we had planned for this year. So I think we’ll continue to seek flattish rates probably for the balance of the year..

And can you talk about the mark-to-market that you saw some tenant growth during the quarter, so basically the move-in rate versus the move-out rate?.

So move-in versus move-out, we have a very slight down tick on move-ins versus move-outs but it’s 1% or 2%, it's really a small number. And I know several of our peers have commented they’ve a much higher difference than that. We don't have that in our particular markets.

So I think part of it's because of the markets we’re in, part of it might be because of the maturity of our rate revenue management program is not nearly as old, all of those but generally, it's a fairly very small impact. And our in place rate changes continue to be implemented really effectively. So we’re bullish.

Certainly, this is a slower time than the hay day that everybody was experiencing in 2014 to 2016. But still we’re feeling good about where we are and the trends that we’re seeing for the last half of the year..

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Arlen Nordhagen for closing comments..

Thank you, Operator. And thanks everyone for joining today's second-quarter earnings call. We’re really pleased with the steps that we've taken this year, which strengthens our ability to continue providing solid returns to our shareholders. And we look forward to a strong and positive 2019 as we execute on these new initiatives.

So thank you all for your continued support for National Storage Affiliates. Bye-bye..

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