Greetings and welcome to the National Storage Affiliates Third Quarter 2019 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

[Operator Instructions] As a reminder, this conference is being recorded.It is now my pleasure to introduce your host, George Hoglund, Vice President of Investor Relations for National Storage Affiliates. Thank you, Mr. Hoglund, you may begin..

Good afternoon or good morning depending on which side of the country you're on. It's a beautiful day here in Colorado, the snow we've received this week is a good reminder to retrieve the winter gear from your storage units and replace it with out-of-season items.

We'd like to thank you for joining us today for the third quarter 2019 earnings conference call of National Storage Affiliates Trust.In addition to the press release distributed yesterday, we 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 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 statement.

For additional detail, 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.Today's conference call is hosted by National Storage Affiliates' Chairman and Chief Executive Officer, Arlen Nordhagen; President and Chief Financial Officer, Tamara Fischer; Chief Operating Officer, Steve Treadwell; and Chief Accounting Officer, Brandon Togashi.

Following prepared remarks, management will accept questions from registered financial analysts.I will now turn the call over to Arlen..

Thanks George and thank you all for joining our call today. We're pleased to report that we continue to lead our sector in virtually all key metrics, including year-over-year same-store revenue, NOI, and core FFO per share growth. Facilitated by our differentiated PRO structure and geographically diversified portfolio.

As a result, we beat our current quarter expectations and have raised our guidance for the remainder of the year.On the other hand, as we mentioned on our previous earnings calls, we have both tougher comps and greater impact from new supply in our markets in the back half of the year and that's playing out just as we thought.

Approximately 40% of our portfolio is being impacted by new supply within a five mile radius, up from 39% last quarter.

And again, this supply is predominantly impacting stores in the top 50 MSAs.However, we are seeing signs that the development pipelines in markets like Portland, Dallas, and Austin appear to have peaked, which leads us to believe that new deliveries in 2020 will decline from 2019 levels.

Fundamentally, we're not seeing any softness in demand as the consumer remains healthy.In addition, as we discussed on our last call, private equity interest in self-storage properties continues to increase as experienced by the enormous amount of equity capital competing to invest in self-storage, driving historically low cap rates.

As a result, we've lost out on a handful of deals, which have gone at prices that leave us scratching our heads a bit.Given this tough acquisition environment, I'd like to highlight a few points. First, NSA remains committed to disciplined underwriting. We will not grow just for growth sake.

We invested $36 million in six properties this quarter, bringing year-to-date acquisitions to $416 million. At the same time, we've passed on a number of deals where the pricing didn't make sense and wouldn't have been accretive to NSA's shareholders.Second, keep in mind, the timing of acquisitions is lumpy.

We enjoyed robust acquisition volume in the first half of 2019. We knew that our acquisition activity would be front-end loaded. So, our pace in the back half of the year is in line with our expectations.

Nonetheless, we continue to be active in underwriting deals and remain pleased with how proactive our PROs have been and bringing potential deals to the table.Third, we're confident we'll generate solid acquisition volume going forward, given our four acquisition drivers, which are; first, the addition of new PROs, and we added two PROs earlier this year.

Second, our captive pipeline, which totals over 100 stores, valued at over $1 billion. In addition, we drive much of our growth by buying third-party acquisitions from individual sellers.And finally, new joint ventures, as well as the future opportunity to buyout our current JV partners, which is currently valued at over $1.5 billion.

Once again, I'm very pleased with our strong quarter and we remain confident that acquisitions will continue to be a substantial driver of accretive FFO per share growth in the future.With that, I will now turn the call over to Tammy..

Thanks Arlen. I'll first spend a few minutes on fundamentals. On average, fundamentals in our portfolio remain healthy. So, we acknowledge the cumulative impact from new supply is weighing on Street rates and has driven intense competition on the Internet marketing front.

Although we're becoming more efficient with our overall marketing spend, we've seen the need to step up our efforts in certain markets and our spend this quarter was up 12%, compared to Q3 last year.Meanwhile, we continue to push mid to high single-digit rent increases to in-place customers, which is currently a key driver of our revenue growth.

Occupancy is up year-over-year and all those Street rates were negative by 1% to 2% in the third quarter that represents a slight improvement from the negative 3% to 4% we saw earlier this year. So far in the fourth quarter, Street rates continue to move in the right direction.

Move-in volumes were down slightly in the quarter, partially offset by move-outs that were also down.Discounting is about flat year-over-year and as we've mentioned, average length of stay is steadily increasing and is now over 15 months.

We expect the strength of our PRO structure combined with our evolving revenue management and digital marketing platforms will continue to drive operational upside.Next, let me comment on a few specific markets.

Our leading MSAs in terms of same-store revenue growth include Riverside-San Bernardino, Atlanta, and Las Vegas, where demand growth has exceeded supply growth.Keep in mind that storage is a local game, so despite seeing new supply on an MSA level our assets may be concentrated in areas that are more or less impacted by the supply.

Lagging markets in our portfolio included Portland, Dallas, and Tulsa, which continue to feel the headwinds from elevated new supply. We're also seeing increasing pressure from new supply in West Florida.Worth noting, all of our top 10 MSAs generated positive same-store revenue and NOI growth in the third quarter.

While the operating environment is no doubt challenging due to elevated new supply, we continue to believe we'll deliver sector-leading growth in same-store NOI and core FFO per share.I'll now turn the call over to Brandon to address third quarter results, recent balance sheet activity, and guidance..

Thank you, Tammy. Yesterday afternoon, we reported solid results for the third quarter with core FFO per share of $0.40, which represents an increase of 11.1% over the prior year period.

This growth was fueled by a combination of healthy same-store NOI performance, strong year-to-date acquisition volume, and increased fees from our JV platform.For the third quarter, same-store NOI increased by 4.2% over prior year, driven by 3.7% growth in same-store revenues and 2.7% growth in property operating expenses.

Our rate increases to existing tenants drove a 3% increase in average annualized rent per square foot and same-store average occupancy increased 30 basis points to 90.2% during the quarter.Regarding same-store OpEx growth for the quarter, the two largest expense categories were well-controlled with property taxes of 3.5% year-over-year, which was lower than expected and personnel expenses up 3.1% year-over-year.Repairs and maintenance costs increased 9.2%, mostly due to timing and marketing costs increased 12% over prior year.

These increases were partially offset by a decrease in utilities and insurance costs.

We expect overall expenses to tick up in the fourth quarter, however, property taxes are coming in lower than we had previously projected, which is a key driver of the reduced OpEx guidance.Now, turning to the balance sheet, as we noted on last quarter's call, we successfully completed our inaugural private placement transaction during the third quarter, which funded on August 30th.

We also completed the recast of our credit facility, increasing the borrowing capacity and lowering the cost. The details of these transactions are in the press release.Our balance sheet is very well-positioned with weighted average cost of debt at quarter end of 3.5% with all of our outstanding debt currently fixed rate or swapped to fixed.

Our weighted average maturity is 6.2 years and our net debt to EBITDA ratio was 5.7 times at the end of the third quarter, toward the lower end of our target range of 5.5 to 6.5 times.

With only a nominal amount of debt maturing between now through 2022 and the full availability of our revolver, we have ample capacity and flexibility to execute our acquisition strategy.Now, moving on to guidance.

We're pleased by our third quarter performance and expect same-store operating expense growth to remain muted for the remainder of the year.

Property taxes have been lower-than-expected and our PROs have done a good job of managing advertising and personnel expenses.We expect revenue growth to continue to moderate in the fourth quarter, primarily due to tougher comps and the cumulative impact of new supply.

Taking all of this into consideration, we've updated our full year 2019 guidance as follows; we project to expect full-year same-store revenue growth in the range of 3.5% to 4%, which is unchanged.

However, we're confident in achieving the top half of that range.We lowered the midpoint of same-store operating expense growth by 50 basis points to 2.5%, and we now project the same-store NOI growth midpoint of 4.5%, an increase of 50 basis points.

We also narrowed our full year 2019 wholly-owned acquisition guidance with the midpoint remaining $450 million.Finally, we're also increasing our guidance for full year 2019 core FFO per share to a range of $1.52 to $1.54, up from our previous range of $1.51 to $1.54.

These updated assumptions are outlined in our earnings release.Thanks again for joining our call today. We'll now turn the call back to the operator to take your questions.

Operator?.

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions]Our first question comes from Smedes Rose with Citi. Please state your question..

Hi, thank you. I wanted to just follow-up on your remarks where you talked about sector-leading NOI growth, same-store NOI growth. So, I mean, is it your view that NSA can kind of maintain the sort of similar spreads, if you will, to same-store NOI in 2020 to the other public storage companies that you've seen across the course of this year..

Hey, Smedes, this is Arlen. I would say that we couldn't necessarily maintain the same spreads from the standpoint that a lot of our peers are getting close to zero, and we are seeing slight deceleration. But I'm very confident we'll continue to have the highest same-store NOI growth in the sector.

And that's really because of a couple of reasons; one is the fact that our markets, we have a lot more of our stores in the smaller MSAs where we see significantly less new supply competition.And the second is that frankly we've been at the game a lot shorter, so we're still rolling out a lot of a new platform tools and refining those platform tools that a lot of our peers have been doing for a lot longer than we have and so we have that ability to keep honing the upside in the properties..

Okay. Thank you. And then you just -- you mentioned steep competition for acquisitions. I think last quarter you talked about 6.25% to 6.50% cap rates for acquisitions that you were able to compete.

Are you still able to buy in that range? And maybe just some commentary around what you're seeing overall in terms of pricing and kind of the quality of the products that's coming to market if you will?.

Yes, I would say we cannot buy at that same range. It has come down 25 to 50 basis points in terms of the cap rates for the same assets. The quality of assets that we see is pretty comparable of what we have seen, and there are some large portfolios out there that have come up as well.

Although a lot of those have been non-stabilized properties and that is not a focus at NSA.We try to focus on buying stabilized properties because our experience is that, in the high supply markets, the risk level of the non-stabilized assets is substantially greater and in my experience has not been worth the price. The risk is just too great.

So, we've stayed away from any of the CFO [ph] deals and done very small number in the non-stabilized assets..

Okay. I appreciate it. Thanks..

Thank you..

Our next question comes from Todd Thomas with KeyBanc Capital Markets. Please state your question..

Hi, thanks. Good afternoon.

Arlen your comments about development activity, specifically in the Portland market, I think you commented that you're encouraged to see some activity there peaking, which I guess is future activities permitting I suppose.But given how many deliveries there have been in recent quarters and sort of what's in the pipeline here to be delivered near-term, how would you expect rents and occupancies to trend in that market over the next several quarters?.

Well, definitely Portland is going to continue to be a -- I'll call it a flat market. It's challenging to just maintain occupancy and revenues in the very close to zero to 1% type range. We've actually -- if you go back for the last four to five quarters, we've really been in that kind of level.

And we went up to 1.9%, I think, last quarter and down a little this quarter and before that we were around 1%, but it's really been the zero to 1% for quite a while and it's just this constant bombardment of new supply.I think our PRO there has done a really good job of competing as effectively as possible.

But I think there's still excess supply there and coming. Even though the demand there is great, it's a very good demand market. You just can't build eight years' worth of supply and think it's going to fill up overnight. So, this is going to be a long process. But it won't go hugely negative. It will just stay pretty close to zero..

And Todd, the only thing I would add to that, this is Tammy, is that we continue to be successful in processing rate increases for our in-place customers and so that's helping us kind of hold the line on revenues..

Okay. And -- but we look at occupancy rates in that market and we're looking at sort of third quarter numbers here and it's kind of trending sub-85%. So, we have a couple of quarters now of occupancy loss during the off peak season.

Is it possible that we see occupancy fall below 80% sort of at the lows of the off-peak season here in Portland?.

Not probably be pushing it a little bit, at least for our portfolio. But we will see seasonal declines, as always, in the fourth quarter and first quarter; it's always lower than in the second and third quarter, but I don't see it going below 80%.

And we're effectively competing to keep in that 80% to 85% range from the lowest to the highest peak; I think 88% or something like that, so..

Yes, Todd, it's Steven. Seasonal trends remain in place in Portland. It is not a deteriorating market per se.

It's a market where we are going to struggle to grow, but occupancy is frankly holding very similar to where it was a year ago and we see the normal seasonal Q4 decline and Street rates were also holding very close to where they were a year ago.So, I don't want to be too positive on Portland, but I also don't want to be too negative.

I think we're going to struggle there, but we expect to keep it above zero in terms of revenue growth..

Okay. And then in terms of the acquisition environment, your comments around the competitive landscape for investments, you discussed how revenue growth is sort of trending lower across the industry here and growth is sort of flattening out.

Do you expect some of the capital that's investing in the space today or looking to invest in the space? Do you expect some of that capital to sort of step away if conditions either remain challenging or grow a bit more challenging from here?.

Well, I would certainly say that we are seeing capital -- that spending towards new development is declining. That's definitely true.

I haven't seen it stepping away of capital that's trying to focus on acquiring stabilized or existing assets yet and that's why the pricing has been tight on that.I think from IRR standpoint, it's obvious that you're not going to hit the same IRRs.

If you're going to have same-store revenue growth only averaging 3% a year for the industry as opposed to a few years ago when it was running 7% or 8% a year. Obviously, your IRRs are going to be lower, but we are in a much lower interest rate environment and so it's still very challenging..

Okay, all right. Thank you..

Thank you..

Our next question comes from Ronald Kamdem with Morgan Stanley. Please state your question..

Hey thanks for taking the questions. The first one was just on value enhancing CapEx. One, can you just remind us a little bit what the opportunity is there.

So, obviously, I see the spending year-to-date, but just trying to get a sense, is that something -- is that 10% of the portfolio, is that 20% of the portfolio, what's the opportunity really there to drive that and what kind of returns you guys get on that?.

Hey Ronald, this is Brandon. I'll give you a little detail on what's in there currently and then, Tammy or Arlen might remark on total opportunity.

Currently, if we have any expansions that's going to be in that number, we rely on our PROs to identify those opportunities to that space or to convert non-climate to climate-controlled.We also last year around this time announced an initiative to do an LED lighting project portfolio-wide. So, we have that rolling through the portfolio now.

So, those dollars are in that year-to-date spend you see. And there is obviously a certain ROI threshold that we have on that a pretty high number on that to make the dollars makes sense.So, that's what's in there now. I can't say that we've necessarily quantified portfolio-wide on a percentage basis, what the opportunities are.

But it's a continuous evaluation between us and constant communication with our PROs..

And I would say as it relates to the whole portfolio, typically the highest returns you can have will be on doing expansions of an existing site where you've already got the land or you have land next door, you've already got the management team and all of that running it.

But of course, you've got a caveat that with is this market already overbuilt.And so I would say, we would probably limit most of those to markets in the smaller MSAs, from number 50 on up, where we don't see nearly the number of new supply coming into the market.

But then, those are also our low rate markets and so you have to be cognizant of the economics that come into play. But usually the expansions on those make good sense.So, I wouldn't say that it's more than 10% of our portfolio in terms of a potential opportunity, but it's nothing like 40% or 50% of our portfolio that has that kind of opportunity..

Great. That's helpful. And not to beat the acquisition question to death, but just taking a step back, obviously, I'm not asking for guidance here, but when I think about the $450 million of wholly-owned, you talked about that obviously cap rates are under pressure, there's a lot more competition.

Is that -- how hard is that number to make in a year, right?So, meaning like do you still have sort of that opportunity to stay at that run rate going out three, four, five years of the environment is getting so competitive or should we either expect that number to come down or will you guys try to sort of just pay up for the deal that you need? Just trying to get a sense of that..

Well, our target remains that we want to continue to grow our asset base by about 10% per year, which means around $500 million of acquisitions per year.

And we do believe we can do that because remember that's comprised of a lot of those different categories that I mentioned.First of all, it's obviously third-party acquisitions from totally independent sellers, but we've got a huge captive pipeline from our PROs already. That's a $1 billion that can come in over the next five -- six years or so.

We've also got the ability to add new PROs which those can bring in big slugs of properties all at one time in $100 million to $1 billion that an individual PRO can bring in.And then finally, the joint venture, both new opportunities for joint ventures, as well as buying out our JV partners.

So, we look at this on a long-term game and we see that we want to continue to grow and acquire $500 plus million per year on average over the next five to 10 years.Now, it's not going to be every single year that we can hit that, but I do believe over the long term, we can do that.

Because remember, there's still 35,000 independent mom-and-pop owners in the U.S. that own one to three properties. We don't want to buy all of those properties, but we certainly would like to buy a lot of them that are in markets that are good institutional quality assets in markets where we have a good PRO presence..

Helpful. Just my last question is -- look, we've seen some of your sort of major market peers dial-up the sort of online marketing spending quite significantly year-over-year. I guess I'm just curious in some of the markets that some of the major markets that you overlap, clearly a lot of the portfolios does not overlap with that.

But just in those top markets in the portfolio, are you feeling more competitive pressure.

Do you sort of feel that in the operations or not so much?.

We definitely feel the competitive pressure when it comes to paid search online marketing spend. And it is definitely more pronounced in the primary market versus a secondary or tertiary market.

The way we've been able to mitigate it so far is simply just being more effective with our paid search strategies and our bidding strategies and more effective with our conversions. So, we're also looking to really amp up the contribution of our SCR or unpaid lead sources and that has helped tremendously as well.So, yes, it's competitive.

Yes, we will see increased spending going forward and it doesn't look like our competitors, our peers are ramping down anytime soon either. So, it's frankly just one of the levers you have to pull if you want to be competitive in an oversupplied market and so we are playing the game to the best of our ability to keep revenues growing..

Helpful, that's all I got. Thanks so much..

Thanks Ron..

Thanks. [Operator Instructions]Our next question comes from Todd Stender with Wells Fargo. Please state your question..

Right, thanks.

And your margins are up nicely, but just going to get a sense of how much you're spending, I guess on the marketing side, specifically in the competitive markets like Portland and Dallas and then maybe counter to that Inland Empire and Las Vegas seem to be doing well, how do you kind of balance that, not overspending due to competition, but also taking your foot off the gas and maybe you should keep it on, how do you kind of think about marketing spend at this point?.

Yes, I would say it's honestly day-to-day and some cases hour-to-hour in terms of how we decide what to spend where.

We do utilize machine learning and artificial intelligence and we let the machine help us optimize our spend to find the best opportunities and that can change very rapidly.So, we're cognizant of differentials and we're focused on investing where we're going to get the best return in terms of lifetime value of the customer that we're going to acquire.

So, to going to a market level discussion of what we're doing, where would be inaccurate because it will change as soon as I get done..

Got it. And then now just switching to discounts, your occupancy has reached 90%. So, you're entering kind of the slow season now, but you also want to keep it as high as you can going into the spring leasing season, just for better pricing power.

How are -- any trends you can share so far in the October and maybe just talk about discounting in general?.

Yes, so discounting, in general, and it feels like it's been for almost two years now that we've been saying it's basically flat year-over-year. It continues to be flat.

I think it's a tool that everyone is using; we certainly use it where we think it makes sense to gain a new occupant or a sign a new lease.And so we've been using these tools regularly where they make sense for a couple of years now, and our competitors are doing the same, I think in general this sector has probably largely plateaued, when it comes to discounting, mostly because everybody is using the same type of discounts out there, first month free being the most popular.So, I don't expect to see many changes on discounting going forward.

I think we'll continue to see more flatness ahead and Q4 is no different so far..

Okay. Thanks. And just finally, Arlen your comments about private equity being pretty stiff competition, I would imagine that wouldn't impact your ability to make and source investments within JVs, you probably have some contracts within there, but the guidance did drop for acquisitions within JVs.

So, is that just a timing issue? Any color around your joint venture investments?.

Yes, you're right. That really is more of a timing issue. We have very good support from our JV partners and commitments from all of them as well as ourselves that we want to continue to make investments in our existing JVs and expand those.

And so the timing relates to those JVs have very defined territories where they make those investments.And so if good investment opportunities don't come up within those territories, then it just doesn't happen at that time.

And so we've had some deals that we're just overpriced and we've said we weren't going to pay that and other deals that were just outside of those territories. But I'm confident we'll continue to have good JV volume of acquisitions in the year ahead. So--.

Okay. Thank you..

Thank you, Todd..

Ladies and gentlemen, there are no further questions at this time. I'll turn the floor back to Tamara Fischer for closing remarks. Thank you..

Thanks again everyone for joining NSA's third quarter 2019 earnings call. We appreciate your continued interest in and support of National Storage Affiliates and we look forward to seeing many of you at the upcoming Nareit Conference in a couple of weeks. Thanks..

Thank you. This concludes today's call. All parties may disconnect..