National Storage Affiliates Trust (NSA) 2015 Q2 法說會逐字稿

Greetings and welcome to the National Storage Affiliates second-quarter 2015 conference call. (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, Miss Dowling. You may now begin.

Hello, everyone. We would like to thank you for joining us today for the second-quarter 2015 earnings conference call of National Storage Affiliates Trust. In addition to the press release distributed yesterday after market close, we filed an 8-K including supplemental financial and operating data, which is also available under the Investor Relations section of our website.

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. Forward-looking statements include information about possible or assumed future results of our business, financial conditions, liquidity, results of operations, and plans and objectives. When management uses words such as believe, expect, anticipate, estimate, plan, continue, intend, should, may, or similar expressions, they are making forward-looking statements. Such statements reflect management's current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions, and changes in circumstances that may cause the Company's actual results to differ significantly from those expressed in any forward-looking statements.

Management will also discuss certain non-GAAP financial measures such as FFO, core FFO, and net operating income. We encourage listeners to review the more detailed discussions related to these forward-looking statements and non-GAAP financial measures contained in the Company's filings with the SEC, and definitions and reconciliations of non-GAAP measures contained in the supplemental information package available on the Company's website at NationalStorageAffiliates.com.

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

Thank you, Marti, and welcome to our second-quarter 2015 earnings conference call, our first as a publicly traded company since completing our initial public offering in April. Accordingly, the results we discuss today will reflect our last month operating as a private company plus our first two months operating as a public company.

I will begin with a brief overview of our Company and industry and then provide an update of our strategic initiatives. Tammy Fischer, our Chief Financial Officer, will review our recent results and balance sheet and provide guidance for the remainder of 2015.

Steve Treadwell, our Senior VP of Operations, is also here with us today and will be able to answer questions about some of our exciting new initiatives as well as operational questions. After our prepared remarks, we will open up the call to your questions.

Just as a reminder to those on the line less familiar with us, National Storage Affiliates is a real estate investment trust focused on owning and operating self-storage facilities located in the top 100 MSAs across the country. We completed our IPO and formation transactions in April of this year and currently own 258 self-storage properties within 16 states, containing over 113,000 storage units and encompassing approximately 14.6 million net rentable square feet. This makes NSA the sixth largest owner-operator of self-storage facilities.

I would personally like to thank all of my colleagues at NSA and our participating regional operators -- that we call our PROs -- for their hard work and dedication throughout this process. We are very excited to be operating now as a public company and look forward to executing on our strategic operating and growth initiatives.

I am very optimistic about our future at NSA and our ability to benefit from the opportunities in the self-storage sector. The self-storage industry remains highly fragmented, with more than 50,000 facilities and over 30,000 owner-operators across the United States. In fact the top five self-storage operators combined own less than 10% of all US facilities.

With the unique advantages of NSA's structure, combined with the flexibility of our capital structure, we expect to be a major consolidator within the sector. We also anticipate being able to grow revenue and net operating income at a strong pace, resulting in positive returns to shareholders.

Since NAREIT began collecting equity sector data in 1994, total investment returns for the self-storage sector have outperformed the returns for all the other equity REIT sectors, while at the same time experiencing the least volatility in those returns. We intend to replicate similar results for our investors and are very pleased to deliver 11.8% same-store NOI growth in our first quarter of operations as a public company.

Our strategy is straightforward, combining a unique set of advantages the drives strong growth and creates meaningful value for shareholders. We differentiate ourselves by partnering with our PROs, which allows us to leverage the powerful combination of a national platform with local operational knowledge and focus.

We believe this combination provides us with significant advantages to drive growth and outperformance over time. To date we have partnered with six seasoned PROs who, prior to joining NSA, were each recognized as one of the 40 largest self-storage operators in the United States.

Our structure is an important part of our strategy and ensures that our PROs are aligned with our shareholders through our two forms of equity ownership in NSA: first, OP units that are identical in their returns to the REIT common shares and benefit based upon the financial performance of NSA as a whole; and second, subordinated performance units or SP units, which value and returns are tied to the performance of the specific portfolio of properties that the PRO manages for NSA, providing them with incentives for outperformance and penalties for underperformance. The PROs are heavily invested in the success of NSA through both OPN to SP units, today representing over 40% of the equity ownership in the Company.

Let me summarize the advantages of this structure. For the PROs, they contribute their properties to NSA and are able to continue to manage and grow their contributed portfolios under the NSA platform. This way they realize scale economies related to cost of capital; Internet marketing, including our national Internet branding, our call center Internet integration, and our mobile marketing initiatives; and they benefit from shared industry best practices. These result in improved financial results that benefit them through increasing value of their equity in NSA.

Further, by owning OP units they are able to geographically diversify their holdings across a large national platform.

Since our IPO, we have been very active executing on our exciting external growth plan. NSA's unique structure gives us the advantage of having three major sources for outsized external growth. Let me provide you with an update on our recent accomplishments and initiatives in these areas.

First, we are able to grow very efficiently through an attractive captive pipeline of potential acquisitions, which today stands at 118 facilities that are currently managed by our PROs but not yet owned by NSA. These are properties which we know in great detail and can acquire and integrate without any surprises and with minimal startup costs.

Acquisition and integration of some of those properties has already begun, as we have now started closing our pipeline properties subsequent to the IPO closings, with one closed already and agreements in place to acquire an additional 16 pipeline assets, which we expect to close by early in the fourth quarter. The total value of these pipeline acquisitions is approximately $80 million.

Second, we are pursuing third-party acquisitions sourced through the long-standing relationships that our PROs have with smaller owner-operators within their markets. Subsequent to our IPO-related closings we have already closed on 11 additional third-party acquisitions and have two additional third-party acquisitions under contract to close by the end of the third quarter. The total value of these third-party acquisitions is over $80 million, with the vast majority of these assets coming in through off-market transactions at favorable cap rates.

Finally, we plan to expand our platform by adding a number of new PROs in the coming years. As you know, we just added our sixth PRO, Storage Solutions of Phoenix, Arizona, at the time of the IPO closing; and we continue discussions today with several of the largest private storage operators to become potential PROs.

This represents the third and final leg of our three-legged strategy for external growth. As evidenced by our success to date, we believe our structure attracts highly successful regional operators, and our success in all three areas of this external growth strategy positions NSA to be a leader in future consolidation within the self-storage industry.

Turning to internal growth, we continue to drive significant value across our portfolio as you can see from our very strong same-store growth and net operating income of 11.8% for the quarter, which Tammy will discuss later in the call. Our platform provides cost and marketing advantages for all of our properties, and we continue to leverage our size to streamline corporate shared services in the areas of management information systems, call center operations, and our most recent initiative, the development of a customized revenue management system.

This new revenue management system is slated to begin a full-scale beta test during the last four months of 2015, and we are very encouraged by the prospects it offers, as this kind of system becomes more and more critical now that our occupancies are exceeding 90%. As we continue to grow, we plan to add initiatives to further increase efficiencies and drive operating margins.

In summary, we are very pleased to have met or exceeded our goals in every area of our business plans so far to date. As we look ahead, we are optimistic about our strategy for success.

We are thrilled to see our growth strategies already producing results that exceed our expectations, with total post-IPO portfolio growth of more than 15% already closed or under contract to close by the end of the third quarter, less than six months after closing our IPO. We've also begun to leverage our strengths and capabilities to deliver strong internal growth across our portfolio, benefiting from improving fundamentals in the self-storage industry, combined with our high-quality portfolio and deep local market operating strengths.

Now I will turn the call over to Tammy to provide more detail on our quarterly results and balance sheet.

Thank you, Arlen. In my comments today, I will review our 2Q and year-to-date 2015 results, update you on our balance sheet and liquidity, and finally I will review our guidance for 2015. Let me begin with our financial results.

Due to the growth in our portfolio and changes in our capital structure, our year-to-date FFO is more than 300% greater than our FFO in the first half of 2014. More importantly, our FFO per share has grown by more than 50% from the prior year.

For the six months ended June 2015, we reported core FFO of $13.1 million or $0.43 per share in units, as compared to $3.1 million or $0.29 per unit for the same period in 2014. For the second-quarter 2015 we reported core FFO of $8.6 million or $0.22 per share in units, increasing by more than 270% from $2.3 million or $0.20 per unit in the second quarter of last year.

We are very pleased with the strong growth in core FFO per share, which reflects the success in our growth and operating initiatives, as Arlen discussed, and believe that we are well positioned to produce strong continued growth moving forward. As a note, we believe core FFO is the most relevant metric to track for National Storage Affiliates, as it eliminates the impact of certain nonrecurring and non-cash items and therefore provides a better perspective on the Company's operating performance and cash flow. Please note that within our earnings release and supplemental package you will find all of the itemized adjustments between NAREIT-defined FFO and our core FFO.

Moving on to results of operations, beginning with our total portfolio, we recorded revenues of $31.7 million in the second quarter and property NOI of $20.8 million. Our total portfolio was 90% occupied at June 30, with an average annualized contractual rent per occupied square foot of $10.58.

Within the same-store portfolio, which includes just over half of our properties and just under half of our total net rentable square feet, second-quarter 2015 revenue increased 6.8% and NOI increased by 11.8% compared to the same period a year ago. Same-store revenue was driven by a 270 basis point increase in average occupancy to 88.3% and a 3.6% increase in average realized rent per occupied square foot, compared to the second quarter of 2014.

Same-store property operating expenses were down 1.6% this year versus the prior year. Expense declines were primarily driven by increased efficiencies in insurance and property G&A expenses, as well as timing differences related to repair and maintenance expenses that were higher than normal in the second quarter of last year.

Importantly, our NOI margin in the second-quarter 2015 improved by 300 basis points compared to the same quarter last year. Over time, we believe we can drive improvement in our NOI margin as we grow in increased efficiencies on our platform. However, we do point out that expense margins may vary slightly quarter-to-quarter due to seasonality and timing of certain expenses.

Our exceptional second quarter combined with our strong first-quarter results produced same-store NOI growth of 10.6% for the first half of 2015 compared to the first half of 2014. All our markets performed well, with the exception of Fayetteville, North Carolina, where occupancy dropped due to a large number of troops redeploying to Fort Bragg.

With regard to our balance sheet, as of June 30, 2015, we had total consolidated debt outstanding of approximately $408 million. Of this, about $182 million is fixed-rate mortgage loan financing with a weighted average interest rate of 3.93% and weighted average maturity of over six years.

We are in the process of expanding our credit facility to $550 million, which will be comprised of a $200 million term loan maturing in 2018 and a $350 million revolving line of credit. At June 30 the term loan balance was approximately $145 million, bearing interest at 2.75%, fixed through swaps.

Our revolving line of credit had an outstanding balance of approximately $81 million at June 30. The revolver carries a rate of 1-month LIBOR plus 160 basis points and matures in April 2017.

Both the term loan and the revolver are extendable for up to one year at the Company's option under certain conditions. Our total weighted average debt maturity is just over four years, and over 75% of our debt is fixed-rate or fixed through swaps.

Now, turning to our expectations for 2015, we are pleased to provide guidance for full-year 2015 core FFO within a range of $0.87 to $0.89 per share. Our guidance is based on several factors, including same-store full-year NOI growth of 8% to 9%, based on revenue growth of 6% to 7% and expense growth of 2% to 3%.

This represents a slower NOI growth than the first two quarters because a number of our stores had already begun implementation of several best practices initiatives in the last half of 2014 and, as a result, delivered same-store NOI growth last year of more than 18% year-over-year. However, we do expect to continue to see additional NOI growth of 6% to 7% over last year for the second half of 2015.

We expect full year G&A of $15.5 million to $16.5 million, including approximately $3 million of non-cash compensation charges. We anticipate incremental post-IPO acquisitions of $170 million to $180 million during the third and fourth quarters this year. Of this estimated amount, we have already closed over $90 million as of today in addition to the $93 million of closings that occurred coincident with our IPO.

We project that average first-year cap rate within a range of 6.5% and 7% on these acquisitions because a high percentage of them are off-market deals sourced by our PROs. After the completion of these acquisitions, we will have approximately $150 million remaining undrawn on our credit facility, plus the availability of an additional $200 million accordion expansion under agreed circumstances.

Finally, in June our Board approved a $0.15 per share dividend for the second quarter of 2015, which was paid on July 15 to shareholders of record on June 30 and was in addition to the $0.04 per unit distribution paid to OP unitholders for the second quarter pre-IPO period. We expect this dividend rate of $0.19 per share per quarter will continue for the near term, and that our Board will continue to review our dividend policy on a quarterly basis.

We are very pleased with our results for the second quarter, which demonstrates the quality of our portfolio, the strength of our team, and the opportunity we have to bring the advantages of our platform to bear on our portfolio. With our IPO complete, we are well positioned to execute on our growth strategies, using our strong balance sheet and unique corporate structure to source and close incremental acquisitions to drive earnings growth and create value for our shareholders.

That completes our prepared remarks. Operator, please open the lines for analyst questions.

(Operator Instructions) George Hoagland, Jefferies.

Good afternoon. Just a couple questions for me. I guess first of all, on the same-store versus non-same-store portfolio, it looks like the margins were slightly higher on the non-same-store portfolio. Could you just talk about relative performance of the two portfolios?

Hi, George, this is Arlen. I will comment briefly on that; and then Steve could provide more details if you want. But in general the difference in margins in the stores would relate more generally to the markets that we're in. As we're in markets with higher overall rate performance, those margins would be slightly higher.

The non-same-store portfolio has a higher number of the stores that are in Southern California, for example, which would deliver slightly higher margins. That's the main reason for the difference there. It's pretty much revenue-driven -- revenue per square foot driven.

Okay, thanks. Then also, just subsequent to quarter-end, how is street-rate growth looking and how is occupancy trending?

Hi, George, it's Steve. We had a great July; we're very pleased with the results for July. The trends in both occupancy and street rates in July were consistent with what we saw in the first half of this year, and we remain very confident that we can deliver the guidance that we provided for the second half of the year.

Okay. Could you share occupancy at the end of July?

Not at this time, but we are very positive and optimistic about occupancy for the quarter.

Okay, thanks. Just one last question for me, then I will jump back in the queue. Can you comment on any development activity that is happening at the PRO level that might lead to potential acquisitions down the road?

George, this is Arlen. We do have a number of development initiatives that the PROs are looking into, and we are evaluating multiple options as it relates to ways that we can participate in that in some way.

As you know, we do not have a [CO] type program we buy properties at CO. Our program is driven by purchasing properties at stabilized occupancy.

But we encourage our PROs to develop new assets in their markets where there is need, and we definitely are seeing demand in almost all of our markets growing at substantially faster pace in our supply. So we are encouraging our PROs to continue to look for good opportunities for new development.

Thanks.

Vikram Malhotra, Morgan Stanley.

Thank you. Congrats, guys, on your first quarter post going public. Just first question on the acquisitions that you've got in contract. Can you give us a bit more color?

Where are these acquisitions? And just maybe a bit more color on the type of assets.

Thanks, Vikram; I appreciate the comment. We are really super-pleased with the acquisition deal flow we have had post-IPO.

To be honest, the acquisition geographically is across pretty much our entire network. We go all the way from Washington, Oregon, California, across into Arizona, Texas, the Carolinas, Georgia. We have seen acquisition opportunities pretty much everywhere that we have PROs.

And it's really driven by the PROs and the local relationships that they have to get us these kinds of deals. Now, about half of those acquisitions are ones that were in our pipeline already, and so we know those properties very well. The other half were third-party deals.

Basically a sizable percentage of those third-party deals were off-market, which is why Tammy mentioned our average cap rate on this overall -- acquisitions overall is between 6.5% and 7% as we look at our first-year performance post-transaction. So that has been very, very rewarding to see that result.

Okay, great. Then I just wanted to get some thoughts on this funding of these acquisitions. Obviously you have a little more room on the credit line now.

But given where the stock is trading at, does that change the way or the mix of how you plan to fund in terms of OP and SP units? Or does that have any other impact on the timing of when you plan to close acquisitions?

Right now, Vikram, it does not change. We have plenty of capacity, as Tammy outlined, on our line of credit. We do see that with the portfolio in total of the acquisitions that we have online, we are looking at about 20% of the total funding of that will be coming in the form of equity -- significantly SP equity and a little bit of OP equity.

We do recognize that we are a new company. This is our very first public earnings call. So we know that our valuation right now is below where we would feel like it should be appropriate.

But as we perform, as we demonstrate results in future quarters, we are confident that the market will more appropriately value our stock, which will give us more ability to use stock. But we are very judicious in the use of any form of equity in terms of our acquisitions because, as you know, we -- the management team and the PROs are by far the largest owners of our stock. We are very, very driven to make sure that everything we do is highly accretive to our stock value.

So that is an overriding concern on every acquisition we do, and we make sure that we believe it will be very accretive. And that's part of the reason why we are focused on finding deals that are off-market and at higher and better cap rates.

Okay, great. Then just last one, could you update us on where you are with the revenue management system and just how maybe some of your newer PROs are adopting, call it, some of the tools and things like the website, etc. that you are providing them?

Thanks, Vikram; this is Steve. We are very excited about revenue management. As I've mentioned before, it's our key 2015 initiative.

We are underway with the beta-test process here. We expect to have about a quarter of our stores upon the system for the bulk of the fourth quarter if not the entire fourth quarter. And then we look to roll it out to the full portfolio next year.

By this time next year we should be fully implemented. We expect good results from the beta test, and we expect to move forward aggressively next year. So we're excited about that as a driver of organic growth going forward.

As we think about new PROs and how they are being integrated into our systems, they are very receptive to the tools that we have provided, from Internet marketing to call center. And we see that as another positive opportunity for organic growth going forward.

Okay. Thanks, guys.

Todd Thomas, KeyBanc Capital Markets.

Thanks, good morning out there. First question, just how are you thinking about leverage in the context of your comments about funding new acquisitions with 20% equity, 80% debt? I guess, how are you thinking about leverage? Where is your comfort level in terms of levering up from here?

Todd, as we've talked about in the past -- and I think our strategy is consistent with what we have discussed -- our thought is to maintain a strong balance sheet and to keep an eye on flexibility to give us -- to create greater opportunities to source various types of capital going forward. As you know, historically we have funded acquisitions with a combination of debt and OP and SP equity, and we would expect to continue to do that.

In the near-term we'll continue to fund our acquisitions primarily with our revolver.

Okay. Then can you just maybe talk a little bit about the pipeline for bringing additional PROs onto the network? I'm assuming the guidance does not include any new PRO acquisitions. But can you just help us understand what the pipeline looks like, and whether or not you're in advanced discussions with any potential new PROs today?

Yes, Todd, this is Arlen again. The guidance does not include any acquisitions of any new PROs. It also does not, frankly, include any acquisitions of third-party that we don't already know about.

We have a very, very active pipeline both of discussions with new perspective PROs as well as additional third-party acquisitions that we are evaluating. But none of those are baked into our guidance.

It's a sizable commitment for someone to become a new PRO, and we did not in our business plan anticipate that we would be adding a new PRO certainly not this early. But our whole hope is that as we get in the latter part of our first year as a public company that I think we'll have a good opportunity to add some PROs over time.

Our long-term goal is still continuing the fact that we want to have six to nine more PROs in the long-term as we build out our overall network. We have a lot of active discussions underway right now with double-digit number of prospective PROs.

But those are long-term commitments, and they take a long time to ink. So I would say we're not looking at anything certainly in the near term, certainly not in our guidance.

Okay, that's helpful. Then Arlen, you mentioned that you're seeing acquisition activity across the network from all the PROs. Are you turning away deals? How are you deciding how to allocate capital as the PROs bring third-party acquisitions to you?

Yes, we have walked away from a number of deals as we evaluate opportunities. That is no secret that prices out there in the market are very high; and the bottom line for us is we're not just going to grow for the sake of growing.

We only want to grow if we really believe it will be accretive to the value of our stock. That is -- we have a huge amount of our net worth invested in this stock, and it's really important for us to make sure that that growth is accretive.

Now, I am very, very pleased that we have been able to generate as much activity as we have. We've got a lot of stuff we are still evaluating.

We find a lot of these deals just because of the relationships the PROs have. Our average PRO has been in the sector for more than 25 years, so they know almost everyone in their local market. If a guy has got three to five properties and they've been in the business a long time, they're looking at: What should I do? I don't know a better investment than self-storage, which most of the guys in this industry know that's a fact.

We offer a great alternative for them, that they can come in on a tax-deferred basis, come in in exchange OP units or potentially SP units, and have a very strong yield even though they might not go out to the market and get the absolute last dollar on the price. That's not what's the most important for them. What's the most important issue is: What's my cash flow after I sell my assets? And if I have to pay a huge amount of taxes and then go and reinvest the net after-tax dollars, you can't come anywhere close to getting the kind of return we can give them through our dividend cash flow.

Okay, that's helpful. Then just a question maybe for Steve. In the same-store presentation I'm assuming that the total revenue includes tenant reinsurance income and other income from accessories. Is that correct?

Then if so, can you just run through some of the information around the tenant insurance? Maybe the year-over-year change, what that income breakout looks like throughout the portfolio, and also maybe talk about where overall penetration is for the total portfolio today.

Sure. Thanks, Todd. In terms of tenant insurance, yes, it's included in the revenues, obviously; but it's not in rental revenue. So it would show up in the other revenues.

We did see substantial growth in that component of our revenues in the same-store pool year-to-year. We're seeing positive trends in terms of the penetration. If you look at our same-store pool we are still at about 41% on our same-store pool penetration, but that has moved up about 500 basis points since the beginning of the year, so we've seen positive movement there.

We are slightly higher in our broader pool, the total portfolio. If you look at our move-in capture rate, we're in the mid-60%s, so we expect that over time we will continue to asymptotically approach that mid-60%s penetration level on a tenant insurance basis.

Okay. Just lastly one more for you, Steve. You talked about beta testing the revenue management system in the last four months of the year. What is being employed today to maximize revenue? How are you and the PROs setting rate discounting levels and so forth?

It's largely consistent with what our PROs have been doing for decades. They're using their expertise in the markets and their experience to set prices and to drive revenue bumps to our current customers.

They've done a great job obviously. We've been able to move both NOI and revenue consistently.

We think that the tools will make us better, and we think they will give us better information at our fingertips and we'll make better decisions going forward. But as it stands today, we continue to rely on the expertise and experience of our PROs.

Todd, this is Arlen. I would add to that that our property management software systems that we use do have some fairly rudimentary revenue management systems in them, and our PROs use those. To be really honest, when you're below 90% occupancy, the combination of that plus the kind of knowledge that our PROs have is pretty effective at delivering strong results in revenue growth.

But I mean, we will be the first to admit that as you get above 90% occupancies you have to have a much more sophisticated revenue management system in place. We've been working on evaluating different systems for months now. We have now selected one, and we are building a customized system, and it will be tested out this year and implemented fully next year. We think that will be very, very high return on investment as we implement that over the coming months.

Okay, great. Thank you.

(Operator Instructions) Ki Bin Kim, SunTrust.

Thank you. First a couple accounting questions. What do you consider same-store?

The reason I ask that is because, if I look at some of your markets, you have had some really big jumps in occupancy from 80% to 90%; and I'm not sure if 80% is considered stabilized or not, but certainly it is in your same-store pool. So I was just curious what you consider same-store.

Sure, Ki Bin; thanks for the question. The way we look at same-store is assets that we have owned for the entirety of the two periods being reported upon. Up to this point we really haven't made a distinction between stabilized and nonstabilized. If we owned it, it was included in our same-store.

Right. So it seems like, for example, markets like in Georgia and Washington -- is there inclusion of somewhat newly developed assets in those markets or -- I guess in overall your same-store pool, which is driving a little bit higher?

Yes, Ki Bin, actually it's not any newly developed stores. What you're seeing there is the fact that there are a number of submarkets, I'll call it, where stabilized occupancy -- frankly because of the supply and demand historically in that market -- may have been a number of 80% or even 75%. But so it's really more -- we're not putting newly developed stores into our same-store.

This is all stores that have been operating for a number of years. But we have had them in our portfolio all of 2014. Then it would be included for the 2015 same-store pool.

But it's not because -- oh, we're bringing in properties that were just developed and they're still in their fill-up curve. It's really the lower occupancy ones is more of a reflection of a situation where a submarket might be significantly overbuilt.

Okay. In your same-store expenses going forward as you develop your Internet presence and your pricing platform, are those costs going to be in your same-store expenses fully?

Yes, for the most part we'll be putting those through the stores. There is a capital investment component that we would do as related to our revenue management program that will be capitalized, because this is a totally customized software system that we're building for us.

But to the extent there are operating costs related to those, those flow through the stores just like they've always done.

Okay. Obviously your same-store pool only represents a little bit more than half of your total portfolio, but I am just assuming you have historical financial data for the older -- the assets that are not technically same-store.

Just curious if you have any color on what that same-store NOI or same-store revenue trend was for those assets, or maybe the entire portfolio.

We don't have the same kind of detailed financial historical data that we do with our same-store pool that has been part of NSA. The reason is because certainly none of our PROs typically would do GAAP-based financials.

A lot of the times they're cash basis. We wouldn't have the same quarterly type of cutoffs, etc.

But I can say that in general -- not with specific numbers, but in general, that the properties that are not in our same-store pool are seeing similar kinds of improvements from the prior year's performance that we're seeing in our same-store portfolio. It's not like the same-store group is actually performing better than the others or something like that. In fact it could even be argued it's a little bit the opposite.

We did do a quick look. One of the things that we had to decide was whether to use a same-store pool that changed quarter to quarter, because we have such a short history as a new company. We decided that would be too confusing for the analysts, to do that; so we have kept the same-store pool for this first two quarters and plan on it for the year.

But we did a look. If we would've changed the same-store pool to, say, all the properties we owned in the second quarter of 2014 versus the second quarter of 2015, how would those results have compared? Actually our NOI growth would've been even higher. It would've been close to 12.5% same-store NOI growth if we expanded our same-store pool.

But we're not going to do that. We're just leaving it this fixed pool for this year, and then we will change it in 2016.

Okay, that color is helpful. You guys made some opening remarks about second half of 2015 and what your guidance implies. Maybe I missed it, but what was the reason why same-store NOI should come down?

Ki Bin, it really relates to some of the seasonality that we see. So we expect Q3 might be up a little bit, maybe stable with Q2; and the typical Q4 slight drop in occupancy and growth in [revenue].

But it's year-over-year, right?

Yes.

So the seasonality should be negated.

Right, although one of the things that Tammy did point out in her remarks earlier was that last year we had implemented the best practices on a bunch of these stores in the second half of last year. So those stores actually in 2014 second-half were seeing same-store growth of over 18% from the prior year.

So we feel like to predict the continued kind of growth like that would be too aggressive. I also want to just comment, Ki Bin, that we're somewhat in a -- I think all of the self-storage operators are somewhat in the universe that we've probably been in before.

The other guys are in the mid-90%s or low to mid 90%s in occupancy. We're in the low 90%s in occupancy. We don't have history of running at that kind of occupancy, and it's more difficult for us to predict how will we be able to continue these same kinds of revenue and NOI growth where -- when we're in uncharted territory like this, at a 90% and plus occupancy in self-storage.

Because every property will have 10 to sometimes as many as 20 different unit configurations, you're going to have unit sizes and configurations that are 100% occupied, and you just don't have availability of those to rent when you're at 90% as an overall blended rate. That means you're going to walk customers away that you didn't have to do in the past.

So we may be conservative, but we have to be realistic and recognize that we're in a world that we haven't been in before. And we want to make sure we're giving guidance that we feel confident we can hit.

Okay, thank you for that. Just a last hopefully quick one here: how much discretion do you have on how much to fund an acquisition, OP versus SP split versus debt? I'm sure there's like a lot of conflicts involved -- or maybe not conflicts not the best word -- but sticking points.

Because your stock price is at $12. It Implies a completely different thing versus $14 on what comes down to the residual cash flow that goes to the equity holders.

So when you buy buildings, obviously as a common equity shareholder of NSA it would be more advantageous for us to have less SP involved. But so I was curious to know: how do you negotiate that conflict? And how much discretion do you ultimately have on how to fund deals going forward?

We actually have a lot of discretion on our end. However, we can't issue OP and SP equity if there is no equity available from effectively the PRO or the seller.

So for example when we're buying assets from a total third-party that is not taking any equity and they are just selling us for cash, in that example we have a required co-investment, which is formulaic, that the PRO needs to be able to invest in terms of their SP equity to maintain the fixed charge coverage ratio and safety margin of cushion that we have required from our PROs on the dividends that we pay to our common shareholders. But beyond that it's basically at our discretion if we would issue any additional equity beyond that.

The most important thing that we look at is: overall, will this be accretive to our overall stock price? Remember management owns more equity both in both OP and in SP than anyone else, and we are totally driven by what will be accretive to the value of our stock.

Okay. Thank you very much.

Thank you. Mr. Nordhagen, I would like to turn the call back over to you for closing comments.

All right, thank you very much. We would really like to thank all of you for joining us today. This is, as you know, our first call as a publicly traded company.

As we move forward we will continue to focus on the operating performance of our portfolio while we look for additional opportunities to grow and drive shareholder value over the long term. We look forward to updating everyone on our progress in the quarters and years to come, as this is the first of many future conference calls. Thank you very much.

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