National Storage Affiliates Trust (NSA) 2015 Q3 法說會逐字稿

Greetings and welcome to the National Storage Affiliates third-quarter 2015 conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. 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 third-quarter 2015 earnings conference call of National Storage Affiliates Trust. In addition to the press release distributed yesterday after market close, we have filed a supplemental package with additional detail on our results, which is available in the most recent Form 8-K, which may be found in the Investor Relations section on 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 includes information about possible or assumed future results of our business, financial conditions, liquidity, results of operations, 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 today 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 the definitions and reconciliations of non-GAAP measures contained in the supplemental information package available on the Company's website at NationalStorageAffiliates.com.

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

Thank you, Marti, and welcome to our third-quarter 2015 earnings conference call, our first full quarter as a publicly-traded Company since completing our IPO in April. This morning I will begin with a brief overview of the quarter's results, and then provide an update on our strategic initiatives.

Tamara Fischer, our CFO, will review our recent results and balance sheet, and update you on guidance for the remainder of 2015. And Steve Treadwell, our Senior VP of Operations, is also here with us today, and will be available to answer questions about our operations.

We're extremely pleased with the strong third-quarter results. I can honestly say that our team is exceeding our expectations in every aspect.

Despite the fact that our outstanding share count more than tripled year-over-year as we deleveraged the Company significantly through our IPO, we reported third-quarter core FFO per share of $0.24, a 14.3% increase over the same period last year, and an increase in our same-store NOI of 13.6% over the third quarter of 2014. This is particularly impressive, given our outstanding same-store results in the third quarter last year.

Meanwhile, we have continued to significantly grow our portfolio, with the acquisition of 15 self storage properties during the quarter, plus an additional 15 properties acquired shortly after the end of the quarter. We've now added over 2 million square feet to the in-place portfolio we identified at the time of the IPO, with a total additional investment of over $170 million. Finally, we took steps to increase our financial flexibility this quarter, with the expansion of our credit facility to $550 million.

We're proud of our team's hard work and the ongoing successful execution of our strategy. And as a result of this strong performance, we are raising our full-year guidance range for 2015 for core FFO to $0.89 to $0.91 per share. Tammy will discuss our outlook in more detail in her prepared remarks.

I'd now like to give you a brief update on our portfolio and operational strategy. Including our acquisitions completed year-to-date, we currently own 276 self storage properties, located in 16 states, containing over 120,000 storage units, and approximately 16 million rentable square feet. Overall, fundamentals in the self storage industry remain strong, with continued growth in consumer demand and risks of new supply largely isolated within individual markets and submarkets.

As many of you know, NSA uses a very differentiated strategy, that creates meaningful opportunities for both internal and external growth. To date, we've partnered with six PROs who are able to combine our national platform with their local knowledge and operational expertise. They are financially incentivized to outperform, and penalized for under performance. Through our national platform, our growth strategy benefits from a lower cost of capital, our integrated call center and internet marketing platform, as well as shared industry best practices.

We currently have several internal growth initiatives underway, where we're experiencing considerable success, as evidenced by the 13.6% increase in same-store NOI that we achieved in the third quarter. Let me highlight some of these opportunities, which we believe can support significant growth into the future.

First, we have a strong opportunity to continue to drive same-store occupancy. Our same-store portfolio had an average occupancy during the third quarter of 90.4%, an increase of 250 basis points compared to the third quarter of last year. And we believe we can continue to demonstrate year-over-year occupancy growth, as we move through the end of the year and into 2016. This growth has been driven by leveraging our centralized call center and internet marketing to generate and convert more leads.

Second, we've just begun a full scale beta test of our new revenue management system in the fourth quarter. Our beta test includes 25% of our portfolio, and we're pleased with our progress and the results so far. The system has been designed to help us optimize the blend of occupancy and rate per occupied square foot. And we're optimistic that it will help us continue to deliver strong revenue improvements, but it is still early in the tests.

Finally, we continue to add opportunities to enhance our growth, by optimizing our assets through redevelopment, expansion, and adjusting our unit mix. We will also continue to drive cost savings by implementing best practices, consolidating vendor relationships, and increasing utilization of our call center and Internet marketing strategies to keep driving down the cost of each new lead that we close to a rental.

For external growth, we continue to expand our portfolio through targeted acquisitions. In the third quarter, we acquired 15 self storage properties, totaling 1.1 million rentable square feet, and approximately 8,200 storage units, for a combined investment of $106 million.

Subsequent to quarter end, we invested another $68 million in 15 additional properties, comprised of approximately 950,000 rentable square feet, and 7,400 units. These properties expand our presence in California, the Carolinas, Georgia, New Hampshire, Oregon and Texas, markets where we believe demand for self storage will grow faster than the national average. Year-to-date, we've acquired 57 properties valued at more than $300 million, and totaling approximately 28,000 units and 3.7 million square feet.

Moving forward, we have a strong, unique pipeline, with three distinct acquisition opportunities. First, our PROs are dedicated to contributing the assets they control upon debt maturity or occupancy stabilization, and to using their best efforts to facilitate the contribution of assets they manage but did not control. We refer to this internally as our captive pipeline, and it currently totals 95 managed properties, worth over $650 million.

Additionally, our PROs provide us with on-the-ground acquisition teams, who have long-standing industry relationships with local and regional operators. Through these teams, we've successfully acquired approximately $100 million since our IPO from third parties, and we're very pleased with our success in identifying and closing high value, off-market transactions.

Finally, we continue to interview and recruit new PROs to join our platform. Typically, these prospective operators own more than 20 properties, valued at over $100 million, and have demonstrated a strong operating track record and capacity for future growth. We currently are in various stages of due diligence with several private operators that have the potential to become new PROs within the next year or two.

In summary, we're extremely pleased with our third-quarter results. We expect to benefit from continued strong fundamentals in the self storage industry, and we believe our differentiated platform promotes both strong internal and external growth.

Finally, our flexible balance sheet supports our strategy, and positions us well, as we look to continue to grow into the future. I'll now turn the call over to Tammy.

Thank you, Arlen, and thank you everyone for joining us today. This morning, I will review our third-quarter and year-to-date results, update you on our balance sheet and liquidity, and finally, I'll provide you with more details on our updated guidance.

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 non-recurring and non-cash items and therefore, provides a better perspective on the Company's operating performance and cash flow.

For the third quarter of 2015, we reported core FFO of $11.3 million or $0.24 per share, as compared to $3.2 million or $0.21 per share for the same period last year. For the nine months ended September 30, we reported core FFO of $24.2 million or $0.68 per share, compared to core FFO of $6.2 million or $0.52 per share for the same period in 2014. This represents growth of 14% and 31% respectively over the prior year's third quarter, and the prior year's nine-month period. We continue to execute on our planned strategy and have both internal and external opportunities to drive strong growth in the future, as Arlen previously outlined.

Turning to our operations, total portfolio revenues were $35.7 million in the third quarter, and property NOI was $23.7 million. At quarter-end, our total portfolio was 89.5% occupied, and our average rent per occupied square foot was $10.75.

In our same-store portfolio, which includes 135 properties and represents approximately 44% of our total rentable square feet, we realized a 10% increase in revenue, and a 13.6% increase in NOI in the third quarter 2015, compared to the prior year. The increase was driven by a 250 basis point improvement in average occupancy to 90.4%, and a 7.3% increase in average rent per occupied square foot.

Property operating expenses in our same-store portfolio grew by 3.8% in the third quarter of 2015, compared to the prior year. We also continued to improve our NOI margin, as we leverage our scale and platform to achieve efficiencies. We are pleased to report that our NOI margin in the same-store portfolio grew by 210 basis points in the third quarter to 65.5% from 63.4% in the same period last year.

Year-to-date, we have produced same-store NOI growth of 11.7% over the same period in 2014. Our Dallas, Atlanta and Portland markets continued to exceed expectations, while Fayetteville and Oklahoma City generated growth below our total portfolio average.

Turning to our balance sheet and liquidity position, at quarter end, we had total debt outstanding of approximately $496 million. Approximately three-quarters of our debt is fixed rate mortgage financing, or fixed with swaps. Our weighted average cost of debt is approximately 3%, and our weighted average maturity is about 3.6 years.

In August, we expanded our credit facility to $550 million. The facility currently consists of a $350 million revolving line of credit maturing in March 2017, with the option to extend for an additional year, and a $200 million term loan maturing in March 2018. The credit facility is expandable, with a $150 million accordion.

Finally, in September, our Board of trustees declared a quarterly dividend of $0.19 per common share, which was paid on October 15, 2015 to holders of record at September 30.

Now, turning to our guidance. In light of our strong results and view of Q4, we are increasing our guidance for full-year 2015 core FFO to a range of $0.89 to $0.91 per share, up $0.02 from our prior guidance. Our guidance is based on several factors, including expected same-store full-year NOI growth of 10% to 11%, driven by revenue growth of 7% to 8%, and expense growth of 2% to 3%. We do not expect to close significant acquisitions during the rest of the quarter.

Our G&A guidance remains unchanged. We expect full-year G&A expense of $15.5 million to $16.5 million, including approximately $3 million of non-cash compensation charges.

That wraps up my remarks. Now we'll take your questions. Operator?

(Operator Instructions)

Our first question is from Vikram Malhotra of Morgan Stanley. Please go ahead.

Thank you. Congrats on the strong results. I had a question just to start off with, on the pricing. Seemed like you got pretty strong year-over-year growth, rental revenue growth, 7%, if I'm correct.

Just trying to understand if you can give us use bit more granularity around maybe rates you're charging to new customers versus existing. Then just any specific regions, or if you can break it up by operator, that you found were particularly strong.

Vikram, this is Steve. Thanks for the question. We're certainly very proud of the 7% growth that we saw in Q3. I think there's probably three levers at work here.

One is obviously street rates and contractual rates that flow through there. Related to that is in-place rate changes. We were very successful during Q3 in pushing those through.

We also saw a little bit of a decrease in the same-store pool when it came to discounts as a percentage of rents, and our fees were up as well. So fees are better structured today than they were a year ago. So all those contributed to about a 7% gain.

As we look forward to Q4, we had a very strong Q4 last year, so we expect the comp to be a little more difficult going forward for Q4 this year. As you think about markets that are strong for us, certainly Portland is strong. Dallas is strong, Georgia is strong, so we're able to see good gains in all of those markets.

Okay. And then just on the NOI growth, could you maybe -- was there anything -- any kind of one-time issue on the revenue side or the NOI side in Georgia? I believe that was up some 48%.

Yes, honestly, Vikram, it's the effect that we have a fixed cost structure there, and as we drive occupancy and we drive revenue growth, the benefit flows through in NOI. So we've been very successful in driving occupancy in the Georgia market, and we've seen that flow out through the NOI.

Okay. And then just last one on the adding PROs to the system, I know you mentioned you're in various stages of conversation, but just trying to get a sense of -- I think overall you had initially laid out you'd like to get to 10 to 15 PROs, but could you maybe give us a bit more color, what are the positives and what are PROs maybe hesitant about, in terms of joining?

Yes, Vikram. Thanks. This is Arlen. I think that we're very pleased with the discussions we have ongoing with a number of prospective PROs, but it is a long-term decision, and it's a long process for PROs to make the decision to join.

I think the issues that they face right now, obviously the market is extremely hot. Cap rates and pricing on assets are very aggressive. We have lost a couple of prospective PROs in this process, of guys that just decided that the prices were so high, they just couldn't turn down. It's like the offer was so high they couldn't turn it down.

Because as you know, with our model, it's really not all about the immediate cash gain. It's about the long-term partnership and growing the portfolio, growing the value together, the PROs with NSA. And so our strategy is much more long-term oriented, and so when a guy gets to the point where they feel like they just can't turn down the quick buck, that definitely hurts us in the process.

But we've got some really, really attractive PROs in our pipeline that we're talking to, and we're very confident that over the long term we'll get to the 10 to 15 PROs that we want to be at. It's just a process that takes time, and hopefully we'll be adding one to three PROs per year as we move forward.

Just to clarify, the PROs that you lost, were they -- was that to the other public peers, or to someone else?

It was to public peers.

Okay. Thank you.

(Operator Instructions)

And the next question is from George Hoglund of Jefferies. Please go ahead.

I was wondering if you could just comment on the acquisition environment in general. How are your discussions for acquisitions going right now, especially since the stock price has performed pretty well over the past two months, how's this impacting the acquisition outlook?

George, this is Arlen. I would say that overall the stock price hasn't had too much of an impact on the acquisition environment. We still believe that we're considerably below our fair NAV, and so we still have to use unique strategies, as we discuss with people the opportunity for acquisitions.

We're very pleased with our pipeline. We've got, as you know, we've got three different avenues of pipeline. The first one is our captive pipeline. That $650 million pipeline, about half of that will be coming up for opportunities for us within the next couple of years.

Then we also have the third-party pipeline that our PROs are out there always working with folks they know, and in that we've got about $250 million that we're underwriting on, on that, right now. Certainly that's a mixture of guys that would be looking at taking OP units, and also deals that would be all cash. And then of course, as we just talked about, our PRO pipeline for prospective PROs.

I think as it relates to our stock and use of that for currency, we do have to recognize that in order to give out OP units at our current price, we need to have a lower price for the acquisition than, for example, someone else could pay for all cash. And as we see declining cap rates continuing in the market across the board, it becomes more advantageous for us to talk to folks about using our currency but at a discounted price, and our strong dividend rate has been overcoming a lot of that, because a guy can recognize that he won't get as high a price, but he'll get much higher cash flow by taking our OP units versus either cashing out and reinvesting those proceeds, or taking other OP units from others.

Okay. Thanks. Just the next question. In terms of the revenue management system that was just implemented, I know it's early on in the beta test, but is there any additional color you can share on how are these initial results?

George, this is Steve. Good question. We're at 25% of our stores right now are up on the system, and we've been very pleased with the progress so far. We're very encouraged with the technology. We really see this as a meaningful tool to help our PROs manage their portfolios going forward.

In term of impact on the financials, we don't foresee that to flow through in Q4. This is really a time of testing and experimentation, so I certainly don't want to over promise in that respect. I think as we roll this out to the full portfolio during the course of the next year, we'll really start to see the financial impacts of the system around this time next year.

And do you think there might be any sort of negative short-term impact as you are implementing the system, in terms of basically working -- tweaking the system, like there might be initial occupancy drops or rate drops initially, just as you basically work through the kinks?

No. It's a fair question. I don't expect to see that. It's a good system, and we expect to see the impact. But we've got to get our feet underneath us and make sure that we're using the system correctly, and that we're optimizing our work flows around it. So it's a matter of just internalizing the system itself, rather than being worried about running it the wrong way.

I think another point on that, George, this is Arlen, is that we do not have an automated system that automatically prices rates. We do have a human element involved in it. And so if we -- that will prevent us from getting into this waterfall of triggering downward spiral in rates that could happen with an automated system. We've definitely got the human involvement in the process with the system that we're using.

Okay. Thanks for the color.

Thank you. The next question is from Anthony Hau of SunTrust. Please go ahead.

I noticed that the conversion ratio for SP to OP units went up to like 1.25 times from 1.1. Should we expect this ratio to increase at this pace going forward, if the portfolio continues to post same-store NOI at these levels?

Anthony, this is Arlen. Thanks. That's a good question, because there's a couple of different points that I should point out on. To directly answer your question, no it wouldn't be something that we would see continuing to increase at that kind of pace.

But remember, the conversion ratio that we show right now is purely hypothetical, because SP units are not allowed to convert to OP units at all for the first two years post IPO, and then in years three and four, we have a much higher discount rate on that conversion, if there was a conversion in years three and four. So the rate that we show and disclose in our information reflects effectively what really could potentially happen in year five, which is the lowest possible discount rate, so it's somewhat -- it's very hypothetical from that standpoint. But we do that because we want people to know the worse case scenario as to where we are at right now.

The other part about it is, the better we do, and we have significantly beat our expectations both last quarter and this quarter, that does create a win-win situation. It does move up the conversion ratio from a hypothetical standpoint, and so that's a great scenario.

If we keep beating things, it will keep moving up. But this is an unusually high jump this quarter, and even if we did another similar results in the fourth quarter, we wouldn't see this kind of a jump in the conversion ratio.

Okay. Thanks for the color. I had one more question for you. I think in your prepared remarks, you mentioned that one of the growth drivers is redevelopment. Could you please provide some more color regarding that, like what type of redevelopment and maybe how many assets you would identify the opportunity to redevelop?

One example of that would be -- the reason why our same-store pool decreased this quarter is that we had one property, we recognized an opportunity where we could take some of the area that we had out of RV storage, outdoor RV storage, and do an expansion, a pretty sizable expansion of the self storage on that facility. Well, obviously, it's not fair to keep that property in the same-store pool, when you're increasing the size of the property by 35%, and so that came out of the pool once that expansion was opened. That would be the kind of things that we look at.

We look at unit conversions. We look at conversion of buildings to either climate control or humidity control. Obviously expansions and conversions, like I just mentioned, where you take out parking or those kinds of things, and convert it into covered storage.

The reality is that most of our PROs over their history have looked for those opportunities, and so we don't see a huge number of those. But the IRR that you generate when you can find them is really attractive, and so we're very aggressive at looking for those and really promoting our PROs to be very creative in ways to do that, so we'll keep doing it. It's not going to be a major impact on our overall growth and FFO per share, but it's certainly true that these kinds of IRRs can add growth over the long run in the several cents per share to our FFO.

Okay. Thank you.

Thank you. We have come to the conclusion of the conference. I would like to turn the conference back over to Mr. Nordhagen for any closing comments.

Thank you, operator. Once again, we really appreciate everyone's interest in National Storage Affiliates. We're really pleased with our third-quarter results, and as we move forward, we will really continue to just execute on our plan and focus on improving all of the metrics that drive shareholder value over the long term. So we look forward to seeing several of you at next week's NAREIT conference where we can talk further, and once again, thank you for joining us today.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.