National Storage Affiliates Trust (NSA) 2016 Q4 法說會逐字稿

Greetings and welcome to the National Storage Affiliates fourth quarter and year end 2016 conference call.

(Operator Instructions)

As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Director of Investor Relations for National Storage Affiliates. Thank you Ms. Dowling, you may begin.

Hello everyone. We would like to thank you for joining us today for the fourth quarter and full year 2016 earnings conference call of National Storage Affiliates trust. In addition to the press release distributed yesterday after markets closed, we have filed an 8-K with the SEC containing the our supplemental package with additional details on our results, which may also be found in the investor relations section on our website at nationalstorageaffiliates.com.

On today's call, Management's prepared remarks and answers to your questions may contain forward-looking statements that are subject to risks and uncertainties. The Company cautions that actual results may differ materially from those projected in any forward-looking statements. For additional details concerning our forward-looking statements, please refer to our public filings with the SEC.

We encourage listeners to review the definitions and reconciliations of non-GAAP financial measures such as FFO, core FFO, and net operating income, contained in the supplemental information package available in the investor relations section on the Company's website and in filings made with the SEC.

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

Thanks, Marti, and welcome everyone to our year-end 2016 earnings conference call. To begin, 2016 was a very strong year for NSA on all fronts. We realized robust growth across virtually our entire portfolio, driving strong increases in all our operating metrics.

We grew same-store portfolio average occupancy by 210 basis points, increasing average occupancy to 90% for the year. Our average rent per square foot increased by 5.3% resulting in same-store revenue and NOI increases of 7.7% and a 10.2% respectively. It was another year of very strong acquisition growth, further demonstrating the depth and quality of our pipeline and our unique ability to source and close accretive acquisitions through our PRO relationships.

During 2016 we acquired and invested in a total of 173 high quality assets, primarily in our core growth markets, representing total investment of over $1.3 billion. Including the addition of our seventh PRO, Hide-Away, in April, and the acquisition of our 66-property iStorage portfolio through a joint venture with a major state pension fund.

As a result, we ended the year with a portfolio of 448 self-storage properties located in 23 states. In total, we have about 28 million rentable square feet, an increase of 75% from one year earlier, and over 100% since our initial public offering.

In 2016, we materially expanded and improved our balance sheet. We upsized our credit facility to $725 million, closed on an additional $100 million term loan, and issued over $500 million in new equity. Our equity base grew through two well received common equity offerings, issuances under our ATM program and through substantial issuance of new OP and SP equity for property acquisitions.

The combination of these transactions maintains the capacity and flexibility we need to fund future growth opportunities. As a result, at the bottom line, we achieved core FFO of $1.12 per share for 2016, up 21.7% from 2015, which meaningfully exceeded our own guidance.

In December, our Board announced a 9% increase in our quarterly common dividend to $0.24 per share. This was on top of the 10% increase we announced in May, and we continued to maintain significant AFFO coverage of our dividend payout. And finally, I'm very pleased to announce that we have recently signed Marc Smith of Personal Mini Storage in Orlando, Florida to become our eighth PRO.

Through this transaction, Personal Mini is co-investing the SP equity to assume management of four of our recent third-party acquisitions in this market and will be adding a fifth property to our portfolio very soon. Beyond that, Personal Mini operates a portfolio of over 30 properties, which we will look to acquire over the next several years, in addition to other third-party acquisitions.

Further, Marc is very well-known and respected as major thought leader within the industry and has served on the board of directors of the National Self Storage Association for the last six years, including as chairman in 2016. His reputation and relationships are a huge plus for us as we continue to recruit additional PROs to join our platform.

It was truly an exceptional year for NSA. And I'm enormously proud of the hard work, spirit, and dedication of the entire NSA and PRO teams. Thank to you all.

Fundamentals in the self storage sector remain good and we remain optimistic about more normalized but continued growth through 2017. We continued to experience stable demand across our portfolio, driven by positive economic fundamentals in nearly all our core markets, including high employment rates and growing consumer spending.

Although new supply is certainly creating some pressures in a few markets, such as Oklahoma, we believe this risk is generally concentrated and market specific, and we still don't see new supply risks being elevated for NSA's portfolio on a national basis. There continues to be a lot of market chatter about starts, but as for now, we're not seeing plans translating into supply exceeding demand in a significant way in most of our primary markets.

I would like to take a moment to update you on our key initiatives. Our portfolio is now operating near what we believe to be our optimum stabilized occupancy levels. So our initiatives to capture revenue upside from rent increases and other sources are vitally important.

Our revenue management system is constant evolving and is more active on our platform than ever. At this time, virtually all of our properties are configured on the revenue management system. We're now evaluating implementation of new modules to enhance the current system and more effectively drive additional revenue.

In addition, we continue to make upgrades and improvements to our management information systems, our internet marketing platform and our call center operations to allow us to make better decisions and improve the results of our marketing spend. Turning to the transaction front, in the fourth quarter alone, we acquired 31 wholly owned self-storage properties for a total investment of approximately $228 million. These fourth quarter acquisitions encompass about 2.1 million rentable square feet with more than 16,600 storage units.

In addition, the 66 iStorage joint venture properties added over 4.5 million rentable square feet and over 35,000 storage units to NSA's platform. Our PRO network is a key element to our continued ability to grow. First, through our captive pipeline, which includes properties that our PROs manage, but NSA does not yet own.

Today with the addition of Personal Mini, the captive pipeline consists of over 120 properties and over 8 million square feet, valued at nearly $1 billion. Our second channel is third-party acquisitions, where our PROs act as our boots on the ground. They are market focused and have local knowledge and relationships, which lead to substantial third-party off-market acquisitions.

In total, over the last two years, through our captive and third-party pipelines and our joint venture, we've acquired over 230 properties, adding over 15 million rentable square feet. Equally important, this growth has both expanded our geographic reach and deepened our presence within our existing markets, providing enhanced local marketing and efficiency gains.

Our third channel of growth is adding new PROs, and we are always in discussions with a number of high-quality operators. As I mentioned, we're extremely pleased that we have added our eighth PRO, Personal Mini Storage, to join NSA this month. We are clearly off to a great start in 2017, and we look forward to working with Marc Smith and his team to continue to grow NSA.

We are very proud of NSA's accomplishments to date, which demonstrate our unique opportunities for continued growth both internally and externally, as well as our ability to deliver strong value for our shareholders. With our joint venture acquisition, the addition of our eighth PRO, balance sheet flexibility, and a healthy pipeline, we're excited to continue executing on our stated growth initiatives in 2017.

I will now turn the call over to Tammy.

Thank you, Arlen. In my comments today, I will review our fourth quarter and a full-year 2016 results, update you on our balance sheet and liquidity, and finally discuss our outlook for 2017, which was provided in detail in our earnings release issued yesterday. Beginning with our financial results for the fourth quarter 2016, we reported net income of $6.1 million compared to $5.4 million in the fourth quarter of 2015. And core FFO of $20 million, or $0.30 per share, an increase of 25% on a per share basis compared to Q4 2015.

For the full year 2016, our net income was $24.9 million compared to $4.8 million in 2015. And our core FFO was $65.5 million, or $1.12 per share, an increase of 21.7% compared to $0.92 per share reported 2015. The increase in core FFO for both the quarter and the year was due to strong growth within the same store portfolio, as well as our robust acquisition activity in 2016, partially offset by higher financing costs, G&A, and an increase of the fully diluted share count.

Turning to our operations, for the fourth quarter 2016, we reported a 9.2% increase in same-store NOI compared to Q4 2015. Same-store revenue was up 6.3%, driven by a 6.7% increase in average rent per square foot, slightly offset by a 30 basis point decrease in average occupancy to 89.1%.

One impact we're seeing of our new revenue manage system is that it results in pushing rental rates harder, even if it results in slight occupancy decreases. Property operating expense increased only a 0.5% compared to the prior year, which was in line with our expectations.

For the full year 2016, our same-store NOI increased 10.2% compared to 2015. Same-store revenue was up 7.7%, driven by a 5.3% increase in average rent per square foot and a 210 basis point increase in average occupancy to 90%. Property operating expenses increased 2.9% year-over-year, again in line with our expectations.

We continue to benefit from our geographically diverse portfolio that is concentrated in states with above-average population and job growth. Our stores located in Oregon, California, Georgia, and Arizona, which represent more than half of our 2016 same-store NOI, continued to outperform. Each delivering double-digit same-store NOI growth in 2016.

We continued to see softness in the fourth quarter in Oklahoma and west Texas, which have been impacted by both the energy sector and new supply coming on-line, and our stores in Washington state were impacted in the fourth quarter by higher property taxes, timing of repair and maintenance projects, and increased advertising spend.

While we have selectively used increased discounting and promotions to support occupancy gains in some markets, we continue to benefit from a roll-up in rental rates for move-ins versus move-outs, driven in part by our revenue management system. We also delivered double-digit growth in tenant insurance revenues during 2016 as our penetration rates continued to grow through high rates of adoption among our new customers, ending the year at over 55% penetration across our portfolio.

As we've discussed, in October we formed a joint venture with a major state pension fund to acquire the iStorage portfolio. NSA invested roughly $80 million for a 25% ownership stake and the joint venture put in place $320 million of mortgage financing. The investment was immediately accretive to core FFO per share, and we expect to generate approximately $7 million to $8 million per year in gross fee income before incremental G&A expense of approximately $3.5 million, allowing us to leverage our total G&A spend.

Our balance sheet remains a strong point for NSA. During 2016 and into the first quarter 2017 we actively worked to expand our capacity and retain financial liquidity and flexibility.

During the fourth quarter, we completed our second follow-on equity offering, issuing nearly 5.2 million common shares, and raising net proceeds of $105 million. We used the proceeds of the offering to pay down a revolving line of credit.

Also in the fourth quarter, we launched an ATM program, adding yet another source of capital to enhance our balance sheet and fund growth. During the fourth quarter, we issued approximately 1.7 million shares under the ATM, raising net proceeds of about $34 million, and leaving about $165 million of liquidity under the program.

In addition, we issued over $16 million of OP and FP equity in the fourth quarter to fund acquisitions completed during the quarter. At year end, our total consolidated debt outstanding was about $873 million, of which about 72% was fixed rate mortgage financing, or fixed with swaps.

Our weighted average effective interest rate was about 3%, and our weighted average maturity was 5.2 years. We have almost no debt maturing before 2020.

Subsequent to year-end we completed an expansion of our credit facility, which increased our borrowing capacity by yet another $170 million, resulting in total capacity under our credit facility today of $895 million. As part of this expansion, we increased our five-year term loan by $10 million, our six-year term loan by $55 million, and added a $105 million seven-year term loan tranche.

We expanded capacity on our revolver from $350 million to $400 million last December. As we have consistently demonstrated, we remain disciplined on the capital front, ensuring a strong and flexible balance sheet to support our growth strategy.

Turning to our guidance, we recognize that 2017 may be a year of transition for the industry with more new supply coming on-line, making it a bit more challenging to forecast. While we have not yet seen a material slowdown in our property performance, we are cognizant of the fact that new supply may impact NSA more significantly later in the year.

For that reason, we have built into our guidance somewhat lower growth expectations compared to 2016. As we announced last evening, we expect 2017 core FFO to be in the range of $1.22 to $1.29 per share. Our guidance is based on several factors, including anticipated same-store NOI growth of 6% to 8%, driven by expected revenue growth of 5% to 7%, and expense growth of 3% to 4%.

As a note, our same-store portfolio in 2017 will include 277 properties. Expected acquisitions in range of $200 million to $500 million. Full-year corporate G&A cash expense, including all iStorage G&A, is expected to be in the range of 9.5% to 10.5% of revenue, excluding the iStorage property revenue. Plus another 1% to 1.5% in non cash comp expense.

To put these numbers in context, if we included the iStorage property revenue in the total revenue denominator, our total cash, plus non cash G&A, would be 9% to 10% of total revenues as we continue to leverage our G&A capacity. This concludes our prepared remarks.

With it that, we will now take your questions. Operator?

Thank you.

(Operator Instructions)

Our first question comes from the line of the line of Vikram Malhotra with Morgan Stanley.

Thank you. Two quick questions. One, can you give us a little bit more color when you talk about supply and not really seeing impact, but you're baking in some impact towards the second half. How are you -- the new supply coming online, what's your expectation in terms of how it will impact occupancy rent growth and how are you factoring that into the guidance?

Hi, Vikram. This is Arlen. We monitor, of course, all of our properties on a regular basis to look at where do we see new supply potentially coming online over the next 12 to 18 months. And particularly as it relates to properties that have some exposure to new supply in this year, about 12% of our portfolio has the potential that by the end of the year, some new supply will be within their trade area.

And so our forecast and our budgeting for this year reflect the fact that we expect those new stores to come online, which will obviously create some additional pressure on discounting, some impact on occupancy, and therefore slower revenue growth. In a few cases even revenue being flat. But generally we reflect that based upon those forecasted openings at the time that they're expected to come into the market.

Okay, that's helpful. Just to clarify the revenue growth expectation, the 5% to 7%, can you break that out between occupancy and rate growth?

Yes. We are pretty close to what we would consider optimal occupancy based on the way the revenue management program is directing us to push harder on rate. We might gain another 50 basis points for average occupancy for this year, or something like that, but we're really forecasting almost all of that to be rate growth.

All of it would be rate, okay. And then just last one to clarify on the supply comment, just based on what you are seeing and talking to other PROs, is 2017 the year where we see peak supply --your comments around the second half. And how much lead time or what you need to see to get a sense of how supply could potentially look like in 2018.

Yes, it looks like late 2017 will probably be the peak additions of new supply. Now, we do have some visibility into supply coming into 2018, obviously. But we're also starting to see some of the developers canceling projects as they reevaluate the market and they recognize, wait a minute, there's too much supply here already, on the pipeline. So we are actually starting to see some of that. So I think late 207, early 2018 will be the peak of when supply additions peak in the overall total national market.

Thank you very much.

Thanks, Vikram.

thank you. Our next question comes from the line of R.J. Milligan with Robert W. Baird. Please go ahead with your questions.

Good afternoon, guys. Arlen, I was wondering if you could give some guidance in terms of your expected external growth this year. $350 million at the midpoint. Can you give us an idea of what buckets those are coming from, whether it be another PRO within your captive pipeline or just one-off growth?

Yes, thanks, R J. We have, as I mentioned, we have -- our captive pipeline now is almost $1 billion. And as we look at that of what's maturing in 2017 for debt maturities, about 20% of that will be maturing in 2017.

Now, we never project that we will get all of that, because obviously the decision makers on that are not always our PROs and such, but we know a sizable portion of that growth will come through the captive pipeline this year. We also do expect a sizable number of third party acquisitions, we already have closed on some and we have a number of ongoing discussions underway as well.

As you know, we added Marc Smith and Personal Mini as our new PRO. We don't anticipate very much new properties coming from the Personal Mini this year, but we will have at least one or two acquisitions on that area as well. And then if we ended with another new PRO in late this year, that would be more to put us toward the high end of the guidance. Otherwise it's primarily just what we know right now, plus the captive pipeline and the third-party acquisitions.

Okay. And then, Tammy, I wanted to talk about the same store definition. So does same store for 2017 include everything that was acquired in 2015?

It's all the stores that we owned for all of 2016.

Is it fair to assume, given that you guys have acquired a significant amount in 2016, I think $1.3 billion, as you bring those onto your platform and continue to lease those up, or maximize revenue in those properties, could we expect an added benefit in 2018 same-store NOI as of those properties? Or brought into the system in the same-store pool?

R.J. this is Arlen. I would say that we've definitely seen that, particularly as we acquire new properties, the first two years of that we see outsized growth. So 2017 -- obviously they're not in our 2017 pool, but in 2018 we will see some continuation on that.

To be honest, we'd like to be able to continue to accelerate the platform adoption programs to try and get those benefits as quickly as possible. But historically we've seen substantial gains in both year one and year two.

So on average the acquisitions in 2015 will be a greater contributor to same-store NOI growth in 2017 versus the legacy portfolio?

Yes, that's true. It's probably about a percent or so higher than the legacy portfolio.

Okay. Excellent. Thanks, guys.

Thank you. Our next questions come from the line of Todd Thomas with Keybanc. Please go ahead with your questions.

Hi, thanks. Good morning out there. First, with regard to occupancy, can you just talk about that balance between rate and occupancy a little bit? You noted that the revenue management system is increasing rate at the expense of occupancy, and just given that we're seeing some new supply enter the market. And Tammy, you mentioned that forecasting is a little challenging today. How comfortable are you with that strategy here?

Hey Todd, this is Arlen again. Yes, we saw some very small occupancy trade-off in the fourth quarter, and we've always focused on revenue growth. That's really what we try for.

It's just that with the new systems, we have a little more sophisticated approach, perhaps, at how to get that revenue growth, and of course we had industry leading revenue growth in the fourth quarter. We've continued to see really strong revenue growth so far this year, but it's really rate driven. To the extent we trade off 10, 20, 30 basis points of occupancy to get significant rate growth, we're going to do that.

Now, over the long run, it is not going to be material. The rate -- the occupancy declines are really pretty low. Even, in fact, right now we're back to pretty much same occupancies that we were a year ago. So that small decline has already been made up. But it's that balance, and ultimately we're just pushing for overall revenues, total revenues.

Do you have an updated occupancy stat for the end of February here and what that looks like on a year over year basis?

I know we are literally flat year over year on same-store pool.

And that's the new same-store pool?

The new, yes.

Got it. Following up on the discussion around potentially adding a new PRO to the network, sounds like there could be one little later in the year perhaps. I think, Arlen, you had felt that there was sort of a limit or a max overall that NSA could support in terms of PROs where you could achieve optimal performance. Any update there at this point in terms of what your current thinking long term for new ads altogether?

We continue to have a good pipeline of discussions, usually it's around 10 PROs in discussion -- potential PROs. We're at eight PROs right now. Our long-term goal would be to be somewhere between 12 and 15 PROs, depending on how big the territories are for the PROs that join us. So we've got somewhere between four and six or so slots remaining.

We cannot control the timing of when PROs join us. We just continue to have the discussions and our goal is to add one to three a year. I certainly hope we can add another one later this year, but unfortunately, that's not a one-sided decision. We just keep working on it, and we're very pleased with the interest level that we have. But there's a big level of commitment involved for PROs who join us, and we just want it to be right for their timing as well.

Okay. And then just a clarification. I'm not sure if I heard this right. But at the high end of the acquisition guidance, is that baking in the addition of another PRO, or do you think you can get to the $500 million just with third-party acquisitions?

We wouldn't get to $500 million with one-off third-party acquisitions. So it would either be a new PRO or a portfolio acquisition, a pretty good size portfolio. We certainly could have that, but if we just do it with the typical one-off, one, two properties from what we call the mom and pop sellers, we wouldn't get to $500 million that way.

Okay. Thank you.

Thank you.

Our next question comes from the line of David Corak with FBR. Please proceed with your questions.

Good afternoon, everyone. For the SP unit distribution guidance, can you kind of walk us through the assumptions on the high and low ends there of that $4 million range, specifically what does that imply in terms of new SP equity and how does that fit in to your acquisition guidance? Kind of along the lines of what you were just talking about with the PRO assumptions. I think you said you already have four or five assets in Orlando that will fall under that.

Yes, David, pretty much the high end of the SP guidance corresponds with the high end of the rest of the guidance. So if we hit the high end of our NOI growth and we hit the high end of our acquisitions growth, that would also tie in with the high end of our SP guidance. And likewise the low end; if we hit the low end of our NOI growth, the low end of our acquisitions growth, that's going to tie in with the low end of the SP guidance, as well.

The SP guidance in total dollars is up a fair amount from 2016, primarily obviously because of the large number of acquisitions that we did in 2016 and especially a lot of those coming in later in the year. And so the SP equity cash flow related to those was only effective for last year for a very small part of the year. So by having those all through the entire year, that's the main reason why the absolute dollar amount goes up quite a bit. But where we are within the guidance range is totally dependent on how we perform on those other metrics.

Okay. That's helpful. And then you mentioned adding a few more PROs over the next couple of years here, but what other territory at this point would you want to add? What are the most attractive territories that you don't currently have?

Well, if you take a look at our map, sort of our map of the United States, we've always said that our goal is to be in as many of the top 100 MSAs as we can be in an accretive way for our investors. So we're not going to go into an MSA just because we want to be there if it is going to hurt our investors.

But you look at the white space on our map, and we say, well, we'd like to be in those white space areas, or the lighter blues on our map -- we have different colors and the lighter blue means we're not as dense there. So we'd like to strengthen the lighter blue and add into the white spaces. But only to the extent that number one, there's a really good operator or PRO in that area and number two, that we can do it in a way that's accretive for our investors. Within that, that's kind of how we're having discussions about the ten or so different PROs that we're talking to.

Okay, fair enough. And going back to your JV here, the on balance sheet acquisition guidance, should we be assume the iStorage JV is still actively looking with some of their capacity to acquire? And then is that $200 million, is that fixed, or can that be increased over time?

Hey David, this is Steve. Definitely the iSource portfolio is looking to grow in 2017 and beyond. We're have capital commitments both from NSA and from our partner. So we're actively out there bidding on properties and underwriting.

And some of that is built into our guidance. It's just really a minor portion at our 25% share of the JV. So we will continue to grow that portfolio.

And I would add to that, David, that the $200 million commitment that we have made for acquisitions with our partner is intended to occur as good accretive acquisitions come up. So I think in our overall thought process we thought that that might take four years, but if we could find $100 million of acquisitions this year in those iStorage territories, we would certainly do $100 million rather than $50 million. But we've forecasted it to be at a fairly slow pace.

Fair enough. Thanks, guys.

Thank you.

Thank you.

(Operator Instructions)

Our next question is coming from the line of Ki Bin Kim of SunTrust.

Thank you. Could you talk a little bit about your non-same-store performance in the quarter year over year and as it compares to your same-store performance? Just given that the same-store pull is a pretty small portion of the entire pool?

Ki Bin, our same-store pool this year represents about 70% of our total square footage. So there's a little over 30% that's in the non same-store pool, and that's of the wholly owned, so that does not include the joint venture. And historically, our non same-store performance has been better than our same-store performance.

As we have implemented the programs with the platform tools, et cetera, the NOI growth in our non-same-store has typically been better by anywhere from 1% to 2% higher NOI growth, up to as much as double same-store NOI growth, depending on how well the store was doing before we bought it. So we definitely would say that the non same-store pool will do better, than the -- but the amount better depends quite a bit on how well it did before we bought it.

So when you provide 2017 guidance are you taking that in account, that the non-same-store pool that becomes the same-store pool gets some type of benefit from just having a better run rate?

Yes what we do is we use our underwritten budget for the forecast for our guidance. And if you recall, we have talked about how our budget and underwriting has actual performance versus underwriting. And so far historically our actual performance has exceeded our underwriting in a pretty meaningful way. But we use our underwritten estimates for our guidance.

Okay. In terms of Personal Mini Storage, what is the approximate run rate for how much acquisitions that new PRO will fuel over the course of a year? Because if I read it correctly, you didn't close on many acquisitions from that PRO yet, right?

That's right. So that's a little bit of a different scenario because we had already gone in to acquire some recent properties in the Orlando market, but we did not after PRO there, and we've had ongoing discussions with Marc Smith there for quite a number of months. And so it made a lot of sense, and he was agreeable to join NSA and he'll take over management of four of those recent acquisitions immediately, and they will be bringing in another acquisition in the short term here.

And then additional future acquisitions that might come through the Personal Mini will depend both on what Marc can generate in terms of third-party acquisitions in his market, because he's very well-known in the Orlando area, and also the ability of potential properties from within his portfolio to be contributed. We have not forecast really any of those additional contribution properties for this year.

We would hope that we might be able to start seeing some of those next year and beyond based upon both being comfortable with how all of the NSA programs work and also debt maturities, et cetera. But I do expect we will have some third-party acquisitions in the Orlando area this year, but we have not forecast very much in our guidance.

So what's keeping Personal Mini Storage from contributing more assets to NSA? Is it more in the timing of debt maturities?

That's certainly one element of it, timing of debt maturity. And a second part of it relates to the issue of the control of the properties and looking at -- because they manage about 36 additional properties on top of the ones that he will be managing for NSA. And obviously in any discussion where there's another party that's involved in the decision making on contribution of properties being managed, those have to be discussed with those decision makers. So it's a combination of debt timing plus discussions with decisions makers to make it make sense for them and the timing of would they're trying to do.

Do you have any cap rate guidance on the acquisition volume that you expect to close in 2017? I'm sure it's a big range, but any type of range that you can provide?

Yes. Obviously it is a range, but we are seeing -- generally cap rates have at least stopped declining. And so we are seeing deals we're underwriting right now and looking at basically right around the 6% cap rate. There's a few of them that are a little below 6%, a few of them that are a little above 6%, but I would say if you're trying to think about an average, somewhere around a 6% is going to be pretty accurate.

Is that in place or on a forward?

That would be on a forward basis.

Thank you.

Thank you.

Our next question comes from the line of Barry Oxford with D.A. Davidson. Please go ahead with your questions.

Great. Thanks, guys. Just to drill agent more down on the Personal Mini, what made them do this deal with you guys? Because they had to be looking at other possible entities out there in the marketplace. What were you guys offering?

Yes, Barry, we essentially see that with every large really good operator PRO that we talk with, that they all have lots of options. And really when a PRO gets into and understands the details of the benefits that they get through the NSA, which is a combination of the platform tools and the participation in the best practices operations, plus the access to capital for growth and the ability to really drive accretive growth for their portfolio. And then the analysis of how that translates into value for the PROs, if they want to stay in the business for a relatively long period, and by that I mean at least five years, and they want to continue to operate for at least five years, we are absolutely certain that the NSA PRO program is the best option for an operator to go under.

Now if they want to cash out and get the money and run and get out quickly, there's lots of other options for them, and then NSA is not the best. But for PROs who rally like the business, want to grow the business, want to keep in the business for at least five more years, I'm confident that the NSA program is the best option.

Then when you look at the SPU units that would be going to Personal Mini, how does that work when you acquire their properties?

So for the initial portfolio, where they're managing these properties that we already owned, they've co invested several million dollars for the SP co-investment related to that. And then as any properties that they would contribute in the future come in, then part of their equity would come in in terms of SP equity, and part of their equity would come in in terms of OP equity. Just like we've done year after year with all of our existing PROs.

Right. Okay. Great. Thanks a lot, guys.

Thank you, Barry.

Yep.

Your next question is a follow up from Ki Bin Kim with SunTrust. Please go ahead with your questions.

Just a couple of quick ones here. Could you provide some more color on the status of your existing customer rate increase program? So, for example, what percent of your customers are eligible -- first, describe what the program is, and what percent of your customer base is eligible for in 2017, for an increase.

Thank you. This is Steve. We're very focused on raising rates for in place customers. We gauge the risk of customer flight based on market and market conditions.

So every store and every market is a little bit different, and we use the revenue management algorithms to guide us in that decision make process. In some markets we're pretty aggressive, and we will send through an increase as early as six months after a customer moves in, and then hit them every nine months thereafter. And others places we're a little bit less aggressive. We might wait up to a year before we send out that first letter and we might have interim increases after that spaced at about nine months to a year.

So it's market dependent. It's been very successful for us. We've found at least in 2016 that we were able to raise rates at the high single digits type of range, and no customer is safe. We consider them all with they're ready. There are some that we go for and some that we don't. So it's not a monolithic approach across the entire portfolio.

I see. And I'm guessing that sounds like it's PRO dependent.

It's more market dependent than PRO dependent, but every PRO has their own style and approach. But it really gets to the strength of the market or the strength of the store.

Yes. I guess what I was kind of getting -- my larger question was, is there a broader initiative to bring things like that, things like pricing strategies more under the NSA umbrella? And given that some time has definitely passed since your IPO, any progress update on maybe having a more singular, centralized approach on those type of things?

Our approach is to provide a common set of tools and techniques to our PROs so that they can leverage the scale that we have as a grander portfolio But our PROs are the operators, they're the boots on the ground as Arlen said earlier. And we trust them with their price decisions more than we trust any system.

So we provide the system, we provide the techniques, we provide best practices, and we want to guide us all to the right decisions. But it's a PRO-level decision when it comes to pricing and price increases.

Yes so one thing to add to that, Ki Bin, is that the system and the guidance is common. Everyone is on the same system. And then it gives guidance to the PRO, but the PRO makes the final decision.

The guidance that they get, it gives them both a conservative approach, a middle approach, and an aggressive approach to pricing. And they make the call on what they do with that pricing. But the guidance on the system is common across all our PROs.

Okay. And last one here. You guys have said on promotions what percent of customers were receiving a promotion in the fourth quarter in 2016 versus fourth quarter 2015.

It was probably around two-thirds of our customers received a promotion of some sort in 2016 Q4, which was marginally up from 2015. We are actively using discounts, promotions to help drive or preserve occupancy, and we recognize that we've got to be competitive. So it's once again store dependent and market dependent.

All in all, we think our discounting growth is well under control. What we're seeing in Q1 right now is basically flat with what we did in Q4 of last year from a same-store perspective. So we think it's under control but it's probably elevated relative to last year.

That's it for me. Thank you.

Thanks Ki Bin.

Thank you, this concludes our question-and-answer session. I would like to turn the floor back to Arlen Nordhagen for closing comments.

Thank you, operator and thanks again everyone for joining us for today's year-end earnings call. 2016 was an exceptional year for NSA, and we appear a appreciate your continued support of National Storage Affiliates trust as we move forward into 2017 and look forward to another great year ahead. Thank you.

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