National Storage Affiliates Trust (NSA) Q3 2016 Earnings Report, Transcript and Summary

Greetings and welcome to National Storage Affiliates Third Quarter 2016 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 third-quarter 2016 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 and 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. The Company cautions that actual results may differ materially from those projected in any forward-looking statement. Management will also discuss certain non-GAAP financial measures such as FFO, core FFO and net operating income. We encourage listeners to review the additional information concerning factors that could cause actual results to materially differ from those in any forward-looking statement, and the non-GAAP financial measures contained in the Company's most recent filings with the SBC 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 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 third-quarter 2016 earnings conference call. After an extremely busy third quarter we are once again pleased to report very strong results with robust year-over-year increases in both our same-store and total portfolios as measured by every operating metric. These strong quarterly results translated into excellent bottom-line growth as net income, FFO and core FFO all grew significantly over the prior year quarter. At the same time we continue to gain scale and drive long-term growth through accretive acquisitions. We were also very fortunate that we sustained minimal damage to our properties from Hurricane Matthew despite having as many as 27 properties that were located in the projected path of the storm. During the quarter we acquired 34 self storage properties for a total investment of $206 million, including our investment in the iStorage joint venture which we closed in early October with a large state pension fund and the other acquisition transactions closed post quarter, our acquisition investments since July 1 exceed $320 million. As a result of this activity NSA currently owns interest in and operates 420 self storage properties located in 23 states with over 25.5 million rentable square feet. Which is a 50% increase from the start of 2016 and a 70% increase from our identified portfolio at the time of our IPO. Fundamentals in the self storage sector remain solid and supportive of continued positive growth. Particularly in our properties, we continue to see move-in rates exceeding move-out rates and our street rates today are almost 10% above one year ago. Although we are seeing new supply coming online in a few of our markets, oversupply is really a localized issue and we continue to see healthy demand across most markets driven by good employment and population growth. As our occupancies are now routinely above 90%, ongoing healthy demand is letting as focus more on pushing rental rates in our portfolio and we continue to see strong rate growth opportunities. Amidst this supportive market environment our differentiated strategy continues to drive industry-leading organic growth in our same-store portfolio. During the quarter our average same-store occupancy continued to grow year-over-year. But as I mentioned, are higher occupancies resulted in more focus on increasing our average rent per occupied square foot resulting in considerable same-store revenue growth. We attribute a portion of this strong year-over-year growth to the implementation of our revenue management system which has been implemented at over 200 properties in 27 markets, including our sixth pro who we recently launched onto this platform. We remain on track for a full roll out by the first quarter of next year. Implementation of our Revenue Management System is key as we move forward because the revenue and NOI growth that we and our industry have experienced during the last three years has been truly historic. And no one expects double-digit NOI growth to continue forever. However, the 20-plus year average same-store NOI growth in self storage has been about 5% per year. And frankly we expect to see that continue over the next 20 years as well. As our portfolio continues to hit optimum occupancy levels we believe future revenue growth will naturally be more dependent on rate increases than occupancy gains. As our revenue growth and the industry's revenue growth normalizes to more typical historic levels over the next two to three years, we will remain aggressive on pushing rate. And we believe that our unique operating platform can support sustained revenue growth in excess of the industry average. Turning to acquisitions, the self storage industry remains highly fragmented. And we continue to capitalize on the unique advantages of our platform to grow through accretive acquisitions. As I mentioned, during the third quarter we are acquired 34 self storage properties for over $200 million. Since quarter end, besides our joint venture investment, we also have another 30 wholly owned properties closed or under contract to close during the fourth quarter valued at over $200 million. These acquisitions will add another 2.3 million square feet to our portfolio in target markets such as Florida, California and Indiana where we continue to increase our market share. As we review our acquisition track record to date, our actual results during our first year of ownership have been beating our underwritten returns by an average of 50 basis points on third-party acquisitions, making them highly accretive to our FFO. Our unique external growth strategy continues to drive a pipeline of well priced potential acquisitions for the future. The captive pipeline of assets that are currently managed by our PROs, but that we do not yet own, today stands at about 90 properties valued at almost $700 million. Additionally, our PROs continue to source and underwrite a significant pipeline of third-party acquisitions for us which they are incentivized to do through their subordinated equity commitment to all new acquisitions. Lastly, we continue discussions with a number of prospective new PROs and we will keep you updated when we have news to announce in this area as well. In addition, in early October we were very pleased to announce a fourth key growth initiative through a significant new joint venture investment with a major state pension fund. This joint venture in which NSA has a 25% interest, acquired the 66 property iStorage portfolio for an aggregate investment of approximately $640 million. The in place cap rate on this acquisition was 5.3% which we believe is very attractive for a portfolio of this size and quality. At the same time, NSA also acquired the iStorage property management platform and its staff of nearly 160 professionals, essentially adding an internal probe for several new markets as well. This transaction provides multiple benefits to NSA. First, this was an off market transaction that gives NSA an interest in a large institutional quality portfolio with a strong initial market presence in some robust markets, including new markets such as East Coast Florida, Northern California, Northern Alabama and Philadelphia Metro, which complement the NSA footprint. Second, we believe the portfolio has meaningful growth opportunities through both rent and occupancy gains as we implement our marketing and revenue management programs. Third, NSA will provide property management services for fee income and enjoy upside potential over the longer term through a promoted return structure. Lastly, our relationship opens yet another potential growth avenue for NSA and allows the Company to leverage its balance sheet and gain additional scale economies. Further, the JV has committed to fund up to $100 million of additional equity to fund future acquisitions by the JV. I will now turn the call over to Tammy.

Thanks, Arlen. We reported net income of $7.9 million for the third quarter of 2016, an increase of $5.8 million compared to Q3 2015. Core FFO was $18.2 million or $0.29 per share, an increase of over 20% on a per share basis compared to third quarter 2015. Our FFO growth continues to be driven by both our strong organic growth in our same-store portfolio as well as our robust acquisition activity over the past year. Despite a strong comp in 3Q 2015 our third-quarter same-store NOI grew by 9.5% to $22.5 million compared to last year. We continue to successfully drive both rate and occupancy year-over-year with average portfolio occupancy increasing 120 basis points and our average rent per square foot increasing by 6.1% resulting in same-store total revenue growth of 7.2% in Q3. Same-store OpEx grew by just 2.6% this quarter, right in line with our expectations. Turning to our individual markets, we continue to benefit from our diverse portfolio that is concentrated in states with above average population and job growth. Georgia, Oregon, California and Arizona, which make up almost half of our same-store pool, remain very strong for us with double-digit NOI growth in each of these markets. Oklahoma and Texas remain our softest markets year to date influenced by the slowdown in the energy sector. Colorado also had a slower quarter influenced by a combination of strong comps plus new supply coming online, as we have discussed in recent calls. Turning to our balance sheet, at quarter end our total debt outstanding was $716 million of which about 88% was fixed-rate mortgage financing or fixed with swaps. Based on this debt, our net leverage is 5.7 times our third-quarter annualized adjusted EBITDA, below our target range of 6 to 7 times. Our weighted average effective interest rate is 3.1% and our weighted average maturity is just under six years. We continue to focus on our balance sheet flexibility and access to capital to fund our growth. As we previously announced, we closed on our first follow-on equity offering early in July issuing just over 12 million shares with gross proceeds of about $250 million. We used these proceeds to repay borrowings on our revolver and to fund acquisitions. Subsequent to quarter end we launched an ATM program which added a new and efficient capital source to our balance sheet. To date we have issued 1.5 million shares under the program, raising over $29 million. So since July 1 we have raised approximately $280 million of new equity to fund our growth. While we continue to pursue a strong growth trajectory with just over $200 million in additional acquisitions currently under contract, we will remain prudent stewards of capital and continue to maintain a strong balance sheet. As we have demonstrated in 2016, we have access to a variety of sources of capital including our ATM, joint venture relationships and other options, including the extra buying power supported by new OP and SP equity from our PRO and private contributing sellers. Additionally, as Arlen discussed, we formed a JV with a major state pension fund to invest $640 million in the iStorage portfolio. And as it contributed approximately $80 million in cash to the JV for a 25% ownership stake which we funded with our line of credit. Our partner contributed $240 million of equity and the joint venture put in place $320 million of secured mortgage debt. In addition to our 25% of the JV income, we anticipate fee income from this JV in the range of $7 million to $8 million per year. Longer term we have an opportunity to receive a promoted profits interest based upon the performance of the portfolio. This acquisition, which closed in October, is expected to be immediately accretive to our core FFO per share. Finally, I would like to mention our guidance and expectations for the remainder of 2016. Taking into consideration our strong operational performance and investment activity year to date we are updating our 2016 acquisition guidance to be in the range of $750 million to $825 million, including the $80 million we just invested in the JV acquisition and the $20 million we invested in the related property management company. In addition, we are increasing our core FFO estimate for the year to be in the range of $1.08 to $1.10 per share. We are not making any changes to our same-store guidance at this time but we'll mention that operational results are trending to the high end of the previous guidance range for same-store NOI growth of 8.5% to 9.5% for the year. This concludes our prepared remarks and we will now open the call to your questions, operator.

Thank you. [Operator Instructions] The first question is from the line of George Hoagland with Jefferies. Please proceed with your questions.

Yeah. Hi, first question for me, just if you can give an update on how the overall revenue management system is doing in terms of implementation and how it is working out relative to expectations?

Hey, George, this is Steve. Thanks for the questions. We are very pleased with the revenue management system. We just launched our sixth PRO a couple weeks ago. We are also completing a transition for the iStorage properties from the system that they were using over to the NSA platform and processes. Overall I would say the impact is good. We continue to see the ability to more effectively push rate with the revenue management system. As we continue to shift from occupancy growth to more rate growth, we think the system becomes that much more impactful and that much more critical to our operation. So overall we are very pleased; we are on track to continue to roll out the entire portfolio and we definitely see the upside.

Thanks for that color. And then also just on Oklahoma, if you can just talk about sort of recent trends you are seeing in the market. And with PSA kind of increasing their exposure there have you seen any change in market rental rates or promotions that are being offered?

Hey, George, this is Arlen. Certainly the Oklahoma market is a tough one right now. I think number one it is because the long lead times in self storage development result in a bunch of new properties that have come online recently that were started back when oil prices were $130. And so we have got new supply coming on at the same time that basically you have got a weak economy because of the energy sector. And then when you add that into the fact that Public Storage moved into the market with a large acquisition there, we know that Public Storage is definitely an aggressive competitor. Long-term we like Public Storage in the market because they are a very smart and a very good competitor for us. But certainly in the short-term we have got these economic issues that we are facing. And we are looking at probably Oklahoma will continue to have results similar to this past quarter for the next few quarters. But ultimately it is still a relatively small piece of our portfolio and that is just part of the issue of having a diversified portfolio. Sometimes markets do great and other times they are weaker, but by having a really good geographic diversification it gives us confidence moving forward that we will continue to outperform over the long-term.

Okay, thanks for the color.

Thank you.

Our next question is from the line of Vikram Malhotra with Morgan Stanley. Please proceed with your questions.

Thank you. Arlen, I thought your comments were interesting but also reflective of what we have heard across some of your peers in terms of stabilizing trends or trends towards a stabilizing the NOI number. Just from your portfolio you're sort of in the 9% plus range over the last few quarters. Given the different market exposure but also just the growth we have seen externally what do you view as a stabilized number for your portfolio?

So I would say that over the longer term, Vikram, so if we look out let's say three years in the future, the 20-year average for self storage NOI growth is 5% a year. I went back and analyzed the numbers on the last time our industry came back off of some really peak occupancy levels and we saw that trend over about a five-year period that it took to get kind of down to the sort of normal level. Obviously the ultimate speed that you go to a normal level depends on how much new development comes online and how quickly. We are not having any impact in markets where we don't see new competitors coming online, this is all triggered by new competitors coming online because ultimately demand is continuing to grow really almost everywhere. We have a few markets that might be an exception where demand is flat but really demand continues to grow really across the nation. What we are seeing is that supply is there to meet the demand and in submarkets where supply is higher than demand, obviously that slows it down. Now back to your more specific question, I think that some of the things that we have as it relates to some of the best practices, some of the rollout in our growth with acquiring new properties, I think it is realistic that we will probably be ultimately coming down to maybe between 5% and 6% type of same-store NOI growth. I think we will be above the historical 20-year average, but we are not going to stay at 9%, 10%, 11% a year. And we are going to see that trend from where we are now down to that 5% to 6% probably over the next couple of years.

Okay, that is helpful. One more quick one. Can you just provide an update on what you have seen in terms of pricing across your markets? Just trying to get a better sense of what pricing is today in some of the smaller secondary markets versus the larger ones.

Vikram, it is Steve. As Arlen mentioned in the comments earlier, year over year right now our street rates are up about 10%. Certainly there are pockets where we are able to be more aggressive than that and pockets where we are not. As you can imagine, West Texas, Oklahoma, places like that it is tough to push rates and also say Fayetteville, North Carolina we continue to lay off on rate increases there. But we see a lot of strength and California, we see a lot of strength in Oregon still, and Florida is going to be a good strong market for us as well. It is pocket but overall on average our street rates are up 10% right now year-over-year.

Great, thank you.

Vikram, one thing I would add to that is that a lot of our markets are lower rate per square foot markets just because of the type. And so it is actually easier for us to raise 10%. Obviously if your rate is only $60, a month a 10% increase is $6 a month. That is a lot easier to get than when your rate is $300 and to get a 10% increase you have got to raise at $30 a month. So that helps us as well, especially in some of our more secondary and tertiary markets.

No, that makes sense. Thank you very much.

Thank you.

The next question is from the line of Todd Thomas with KeyBanc Capital Markets. Please proceed with your question.

Hi, thanks. Just a first question, so digging into acquisitions a little bit and thinking ahead into 2017. Just given that fundamentals are moderating a bit at this point in the cycle, any thoughts about deploying capital going forward whether you have changed underwriting hurdles or if your appetite to invest has changed?

Hi, Todd, this is Arlen again. I would say that certainly we continue to be a very aggressive growth Company. But at the same time, this year, if we include the entire size of the iStorage portfolio and what we have on the pipeline that we are going to close before year-end as we talked about, we are going to end up closing over $1.3 billion of transactions this year. Now there is no way, or almost no way -- I won't never say no way. But there is almost no way that we are going to do that again next year. We expect that to be back to a more normalized type of level of acquisitions. And we are -- we frankly are looking at our underwriting a little bit more -- I wouldn't say disciplined but more higher hurdle rate.

Yes.

More conservative expectations. The one thing I will is we annualized our underwriting on all of the deals we have done and it has been really, really significant that on average we are outperforming our underwriting by more than the 50 basis points in the first year that I mentioned. So if we underwrote the deal to come in at a 6% to 6.5% cap in the first year, the real numbers are coming out 6.5% to 7%. So we are super pleased with that performance. That is obviously driven by our PROs and the way they integrate our best practices. So we see the most upside on acquisitions and we don't want to give up on those we want to keep pursuing them. But we won't be at the same kind of pace of $1.3 billion next year.

Okay. And then I would sort of be curious, you are in conversation/discussions with a lot of private operators obviously. Any sense how they are faring and the current environment, whether they are seeing some demand weakness or conditions just become a little bit more challenging that might cause them to potentially look to transact? Is there any greater willingness to transact on their end?

I would say it is totally triggered by two things. One is there are new competitors coming into their market. If there are -- and especially if there are more than they expect the demand to grow they are a lot more open to the discussion of potentially selling their properties. The other is more of a lifecycle issue in terms of their personal life -- where they are in personal life. Are they looking more towards retirement? Are they looking towards diversification, that kind of thing? But I will again reiterate, I don't see anyone out there saying, oh demand in my market is shrinking. Pretty much everywhere demand is going up the issue is supply going up faster than demand. And that is where we do see some more willingness of operators -- private operators to sell.

Okay, and then just shifting over to iStorage. So is third-party management now a business that you see expanding meaningfully from here? And I guess the second part to that question is for Steve. As President of iStorage now, just curious how you will be splitting your time between operating iStorage specifically and then implementing revenue management and best practices throughout the NSA REIT portfolio?

Yes, so I will handle the third-party management question and I will turn it over to Steve. Third-party management is not something that we see as part of our strategy. Effectively our PRO model and our PRO network gives us effectively access to third-party management benefits without the third-party management headaches, if you will. Because as I mentioned on the call, we still have 90 properties that our PROs manage that aren't in NSA yet. So that effectively is like a pipeline. And if you talk to any of our peers that do third-party management, I mean they are all pretty honest about it. Nobody makes much money on third-party management. What you really do is you hope that those end up with pipeline assets for you to acquire down the road. So third-party management does is not really part of our really significant at all part of our strategy. It is definitely significant that we have put Steve Treadwell, our Head of all of NSA operations, in charge of the iStorage platform named as President there because we view that as a very significant investment. But one thing that has worked out really well in that is that we through the acquisition of the platform and their management Company, we moved over essentially their entire operational management group. So there was really no turnover, no transition of difficulty in integrating them over. And then Steve heads up that group but it's sort of business as usual and then adding in some of the tools and platform items that we have at NSA to make that a really smooth transition. So we are not seeing a hiccup in terms of performance of the iStorage properties since we bought them versus their previous management. And then I will let Steve talk more about how his time will be split.

Hey, Todd. Yes, it is a good question. For me it is going to be a challenging balancing act. But I think it is certainly feasible and achievable. The good things that I have going for me is that we have been building up the team here at NSA. Over the last several months we saw this acquisition happening and we were ready for it and we have been planning for it. So I have got a lot of help as far as driving initiatives and driving revenue management here at NSA corporate. And then on the iStorage side we have got a great team, we brought them over intact in full. They know how to manage those portfolios and those properties. So they don't need a lot from me, but we are going to give a lot of guidance in terms of the things that we have learned on the NSA side and try to transition the best practices into that portfolio. So have a lot of work ahead of me, a lot of wood to chop, but two good teams to rely on so I think it will work out fine.

And the only thing I would add to that is we also brought over the property accounting team. And so, the accounting has been really seamless from the date of acquisition and we have a senior corporate guy who is working with the team in Florida. And so we feel really good about that side of things too.

And when you think about iStorage -- I know, Arlen, you've maintained that a decentralized operating platform can work and that the brand is maybe not as important nationally, it is a little more of a local business. But I am just wondering which -- that management company acquisition, whether you would consider rebranding the portfolio under iStorage longer-term?

I would again say that certainly in the short term we would not consider that and in the long term the only way we would ever consider it is if there is really a significant economic advantage to the Company to do that. And that will really depend on what happens in the future with marketing and how self storage is marketed. If we ever get to the point where self storage is marketed in a similar way like Coca-Cola or something where you're using mass marketing techniques where there are very huge economic advantages of having one brand name, then we would certainly look at rebranding our stores. But right now with the basis of marketing effectively being the Internet, there is only one brand name that gets a benefit on Internet marketing and, to be honest that is Public Storage, because it is little P, little S, it is a generic term. And that name is taken, we can't have that name. So the bottom line is right now with the type of marketing that is effective in self storage we would not do it. In the future we certainly would remain open to that if things change.

Okay, great. Thank you.

Thank you.

Thank you. [Operator Instructions] The next question is from the line of Barry Oxford with D.A. Davidson. Please proceed with your question.

Great, thanks guys. Arlen, just to piggyback on the iStorage and in particular what drove the 25% interest versus why not go with 50% unless you guys are just trying to retain dry powder?

Well, it is a good question, Barry. The honest truth is that our return on invested capital is the highest at a lower investment percentage. I mean it is -- because we get a promoted interest. And so that promoted interest gives us a disproportionate share of the upside. So of course then you say well, theoretically why wouldn't you just do it for 10% or something like that? Well, obviously our joint venture partner has a lot to say about that and they wanted us to have real significant skin in the game. But yet we wanted to have a promote because it results in a much better return to our shareholders. And so that is where we ended up at the 25%. We also feel like that is a good -- in terms of allocation of capital, the appropriate amount of our capital allocated into the joint venture side of the business versus our wholly owned stores.

Great, great, thanks. And then one other question switching gears. When we look at the same store NOI number, and this may be too hard to do, but is there any way to kind of break it apart and say, look, we've got an extra 100 or 150 basis points from same-store NOI due to our revenue enhancement systems or something like that? Or is it just too hard to kind of break those two out?

Scientifically it is very challenging to try to break that out. Anecdotally we know it is having an impact. Functionally and logistically if you look at this year and this quarter the system is still pretty new to the same-store pool and still not fully penetrated in that pool. So it is hard to put a lot of the growth directly on revenue management. But it contributed and it will continue to contribute and that proportion will grow over time. So I am giving you a very vague answer to say that, yes, it matters. Yes, it has an impact. Yes, it is going to grow. But I don't have a number for you.

And that is why I couched my question the way I did I didn't think you could pull it apart but I thought I would give it a shot.

And, Barry, I will give you my comment in that regard. It is no secret that obviously NSA is still a young Company. We have best practices that we have not rolled out everywhere. One of them is the revenue management system, but that it is not the only one. As we continue to roll those out we do have a lot more upside in our stores probably than our peers who have been running a lot of these best practices for a decade. And that is just the reality of it. We don't apologize for that, I mean that is just the reality of it. We see that as a significant upside for our shareholders that we can continue to add these improvements over time that perhaps other people have been doing for a lot longer.

Okay, great. Thanks, guys. I appreciate the update.

Thank you.

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

Thanks. So maybe just sticking with the same question. What do you think it helps going forward? How much does it help same-store NOI rolling out the entire revenue management system and other best practices?

So, Ki Bin, I think what I believe -- I kind of hinted at it when I said that I thought that probably long-term we can run 5% to 6% same-store NOI growth year-over-year on a 20 year average. I think the difference between that and the historical 20-year average that we look in the industry of 5%, that extra 1% or so is probably what you can net out of a revenue management system compared to having good revenue management but not this algorithmic really scientific approach. That is probably an extra 1% a year.

Okay, that is helpful. And, Arlen, I think you are in an interesting position because you have -- you're obviously running a public company but you also deal with a lot of private operators -- well once private operators [technical difficulty] probably looking at. In terms of just overall same-store NOI revenue trends, did the private market push us hard as a public Company? And if they didn't do they have a little bit of a softer landing than the public companies have shown so far in terms of operating metrics?

I would say certainly in general private operators do not push as hard. And I would for sure say that is true for the mom-and-pop's, the folks that operate one to five properties. They don't have -- they can't afford to have the sophisticated algorithmic types of revenue management systems that our peers have that we have implemented and that means you have to use a more simple approach and they don't necessarily push rate for example as hard. And you are right, that could potentially provide maybe a softer landing or less of an impact on that. But we have a lot of pretty sophisticated private operators in our sector as well. Guys that run 20 to 50 properties or even up to 100 properties, those guys are pretty sophisticated. And some of them have become PROs, as you know. But even with those guys we find that by all working together bringing the best ideas that each of us have I can say that there is not a single PRO in our network and has not learned things from others and has not adopted better practices to make their operations better. And some of it is that the scale that we get by having 400 plus properties now allows us to do some stuff that even a guy with 100 or 150 properties couldn't do on his own. But your comment is legitimate that private operators generally -- certainly mom and pops definitely don't have as much as aggressiveness there.

And just a couple of quick ones here. Any chance of some these management contracts coming back to NSA where you have an opportunity to buy them over the next couple years or is that still very far out into the future?

The captive pipeline.

So the captive pipeline properties, actually...

Not the captive pipeline. I meant because of management of these properties are done at the PRO level any chance where you can buy the contract back?

Generally those are in our captive pipeline.

So if a PRO is doing just third-party management we'll know when their debt is going to mature. So let's just take an example. We have got a PRO, he doesn't own the property, he might not have any ownership but he is just third-party managing for another owner. Well, he will know exactly when that debt is going to mature. And one thing that is a truism in our industry and every other real estate is when the debt matures you have to do something, right? So basically that means that that owner has to decide is he going to sell it or is he going to refinance it? And so that is when our PROs work with us to talk to that owner and show them the advantages they can get by contributing it into NSA. We provide significant tax advantages through our OP unit, we provide huge diversification benefits because now instead of owning one property in one market they own a small percentage of 400 properties across hundreds of different areas of sub-markets. And certainly that helps and we have been quite successful so far at getting a significant percentage of those to come on board. Now the other part of your question could relate to if a PRO decides to retire and so what happens in that scenario is that if a Pro decided to retire they would sell their management Company to NSA, we have that under a defined formula. And that management Company and all of the employees would continue but would be merged under the iStorage management Company that we own. And then all of that PROs SP or subordinated equity gets converted into OP equity and then that portfolio of that PRO when he retires, it becomes wholly owned by NSA from the standpoint that all of the cash flow goes to NSA. We do not have any more subordinated equity in that scenario on that particular portfolio. But we also have 100% of the upside but no downside protection then.

Right, so that was actually -- the latter was my question. Is that still way off in the future? Any prospects of those happening?

Well as you probably remember, we built in a very significant penalty for a PRO to retire before five years. So the reality is the first likely possibility of that happening would be about 2020.

Okay. And iStorage, can you just remind us why there was no SPUs or why none of the PROs wanted to contribute to this JV?

Well, it is because they weren't offered the opportunity to contribute for that JV. It was a unique opportunity where the truth is that the iStorage could have potentially become a PRO. But because of the owners' objectives and what they had going on with other things they were going to -- they decided to sell. And so, we got the opportunity on an off-market basis to buy that portfolio. And it was so big there was no way we were going to do it wholly owned. So it worked out very well with the JV structure, gives us a higher -- a promoted return on it. And effectively instead of our PROs getting a promoted return effectively NSA is the PRO in this case. It is like a wholly-owned PRO is what the iStorage really is like.

Okay, well, thank you, Arlen.

Thank you. At this time I will turn the floor back over to Arlen Nordhagen for closing remarks.

So thank you again, everyone, for joining today's earnings call. And as I mentioned earlier, we really couldn't be more pleased with our third-quarter results which show strong same-store growth as well as continued success in growing our platform which now includes our new joint venture. Thanks again for your continued interest and for your support of National Storage Affiliates. Have a great week.

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