Greetings, and welcome to National Storage Affiliates First Quarter 2017 Conference Call. At this time, all participants are in a listen-only mode and a brief question-and-answer session will follow the formal presentation. [Operator Instructions] And 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, Ms. Dowling, you may begin.

Hello, everyone, we would like to thank you for joining us today for the first quarter 2017 earnings conference call of National Storage Affiliates Trust. In addition to the press release distributed yesterday after market closed, we have filed an 8-K with the SEC containing 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 detail concerning our forward-looking statements, please refer to our public filings with the SEC. We also encourage listeners to review the definitions and reconciliations of non-GAAP financial measures such as FFO, core FFO and net operating income contained in the supplemental information package available in the Investor Relations section on the Company’s website and in its 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 first quarter 2017 earnings conference call. We were very happy to report another excellent quarter last night, with Q1 results ahead of our forecasts and demonstrating continued execution of our strategy. Our first Core FFO was $0.29 per share, which represented a 16% increase over Q1 2016. And our same store NOI grew by 9.1% over the prior year’s results, driven by a 6.6% increase in revenue, continuing the growth pace we delivered last quarter. For this quarter, our same-store average occupancy was the same as last year, so revenue gains were primarily driven by increasing rent per occupied square foot. We were also very pleased with the results of our iStorage joint venture, which is performing consistently with our budgets, delivering revenues more than 10% ahead of the portfolio results in Q1 2016. Average iStorage occupancy in Q1 2017 increased more than 200 basis points over Q1 2016 and is now running above 88%. And we’ve now begun looking at some additional acquisitions for the joint venture in the second quarter. Additionally, we continue to grow our wholly-owned portfolio with the acquisition of 5 more self-storage properties for approximately $32 million during the quarter. We expect this acquisition pace to pick up materially during the last 3 quarters of the year, resulting in full year acquisitions consistent with our guidance. Most importantly, we also added our eighth PRO, Personal Mini Storage of Orlando, Florida to the NSA team in February. Finally, our balance sheet is stronger than ever as we expanded our credit facility capacity this quarter to $895 million and our leverage today remains at the low end of our target range. Across the self storage industry, fundamentals remain balanced. We continue to see increasing demand driven by sustained household and…

Thanks, Arlen. I’ll start with a review of our first quarter results and wrap up with a discussion of our balance sheet and 2017 guidance. For the first quarter 2017, we reported net income of $7.2 million compared to $4.8 million in the first quarter 2016, an increase of just under 50%. Core FFO was up 70% to $21.3 million or $0.29 per share, an increase of 16% per share over the same quarter last year. These strong year-over-year increases were driven by over $10 million of incremental NOI this quarter from the acquisition of 109 properties acquired subsequent to the beginning of 2016, as well as continued same-store NOI growth, offset by increases in interest expense and G&A expense. Our same-store pool grew by about 25% this year from last year’s 222 stores to this year’s 277 because of the properties we acquired in 2015. Overall, we grew same-store NOI in the first quarter of this year by 9.1% over the same period last year. Our same-store revenue grew 6.6% during this period, which was primarily driven by a 6.1% increase in average rent per square foot. Same-store property operating expenses grew by just 1.6% due to our PROs’ continued emphasis on strong cost controls, and to a certain extent, due to timing. Of significant benefit for the new stores in the same store pool is both the addition of the NSA operating platform and a favorable geographic mix, with more than 60% of the revenue from those added stores coming from California and North Carolina. Several of our markets closed to double-digit NOI growth this quarter, including California, North Carolina and Arizona. Our weakest market was Oklahoma, which was essentially flat due to the impact of new supply and the downturn in the energy sector. Both Oregon and…

Thanks. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of George Hoglund with Jefferies. Please go ahead with your questions.

Yes. Could you give a little more color on the acquisition pipeline in terms of how is pricing, trending and when you look at how much of that pipeline is going to be coming from existing pros versus new third-party acquisitions?

Okay, sure. Hi George, this is Arlen. Overall, our pipeline size remains pretty consistent with what we’ve seen consistently year-over-year. The one thing we are seeing as a bit of a difference is that there is this gap between sort of seller expectations and buyer willingness to pay, and so that’s actually been a little bit challenging for us. We’ve had some situations where we thought we had a couple of deals that we were going to close on, and the sellers just pulled them out because even though we bid the highest of anyone out there, basically, they weren’t willing to sell at that price. Now that being said, what’s that caused us to do was to look back and go more aggressively on pricing on the highest quality deals out there, but we’re – so we’re kind of focusing on the highest quality. If you look at our overall captive pipeline, we’ve got about $100 million – between $100 million and $150 million that will come for this entire year from the captive pipeline, some of that we’ve already closed. And then right now, we’ve got third-party deals that, as Tammy mentioned, I think in the $80 million or so, something like that, that were – that we have under either contract or LOI right now. Or – so we’re confident that we’re going to hit our guidance range, and I’m certainly hopeful that we’ll be closer to the midpoint of the range. And as Tammy said, for us to hit the high-end of the range, we definitely have to have some large portfolios or another large PRO join us. But we’re happy with the pricing. We’re still in the 6% to 6.5% cap rate range, and we’re able to get quite high-quality deals for that.

Okay, thanks. And then one more, if you can just comment on kind of where your increases are to existing customers in terms of rental rates and kind of where are street rates year-over-year?

Yes. So we’ve been able to move our street rates, average about 6% in the first quarter. So you can see, our total revenue gains were little more than that, and that’s because we’re moving our existing customers higher than that, and also, we’re getting some ancillary revenues at a higher gain than that. Our existing tenants are moving in the 6% to 9% range when we renew those. And we’re seeing pretty consistent 5% to 6% street rate gains going into the second quarter. We’re now – May will be a big month for us to see the trend because this is kind of the big move-in month as we start the summer season. We’re certainly encouraged by the way the April results were, but frankly, it’s too early to tell yet for the quarter because May and June are the really big months.

Okay, thanks.

Thanks, George.

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

Hi, guys. I just want to clarify, on the acquisition guidance for the year, you guys were at 200 to 500. Just curious where you think you’re going to end up there given what the pipeline looks like and the first quarter activity?

Well, it’s always difficult for us to know. But we do think, R.J., that – my goal – my hope is that we’ll be close to the midpoint on that. I think with where we are right now, I feel very, very confident we’ll be above the minimum. But to get to the 350, I just don’t know. It’s too hard to predict. Certainly, if we get any portfolios, new PROs, those kinds of things that would make us move up from there. But if I was forecasting right now, I’d probably use the midpoint as there’s no better guess than that.

Okay. That’s helpful. And I just want to talk about your NSA-specific markets versus some of your peers and maybe the differentiation between those in terms of – you mentioned new supply, but I’m thinking more on the rate and the ability to push rate, and the fact that some of your peers are doing more discounting in some of those markets. So I’m just curious what the outlook for – what you think the ability is to push rate higher in the portfolio given your markets and what you are seeing on the discounting side?

Yes, I think that’s a good point because we really do feel very positive about that as it relates to our portfolio. There’s a few different factors: One, if you look at our average rate per square foot as a percentage of household income for our customers, we’re considerably lower as a percentage of household income than any of our peers in terms of what it means to our customers to spend money on a self-storage rental, and that gives us a lot of advantage as we move rates with limited resistance. Then the other thing that’s really meaningful is that we’ve been able to actually continue to maintain our occupancy with actually lower marketing spend this year so far than we did last year. Part of that’s because of more efficiency in our platform with our scale as we add more and more PROs and more and more properties. But also, I think it’s just the fact that we do have generally less pressure from competition. Now that being said, we certainly do have new competitors in a number of our markets. In fact, we did a survey recently where we looked at all of our properties and how many new competitors we would expect to see over a two-year period, and it averaged out to around 2% increase in supply. Well that’s almost perfect if you think that our demand’s going to go up 2% in a 2-year period. Of course, the problem is it’s not perfectly balanced, and some markets are less and some markets are more. But overall, that’s a very positive sign, from our perspective, both with – and our discounting has not been higher. We’ve basically been flat on our discounting from last year. So all-in-all, all of those things are very strong indicators.

Okay. That’s helpful. Thanks, guys.

Thank you.

Our next question is comes from the line of Todd Thomas with KeyBanc. Please proceed with your questions.

Hi, thanks. Arlen, last quarter, it sounded like you were more focused on rate versus occupancy. And now, occupancy is trending down a little bit. It was flat on average for the quarter, but lower at March 31 by about 30 basis points. Have you been able to claw back some of that occupancy through April? And also, maybe can you just talk about how you’re thinking about balancing out rate versus occupancy and what the strategy is heading further into the peak leasing season here?

Yes, Todd. I’m actually really glad you asked that because that’s a really good question. And I’m going – I’m kind of the old guy in the industry here, so I’m going to kind of go back to a history lesson as I answer that question. Because our PROs and our whole system is designed to maximize revenue, not occupancy. And so we are more than happy to give up a point in occupancy to get higher revenue. And in fact, if you look at the self-storage industry, going back from the time period when we saw really large increases in supply from 1995 to 2008, during that time period, the overall industry occupancy dropped from about 89%, almost 90%, down to 80%. So a 9% to 10% drop in overall industry occupancy industry-wide, that’s about 1% a year, almost 1% a year. But during that entire time period, average same-store revenues grew by 4.2% a year. And the reason was because people were not focused on occupancy; they were focused on revenue. And so – and in fact, if you look at that entire time period, there was only one year, 2002, when same-store revenue was negative, and that was of course right after the 9/11 catastrophe. So 2002 was the one negative year out of that entire time, from 1995 to 2008, occupancies declined on average, almost 1% a year, yet revenues grew 4.2% a year. And that’s what we’re really focusing our PROs on. We want to focus revenue gains, not occupancy. I don’t care if our occupancy goes down to 2% and our revenues goes up 7%. I’m more than happy to see that.

Okay. So it sounds like you’re comfortable letting occupancy fall a bit here at the expense of maximizing revenue. Is there sort of a floor which you would sort of look at occupancy and say, hey, it’s time to start stabilizing that? I mean, is there a certain, I guess, theoretical level at which you would not want to see the overall portfolio fall below?

Well there’s no theoretical level, but the theoretical is on a market-by-market basis, and it’s basically looking at the supply-demand balance. So if your submarket has a supply-demand balance where you’re at 92%, well, we ought to be at least at 92%. But if that submarket has a supply-demand balance of 82%, then we should be at above 82%. But if we try to go to 90% in a submarket where the supply-demand is at 82%, all you do is start a price war. And that’s been one of the big advantages of self-storage throughout its history, is that operators have been really smart about not starting price wars when the supply-demand balance is not there. And so we see that as a major benefit of the industry historically, and we’ve actually designed our revenue management system to specifically work that way where we have what we call a human circuit breaker, if you will, between the algorithms of the revenue management system and the actual pricing that hits the street, we always have a human intervention in there. We have a PRO and analyst that looks at that supply-demand balance and make sure we don’t start a price war when we’re in a situation where the supply-demand is in an imbalance. It does you no good. So ultimately, we want to maximize revenues, not occupancy.

Okay. And then just shifting over to the transaction market, your comment about the gap between buyer and seller expectations, how wide is that today? And then, I think you mentioned that you might look to some higher quality properties or portfolios or something along those lines as you commented, can you just elaborate on that little bit?

Yes. So I would say that probably what the seller expects in terms of a cap rate and what we would like to pay is probably 25 basis points differential. And so when we’re finished with the situation where the choice is we just won’t get the deal or not, what we’re doing is we’re passing up deals, but we’re also, if it’s a really high-quality deal, we’re willing to go to the seller’s price to make sure we don’t lose out on that one. Because in our opinion, if we lose out on it and say, we’re not going to buy that and we’re going to wait, 3 years from now, we’ll pay a lot higher price to buy that same property. So I’d rather buy it now and pay a 25 basis point premium, than lose out on a really high-quality property.

Okay, great. And just lastly for Tammy, can you just remind us with regard to the same-store and the methodology around your same-store pool, does that change quarterly, or is that an annual change that occurs January 1 of each year? I’m just trying to understand whether that pool, the 277 properties, will be consistent throughout the year?

Yes. Todd, thanks for that. That’s a good question. We do readjust the same-store pool on January 1 of each year, and it includes all of the storage that we owned as of the beginning of the prior year. So in this case, 1/1/16.

Okay, got it. Thank you.

Thanks, Todd.

[Operator Instructions] Our next question comes from the line of Todd Stender with Wells Fargo. Please go ahead with your questions.

Hi, thanks. So you acquired five facilities in the quarter, would you mind going through each of those? I wanted to get a sense of the occupancies and rental rates and I want to see how much you’re paying for either a stabilized asset or one that has some potential upside.

I don’t know that I have each individual one-by-one basis. But in general, I can say that the occupancy’s relatively stabilized on the properties we’ve bought. They’re roughly 150 to 200 basis points lower than, let’s say, our stabilized same-store portfolio. So we would typically have maybe that much upside in occupancy. And what we do is we look at our year one projected NOI on that acquisition. So we invested roughly $32 million looking at what we think the occupancy will do and what the expenses will do, and we’re running around an average of about a 6.5%, year one yield, NOI divided by investment on those new acquisitions. And of course, each one’s a little different, but that’s about what the group is averaging. So hopefully, that gives you an idea of what you need, Todd.

It does. And how about rate? Any comments on rate relative to the market?

Well generally, they’re going to be in relatively comparable rates to their market, although it does vary a lot. Like it varies a lot on who we buy it from. So Steve might have some more comments on that.

Hey, Todd, this is Steve. Yes, just back to your earlier question, just to give you some color, if you look at our non-same-store pool versus our same-store pool, it tends to run 150 basis points to 200 basis points behind our same-store pool in terms of occupancy, and that’s not inconsistent with the acquisitions that we’re making this year. So that just gives us certainly upside and the potential to grow revenues in those stores. And we are certainly looking for those stores where they have not been active on their price increases, and we think that in many cases, we’re going to get most of our pop in the early days of an acquisition from increasing prices to market rates. So we see opportunities out there on the acquisition front to bring prices up the market.

That’s very helpful, Steve. Thank you. And then when does a property put on to the revenue management platform in the web? How quickly does that stuff get implemented?

It’s pretty much immediate. It really is certainly up to the PRO in terms of how they exactly integrate a property. But the PRO’s well-equipped. They’re ready to put it on revenue management and get the focus going very early in the lifecycle of the property.

Certainly, within the first couple of months at the least, but some PROs are able to do it within days.

All right. That’s quicker than I thought. Okay, thank you.

Thanks, Todd.

Thank you. Our next question is comes from the line of Vikram Malhotra with Morgan Stanley. Please go ahead with your questions.

Thanks. Sorry, if I missed this. But I just want to get a sense of how the change in the pool impacted revenue expense and overall NOI growth, if you have sort of that broken out?

Yes, Vikram. Our NOI growth would’ve been about 170 basis points lower if you just evaluated our old same-store pool. And of that difference, about two-thirds of it is driven by the geographic mix of the new stores added to the portfolio, primarily in California and North Carolina.

Okay, so 170 basis points on NOI, and what was the difference on revenue?

It was about 110 basis points.

110 basis points okay. And then just – sorry, go head.

Vikram, I just wanted to add to that it’s – what we – we were really smart – or I don’t know, maybe we were lucky. But we’re either lucky or smart when we looked at what we bought in 2015. And we really focused on buying a lot of properties in really strong markets like California, the Carolinas, et cetera. And so just the fact that we bought those properties in those markets made most of that. As Tammy said, two-thirds of that was just because we bought them in the right markets, and those markets for all of our stores, our old same stores and the new ones, did really well. And then the last, roughly, third of it is just because of they weren’t fully on our platforms at the beginning of last year, and so some of that’s really partial pickup from the fact that by Q1 of 2016, they were fully operating with all of our systems.

Okay. And generally, you’d expect, as the pool grows from here on, because those new properties may not have been on the systems, you’d generally expect there to be a benefit from those other stores – from the new stores?

That’s kind of why we broke it out that way. Roughly that two-thirds, that benefit will keep going because it’s geographic in origin and it assumes that we’ll basically continue to do the same as what that old geography’s doing. But the last one-third will slowly go down. The last one-third of that 170 basis points of NOI gain, that will slowly go down. Because by the fourth quarter of last year, we would’ve had most of those benefits clearly online, where as in the first quarter, we had only part of them.

Okay, that makes sense. And then just the street rate growth, the 6% or so. Is that – can you just define that? How are you calculating that? Is that sort of what you would be versus what you’d be charging new customers last year? Some more color on the calculation would be great.

Hey, Vikram, this is Steve. Yes, when we talk about Street rate increases, we’re looking at a direct comparison this year versus last year of our asking rate for that next new customer who either comes to us via the web or walks in the door. And we keep it consistent within our systems.

And so that’s for all of our available units that we have to rent. So it’s not like a difference between a walk-in rate and an Internet rate or whatever. It’s the actual average of all those units that we have to rent and what we’re renting them at versus what we rented them at last year for the move-in rate type of a thing.

And would you be able to give us a split in terms of what percent of the customers actually avail of that web rate versus the in-store?

So it is – the pricing is consistent. The thing that we do find is that if somebody walks in the store and they have not been doing their shopping, we may have an opportunity to actually sell the unit at a price that’s higher than what we’re advertising on the web. But that’s in a minority of cases, probably 10% to 20% at the most, that we would be able to take advantage of that.

Okay. I have just other clarifications I can follow-up with you offline. Thank you.

Okay, thanks.

Thanks.

Thank you. This concludes our question-and-answer session. I’d like to turn the floor back to Arlen Nordhagen for closing comments.

Thank you, operator. We appreciate everyone joining us today for our first quarter earnings call. As outlined, we’re really pleased with how the year’s begun. Our strong quarter year-over-year increases are really setting the stage for a very strong and successful 2017. And thank you for your continued support of National Storage Affiliates. Have a good day.

This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.