National Storage Affiliates Trust (NSA) Q3 2017 Earnings Report, Transcript and Summary

Greetings, and welcome to the National Storage Affiliates Third Quarter 2017 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. And it is now my pleasure to introduce your host, Marti Dowling, Director of Investor Relations for National Storage Affiliates. Thank you, Mrs. Dowling, you may now begin.

Hello, everyone. We would like to thank you for joining us today for the third 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 detail 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 statement. 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 thank you, everyone, for joining our third quarter 2017 earnings conference call. Our results, which we reported yesterday, demonstrate the continued success of our differentiated strategy to combine the power of our national self-storage platform with the local knowledge of our seasoned participating regional operators to drive outsized growth. For the third quarter, our same-store NOI grew by 6.7% year-over-year, and our core FFO per share increased by 13.8%. I'm pleased to note that this was our 10th consecutive quarter of double-digit year-over-year quarterly core FFO per share growth since our IPO in 2015. Our platform also provides meaningful competitive advantages for driving external growth as we benefit from both a captive pipeline of high-quality potential acquisitions that our PROs already manage, plus decades of established relationships with local third parties who are looking to sell their stores. As we anticipated, our acquisition pace has accelerated meaningfully in the second half of the year as sellers have come back to the market. Fortunately, the bid-ask spread has narrowed sufficiently, and we've been able to close our latest acquisitions, with pricing slightly better than we were seeing last year. During the third quarter, we acquired 19 properties for a total of about $125 million. And subsequent to quarter end, we have invested in 29 more stores, totaling just over $180 million, which includes one JV acquisition for about $9 million. This brings our total consolidated acquisitions this year to 62 stores valued at over $400 million or 19% growth on a square-footage basis since the start of the year. These stores are geographically diverse, but the largest additions have been in Georgia, Florida and California. We've also invested in 5 stores valued at about $60 million through our joint venture this year. One thing I'd like to mention is that 13 of the stores we've acquired this year will be managed by the NSA management company and carry the iStorage flag, which we will refer to as our corporate stores. These are stores located in markets where NSA doesn't have a PRO presence but where we have been able to find good acquisition opportunities outside of our designated PRO and JV territories. The most significant of these to date are the St. Louis and Kansas City MSAs, where we recently acquired 10 corporate stores. This increased acquisition activity was supported by the continued expansion of our strong balance sheet. Notably, we were recently able to tap into the perpetual preferred equity market at a record low yield for a noninvestment-grade rated company. Tammy will provide more details in a moment, but we are very pleased with our continued access to well-priced capital and remain comfortable with our liquidity and capital position at this time. Now let's turn to the fundamentals that we're seeing in the self-storage sector and specifically address a couple of factors impacting us today. I'll first review the impact of the recent severe hurricane activity and then discuss what we're seeing from new supply. Regarding the hurricanes that hit Houston and Florida this year, we were very fortunate that the impact on NSA's portfolio was limited. In Houston, we only have 5 stores, 3 wholly owned and 2 in our joint venture. However, we have 50 stores in Florida, 29 wholly owned and 21 in our joint venture portfolio. For all these stores combined to date, we have incurred hurricane-related repair and maintenance expense of approximately $75,000 in the third quarter, and we anticipate another $75,000 of storm-related repair and maintenance expense in the fourth quarter. We also expect to make approximately $300,000 of incremental CapEx investments to replace damaged infrastructure caused by the hurricanes. The capital projects are in various stages of completion, and about $50,000 of their expenditures will be covered by flood insurance for one of our Houston stores. The remainder of our stores did not incur enough damage to exceed our deductibles. On a net basis, the primary impact of the stores for us will be slightly positive through the absorption of new supply in both Houston and Florida. Moving on, I'd like to talk briefly about new supply. At this point in the cycle, given several years of limited new construction and outsized revenue and NOI growth, it's only natural to expect construction activity to increase. I'm happy to say that we are seeing increasing total demand in pretty much all of our markets. But in several markets, supply is growing faster than demand. So in our view, the absolute amount of new supply is not necessarily the issue. The issue is more directly related to where the new supply is being developed and how the increase in new supply lines up with the increase in new demand. Until recently, we've seen substantial new supply in the top 20 MSAs. But even in those markets, the impact of new supply is very submarket-specific. About 35% of NSA stores are located in the top 20 MSAs, and we've been most impacted by new supply in those markets. In total, looking at both our top 20 MSAs and our secondary markets, we estimate approximately 20% of our properties are being affected by new supply within 3 miles of our stores in 2016, 2017 and into 2018. We believe our stores in the Portland, Dallas, Atlanta and Western Florida markets will be most significantly affected by new supply in the next 1.5 years. These markets, despite relatively healthy economies and steady demand growth, just have too much supply coming online too quickly and may take some time to get to equilibrium. Given this new supply picture, we have a few takeaways. First, we'll continue to benefit from the diversification of our portfolio and our concentration in markets with strong demand drivers, such as population growth and job growth. And many of our markets have very limited new supply coming. So demand growth should be more than adequate to fully absorb that new supply quickly. Second, we're committed to maintaining rate integrity. The way we think about it is that market occupancy is kept somewhere in the low- to mid-90% range anyway, and we would rather give up 1% to 2% in occupancy in an oversupplied market and continue to hold our overall market rates and pass through increases to existing customers instead of fighting to keep higher occupancy by lowering our overall market rates. Historically, our overall net revenue growth has been better by recognizing the reality of the supply-demand picture and adjusting our revenue management approach accordingly. Third, we continue to benefit from the on-boarding of our new acquisitions to our national platform, bringing added scale advantages to our call center, corporate G&A and marketing spend. This larger scale is further enhanced by our JV platform, and given our smaller size relative to peers, this growth is material on an overall percentage basis. The important point here is that these scale benefits can truly move the needle for NSA. Finally, our emphasis on external growth and our unique structure remain a strong competitive advantage for NSA. The 4 pillars of our external growth strategy remain very positive as we look toward 2018. First, our captive pipeline, which consists of properties that our PROs manage but which NSA does not yet own, currently stands at about 120 properties valued at nearly $1 billion. Second, the personal networks and relationships of our PROs provide us a big strategic advantage in sourcing third-party acquisitions. In addition, we continue to evaluate potential new PROs through ongoing discussions with several high-quality private operators. And finally, our joint venture strategy allows us to compete for transactions that may be too large for us to acquire on our own, while at the same time, driving fee income and scale to our platform and balance sheet. And as joint ventures wind down to an exit strategy, this provides another source of potential growth for us in future years. Year-to-date, about $60 million of our acquisitions have been completed through our joint venture. With that, I'll now turn the call over to Tammy.

Thanks, Arlen. Last night, we reported core FFO of $23.8 million and core FFO per share of $0.33, a 13.8% increase over last year. Our FFO growth continues to be driven by our significant acquisition activity as well as solid organic growth in our same-store portfolio. We also benefited from our unconsolidated joint venture with $2 million of management fees and $1.3 million of FFO this quarter. This growth was partially offset by increases in both interest expense and G&A. Turning now to operations. Our third quarter same-store NOI growth led the industry at 6.7% and was driven by a 5.4% increase in total revenue and a 2.4% increase in property operating expenses. These strong increases were delivered in spite of very tough comps in 2016 when we led the industry in both same-store revenue and NOI growth. We continue to prioritize rate growth over occupancy as we seek to drive long-term total revenue growth. As Arlen mentioned, keeping our pricing integrity is especially important at this point in the cycle where we are seeing the localized impact of new supply. We believe the short-term negative implications of quarterly fluctuations in occupancy can be mitigated by focusing on maintaining and increasing overall average rental rates to our customer base. Other than the $75,000 of incremental R&M expense we incurred during the quarter as a result of hurricanes Harvey and Irma, our controllable operating expenses were in line with expectations this quarter. Across the portfolio, we received property tax notices and trued up our accruals, resulting in expense fluctuations in several states, including a significant increase in Colorado, which you might have noticed in our Supplemental Schedule 6. We also increased our marketing spend in Oregon, which resulted in higher year-over-year expense growth in the quarter, although year-to-date, OpEx is in line with our expectations for Oregon and certainly for the total same-store portfolio, with year-to-date expense growth of just 1.5%. Within the same-store portfolio, our strongest-performing markets were in California, Washington, Arizona and North Carolina, where we saw a relatively good balance between new supply and increasing demand in most submarkets. Our weakest markets were in Colorado, Oklahoma, Georgia and Texas. In those states, we saw the impact of excess new competition in certain markets limit our ability to push rates and in certain markets, causing us to give up some occupancy. In Oregon, our Portland stores are challenged by excess new supply, but our other stores are doing well. So in that state, the issue is more isolated to one market. In summary, our geographic diversity continues to serve us well. The overall economy remains healthy, with steady job and population growth in most of our top markets. Further, while we continue to monitor new supply carefully, as Arlen mentioned, the impact of new supply continues to be localized. Given that our PROs have a deep understanding of the markets and submarkets in which they operate, we believe that our strategy will continue to be advantageous in this environment. With respect to our balance sheet, we continue to focus on maintaining a strong, flexible balance sheet with low leverage. We believe that multiple sources of capital set the foundation for long-term growth for NSA. In early August, we closed an $85 million mortgage financing, secured by 22 of our properties. This 10-year interest-only loan has a fixed rate of 4.14%. The proceeds were used to repay borrowings under our revolving line of credit. At quarter end, our net debt-to-EBITDA ratio was 6.3x, which we further reduced through a preferred stock offering in October. As a reminder, we have very little debt maturing before 2020 when our revolver matures. Post quarter end, we took advantage of favorable market conditions to access the perpetual preferred equity market. In early October, we completed a preferred equity offering of our 6% Series A preferred shares, which yielded total proceeds of about $173 million. We were very pleased with the pricing and market reception of our inaugural preferred offering and view this as an endorsement of our successful execution of our differentiated growth strategy as well as the strength of our balance sheet. We used the proceeds of this offering to repay borrowings on our revolver, which created capacity to close over $180 million of acquisitions we had under contract at the time of the preferred issuance. Finally, we remain very comfortable with our full year 2017 guidance range for core FFO. With regard to some of our supporting assumptions, we expect our same-store results to come in near the midpoint of the range we provided. We will obviously exceed the top end of our guidance with respect to 2017 acquisitions given that we've already closed approximately $460 million year-to-date. I would also note that our fourth quarter FFO results will be impacted by the higher cost of the debt termed out in the third quarter as well as the preferred equity issued in October. However, these moves are consistent with our long-term balance sheet strategy and set us up for sustained growth going forward. As we look forward to the end of 2017 and into 2018, we will continue to strive to position NSA for long-term growth and value creation for our shareholders. We'll now turn the call back to the operator to take your questions. Operator?

[Operator Instructions] Our first question comes from the line of Todd Thomas with KeyBanc Capital Markets. Please proceed with your question.

I was just curious. First question, can you provide us with the first year yields or the cap rate on the acquisitions completed in the quarter and the $180 million investments that were completed subsequent to the end of the quarter?

Yes, in general, as I mentioned, our cap rates have improved a little bit over last year. Our blended average cap rate on those acquisitions this year is running about 6.3%, where last year, we blended average at about 6.1%. So we're seeing about a 20 basis point improvement in cap rates, and that's reflective, obviously, of the fact that interest rates are up a little bit and also, we do expect slower growth coming -- going forward. So we are pleased to see that.

So your commentary that the bid-ask spread has narrowed a little bit, it sounds like in your favor. It's a little bit different than what we've heard from some of the other public self-storage REITs. Is it because you're transacting in different markets and looking at different properties or portfolios? Or is there something else?

I would say it is a combination of 2 things. One is we do -- we have a broader target of markets. As you know, our focus is on the top 100 MSAs. We're not so focused on just the really large MSAs. And then the second is that our multiple sources of capital -- I mean, of deals, deal flow through our PROs particularly, create a lot of opportunities for us to look at that may not be available for others because they're kind of off-market situations. But it is a combination of both.

And then I'm just curious. For these -- for the acquisitions, the investments that were completed here, why wasn't more SP or OP equity used to fund those transactions? And then as you think about funding acquisitions with a view into '18, as you look at where your common stock trades today, would you consider equity issuance at these levels in order to pay down the line, reload the balance sheet a little bit, heading into the new year?

Yes. So we did issue some SP and OP equity this year. It's going to be in the $30 million-type range for the year, but that is less than normal. And frankly, part of it is we don't control at all. It depends on the sellers' objectives if they want cash, certainly as it relates to OP type of equity. But the other part of it is we were not particularly aggressive at wanting to issue OP equity when our prices were down in the $23 range, which we've been at for much of the year. We've recently moved up into the $26 range which we feel is more appropriate, and we will be issuing new equity, OP and SP equity next year. I'm sure we always do. The amount though varies both on really personal desires of the sellers and our PROs' requirements for commitments on SP as well as how aggressive we feel the stock is, which was part of the reason we did the preferred stock offering as well.

And just lastly, can you just comment on the pipeline for '18, what you're seeing there in terms of acquisitions?

We see it's a pretty good pipeline. The difficult part is we have a good view to stuff that might be looking at closing in the first, let's say, quarter to 4 months or so of the year. And between what the PROs have lined up, both from captive pipeline stuff and deals that they sort of are working on, on the side, we think the first quarter will be a good quarter. Beyond that, we don't know yet, but we're very encouraged by the fact that the bid-ask spread has come together, that our people aren't waiting around for tax changes, that kind of thing. So our overall goal, as I think we've mentioned to you before, Todd, is that we'd like to grow our portfolio by 10% a year or more if good deals are out there. So with our size of our portfolio right now being our total enterprise is about 300 and -- $3.5 billion, we'd like to grow by 10% of that at least next year.

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

Just quickly on -- I appreciate your update on supply, Arlen, but can you just comment specifically on when you think deliveries will peak in your markets on sort of kind of a weighted average basis?

Yes. Based on what we're looking at, it's probably going to peak within the next 3 to 6 months. We're actually really encouraged by that. Now we've done tons of analysis on what's coming in our markets, and it does vary. There's no doubt that markets vary a lot. But we've looked especially at our top 40 markets that we participate in. And overall, when you look at the entirety of those 40 markets, we see supply growth and demand growth being almost perfectly matched overall from a 5-year period from 2016 through 2020. But the problem is, every market's not perfectly matched. And in those 40 markets, we've identified 5 of those markets that we think will be oversupplied during that time period for the demand growth and 9 of those markets that will be undersupplied for the demand growth. But overall, it's fundamentally a balance. So we're really encouraged by both the fact that we're seeing strong demand growth across the board in every one of our markets. We're seeing continued new demand for self-storage, new move-ins, higher move-ins than last year, those kinds of things and also, the fact that supply is peaking and coming down. So I think we're really generally in for a pretty soft landing, but there will be some bumps along the way depending on the specific market.

But I think you have mentioned previously and some of your peers have mentioned, correct me if I'm wrong though, that in some of the smaller markets, maybe the 25 to 75 MSAs, that there's been a pickup in starts recently. I mean, did your comments, what you kind of just said, kind of disagree with that?

No. But remember, I'm talking about the new construction that we've seen both in the last 2 years and in the next 2 to 3 years. We try to look forward in a 5-year period. And it is definitely true that in the last 2 years, the huge percentage of the new supply was in the big top 20 MSAs, where we have 35% of our property. In the next 3 years, there will be more in the smaller MSAs. But overall, we don't see it as a problem, especially in our markets because we have very strong demand growth since we're in so many markets with strong population and job growth.

And then can you tell us how Street rates kind of trended through the quarter and where they stand in October?

Yes, Street rates are certainly in line with expectations and in line with what we would expect with the seasonal dynamics of Q4. But overall, they're flat year-to-year. We saw that through much of Q3, and we're seeing a similar dynamic in Q4. So I'd say Street rates are flat. The upside is that we are still very successful in raising rates on enterprise customers, and that's really allowed us to drive our revenue growth for the last couple of quarters.

I'd just comment -- add to that, that even despite relatively flat Street rate growth, that our overall contractual rates are up 5.5% or so. So generally, very strong continued movement on rates overall to our customer portfolio.

Our next question comes from the line of R.J. Milligan from Baird. Please proceed with your question.

A quick question on those markets, Arlen, that you mentioned, where you do expect some new supply to affect fundamentals. I think you mentioned Portland, Dallas, West Florida, where the new supply will be most impactful. Can you talk about what you expect fundamentals to do over the next, say, 2 to 3 years? And how long of a headwind will that new supply be in those markets?

It varies, obviously, a little bit by market. And we don't give a lot of exact details on that because that's not information that we share. But I can say that the most difficult of those will probably be Portland area, where we see that the demand is growing well but supply is growing faster. Of the others, we think that there might be -- in a 5-year time period, we might see effectively 6 or 7 years of supply coming in at the same time that you have 5 years of demand growth. So those might have a couple of year headwind against those. Overall, and certainly with our overall portfolio, we're in very good shape, but we know that some markets will have it harder than others. And fortunately, some of our biggest markets -- in fact, in our top 10 markets, we only have one market that's actually a negative, and we have 3 markets that are strong -- not enough supply for the demand growth. So generally, we will be affected positively by that, which is favorable. But it's no -- we've said all along that we do see the trends in our industry coming back to more industry norms, the 25-year-type averages in terms of revenue and NOI growth and a pretty soft landing. And I'm very encouraged that, that seems to definitely be coming.

And then on the captive pipeline, Arlen, you commented there's still about $1 billion there. Can you talk about the time line for that to free up, whether it be debt maturities or partnership agreements, and then what the historical sort of hit rate has been on acquiring those properties within that pipeline, just to try and get an idea of how big that opportunity is and over what time period?

Yes. So most of it -- only about 10% of that is related to stabilization-type assets or partnership maturity-type situations. Mostly, it's relating to debt maturities. So 90% or so is debt maturities, which basically means that it spreads out really over the next 8 years or so. But we do have more of it coming in the next 3 to 4 years than in the last 4 to 5 years of that 8-year period. Now our hit rate has historically been really high. I think it's around 85%. But that is not a realistic -- I mean, to think that we'll always hit 85%, I just don't -- I don't feel like that's a realistic number. We kind of use somewhere in the 50% to 60% hit rate. And if we end up better than that, which we have so far, that's great. But we don't count on that.

Our next question will come from the line of Ki Bin Kim from SunTrust Robinson Humphrey. Please proceed with your question.

This is Ian on with Ki Bin. First question, with your revenue management system, like how much of the platform is currently on that? And for new acquisitions, how long does it typically take for them to get on the system?

Yes, revenue management is actually available for the entire portfolio at this point, and all of our PROs are engaged in some level of revenue management. It becomes more meaningful for some properties than others. We found certain markets where it's extremely effective and other markets where it's a little less impactful. But I'd say it is broadly deployed throughout the portfolio. With respect to new acquisitions, it's a really simple process to bring it onto the platform. What is not so simple is to optimize our approach to revenue management for a new store. That can take upwards of 6 months before it would really get into the groove in terms of increasing rates on in-place customers and essentially finding the sweet spot of what we think is the sweet spot on market rates. So easy to do technologically, hard to do functionally and in an impactful way. So that takes a little longer.

And then, I guess, what are the better markets for the revenue management system? And which ones are you struggling with to optimize?

The ones where we actually see dynamic price movement tends to be better for us. So we've seen a lot of success on the West Coast. Certainly, Oregon, Washington and all of California benefited greatly from having those types of tools available to us to set our rates and be very thoughtful in terms of increasing rates and in-place customers. For your slower markets or smaller markets, where mom-and-pop really aren't moving rates around, it becomes a little less impactful, but still useful when you think about raising rates on in-place customers.

[Operator Instructions] Our next question comes from the line of George Hoglund from Jefferies. Please proceed with your question.

If you could just comment a bit more on some of the markets where that you're seeing improvement, for example, like in Oklahoma, just in terms of do you think some of that improvement is sustainable due to declining new supply, or are there other factors in the market that may make those improvements continue on for the next couple of quarters?

Yes, I think in general, where we are seeing improvement, it is where we've seen the absorption of the new supply that was theirs kind of pretty much be relatively fully absorbed. So Oklahoma, as you mentioned, we did have quite a bit of new supply come into Oklahoma, and obviously, Oklahoma is not a strong economy. So that new supply, it took time to absorb, and it's still not fully absorbed. But enough of it has been absorbed now that at least it's improving and stabilizing. Now will it be a gangbuster market in the future? I don't see that in the short term unless something happened where the economy really turned around. But at least it's not in the decline mode like it was because we had a slow economy and excess supply. So that's helped there. Some other markets where we have seen increasing absorption and taking up of the existing supply, in some cases, actually, we might see some new supply coming online further. So North Carolina is an example where we had a good quarter in North Carolina, but we do see a number of new supply coming in the future in the Raleigh-Durham area, which will put pressure on that market. But that's part of the analysis I commented on earlier, and that's one of the more difficult markets. We think that Portland certainly has continued impact of new supply, both what's already been built and some more that are coming. But overall, we're certainly pleased with the relatively soft landing we're going to see in the big picture.

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

This is Kevin on for Vikram. I just had a couple of questions. So just kind of looking at the guidance and then comparing it to where you've trended so far this year, it seems like you've definitely been on the high side so far. And I'm just wondering, what are you -- basically, for the balance of the year and really, this fourth quarter, what is implied in your same-store numbers? Would there be potentially an uptick in expenses? I mean, kind of just looking back, there shouldn't be a pretty difficult comp for 4Q '16.

Hi, this is Tammy Fischer. I think what you're seeing in our guidance is exactly where we think we're going to end up for the year, and what's implied by the fourth quarter is likely some higher expenses and seasonality, of course.

In particular, the property tax adjustments that Tammy mentioned in her comments affected both the third quarter and will affect the fourth quarter as those -- we got hit with some unbelievable price increases unexpected in some markets on property taxes. And of course, we challenged those, but we cannot assume we're going to win the challenges, and we have to book those as though they're going to be fully expensed from now through the end of the year.

And then I think the other thing that -- other point that we wanted to make is to be sure that everybody's taking into account some of the moves that we've made on the balance sheet, for instance, the term debt that we did early August and then, of course, the perpetual preferred that we just did about a month ago.

Sounds good. And then just in terms of the -- so like from a run rate perspective in the expense growth, just kind of looking historically, it's been pretty volatile. Where do you see the long-term run rate on expense growth coming out to be?

So we're not, obviously, not prepared to give guidance on 2018, but I will say that our operating expenses overall will be, call it, around inflation and with the exception of property taxes. And we think property tax expense will continue to increase in what we've used historically as 5% to 6% range.

And then just one more for me. So in terms of the new PROs, how are they looking today in terms of, I guess, essentially when you first went public, just in terms of how are they -- what is the attractiveness of deals? And also, when they're looking to contribute properties, how do those properties -- how will the cap rates compare to the market cap rates that you're seeing?

So the performance of our new PROs, subsequent to the IPO, has been very, very strong. And in general, as properties come in from those captive pipelines from the PROs, we have an agreement with the PROs that they will come in based on their one-off appraised value of that individual property. So that gives them a fair value to come in and contribute the property, but it does not give them the portfolio premium that they might normally get if they sold the portfolio, but we believe that they realize the effective portfolio premium over time by their participation in NSA's equity. So that's really the way that, that works. We are very pleased with all of our PROs' performance. We -- frankly, it's been a real win-win-win. We believe a win for our investors as our performance has been extremely strong, a win for our PROs as they've done really well, both financially and from a personal operational standpoint, and certainly, a win for us here at corporate management in terms of the results that we've been able to deliver and continue to plan on that for the years ahead.

Our next question is a follow-up question from the line of Ki Bin Kim. Please proceed with your question.

This is Ki Bin. So the acquisitions you bought this quarter, can you give a little more color on the quality in respect to that 6.3% cap rate and geographic footprint?

Yes. I would say -- Ki Bin, this is Arlen. I would say, overall, the geographic footprint is probably a little more geared towards the markets between, I'd say, MSAs 20 and 50. So a little bit on the -- pretty much in our sweet spot in terms of where we like to operate. So -- and the relative quality is about the same, although I will say that we had a lot more investment planned in a number of properties to upgrade the properties from the time we buy them from the sellers than we did last year. But that's factored into the cap rate numbers I was mentioning to you. So I guess a way to say that is once we have them under our operation fully with the improvements we've added, they will be relatively comparable quality to our other portfolio and then roughly more the 20 to 50 MSAs.

Do they age...

Ki Bin, the only thing I was going to add to what Arlen said is that one of the things we look for and feel pretty good about is that these assets have been undermanaged. So we see good upside opportunity in the acquisitions that we've made in the last 4 or 5 months.

And the ages are really close to our average age of our portfolio, maybe even a little bit newer, but very, very close to average. So overall, it's really, really comparable. And almost all of the acquisitions, not quite all, but almost all, are quite synergistic in markets. So we didn't add many new markets. It's mostly markets where we already were, and we're just strengthening our market share within those markets, for the most part.

Okay. And you guys talked about a soft landing, but you mentioned that your Street rates were flat year-over-year. So just curious, what has happened to your promotions, the other side of the equation? Has that been kind of flat year-over-year as well?

Our promotions and discounts had been pretty stable for the last few quarters. As a percentage of revenue, they're actually down from Q1 and Q2 when you look at Q3. When you look at dollar terms, they're mildly up year-over-year. I would expect to nearly about flat year-over-year for Q4 as well. We feel like we've really reached a plateau with respect to discounting and expect to see consistent performance here for the next several quarters. It's a tool that we like. It makes sense to bring in occupancy and try to hold rate, and it's been working for us. And we do it on a selective basis, on a market-by-market basis and a store-by-store basis.

Do you mind providing some stats on discounts as a percent of revenue in the third quarter versus last year?

Yes, it's only up a few basis points. The absolute number is not something that we actually disclose, but year-over-year, quarter-to-quarter, it's really only up a few basis points.

So you guys mentioned that some other revenue or maybe a majority of the revenue growth is coming from either occupancy, which is, I think, was kind of flat, and existing customer rate increases. I always wanted to try to understand that better. Is there an upsized opportunity with your portfolio that you've been acquiring to pass out rate increases that maybe the previous owners weren't doing as much? And if you could provide some good descriptive color around that, for example, how many -- what percent of your customers have been in the portfolio over a year who hadn't received a letter that might be eligible, things like that?

Yes. So let me start with the high level. In terms of in-place rate changes, we've been really successful over a number of quarters now of sort of increasing rates at, call it, the high single digits, sometimes low double-digit rates on an appreciable number of our customers, such that we're hitting 75% to 80% of our customers over the course of the year. And what that means is that we can achieve contractual rates that are in the high single digits in terms of growth year-over-year. We're looking at 5% to 6%, has been the recent trend, and so that's really been a growth driver for revenue for us. As you noted, I think occupancy has been rather flattish to mildly down this year, and we expect to see something similar in Q4 with respect to occupancy. With respect to new stores and finding opportunities there, that's absolutely something we look for. We're always keen to find a store that's overoccupied and has not been raising rates and has not been issuing those rate increase letters. And we do find quite a bit of that, particularly with the smaller operators and with those undermanaged stores that Tammy mentioned. So that's definitely an opportunity for us. With respect to increasing rates on customers, we -- our average is probably around 9 months in terms of the first time we send a letter out to a customer. And then after that, the subsequent increases tend to run between 9 and 12 months for a second increase to a customer.

I will say though one thing about that is it does depend on how competitive the market is. So if we're in a market, let's say, that rates have gone down, which some markets have that or there's higher promos, that might be much more likely that the customer might get a rate increase in 3 to 5 months instead of 9 months. Whereas if it's a market that the rates have been going up and they're continuing up somewhat, then it's probably 9 months before they will get a rate increase. So you blend all of that together, and it ends up with very effective revenue movement.

Yes. Well, I'm just comparing your performance compared to some of your peers. And everyone has some similar version of this program, and your same-store revenue run rate has been much better. So I was just curious if you're able to push out more of it, not the percent increase, but are there more eligible customers in your portfolio maybe than some peers or the average portfolio out there? That's what I was trying to get to.

Well, that doesn't really affect our same-store pool, though. I mean, that affects our FFO because of the fact that these new stores, when we buy them, if the prior owner didn't raise rates, we move those rates through. And -- but by the time they get into our same-store pool, we've already done that quite a bit. So the real difference in terms of the same-store performance, I think, is mostly related to the markets we're in and the fact that we have less new supply in the markets that we're in, in average, not in total, as I mentioned, we have 35% of our properties in the top 20 MSAs and there's lots of new competitors in those, but in average, we have more diversified portfolio across more broader markets, which I think have less new supply, which has helped us in our relative performance.

There are no further questions in the queue. I'd like to hand the call back over to Mr. Nordhagen for closing comments.

Thank you, and thanks again, everyone, for joining us today for our 2017 third quarter earnings call. As always, we appreciate your continued interest in and support of National Storage Affiliates, and we look forward to visiting with you again at the end of next quarter as we wrap up 2017. Thanks a lot.

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