NSA
#Thank you, <UNK>, and welcome, everyone, to our first-quarter 2016 earnings conference call.
This morning, I'll start with a brief overview of our quarterly results, and then provide an update on our strategic initiatives, including our recent acquisition activity.
<UNK> <UNK>, our CFO, will review our recent results and balance sheet, and will close by updating you on our 2016 guidance.
And <UNK> <UNK>, our Senior VP of Operations, is here with us today, and will be available to answer questions about our operations.
After our prepared remarks, we will open up the call to analyst questions.
Once again, our first-quarter results were very strong, as we continued to execute on NSA's unique internal and external growth strategy.
Our first-quarter core FFO per share grew by 19% year over year to $0.25 per share, and we produced an 11.3% increase in same-store NOI over the prior year.
We also continued to grow our portfolio significantly, as we acquired 39 properties year to date, including 14 properties from Hide-Away Storage of Sarasota, Florida, who we added as our seventh PRO.
Year to date, we've already closed on over $260 million of acquisitions, including new PRO stores, captive pipeline stores, and third-party acquisitions.
We continue to have great success at funding a large percentage of our acquisitions by using our operating partnership unit equity, as the acquisitions year to date included the issuance of almost $100 million of new OP and SP unit equity.
And we are currently in discussions with a number of prospective sellers and PROs with very large equity positions in their properties.
Finally, post quarter end, we enhanced our access to capital through the recast and upsizing of our credit facility, which now has a total capacity of $675 million.
As a result of this very strong start to 2016, we are updating our core FFO guidance for the year to between $1.04 and $1.08 per share.
Tammy will discuss this in more detail in a few moments.
Moving on to our portfolio and strategy, we continue to execute on all fronts.
Including our recently completed acquisitions, NSA currently owns 315 self-storage properties in 18 states, comprising approximately 146,000 units and almost 19 million rentable square feet.
The self-storage sector remains strong.
We are seeing steadily increasing demand in most of our markets, which continued to benefit from above average employment and population growth, and only seeing the impact of new supply in a few markets and submarkets.
We continue to successfully grow same-store occupancy, as we keep closing the occupancy gap with our public REIT peers.
Our first-quarter same-store portfolio's average occupancy was 89.2%, which is an impressive 440-basis-point gain from the same quarter of the prior year.
We expect to grow our occupancy further as we use our national marketing platform and our call center to drive strong conversion of new leads heading into the seasonally strong second and third quarters.
Additionally, our new revenue management system, which allows us to optimize rate and occupancy, is now operational in 117 stores in 19 markets with four different PROs.
We are pleased with the positive results we have been seeing so far, and so are our PROs who are integral in testing and implementation of this data-driven tool.
We believe the rollout of this system was an important contributor to our 9.1% same-store revenue growth this quarter over the first quarter of last year.
And we will add more stores to the system throughout the balance of the year, as we continue to tweak the metrics for optimum performance.
Within the self-storage space, our differentiated strategy of external growth drivers has allowed us to significantly grow our portfolio and broaden our presence through acquisitions, with almost 20% unit growth year to date in 2016 and almost 50% growth since the end of first-quarter 2015.
We believe our strong acquisition pace will help us continue to scale our national marketing platform and our call center, vendor relationships and corporate overhead, and ultimately, drive strong growth in FFO per share.
During the first quarter, we acquired 17 self-storage properties for a total of $89 million, which added 7,600 storage units and 1.1 million square feet to our portfolio.
Subsequent to quarter end, including the addition of properties from our seventh PRO, Hide-Away, we acquired 22 self-storage facilities for an aggregate investment of almost $174 million, which added 1.7 million square feet and over 15,000 storage units to our portfolio.
With our acquisitions so far this year, we've expanded our presence in our existing markets, entered the Indianapolis market, and significantly expanded our West Florida market exposure with the addition of Hide-Away.
The three components of NSA's external growth strategy ---+ captive PRO pipeline, third-party acquisitions, and addition of new PROs ---+ is firing on all cylinders.
As we move through 2016, all components of our growth strategy are enhancing shareholder value.
Our captive pipeline of assets, which are PROs already managed but we do not yet known, currently totals almost 100 properties, valued at over $700 million.
We continue to benefit from our PROs relationships, as they add to their properties under management, which in turn, expands our pipeline of potential transactions.
Additionally, our PROs have long-standing local market relationships and are incentivized to source new acquisitions for NSA.
These third-party acquisitions, which are very often off-market transactions, have totaled over $210 million since our IPO and over $110 million just this year.
Given the fragmented nature of the industry, we believe we have a long runway for future third-party acquisitions as well.
Finally, as demonstrated with our Hide-Away transaction early in the second quarter, we continue to recruit new PROs to add to our platform.
These PROs bring valuable operational expertise and local relationships to NSA, in addition to contributing large portfolios of self-storage assets.
Before I turn the call over to Tammy, I'd just like to say again how pleased we are with our first-quarter results.
Our expanded same-store pool is performing very well, and our acquisition pace is stronger than ever.
And with the recent recast of our credit facility and the addition of substantial new OP equity, we have significant additional capacity for future growth.
I'd like to thank the entire NSA team for their continued hard work and dedication in helping us achieve these outstanding results.
I'll now turn the call over to Tammy.
Thanks, <UNK>.
Today I'll review our first-quarter results, discuss our balance sheet and liquidity position, and will close with comments on our updated outlook for 2016.
For Q1 2016, we reported core FFO of $12.5 million or $0.25 per share, up 19% from Q1 2015.
This growth was driven by our strong acquisition activity over the past year, robust organic growth in our same-store portfolio, and reduced interest expense.
Turning to operational results, our 2016 same-store portfolio of 222 stores represents about 80% of our stores at the beginning of the year.
Q1 same-store NOI was $20.4 million, 11.3% better than Q1 2015.
Our same-store growth was driven by both rate and occupancy increases, with average occupancy growing by 440 basis points, and rent and revenue per square foot up 3.9%, driving our same-store revenue increase of 9.1%.
Same-store property operating expense increases were below budget, but were still up by 4.8%, primarily driven by increased advertising spend and property tax increases, particularly in California, Oklahoma and Texas.
We budgeted higher expense increases in Q1, with lower expense growth in the last three quarters, and still expect full-year OpEx growth to be in the range of 3% to 4%, as we guided in our last call.
We are also pleased with the 1.4% improvement in our NOI margin this quarter compared to Q1 last year.
We achieved double-digit NOI growth in Oregon, California, Georgia and Washington, while NOI growth in Texas, North Carolina and Oklahoma was below the portfolio average, though still positive.
Oklahoma is still seeing some pressure from increased supply that was constructed while the oil industry was booming.
And the Fayetteville market continues to be weak due to the impact of reduced military deployment, negatively impacting overall results in North Carolina.
Finally, as we have discussed on recent calls, Oklahoma and West Texas have been affected by softness in the energy markets.
However, we do continue to benefit from our portfolio's focus on states with projected strong population and job growth.
And the diversity of our portfolio limits our exposure to any single market that may be experiencing pressure.
Now let's turn to our balance sheet and liquidity position.
With the completion of the amendment to our credit agreement last week, and including all of our acquisition activity year to date, our total debt outstanding is approximately $730 million.
Today, about 60% of this debt is fixed rate mortgage financing, or fixed with swaps.
In the near term, we expect to swap additional variable rate debt, reducing our overall interest rate exposure.
Our weighted average interest rate is just under 3%, and our weighted average maturity is now nearly six years.
We continue to effectively use multiple sources of capital available to us to fund our growth.
As you know, we actively use our OP and SP unit currency, and we continually evaluate various alternatives to optimize the flexibility of our balance sheet to position us conservatively for the long term.
Now that we've passed the one-year anniversary of our IPO, we are S3 eligible, and plan to file a shelf registration in the near term.
This year alone we've funded over $250 million of acquisitions with a combination of the issuance of nearly $100 million in new OP and SP equity, along with funding on our revolver in the assumption of long-term mortgage financing in connection with the Hide-Away transaction.
As I mentioned, we recently recast our credit facility, expanding total capacity to $675 million, bringing terms to market and extending maturities significantly.
We reallocated a component of our borrowings to five- and six-year term loan tranches, meaningfully increasing our financial flexibility.
We are also evaluating proposals that would allow us to term out substantially all of the remainder of our revolver balance, providing additional flexibility.
Now I'd like to update you on our current thoughts with respect to a few specific areas for the remainder of 2016.
Based on our current outlook for NSA's growth prospects, and our positive view on self-storage fundamentals, we are tightening our core FFO range, now anticipating core FFO to be in the range of $1.04 to $1.08 per share for the year.
This higher mid-point is driven by anticipated same-store NOI growth of 7.5% to 9.5%, and anticipated total aggregate acquisitions between $400 million and $550 million this year.
This concludes my prepared remarks.
And with that, we now welcome your questions.
Operator.
Hi, <UNK>, this is <UNK>.
I think in general, most of our acquisitions are in small chunks, one to three properties at a time.
In the larger transactions that you do see out there, they tend to be highly marketed transactions and the pricing on those gets to be quite steep.
We've been fortunate with our PRO pipeline and our PRO relationships to be able to source considerably better deals at better pricing.
Certainly we would look at portfolios if they make strategic sense to us, but that's not the main focus.
We do see most of these acquisitions will be in smaller chunks.
I would say overall that our PROs have been successful across the board at sourcing deals because they all have these long-standing relationships.
One thing to remember is the average length of our PROs being in the industry is over 30 years, so these guys know almost everyone in their local markets.
I would say overall we've certainly seen each PRO bringing properties for underwriting.
We've been a little bit selective in some markets that we ---+ staying away from some markets that we think might start to show some over-building in the future and focusing on some that we think might have higher growth.
But overall it's been a very diversified addition of properties.
I think right now based on what we're seeing, we're prepared to leave the guidance where it is, in the 20 million to 22 million range.
Thanks, <UNK>.
Hey, this is <UNK>, appreciate the question.
Oregon and California have been really strong for us for the last 12 months; we see a lot of demand.
The supply has not necessarily kept up with demand, so we're able to drive both occupancy and rate.
And some of our best occupancies are in those markets.
As we hit that ceiling on occupancy, we're really pushing the rate that much harder in those markets.
So we like those markets.
We expect them to continue to be successful for us this year.
We'll add another 20 stores this month and then our objective is, frankly, to roll it out to the entire portfolio around probably year-end or so.
We expect to continue to look for markets and opportunities where we can get the best ROI on the system.
We're still in a testing mode so we're figuring out where it's best served to be deployed.
We're very pleased with the results that we've seen so far.
It's driving both occupancy and rate and it's definitely contributing to our revenue growth.
We expect to see that continue and amplified as we add more stores to the system.
I think one thing to notice on that too, <UNK>, is that we have four of our seven PROs on it so far.
So we not only roll out stores but additional PROs, and so that takes a little bit more effort.
But we feel a very positive about it and even our new seventh PRO that we just added, Hide-Away on April 1, we feel like by the end of the year they should be able to be on the system.
Well, I would say overall that pricing continues to get tighter.
The most attractive markets, the largest markets with the class A properties and the biggest markets, I think, the cap rates have bottomed out there.
But every other market we're seeing continued tightening of cap rates overall.
This is where we've had to rely greatly on the relationships that our PROs bring to bear to be able to get good deals out there.
I would say, not necessarily any markets that are bigger in terms of opportunities than others, but certainly the low cap rates in the industry as a whole has made a number of folks consider selling that weren't before.
And then we also, frankly, have the aging of our ownership group.
As the industry ages, we see a lot more owners that are at the age where they are looking to sell their properties and that's a great, great feature.
One of the things that we notice is there is a huge number of CMBS loans maturing in the next few years in the industry.
Most of those are typically with one to three property owners.
Those are a great source of acquisitions because an owner there might be getting older and he has to look at either refinancing his property or selling it.
And so that gives us some great openings.
Hi, <UNK>, it's <UNK>.
We are very pleased with what it's doing for us.
We think the system is working well.
It's a very valuable tool.
Since we're still in the implementation phase and in sort of a testing mode, we don't want to be too specific at this point.
I think once we've got a full year of results under our belt, we can be a little more specific about the direct benefits of the system but for now we're sold on it.
We think it's going to continue to drive revenue and occupancy going forward.
One thing, <UNK>, this is <UNK>, I would comment on that also that we did increase our guidance on our same-store NOI and a significant part of that relates to the impact we are seeing from our revenue management program.
But to be honest, it works better in some places than others and that's part of the tweaking that we're doing as we customize the proprietary system.
So I'll describe it as a tool because that's exactly what it is.
We have provided the tool.
We developed the tool and we give it to our PROs for them to implement and for our PROs to use.
At the end of the day, they are the ones who are vetting the system and operating the system.
We help them a lot.
We provide analytical support; we obviously provide the software support.
But it is their system to use and it's theirs to use to drive revenue.
So it's just like everything else we do, we provide the tools and the PROs operate.
Well, it's not a question of deviating from the system.
We don't see the system as the end-all, be-all.
We see the system as a tool.
The tool is used to make decisions and to make good decisions; it is not there to make decisions for us.
So we don't even think about it in terms of deviating from the system, we think about it using the tool to make decisions.
Well, obviously Internet is a big deal for us.
Scale matters.
We've made a lot of great investments in our internet platform over the last year.
We've got five of our seven PROs up on our platform; we'll have the sixth here very shortly.
And then of course Hide-Away will join us on the platform very soon.
We've seen great gains in terms of year-over-year traffic on the platform.
We've seen a lot more leads coming through it.
45% of our traffic is coming from mobile, so we think that's been very successful.
And as with everything, we still think internet is probably driving 60%-plus of our leads at the end of the day.
They don't all necessarily rent or reserve through the internet or through the call center but ultimately they do find us on the internet and that drives a lead or a rental.
No, I don't ---+
We have plenty of people who find us on the internet and then walk in.
We have people who find us on the internet and then call our call center or call the store directly.
So it's not as easy as saying that this many rentals came from the internet.
It's a lot more amorphous than that.
No, I think that's about right, <UNK>.
It was pretty close to $80 million.
As I mentioned in my prepared remarks, close to $100 million in year to date and the $250 million of acquisitions we've completed.
It is obviously hard to predict how much equity we will issue with each acquisition.
When we bring on a new PRO they tend to have more equity and higher percentage of equity as a component of the total transaction.
But we are seeing plenty of sellers who are very interested in taking our OP unit equity and diversifying and doing some estate planning.
So we've been very fortunate in that regard.
And that's what makes it so hard for us to predict, <UNK>, is that we have some ---+ I mentioned we have some sellers that we are talking to that have a lot of equity.
If the guy's owned properties for a long time, it's not uncommon, if these are highly successful properties, that they might have something like 20% debt and 80% equity on these properties.
And in a lot of those cases, the opportunity to take our OP equity is a really big financial advantage for them from a tax standpoint, as well as a diversification standpoint.
But it's very hard to predict because it varies a lot from seller to seller.
I think that was the revolver that you were seeing in 2017.
So that's all been pushed out with the recast.
Thanks.
Hi, <UNK>, this is <UNK>.
The addition of Hide-Away by itself would typically not make much of a change in the conversion ratio.
In fact, normally right upon issuance it might slightly drop a little bit.
But basically, the conversion ratio really moves based upon significant increases in same-store performance.
As same-store performance is really strong, that's the reward that a PRO receives for delivering that performance as it slightly increases that conversion ratio.
But realistically the Hide-Away won't really change it much and so it'll mainly be driven by how strong is same-store performance going forward.
Typically not.
Hi, <UNK>, it's <UNK>.
We are obviously taking a balanced approach when it comes to driving revenue growth.
Both occupancy and rate are contributing about evenly right now on the revenue management side.
We obviously take into account the current occupancy of a store and a price type when we make decisions about what to do with pricing in that store and what to do with in-place rate changes to current customers.
So it's completely dependent upon the store and the price type, how hard we push rate.
And we're very cognizant of occupancy dynamics and we will not necessarily sacrifice occupancy for rate.
We're always looking to maximize revenue, that's the equation at the end of the day.
Thank you.
Hi, <UNK>, this is <UNK>.
In general, we don't see a lot of difference between us and most of the industry.
Although it does vary from location to location.
On an overall average we'll have between 15% and 20% of our customers that will come from the commercial sector.
Certainly that sector has been stronger lately.
That was the sector that got hit the worst in the downturn in 2009 and 2010 and it has come back in a strong way, overall.
But it's still true that 80% of our customers are essentially residential, whether that be residential homeowner, residential apartment dweller, renter, student, military, that's really the bulk of our customers.
But the commercial market is strong right now; I'd call it pretty stable.
We don't have any specific candidates for disposition right now.
We continually look at those and in terms of more opportunities related to a potentially a higher and better use where that property might be able to be sold at a really low cap rate and we can move the funds through a 1031 exchange into another self-storage facility.
Since NSA is relatively young as a Company, most of these properties we've only owned for a couple of years.
So certainly selling the properties or selling properties isn't a major focus for us.
We look at it on an opportunistic basis and I can say right now we don't have any specific ones that are slated to sell right now.
But we always keep our eyes open for those kinds of opportunities if there's someone that'll pay us a 3% cap rate or a 2% cap rate, we're certainly willing to listen.
All right, thank you.
All right, thank you again, everyone, for joining us for our first-quarter earnings call.
As I said, our first-quarter results were very strong, as we realized meaningful growth in our same-store portfolio.
And our robust acquisition activity has exceeded even our expectations.
Our efforts over the past year are translating into really meaningful increases in revenue and core FFO and we believe we have a considerable runway for future growth.
So we look forward to seeing many of you at NAREIT in June and thanks again for your time this afternoon.
