National Storage Affiliates Trust

NYSE:NSA

Earnings Call Transcript 2018-Q3

[Operator]

Greetings and welcome to the National Storage Affiliates’ Third Quarter 2018 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, Mrs. Dowling. You may now begin.

[Marti Dowling, Director, Investor Relations]

Hello, everyone. We would like to thank you for joining us today for the third quarter 2018 earnings conference call of National Storage Affiliates Trust. In addition to the press release distributed yesterday, we have filed an 8-K with the SEC containing our supplemental package with additional detail on our results, which maybe 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 our website and in our SEC filings.

Today’s conference call is hosted by National Storage Affiliates’ Chief Executive Officer, Arlen Nordhagen; President and Chief Financial Officer, Tamara Fischer; and Chief Operating Officer, Steve Treadwell. Following prepared remarks, management will accept questions from registered financial analysts.

I will now turn the call over to Arlen.

[Arlen Nordhagen, Chief Executive Officer]

Thanks, Marti and good morning everyone. We are very pleased with our third quarter activity and results, one of the high points being the September closing of the $1.3 billion acquisition of the Simply Self Storage portfolio by our newly formed joint venture.

We are also pleased to once again deliver sector leading same-store performance and FFO growth. Compared to the same quarter in 2017, our core FFO per share grew 9.1% and our same-store NOI growth was 5%. In addition, subsequent to quarter end, we have executed definitive agreements to add Southern Self Storage as NSA’s 9th participating regional operator. Peter Cowie and Bob McIntosh, the principals at Southern are well known and highly respected within the self storage industry and they will be expanding NSA’s presence in New Orleans, Southern Georgia, the Florida Panhandle and Puerto Rico. We are pleased to consistently deliver strong quarterly results as we execute on our strategy to drive both internal and external growth.

Turning to market conditions, at a high level across the U.S., demand in the self storage industry remains healthy and is supported by strong fundamentals. Economic growth remains robust with continued growth in employment and household formations, which drive demand for self storage. On a regional and local level, however, supply and demand imbalances continue to pressure street rates. Almost 20% of our stores are currently challenged by excess new supply, with the most significant impact being in Portland, Oregon. Fortunately, on a national basis, it looks like we are nearing the peak with respect to new supply deliveries. But based on our past experience we believe it will likely be 2 to 3 years before this new supply is absorbed, particularly in oversupplied markets like Portland.

And over the next 12 months, we expect to see several other markets across the country moving to an oversupplied situation as well. As a reminder, this is why we operate with a diversified national portfolio. And while we have exposure to several oversupplied markets, we are thankful that the majority of our markets are in balance given the demand growth we are seeing. On a separate note, our properties located in areas affected by Hurricanes Michael and Florence didn’t sustain material damage, although we did and will incur higher than normal expenses in repairs and maintenance at a few stores related to cleanup costs. Most important, however, our employees and their families in the areas affected by the storms are safe.

I would now like to update you on our Simply Self Storage JV acquisition and integration. The Simply portfolio was acquired by our 2018 joint venture with Heitman for approximately $1.3 billion and represents one of the largest M&A transactions in self storage history. We own a 25% interest in the joint venture, which we funded with proceeds from our July equity offering. In addition to our pro rata share of joint venture earnings, NSA will earn fee income for managing the properties and other platform-related fees as well as a longer term opportunity to earn an incentive promote above targeted return thresholds. The size and scale of this portfolio was transformational for NSA and our team is working hard on the successful integration of these properties which has gone exceptionally well in the 8 weeks since we closed the transaction.

Looking ahead, we continue to identify opportunities to grow our portfolio as we leverage our industry relationships and our OP equity currency to consolidate smaller operators in the highly fragmented self storage industry. Specifically for NSA, our captive pipeline includes over 100 properties that we haven’t yet acquired, valued at nearly $1 billion. In addition, our pipeline of third party pro driven acquisitions remains solid. And as we’ve demonstrated this quarter, our joint venture strategy allows us to access the capital needed to successfully complete transactions of a material size. Finally, we remain in ongoing discussions with several high-quality potential new PROs as evidenced by our announcement of adding Southern Self Storage to the NSA family.

With that, I will now turn the call over to Tammy.

[Tamara Fischer, President and Chief Financial Officer]

Thanks, Arlen and thanks everyone for joining us on our call today and for your continued interest and support. As Arlen mentioned, last evening we reported third quarter 2018 results leading with 9.1% growth in core FFO per share and same-store NOI growth for the quarter of 5%. Our same-store revenue grew by 4% driven primarily by rental rate growth and offset only slightly by a decrease in average occupancy. These results are consistent with our expectations. Same-store operating expenses increased just 2% for the third quarter due in part to successfully managing controllable expenses and in part due to timing. As expected, property taxes continue to tick up and personnel costs are increasing as employment markets tighten. Regarding specific markets, our stores in California, Texas, Georgia and Central Florida are delivering particularly strong results due to positive local economic conditions in some cases and favorable supply demand dynamics in other markets.

We continue to face challenges from excessive new supply in Oregon, particularly in Portland, which is our market most impacted by new supply. Other markets facing supply challenges include Oklahoma as well as Raleigh, Durham and Charlotte, North Carolina. Our strategy with respect to new supply remains unchanged. In most cases, we seek to maintain our contract rates rather than insisting on maximum occupancy and we leverage our PROs in site to best manage this balance within each individual submarket.

On the balance sheet front, we continue to successfully match our access to capital markets with our growth pipeline. In July, we issued 5.9 million shares in a common equity offering at $29.86 per share raising net proceeds of $176 million. Net proceeds were used to fund our 25% share of equity commitment for the Simply Self Storage acquisition by our joint venture. The remainder of the 2018 joint venture was financed with approximately $480 million of equity from our partner, Heitman and a $643 million secured loan with New York Life and Prudential. The financing carries an annual interest rate locked at 4.34% and has a 10-year maturity. At quarter end, our net debt to EBITDA ratio was 5.7x and we had roughly $164 million outstanding on our $400 million revolver.

Further, as we mentioned in the last quarter, we acknowledge certain assumptions included in our previously provided full year 2018 guidance will be affected by our July equity offering, the formation of our 2018 JV and related acquisitions, but consistent with our expectations even after all of these changes, our guidance for the year remains unchanged. We expect both same-store revenue and expense growth to come in near the low end of our guidance range resulting in NOI growth comfortably within the range. As a result, we are reaffirming our guidance of a $1.33 to a $1.37 for core FFO for share for the full year 2018. And we expect to end the year near the high end of that range.

Thanks again for joining us today. And we will now turn the call back to the operator for Q&A. Operator?

[Operator]

Thank you. [Operator Instructions] Our first question comes from the line of Smedes Rose with Citi. Please proceed with your question.

[Unidentified Analyst]

Good morning. This is Fiona in for Smedes. So it sounds like you have decided to retain so far the Puerto Rico properties that were potentially targeted for sale. Could you maybe just talk about the factors that drove that decision?

[Arlen Nordhagen, Chief Executive Officer]

Yes, thanks for the question. That really relates and ties in with the announcement we made of the addition of our 9th PRO, the Southern Self Storage group. Southern is a group of guys, Peter and Bob, who we have known for many years and actually had talked to about joining NSA way back when we first started the company. Because of some personal things with their investors, they chose instead to sell their portfolios at that time to Public Storage. But since that time, we have kept in contact, they have continued to grow their portfolio and we have continued to look at ways that we could bring them in as a PRO. And one of the key issues there was to get the scale that they need to integrate the different kinds of systems and management information systems, etcetera that we use at NSA. So the key to that was to get them to a position where they could be at least at 20 properties under their management. They built their portfolio up to 9 properties right now and then together we underwrote an acquisition of another 11 properties that we are buying together in New Orleans. And since they are in Southern Florida, it made a lot of sense for them to look at the opportunity to also co-invest in the Puerto Rican assets that we acquired as part of the joint venture. And after underwriting and looking at that, we reached a mutual agreement that they would co-invest in those properties as well as the New Orleans acquisition we underwrote together and contribute their properties. They will contribute 6 of them immediately and the other ones will go into the captive pipeline. So that combination results in a really good fit for the PRO. A new PRO coming in, they will have 23 properties immediately under management with NSA and 3 in the pipeline. They will have territories to grow in and we will get a couple of great guys that we’d love to have as PROs and have been trying to have as PROs really since we started NSA. That said, Puerto Rico is a market, that’s a different market, but we like the market in the fact that it has very low penetration in the Self Storage business. And so once we figured out how we could effectively manage it with a new PRO that’s down there in Southern Florida that could handle that, it just made a lot of sense for us to keep those assets.

[Unidentified Analyst]

Great. Thanks for the background and congrats again on adding them to the platform. So moving on into development, are you seeing any changes in developer behavior and/or like upticks in development in the smaller markets as the larger markets now look to be largely saturated?

[Arlen Nordhagen, Chief Executive Officer]

I would say that we are not necessarily seeing a change in behavior, but I would say that where we are seeing the drop off in developments is more in the larger markets. So, for example, we subscribe to numerous services and do our own surveys of where new developments are across the country. And one of the ones that we like that’s most broadly covering a lot of markets is the Yardi service because they survey about 130 some markets across the U.S. They are showing and we concur with these numbers, that from 2018 to 2019, the total number of developments across those 130 some markets is going to go down by about 22%, the new openings. So that’s a big improvement in the new supply coming online. The truth is that most of that drop is coming in the top 50 MSAs. The MSA is from like 51 to 130 are developing at about the same pace that they were the last year or 2. So while we are not seeing a drop off in these more secondary markets, we are also not seeing an increase in the new developments. It’s just that it’s staying at more of a consistent level.

[Unidentified Analyst]

Got it. Thank you.

[Arlen Nordhagen, Chief Executive Officer]

Thank you.

[Operator]

Our next question comes from the line of Todd Stender with Wells Fargo. Please proceed with your question.

[Todd Stender, Wells Fargo]

Hi, thanks. I wanted to hear more about Southern Self Storage, if you don’t mind. It sounds like they are on round 2 of their storage careers if they previously sold the portfolio to Public Storage. Can you talk about how big they previously got to and a little bit more about their geographic focus?

[Arlen Nordhagen, Chief Executive Officer]

Yes, so that’s right, Todd. They were very successful at building a very valuable portfolio and they had it between 25 and 30 properties at the time and sold that out to Public Storage almost at the exact same time that we started NSA back in 2013. They have been building up the portfolio since that time and focusing primarily, I would say, in Panhandle, Florida, Southern Georgia, they will be moving into the New Orleans market with us with this acquisition that we are working on together that will close in January. And then they will pickup Puerto Rico as well. So those will be the areas that they will focus on expanding growth and is basically Panhandle, Florida, Southern Georgia, across the Gulf Coast in terms of New Orleans and then down in Puerto Rico. They have been very successful in their careers at doing a great job on managing the properties that they have built and owned. And most of the ones that they are contributing from their portfolio are very new properties. A lot of them were built by them since 2013 or others that are very new that they have bought. So they are pretty much around the 2010 type vintage in terms of the age of those properties.

[Todd Stender, Wells Fargo]

Any difference in structure, this is your 9th PRO, how does this compare to some of the first PROs that you brought on just as far as compensation, structure and waterfall?

[Arlen Nordhagen, Chief Executive Officer]

So to the exact same structure, we don’t change the documents. The one thing that obviously changes is as PROs come in they get their OP units and SP units issued at today’s stock price. So that’s different than the guys that started back when we were private, than when we first went public when our price was much lower, but other than that the structure is identical.

[Todd Stender, Wells Fargo]

Okay, thank you. And then finally, how is the co-investment structured, I guess with the Puerto Rico facilities and what will they be branded as?

[Arlen Nordhagen, Chief Executive Officer]

The Puerto Rico facilities right now are branded under a unique name just unique to Puerto Rico. At this point, we will probably leave that name, but we can evaluate over time whether we would want to change it to a name that would be associated with Southern. The co-investment as you know, we have a formula that calculates the fixed charge coverage ratio that every PRO needs to have to give a tremendous amount of safety cushion for our distributions to our OP units. And we calculate that amount of subordinated equity based on not just the 6 properties they are initially contributing, but also the 11 properties we are buying in New Orleans and the 6 properties in Puerto Rico. So the total value of those properties, Southern has to co-invest enough subordinated equity to cover all of those in terms of the subordinated cash flow to give safety cushion on all of those and that’s what they have agreed to do. We believe it will be a very successful venture for us and for them as we move forward in growing those territories together.

[Todd Stender, Wells Fargo]

Great. Thank you, Arlen.

[Arlen Nordhagen, Chief Executive Officer]

Yes. Thanks, Todd.

[Operator]

Our next question comes from the line of Ronald Kamdem with Morgan Stanley. Please proceed with your question.

[Ronald Kamdem, Morgan Stanley]

Hey, thanks guys. The first one I had was that I noticed in the quarter occupancy was down 70 basis points. Obviously that compares to annual contract rent, which had a nice boost of 3-8 this quarter versus 3-1. So I guess my question is just when that occupancy decline, how do you guys view that? Is that sort of what you expected? Is that better than expected and how do you think about that in terms of your strategy of prioritizing pricing over occupancy?

[Steve Treadwell, Chief Operating Officer]

Yes, this is Steve. Honestly, it was largely in keeping with the expectations. We have seen that gap, year-over-year gap close a little bit in October. So we see that as a positive. Overall, we thought occupancy would be flattish to maybe a small bias to the downside this year and that’s proven out now so far. So everything is sort of as expected and as you noted, we’re making it up on the rate side. We continue to have success on sending out rent increase letters and really that’s how we’re driving our revenue increases today. It’s not through occupancy it’s through the rate growth.

[Ronald Kamdem, Morgan Stanley]

Got it. And then maybe can you touch on anything notable in terms of concession trends, like how are they comparing this year versus last year and how you guys are thinking about that?

[Steve Treadwell, Chief Operating Officer]

Yes. Ron, it’s generally flat and we have seen it for several quarters now. When you look at year-over-year discounting, it’s roughly flat. So I don’t expect that to change, it continues to be a tool that we need to acquire new customers. It continues to be very popular among our peers. So to be competitive we have to offer discounts and concessions, and it’s continuing to work for us, but there is no strong trend up or down. There was probably a slight tailwind in Q3, but I wouldn’t expect that to persist.

[Ronald Kamdem, Morgan Stanley]

Great. My last one is just Portland, I think I heard in your opening comments you talked about it could be a 2-year plus process before some of that supply gets absorbed. I am just thinking about from the developer standpoint, have you seen – is that impacting pro formas or are you seeing any changes on the ground given that outlook?

[Arlen Nordhagen, Chief Executive Officer]

Yes, Ron, this is Arlen. We definitely are seeing changes in developers’ mentality. But it obviously takes developers a while and what that’s driven by is the fact that a lot of these guys that are in development, when they started the process of developing these properties, they were looking at being able to develop to something like a 9 yield and they could sell it at [indiscernible] for a 5.5 or something and they are looking at like this is a home run opportunity. Subsequent to that, they’ve gone through all this zoning and permitting process, they finally get to the point of where they’re going to start construction and they re-look at their numbers and now they’re developing not to a 9 anymore, it’s to an 8 because of the rates going down and cost going up. And they can’t sell it at a 5 or 5.5 anymore, they’re looking at selling it at a 6 and they can’t sell it at [indiscernible] anymore, they’re looking at selling it after it fills up in 3 to 5 years. So the economics for developers has changed dramatically in the last 2 years and so we’re seeing a lot of properties come to market where the developers, if they’ve already opened, they are trying to sell them now while they’re at 0% to 40% occupancy or they’re just trying to sell the land because they realize the economics are nowhere near as good as it used to be. And I think that’s the big driver of why we’re seeing a big drop in the expected new completions for 2019 versus 2018 and beyond that it will be even more of a drop, I believe. The issue though is these developers have put a lot of time into this. So there’s a lot of guys who still keep doing it, they keep going ahead and there’re going to be unpleasant results I think in terms of the returns. They are not going to get anywhere kind of the returns they thought they would get, but a lot of the properties are good developments and they will be absorbed, but some of the markets, it’s going to take 5 years to absorb the excess supply that’s in those markets.

[Ronald Kamdem, Morgan Stanley]

Got it. Helpful. Thank you.

[Arlen Nordhagen, Chief Executive Officer]

Thank you.

[Operator]

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

[Ki Bin Kim, SunTrust Robinson Humphrey]

Thanks. So if I look at your guidance for the year, it implies that the fourth quarter same-store revenue run-rate will be closer to like 6%. So, I guess first question does that math makes sense? I am not sure of how much seasonality that impacts the full year guidance and how do you get there?

[Tamara Fischer, President and Chief Financial Officer]

So, hi, Ki Bin, this is Tammy. I think what we were trying to message is that although there were changes in some of our assumptions around the guidance that we provided earlier for the full year when it’s all said and done, we think we are going to end up in our guidance range. We are comfortable with the guidance ranges we have provided, but specifically as it relates to same-store results, we think we are going to be at the low end of the same-store revenue growth, the low end of expense growth and somewhere in the middle, probably the lower third of our same-store NOI growth projections.

[Ki Bin Kim, SunTrust Robinson Humphrey]

Okay. So even at the lower end though, doesn’t that imply acceleration into the fourth quarter for same-store revenue?

[Tamara Fischer, President and Chief Financial Officer]

No, I don’t think so. I think...

[Steve Treadwell, Chief Operating Officer]

Concerning year-to-date, Ki Bin, our year-to-date numbers are 4% revenue, 2.9% expense and 4.5% on NOI, so that’s exactly what Tammy said.

[Tamara Fischer, President and Chief Financial Officer]

Right.

[Ki Bin Kim, SunTrust Robinson Humphrey]

Okay. And did you guys give an update I might have missed this on street rates you saw in the quarter and into October and promotion usage, did you already talk about that?

[Arlen Nordhagen, Chief Executive Officer]

Yes, we hit on discounting a little bit, but I will reiterate. It was basically flat for Q3 versus last year’s Q3, but we did have a couple of pockets here and there where we saw less discounting on a dollar basis. So, that helped us a little in Q3, I don’t expect that to happen again in Q4 and discounting is consistent across all markets in terms of our use of that tool to acquire new customers. On the rate side, we did see street rates and moving rates down about 1% or 2% during Q3. I don’t see that changing materially in Q4. It feels like that’s sort of the trend here through the balance of the year. And we’re making up for that through in place rate changes or rent increases to our customer base. We are able to once again hit sort of the high single digits on the size of those increases on average and about a third of our customers during Q3 saw an increase letter from us. And so that’s really a great tool for driving revenue and even in the face of multiple quarters now, a flattish or maybe small downsides on street rates. We continue to have success on the rent increases to current customers. So we are not overly penalized by the street rate environment.

[Ki Bin Kim, SunTrust Robinson Humphrey]

And the number of customers receiving it in the same-store pool this quarter, has that increased versus last year or is that pretty consistent?

[Arlen Nordhagen, Chief Executive Officer]

We are more aggressive during Q2 and Q3 and less aggressive during Q4 and Q1.

[Ki Bin Kim, SunTrust Robinson Humphrey]

I mean, year-over-year?

[Arlen Nordhagen, Chief Executive Officer]

Year-over-year, yes, it’s similar, we probably had more customers this year than last year, but our philosophy hasn’t changed.

[Ki Bin Kim, SunTrust Robinson Humphrey]

Okay. So if I think about the other self storage companies that have talked about flattish street rates or maybe even a little bit negative, what we notice is, I mean, not surprisingly, their same-store revenue trajectory starts to decline, right? You guys have been able to quantify that pattern. So I was just curious how – what you think is contributing to that, if you say your existing customer rate increases hasn’t moved much and doesn’t that mean like eventually we should start to see some pressure on your same-store revenues going forward?

[Arlen Nordhagen, Chief Executive Officer]

Well, I think to be fair we have seen deceleration in our revenue growth over multiple quarters now. So we are following the same trend, maybe just a little step above the others which is a good thing. And frankly I think we are just being disciplined on our in-place rate changes to existing customers and it continues to be a driver for us even in the face of street rates that are a slight headwind. So I think there is still a lot of room to go there. I hear your point on street rates being flat for a sustained period of time, but it would take a really long time for that to materially penalize our ability to push through rent increases.

[Steve Treadwell, Chief Operating Officer]

The other thing on that, Ki Bin, is if you look back through history on street rates overall, they are always very, very jerky. In other words, you will see periods where they will be flat for a long time or even down and then they will jump 20% in 1 month and obviously our revenues don’t go up 20% in 1 month, that’s just the street rates, which affects us only 5% of our customers. So, really street rates over the long-term, long, long-term have to gradually move upward but they are very, very jerky, whereas our overall revenue growth is much more smooth.

[Ki Bin Kim, SunTrust Robinson Humphrey]

Okay, thank you.

[Steve Treadwell, Chief Operating Officer]

Thank you.

[Operator]

Our next question comes from the line of Jeremy Metz with BMO Capital Markets. Please proceed with your question.

[Jeremy Metz, BMO Capital Markets]

Hi, good morning. I just want to go back to Southern Self Storage you gave a lot of different numbers there. I think they have 9 existing assets, only 6 are coming on to the NSA platform to start. You have another 11 on your contract, it sounds like. Can you just help us think through this from as we think about an income perspective, what kind of OP, SP impact this should have, how should we think about this? And then for the next 11, how much consideration is that one?

[Arlen Nordhagen, Chief Executive Officer]

Yes, Jeremy. Yes, so as we will close both Southern joining and the acquisition of those 11 in January. Combined those will be contributions to NSA in January of about $110 million, a little bit more than that. And basically then the 3 properties that they haven’t contributed will go into our pipeline at that time. Out of that $110 million, between $20 million and $30 million, we will get the exact number as we get closer of that equity will be provided by Southern through their contribution of their equity and their properties, and most of that will be subordinated equity. Some of it will be regular equity according to the formulas that we use and we’ll disclose the exact numbers when we have them at that time. But you can count on, the vast majority of it’s going to be subordinated equity and that will start the year out with a very strong acquisition in the month of January.

[Jeremy Metz, BMO Capital Markets]

Yes, no, okay. That’s helpful. I am sorry if I missed this, but are those going to stay with the Southern branding or are those being re-branded under others going into...

[Arlen Nordhagen, Chief Executive Officer]

Those will be Southern branding. They will be Southern branding, yes. The only ones that we are not sure about are Puerto Rico, because they are also taking over management of those and Puerto Rico has a unique brand which we may just leave that unique brand, but it will still be managed by Southern’s group.

[Jeremy Metz, BMO Capital Markets]

Got it. Okay, helpful. And then just going you have had a lot of different comments on supply here in the call already and time it takes to absorb everything. We have talked about obviously the rolling impact it can have. You mentioned NSA portfolio, it’s about 20% as being impacted today, but as we look into next year, do you see that going to call it 30% more, less, how should we think about that impact?

[Arlen Nordhagen, Chief Executive Officer]

Well, it will definitely go up. I mentioned in my remarks that we know that as all of these new properties that are finishing up in the rest of 2018 plus the new ones that are in construction and will open in ‘19, we are going to be impacted by a bunch of those as well. And really the way we look at it, the impact of the new stores, don’t drop off for us until they are about 3 years old. So you look back in 2016, there wasn’t that much built in the U.S. and certainly not in our markets. There is a lot built in ‘17, a lot in the ‘18, ‘l8 being the peak year, ‘19 will be dropping back again more to the same size about as 2017 overall, but certainly that 20% is going to go up somewhat, but we don’t think it will be a material overall bad effect to us because we have a lot of markets that we’re in very favorable supply demand dynamic. So that’s kind of the thing we really like is the fact that we have really good geographic diversification and a lot of our markets are really strong in terms of good growth and demand and very limited supply, but these markets especially it’s the top 50 MSAs, those are the ones that are by far hit the most with excess supply over and above demand growth rates.

[Jeremy Metz, BMO Capital Markets]

Got it. Thanks.

[Arlen Nordhagen, Chief Executive Officer]

Thank you.

[Operator]

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

[Tayo Okusanya, Jefferies]

Hi, good morning. One other thing that’s always been attractive about your story is just again the occupancy pickup story because again your occupancies are much lower than the peers. Could you just talk a little bit about how we should be thinking about NSA kind of closing that delta on a going forward basis, especially in light of the supply backdrop?

[Arlen Nordhagen, Chief Executive Officer]

Well, that’s really a long-term question, Tayo. In the short-term, we are not going to see occupancy going up, because we are – I mean, it’s just basic math, the supply growth is exceeding demand growth. And one of the things that we have repeated over and over again is we don’t want to start price wars by taking an outsized share of growth in occupancy when the market is getting hit worse and the overall market occupancies are declining. But in the long-term, your comment is a really good one in that the way that we ultimately can close the gap and you say, well, how is it that Public Storage can run numbers like 94% occupancy and the reason they can do it is they have high local market share. Remember, in self storage, it’s not all one type of space that you are renting. Every property has got a dozen different sizes and unit configurations that you are renting. So when a customer comes in and for his needs, he needs a 10x15 climate controlled unit, if I don’t have a 10x15 climate controlled unit at my property, I just lose that customer. But if I have another property a mile away that I can send him to, I keep that customer and that’s exactly what Public Storage does, an extra space, everybody who has got high local market share. So what we try to do as we build our acquisitions over time is keep increasing our local market share. That will then over the long run allow us to move our overall average occupancy from 89% to 90% to 91% to 92%, but that’s a long-term strategy thing. It doesn’t happen overnight. Short-term, we don’t want to cause price wars when the market – the overall market equilibrium is there is so much new supply that market equilibrium has dropped the occupancy supply demand ratio to 82%. We don’t want to insist on trying to run 92%, because if we do that we are going to destroy the market and all we get is less revenues.

[Tayo Okusanya, Jefferies]

Fair enough. I think that’s a smart way to think about it. Thank you.

[Arlen Nordhagen, Chief Executive Officer]

Thanks, Tayo.

[Operator]

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

[Todd Thomas, KeyBanc Capital Markets]

Hi, thanks. Just first question is following up on Ki Bin’s question on revenue growth I understand the ECRI policy hasn’t changed much, but if occupancy is down year-over-year, street rents are sort of flattish or lower. Is the majority of the revenue growth – is the majority of that contribution coming from the ECRIs, what else is contributing to that revenue growth?

[Arlen Nordhagen, Chief Executive Officer]

No, I think you are absolutely right and that’s been consistent now for several quarters that we are driving our revenue growth through the rent increases. Discounting depending on how you are looking versus the previous year can be the small headwind or small tailwind, but I don’t think that’s going to be a material factor going forward at least in the near-term. So it’s all relying on these rent increase leverage.

[Todd Thomas, KeyBanc Capital Markets]

Okay. And then, Arlen, you mentioned in your remarks that the JV allows you to look at other acquisitions of size and in light of your comments about the importance of increasing local market share. I was just curious you are digesting the Simply portfolio, but that seems like it’s going well. What’s your appetite like today for additional investments and are you seeing anything else of size out there on the market?

[Arlen Nordhagen, Chief Executive Officer]

Well, Todd, we will always look at every opportunity that’s out there. We are a very growth-oriented company, as you know. We have stated publicly that it is our goal to grow by at least 10% per year in terms of our asset base and our asset base is now over $4 billion. So that means our goal is to grow by $400 million, but we try to grow in a very disciplined way. If there are big opportunities that come up, we don’t want to absorb those all by ourselves and we’d like to look for and we do look for joint venture partners for those. When they’re smaller deals, we like to take those on 100% and pull them in to our – either our PROs management team or our storage in-house management team. So we are going to – it’s going to be more the same, but the one thing you can count on is that we will be focusing on growing overall our portfolio by 10% a year.

[Todd Thomas, KeyBanc Capital Markets]

Okay. And Tammy, 492 wholly owned properties in the portfolio today the same-store is 376, what will the changes look like to the same-store pool heading into 2019?

[Tamara Fischer, President and Chief Financial Officer]

We haven’t finalized it yet, Todd, but we expect it to go up by call it 60, 65 stores in wholly owned portfolio. The biggest change in the mix will be addition of stores that we acquired in Georgia, specifically around Atlanta and St. Louis and Kansas City.

[Todd Thomas, KeyBanc Capital Markets]

Okay, great. Thank you.

[Tamara Fischer, President and Chief Financial Officer]

You bet.

[Operator]

There are no further questions in the queue. I’d like to hand the call back to management for closing comments.

[Arlen Nordhagen, Chief Executive Officer]

Thanks, Doug and thanks again for joining NSA’s third quarter earnings call. As we mentioned earlier in the call, we are really pleased to announce the addition of our 9th PRO, Southern Self Storage, the successful and swift integration of the Simply portfolio and solid third quarter operating results. As we look ahead to 2019, we appreciate your continued interest in and support of National Storage Affiliates and we look forward to seeing many of you at next week’s REIT World Conference in San Francisco. Have a good weekend.

[Operator]

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.